<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 30, 1997
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 7373 870551650
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
---------------
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 350
SANTA CLARA, CA 95054
(408) 987-3200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JAMES J. HEFFERNAN
CHIEF FINANCIAL OFFICER
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 350
SANTA CLARA, CA 95054
(408) 987-3200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES TO:
MARK BONHAM, ESQ. JOHN W. CAMPBELL III, ESQ.
ARMANDO CASTRO, ESQ. KRISTIAN E. WIGGERT, ESQ.
CHRISTOPHER F. BOYD, ESQ. EDA S. L. TAN, ESQ.
MATTHEW B. SWARTZ, ESQ. SUSAN H. MAC CORMAC, ESQ.
WILSON SONSINI GOODRICH & ROSATI MORRISON & FOERSTER LLP
PROFESSIONAL CORPORATION 425 MARKET STREET
650 PAGE MILL ROAD SAN FRANCISCO, CA 94105
PALO ALTO, CALIFORNIA 94304 (415) 268-7000
(650) 493-9300
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.001 par value............... $63,250,000 $19,167
</TABLE>
===============================================================================
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o).
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED SEPTEMBER 30, 1997
PROSPECTUS
SHARES
[USWEB LOGO]
COMMON STOCK
All of the shares of Common Stock being offered hereby are being sold by
the Company. Prior to this offering, there has been no public market for the
Common Stock of the Company. It is currently estimated that the initial public
offering price will be between $ and $ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has applied for quotation of its Common Stock on
the Nasdaq National Market under the symbol USWB.
-----------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" COMMENCING ON PAGE 7.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT (1) COMPANY (2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $ $ $
- -------------------------------------------------------------------------------
Total (3)............. $ $ $
- -------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock solely to cover over-allotments, if
any. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
-----------
The shares of Common Stock are offered by the several Underwriters subject to
prior sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1997, at the office of the agent of Hambrecht &
Quist LLC in New York, New York.
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON
FIRST ALBANY CORPORATION
, 1997
<PAGE>
[ART]
[Logo of HARLEY DAVIDSON]
[Logo of Chevron]
MICROSOFT
REI
CHARLES SCHWAB
SONY MUSIC
SILICON GRAPHICS
A STRATEGIC PARTNER FOR THE INFORMATION AGE
USWeb is a leading Internet professional services firm that provides Intranet,
Extranet and Web site solutions to medium-sized and large companies.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
USWeb, the USWeb logo, A Strategic Partner for the Information Age and the
names of products offered by USWeb are trademarks or registered trademarks of
USWeb. This Prospectus also includes product names, trade names and trademarks
of other companies.
2
<PAGE>
STRATEGIC RELATIONSHIPS [Map of the United States with star
representing USWeb headquarters and
dots representing USWeb Consulting
offices]
MICROSOFT
HEWLETT-PACKARD
SERVICES
PANDESIC
[_] STRATEGY CONSULTING
SUN MICROSYSTEMS USWeb works closely with the client
to conduct a thorough study of the
client's strategic market position,
business requirements and existing
systems and capabilities to
determine the ways in which Internet
solutions can most improve the
client's business process.
REUTERS
Strategic relationships are an
important element of the Company's
efforts to enter new markets, gain
early access to leading-edge
technology, cooperatively market
products and services with leading [_] ANALYSIS AND DESIGN
technology vendors, cross-sell Once the strategic groundwork has
additional services and gain been established, the Company
enhanced access to vendor training translates the client's strategic
and support. requirements into a system or
process design architecture, a
blueprint that defines the roles the
system will perform to meet those
requirements.
[_] TECHNOLOGY DEVELOPMENT
In the development phase, the
Company builds a testable version of
the client's solution based on the
blueprint produced in the analysis
and design phase.
[_] IMPLEMENTATION AND INTEGRATION
In the implementation phase, USWeb
tests the solution created in the
development phase and readies it to
be deployed into a full production
system.
[_] AUDIENCE DEVELOPMENT
The Company can work with the client
to develop a strategy for achieving
its online marketing objectives by
increasing Web site traffic,
strengthening brand awareness and
generating sales leads.
[_] MAINTENANCE
USWeb can provide the client with
ongoing support services for its
Internet solutions, from content
maintenance to site administration,
for as long as the client wishes.
INSIDE GATE-FOLD
[PICTURE TO COME]
<PAGE>
[SCREEN SHOT #1]
GATE-FOLD TWO
[DESCRIPTION OF INTERNET SOLUTION #1]
[COLOR TO COME]
[SCREEN SHOT #2]
[DESCRIPTION OF INTERNET SOLUTION #2]
[SCREEN SHOT #3]
[DESCRIPTION OF INTERNET SOLUTION #3]
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements, including the Notes
thereto, appearing elsewhere in this Prospectus. The Common Stock offered
hereby involves a high degree of risk. See "Risk Factors."
THE COMPANY
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions and services to medium-sized and
large companies. International Data Corporation estimates that the worldwide
market for Internet professional services was $2.5 billion in 1996 and will
grow to $13.8 billion in 2000. To take advantage of the opportunity presented
by this market, the Company has invested substantial time and resources to
establish a national network of consulting offices. Because of this investment,
the Company believes it has built one of the most recognized brands for
Internet professional services and developed a highly scalable organization
that can leverage central resources as its operations expand through
acquisitions as well as internal growth. The Company has developed and is
aggressively pursuing an acquisition program that uses a consistent methodology
designed to efficiently identify, acquire and integrate qualified Internet
professional services firms.
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. The Company's
services include strategy consulting; analysis and design; technology
development; implementation and integration; audience development; and
maintenance. The Company delivers these services to clients through its network
of consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. In addition,
individual consulting offices may draw as needed upon the assistance of one or
more additional offices with specialized creative or technical expertise.
The Company has developed central resources to provide clients with Internet
solutions based on the most effective technologies and proven methodologies.
The USWeb Internet Strategy and Solutions Center aggregates and redeploys the
best practices, technologies and creative work delivered by USWeb consulting
offices. The Strategy and Solutions Center provides the offices with efficient,
real-time access to these resources through USWeb Central, the Company's secure
Intranet, thereby enabling them to leverage the capabilities of the entire
USWeb operation.
The Company markets its services to medium-sized and large companies. Among
the Company's clients during the eight months ended August 31, 1997 were
Charles Schwab, Chevron, Harley-Davidson, Microsoft, REI, Silicon Graphics and
Sony Music. Clients typically begin their adoption of Internet solutions by
establishing a basic Web site costing several thousand dollars and then
implement increasingly powerful business solutions, which can include business
critical, fully integrated Intranets or Extranets costing several million
dollars. The Company's strategy is to provide clients with services at all
stages of their adoption of Internet solutions.
The Company has made a significant investment in building and maintaining the
USWeb brand. Increasing recognition of the USWeb brand improves the ability of
USWeb consulting offices to access and influence key client decision makers,
hire skilled employees and leverage strategic relationships. The Company
believes that its marketing, advertising, seminars and other brand development
efforts have established USWeb as one of the most recognized Internet
professional services firms.
Strategic relationships are an important element of the Company's efforts to
enter new markets, gain early access to leading-edge technology, cooperatively
market products and services with leading technology
3
<PAGE>
vendors, cross-sell additional services and gain enhanced access to vendor
training and support. The Company has entered into, and intends to continue
entering into, strategic relationships with a limited number of leading
Internet hardware, software and content vendors. The Company currently has
strategic relationships with Microsoft, Hewlett-Packard, Pandesic (a joint
venture between Intel and SAP), Sun Microsystems and Reuters.
The Company's objective is to become and remain the leading global Internet
professional services firm. To achieve its goal, the Company's strategy is to
continue to expand its network of consulting offices, develop additional
Internet services and solutions, enhance the USWeb brand and leverage
operational economies of scale. To add consulting offices through acquisitions,
the Company uses a standard valuation methodology that includes purchase price
adjustments to align target company management objectives with those of the
overall USWeb organization and stock bonus and stock option grants to all
target company employees to provide them with an incentive to contribute to the
success of the overall USWeb organization. As of September 30, 1997, the
Company had acquired eight companies and signed definitive acquisition
agreements with five others.
The Company was incorporated in Utah in December 1995. The Company intends to
reincorporate under the laws of Delaware prior to the closing of this offering.
The Company's principal executive offices are located at 2880 Lakeside Drive,
Santa Clara, California 95054, its World Wide Web address is
http://www.usweb.com and its telephone number is (408) 987-3200. As used in
this Prospectus, the "Company" and "USWeb" refer to USWeb Corporation, a
Delaware corporation and its Utah predecessor.
THE OFFERING
Common Stock offered by the Company... shares
Common Stock to be outstanding after
the offering.......................... shares (1)
Use of proceeds....................... For general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market
symbol................................ USWB
- --------------------
(1) Based on the number of shares of Common Stock outstanding at September 29,
1997. Excludes (i) 9,300,000 shares of Common Stock reserved for issuance
under the Company's stock option plans, including the 1997 Acquisition
Stock Option Plan, of which 6,238,920 shares were issuable upon exercise of
outstanding options, (ii) 104,722 shares of Common Stock issuable upon
exercise of outstanding warrants, (iii) 1,000,000 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase Plan
and (iv) shares that may be issued as stock bonuses and acquisition
purchase price adjustments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Internet
Professional Services Firms," "Management--Employee Benefit Plans" and
Notes 1, 9, 10 and 13 to Consolidated Financial Statements.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL
- ----------
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues--Services..... $ -- $ -- $ -- $ -- $ 59 $ 2,186
Revenues--Other........ -- 100 411 1,309 436 258
Gross profit........... -- 100 332 1,180 198 12
Loss from operations... (2,556) (2,743) (3,978) (4,688) (5,850) (11,410)
Net loss............... (2,525) (2,670) (3,948) (4,665) (5,843) (15,400)
Pro forma:
Net loss per
share (6)........... $(0.10) $(0.10) $(0.15) $(0.18) $(0.23) $ (0.59)
Shares outstanding
(6)................. 25,460 25,702 25,873 25,959 25,959 26,089
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
PRO FORMA (2)
PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
DATA:
Revenues--Services..... $2,815 $2,704 $2,432 $3,224 $3,616 $ 4,047
Revenues--Other........ -- 75 240 1,188 194 214
Gross profit (loss).... 388 111 (396) 794 140 (104)
Loss from operations... (7,937) (8,262) (9,114) (9,702) (9,281) (10,136)
Net loss............... (7,951) (8,223) (9,118) (9,726) (9,315) (14,101)
Pro forma:
Net loss per share
(6)................. $(0.31) $(0.31) $(0.34) $(0.36) $(0.34) $ (0.51)
Shares outstanding
(6)................. 25,653 26,126 26,576 26,940 27,219 27,498
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
SUPPLEMENTAL (2)(3)
PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
DATA BEFORE ACQUISITION-
RELATED NON-CASH
CHARGES:
Revenues--Services..... $2,815 $2,704 $2,432 $3,224 $3,616 $ 4,047
Revenues--Other........ -- 75 240 1,188 194 214
Gross profit before
stock compensation.... 1,174 975 586 1,776 1,122 878
Operating loss before
acquisition-related
non-cash charges...... (2,170) (2,621) (4,373) (5,047) (5,302) (6,410)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------
ACTUAL PRO FORMA (4) AS ADJUSTED (5)
------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 9,333 $9,333 $
Working capital....................... 4,047 4,047
Total assets.......................... 20,310 20,310
Mandatorily redeemable convertible
preferred stock...................... 32,490 --
Total stockholders' equity (deficit).. (19,879) 12,611
</TABLE>
<TABLE>
<CAPTION>
AS OF
-----------------------------------------------------
MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1996 1996 1996 1997 1997
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Total employees........ 30 50 58 69 103 229
Number of Company-owned
offices............... -- -- -- -- 4 13
Number of Affiliate of-
fices................. -- -- 16 27 31 23
Total number of con-
sulting offices....... -- -- 16 27 35 36
</TABLE>
- --------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 consolidated financial statements to facilitate
presentation.
(2) Pro forma consolidated statement of operations data reflect the effect of
the consolidation of the results of operations of USWeb San Francisco,
USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb
Silicon Valley, USWeb DC, USWeb Phoenix and USWeb Pittsburgh, as if each
such company was acquired on January 1, 1996 (or inception, if later).
(3) Acquisition-related non-cash charges include stock compensation,
amortization of intangible assets and acquired in-process technology. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 1 to Consolidated Financial Statements.
(4) Pro forma consolidated balance sheet data gives effect to the conversion of
all outstanding shares of Preferred Stock into 12,094,360 shares of Common
Stock immediately prior to the closing of this offering.
(5) Adjusted to give effect to the sale of shares of Common Stock by the
Company at an assumed initial public offering price of $ per share and the
application of the net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
(6) See computation of pro forma net loss per share in "Pro Forma Selected
Consolidated Financial Data."
----------------
Unless otherwise indicated, all information contained in this Prospectus: (i)
assumes no exercise of the Underwriters' over-allotment option; (ii) reflects
the reincorporation of the Company in Delaware prior to the closing of this
offering; (iii) reflects a one-for-three reverse split of the Common Stock to
be effected prior to the closing of this offering; (iv) assumes an initial
public offering price of $ per share; (v) except in the Consolidated
Financial Statements, reflects the conversion of all outstanding Preferred
Stock into Common Stock, which will occur upon the closing of this offering;
and (vi) unless otherwise indicated, refers to historical and not pro forma
results of operations. See "Capitalization," "Description of Capital Stock" and
"Underwriting." The phrase "Company-owned offices" refers to offices managed by
entities with whom the Company has consolidated its results of operations as of
the date indicated.
This Prospectus contains, in addition to historical information, forward-
looking statements that involve risks and uncertainties. The Company's actual
results or experience could differ significantly from those discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk Factors,"
as well as those discussed elsewhere in this Prospectus.
6
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed in
the forward-looking statements as a result of certain factors, including the
factors set forth below and elsewhere in this Prospectus. The following risk
factors should be considered carefully in addition to the other information
contained in this Prospectus before purchasing the Common Stock offered
hereby.
Limited Operating History; Accumulated Deficit. The Company was founded in
December 1995 and enrolled its first franchisee ("Affiliate") in April 1996.
Accordingly, the Company has only a limited operating history on which to base
an evaluation of its business and prospects. The Company and its prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients by the USWeb Internet Strategy and Solutions Center (the "Strategy and
Solutions Center"), enhance the USWeb brand, respond to competitive
developments and continue to attract, retain and motivate qualified employees.
There can be no assurance that the Company will be successful in meeting these
challenges and addressing such risks and the failure to do so could have a
material adverse effect on the Company's business, results of operations and
financial condition.
The Company has incurred net losses since inception, and as of June 30, 1997
had an accumulated deficit of $35.1 million. Although the Company has
experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. In addition, the
Company intends to continue to invest heavily in acquisitions, infrastructure
development and marketing. As a result, the Company expects to continue to
incur substantial operating losses at least through 1998, and there can be no
assurance that the Company will achieve or sustain profitability. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Related to Acquisitions. A key component of the Company's growth
strategy is the acquisition of Internet professional service firms that meet
the Company's criteria for revenues, profitability, growth potential and
operating strategy. The successful implementation of this strategy depends on
the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. As of September 30, 1997, the Company had acquired
eight companies and signed definitive acquisition agreements with five others.
These agreements contain protective rights and certain conditions to closing,
and there can be no assurance that such protective rights and closing
conditions will be satisfied or that these acquisitions will be consummated.
In addition, there can be no assurance that the Company will be able to
continue to identify additional suitable acquisition candidates or that the
Company will be able to acquire such candidates on acceptable terms. Moreover,
in pursuing acquisition opportunities the Company may compete with other
companies with similar growth strategies, certain of which competitors may be
larger and have greater financial and other resources than the Company.
Competition for these acquisition targets likely could also result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. Acquisitions also involve a number of other risks,
including adverse effects on the Company's reported operating results from
increases in goodwill amortization, acquired in-process technology, stock
compensation expense and increased compensation expense resulting from newly
hired employees, the diversion of management attention, potential disputes
with the sellers of one or more acquired entities and the possible failure to
retain key acquired personnel. Client satisfaction or performance problems
with an acquired firm could also have a material adverse impact on the
reputation of the Company as a whole, and any acquired subsidiary could
significantly underperform relative to the Company's expectations. As all of
the Company's acquisitions through September 30, 1997 were
7
<PAGE>
completed in 1997, the Company is currently facing all of these challenges and
its ability to meet them over the long term has not been established. Due to
all of the foregoing, the Company's pursuit of an overall acquisition strategy
or any individual completed, pending or future acquisition may have a material
adverse effect on the Company's business, results of operations, financial
condition and cash flows. Although to date the Company has not used cash for
acquisition consideration, to the extent the Company chooses to do so in the
future, the Company may be required to obtain additional financing, and there
can be no assurance that such financing will be available on favorable terms,
if at all. In addition, if the Company issues stock to complete any future
acquisitions, existing stockholders will experience further ownership dilution.
See "--Dilution," "--Future Capital Needs; Uncertainty of Additional
Financing," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business--Consulting Office Network Development."
Potential Fluctuations in Quarterly Results. As a result of the Company's
limited operating history, rapid growth and the emerging nature of the markets
in which it competes, the Company's historical financial data is of limited
value in planning future operating expenses. Accordingly, the Company's expense
levels are based in part on its expectations concerning future revenues and are
fixed to a large extent. The Company's revenues are derived primarily from
consulting fees for Internet solution engagements, which are difficult to
forecast accurately. The Company may be unable to adjust spending in a timely
manner to compensate for any unexpected shortfall in revenues. Accordingly, a
significant shortfall in demand for the Company's services could have an
immediate and material adverse effect on the Company's business, results of
operations, financial condition and cash flows. Further, the Company intends to
increase its business development and marketing expenses significantly to
expand operations and enhance the Company's brand name and to increase other
operating expenses as required to build the Strategy and Solutions Center and
support the operations of the Company's consulting offices. To the extent that
such expenses precede or are not rapidly followed by increased revenues, the
Company's business, results of operations and financial condition may be
materially adversely affected.
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's consulting
offices; the Company's success in finding and acquiring suitable acquisition
candidates; the Company's ability to attract and retain personnel with the
necessary strategic, technical and creative skills required to service clients
effectively; the cost of advertising and related media; the amount and timing
of expenditures by USWeb clients for Internet professional services; client
budgetary cycles; the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations; the introduction of new
products or services by the Company or its competitors; pricing changes in the
industry; technical difficulties with respect to the use of the Internet;
economic conditions specific to Internet technology usage; government
regulation and legal developments regarding the use of the Internet; and
general economic conditions. As a strategic response to changes in the
competitive environment, the Company may from time to time make certain
pricing, service, technology or marketing decisions or business or technology
acquisitions that could have a material adverse effect on the Company's
business, results of operations and financial condition. The Company may also
experience seasonality in its business in the future, resulting in diminished
revenues to the Company as a consequence of decreased demand for Internet
professional services during summer and year-end vacation and holiday periods.
Due to all of the foregoing factors, in some future quarter the Company's
operating results may fall below the expectations of securities analysts and
investors. In such event, the trading price of the Company's Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Recruitment and Retention of Internet Solutions Professionals. The Company's
business of delivering Internet professional services is labor intensive.
Accordingly, the Company's success depends in part on its ability to identify,
hire, train and retain consulting professionals who can provide the Internet
strategy, technology, marketing, audience development and creative skills
required by clients. There is currently a
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<PAGE>
shortage of such personnel, and this shortage is likely to continue for the
foreseeable future. The Company competes intensely for qualified personnel
with other companies, and there can be no assurance that the Company will be
able to attract, assimilate or retain other highly qualified technical,
marketing and managerial personnel in the future. The inability to attract and
retain the necessary technical, marketing and managerial personnel would have
a material adverse effect on the Company's business, results of operations and
financial condition.
Competition; Low Barriers to Entry. The market for Internet professional
services is relatively new, intensely competitive, rapidly evolving and
subject to rapid technological change. The Company expects competition to
persist, intensify and increase in the future. The Company's competitors can
be divided into several groups: computer hardware and service vendors such as
International Business Machines Corporation ("IBM"), Digital Equipment
Corporation ("DEC") and Hewlett-Packard Company ("Hewlett-Packard");
advertising and media agencies such as CKS Group, Inc. ("CKS"), Foote, Cone &
Belding and Ogilvy & Mather; Internet integrators and Web presence providers
such as Organic Online, Inc. ("Organic Online"), Poppe Tyson and Proxicom,
Inc. ("Proxicom"); large information technology consulting service providers
such as Andersen Consulting, Cambridge Technology Partners and Electronic Data
Systems Corporation ("EDS"); telecommunications companies such as AT&T
Corporation ("AT&T") and MCI Communications Group ("MCI"); Internet and online
service providers such as America Online Incorporated ("America Online"),
NETCOM On-Line Communications Services Inc. ("NETCOM") and UUNet Technologies,
Inc. ("UUNet"); and software vendors such as Lotus Development Corporation
("Lotus"), Microsoft Corporation ("Microsoft"), Netscape Communications Corp.
("Netscape"), Novell, Inc. ("Novell") and Oracle Corporation ("Oracle").
Although only a few of these competitors have to date offered a full range of
Internet professional services, several have announced their intention to
offer comprehensive Internet technology solutions. Furthermore, most of the
Company's current and potential competitors have longer operating histories,
larger installed customer bases, longer relationships with clients and
significantly greater financial, technical, marketing and public relations
resources than the Company, and could decide at any time to increase their
resource commitments to the Company's market. In addition, the market for
Intranet, Extranet and Web site development is relatively new and subject to
continuing definition, and, as a result, may better position the Company's
competitors to compete in this market as it matures. Competition of the type
described above could materially adversely affect the Company's business,
results of operations and financial condition.
There are relatively low barriers to entry into the Company's business.
Because professional services firms such as the Company rely on the skill of
their personnel and the quality of their client service, the Company has no
patented technology that would preclude or inhibit competitors from entering
the Internet professional services market. The Company expects that it will
face additional competition from new entrants into the market in the future.
There can be no assurance that existing or future competitors will not develop
or offer services that provide significant performance, price, creative or
other advantages over those offered by the Company, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business--Competition."
Management of Growth; Integration of Acquisitions. The Company's rapid
growth has placed, and is expected to continue to place, a significant strain
on the Company's managerial, operational, financial and other resources. As of
August 31, 1997, the Company had grown to 316 employees since its inception in
December 1995, and the Company expects that continued hiring of new personnel
will be required to support its business. The Company's future success will
depend, in part, upon its ability to manage its growth effectively, which will
require that the Company continue to implement and improve its operational,
administrative and financial and accounting systems and controls and to
expand, train and manage its employee base. There can be no assurance that the
Company's systems, procedures or controls will be adequate to support the
Company's operations or that the Company's management will be able to achieve
the rapid execution necessary to exploit the market for the Company's business
model. Furthermore, the Company's future performance will depend on the
Company's ability to integrate the organizations acquired by the Company,
which, even if successful, may take a significant period of time, will place a
significant strain on the Company's resources, and could subject the Company
to additional expenses during the integration
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<PAGE>
process. As a result, there can be no assurance that the Company will be able
to integrate acquired businesses successfully or in a timely manner in
accordance with its strategic objectives. If the Company is unable to manage
internal or acquisition-based growth effectively, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business--Strategy," "--Consulting Office Network
Development" and "--Employees."
Dilution. Investors participating in this offering will incur immediate,
substantial dilution. The Company also has outstanding a large number of stock
options and warrants to purchase the Company's Common Stock with exercise
prices significantly below the estimated initial public offering price. To the
extent such options or warrants are exercised, there will be further dilution.
In addition, the Company expects to continue its acquisition program through
at least the end of 1998, pursuant to which the Company intends to issue
additional shares of Common Stock as acquisition consideration and grant
additional stock options and stock bonuses to the employees of the acquired
companies. Furthermore, the Company may be required, pursuant to the terms of
the definitive acquisition agreements, to issue additional shares, stock
options and stock bonuses to the shareholders and employees of the acquired
companies at each of six and twelve months after the dates of consolidation of
the acquired companies. Although the Company has had no experience to date
with such additional issuances, they could be material. For these reasons, the
Company's acquisition program will result in further substantial ownership
dilution to investors participating in this offering. See "Dilution."
Uncertain Maintenance and Strengthening of the USWeb Brand. The Company
believes that maintaining and strengthening the USWeb brand is an important
aspect of its efforts to attract clients and that the importance of brand
recognition will increase due to the increasing number of companies entering
the market for Internet professional services. Promoting and positioning the
USWeb brand will depend largely on the success of the Company's marketing
efforts and the ability of the Company to provide high quality, reliable and
cost effective Internet solution strategy consulting, analysis and design,
technology development, implementation and integration, audience development
and maintenance services. If clients do not perceive the Company's services as
meeting their needs, or if the Company fails to market those services
effectively, the Company will be unsuccessful in maintaining and strengthening
its brand. In addition, while the Company centralizes its marketing efforts,
it provides client service through the individual consulting offices and
client dissatisfaction with the performance of a single office could tarnish
the perception of the USWeb brand as a whole. Furthermore, in order to promote
the USWeb brand in response to competitive pressures, the Company may find it
necessary to increase its marketing budget or otherwise increase its financial
commitment to creating and maintaining brand loyalty among clients. If the
Company fails to promote and maintain its brand, or incurs excessive expenses
in an attempt to promote and maintain its brand, the Company's business,
results of operations and financial condition will be materially adversely
affected. See "Business--Marketing."
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software
companies, including Microsoft, Hewlett-Packard, Pandesic LLC ("Pandesic," a
joint venture between Intel Corporation ("Intel") and SAP America Inc.
("SAP")), Sun Microsystems, Inc. ("Sun Microsystems") and Reuters Ltd.
("Reuters"). The loss of any one of these strategic relationships would
deprive the Company of the opportunity to gain early access to leading-edge
technology, cooperatively market products with the vendor, cross-sell
additional services and gain enhanced access to vendor training and support.
The agreements regarding these strategic relationships are typically
terminable at will by either party, and, in the event that any strategic
relationship is terminated, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Business--
Strategy" and "--Strategic Relationships."
Uncertain Adoption of Internet Solutions; Dependence on Client
Outsourcing. The market for the Company's services will depend upon the
adoption of Internet solutions by companies to improve their business
processes. The Internet may not prove to be a viable commercial marketplace
because of inadequate
10
<PAGE>
development of the necessary infrastructure, lack of development of
complementary products, such as high speed modems and high speed communication
lines, implementation of competing technology, delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity, governmental regulation, or other reasons. The Internet has
experienced, and is expected to continue to experience, significant growth in
the number of users and volume of traffic. There can be no assurance that the
Internet infrastructure will continue to be able to support the demands placed
on it by this continued growth. Moreover, critical issues concerning the use
of Internet solutions (including security, reliability, cost, ease of
deployment and administration and quality of service) remain unresolved and
may affect the growth of the use of such technologies to solve business
problems. The adoption of Internet solutions for commerce and communications,
particularly by those individuals and enterprises that have historically
relied on alternative means of commerce and communication, generally requires
the acceptance of a new way of conducting business and exchanging information,
which may be difficult for those with substantial investments in alternate
means that might be made obsolete. If critical issues concerning the ability
of Internet solutions to improve business processes are not resolved or if the
necessary infrastructure is not developed, the Company's business, results of
operations and financial condition will be materially adversely affected.
Even if these issues are resolved, there can be no assurance that businesses
will elect to outsource the design, development and maintenance of their
Intranets, Extranets and Web sites to Internet professional services firms.
Companies may decide to assign the design, development and implementation of
Internet solutions to their internal information technology divisions, which
have ready access to both key client decision makers and the information
required to prepare proposals for such solutions. If independent providers of
Internet professional services prove to be unreliable, ineffective or too
expensive, or if software companies develop tools that are sufficiently user-
friendly and cost-effective, enterprises may choose to design, develop or
maintain all or part of their Intranets, Extranets or Web sites in-house. If
the market for the Company's services does not continue to develop or develops
more slowly than expected, or if the Company's services do not achieve market
acceptance, the Company's business, results of operations and financial
condition will be materially adversely affected. See "Business--Industry
Background" and "--Strategy."
Rapid Technological Change. The market for Internet professional services is
characterized by rapid technological change, changes in user and client
requirements and preferences, frequent new product and service introductions
embodying new processes and technologies and evolving industry standards and
practices that could render the Company's existing service practices and
methodologies obsolete. The Company's success will depend, in part, on its
ability to improve its existing services, develop new services and solutions
that address the increasingly sophisticated and varied needs of its current
and prospective clients, and respond to technological advances, emerging
industry standards and practices, and competitive service offerings. There can
be no assurance that the Company will be successful in responding quickly,
cost-effectively and sufficiently to these developments. If the Company is
unable, for technical, financial or other reasons, to adapt in a timely manner
in response to changing market conditions or client requirements, its
business, results of operations and financial condition would be materially
adversely affected. See "Business--Strategy" and "--Clients."
Risks Associated with International Operations and Expansion. The Company
intends to expand its operations into international markets. However, to date
the Company has not established any consulting office outside of the United
States and has no experience in either managing an international network of
consulting offices or in marketing services to international clients. The
Company expects to incur significant costs to do both. If revenues from
international consulting offices are not adequate to offset the expenses of
establishing and maintaining an international network and of localizing the
Company's marketing programs, the Company's business, results of operations
and financial condition could be materially adversely affected. There can be
no assurance that the Company will be able to establish and maintain
international consulting offices or market its services to international
clients. In addition to the uncertainty as to the Company's ability to
generate revenues from foreign operations and expand its international
presence, there are certain risks inherent in doing business on an
international level, such as unexpected changes in regulatory requirements,
export and import restrictions, tariffs and other trade barriers, difficulties
in staffing and managing foreign operations,
11
<PAGE>
longer payment cycles, problems in collecting accounts receivable, political
instability, fluctuations in currency exchange rates, software piracy,
seasonal reductions in business activity and potentially adverse tax
consequences, any of which could adversely affect the Company's international
operations. There can be no assurance that one or more of the factors
described above will not have a material adverse effect on the Company's
future international operations and, consequently, on the Company's business,
results of operations and financial condition. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Risks of Fixed-Price Engagements. The Company intends to increase the
percentage of its engagements that are billed on a fixed-price basis, as well
as the percentage of revenues derived from fixed-price engagements, as
distinguished from the Company's current principal method of billing on a time
and materials basis. To date, the Company has had only limited experience with
fixed-price engagements. The Company's failure to estimate accurately the
resources and time required for an engagement, to manage client expectations
effectively regarding the scope of services to be delivered for the estimated
fees or to complete fixed-price engagements within budget, on time and to
clients' satisfaction would expose the Company to risks associated with cost
overruns and, in certain cases, penalties, any of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Risks of Franchising. USWeb has entered into franchise agreements with
Affiliates, which manage a number of its consulting offices. While these
agreements permit the Company to terminate the franchise relationship if an
Affiliate continues to underperform relative to other Affiliates, such an
Affiliate must be given at least 12 months to improve its performance.
Consequently, a significantly underperforming Affiliate could adversely affect
the Company's reputation. In addition, a terminated Affiliate may refuse to
comply with the terms of the franchise agreement relating to relinquishment of
the USWeb brand and other Company intellectual property or initiate litigation
against the Company. The operational autonomy granted to each Affiliate
through the franchise structure, together with the absence of certain
territorial restrictions on its activities, may inhibit the Company's control
over its market presence or enable the Affiliate to compete with Company-owned
offices for client engagements. Further, despite implementation of contractual
safeguards and insurance against such a possibility, USWeb may be held by a
court to be responsible for some action or liability of an Affiliate. Varying
rights and protections under different state laws, lack of control of
Affiliate actions, or findings of vicarious liability for Affiliate actions
could have a material adverse effect on the Company's business, operating
results and financial condition. In addition, if a significant portion of the
Affiliates chose not to work cooperatively, or if any significant Affiliate or
group of Affiliates were to leave the USWeb network, the network would be
correspondingly weaker. Furthermore, although for a period of two years after
the end of the Affiliate relationship the Affiliate and key persons associated
with the Affiliate are prohibited from certain activities in competition with
USWeb and from soliciting USWeb employees for alternate employment,
enforceability of these restrictions will vary depending on applicable state
law. To the extent that the action or inaction of any Affiliate proves
deleterious to the reputation associated with the USWeb brand, the Company's
business, results of operations and financial condition could be materially
adversely affected.
Dependence on Key Personnel. The Company's performance is substantially
dependent on the continued services and on the performance of its executive
officers and other key employees, many of whom have worked together for only a
short period of time. Particularly in light of the Company's relatively early
stage of development, the Company is dependent on retaining and motivating
highly qualified personnel, especially its senior management. The Company does
not have "key person" life insurance policies on any of its executive
officers. The loss of the services of any of its executive officers or other
key employees could have a material adverse effect on the business, results of
operations or financial condition of the Company. See "Management."
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<PAGE>
Intellectual Property Risks. The Company regards its copyrights, trademarks,
trade secrets (including its methodologies, practices and tools) and other
intellectual property rights as critical to its success. To protect its rights
in these various intellectual properties, the Company relies on a combination
of trademark and copyright law, trade secret protection and confidentiality
agreements and other contractual arrangements with its employees, Affiliates,
clients, strategic partners, acquisition targets and others to protect its
proprietary rights. The Company has also registered several of its trademarks
in the U.S. and internationally. Effective trademark, copyright and trade
secret protection may not be available in every country in which the Company
offers or intends to offer its services. There can be no assurance that the
steps taken by the Company to protect its proprietary rights will be adequate
or that third parties will not infringe or misappropriate the Company's
copyrights, trademarks and similar proprietary rights, or that the Company
will be able to detect unauthorized use and take appropriate steps to enforce
its rights. In addition, although the Company believes that its proprietary
rights do not infringe on the intellectual property rights of others, there
can be no assurance that other parties will not assert infringement claims
against the Company. Such claims, even if not meritorious, could result in the
expenditure of significant financial and managerial resources.
Potential Liability to Clients. Many of the Company's consulting engagements
involve the development, implementation and maintenance of applications that
are critical to the operations of its clients' businesses. The Company's
failure or inability to meet a client's expectations in the performance of its
services could injure the Company's business reputation or result in a claim
for substantial damages against the Company, regardless of the Company's
responsibility for such failure. In addition, the Company aggregates and makes
available through the Strategy and Solutions Center methodologies,
technologies and content which may include confidential or proprietary client
information. Although the Company has implemented policies to prevent such
client information from being disclosed to unauthorized parties or used
inappropriately, any such unauthorized disclosure or use could result in a
claim for substantial damages. The Company attempts to limit contractually its
damages arising from negligent acts, errors, mistakes or omissions in
rendering Internet professional services; however there can be no assurance
that any contractual protections will be enforceable in all instances or would
otherwise protect the Company from liability for damages. Although the Company
maintains general liability insurance coverage, including coverage for errors
and omissions, there can be no assurance that such coverage will continue to
be available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance
requirements, could adversely affect the Company's business, results of
operations and financial condition.
Future Capital Needs; Uncertainty of Additional Financing. The Company
currently anticipates that its available cash resources and credit facilities,
combined with the net proceeds to the Company from this offering, will be
sufficient to meet its presently anticipated working capital and capital
expenditure requirements for at least the next 12 months. However, the Company
may need to raise additional funds in order to support more rapid expansion,
develop new or enhanced services and products, respond to competitive
pressures, acquire complementary businesses or technologies or take advantage
of unanticipated opportunities. The Company's future liquidity and capital
requirements will depend upon numerous factors, including the success of the
Company's existing and new service offerings and competing technological and
market developments. The Company may be required to raise additional funds
through public or private financing, strategic relationships or other
arrangements. There can be no assurance that such additional funding, if
needed, will be available on terms acceptable to the Company, or at all.
Furthermore, any additional equity financing may be dilutive to stockholders,
and debt financing, if available, may involve restrictive covenants, which may
limit the Company's operating flexibility with respect to certain business
matters. Strategic arrangements, if necessary to raise additional funds, may
require the Company to relinquish its rights to certain of its intellectual
property. If additional funds are raised through the issuance of equity
securities, the percentage ownership of the stockholders of the Company will
be reduced, stockholders may experience additional dilution in net book value
per share, and such equity securities may have rights,
13
<PAGE>
preferences or privileges senior to those of the holders of the Company's
Common Stock. If adequate funds are not available on acceptable terms, the
Company may be unable to develop or enhance its services and products, take
advantage of future opportunities or respond to competitive pressures, any of
which could have a material adverse effect on the Company's business, results
of operations and financial condition. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
Government Regulation and Legal Uncertainties. The Company is not currently
subject to direct government regulation, other than pursuant to certain
franchising regulations, the securities laws and the regulations thereunder
applicable to all publicly owned companies, and laws and regulations
applicable to businesses generally, and there are currently few laws or
regulations directly applicable to access to or commerce on the Internet.
However, due to the increasing popularity and use of the Internet, it is
likely that a number of laws and regulations may be adopted at the local,
state, national or international levels with respect to the Internet covering
issues such as user privacy, freedom of expression, pricing of products and
services, taxation, advertising, intellectual property rights, information
security or the convergence of traditional communications services with
Internet communications. For example, the Telecommunications Act of 1996
imposes criminal penalties on anyone who distributes obscene or indecent
communications over the Internet. Although the anti-indecency provisions of
the Telecommunications Act have been declared unconstitutional by the federal
courts, the increased attention focused upon these liability issues as a
result of the Telecommunications Act could adversely affect the growth of the
Internet and therefore demand for the Company's services. In addition, because
of the growth in the electronic commerce market, Congress has held hearings on
whether to regulate providers of services and transactions in the electronic
commerce market, which regulations could negatively affect client demand for
Internet solutions that facilitate electronic commerce. Moreover, the adoption
of any such laws or regulations may decrease the growth of the Internet, which
could in turn decrease the demand for the Company's services or increase the
cost of doing business or in some other manner have a material adverse effect
on the Company's business, results of operations or financial condition. In
addition, the applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation, libel and personal privacy is uncertain. The vast majority of such
laws were adopted prior to the advent of the Internet and related technologies
and, as a result, do not contemplate or address the unique issues of the
Internet and related technologies. Changes to such laws intended to address
these issues, including some recently proposed changes, could create
uncertainty in the marketplace which could reduce demand for the Company's
services or increase the cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
have a material adverse effect on the Company's business, results of
operations and financial condition.
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
offering, there has been no public market for the Company's Common Stock, and
there can be no assurance that an active public market for the Common Stock
will develop or be sustained after the offering. The initial public offering
price will be determined by negotiation between the Company and the
underwriters based upon several factors. See "Underwriting" for a discussion
of the factors to be considered in determining the initial public offering
price. The market price of the Company's Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by the Company or its competitors, changes in financial estimates
by securities analysts, or other events or factors. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many
technology companies and that often have been unrelated to the operating
performance of such companies. In the past, following periods of volatility in
the market price of a company's securities, securities class action litigation
has often been instituted against such a company. Such litigation could result
in substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business,
operating results and financial condition. See "Underwriting."
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Shares Eligible for Future Sale. Sales of a substantial number of shares of
Common Stock in the public market following this offering could adversely
affect the market price for the Common Stock. See "Description of Capital
Stock" and "Shares Eligible for Future Sale."
Effect of Certain Charter Provisions; Antitakeover Effects of Certificate of
Incorporation, Bylaws and Delaware Law. The Board of Directors has the
authority to issue up to 1,000,000 shares of Preferred Stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult
for a third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's Amended and Restated Certificate
of Incorporation and Bylaws and of Delaware law could delay or make difficult
a merger, tender offer or proxy contest involving the Company. See
"Description of Capital Stock--Preferred Stock" and "--Certain Antitakeover
Effects of Provisions of the Certificate of Incorporation, Bylaws and Delaware
Law."
Concentration of Stock Ownership. Upon completion of this offering, the
present directors, executive officers and their respective affiliates will
beneficially own approximately % of the outstanding Common Stock assuming no
exercise of the Underwriters' over-allotment option and % of the outstanding
Common Stock assuming full exercise of the Underwriters' over-allotment
option. As a result, these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing
a change in control of the Company. See "Principal Stockholders" and
"Description of Capital Stock--Certain Antitakeover Effects of Provisions of
the Certificate of Incorporation, Bylaws and Delaware Law."
No Specific Use of Proceeds. The Company has not designated any specific use
for the net proceeds from the sale by the Company of the Common Stock offered
hereby. The Company expects to use the net proceeds for general corporate
purposes, including working capital. Accordingly, management will have
significant flexibility in applying the net proceeds of this offering. The
failure of management to apply such funds effectively could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Use of Proceeds."
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock being offered by the Company hereby at an assumed initial public
offering price of $ per share are estimated to be approximately $
(approximately $ if the Underwriters' over-allotment option is exercised in
full). The principal purposes of this offering are to obtain additional
capital, create a public market for the Company's Common Stock and facilitate
future access by the Company to the public equity markets. The Company expects
to use the net proceeds from this offering for general corporate purposes,
including working capital and acquisition-related costs. The Company regularly
reviews potential acquisition candidates, is holding preliminary discussions
with a number of such candidates and is engaged in active negotiations with a
number of other such candidates. Although to date the Company has not used
cash for acquisition consideration, to the extent the Company chooses to do so
in the future, the Company may be required to obtain additional financing.
Pending use of the net proceeds for the above purposes, the Company intends to
invest such funds in short-term, interest-bearing, investment-grade
obligations. See "Risk Factors--No Specific Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain any future earnings to finance
the growth and development of its business and therefore does not anticipate
paying any cash dividends in the foreseeable future. The payment of cash
dividends in the future will be at the discretion of the Board of Directors
and subject to certain limitations under the Delaware General Corporation Law
and will depend upon factors such as the Company's earnings levels, capital
requirements, financial condition and other factors deemed relevant by the
Board of Directors. There can be no assurance that the Company will pay any
dividends in the future.
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CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997 (i) on an actual basis, (ii) pro forma to reflect the conversion of
all outstanding shares of Preferred Stock of the Company into Common Stock and
(iii) as adjusted to give effect to the sale by the Company of shares of
Common Stock offered hereby at an assumed initial public offering price of
$ per share and the application of the net proceeds therefrom. See "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------
PRO AS
ACTUAL FORMA (1) ADJUSTED (2)
-------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations, long-term portion.......... $ 487 $ 487 $487
-------- -------- ----
Mandatorily Redeemable Convertible Preferred
Stock........................................ 32,490 -- --
-------- -------- ----
Stockholders' equity:
Preferred Stock, $.001 par value, 1,000,000
shares authorized, no shares issued and
outstanding actual; shares authorized, no
shares issued and outstanding pro forma and
as adjusted.................................. -- -- --
Common Stock, $.001 par value, 100,000,000
shares authorized; 9,685,312 shares issued
and outstanding actual; 21,779,672 shares
issued and outstanding pro forma; and
shares issued and outstanding as adjusted
(3).......................................... 5 17
Additional paid-in capital.................. 15,167 47,645
Accumulated deficit......................... (35,051) (35,051)
-------- -------- ----
Total stockholders' equity (deficit)...... (19,879) 12,611
-------- -------- ----
Total capitalization.................... $ 13,098 $ 13,098 $
======== ======== ====
</TABLE>
- ---------------------
(1) Pro forma information gives effect to the conversion of all outstanding
shares of Preferred Stock into Common Stock immediately prior to the
closing of this offering. See Note 2 to Consolidated Financial Statements.
(2) As adjusted to reflect the sale of shares of Common Stock by the
Company at an assumed initial public offering price of $ per share and
the application of the estimated net proceeds therefrom.
(3) Excludes (i) 9,300,000 shares of Common Stock reserved for issuance under
the Company's stock option plans, including the 1997 Acquisition Stock
Option Plan, of which 3,282,957 shares were issuable upon exercise of
outstanding options, (ii) 104,722 shares issuable upon exercise of
outstanding warrants, (iii) 161,147 shares reserved for future grant under
the Company's Affiliate Warrant Program, (iv) 1,000,000 shares of Common
Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan and (v) shares that may be issued as stock bonuses and
acquisition purchase price adjustments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Acquisition of
Internet Professional Services Firms," "Management--Employee Benefit
Plans" and Notes 1, 9, 10 and 13 to Consolidated Financial Statements.
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
(assuming the conversion of all outstanding shares of Preferred Stock into
Common Stock) was $6.1 million, or $0.28 per share of Common Stock. Net
tangible book value per share represents the amount of total tangible assets
less total liabilities (adjusted to reflect the removal of the mandatory
redemption feature of the outstanding Preferred Stock) divided by the number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of shares of Common Stock offered hereby (based upon an assumed
initial public offering price of $ per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses), the
Company's pro forma net tangible book value at June 30, 1997 would have been
$ , or $ per share. This represents an immediate increase in net pro forma
tangible book value to existing stockholders of $ per share and an immediate
dilution of $ per share to new investors. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of June 30,
1997.......................................................... $0.28
Increase in net tangible book value per share attributable to
new investors.................................................
-----
Pro forma net tangible book value per share after the offering...
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the differences between existing stockholders and new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... 21,779,672 % $36,291,534 % $1.67
New investors...........
---------- ----- ----------- -----
Total................. 100.0% $ 100.0%
========== ===== =========== =====
</TABLE>
The foregoing tables assume no exercise of the Underwriters' over-allotment
option and no exercise of stock options and warrants outstanding at June 30,
1997. As of June 30, 1997, there were options outstanding to purchase a total
of 3,739,954 shares of Common Stock, 5,560,045 shares reserved for grant of
future options under the Company's stock option plans, 104,722 shares of
Common Stock issuable upon exercise of outstanding warrants, 161,417 shares
reserved for future grant under the Affiliate Warrant Program and an aggregate
of 1,000,000 shares of Common Stock reserved for issuance under the 1997
Employee Stock Purchase Plan. To the extent that any of these options and
warrants are exercised, there will be further dilution to new investors. See
"Capitalization," "Management--Employee Benefit Plans" and Notes 1, 9, 10 and
13 to Consolidated Financial Statements.
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto
included elsewhere herein. The statement of operations data set forth below
with respect to the year ended December 31, 1996 and the balance sheet data at
December 31, 1996 are derived from, and are qualified by reference to, the
audited consolidated financial statements of the Company included elsewhere in
this Prospectus. The selected consolidated financial data for the six-month
periods ended June 30, 1996 and 1997 are derived from unaudited financial
statements prepared by the Company and include all adjustments, consisting
only of normal recurring adjustments, which the Company believes are necessary
for a fair statement of the Company's results of operations for those periods.
Operating results for the six months ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
The pro forma consolidated statement of operations data for the year ended
December 31, 1996 and the six months ended June 30, 1997 reflect the effect of
the acquisitions of the outstanding capital stock of USWeb San Francisco,
USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb Silicon
Valley, USWeb DC, USWeb Phoenix and USWeb Pittsburgh, as if each of the
acquisitions had occurred on January 1, 1996. All intercompany revenues and
expenses have been eliminated in consolidation. The pro forma balance sheet
data reflects the conversion of all outstanding shares of the Company's
Preferred Stock into Common Stock upon the closing of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Notes 1 and 2 to Financial Statements.
<TABLE>
<CAPTION>
PRO FORMA (2)
-----------------------
SIX MONTHS ENDED SIX MONTHS
YEAR ENDED JUNE 30, YEAR ENDED ENDED
DECEMBER 31, ----------------- DECEMBER 31, JUNE 30,
1996 1996 1997 1996 1997
------------ ------- -------- ------------ ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA (1):
Revenues:
Services.............. $ -- $ -- $ 2,245 $ 11,175 $ 7,663
Other................. 1,820 100 694 1,503 408
-------- ------- -------- -------- --------
Total revenues...... 1,820 100 2,939 12,678 8,071
-------- ------- -------- -------- --------
Cost of revenues:
Services.............. -- -- 2,171 7,959 5,860
Other................. 208 -- 211 208 211
Stock compensation
(3).................. -- -- 347 3,614 1,964
-------- ------- -------- -------- --------
Total cost of reve-
nues............... 208 -- 2,729 11,781 8,035
-------- ------- -------- -------- --------
Gross profit............ 1,612 100 210 897 36
-------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support.............. 12,764 4,301 8,335 14,112 9,098
General and adminis-
trative.............. 2,813 1,098 3,762 4,610 4,614
Acquired in-process
technology (3)....... -- -- 2,848 3,610 --
Stock compensation
(3).................. -- -- 948 6,189 3,602
Amortization of intan-
gible assets (3) .... -- -- 1,577 7,391 2,139
-------- ------- -------- -------- --------
Total operating ex-
penses............. 15,577 5,399 17,470 35,912 19,453
-------- ------- -------- -------- --------
Loss from operations.... (13,965) (5,299) (17,260) (35,015) (19,417)
Interest income......... 215 114 69 216 101
Interest expense........ (58) (10) (52) (219) (100)
Impairment of investee
carried at cost........ -- -- (4,000) -- (4,000)
-------- ------- -------- -------- --------
Net loss................ $(13,808) $(5,195) $(21,243) $(35,018) $(23,416)
======== ======= ======== ======== ========
Pro forma:
Net loss per share
(4)(5)............... $ (0.54) $ (0.20) $ (0.82) $ (1.33) $ (0.86)
Weighted average
shares outstanding
(4)(5)............... 25,749 25,581 26,024 26,324 27,358
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA AT
DECEMBER 31, JUNE 30, JUNE 30,
1996 1997 1997
------------ -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................... $ 3,220 $ 9,333 $9,708
Working capital............................. 73 4,047 4,608
Total assets................................ 7,482 20,310 26,367
Lease obligations, long term portion........ 436 487 487
Mandatorily redeemable convertible preferred
stock(2)................................... 16,200 32,490 32,490
Stockholders' equity (deficit)(2)........... (12,492) (19,879) (14,889)
</TABLE>
- -------------------
(1) The Company was incorporated on December 6, 1995 and had insignificant
activities from inception through December 31, 1995, which have been
included in the 1996 financial statements to facilitate presentation.
(2) Pro forma consolidated statement of operations data reflect the effect of
the acquisitions of the outstanding capital stock of USWeb San Francisco,
USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb
Silicon Valley, USWeb DC, USWeb Phoenix and USWeb Pittsburgh, as if each
of the acquisitions had occurred on January 1, 1996.
(3) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's DIscussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
(4) Historical pro forma net loss per share is computed using the weighted
average number of common and common equivalent shares outstanding. The
weighted average shares outstanding excludes acquisition shares held in
escrow that are not probable of issuance and includes contingent shares
which, based upon currently available information, are probable of
issuance at the end of the contingency periods. Common equivalent shares
consist of mandatorily redeemable convertible preferred stock (using the
if-converted method) and stock options and warrants (using the treasury
stock method). Common equivalent shares are excluded from the computation
if their effect is anti-dilutive, except that, pursuant to a Securities
and Exchange Commission Staff Accounting Bulletin, shares of common stock,
mandatorily redeemable convertible preferred stock (using the if-converted
method) and common equivalent shares (using the treasury stock method and
the assumed public offering price) issued within 12 months prior to the
Company's filing of a Registration Statement for this offering have been
included in the computation as if they were outstanding for each period
presented.
(5) Pro forma net loss per share is computed on the basis of (4) above and
giving effect to amortization of deferred compensation expense related to
acquired companies as if acquired on January 1, 1996 (or date of
inception, if later). Common shares deemed outstanding under stock bonus
arrangements for employees of acquired companies is computed for each
period by dividing cumulative deferred compensation expense recognized in
the statement of operations by the proposed offering price.
19
<PAGE>
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations data
reflect the effect of the acquisitions of the outstanding capital stock of
USWeb San Francisco, USWeb Seattle, USWeb Milwaukee, USWeb LA Metro, USWeb
Atlanta, USWeb Silicon Valley, USWeb DC, USWeb Phoenix and USWeb Pittsburgh,
as if each of the acquisitions had occurred on January 1, 1996 (or inception,
if later). All intercompany revenues and expenses have been eliminated in
consolidation. The pro forma consolidated statement of operations data are
presented for informational purposes only and may not be indicative of the
results of operations had the acquisitions occurred on January 1, 1996, nor do
they purport to indicate the future results of operations of the Company. The
following pro forma consolidated statement of operations data should be read
in conjunction with the Consolidated Financial Statements and notes thereto
and the Pro Forma Consolidated Financial Information and related notes
appearing elsewhere in this Prospectus. Management believes that all
adjustments necessary to present fairly such pro forma consolidated statement
of operations data have been made.
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ----------------------------------------------------------
DEC. 31, JUNE 30, MAR. 31, JUNE 30, SEP. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1997 1996 1996 1996 1996 1997 1997
---------- ---------- -------- -------- -------- -------- -------- --------
CONSOLIDATED STATEMENT (IN THOUSANDS, EXCEPT PER SHARE DATA)
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 11,175 $ 7,663 $ 2,815 $ 2,704 $ 2,432 $ 3,224 $ 3,616 $ 4,047
Other.................. 1,503 408 -- 75 240 1,188 194 214
-------- -------- ------- ------- ------- ------- ------- --------
Total revenues......... 12,678 8,071 2,815 2,779 2,672 4,412 3,810 4,261
-------- -------- ------- ------- ------- ------- ------- --------
Cost of revenues:
Services............... 7,959 5,860 1,641 1,804 2,008 2,506 2,556 3,304
Other.................. 208 211 -- -- 78 130 132 79
Stock compensation (1). 3,614 1,964 786 864 982 982 982 982
-------- -------- ------- ------- ------- ------- ------- --------
Total cost of revenues. 11,781 8,035 2,427 2,668 3,068 3,618 3,670 4,365
-------- -------- ------- ------- ------- ------- ------- --------
Gross profit (loss)..... 897 36 388 111 (396) 794 140 (104)
-------- -------- ------- ------- ------- ------- ------- --------
Operating expenses:
Marketing, sales and
support............... 14,112 9,098 2,193 2,626 3,982 5,311 4,296 4,802
General and administra-
tive.................. 4,610 4,614 1,151 970 977 1,512 2,128 2,486
Acquired in-process
technology (1) ....... 3,610 -- 2,256 1,354 -- -- -- --
Stock compensation (1). 6,189 3,602 1,142 1,445 1,801 1,801 1,801 1,801
Amortization of
intangible assets (1). 7,391 2,139 1,583 1,978 1,958 1,872 1,196 943
-------- -------- ------- ------- ------- ------- ------- --------
Total operating ex-
penses................ 35,912 19,453 8,325 8,373 8,718 10,496 9,421 10,032
-------- -------- ------- ------- ------- ------- ------- --------
Loss from operations.... (35,015) (19,417) (7,937) (8,262) (9,114) (9,702) (9,281) (10,136)
Interest income......... 216 101 31 83 57 45 29 72
Interest expense........ (219) (100) (45) (44) (61) (69) (63) (37)
Impairment of investee
carried at cost........ -- (4,000) -- -- -- -- -- (4,000)
-------- -------- ------- ------- ------- ------- ------- --------
Net loss................ $(35,018) $(23,416) $(7,951) $(8,223) $(9,118) $(9,726) $(9,315) $(14,101)
======== ======== ======= ======= ======= ======= ======= ========
Pro forma:
Net loss per share (2).. $ (1.33) $ (0.86) $ (0.31) $ (0.31) $ (0.34) $ (0.36) $ (0.34) $ (0.51)
Weighted average shares
outstanding (2)........ 26,324 27,358 25,653 26,126 26,576 26,940 27,219 27,498
</TABLE>
- ---------------------
(1) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
(2) Historical Pro forma net loss per share is computed using the weighted
average number of common and common equivalent shares outstanding. The
weighted average shares outstanding excludes acquisition shares held in
escrow that are not probable of issuance and includes contingent shares
which, based upon currently available information, are probable of
issuance at the end of the contingency periods. Common equivalent shares
consist of mandatorily redeemable convertible preferred stock (using the
if-converted method) and stock options and warrants (using the treasury
stock method). Common equivalent shares are excluded from the computation
if their effect is anti-dilutive, except that, pursuant to a Securities
and Exchange Commission Staff Accounting Bulletin, shares of common stock,
mandatorily redeemable convertible preferred stock (using the if-converted
method) and common equivalent shares (using the treasury stock method and
the assumed public offering price) issued within 12 months prior to the
Company's filing of a Registration Statement for this offering have been
included in the computation as if they were outstanding for each period
presented.
(3) Pro forma net loss per share is computed on the basis of (2) above and
giving effect to amortization of deferred compensation expense related to
acquired companies as if acquired on January 1, 1996 (or date of
inception, if later). Common shares deemed outstanding under stock bonus
arrangements for employees of acquired companies is computed for each
period by dividing cumulative deferred compensation expense recognized in
the statement of operations by the proposed offering price.
20
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
During the period from January 1, 1997 to July 1, 1997, the Company
recognized the effect of the acquisition of nine Affiliates (the "Controlled
Companies") in separate transactions as follows. See Note 1 to Consolidated
Financial Statements.
<TABLE>
<CAPTION>
EFFECTIVE DATE COMMON RECOGNIZED
OF SHARES PURCHASE
CONTROLLED COMPANY CONSOLIDATION ISSUED PRICE
- ------------------ -------------- --------- ----------
<S> <C> <C> <C>
USWeb San Francisco (formerly XCom Corpora-
tion)..................................... March 16, 1997 383,210 $ 1,609
USWeb Seattle (formerly Cosmix Corpora-
tion)..................................... April 1, 1997 119,774 503
USWeb Milwaukee (formerly Fetch Interac-
tive, Inc.)............................... April 1, 1997 464,838 1,387
USWeb LA Metro (formerly NewLink Corpora-
tion)..................................... April 1, 1997 425,700 1,537
USWeb Atlanta (formerly InterNetOffice,
LLC)...................................... May 1, 1997 510,647 1,568
USWeb Silicon Valley (formerly NetWORKERS
Corporation).............................. May 1, 1997 135,415 569
USWeb DC (formerly Infopreneurs Inc.)...... June 1, 1997 1,008,170 3,173
USWeb Phoenix (formerly Netphaz Corpora-
tion)..................................... June 1, 1997 235,205 774
USWeb Pittsburgh (formerly Electronic Im-
ages, Inc.)............................... July 1, 1997 1,665,525 6,995
--------- -------
4,948,484 $18,115
========= =======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, each purchase price has been allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
on the basis of their fair values on the acquisition dates. Approximately
$3,610 of the aggregate purchase price was allocated to in-process technology.
Because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use, these
amounts were immediately charged to operations. Approximately $1,379 was
allocated to existing technology and is being amortized over its estimated
useful life of six months. The purchase price in excess of identified tangible
and intangible assets in the amount of $10,428 was allocated to goodwill and
is being amortized over its estimated useful life of 12 to 24 months.
The following unaudited pro forma consolidated statements of operations give
effect to these acquisitions as if they had occurred on January 1, 1996 by
consolidating the results of operations of the Controlled Companies with the
results of operations of USWeb for the year ended December 31, 1996 and the
unaudited six-month period ended June 30, 1997. Certain of the Controlled
Companies were not in existence as of January 1, 1996. In such cases the
Company has consolidated such entities as of their respective inception dates.
Certain of the Controlled Companies have fiscal year ends other than December
31. In such cases the Company has concluded that converting such operations to
a calendar year basis would not have a material impact on the accompanying
consolidated pro forma results of operations. The pro forma adjustments
include the elimination of all intercompany transactions.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transactions been in effect as of the beginning of the periods
presented and should not be construed as representative of future operating
results.
The unaudited pro forma consolidated balance sheet gives effect to the
recognition of the USWeb Pittsburgh acquisition as if it had occurred on June
30, 1997 by consolidating the balance sheet of USWeb Pittsburgh with the
historical consolidated balance sheet of USWeb at June 30, 1997. The USWeb
consolidated balance sheet at June 30, 1997 includes the balance sheets of the
other eight Controlled Companies listed above as they were acquired prior to
June 30, 1997.
The historical financial statements of the Company, USWeb San Francisco,
USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb DC and USWeb Pittsburgh
are included elsewhere in this Prospectus and the unaudited pro forma
consolidated financial information presented herein should be read in
conjunction with those financial statements and related notes.
21
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------- ---------------------------------------------------
CONSOLI-
DATED
USWEB USWEB (A)
CORPORA- CONTROLLED ADJUST- CORPORA- CONTROLLED ELIMI- ADJUST-
TION COMPANIES MENTS PRO FORMA TION COMPANIES NATION MENTS PRO FORMA
-------- ---------- -------- --------- -------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ -- $11,175 $ -- $ 11,175 $ 2,245 $ 7,663 $(2,245) $ -- $ 7,663
Other.................. 1,820 -- (317)(B) 1,503 694 -- 182 (468)(B) 408
-------- ------- -------- -------- -------- ------- ------- ------- --------
Total revenues......... 1,820 11,175 (317) 12,678 2,939 7,663 (2,063) (468) 8,071
-------- ------- -------- -------- -------- ------- ------- ------- --------
Cost of revenues:
Services............... -- 8,076 (117)(B) 7,959 2,171 5,804 (1,796) (319)(B) 5,860
Other.................. 208 -- -- 208 211 -- -- -- 211
Stock compensation (1)
...................... -- -- 3,614 (E) 3,614 347 -- (347) 1,964 (E) 1,964
-------- ------- -------- -------- -------- ------- ------- ------- --------
Total cost of revenues. 208 8,076 3,497 11,781 2,729 5,804 (2,143) 1,645 8,035
-------- ------- -------- -------- -------- ------- ------- ------- --------
Gross profit (loss)..... 1,612 3,099 (3,814) 897 210 1,859 80 (2,113) 36
-------- ------- -------- -------- -------- ------- ------- ------- --------
Operating expenses:
Marketing, sales and
support............... 12,764 1,348 -- 14,112 8,335 1,329 (566) -- 9,098
General and
administrative........ 2,813 1,797 -- 4,610 3,762 1,697 (845) -- 4,614
Acquired in-process
technology (1) ....... -- -- 3,610 (C) 3,610 2,848 -- (2,848)(C) --
Stock compensation (1)
...................... -- -- 6,189 (E) 6,189 948 -- (948) 3,602 (E) 3,602
Amortization of
intangible assets (1)
...................... -- -- 7,391 (D) 7,391 1,577 -- (1,577) 2,139 (D) 2,139
-------- ------- -------- -------- -------- ------- ------- ------- --------
Total operating
expenses.............. 15,577 3,145 17,190 35,912 17,470 3,026 (3,936) 2,893 19,453
-------- ------- -------- -------- -------- ------- ------- ------- --------
Income (loss) from
operations............. (13,965) (46) (21,004) (35,015) (17,260) (1,167) 4,016 (5,006) (19,417)
Interest income......... 215 1 -- 216 69 32 -- -- 101
Interest expense........ (58) (161) -- (219) (52) (66) 18 -- (100)
Impairment of investee
carried at cost........ -- -- -- -- (4,000) -- -- -- (4,000)
-------- ------- -------- -------- -------- ------- ------- ------- --------
Net loss................ $(13,808) $ (206) $(21,004) $(35,018) $(21,243) $(1,201) $ 4,034 $(5,006) $(23,416)
======== ======= ======== ======== ======== ======= ======= ======= ========
Pro forma:
Net loss per share (G). $ (1.33) $ (0.86)
======== ========
Weighted average shares
outstanding (G)....... 26,324 27,358
======== ========
</TABLE>
- -------------------
(1) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
22
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------------------------
USWEB USWEB PRO FORMA
CORPORATION PITTSBURGH ADJUSTMENT PRO FORMA
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 9,333 $ 375 $ -- $ 9,708
Accounts receivable, net...... 1,481 758 -- 2,239
Other current assets.......... 445 268 -- 713
------- ------ ------ -------
Total current assets........ 11,259 1,401 -- 12,660
Property and equipment........ 2,295 887 3,182
Intangible assets, net........ 6,543 -- 3,687 (F) 10,230
Other assets.................. 213 82 -- 295
------- ------ ------ -------
$20,310 $2,370 $3,687 $26,367
======= ====== ====== =======
LIABILITIES, MANDATORILY REDEEM-
ABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable.............. $ 1,834 $ 43 $ -- $ 1,877
Accrued expenses.............. 5,022 528 -- 5,550
Current portion of lease obli-
gations...................... 356 -- -- 356
Current portion of note pay-
able......................... -- 269 -- 269
------- ------ ------ -------
Total Current Liabilities... 7,212 840 -- 8,052
Lease obligations, long-term
portion........................ 487 -- -- 487
Note payable--long-term portion. -- 227 -- 227
------- ------ ------ -------
7,699 1,067 -- 8,766
------- ------ ------ -------
Commitments and contingencies
Mandatorily Redeemable Convert-
ible Preferred Stock........... 32,490 -- -- 32,490
------- ------ ------ -------
Stockholders' equity (deficit):
Common Stock.................. 5 5 -- 10
Additional paid in capital.... 15,167 130 4,855 (F) 20,152
Notes receivable.............. -- (62) 62 (F) --
Retained earnings (accumulated
deficit)..................... (35,051) 1,230 (1,230)(F) (35,051)
------- ------ ------ -------
Total stockholders' equity
(deficit).................. (19,879) 1,303 3,687 (14,889)
------- ------ ------ -------
$20,310 $2,370 $3,687 $26,367
======= ====== ====== =======
</TABLE>
23
<PAGE>
USWEB CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS)
The following adjustments were applied to the historical statement of
operations of the Company and the Controlled Companies to arrive at the pro
forma consolidated statements of operations.
(A) To eliminate items of income and expense related to the Controlled
Companies which are included in the consolidated results of operations of
the Company from the date of the respective acquisition to June 30, 1997.
(B) To eliminate intercompany revenues and related expenses associated
with the Controlled Companies which had previously been Affiliates of the
Company.
(C) To record acquired in-process technology associated with the
acquisitions in the amount of $3,610 which is expensed at the later of
January 1, 1996 or the date of inception of the respective Controlled
Company.
(D) To record amortization expense related to (i) capitalized technology
in the amount of $1,379, which is amortized over its estimated useful life
of 6 months, and (ii) goodwill in the amount of $10,428, which is amortized
over its estimated useful life of 12 to 24 months.
(E) To record stock compensation expense related to new employees in the
amount of $33,400, which is allocated between cost of revenues and
operating expenses based upon employee classification and is amortized over
the related vesting period of 36 months.
(F) To record identified intangible assets associated with the
acquisition of USWeb Pittsburgh and to eliminate the historical
stockholders' equity of USWeb Pittsburgh using the purchase method of
accounting.
(G) Pro forma net loss per share is computed using the weighted average
number of common and common equivalent shares outstanding. The weighted
average shares outstanding excludes acquisition shares held in escrow that
are not probable of issuance and includes contingent shares which, based
upon currently available information, are probable of issuance at the end
of the contingency periods. Common equivalent shares consist of mandatorily
redeemable convertible preferred stock (using the if-converted method) and
stock options and warrants (using the treasury stock method). Common
equivalent shares are excluded from the computation if their effect is
anti-dilutive, except that, pursuant to a Securities and Exchange
Commission Staff Accounting Bulletin, shares of common stock, mandatorily
redeemable convertible preferred stock (using the if-converted method) and
common equivalent shares (using the treasury stock method and the assumed
public offering price) issued within 12 months prior to the Company's
filing of a Registration Statement for this offering have been included in
the computation as if they were outstanding for each period presented.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Consolidated Financial Data," "Pro Forma Selected Consolidated
Financial Data" and the Company's Consolidated Financial Statements, including
the Notes thereto, included elsewhere in this Prospectus. Except for the
historical information contained herein, the discussion in this Prospectus
contains forward-looking statements that involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations and intentions.
The cautionary statements made in this Prospectus should be read as being
applicable to all related forward-looking statements wherever they appear in
this Prospectus. The Company's actual results could differ materially from
those discussed below. Factors that could cause or contribute to such
differences include those discussed in "Risk Factors," as well as those
discussed elsewhere herein.
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions to businesses. The Company has built
a national network of consulting offices and what it believes to be one of the
most recognized brands for Internet professional services. The Company offers
a comprehensive range of services to deliver Internet solutions designed to
improve clients' business processes. The Company's services include strategy
consulting; analysis and design; technology development; implementation and
integration; audience development; and maintenance. The Company markets its
services to medium-sized and large companies.
From December 6, 1995 (inception) to March 31, 1997, the Company's operating
activities related primarily to recruiting personnel, raising capital,
preparing and securing approval of its Uniform Franchise Offering Circular and
conducting business as a franchisor of Internet professional services firms.
Each such firm that entered into a franchise agreement with USWeb was
designated an "Affiliate." In March 1997, the Company entered into its last
Affiliate agreement and does not expect to enter into any additional Affiliate
agreements. In the first quarter of 1997, the Company initiated the second
phase of its corporate development strategy and began to acquire Internet
professional services firms, starting with certain qualified Affiliates. To
date, the Company has derived its revenues from a combination of service
revenues generated by its Company-owned offices and fees paid by its
Affiliates. The Company expects that revenues attributable to its Company-
owned offices, which represented approximately 76% of total revenues for the
six months ended June 30, 1997, will increase as a percentage of total
revenues. Because of this transition in business strategy from a franchising
model to one based on Company-owned operations, the Company believes that its
historical financial statements for periods ending on or before March 31, 1997
are not indicative of future operating results.
The Company has only a limited operating history upon which to base an
evaluation of its business and prospects. The Company and its prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in an early stage of development, particularly
companies in new and rapidly evolving markets such as Internet professional
services. Such risks for the Company include, but are not limited to, an
evolving business model and the management of both internal and acquisition-
based growth. To address these risks, the Company must, among other things,
continue to expand its network of consulting offices, continue to develop the
strength and quality of its operations, maximize the value delivered to
clients, enhance the USWeb brand, respond to competitive developments and
continue to attract, retain and motivate qualified employees. There can be no
assurance that the Company will be successful in meeting these challenges and
addressing such risks, and the failure to do so could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company has incurred net losses since inception, and as of June
30, 1997 had an accumulated deficit of $35.1 million. Although the Company has
experienced revenue growth in recent months, such growth rates may not be
sustainable or indicative of future operating results. The Company expects to
continue to incur substantial operating losses through at least 1998, and
there can be no assurance that the Company will achieve or sustain
profitability. See "Risk Factors--Limited Operating History; Accumulated
Deficit."
25
<PAGE>
ACQUISITION OF INTERNET PROFESSIONAL SERVICES FIRMS
The Company began to acquire selected Internet professional services firms in
the first quarter of 1997. The Company transitioned from a franchise-based
business model to one based on Company-owned operations to provide greater
economies of scale, enable the consulting offices to focus on providing
Internet professional services and facilitate their growth by furnishing needed
working capital. All acquisitions have been structured as stock-for-stock
mergers.
The Company uses a consistent valuation model and process methodology for its
acquisitions. The Company determines the initial purchase price of each
candidate company based on quantitative factors, including historical revenues,
profitability, financial condition and contract backlog, and the Company's
qualitative evaluation of the candidate's management team, operational
scalability and customer base. The Company acquires suitable candidates through
mergers in exchange for shares of USWeb Common Stock. On the closing date of
the acquisition, fifty percent of the shares to be issued are delivered to the
acquired company's shareholders and the remaining fifty percent are deposited
into a one-year escrow. The acquired company is valued again at each of six and
twelve months after the date of consolidation, and additional shares are issued
or escrowed shares are returned depending on whether the valuation has
increased or decreased. After all such purchase price adjustments have been
made, all shares remaining in escrow are issued to the acquired company's
shareholders. The Company expects to continue using this valuation methodology
for future acquisitions. The Company's acquisition program will result in
further substantial ownership dilution to investors participating in this
offering. See "Risk Factors--Dilution."
The acquisitions have been accounted for using the purchase method of
accounting. For each acquisition, a portion of the purchase price is allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed based on their respective fair values on the acquisition date. This
portion includes both (i) amounts allocated to in-process technology and
immediately charged to operations and (ii) amounts allocated to completed
technology and amortized on a straight-line basis over the estimated useful
life of the technology of six months. The portion of the purchase price in
excess of tangible and identifiable intangible assets and liabilities assumed
is allocated to goodwill and amortized on a straight-line basis over the
estimated period of benefit, which ranges from one to two years. The results of
operations of the acquired entity are consolidated with those of the Company as
of the date the Company acquires management control of the entity, which
generally occurs prior to the formal legal closing of the transaction and the
physical exchange of acquisition consideration.
All target company employees and those non-employee shareholders who enter
into consulting agreements are granted options to purchase shares of the
Company's Common Stock. Each option becomes exercisable ratably over a 36-month
period and has an exercise price per share equal to the fair market value of a
share of USWeb Common Stock on the date of grant. Additional options are
granted at the six and twelve month re-valuation dates if the target company's
formula-based valuation increases. Each optionee is also given the right to
receive a stock bonus at the time an option is granted. The stock bonus vests
at the same rate as the corresponding option and is equal in value to the
aggregate exercise price of this option. The stock bonus is payable at the
earlier of three years from the date of grant or upon termination of
employment. The stock bonus amount is amortized ratably over a 36-month period
and recorded as compensation expense. This charge is identified as "Stock
Compensation" and allocated to cost of revenues or operating expenses depending
on whether the optionee is acting in a service delivery or administrative
capacity.
As a result of both the purchase accounting adjustments and the stock
compensation charges described above, the Company has incurred significant non-
cash expenses related to its acquisitions. For example, on a pro forma basis
for the three months ended June 30, 1997, stock compensation expense included
in cost of revenues totaled $982,000, stock compensation expense included in
operating expenses totaled $1.8 million and amortization of intangible assets
totaled $943,000, all of which were related to the first eight Controlled
Companies. In addition, the Company had previously recognized an aggregate cost
of $3.6 million for acquired in-process technology related to these
acquisitions. The Company expects these acquisition-related non-cash expenses
to increase as it continues its acquisition program.
26
<PAGE>
To capitalize on the growth opportunities for a newly acquired consulting
office, the Company generally hires a number of additional Internet
professionals during the three-month period following the office's integration
into the USWeb network. The capacity utilization rates of these new employees
are initially not as high as those of seasoned employees because of the time
spent on training and professional development. Consequently, the Company
expects that the cost of service revenues as a percentage of service revenues
of an integrated office will generally increase during the first three months
following such integration. The Company believes that this investment in
training and professional development will contribute to its ability to meet
its growth targets.
The successful implementation of the Company's acquisition strategy depends
on the Company's ability to identify suitable acquisition candidates, acquire
such companies on acceptable terms and integrate their operations successfully
with those of the Company. There can be no assurance that the Company will be
able to do so. Moreover, in pursuing acquisitions the Company may compete with
companies with similar acquisition strategies, certain of which competitors
may be larger and have greater financial and other resources than the Company.
Competition for these acquisition targets could also result in increased
prices for acquisition targets and a diminished pool of companies available
for acquisition. Acquisitions also involve a number of other risks, including
adverse effects on the Company's reported operating results from increases in
goodwill amortization, acquired in-process technology, stock compensation
expense and increased compensation expenses resulting from newly hired
employees, the diversion of management attention, risks associated with the
subsequent integration of acquired businesses, potential disputes with the
sellers of one or more acquired entities and the failure to retain key
acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse impact on the reputation of
the Company as a whole, and any acquired subsidiary could significantly
underperform relative to the Company's expectations. Due to all of the
foregoing, the Company's pursuit of an overall acquisition strategy or any
individual completed, pending or future acquisition may have a material
adverse effect on the Company's business, results of operations, financial
condition and cash flows. Although to date the Company has not used cash for
acquisition consideration, to the extent the Company seeks to use cash to pay
for all or part of any future acquisitions, the Company may be required to
obtain additional financing, and there can be no assurance that such financing
will be available on favorable terms, if at all. See "Risk Factors--Risks
Related to Acquisitions" and "--Future Capital Needs; Uncertainty of
Additional Financing."
SOURCES OF REVENUES
The Company operated under its Affiliate model from December 1995
(inception) through the first quarter of 1997. During that period, revenues
were derived almost exclusively from initial fees and monthly royalties from
Affiliates. Initial fees were typically recognized when received because all
obligations required of USWeb by the Affiliate agreement were substantially
performed concurrently with the execution of the agreement. Monthly royalties
are equal to the greater of (i) a minimum monthly payment or (ii) the
aggregate of a five percent royalty and a two percent marketing promotion fee
applied to each Affiliate's "Adjusted Gross Revenues," defined as the
Affiliate's gross revenues from Internet professional services less (i)
rebates, discounts and taxes the Affiliate is required to collect, (ii) the
Affiliate's direct cost for third-party hardware and software resold to
clients, (iii) Internet access services purchased from USWeb-approved
suppliers and resold to clients, and (iv) certain other goods and services
purchased and resold to clients. Monthly royalty revenue is recognized as
reported by the Affiliate to the Company.
In the first quarter of 1997, the Company ended its program for attracting
new Affiliates and initiated the acquisition phase of its corporate
development strategy. As discussed above under "--Acquisition of Internet
Professional Services Firms," the Company consolidates the financial
statements of acquired entities beginning on the date the Company assumes
effective control of those entities. Revenues from Company-owned operations
consist of fees for consulting services rendered over the course of an
engagement, recognized on a percentage-of-completion basis. The services
offered by the Company include strategy consulting; analysis and design;
technology development; implementation; audience development; and maintenance.
Each engagement is billed over the course of the engagement on either a time
and materials
27
<PAGE>
basis or a fixed-price basis. Billable rates vary by the service provided and
geographical region and typically range from $100 to $250 per hour. Although a
majority of engagements are currently performed on a time and materials basis,
the Company intends to increase the percentage of engagements billed on a
fixed-price basis. The pricing, management and execution of individual
engagements are the responsibility of the consulting office that performs or
coordinates the services. The Company also recognizes revenues from third-party
hardware, software, Internet access and hosting services and certain other
goods and services purchased and resold to clients; however, revenues from such
activities have been immaterial to date.
To date, the Company has had only limited experience with fixed-price
engagements. The Company's failure to estimate accurately the resources and
time required for an engagement, to manage effectively client expectations
regarding the scope of services to be delivered for the estimated fees or to
complete fixed-price engagements within budget, on time and to clients'
satisfaction would expose the Company to risks associated with cost overruns
and, in certain cases, penalties, any of which could have a material adverse
effect on the Company's business, results of operations and financial
condition. See "Risk Factors--Risks of Fixed-Price Engagements."
COST STRUCTURE
Consulting offices owned by the Company recognize revenues using the
percentage-of-completion method. Direct costs, such as personnel salaries and
benefits and the cost of any third-party hardware or software included in an
Internet solution, and related overhead expenses, such as depreciation and
occupancy charges, associated with the generation of the revenues are
classified as cost of revenues. The technology, sales, marketing and
administrative costs of each Company-owned office are classified as operating
expenses.
All corporate expenses are classified as operating expenses. Marketing, sales
and support expenses include product and service research, advertising, brand
name promotions and lead-generation activities, as well as the salary and
benefits costs of the personnel in these functions. General and administrative
expenses include accounting, legal and human resources costs.
28
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro forma quarterly results as a
percentage of pro forma total revenues for the six quarters ended June 30,
1997. The Company believes that all necessary adjustments, consisting only of
normal recurring adjustments, have been included in the amounts stated below
to present fairly such quarterly information. The operating results for any
quarter are not necessarily indicative of results for any subsequent period.
Because of the Company's transition from a franchise business model to one
based on Company-owned operations, the Company believes that its historical
financial statements for periods ended on or before March 31, 1997 are not
necessarily indicative of future operating results. The Company has therefore
included its quarterly results of operations on a pro forma basis to
facilitate the understanding of the effects of business acquisitions on the
Company's operations.
<TABLE>
<CAPTION>
YEAR SIX MONTHS THREE MONTHS ENDED
ENDED ENDED ------------------------------------------------------
DEC. 31, JUNE 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1996 1997 1996 1996 1996 1996 1997 1997
-------- ---------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... 88 % 95 % 100 % 97 % 91 % 73 % 95 % 95 %
Other.................. 12 % 5 % -- % 3 % 9 % 27 % 5 % 5 %
------ ------ ------ ------ ------ ------ ------ ------
Total revenues......... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
------ ------ ------ ------ ------ ------ ------ ------
Cost of revenues:
Services............... 63 % 73 % 58 % 65 % 75 % 57 % 67 % 78 %
Other.................. 2 % 3 % -- % -- % 3 % 3 % 3 % 2 %
Stock compensation (1). 29 % 24 % 28 % 31 % 37 % 22 % 26 % 23 %
------ ------ ------ ------ ------ ------ ------ ------
Total cost of revenues. 94 % 100 % 86 % 96 % 115 % 82 % 96 % 103 %
------ ------ ------ ------ ------ ------ ------ ------
Gross profit............ 6 % -- % 14 % 4 % (15)% 18 % 4 % (3)%
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Marketing, sales and
support............... 111 % 113 % 78 % 94 % 149 % 120 % 113 % 113 %
General and administra-
tive.................. 36 % 57 % 41 % 35 % 37 % 34 % 56 % 58 %
Acquired in-process
technology (1)........ 28 % -- % 80 % 49 % -- % -- % -- % -- %
Stock compensation (1). 49 % 45 % 41 % 52 % 67 % 41 % 47 % 42 %
Amortization of intan-
gible assets (1)...... 58 % 27 % 56 % 71 % 73 % 42 % 31 % 22 %
------ ------ ------ ------ ------ ------ ------ ------
Total operating ex-
penses................. 282 % 242 % 296 % 301 % 326 % 237 % 247 % 235 %
------ ------ ------ ------ ------ ------ ------ ------
Loss from operations.... (276)% (242)% (282)% (297)% (341)% (219)% (243)% (238)%
Interest income......... 2 % 1 % 1 % 3 % 2 % 1 % 1 % 2 %
Interest expense........ (2)% (1)% (2)% (2)% (2)% (1)% (2)% (1)%
Impairment of investee
carried at cost........ -- % (50)% -- % -- % -- % -- % -- % ( 94)%
------ ------ ------ ------ ------ ------ ------ ------
Net loss................ (276)% (292)% (283)% (296)% (341)% (219)% (244)% (331)%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
- ---------------------
(1) These expenses are non-cash acquisition-related charges incurred as a
result of the Company's acquisition program. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and Note 1
to Consolidated Financial Statements.
COMPARISON OF THREE MONTHS ENDED JUNE 30 AND MARCH 31, 1997
Revenues. Total revenues increased 12% to $4.3 million for the three months
ended June 30, 1997 from $3.8 million for the three months ended March 31,
1997. This increase was primarily attributable to growth in service revenues
generated by Company-owned consulting offices, which increased 12% to $4.0
million for the three months ended June 30, 1997 from $3.6 million for the
three months ended March 31, 1997. Other revenues increased 10% to $214,000
for the three months ended June 30, 1997 from $194,000 for the three months
ended March 31, 1997.
Cost of Revenues. Cost of revenues increased 19% to $4.4 million for the
three months ended June 30, 1997 from $3.7 million for the three months ended
March 31, 1997. The increase in cost of revenues was primarily attributable to
the cost of revenues associated with the increased service fees generated by
Company-owned consulting offices, which costs increased 29% to $3.3 million
for the three months ended
29
<PAGE>
June 30, 1997 from $2.6 million for the three months ended March 30, 1997.
Cost of service revenues as a percentage of service revenues increased to 82%
for the three months ended June 30, 1997 from 71% for the three months ended
March 31, 1997, primarily because of the Company's post-acquisition hiring of
new employees in anticipation of increased demand for services.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased 12% to $4.8 million for the three months ended June 30, 1997 from
$4.3 million for the three months ended March 31, 1997. This increase was
primarily attributable to increases in advertising and promotional expenses to
build the USWeb brand and in personnel to support the growth in the Company's
operations.
General and Administrative Expenses. General and administrative expenses
increased 17% to $2.5 million for the three months ended June 30, 1997 from
$2.1 million for the three months ended March 31, 1997. This increase was
primarily attributable to increases in personnel to support the growth in the
Company's operations.
Stock Compensation. Stock compensation expenses totaled $1.8 million for
each of the three month periods ended June 30 and March 31, 1997, reflecting
the amortization of stock bonuses awarded to employees of controlled
companies.
Amortization of Intangible Assets. Amortization of intangible assets
decreased to $943,000 for the three months ended June 30, 1997 from $1.2
million for the three months ended March 31, 1997. This decrease was primarily
attributable to the completion of the amortization of certain technologies and
goodwill of companies controlled in the first quarter of 1997 and the
resulting lack of amortization expenses for such companies during the three
months ended June 30, 1997.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the three month periods ended June 30 and March 31, 1997,
because the Company incurred net operating losses in each of those periods.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues increased 44% to $8.1 million for the six months
ended June 30, 1997 from $5.6 million for the six months ended June 30, 1996.
This increase was primarily attributable to increased service revenues
generated by the Company's wholly owned consulting offices, which increased
39% to $7.7 million for the six months ended June 30, 1997 from $5.5 million
for the six months ended June 30, 1996. Approximately $1.4 million of this
increase was attributable to increased service fees generated by existing
consulting offices and the remaining $0.8 million of the increase was
attributable to the acquisition by the Company of two Internet professional
services firms that began operations in the second half of 1996. Other
revenues increased to $408,000 for the six months ended June 30, 1997 from
$75,000 for the six months ended June 30, 1996. This increase was primarily
attributable to increased monthly royalties from Affiliates.
Cost of Revenues. Cost of revenues increased 58% to $8.0 million for the six
months ended June 30, 1997 from $5.1 million for the six months ended June 30,
1996. The increase in cost of revenues was primarily attributable to the cost
of revenues associated with the increased service fees generated by Company-
owned offices, which costs increased 70% to $5.9 million for the six months
ended June 30, 1997 from $3.4 million for the six months ended June 30, 1996.
Cost of service revenues as a percentage of service revenues increased to 76%
for the six months ended June 30, 1997 from 62% for the six months ended
June 30, 1996, primarily because of the Company's hiring of new employees in
anticipation of increased demand for services.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased 89% to $9.1 million for the six months ended June 30, 1997 from $4.8
million for the six months ended June 30, 1996. This increase was primarily
attributable to USWeb branding campaigns and increases in personnel to support
the growth in the Company's operations.
30
<PAGE>
General and Administrative Expenses. General and administrative expenses
increased 118% to $4.6 million for the six months ended June 30, 1997 from
$2.1 million for the six months ended June 30, 1996. This increase was
primarily attributable to increases in professional service fees related to
the design of the Company's acquisition program and increases in personnel to
support the internal growth in the Company's operations.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $3.6 million during the six months ended June
30, 1996. This amount represented all acquired in-process technology for
entities acquired by the Company before June 30, 1997; consequently, no such
expenses were recorded for the six months ended June 30, 1997. The acquired
in-process technology had not reached the stage of technological feasibility
at the date of acquisition and had no alternative future use.
Stock Compensation Expenses. Stock compensation expenses increased 39% to
$3.6 million for the six months ended June 30, 1997 from $2.6 million for the
six months ended June 30, 1996. This increase was primarily attributable to
the acquisition by the Company of two Internet professional services firms
that began operations in the second half of 1996.
Amortization of Intangible Assets. Amortization of intangible assets
decreased to $2.1 million for the six months ended June 30, 1997 from $3.6
million for the six months ended June 30, 1996. This decrease was primarily
attributable to the completion of the amortization of certain intangible
assets of certain controlled companies prior to the beginning of 1997 and the
resulting lack of amortization expense for such companies during the six
months ended June 30, 1997.
Impairment of Investee. During the six months ended June 30, 1997, the
Company recognized an impairment provision totaling $4.0 million, representing
the total amount of its cost basis investment in an independent Internet
consulting firm.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the six month periods ended June 30, 1997 and 1996 because the
Company has incurred net operating losses from December 6, 1995 (inception)
through June 30, 1997.
YEAR ENDED DECEMBER 31, 1996. The Company's results of operations for the
year ended December 31, 1996 are set forth in "Selected Consolidated Pro Forma
Financial Data" above. Because the Company was in operation for less than one
month of 1995, the Company believes that a comparison of its results of
operations for the years ended December 31, 1996 and 1995 would not be
meaningful.
HISTORICAL RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30 AND MARCH 31, 1997
Revenues. Total revenues increased to $2.4 million for the three months
ended June 30, 1997 from $495,000 for the three months ended March 31, 1997.
This increase was primarily attributable to the consolidation of operations by
the Company with seven Internet professional services firms during the three
months ended June 30, 1997.
Cost of Revenues. Cost of revenues increased to $2.4 million for the three
months ended June 30, 1997 from $297,000 for the three months ended March 31,
1997. The increase in cost of revenues was primarily attributable to the costs
associated with the increased service fees generated by the Company's wholly
owned consulting offices.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $4.6 million for the three months ended June 30, 1997 from $3.8
million for the three months ended March 31, 1997. This increase was primarily
attributable to increases in personnel to support the growth in the Company's
operations.
General and Administrative Expenses. General and administrative expenses
increased to $2.3 million for the three months ended June 30, 1997 from $1.4
million for the three months ended March 31, 1997.
31
<PAGE>
This increase was primarily attributable to increases in personnel to support
the growth in the Company's operations.
Stock Compensation. Stock compensation expenses increased to $912,000 for the
three month period ended June 30, 1997 from $36,000 for the three month period
ended March 31, 1997.This increase was primarily attributable to the
consolidation of operations by the Company with seven Internet professional
services firms during the three months ended June 30, 1997.
Amortization of Intangible Assets. Amortization of intangible assets
increased to $1.5 million for the three months ended June 30, 1997 from
$106,000 for the three months ended June 30, 1996.This increase was primarily
attributable to the consolidation of operations by the Company with seven
Internet professional services firms during the three months ended June 30,
1997.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the three month periods ended June 30 and March 31, 1997 because
the Company incurred net operating losses in each of those periods.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Revenues. Total revenues increased to $2.9 million for the six months ended
June 30, 1997 from $100,000 for the six months ended June 30, 1996. This
increase was primarily attributable to the Company beginning its acquisition
program in the first quarter of 1997 and recording $2.2 million in service
revenues generated by the eight Internet professional services firms when
results of operations were consolidated with those of the Company during the
three months ended June 30, 1997. No service revenues were recorded for the six
months ended June 30, 1996 because all consulting offices during such period
were Affiliates.
Cost of Revenues. Cost of revenues totaled $2.7 million for the six months
ended June 30, 1997. The Company did not record any cost of revenues for the
six months ended June 30, 1996 because the Company did not generate any service
revenues during such period and there were no costs associated with other
revenues.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $8.3 million for the six months ended June 30, 1997 from $4.3
million for the six months ended June 30, 1996. This increase was primarily
attributable to increases in personnel to support the internal growth in the
Company's operations and the consolidation of the results of operations of
eight Internet professional services firms with those of the Company in the
first six months of 1997.
General and Administrative Expenses. General and administrative expenses
increased to $3.8 million for the six months ended June 30, 1997 from $1.1
million for the six months ended June 30, 1996. This increase was primarily
attributable to increases in personnel to support the internal growth in the
Company's operations and the consolidation of the results of operations of
eight Internet professional services firms with those of the Company in the
first six months of 1997.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $2.8 million for the six months ended June 30,
1997. The Company did not record any such expenses for the six months ended
June 30, 1996 because the Company did not acquire any entities during such
period. The acquired in-process technology had not reached the stage of
technological feasibility at the date of acquisition and had no alternative
future use.
Stock Compensation. Stock compensation expense totaled $948,000 for the six
month period ended June 30, 1997. The Company did not record any such expenses
for the six months ended June 30, 1996 because the Company did not acquire any
entities during such period.
Amortization of Intangible Assets. Amortization of intangible assets was $1.6
million for the six months ended June 30, 1997. The Company did not record any
such expenses for the six months ended June 30, 1996 because the Company did
not acquire any entities during such period.
32
<PAGE>
Impairment of Investee. During the six months ended June 30, 1997, the
Company recognized an impairment provision totaling $4.0 million, representing
the total amount of its cost basis investment in an independent Internet
consulting firm.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the six month periods ended June 30, 1997 and 1996 because the
Company has incurred net operating losses from December 6, 1995 (inception)
through June 30, 1997.
YEAR ENDED DECEMBER 31, 1996. The Company's results of operations for the
year ended December 31, 1996 are set forth in the Company's audited
consolidated statement of operations included elsewhere in this Prospectus.
Because the Company was in operation for less than one month of 1995, the
Company believes that a comparison of its results of operations for the years
ended December 31, 1996 and 1995 would not be meaningful.
FACTORS AFFECTING OPERATING RESULTS
The Company's quarterly operating results may fluctuate significantly in the
future as a result of a variety of factors, many of which are outside the
Company's control. These factors include the level of demand for Intranet,
Extranet and Web site development; the productivity of the Company's consulting
offices; the Company's success in finding and acquiring suitable acquisition
candidates; the Company's ability to attract and retain personnel with the
necessary strategic, technical and creative skills required to service clients
effectively; the cost of advertising and related media; the amount and timing
of expenditures by USWeb clients for Internet professional services; client
budgetary cycles; the amount and timing of capital expenditures and other costs
relating to the expansion of the Company's operations; the introduction of new
products or services by the Company or its competitors; pricing changes in the
industry; technical difficulties with respect to the use of the Internet;
economic conditions specific to Internet technology usage; and general economic
conditions. As a strategic response to changes in the competitive environment,
the Company may from time to time make certain pricing, service, technology or
marketing decisions or business or technology acquisitions that could have a
material adverse effect on the Company's business, results of operations and
financial condition. The Company may also experience seasonality in its
business in the future, resulting in diminished revenues to the Company as a
consequence of decreased demand for Internet professional services during
summer and year-end vacation and holiday periods. Due to all of the foregoing
factors, in some future quarter the Company's operating results may fall below
the expectations of securities analysts and investors. In such event, the
trading price of the Company's Common Stock would likely be materially and
adversely affected. See "Risk Factors--Potential Fluctuations in Quarterly
Results."
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 128, "Earnings Per Share," was issued in February 1997, and requires
companies to apply the statement in its consolidated financial statements for
the year ending December 31, 1997. This pronouncement establishes new standards
for computing and presenting earnings or loss per share on a basis that is more
comparable to international accounting standards and provides for the
presentation of basic and diluted earnings or loss per share, replacing the
currently required primary and fully-diluted amounts. The basic earnings or
loss per share will be computed by dividing net income or loss by the weighted
average number of shares outstanding during the period. Diluted earnings or
loss per share will be computed in a manner similar to the current method for
calculating fully-diluted earnings or loss per share. Prior period earnings or
loss per share will be restated to conform with the new statement. Basic and
diluted pro forma net loss per share as determined by applying SFAS No. 128 are
not materially different than as reported pro forma net loss per share.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." The adoption of the both statements
are required for fiscal years beginning after December 15, 1997. Under
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SFAS No. 130, companies are required to report in their financial statements,
in addition to net income, comprehensive income including, as applicable,
foreign currency items, minimum pension liability adjustments, and unrealized
gains and losses on certain investments in debt and equity securities. SFAS
No. 131 requires that companies report separately in their financial
statements certain financial and descriptive information about operating
segments, if applicable. The Company does not expect the adoption of SFAS
No. 130 or SFAS No. 131 to have a material impact on the Company's
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had approximately $9.3 million in cash and
cash equivalents. The Company has financed its operations primarily through
private sales of equity securities. For the period from December 6, 1995
(inception) to June 30, 1997, the Company used approximately $19.4 million and
approximately $2.1 million to fund operating activities and capital equipment
purchases, respectively. These operating and investing expenditures were
financed primarily with the net proceeds from private sales of preferred stock
totaling approximately $32.5 million, the issuance of $500,000 in promissory
notes that were subsequently converted into Common Stock and equipment lease
obligations totaling approximately $ .
The Company has a credit agreement with a leasing company which provides a
line of credit for capital equipment purchases of up to $600,000. At June 30,
1997, the Company had borrowed approximately $599,000 under this line of
credit. Expenditures for property and equipment, including those subsequently
financed under capitalized equipment leases, are primarily for purchases of
computer hardware and software used in the Company's operations, including
expenditures for management information and communications systems.
The Company believes that the net proceeds from this offering, combined with
current cash balances, will be sufficient to fund its requirements for working
capital and capital expenditures for at least the next 12 months. Thereafter
the Company may sell additional equity or debt securities or seek additional
credit facilities. Sales of additional equity or convertible debt securities
would result in additional dilution to the Company's stockholders. The Company
may need to raise additional funds sooner in order to support more rapid
expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
take advantage of unanticipated opportunities. The Company's future liquidity
and capital requirements will depend upon numerous factors, including the
success of the Company's existing and new service offerings and competing
technological and market developments. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Financing."
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BUSINESS
OVERVIEW
USWeb is a leading Internet professional services firm that provides
Intranet, Extranet and Web site solutions to medium-sized and large companies.
International Data Corporation estimates that the worldwide market for
Internet professional services was $2.5 billion in 1996 and will grow to $13.8
billion in 2000. To take advantage of the opportunity presented by this
market, the Company has established a national network of consulting offices.
The Company believes it has built one of the most recognized brands for
Internet professional services and developed a highly scalable organization
that can leverage central resources as its operations expand through
acquisitions as well as internal growth. The Company has developed and is
aggressively pursuing an acquisition program that uses a consistent
methodology designed to efficiently identify, acquire and integrate qualified
Internet professional services firms.
INDUSTRY BACKGROUND
Intranets, Extranets and Web sites (collectively, "Internet solutions")
provide companies with a fundamentally new set of tools for improving basic
business processes such as communications, data transmission, marketing,
transaction processing and customer service. An Intranet enables a company's
employees to receive corporate information and training efficiently,
communicate through e-mail, use the internal network's business applications,
and access proprietary information and legacy databases. An Extranet can
extend part or all of the functionality of a secure Intranet to selected
business partners outside of the company, such as customers, suppliers,
distributors or other parties in the company's value chain. Forrester
Research, Inc. ("Forrester") estimates that the worldwide market for Intranet
development services will grow from approximately $100 million in 1996 to
approximately $6.9 billion in 2000. Web sites, which are accessible by the
general public, can present advertising and marketing materials in new and
compelling fashions, display products and services in electronic catalogs,
offer products and services for sale online, process transactions and fulfill
orders, provide customers with rapid and accurate responses to their
questions, and gather customer feedback efficiently. Forrester estimates that
the worldwide market for Web site content and electronic commerce solution
development will grow from approximately $1.2 billion in 1996 to approximately
$9.4 billion in 2000.
Although businesses are adopting Internet solutions rapidly and at
increasing rates, the basic technical differences of such solutions from
earlier technologies and the broad scope of business process improvements that
such solutions can provide require companies to take fundamentally new
approaches toward implementing them. Businesses seeking to realize the
benefits provided by Internet solutions face a formidable series of challenges
presented by the need to link business strategy, new and rapidly changing
technologies and continuously updated content. Before creating an Intranet,
Extranet or Web site, a company must first conduct a thorough needs assessment
to review its strategic business requirements and compare them to the
capabilities of its existing processes and systems. Next, the company must
architect the solution and develop an implementation plan. The implementation,
establishment and maintenance of the solution will require significant
technical expertise in a number of areas, such as electronic commerce systems,
security and privacy technologies, application and database programming,
mainframe and legacy integration technologies and advanced user interface and
multimedia production.
To perform this multitude of functions in-house, a company would have to
make substantial commitments of time, money and technical personnel to keep
current with rapidly evolving technologies, content presentation techniques
and competitors' offerings. Professionals with the requisite strategic,
technical and creative skills are often in short supply and many organizations
are reluctant to expand their internal information systems or marketing
departments for particular engagements at a time when they are attempting to
minimize fixed costs to increase returns on investment. At the same time,
external economic factors encourage organizations to focus on their core
competencies and trim workforces in the information technology management
area. Accordingly, many businesses have chosen to outsource a significant
portion of the design, development and maintenance of their Intranets,
Extranets and Web sites to independent
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professionals who can leverage accumulated strategic, technical and creative
talent and stay current with ongoing developments in a field characterized by
extremely short technology, process and content lifecycles.
Companies seeking to establish Internet solutions may turn to their
traditional marketing or technology service providers for assistance. However,
most of these providers have neither a proven track record of successful
Internet solution deployment nor the full portfolio of strategy, technology,
marketing and creative skills required to serve client needs effectively. Most
advertising and marketing communications agencies lack the extensive technical
skills, such as application development and legacy system and database
integration, required to produce the increasingly complex and functional
solutions demanded by clients. Most national information technology consulting
service providers have sizable corporate infrastructures and have therefore
chosen to focus on multi-million dollar engagements such as Year 2000 projects
and client/server enterprise resource planning software deployments, not
Internet solution consulting engagements. Most large computer technology
product and service vendors lack the creative and marketing skills required to
build audiences and deliver unique and compelling content, and are further
constrained by their need to recommend their proprietary brands. Internet
access service providers, whose core strength is in providing Internet access
and site hosting rather than solution development, typically lack both the
necessary creative and application development skills.
A number of small Internet professional services firms have emerged to
address the significant and rapidly growing market for Internet solutions.
However, the small size and capital constraints of most of these firms
restrict their ability to supply clients with the necessary depth and
integration of strategic, technical and creative skills. Furthermore, many of
these providers tend to develop expertise in a limited number of vertical
markets because of the need to leverage the information and experiences gained
from the relatively small number of Internet solution engagements they have
completed.
The Company believes that the rapidly increasing demand for Internet
solutions, combined with the inability of most current providers to supply the
full range and integration of strategic, technical and creative skills
required by clients, has created a significant market opportunity for a scaled
Internet professional services firm. In the currently fragmented and rapidly
changing environment, an organization that could deliver the creative
strengths of advertising and marketing firms, the strategic skills and
technical capabilities of information technology consulting service providers,
and the national reputation, economies of scale, multiple points of local
presence and information sharing capabilities of a large organization could
capitalize on this opportunity to help companies significantly improve their
business processes.
THE USWEB SOLUTION
USWeb's mission is to provide clients with the vision, expertise and
resources required to develop new strategies and improve business processes
using Internet solutions. To capitalize on the opportunity presented by the
rapid growth in demand for such solutions combined with a fragmented group of
organizations serving this demand, USWeb has built and is continuing to expand
through acquisitions and internal growth an Internet professional services
firm with more than 40 Company-owned and Affiliate offices nationwide. The
Company's services include strategy consulting; analysis and design;
technology development; implementation and integration; audience development;
and maintenance.
The Company delivers value to its clients through the application of its
Internet strategy and solutions methodology. Through its focus on Internet
technologies, the Company believes that it is well positioned to provide wide-
ranging and leading edge expertise with regard to:
. Internet browsers, servers and plug-ins
. Electronic commerce and transaction systems
. Security authentication and privacy technologies
. E-mail and advanced collaboration systems
. Digital asset management systems
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. Client/server and database application systems
. Mainframe and legacy integration technologies
. Advanced user interface and multimedia production
. Custom programming and tool applications
. Site administration and reporting tools
. Internet marketing systems and services
. Client, server and routing hardware
. Internet access and hosting services
The Company delivers these services to clients through its network of
consulting offices, whose regional presence enables each office to develop
close client relationships and an understanding of client needs. Each
consulting office also benefits from the resources of the overall USWeb
organization. For example, individual consulting offices may draw as needed
upon the assistance of one or more additional offices with specialized
creative or technical expertise. Each consulting office also draws upon the
USWeb Internet Strategy and Solutions Center, which aggregates the expertise
of the entire USWeb network of offices to provide resources such as USWeb
Business Solutions that target selected client market segments or business
functions, a centralized index of best demonstrated practice methodologies, a
technology library of proprietary reusable software and content objects, a
central project registry, executive briefing programs for client decision
makers, SiteCast Internet solution education broadcasts and professional
Internet technology certification programs. The consulting offices can
leverage these central resources to provide clients efficiently with effective
Internet business solutions. The Company believes that its methodology has a
proven track record of delivering value to clients and is an important factor
in retaining existing clients and marketing to new ones.
USWeb believes that its operational model enables it to scale rapidly by
leveraging its central resources as its operations expand. First, the Company
believes that its aggregation and deployment of the accumulated experience and
expertise of its network of offices provides clients with enhanced business
solutions. Second, the Company's ability to leverage central technology and
operational resources enables the Company to scale efficiently, both through
the growth of existing consulting offices and the acquisition of new offices,
which also provides significant numbers of additional skilled personnel.
Finally, the Company's aggressive brand development campaign, which reinforces
the message that USWeb is a secure, reliable, high quality choice for the
provision of Internet professional services, increases the Company's ability
to access and influence key client decision makers.
STRATEGY
The Company's objective is to become and remain the leading global Internet
professional services firm. The Company's strategy to achieve this objective
includes the following elements:
Continue to Expand Network of Company-Owned Offices. The Company is
continuing to build its network of Company-owned offices through acquisitions
and internal growth. The Company believes that in the fragmented market for
providing Internet solutions, rapidly building a critical mass of strategic,
technical and creative talent through both internal growth and acquisitions
will provide USWeb with a substantial competitive advantage. As of September
30, 1997, USWeb had Company-owned offices in 17 locations across the United
States, including locations in Atlanta, Austin, Chicago, Los Angeles,
Milwaukee, New York, Philadelphia, Phoenix, Pittsburgh, Santa Clara, San
Diego, San Francisco, Seattle and Washington, D.C. The Company intends to
acquire additional offices in both the U.S. and abroad by continuing to
implement its acquisition methodology for identifying, acquiring and
integrating Internet professional services firms that meet the Company's
criteria for revenues, profitability, growth potential and operating strategy.
Strengthen Position as a Leading Internet Professional Services Firm. The
Company is continuing to strengthen its position as a leading Internet
professional services firm in order to provide clients with superior
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Internet solutions. The Company intends to continue investing significantly in
identifying, reviewing and integrating the latest Internet technologies and
accumulating and deploying the best demonstrated practices for developing and
implementing Internet solutions. The Company is continuing to develop USWeb
Business Solutions, partially pre-built Internet solutions that combine USWeb
methodologies, services and reusable software and content objects with third-
party software. The Company's consulting offices intend to continue leveraging
the Company's nationwide presence, operational scale and professional
marketing tools, which provide each consulting office with resources and
credibility to convince client decision makers that USWeb can provide
successful Internet solutions to meet the most demanding business needs. The
Company also intends to remain both vendor and technology neutral in order to
focus on delivering the Internet solution best suited to a client's needs.
Enhance USWeb Brand. In a fragmented industry that lacks brands strongly
identified with Internet professional services, USWeb believes that it has
built one of the most well-recognized brands. The Company's brand development
programs are designed to reinforce the message that USWeb is a national
company with a local presence that can provide a complete range of services to
build and deploy business solutions and has a proven track record of doing so.
The Company is continuing to build and differentiate this brand through the
use of publicity campaigns that include Internet, print and radio advertising;
national seminars and executive briefings; Internet broadcasts; extensive
marketing tools and educational "white papers"; and co-marketing programs with
selected strategic partners.
Develop Additional Strategic Relationships. The Company intends to continue
developing strategic relationships because they enable USWeb to enter new
markets, gain early access to leading-edge technology, cooperatively market
products and services with leading technology vendors, cross-sell additional
services and gain enhanced access to vendor training and support. USWeb has
developed a number of strategic relationships with leading Internet hardware,
software and content companies, including Microsoft, Hewlett-Packard, Pandesic
(a joint venture between Intel and SAP), Sun Microsystems and Reuters.
Collectively these relationships provide for co-marketing programs, joint
research and development on leading implementations of Internet solutions,
technical education, client feedback channels and hardware and software
distribution rights.
Leverage Operational Economies of Scale. USWeb provides certain operational
and administrative services centrally, allowing the network of offices to
benefit from the economies of scale created by a large operation while
enabling the consulting offices to focus on their core competency of providing
superior client services. These centrally provided services include business
development programs, operations management guides, client support assistance,
carrier-grade site hosting, human resources programs, financial reporting and
forecasting, performance appraisals and standardized methodologies.
SERVICES
The Company offers a comprehensive range of services to deliver Internet
solutions designed to improve clients' business processes. In each consulting
engagement, the client can contract for the specific services it requires,
depending on the nature of the engagement and the capabilities of the client's
organization. The Company bills most of its engagements on a time and
materials basis, although it has delivered several solutions on a fixed-price
basis and intends to increase the percentage of engagements provided on such a
basis.
INTERNET SOLUTION DEVELOPMENT AND DEPLOYMENT. The Company's Internet
solution development and deployment methodology consists of six phases:
Strategy Consulting. USWeb works closely with the client to conduct a
thorough study of the client's strategic market position, business
requirements and existing systems and capabilities to determine the ways in
which Internet solutions can most improve the client's business processes. The
Company then delivers its
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recommendations, which define the strategic basis for a specific Internet
solution that takes into account the client's budget, timeline and available
resources.
Analysis and Design. Once the strategic groundwork has been established, the
Company translates the client's strategic requirements into a system or
process design architecture, a blueprint that defines the roles the system
will perform to meet those requirements. By choosing USWeb, the Company's
clients receive vendor-neutral solutions prepared by Internet-focused
consultants. USWeb researches, tests and evaluates virtually all major
Internet technologies and tools to design system and process architectures
that successfully meet client needs. The Company's objective is to design,
build and deploy a solution that is logically planned, scales well over time,
is sufficiently secure, and is easy to use, administer and manage.
Technology Development. In the development phase, the Company builds a
testable version of the client's solution based on the blueprint produced in
the analysis and design phase. The Company designs, codes, integrates and
tests all necessary programs and components using a broad range of expertise,
including object-based and relational database systems; electronic commerce
systems; custom ActiveX, Java and C++ programming and host integration;
implementation of third-party applications and security technologies; and
integration of hardware, software and Internet access products. USWeb's
experienced and professional graphic designers also work to create a
compelling user interface for the solution to enable it to attract and hold
the attention of the client's target audience while conforming to the client's
brand image and marketing campaigns. In performing these functions, USWeb
professionals benefit from access to an extensive library of re-usable
software and content objects.
Implementation and Integration. In the implementation phase, USWeb tests the
solution created in the development phase and readies it to be deployed into a
full production system. The Company delivers the system to the client,
installs it, converts and initializes all necessary data, performs acceptance
testing and puts the system into operation. The Company also integrates
Intranet solutions with back-office legacy systems to ensure that each
client's critical applications are secure and seamless. USWeb maintains third-
party vendor relationships that offer its clients secure, state-of-the-art,
high-availability Intranet, Extranet and Web site hosting and integrated
services for relational databases, workgroup collaboration, streaming audio
and video, management and monitoring, e-mail and secure electronic commerce.
Audience Development. The Company can work with the client to develop a
strategy for achieving its online marketing objectives by increasing Web site
traffic, strengthening brand awareness and generating sales leads. The Company
provides online media planning and purchasing services and advice regarding
online public relations. The Company has also developed a proprietary audience
creation methodology designed to optimize a Web site's search engine presence,
increase site access through hyperlink recruitment and disseminate the
client's key messages to Internet newsgroups, mailing lists and forums.
Maintenance. USWeb can provide the client with ongoing support services for
its Internet solutions, from content maintenance to site administration, for
as long as the client wishes. The Company's technical staff can also assist
clients on a case-by-case basis to resolve technical problems, provide
assistance with the hosting environment, and deliver support for Internet
solution software.
PROFESSIONAL CERTIFICATION PROGRAM. USWeb's Professional Certification
Program is a comprehensive education and certification program for information
technology professionals, combining the benefits of vendor-neutral knowledge
and skills certification with product-specific technology training. The
Professional Certification Program offers two tracks for becoming a Certified
Professional:
USWeb Certified Specialist. The USWeb Certified Specialist Program is
designed for specialists in one aspect of Internet solution design, such as
Java programming, Web server administration or graphic design. The Certified
Specialist Program focuses on developing a solid foundation of Internet
technology skills and provides in-depth treatment of the products and tools
used in current Internet solutions.
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USWeb Certified Architect. The USWeb Certified Architect Program is designed
for project managers and consultants who must architect Internet solutions and
evaluate the products, tools and resources needed for a successful
implementation. The Certified Architect Program focuses on providing a
thorough understanding of Internet solution development.
The Company recently launched the Professional Certification Program and
expects the first Certified Professionals to graduate in the first quarter of
1998. The Company's Strategy and Solutions Center develops the courseware,
tests and education strategies; Wave Technologies International, Inc. and
others provide the training facilities and classroom instruction; and Sylvan
Learning Systems, Inc. administers the testing and certification.
REPRESENTATIVE EXAMPLES OF USWEB INTERNET SOLUTIONS. The following examples
illustrate the Company's Internet solution development capabilities.
Harley-Davidson Dealer Extranet. Harley-Davidson, a motorcycle manufacturer,
was seeking ways to streamline two specific business processes: technical
documentation distribution and warranty claims processing. To obtain
instruction sheets, service bulletins or other technical documentation,
dealers previously had to request the appropriate documents by telephone and
then wait for Harley-Davidson to process the request manually and fax the
documents back to the dealership. To process warranty claims, dealers
previously had to mail such claims to Harley-Davidson and wait for them to be
manually entered into a database and checked for errors through overnight
batch processing. Both of these procedures were slow, inefficient and prone to
errors. To improve these basic business processes, USWeb created an Extranet
accessible via a Web browser that allows dealers to securely search, view and
print technical documents at their convenience and submit warranty claims
directly online. Using the Extranet has reduced turnaround time for
documentation distribution and warranty claims processing, reduced the error
rate and reduced overhead costs associated with providing information through
paper forms or telephone support.
Polk Audio Web Site and Extranet. Polk Audio, a manufacturer of home and
automobile speakers, was seeking ways to strengthen its communications with
its customers and with its global network of dealers. For customers, USWeb
helped Polk Audio create www.polkaudio.com, a Web site that offers a highly
informational and interactive experience. An audiophile can use the site's
virtual systems consultant to identify a sound system that meets his or her
personal audio requirements. For dealers, USWeb created a Retail Partner and
Dealer Management Extranet that distributes business critical information
online. Previously, to obtain information on order status, shipment schedules
and product specifications, dealers had to request the appropriate documents
by telephone and then wait for Polk Audio to process the request manually and
fax the documents back to the dealer. Dealers can now use the Extranet to view
the delivery status of a particular product or quickly and efficiently obtain
sales and training materials and service manuals.
Real Estate Tax Services Intranet. Real Estate Tax Services ("RETS"), a
provider of corporate tax assessment and property appraisal services, wanted
to improve its network infrastucture and its mission critical system of
managing and distributing data. Processing more than 200,000 tax bills
annually, RETS uses mainframe computers for storing client tax-related
information. Frequently, RETS field agents require quick turn-around on custom
client reports. To prepare these reports, administrators previously used
proprietary software to import mainframe data into desktop spreadsheet
applications. After manipulating and reformatting the content, the data was
then exported into word-processing applications suitable for presentations.
Following this highly administrative, time-consuming effort, RETS
administrators would then forward these reports to agents around the country.
Beginning with the deployment of a new high-speed network infrastructure,
USWeb automated these processes by designing a database-integrated Intranet
solution. The RETS Intranet streamlines internal resources and empowers field
agents to easily and effectively store and retrieve data, as well as generate
client presentations from any geographic location using lap-top computers and
an intuitive Web browser.
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CONSULTING OFFICE NETWORK DEVELOPMENT
USWeb has established and is continuing to expand a nationwide network of
consulting offices. As of September 30, 1997, the Company had 41 consulting
offices, 17 of which were Company-owned and 24 of which were owned by
Affiliates. The Company believes that in the fragmented market for providing
Internet solutions, rapidly building a critical mass of strategic, technical
and creative talent through both internal growth and acquisition will provide
USWeb with a substantial competitive advantage. The Company promotes internal
growth through its continued investment in branded marketing programs,
expansion and improvement of the Strategy and Solutions Center, new and
existing strategic partnerships, and rigorous management of business
fundamentals.
The Company is aggressively pursuing its selective acquisition program. The
Company uses a standardized transaction structure that includes a purchase
price adjustment feature to provide target company management with an
incentive to grow their organizations. The Company also grants stock options
to all employees of a target company to provide them with an incentive to
contribute to the success of the overall USWeb organization. The Company
believes that its use of a consistent acquisition structure also speeds the
negotiation and closing of each acquisition.
The Company has a team of professionals dedicated to identifying potential
acquisition candidates and implementing the Company's acquisition methodology.
This team identifies those Internet professional service firms that meet its
acquisition criteria, engages in a series of meetings and due diligence
activities with each candidate to explore whether it meets USWeb's criteria
for growth potential and operating strategy, and completes the acquisition of
a significant percentage of those candidates. The Company stresses to each
desired candidate the advantages of merging with USWeb, including client
recognition and acceptance of the USWeb brand, additional funding required to
pursue profitably large, long-term client opportunities and strategic
partnerships with leading hardware, software and content vendors. Following
the closing of each acquisition, the Company moves rapidly to integrate the
new subsidiary into USWeb operations by deploying a conversion team to
integrate financial, marketing and operating procedures, providing access to
USWeb Central, the Company's secure Intranet, and delivering a thorough
orientation to all employees.
As of September 30, 1997, the Company had acquired or signed a definitive
acquisition agreement with the following companies:
<TABLE>
<CAPTION>
OFFICE MONTH OF NUMBER OF
NAME LOCATIONS CONSOLIDATION (1) EMPLOYEES (2)
---- ----------------- ----------------- -------------
<S> <C> <C> <C>
USWeb San Francisco....... San Francisco, CA March 1997 42
San Diego, CA
Irvine, CA
New York, NY
USWeb Seattle............. Seattle, WA April 1997 23
USWeb Milwaukee........... Milwaukee, WI April 1997 32
USWeb LA Metro............ Los Angeles, CA April 1997 16
USWeb Silicon Valley...... Santa Clara, CA May 1997 12
USWeb Atlanta............. Atlanta, GA May 1997 23
Austin, TX
USWeb DC ................. Washington, D.C. June 1997 13
Philadelphia, PA
USWeb Phoenix............. Phoenix, AZ June 1997 10
USWeb Pittsburgh.......... Pittsburgh, PA July 1997 57
USWeb Chicago Metro....... Chicago, IL July 1997 10
USWeb Dream Media (3)..... Hollywood, CA September 1997 13
USWeb Hollywood (3)....... Hollywood, CA September 1997 4
USWeb Cybernautics........ Sausalito, CA September 1997 39
</TABLE>
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- ---------------------
(1) The Company consolidates the target entity's results of operations as of
the date USWeb establishes requisite control of the target entity, as
allowed by generally accepted accounting principles, which date is
generally in advance of the legal completion of the underlying merger.
(2) Represents the number of full-time employees as of August 31, 1997.
(3) USWeb Dream Media and USWeb Hollywood will combine their operations into a
single wholly owned subsidiary of the Company at the closing of the
acquisitions.
The Company believes that there are many other potential acquisition
candidates in the U.S. and abroad that satisfy its acquisition criteria. The
Company is currently discussing on a non-binding basis the acquisitions of
several companies in the U.S. To penetrate foreign markets, the Company may
use joint ventures as well as acquisitions, so as to capitalize on a foreign
partner's local knowledge and reputation as well as USWeb's brand name and
central technical, marketing and administrative resources. The Company's
acquisition strategy involves a number of risks and uncertainties, and there
can be no assurance that the Company will be able to identify suitable
acquisition candidates, acquire such companies on acceptable terms or
integrate their operations successfully with those of the Company. If the
Company issues stock to complete future acquisitions, there will be ownership
dilution to existing stockholders. In addition, to the extent the Company
chooses to pay cash consideration in such acquisitions, the Company may be
required to obtain additional financing and there can be no assurance that
such financing will be available on favorable terms, if at all. See "Risk
Factors--Risks Related to Acquisitions," "--Dilution," "--Management of
Growth; Integration of Acquisitions" and "--Future Capital Needs; Uncertainty
of Additional Financing."
In addition to its Company-owned offices, as of September 30, 1997 USWeb had
13 Affiliates which collectively managed an aggregate of 24 consulting
offices. Each Affiliate agreement typically grants a nonexclusive right to the
Affiliate to maintain an office and advertise in a designated metropolitan
area or territory. The Affiliate agreements, which have terms ranging from
five to ten years, also include a nonexclusive license to use the Company's
intellectual property and proprietary information, including the USWeb brand,
the Company's Internet solution development methodology and the Strategy and
Solutions Center. In exchange for these rights, most Affiliates paid the
Company an initial fee and all Affiliates make monthly royalty payments to the
Company. Monthly royalties are equal to the greater of (i) a minimum monthly
payment or (ii) the aggregate of a five percent royalty and a two percent
marketing promotion payment, each based on the Affiliate's adjusted gross
revenues. For the six months ended June 30, 1997, initial fees and monthly
royalty payments together represented 23.6% of the Company's total revenues.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
The Company selected a franchise business model as the first phase of its
corporate development strategy because it enabled the Company to rapidly scale
its operations and build its brand with relatively low risk and capital
commitment while leveraging the existing infrastructure, expertise and client
relationships of the Affiliates. The Company launched the second phase of its
market entry strategy, the acquisition of those Affiliates and other Internet
professional services firms that meet its acquisition criteria, in the first
quarter of 1997. The Company last enrolled an Affiliate in March 1997 and does
not intend to enter into any additional Affiliate agreements. The Company may
also decide to terminate the Affiliate agreements of those Affiliates that do
not meet the performance criteria required by such agreements to ensure their
continuation. A significant number of Affiliates remain and the operation of
franchises does entail certain risks to the Company's business. See "Risk
Factors--Risks of Franchising."
CLIENTS
The Company markets its services to medium-sized and large companies, which
it defines as those with over 100 employees or $10 million in annual revenues.
Such companies have several desirable characteristics as potential clients: a
need for Internet solutions ranging from basic Web sites to complex and highly
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functional Intranets, substantial budgets devoted to information technology
expenditures, and a relatively high willingness to adopt Internet-based
strategies and solutions. The Company tailors its professional services to meet
the specific needs of these clients. Servistar Coast to Coast accounted for
18.8% of the Company's pro forma total revenues for the six months ended June
30, 1997. The Company's top 10 clients accounted for 37.6% of the Company's pro
forma total revenues during such period.
The Company provides Internet professional services to clients in a variety
of industries, as indicated by the representative clients set forth below, each
of which was responsible for at least $50,000 in services revenues, on a pro
forma basis, for the nine months ended September 30, 1997.
Amgen Harley-Davidson REI
BellSouth Ingram Micro Rolling Stone Magazine
Catalina Marketing Marcus & Millichap Silicon Graphics
Charles Schwab Microsoft Sony Music
Chevron National Geographic Thomasville Furniture
Computer Curriculum Corp. New York Magazine Toshiba
Epic Records Polk Audio Zenith
Clients typically begin their adoption of Internet solutions by establishing
a basic Web site costing several thousand dollars and then implement
increasingly powerful business solutions, which can include business critical,
fully integrated Intranets or Extranets costing several million dollars. The
Company's strategy is to provide clients with services at all stages of their
adoption of Internet solutions. The Company targets clients whose Internet
technology consulting needs will result in contracts ranging from $25,000 to
$3,000,000 per engagement. The Company's 30 largest clients spent approximately
$100,000 to $400,000 each for USWeb services, on a pro forma basis, for the
eight months ended August 31, 1997.
USWEB INTERNET STRATEGY AND SOLUTIONS CENTER
The Strategy and Solutions Center, located at the Company's headquarters in
Santa Clara, California, is designed to provide clients with more effective
Internet solutions by aggregating and redeploying the best methodologies,
technologies and creative work delivered by USWeb consulting offices. The
Company believes that the Strategy and Solutions Center provides USWeb
consulting offices with a competitive advantage by giving them efficient, real
time access to these assets, thereby allowing them to leverage the capabilities
of the entire USWeb operation in their efforts on behalf of each client. The
Strategy and Solutions Center is a centrally managed resource that can be made
available to a large number of consulting offices through USWeb Central, the
Company's secure Intranet.
The Strategy and Solutions Center provides the following resources and
programs for its clients:
USWeb Solutions Library. The Strategy and Solutions Center aggregates the
best demonstrated practices of its offices to develop USWeb Business Solutions,
partially pre-built Internet solutions that combine USWeb methodologies,
services and reusable software and content objects with third-party software.
One of the first USWeb Business Solutions was designed for human resources in
collaboration with Coopers & Lybrand and leading providers of Internet-based
human resource management technologies. The Company intends to target each
USWeb Business Solution toward a selected vertical market or business function
and offer it at a fixed price range. The Company's goal is to provide through
each USWeb Business Solution a large volume of high-quality sales and
implementation tools that leverage the cumulative experience of all USWeb
consulting offices.
USWeb Technology Library. The Strategy and Solutions Center maintains and
continually expands a technology library of proprietary reusable software and
content objects developed during the course of client engagements. The Company
believes that access to these assets helps reduce the costs of designing and
implementing individual Internet solutions, improves the quality of client
service and facilitates the Company's development of USWeb Business Solutions.
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USWeb Project Registry. The Strategy and Solutions Center has constructed a
database in which each client engagement is summarized and registered,
enabling each consulting office to find rapidly which offices have performed
certain types of work. This project registry is used to facilitate the real-
time distribution of engagement activity to those consulting offices best
equipped to serve the client.
USWeb Executive Briefing Program. The Strategy and Solutions Center has
established a program that enables USWeb consulting offices to provide their
key clients with executive seminars, solution demonstrations and discussions
with senior USWeb executives on-site at the Strategy and Solutions Center.
These sessions provide key client decision makers with first-hand experience
on the ways Internet solutions can significantly improve business processes.
USWeb SiteCasts. The Strategy and Solutions Center develops and distributes
the USWeb SiteCast Intranet Series, a sequence of Internet broadcasts designed
to show businesses how to use Internet solutions to improve business
processes. The Company sponsors the SiteCasts jointly with Microsoft and each
SiteCast incorporates leading Microsoft Internet technologies. The first
SiteCast, held on June 24, 1997 using Microsoft's NetShow 2.0, brought
together computer industry leaders to discuss how to use Intranets to achieve
business objectives. This SiteCast, which attracted approximately 800
participants, was the first Internet broadcast to incorporate simultaneous
videoconferencing, chat sessions and presentations and include both pre-taped
and live video. The second SiteCast, held on September 16, 1997, attracted
more than 2,300 participants and demonstrated how Internet solutions can
automate business processes, using as an example the Intranet USWeb created
for the Stanford University Graduate School of Business.
In each area where methodologies, technologies and content are aggregated,
the Company has implemented policies to ensure that confidential or
proprietary client information and assets are accessible only by properly
authorized personnel and not disclosed to unauthorized parties.
MARKETING
The Company's marketing efforts are dedicated to demonstrating the benefits
of Internet solutions, and the proven effectiveness of the USWeb organization
in providing such solutions, to key decision makers in client organizations.
The Company believes that a strong USWeb brand provides USWeb consulting
offices with a competitive advantage over those Internet professional services
firms whose brands may not be as well known or may not convey the same focused
message of competence, security and results. The Company's marketing programs
are also highly scalable because most advertising campaigns and marketing
tools are developed by the Company's corporate marketing group and can be
delivered to all of the consulting offices without requiring significant
additional expenses.
The Company's marketing program includes the following initiatives:
Enhance the USWeb Brand. The continued strengthening of the USWeb brand is
crucial to the achievement of the Company's objective of becoming the most
recognized provider of Internet professional services to medium-sized and
large business clients. The Company's brand development programs are designed
to reinforce the message that USWeb is a national company with a local
presence that can provide a complete range of services to build and deploy
business solutions and has a proven track record of doing so. The Company is
continuing to build and differentiate this brand through the use of publicity
campaigns that include Internet, print and radio advertising; national
seminars and executive briefings; Internet broadcasts; extensive marketing
tools and educational "white papers"; and co-marketing programs with strategic
partners.
Generate Client Leads. The Company's marketing campaigns are intended to
generate client leads for its consulting offices in several ways. First,
central lead management programs direct leads generated by the Company's
national advertising to consulting offices based on client zip code and other
substantive lead attributes. Second, regional marketing derived from corporate
advertising templates for multiple forms of media, including direct mail and
tradeshow programs, are personalized for an office's target market to drive
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<PAGE>
demand directly to that office. Third, the Company has implemented programs to
encourage cross-office lead referral when clients have vertical market needs
or proximity concerns that would be best addressed by another office. Finally,
the Company has established a national account program to help manage the
accounts of clients with multiple locations and direct service fulfillment to
the consulting office best situated by geography and specialty to meet the
client's needs.
Develop Marketing and Sales Tools for Consulting Offices. The Company has
developed a toolkit of marketing and sales materials to be used by consulting
offices in their business generation efforts. These materials include
brochures, reprints of articles, fact sheets, white papers, summary "success
stories," PR handbooks, business development guides and client presentation
templates and technologies. These materials are designed to increase the
effectiveness of the sales and marketing efforts of the Company's consulting
offices by providing them with centralized expert advice and a consistent,
professional "look and feel" to all marketing tools.
STRATEGIC RELATIONSHIPS
The Company has entered into, and intends to continue entering into,
strategic relationships with a limited number of leading Internet hardware,
software and content companies. The Company believes that these relationships
enable it to deliver clients more effective solutions with greater efficiency
because the strategic relationships provide the Company with the opportunity
to gain early access to leading-edge technology, cooperatively market products
and services with leading technology vendors, cross-sell additional services
and gain enhanced access to vendor training and support. The Company also
believes that these relationships are important because they leverage the
strong brand and technology positions of these market leaders.
The Company has strategic relationships with the following companies:
[LOGO] Microsoft. The Company and Microsoft have entered into a joint
marketing and technical partnership agreement. The companies are engaging in a
joint branded marketing campaign designed to increase demand for Microsoft's
Internet software products and USWeb's professional services. Microsoft is
also providing USWeb consulting offices with education and support in the use
of Microsoft's Internet products, and the USWeb consulting offices are
providing Microsoft with product feedback and customer reactions.
[LOGO] Hewlett-Packard. The Company and Hewlett-Packard have entered into an
agreement to launch collaborative marketing and technical support programs to
offer business clients a complete set of Internet solutions. The companies are
engaging in a joint branded marketing campaign designed to increase demand for
Hewlett-Packard's Internet systems and USWeb's professional services. Hewlett-
Packard is also providing USWeb consulting offices with education and support
in the use of Hewlett-Packard's Internet systems and USWeb consulting offices
are providing Hewlett-Packard with product feedback and client reactions.
[LOGO] Pandesic. Intel and SAP have entered into a joint venture and formed
Pandesic to deliver a comprehensive hardware, software and service solution
for managing Internet-based electronic commerce. The Company and Pandesic have
entered into an agreement to implement a joint systems integration program,
develop joint marketing and sales programs, build field development programs
and conduct ongoing technical exchanges to ensure the proper deployment and
efficient utilization of the Pandesic electronic commerce platform.
[LOGO] Sun Microsystems. The Company and Sun Microsystems have entered into
an agreement enabling each USWeb consulting office to become an authorized
reseller of Sun NETRA network servers after having filed the appropriate
documentation and attended required training classes. This marketing program
enables each USWeb affiliate to deliver a complete UNIX Intranet solution to a
customer.
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<PAGE>
[LOGO] Reuters. The Company and Reuters have entered into an agreement to
develop USWeb Business Solutions that will integrate Reuters data feeds into
corporate Intranet environments. The two parties also intend to develop joint
sales and marketing programs.
The agreements regarding these strategic relationships are typically
terminable at will by either party, and, in the event that any strategic
relationship is terminated, the Company's business, results of operations and
financial condition may be materially adversely affected. See "Risk Factors--
Reliance Upon Key Strategic Relationships."
OPERATIONS
The Company's organization includes its headquarters in Santa Clara,
California and over 40 Company-owned and Affiliate consulting offices in the
U.S. Each consulting office is responsible for providing Internet professional
services to its clients, either alone or in conjunction with one or more other
offices. The managers of each office also make all client sales, engagement
pricing, and staffing decisions for that office. However, the Company's
executive officers take an active role in directing the activities of all
consulting offices.
USWeb headquarters manages the Strategy and Solutions Center, the Company's
marketing campaigns, the strategic relationships with partner companies and
the acquisition program. The Company's headquarters also provides consulting
offices with operational support in financial management and reporting, human
resources, office administration, and management performance improvement
tools. USWeb also negotiates with product, office equipment and financing
vendors to deliver quality products to its consulting offices at favorable
prices. Finally, the Company has established relationships with leading
Internet communications companies to provide clients with carrier-grade,
highly reliable central hosting and value-added services such as shared
databases, electronic commerce, and audio and video streaming.
USWeb headquarters also manages USWeb Central, the Company's Intranet and
the Company's primary channel for enterprise-wide interaction and
communication. The Company developed and maintains USWeb Central in-house.
USWeb Central provides Company-owned and Affiliate consulting offices with
rapid, secure and efficient online access to each other and to all of the
Company's centrally managed resources, such as the Strategy and Solutions
Center libraries, sales and marketing tools, vendor information and
operational assistance. The Company believes that USWeb Central is both
scalable and critical to its strategy of strengthening its position as a
leading Internet professional services firm, because USWeb Central is the
primary mechanism by which the Company is able to aggregate and redeploy the
best strategic, technical and creative work developed by the consulting
offices.
COMPETITION
The market for Internet professional services is relatively new, intensely
competitive, rapidly evolving and subject to rapid technological change. The
Company expects competition to persist, intensify and increase in the future.
The Company's competitors can be divided into several groups: computer
hardware and service vendors such as IBM, DEC and Hewlett-Packard; advertising
and media agencies such as CKS, Foote, Cone & Belding and Ogilvy & Mather;
Internet integrators and Web presence providers such as Organic Online, Poppe
Tyson and Proxicom; large information technology consulting service providers
such as Andersen Consulting, Cambridge Technology Partners and EDS;
telecommunications companies such as AT&T and MCI; Internet and online service
providers such as America Online, NETCOM and UUNet; and software vendors such
as Lotus, Microsoft, Netscape, Novell and Oracle. Although only a few of these
competitors have to date offered a full range of Internet professional
services, several have announced their intention to offer comprehensive
Internet technology solutions.
The Company believes that the principal competitive factors in its market
are strategic expertise, technical knowledge and creative skills, brand
recognition, reliability of the delivered solution, client service and price.
Most of the Company's current and potential competitors have longer operating
histories, larger
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installed client bases, longer relationships with clients and significantly
greater financial, technical, marketing and public relations resources than
the Company and could decide at any time to increase their resource
commitments to the Company's market. In addition, the market for Internet
solutions is relatively new and subject to continuing definition, and, as a
result, the core business of certain of the Company's competitors may better
position them to compete in this market as it matures. Competition of the type
described above could materially adversely affect the Company's business,
results of operations and financial condition.
There are relatively low barriers to entry into the Company's business. For
example, the Company has no patented technology that would preclude or inhibit
competitors from entering the Internet professional services market. The
Company expects that it will face additional competition from new entrants
into the market in the future. There can be no assurance that existing or
future competitors will not develop or offer services that provide significant
performance, price, creative or other advantages over those offered by the
Company, which could have a material adverse effect on the Company's business,
results of operations and financial condition. See "Risk Factors--Competition;
Low Barriers to Entry."
EMPLOYEES
As of August 31, 1997 the Company had 316 employees, of which 78 were
located at the Company's headquarters office in Santa Clara, California and
238 were located in consulting offices. The headquarters employees included 43
in sales and marketing, 9 in hosting and education and 26 in finance,
administration and the Strategy and Solutions Center. None of the Company's
employees is represented by a labor union. The Company has experienced no work
stoppages and believes its relationship with its employees is good.
Competition for qualified personnel in the industry in which the Company
competes is intense. The Company believes that its future success will depend
in part on its continued ability to attract, hire or acquire and retain
qualified employees. See "Risk Factors--Recruitment and Retention of Internet
Solutions Professionals" and "--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing, training, and
research and development facilities occupy approximately 27,100 square feet in
a single building in Santa Clara, California, pursuant to a lease that expires
in January 2007. In addition, as of September 15, 1997, Company-owned offices
leased their facilities. The Company believes its current facilities are
adequate to meet its needs for the foreseeable future.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
September 15, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph Firmage...................... 27 Chairman of the Board and Chief Executive Officer
Tobin Corey......................... 36 President
James Heffernan..................... 56 Executive Vice President, Chief Financial Officer,
Secretary and Director
Sheldon Laube....................... 47 Executive Vice President and Chief Technology
Officer
Jeffrey Ballowe(1).................. 41 Director
Robert Hoff(1)(2)................... 44 Director
Gary Rieschel(2).................... 40 Director
Barry Rubenstein.................... 54 Director
</TABLE>
- ---------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Mr. Joseph Firmage co-founded the Company in December 1995 and has served as
its Chairman and Chief Executive Officer since that time. From August 1994 to
December 1995, Mr. Firmage served as Vice President of Strategic Planning of
the Systems Group of Novell. Prior to joining Novell, Mr. Firmage founded
Serius Corporation ("Serius"), where he served as Chief Executive Officer from
1989 through 1993, when Serius was sold to Novell.
Mr. Tobin Corey co-founded the Company in December 1995 and has served as
its President since June 1996. Prior to June 1996, Mr. Corey served as its
Executive Vice President, Marketing. From 1994 to December 1995, Mr. Corey
served as Vice President of Marketing for the NetWare Products Division of
Novell. From 1991 through 1994, Mr. Corey served as Director of Marketing for
the Desktop Division of Novell.
Mr. James Heffernan co-founded the Company in December 1995 and has served
as its Executive Vice President, Chief Financial Officer, Secretary and a
Director since that time. From May 1993 to July 1994, he worked as an
independent consultant and then joined Interlink Computer Sciences, Inc. in
July 1994 as Chief Financial Officer, where he served until January 1996. From
March 1992 to May 1993, Mr. Heffernan served as Chief Financial Officer and
Chief Operating Officer of Serius. Mr. Heffernan has also served as an officer
of several other technology companies, including Software Publishing Corp.,
Zital Inc. and Measurex Corp. Mr. Heffernan is a director of Western Micro
Technology, Inc.
Mr. Sheldon Laube co-founded the Company and has served as its Executive
Vice President and Chief Technology Officer since January 1996. From July 1995
through January 1996, Mr. Laube served as Chief Technology Officer for Novell.
Prior to joining Novell, Mr. Laube was employed by Price Waterhouse LLP as a
partner and served as Director of Information and Technology from 1986 to May
1995.
Mr. Jeffrey Ballowe has served as a Director of the Company since February
1996. Mr. Ballowe has been President of the Ziff-Davis Interactive Media and
Development Group since March 1996. Prior to March 1996, Mr. Ballowe served as
President of the Ziff-Davis Interactive Media Group in 1995 and as President
of the Ziff-Davis Marketing and Development Group in 1994. He became Group
Vice President of the Ziff-Davis Business Media Group in 1993 and Vice
President of the Ziff-Davis Worldwide Network of Direct Publications in 1991.
Mr. Robert Hoff has served as a Director of the Company since February 1996.
He has been a general partner of Crosspoint Venture Partners, a private
venture capital investment company, since September 1983. Mr. Hoff also serves
as a director of PairGain Technologies, Inc. and Onyx Acceptance Corporation.
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Mr. Gary Rieschel has served as a Director of the Company since March 1996.
Mr. Rieschel has been a Senior Vice President of SOFTBANK Holdings, a venture
capital fund, since January 1996. Prior to January 1996, Mr. Rieschel served
as Vice President of Marketing for nCube from August 1994 to December 1995; as
Director of Channel Sales for Cisco Systems from September 1993 to August
1994; and as General Manager, Asia for Sequent Computer from January 1989 to
July 1993. Mr. Rieschel is a director of Electric Minds, OnLive! Technologies,
The Palace and Concentric Networks.
Mr. Barry Rubenstein has served as a Director of the Company since June
1996. Mr. Rubenstein co-founded 21st Century Communications Partners where he
has been a partner since its formation in 1994. In addition, Mr. Rubenstein
has served as a partner and co-founder of investment partnerships including
Woodland Venture Fund, Seneca Ventures and The Northern Union Club. Prior to
his experience as an investor, Mr. Rubenstein served as the founder of several
technology companies, including Applied Digital Data Systems, Inc. and
Cheyenne Software, Inc. Mr. Rubenstein is a director of Infonautics, Inc.,
Enteractive, Inc., Decisis, Inc., Ariel, Inc., Sansource, Inc. and GTS
Communications, Inc.
Executive officers of the Company are appointed by the Board of Directors
and serve at the discretion of the Board. There are no family relationships
among any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee, consisting of Mr. Ballowe and Mr. Hoff,
recommends the selection of independent public accountants to the Board of
Directors, reviews the scope and results of the audit and other services
provided by the Company's independent auditors, and reviews the Company's
accounting practices and its systems of internal accounting controls.
The Compensation Committee, consisting of Mr. Hoff and Mr. Rieschel, reviews
and approves the salaries, bonuses and other compensation payable to the
Company's executive officers and administers and makes recommendations
concerning the Company's employee benefit plans.
DIRECTOR COMPENSATION
The Company reimburses its directors for all out-of-pocket expenses incurred
in the performance of their duties as directors of the Company. The Company
currently does not pay fees to its directors for attendance at meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee of the Company serves as a member of
the board of directors or compensation committee of any entity that has one or
more executive officers serving as a member of the Company's Board of
Directors or Compensation Committee. See "Certain Transactions" for a
description of transactions between the Company and entities affiliated with
members of the Compensation Committee.
MANAGEMENT CONTINUITY AGREEMENTS
The Company has entered into Management Continuity Agreements with each of
Messrs. Firmage, Corey, Heffernan and Laube. Pursuant to the agreements with
each of Messrs. Firmage, Corey and Heffernan, if the Company (a) terminates
his employment without cause at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay to him equal to his 12 months' base
compensation or (b) if the Company terminates his employment or he voluntarily
terminates his employment at any time 60 days or less before or within 18
months after a change in control, the Company shall provide such executive
severance pay equal to the greater of his base compensation for the year
immediately preceding or the year coinciding with the year
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of payment of such severance pay. In either case, the Company shall also
provide (i) a release of all repurchase rights over unvested stock and an
acceleration of the vesting period for any unvested options and (ii) health
insurance coverage to the extent provided immediately prior to his termination
until the earlier of 12 months following such termination or the date that he
receives health insurance coverage from another employer. In the event that he
is terminated as a result of death or disability (regardless of whether there
is a change in control), any repurchase rights of the Company with respect to
50% of the shares that he holds shall lapse and options that he holds shall
become vested as to an additional 50% of the shares subject to such options.
The term of each of the agreements is for the period of each of Mr. Corey's,
Mr. Heffernan's and Mr. Laube's at will employment.
Pursuant to the agreement with Mr. Laube, if the Company terminates his
employment without cause (a) at any time more than 60 days before or more than
18 months after a "change in control" (as defined in the agreement), the
Company shall provide severance pay equal to his 12 months' base compensation
or (b) at any time 60 days or less before or within 18 months after a change
in control, the Company shall provide severance pay equal to the greater of
his base compensation for the year immediately preceding or the year
coinciding with the year of payment of such severance pay. In either case, the
Company shall also provide (i) a release of all repurchase rights over
unvested stock and an acceleration of the vesting period for any unvested
options and (ii) health insurance coverage to the extent provided immediately
prior to Mr. Laube's termination until the earlier of 12 months following such
termination or the date that Mr. Laube receives health insurance coverage from
another employer. In the event that Mr. Laube is terminated as a result of
death or disability (regardless of whether there is a change in control), any
repurchase rights of the Company with respect to 50% of the shares that he
holds shall lapse and options that he holds shall become vested as to an
additional 50% of the shares subject to such options. Further, Mr. Laube may
not be terminated during the period ending February 12, 1998 except for cause
or for "good business reasons" (as defined in the agreement). After such
period, Mr. Laube's employment will be at will. In the event that Mr. Laube is
terminated for good business reasons during the initial two-year period, he is
entitled to receive severance pay equal to 24 months' base compensation
together with a release of all repurchase rights over unvested stock and an
acceleration of the vesting period for any unvested options (as defined in the
agreement). In addition to his base compensation of $260,000, Mr. Laube is
entitled to receive a quarterly bonus of $25,000 so long as he is employed by
the Company.
LIMITATION ON LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation to be effective upon the
completion of this offering, the Company's Bylaws, Section 145 of the Delaware
General Corporation Law and the form of indemnification agreement entered into
between the Company and certain of its directors and officers, subject to
certain conditions, authorize the Company to indemnify, or indemnify by their
terms, as the case may be, the directors and officers of the Company against
certain liabilities and expenses incurred by such persons in connection with
claims made by reason of their being such a director or officer.
Section of the Underwriting Agreement with respect to the offering made
hereby provides for indemnification by the Underwriters and their controlling
persons, on the one hand, and of the Company and its controlling persons on
the other hand, for certain liabilities arising under the Securities Act of
1933, as amended and the Securities Exchange Act of 1934, as amended or
otherwise.
The Company intends to obtain directors and officers insurance providing
indemnification for certain of the Company's directors, officers, affiliates,
partners or employees for certain liabilities.
The Company has entered into agreements to indemnify its directors and
executive officers, in addition to indemnification provided for in the
Company's Bylaws. These agreements, among other things, indemnify the
Company's directors and executive officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
the Company, arising out of such person's services as a director or executive
officer of the Company, any subsidiary of the Company or any other company or
enterprise to which the person provides
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services at the request of the Company. The Company believes that these
provisions and agreements are necessary to attract and retain qualified
directors and executive officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification is
expected to be required or permitted. The Company is not aware of any
threatened litigation or proceeding that might result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
The following table sets forth information concerning the compensation paid
by the Company during the fiscal year ended December 31, 1996 to the Company's
Chief Executive Officer and each of the Company's four other executive
officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Joseph Firmage.......... 1996 $ 200,000(1) $ -- -- $115,356(2)(3)
Chairman and Chief
Executive Officer and
Director
Tobin Corey............. 1996 197,307(4) 5,582 -- 48,980(2)(3)
President
James Heffernan......... 1996 191,667(4) -- -- 1,313(3)
Executive Vice
President, Chief
Financial Officer,
Secretary and Director
Sheldon Laube........... 1996 241,886(4) 100,000 -- 508(3)
Executive Vice
President and Chief
Technology Officer
Kenneth Campbell(5)..... 1996 220,000 -- -- 840(3)
Executive Vice
President, Affiliate
Operations
</TABLE>
- ---------------------
(1) Does not include $16,666 earned in 1995 but not paid until 1996.
(2) Includes payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey in the amount of $115,216 and $48,787, respectively.
(3) Includes life insurance premiums paid on behalf of Mr. Firmage, Mr. Corey,
Mr. Heffernan, Mr. Laube and Mr. Campbell in the amount of $140, $193,
$1,313, $508 and $840, respectively.
(4) The annual base salaries for Mr. Corey, Mr. Heffernan and Mr. Laube are
$200,000, $200,000 and $260,000, respectively. The figures listed
represent payment for actual employment during 1996, which was slightly
less than 12 months.
(5) Mr. Campbell resigned from the Company effective July 29, 1997. See
"Certain Transactions" for a description of the terms of Mr. Campbell's
release agreement.
OPTION GRANTS AND EXERCISES DURING FISCAL 1996
No stock options were granted to or exercised by Named Executive Officers
during fiscal 1996. Such officers have, in connection with the formation of
the Company, purchased restricted stock with a four-year vesting schedule. See
"Certain Transactions."
51
<PAGE>
EMPLOYEE BENEFIT PLANS
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors in December 1995 and approved by the stockholders in
December 1996. The 1996 Plan will terminate in December 2005 unless terminated
earlier by the Board of Directors. The 1996 Plan provides for grants of
options to employees and consultants (including officers and directors) of the
Company and its subsidiaries. A total of 600,000 shares of Common Stock were
reserved for issuance pursuant to the 1996 Plan. The 1996 Plan may be
administered by the Board of Directors or by a committee appointed by the
Board, in a manner that satisfies the legal requirements relating to the
administration of stock plans under all applicable laws (the "Administrator").
The 1996 Plan is currently administered by the Board of Directors. The Company
does not intend to issue any additional options under the 1996 Plan.
The exercise price of options granted under the 1996 Plan is determined by
the Administrator. With respect to incentive stock options granted under the
1996 Plan, the exercise price must be at least equal to the fair market value
per share of the Common Stock on the date of grant, and the exercise price of
any incentive stock option granted to a participant who owns more than 10% of
the voting power of all classes of the Company's outstanding capital stock
must be equal to at least 110% of fair market value of the Common Stock on the
date of grant. The maximum term of an option granted under the 1996 Plan may
not exceed ten years from the date of grant (five years in the case of a
participant who owns more than 10% of the voting power of all classes of the
Company's outstanding capital stock). In the event of termination of an
optionee's employment or consulting arrangement, an option may only be
exercised, to the extent vested as of the date of termination, for a period
not to exceed 90 days (12 months, in the case of termination as a result of
death or disability) following the date of termination. Options granted under
the 1996 Plan are not generally transferable by the optionee, and may be
exercised during the life of the optionee only by the optionee.
The 1996 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option shall be assumed or an equivalent option substituted for
by the successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the optionee shall have the
right to exercise the option as to all of the optioned stock, including shares
as to which it would not otherwise be exercisable. If an option becomes
exercisable in full in the event of a merger or sale of assets, the
Administrator shall notify the optionee that the option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice,
and the option will terminate upon the expiration of such period.
The 1996 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option as to all of the optioned stock, including shares as to
which it would not otherwise be exercisable. If the Administrator makes an
option exercisable in full in the event of a proposed dissolution or
liquidation, the Administrator shall notify the optionee that the option shall
be fully exercisable until ten (10) days prior to such transaction. To the
extent the option has not been exercised, such option will terminate
immediately prior to the consummation of such proposed action.
As of September 29, 1997, the Company had outstanding options to purchase
120,771 shares of Common Stock under the 1996 Plan held by an aggregate of 58
persons at a weighted exercise price of $0.78 per share. As of September 29,
1997, options to purchase an aggregate of 295,549 shares of Common Stock under
the 1996 Plan had been exercised.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), and for the granting to employees and consultants of nonstatutory
stock options and stock purchase rights ("SPRs"). The 1996 Equity Plan was
approved by the Board of Directors in
52
<PAGE>
December 1996. Unless terminated sooner by the Board of Directors, the 1996
Equity Plan will terminate automatically in December 2006. The 1996 Equity
Plan was amended by the Board of Directors in September 1997. A total of
700,000 shares of Common Stock are currently reserved for issuance pursuant to
the 1996 Equity Plan.
The 1996 Equity Plan may be administered by the Board of Directors or a
committee of the Board (the "Administrator"), which Administrator shall, in
the case of options intended to qualify as "performance-based compensation"
within the meaning of Section 162(m) of the Code, consist of two or more
"outside directors" within the meaning of Section 162(m) of the Code. The
Administrator has the power to determine the terms of the options or SPRs
granted, including the exercise price, the number of shares subject to each
option or SPR, the exercisability thereof and the form of consideration
payable upon such exercise. In addition, the Committee has the authority to
amend, suspend or terminate the 1996 Equity Plan, provided that no such action
may impair the rights of any optionee under the 1996 Equity Plan unless
mutually agreed. Notwithstanding the foregoing, employees, directors and
consultants may not be granted options to purchase more than 150,000 shares of
Common Stock in any fiscal year, except for additional shares issued pursuant
to his or her initial service and any increases resulting for capitalization.
Unless otherwise determined by the Administrator, options and SPRs granted
under the 1996 Equity Plan are not generally transferable by the optionee, and
each option or SPR is exercisable during the lifetime of the optionee only by
such optionee. Options granted under the 1996 Equity Plan must generally be
exercised within three months of the end of optionee's status as an employee
or consultant of the Company, or within 12 months after such optionee's
termination by death or disability, but in no event later than the expiration
of the option's ten year term. In the case of SPRs, unless the Committee
determines otherwise, the restricted stock purchase agreement pursuant to
which the SPR is exercised shall grant the Company a repurchase option
exercisable upon the voluntary or involuntary termination of the purchaser's
employment with the Company for any reason (including death or disability).
The purchase price for shares repurchased pursuant to such restricted stock
purchase agreement shall be the original price paid by the purchaser and may
be paid by cancellation of any indebtedness of the purchaser to the Company.
The repurchase option shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the 1996
Equity Plan must be at least equal to the fair market value of the Common
Stock on the date of grant. The exercise price of nonstatutory stock options
and SPRs granted under the 1996 Equity Plan is determined by the
Administrator, but with respect to nonstatutory stock options intended to
qualify as "performance-based compensation" within the meaning of Section
162(m) of the Code, the exercise price must at least be equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of the Company's outstanding capital stock, the exercise price of any
incentive stock option granted must equal at least 110% of the fair market
value on the grant date and the term of such incentive stock option must not
exceed five years. The term of all other options granted under the 1996 Equity
Plan may not exceed ten years.
The 1996 Equity Plan provides that in the event of a merger of the Company
with or into another corporation, a sale of substantially all of the Company's
assets or a like transaction involving the Company, each option shall be
assumed or an equivalent option substituted by the successor corporation. If
the outstanding options are not assumed or substituted as described in the
preceding sentence, the optionee shall have the right to exercise the option
or SPR as to all of the optioned stock, including shares as to which it would
not otherwise be exercisable. If an option or SPR becomes exercisable in full
in the event of a merger or sale of assets, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable for a period of 15
days from the date of such notice, and the option or SPR will terminate upon
the expiration of such period.
The 1996 Equity Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which they would not otherwise be exercisable. If the
Administrator
53
<PAGE>
makes an option or SPR exercisable in full in the event of a proposed
dissolution or liquidation, the Administrator shall notify the optionee that
the option or SPR shall be fully exercisable until 10 days prior to such
transaction. To the extent the option or SPR has not been exercised, such
option or SPR will terminate immediately prior to the consummation of such
proposed action.
As of September 29, 1997, the Company had outstanding options to purchase
555,227 shares of Common Stock under the 1996 Equity Plan held by an aggregate
of 107 persons at a weighted exercise price of $7.38 per share. As of
September 29, 1997, no options to purchase shares of Common Stock under the
1996 Equity Plan had been exercised.
1997 Acquisition Stock Option Plan.
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") was
approved by the Board of Directors in February 1997 and amended in July 1997.
The 1997 Plan provides for the grant of incentive stock options, within the
meaning of Section 422 of the Code, to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs
to employees, directors and consultants. A total of 8,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 400,000 shares, (ii)
4% of the outstanding shares, or (iii) a lesser amount determined by the Board
of Directors, are currently reserved for issuance pursuant to the 1997 Plan.
Unless terminated sooner by the Board of Directors, the 1997 Plan will
terminate automatically in February 2007.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (as applicable, the "Administrator"). The Administrator has the
power to determine the terms of the options or SPRs granted, including the
exercise price of the option or SPR, the number of shares subject to each
option or SPR, the exercisability thereof and the form of consideration
payable upon such exercise. In addition, the Administrator has the authority
to amend, suspend or terminate the 1997 Plan, provided that such action may
not impair the rights of any optionee under the 1997 Plan unless mutually
agreed.
Options and SPRs granted under the 1997 Plan are generally not transferable
by the optionee, and each option or SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months after the end of optionee's status
as an employee, director or consultant of the Company, or within 12 months
after such optionee's termination by death or disability, but in no event
later than the expiration of the option's ten year term.
In the case of SPRs, unless the Administrator determines otherwise, the
restricted stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's employment with the Company for any reason (including death or
disability). The purchase price for shares repurchased pursuant to the
restricted stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
The exercise price of all incentive stock options granted under the 1997
Plan must be at least equal to the fair market value of the Common Stock on
the date of grant. The exercise price of nonstatutory stock options and SPRs
granted under the 1997 Plan is determined by the Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-
based compensation" within the meaning of Section 162(m) of the Code, the
exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. With respect to any participant who owns stock
possessing more than 10% of the voting power of all classes of the outstanding
capital stock of the Company, its parent or any subsidiary, the exercise price
of any incentive stock option granted must equal at least 110% of the fair
market value on the grant date and the term of such incentive stock option
must not exceed five years. The term of all other options granted under the
1997 Plan may not exceed ten years.
54
<PAGE>
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, or a sale of substantially all of the Company's
assets, each option and SPR shall be assumed or an equivalent option
substituted for by the successor corporation. If the outstanding options or
SPRs are not assumed or substituted for by the successor corporation, the
optionee shall have the right to exercise the option or SPR as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If an option or SPR becomes exercisable in full in the event of a
merger or sale of assets, the Administrator shall notify the optionee that the
option or SPR shall be fully exercisable for a period of 15 days from the date
of such notice, and the option or SPR will terminate upon the expiration of
such period.
The 1997 Plan provides that in the event of a proposed dissolution or
liquidation, the Administrator may provide for the optionee to have the right
to exercise the option or SPR as to all of the optioned stock, including
shares as to which they would not otherwise be exercisable. If the
Administrator makes an option or SPR exercisable in full in the event of a
proposed dissolution or liquidation, the Administrator shall notify the
optionee that the option or SPR shall be fully exercisable until fifteen (15)
days prior to such transaction. To the extent the option or SPR has not been
exercised, such option or SPR will terminate immediately prior to the
consummation of such proposed action.
As of September 29, 1997, no shares had been issued upon exercise of stock
options granted under the 1997 Plan, and 6,238,920 shares were subject to
outstanding options.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "ESPP") was adopted by
the Board of Directors in September 1997. A total of 1,000,000 shares of
Common Stock has been reserved for issuance under the ESPP, plus annual
increases equal to the lesser of (i) 50,000 shares, (ii) 4% of the outstanding
shares on such date or (iii) a lesser amount determined by the Board.
The ESPP, which is intended to qualify under Section 423 of the Code,
contains consecutive, overlapping, 24-month offering periods. Each offering
period includes four six-month purchase periods. The offering periods
generally start on the first trading day on or after May 1 and November 1 of
each year, except for the first such offering period which commences on the
first trading day on or after the effective date of this Offering and ends on
the last trading day on or before October 31, 1998.
Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, no employee may be
granted an option to purchase under the ESPP who (i) immediately after grant
owns stock possessing 5% or holds equivalent outstanding options or more of
the total combined voting power or value of all classes of the capital stock
of the Company, or (ii) whose rights to purchase stock under all employee
stock purchase plans of the Company accrues at a rate which exceeds $25,000
worth of stock for each calendar year. The ESPP permits participants to
purchase Common Stock through payroll deductions of up to 15% of the
participant's "compensation." Compensation is defined as the participant's
base straight time gross earnings, overtime and commissions but excludes
payments for shift premium, incentive compensation, incentive payments,
bonuses and other compensation. The maximum number of shares a participant may
purchase during a single purchase period is 2,500 shares.
Amounts deducted and accumulated by the participant are used to purchase
shares of Common Stock at the end of each purchase period. The price of stock
purchased under the ESPP is 85% of the lower of the fair market value of the
Common Stock at the beginning of the offering period or at the end of the
purchase period. In the event the fair market value at the end of a purchase
period is less than the fair market value at the beginning of the offering
period, the participants will be withdrawn from the current offering period
following exercise and automatically re-enrolled in a new offering period. The
new offering period will use the lower fair market value as of the first date
of the new offering period to determine the purchase price for future purchase
periods. Participants may end their participation at any time during an
offering period, and they will be paid their payroll deductions to date.
Participation ends automatically upon termination of employment with the
Company.
55
<PAGE>
Rights granted under the ESPP are generally not transferable by a
participant unless otherwise provided under the ESPP. The ESPP provides that,
in the event of a merger of the Company with or into another corporation or a
sale of substantially all of the Company's assets, each outstanding option may
be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date
will be set. The ESPP will terminate by its own terms in September 2007. The
Board of Directors has the authority to amend or terminate the ESPP, except
that no such action may adversely affect any outstanding rights to purchase
stock under the ESPP.
Affiliate Warrant Program
In June 1996, the Company established the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates and to create
performance incentives for such Affiliates. Under the Program, each Affiliate
that signed an Affiliate agreement on or before March 31, 1997 was granted a
warrant to purchase shares of the Company's Common Stock upon execution of the
Affiliate agreement (a "Signing Warrant") and earns warrants ("AGR Warrants")
to purchase additional shares of Common Stock at the rate of one share of
Common Stock per $50 of Affiliate adjusted gross revenue, as defined. The
exercise price of all warrants issued and issuable to an individual Affiliate
was set at the time of signing of the Affiliate agreement. Warrants vest 25%
after one year and then ratably each month over the 36 month period. Warrants
are exercisable for a maximum period of five years from the effective date of
the Affiliate agreement. Warrants may not be exercised prior to the earlier of
the closing of this offering or any acquisition of the Company. A total of
333,333 shares of Common Stock have been reserved for issuance under the
Program, and the Company does not intend to increase this amount.
During 1996, the Company issued Signing Warrants to purchase an aggregate of
108,500 shares of Common Stock Signing Warrants and AGR Warrants to purchase
an aggregate of 17,919 shares of Common Stock. No warrants were exercised or
canceled during 1996 and no warrants were exercisable as of December 31, 1996.
The estimated cost of such warrants totaled $501,000 and was recognized as
cost of revenues during 1996.
During the first six months of 1997, the Company issued Signing Warrants to
purchase an aggregate of 4,000 shares of Common Stock and AGR Warrants to
purchase an aggregate of 41,495 shares of Common Stock. As of June 30, 1997,
the weighted average remaining contractual life of outstanding warrants was
4.5 years, the weighted average exercise price per share was $1.35 and the
weighted average fair value per share was $1.38. The estimated cost of such
warrants totaled $135,000 and was recognized as cost of revenues during 1997.
56
<PAGE>
CERTAIN TRANSACTIONS
Since its inception, the Company has issued, in private placement
transactions, shares of Preferred Stock as follows: 6,172,833 shares of Series
A Preferred Stock at $1.62 per share, 3,103,333 shares of Series B Preferred
Stock at $2.01 per share and 2,818,193 shares of Series C Preferred Stock at
$6.21 per share. In connection with the issuance of Series C Preferred Stock,
the Company issued warrants (the "Series C Warrants") to purchase an aggregate
of 704,549 shares of Series C Preferred Stock at an exercise price of $7.50
per share. Each share of Preferred Stock will convert into one share of Common
Stock upon the closing of this offering. The holders of such shares of
converted Preferred Stock are entitled to certain registration rights with
respect to the Common Stock issued upon conversion thereof. See "Description
of Capital Stock--Registration Rights." The following table sets forth the
number of shares of Preferred Stock, Series C Warrants and Common Stock
purchased by the Company's directors, five percent stockholders and their
respective affiliates:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES C COMMON
INVESTOR PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK WARRANTS STOCK
-------- --------------- --------------- --------------- -------- -------
<S> <C> <C> <C> <C> <C>
Crosspoint Venture
Partners (1)........... 1,233,333 -- 48,309 9,662 500,000
SoftVen No. 2 Investment
Enterprise
Partnership (2)........ 4,339,990 3,103,333 -- -- --
21st Century
Communications
Partners, L.P. (3)..... -- -- 1,288,243 322,062 --
The Cutler Group........ 308,333 -- 24,892 (4) 4,978 958,982 (5)
</TABLE>
- ---------------------
(1) Robert Hoff, a general partner of Crosspoint Venture Partners, serves on
the Company's Board of Directors.
(2) Jeffrey Ballowe, President of Ziff-Davis Interactive Media and Development
Group, an affiliate of SoftVen No. 2 Investment Enterprise Partnership,
and Gary Rieschel, Executive Managing Director of SOFTBANK Holdings, an
affiliate of SoftVen No. 2 Investment Enterprise Partnership, serve on the
Company's Board of Directors.
(3) Includes 545,893 shares and warrants to purchase 136,474 shares held by
21st Century Communications Partners, L.P., 185,668 shares and warrants to
purchase 46,417 shares held by 21st Century Communications T-E Partners,
L.P., 73,591 shares and warrants to purchase 18,398 shares held by 21st
Century Communications Foreign Partners, L.P., 442,841 shares and warrants
to purchase 110,710 shares held by Wheatley Partners, L.P. and 40,250
shares and warrants to purchase 10,063 shares held by Wheatley Foreign
Partners, L.P., each a general partnership of which Mr. Rubenstein is a
general partner.
(4) Consists of 24,892 shares of Series C Preferred Stock held by Storie
Partners, an affiliate of The Cutler Group.
(5) Includes 425,649 shares of Common Stock held by Frank Cutler, principal
of The Cutler Group, and 533,333 shares of Common Stock held by Storie
Partners, an affiliate of The Cutler Group.
In December 1995, the Company entered into restricted stock purchase
agreements with each of Joseph Firmage, Tobin Corey, James Heffernan and
Kenneth Campbell. In January 1996, the Company entered a Restricted Stock
Purchase Agreement with Sheldon Laube. Pursuant to these Restricted Stock
Purchase Agreements, Messrs. Firmage, Corey, Heffernan, Laube and Campbell
acquired the number of shares of the Company's Common Stock set forth opposite
their names in the table below:
<TABLE>
<CAPTION>
SHARES OF COMMON
EXECUTIVE OFFICER STOCK ACQUIRED
----------------- ----------------
<S> <C>
Joseph Firmage.......................................... 1,779,993
Tobin Corey............................................. 932,360
James Heffernan......................................... 762,549
Sheldon Laube........................................... 762,549
Kenneth Campbell........................................ 762,549
</TABLE>
57
<PAGE>
The shares of Common Stock subject to the Restricted Stock Purchase
Agreements were issued in exchange for cash. The Restricted Stock Purchase
Agreements provide the Company the right to repurchase at the original
purchase price all shares of Common Stock not released from such right of
repurchase, and 1/48th of the shares issued under the Restricted Stock
Purchase Agreements are released from the Company's right of repurchase each
month after the date of purchase. Further, the Company retains a right of
first refusal to purchase any shares issued pursuant to a Restricted Stock
Purchase Agreement until 90 days after the effective date of this offering.
The Company has entered into indemnification agreements with each of its
directors and executive officers. These agreements require the Company to
indemnify such individuals for certain liabilities to which they may be
subject as a result of their affiliation with the Company, to the fullest
extent allowed by Delaware law. See "Management--Limitation on Liability and
Indemnification Matters."
The Company has entered into Management Continuity Agreements with Messrs.
Firmage, Corey, Heffernan and Laube. See "Management--Employment Agreements."
In January 1996, the Company extended a loan of $70,000 (with interest
accruing at 5% per annum) to Tobin Corey, to cover the expenses of Mr. Corey's
relocation to California from Utah (the "Corey Loan"). In July 1997, the
Company forgave the Corey Loan, together with accrued interest and a tax
gross-up, for a total amount forgiven of $135,000.
In August 1997, the Company entered into a General Release Agreement with
Kenneth Campbell (the "Campbell Release Agreement"). Pursuant to the terms of
the Campbell Release Agreement, Mr. Campbell shall receive an amount equal to
his base salary of $220,000, payable semimonthly over the 12 month period
beginning August 1, 1997. In addition, on Mr. Campbell's termination date, the
Company paid Mr. Campbell $15,229, an amount equal to the value of his accrued
and unused vacation. Further, pursuant to the terms of the Campbell Release
Agreement, the Company accelerated vesting of certain shares of Common Stock
held by Mr. Campbell so that, as of the date of the Campbell Release
Agreement, Mr. Campbell held 413,047 shares. The Company repurchased the
remaining 349,502 shares of Common Stock held by Mr. Campbell at a price of
$.0001 per share.
58
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of September 15, 1997
for (i) each person or entity who is known by the Company to beneficially own
more than 5% of the outstanding Common Stock of the Company, (ii) each of the
Company's directors, (iii) each Named Executive Officer and (iv) all directors
and executive officers of the Company as a group:
<TABLE>
<CAPTION>
PERCENT OF SHARES
BENEFICIALLY OWNED (1)
--------------------------
DIRECTORS, NAMED EXECUTIVE OFFICERS, 5% STOCKHOLDERS NUMBER OF SHARES BEFORE AFTER
AND ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP BENEFICIALLY OWNED OFFERING OFFERING
- ---------------------------------------------------- ------------------ ----------- -----------
<S> <C> <C> <C>
SoftVen No. 2 Investment Enterprise
Partnership......................... 7,443,323 32.5%
Jeffrey Ballowe (2).................. 7,443,323 32.5
Gary Rieschel (2).................... 7,443,323 32.5
Joseph Firmage (3)................... 1,779,993 7.8
Robert Hoff (4)...................... 1,791,304 7.8
Crosspoint Venture Partners.......... 1,791,304 7.8
Barry Rubenstein (5)................. 1,545,890 6.7
21st Century Communications Partners,
L.P. (6)............................ 1,867,955
The Cutler Group (7)................. 1,297,185 5.6
Tobin Corey (8)...................... 932,360 4.1
James Heffernan (9).................. 762,549 3.3
Sheldon Laube (10)................... 762,549 3.3
Kenneth Campbell (11)................ 413,047 2.7
All executive officers and directors
as a group (8 persons) (12)......... 16,757,075 73.1
</TABLE>
- ---------------------
(1) Beneficial ownership is determined in accordance with the rules of
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that
person, shares of Common Stock subject to options or warrants held by
that person that are currently exercisable or exercisable within 60 days
of September 15, 1997 are deemed outstanding. Such shares, however, are
not deemed outstanding for the purposes of computing the percentage
ownership of each other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, each
stockholder named in the table above has sole voting and investment power
with respect to the shares set forth opposite such stockholder's name.
Percentage beneficial ownership is based on 22,936,022 shares of Common
Stock outstanding as of September 15, 1997 and shares of Common Stock
outstanding after completion of this offering.
(2) Consists of 7,443,323 shares of Common Stock held by SoftVen No. 2
Investment Enterprise Partnership. Jeffrey Ballowe, President of Ziff-
Davis Interactive Media and Development Group, an affiliate of SoftVen
No. 2 Investment Enterprise Partnership, and Gary Rieschel, Executive
Managing Director of SOFTBANK Holdings, an affiliate of SoftVen No. 2
Investment Enterprise Partnership, serve on the Company's Board of
Directors. Mr. Ballowe and Mr. Rieschel disclaim beneficial ownership of
such shares.
(3) Includes 120,000 shares held by certain relatives of Mr. Firmage and
279,993 held by JPF LLC, a limited liability company of which Mr. Firmage
retains beneficial control. Mr. Firmage disclaims beneficial ownership of
all such shares.
59
<PAGE>
(4) Includes warrants to purchase 9,662 shares of Common Stock held by
Crosspoint Venture Partners. Mr. Hoff is a general partner of Crosspoint
Venture Partners. Mr. Hoff disclaims beneficial ownership of all such
shares except as to the pecuniary interest therein arising from his
interest in such fund.
(5) Includes 545,893 shares and warrants to purchase 109,178 shares held by
21st Century Communications Partners, L.P., 185,668 shares and warrants
to purchase 37,133 shares held by 21st Century Communications T-E
Partners, L.P., 73,591 shares and warrants to purchase 14,718 shares held
by 21st Century Communications Foreign Partners, L.P., 442,841 shares and
warrants to purchase 88,568 shares held by Wheatley Partners, L.P. and
40,250 shares and warrants to purchase 8,050 shares held by Wheatley
Foreign Partners, L.P., each of which is an affiliate of 21st Century
Communications Partners, L.P., a general partnership of which
Mr. Rubenstein is a General Partner. Mr. Rubenstein disclaims beneficial
ownership of such shares.
(6) Includes 545,893 shares and warrants to purchase 109,178 shares held by
21st Century Communications Partners, L.P., 185,668 shares and warrants
to purchase 37,133 shares held by 21st Century Communications T-E
Partners, L.P., 73,591 shares and warrants to purchase 14,718 shares held
by 21st Century Communications Foreign Partners, L.P., 442,841 shares and
warrants to purchase 88,568 shares held by Wheatley Partners, L.P. and
40,250 shares and warrants to purchase 8,050 shares held by Wheatley
Foreign Partners, L.P.
(7) Includes 558,225 shares of Common Stock and warrants to purchase 4,978
shares of Common Stock held by Storie Partners, an affiliate of The
Cutler Group, and 425,649 shares of Common Stock held by Frank Cutler,
principal of the Cutler Group.
(8) Includes 200,457 shares held by certain relatives of Mr. Corey. Mr. Corey
disclaims beneficial ownership of all such shares.
(9) Includes 115,000 shares held by certain relatives of Mr. Heffernan. Mr.
Heffernan disclaims beneficial ownership of all such shares.
(10) Includes 20,000 shares held by certain relatives of Mr. Laube. Mr. Laube
disclaims beneficial ownership of all such shares.
(11) Includes 26,333 shares held by certain relatives of Mr. Campbell. Mr.
Campbell disclaims beneficial ownership of all such shares.
(12) See notes (2)-(5) and (8)-(11) above.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Certificate of Incorporation and Bylaws is a
summary and is qualified in its entirety by the provisions of the Certificate
of Incorporation and Bylaws, which have been filed as exhibits to the
Company's Registration Statement of which this Prospectus is a part.
Upon the closing of this offering, the authorized capital stock of the
Company, after giving effect to the conversion of all outstanding Preferred
Stock into Common Stock and the reincorporation of the Company in the State of
Delaware, will be shares, consisting of shares of Common Stock, par
value per share, and shares of undesignated Preferred Stock, par
value per share.
COMMON STOCK
As of September 29, 1997 there were 22,936,022 shares of Common Stock
outstanding held of record by 115 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any then outstanding Preferred Stock,
holders of Common Stock are entitled to receive ratably such dividends as may
be declared by the Board of Directors out of funds legally available therefor.
In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payment of liabilities and the liquidation preferences of any
outstanding shares of Preferred Stock, if any. Holders of Common Stock have no
preemptive rights or rights to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of the offering will be,
fully paid and nonassessable. The rights of holders of Common Stock are
subject to, and may be adversely affected by, the rights of any series of
Preferred Stock which the Company may issue in the future.
PREFERRED STOCK
Effective upon the closing of this offering, the Board of Directors will
have the authority, without further action by the stockholders, to issue up to
1,000,000 shares of Preferred Stock in one or more series, and to fix the
rights, designations, preferences, privileges, qualifications and restrictions
thereof, including dividend rights, conversion rights, voting rights, rights
and terms of redemption, liquidation preferences and sinking fund terms, any
or all of which may be greater than the rights of the Common Stock. No shares
of Preferred Stock will be outstanding upon the closing of this offering. The
issuance of Preferred Stock could adversely affect the voting power of holders
of Common Stock and the likelihood that such holders will receive dividend
payments and payments upon liquidation. Such issuance could have the effect of
decreasing the market price of the Common Stock. The issuance of Preferred
Stock may have the effect of delaying, deterring or preventing a change in
control of the Company with any further action by the stockholders. The
Company has no present plans to issue any shares of Preferred Stock.
WARRANTS
Effective upon the closing of this offering, the Company will have warrants
to purchase 981,186 shares of its Common Stock outstanding. As of September
30, 1997, 927,853 of such warrants had an average remaining contractual life
of 2.95 years and a weighted average exercise price per share of $5.80, and
53,333 of such warrants had an average remaining contractual life of 8.5 years
and a weighted average exercise price per share of $1.62.
No fractional shares of Common Stock will be issued in connection with the
exercise of warrants. In the event a holder of warrant fails to exercise the
warrants prior to their expiration, the warrants will expire and the holder
thereof will have no further rights with respect to such warrants.
61
<PAGE>
A holder of warrants will not have any rights, privileges or liabilities as
a stockholder of the Company prior to exercise of the warrants. The Company is
required to keep available a sufficient number of authorized shares of Common
Stock to permit exercise of the warrants.
The exercise price of the warrants and the number of shares issuable upon
exercise of the warrants will be subject to adjustment to protect against
dilution in the event of stock dividends, stock splits, combinations,
subdivisions and reclassifications. See "Affiliate Warrant Program."
REGISTRATION RIGHTS
After this offering, the holders of 12,861,224 shares of Common Stock,
including 757,882 shares of Common Stock issuable upon the conversion of
outstanding warrants, will be entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
agreement between the Company and the holders of such registrable securities,
if the Company proposes to register any of its securities under the Securities
Act, either for its own account or for the account of other security holders
exercising registration rights, such holders are entitled to notice of such
registration and are entitled to include shares of such Common Stock therein.
Further, holders may require the Company to file additional registration
statements on Form S-3 at the Company's expense. These rights are subject to
certain conditions and limitations, among them the right of the underwriters
of an offering to limit the number of shares included in such registration in
certain circumstances.
CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF
INCORPORATION, BY-LAWS AND DELAWARE LAW
General
Certain provisions of the Delaware General Corporation Law and the Company's
Certificate of Incorporation and Bylaws could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
to acquire, control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of the
Company's Common Stock. These provisions of Delaware law and the Company's
Certificate of Incorporation and Bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual
or threatened change of control of the Company (including unsolicited takeover
attempts), even though such a transaction may offer the Company's stockholders
the opportunity to sell their stock at a price above the prevailing market
price. The Certificate of Incorporation allows the Company to issue Preferred
Stock with rights senior to those of the Common Stock and other rights that
could adversely affect the interests of holders of Common Stock, which could
decrease the amount of earnings or assets available for distribution to the
holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock, as well as having the anti-takeover effect
discussed above. See "Risk Factors--Effect of Certain Charter Provisions;
Antitakeover Effects of Certificate of Incorporation, Bylaws and Delaware
Law."
Delaware Takeover Statute
The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which prohibits a Delaware corporation from engaging in a
"business combination" with certain persons ("Interested Stockholders") for
three years following the date any such person becomes an Interested
Stockholder. Interested Stockholders generally include (i) persons who are the
beneficial owners of 15% or more of the outstanding voting stock of the
corporation and (ii) persons who are affiliates or associates of the
corporation and who hold 15% or more of the corporation's outstanding voting
stock at any time within three years before the date on which such person's
status as an Interested Stockholder is determined. Subject to certain
exceptions, a business combination includes, among other things, (i) a merger
or consolidation, (ii) the sale, lease exchange, mortgage, pledge, transfer or
other disposition of assets having an aggregate market value
62
<PAGE>
equal to 10% or more of either the aggregate market value of all assets of the
corporation determined on a consolidated basis or the aggregate market value
of all the outstanding stock of the corporation, (iii) any transaction that
results in the issuance or transfer by the corporation of any stock of the
corporation to the Interested Stockholder, except pursuant to a transaction
that effects a pro rata distribution to all stockholders of the corporation,
(iv) any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series, or
securities convertible into the stock of any class or series, of the
corporation that is owned directly or indirectly by the Interested
Stockholder, or (v) any receipt by the Interested Stockholder of the benefit
(except proportionately as a stockholder) of any loans, advances, guarantees,
pledges or other financial benefits provided by or through the corporation.
Section 203 does not apply to a business corporation if (i) before a person
becomes an Interested Stockholder, the board of directors of the corporation
approves the transaction in which the Interested Stockholder became an
Interested Stockholder or approved the business combination, or (ii) upon
consummation of the transaction that resulted in the Interested Stockholder
becoming an Interested Stockholder, the Interested Stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commences, other than certain the affirmative vote of the holders
of at least two-thirds of the outstanding voting stock of the corporation not
owned by the Interested Stockholder.
Certificate of Incorporation and Bylaws
The Company's Bylaws also require that special meetings of the stockholders
of the Company may be called only by the Board of Directors, the Chief
Executive Officer of the Company or by any person or persons holding shares
representing at least 20% of the outstanding capital stock. The Company's
Bylaws also require advance written notice, which must be received by the
Secretary of the Company not less than 90 days prior to the meeting, by a
stockholder of a proposal or directors nomination which such stockholder
desires to present at an annual or special meeting of stockholders. The
Company's Certificate of Incorporation does not include a provision for
cumulative voting in the election of directors. Under cumulative voting, a
minority stockholder holding a sufficient number of shares may be able to
ensure the election of one or more directors. The absence of cumulative voting
may have the effect of limiting the ability of minority stockholders to effect
changes in the Board of Directors and, as a result, may have the effect of
deterring hostile takeover or delaying or preventing changes in control or
management of the Company.
The Company's Bylaws provide that the authorized number of directors may be
changed by an amendment to the Bylaws adopted by the Board of Directors or by
the stockholders. Vacancies in the Board of Directors may be filled either by
holders of a majority of the Company's voting stock or a majority of directors
in office, although less than a quorum. See "Risk Factors--Effect of Certain
Charter Provisions; Antitakeover Effects of Incorporation, Bylaws and Delaware
Law."
TRANSFER AGENT AND REGISTRAR
has been appointed as transfer agent and registrar for the Company's
Common Stock.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol USWB.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be shares of Common Stock
outstanding. The shares (or up to shares if the Underwriters' over-
allotment option is exercised in full) of Common Stock issued and sold in this
offering will be freely tradable (other than by an "affiliate" of the Company
as such term is defined in the Securities Act of 1933, as amended (the
"Securities Act")) without restriction under the Securities Act. The remaining
22,936,022 shares of Common Stock then outstanding will be deemed "restricted
securities" within the meaning of Rule 144 of the Securities Act (the
"Restricted Shares") and may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act, which rules are summarized below, or
another available exemption from registration.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned Restricted Shares for at least one year from the later of the date such
Restricted Securities were acquired from the Company or (if applicable) from
an affiliate on the date on which they were fully paid, is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of (i) 1% of the then-outstanding shares of Common Stock or (ii) the
average weekly trading volume of the Common Stock in the public market as
reported through the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements as to the manner and notice of sale and the availability of
public information about the Company.
Restricted Shares held by affiliates of the Company are subject to the
foregoing volume limitation, holding period and other restrictions under Rule
144. Affiliates may sell shares other than Restricted Shares in accordance
with the foregoing volume limitations and other restrictions, but without
regard to any holding period.
Further, under Rule 144(k), if a period of at least two years has elapsed
since the later of the date Restricted Shares were acquired from the Company
or from an affiliate of the Company on the date on which they were fully paid,
a holder of such Restricted Shares who is not an affiliate of the Company at
the time of sale, and has not been an affiliate of the Company for at least
three months prior to the sale, would be entitled to sell the shares
immediately without regard to volume limitations and the other conditions
described above.
Prior to this offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that the market sales of
shares or the availability of such shares for sale will have on the market
price of the Common Stock from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could have an adverse
impact on such market price and the Company's ability to raise additional
capital.
In general, under Rule 701 of the Securities Act as currently in effect, any
employee, officer, director, consultant or advisor of the Company who
purchased shares from the Company in connection with a compensatory stock or
option plan or written employment agreement is eligible to resell such shares
90 days after the effective date of this offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period,
contained in Rule 144.
Within 90 days of the date of this Prospectus, the Company intends to file a
registration statement under the Securities Act to register shares of Common
Stock reserved for issuance under its equity incentive plans, thus permitting
the resale of such shares by non-affiliates in the public market without
restriction under the Securities Act. See "Management--Employee Benefit
Plans." Such registration statement will become effective immediately upon
filing. As of September 29, 1997, options to purchase 6,914,918 shares of
Common Stock were outstanding under the Company's stock option plans.
64
<PAGE>
After the closing of this offering, the holders of 12,861,224 shares of
Common Stock, including 757,882 shares of Common Stock issuable upon exercise
of outstanding warrants, will be entitled to certain rights with respect to
the registration of such shares under the Securities Act. See "Description of
Capital Stock--Registration Rights."
The holders of substantially all of the shares of Common Stock, options and
warrants currently outstanding and all executive officers and directors of the
Company have agreed that for a period of 180 days after the date of this
Prospectus they will not offer, sell or otherwise dispose of, any shares of
Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into Common Stock. However,
Hambrecht & Quist LLC, in its sole discretion, may release such persons from
these lock-up agreements, in whole or in part, at any time without notice.
Following the 180-day lock-up period, all of the Restricted Securities will
become eligible for sale, subject to the manner of sale, volume, notice and
information requirements of Rule 144 of the Securities Act. After the initial
180 day lock-up period, 18,467,900 shares of Common Stock will become
immediately saleable.
65
<PAGE>
UNDERWRITING
Subject to certain terms and conditions of the Underwriting Agreement, the
Underwriters named below through their representatives, Hambrecht & Quist LLC,
Donaldson, Lufkin & Jenrette Securities Corporation, Wessels, Arnold &
Henderson, L.L.C. and First Albany Corporation (collectively, the
"Representatives"), have severally agreed to purchase from the Company the
following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---- ---------
<S> <C>
Hambrecht & Quist LLC..............................................
Donaldson, Lufkin & Jenrette Securities Corporation................
Wessels, Arnold & Henderson, L.L.C. ...............................
First Albany Corporation...........................................
----
Total..............................................................
====
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and receipt of certain
certificates, opinions and letters from the Company and its counsel and
independent auditors. The nature of the Underwriters' obligations is such that
they are committed to purchase all shares of Common Stock offered hereby if
any of such shares are purchased.
The Underwriters propose to offer the shares of Common Stock directly to the
public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not to
exceed $ per share. The Underwriters may allow, and such dealers may reallow,
a concession not in excess of $ per share to certain other dealers. After the
initial public offering of the shares, the offering price and other selling
terms may be changed by the Representatives.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an aggregate
of additional shares of Common Stock at the initial public offering price,
less the underwriting discount, set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise this option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by it shown in the table above bears to the total number of shares
of Common Stock offered hereby. The Company will be obligated, pursuant to the
option, to sell shares to the Underwriters to the extent the option is
exercised. The Underwriters may exercise such option only to cover over-
allotments made in connection with the sale of shares of Common Stock offered
hereby.
The offering of the shares is made for delivery when, as and if accepted by
the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the
right to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The Company and substantially all of the Company's stockholders,
optionholders and warrantholders have agreed, with certain exceptions, that
they will not, without the prior written consent of Hambrecht & Quist LLC,
offer, sell, or otherwise dispose of any Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock during the 180-day period following the date of
this Prospectus.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
66
<PAGE>
Prior to this offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be
determined by negotiation among the Company and the Representatives. Among the
factors considered in determining the initial public offering price are
prevailing market conditions, revenues and earnings of the Company, market
valuations of other companies engaged in activities similar to those of the
Company, estimates of the business potential and prospects of the Company, the
present state of the Company's business operations, the Company's management
and other factors deemed relevant. The estimated initial public offering price
range set forth on the cover of this preliminary prospectus is subject to
change as a result of market conditions and other factors.
Certain persons participating in this offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
The Underwriters have reserved up to 5% of the shares of Common Stock
offered hereby for sale at the initial public offering price to certain
employees, officers and directors of the Company and other persons designated
by the Company. The number of shares available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
unreserved shares not so purchased on the effectiveness of the offering will
be offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Attorneys employed by Wilson Sonsini Goodrich & Rosati, or
investment partnerships of which they are the beneficial owners, hold 7,554
shares of Common Stock. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by Morrison & Foerster LLP, San
Francisco, California.
EXPERTS
The financial statements of USWeb Corporation, USWeb San Francisco and USWeb
LA Metro as of December 31, 1996 and for the year then ended, the financial
statements of USWeb Pittsburgh as of January 31, 1996 and 1997 and for the
years then ended, the financial statements of USWeb Milwaukee as of June 30,
1996 and for the year then ended, the financial statements of USWeb Atlanta as
of December 31, 1996 and for the period from May 7, 1996 (inception) to
December 31, 1996 and the consolidated financial statements of USWeb DC as of
December 31, 1996 and for the period from June 30, 1996 (inception) to
December 31, 1996 included in this Prospectus and the Registration Statement
have been so included in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement on Form S-1
under the Securities Act, and the rules and regulations promulgated
thereunder, with respect to the Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, does not contain all
of the information set forth in the Registration Statement and the exhibits
and schedules thereto. Statements contained in the Prospectus as to the
contents of any contract or other document that is filed as an exhibit to the
Registration Statement are not necessarily complete and each such statement is
qualified in all respects by reference to the full text of such contract or
document. For further information with respect to the Company and the Common
Stock, reference is hereby made to such exhibits and schedules thereto, which
may be inspected and copied at the principal office of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Seven World Trade Center, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and copies of all or any part thereof may be obtained at
prescribed rates from the Commission's Public Reference Section at such
addresses. Also, the Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file
electronically with the Commission. Upon approval of the Common Stock for
quotation on the Nasdaq National Market, such reports, proxy and information
statements and other information also can be inspected at the office of Nasdaq
Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent public accounting
firm and make available to its stockholders quarterly reports for the first
three quarters of each fiscal year containing interim unaudited financial
information.
68
<PAGE>
USWEB CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USWEB CORPORATION
Report of Independent Accountants.......................................... F-3
Consolidated Balance Sheet................................................. F-4
Consolidated Statement of Operations....................................... F-5
Consolidated Statement of Stockholders' Equity (Deficit)................... F-6
Consolidated Statement of Cash Flows....................................... F-7
Notes to Consolidated Financial Statements................................. F-8
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants.......................................... F-24
Balance Sheet.............................................................. F-25
Statement of Operations.................................................... F-26
Statement of Shareholders' Equity.......................................... F-27
Statement of Cash Flows.................................................... F-28
Notes to Financial Statements.............................................. F-29
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants.......................................... F-32
Balance Sheet.............................................................. F-33
Statement of Operations.................................................... F-34
Statement of Stockholders' Deficit......................................... F-35
Statement of Cash Flows.................................................... F-36
Notes to Financial Statements.............................................. F-37
USWEB LA METRO (FORMERLY NEWLINK CORPORATION)
Report of Independent Accountants.......................................... F-41
Balance Sheet.............................................................. F-42
Statement of Operations.................................................... F-43
Statement of Shareholders' Equity.......................................... F-44
Statement of Cash Flows.................................................... F-45
Notes to Financial Statements.............................................. F-46
USWEB ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants.......................................... F-49
Balance Sheet.............................................................. F-50
Statement of Operations.................................................... F-51
Statement of Stockholders' Equity.......................................... F-52
Statement of Cash Flows.................................................... F-53
Notes to Financial Statements.............................................. F-54
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants.......................................... F-57
Consolidated Balance Sheet................................................. F-58
Consolidated Statement of Operations....................................... F-59
Consolidated Statement of Stockholders' Deficit............................ F-60
Consolidated Statement of Cash Flows....................................... F-61
Notes to Consolidated Financial Statements................................. F-62
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants.......................................... F-65
Balance Sheet.............................................................. F-66
Statement of Operations.................................................... F-67
Statement of Shareholders' Equity.......................................... F-68
Statement of Cash Flows.................................................... F-69
Notes to Financial Statements.............................................. F-70
</TABLE>
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of USWeb Corporation
The recapitalization and reverse stock split described in Note 12 to the
consolidated financial statements has not been consummated at September 30,
1997. When it has been consummated, we will be in a position to furnish the
following report:
"In our opinion, the accompanying balance sheet and the related
statements of operations, of stockholders' equity (deficit) and of cash
flows present fairly, in all material respects, the financial position
of USWeb Corporation at December 31, 1996, and the results of its
operations and its cash flows for the year ended December 31, 1996, in
conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of
these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable
basis for the opinion expressed above."
PRICE WATERHOUSE LLP
San Jose, California
September 30, 1997
F-3
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30, 1997
DECEMBER 31, --------------------
1996 HISTORICAL PRO FORMA
------------ ---------- ---------
(NOTE 2)
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 3,220 $ 9,333 $ 9,333
Accounts receivable, net................... 137 1,481 1,481
Other current assets....................... 54 445 445
------- ------- -------
Total current assets..................... 3,411 11,259 11,259
Property and equipment, net.................. 1,084 2,295 2,295
Intangible assets, net....................... -- 6,543 6,543
Investment in affiliate...................... 2,850 -- --
Other assets................................. 137 213 213
------- ------- -------
$ 7,482 $20,310 $20,310
======= ======= =======
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................... $ 906 $ 1,834 $ 1,834
Accrued expenses........................... 2,190 5,022 5,022
Current portion of lease obligations....... 242 356 356
------- ------- -------
Total current liabilities................ 3,338 7,212 7,212
Lease obligations, long-term portion......... 436 487 487
------- ------- -------
3,774 7,699 7,699
------- ------- -------
Commitments and contingencies (Notes 1 and
11)
Mandatorily Redeemable Convertible
Preferred Stock (Note 7)................... 16,200 32,490 --
------- ------- -------
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value,
1,000,000 shares authorized; no shares is-
sued and outstanding...................... -- -- --
Common Stock, $0.001 par value, 100,000,000
shares authorized; 6,381,000 and 9,685,312
shares issued and outstanding; 21,779,672
shares issued and outstanding pro forma... 2 5 17
Additional paid-in capital................. 2,714 15,167 47,645
Note receivable............................ (1,400) -- --
Accumulated deficit........................ (13,808) (35,051) (35,051)
------- ------- -------
Total stockholders' equity (deficit)..... (12,492) (19,879) 12,611
------- ------- -------
$ 7,482 $20,310 $20,310
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Services..................................... $ -- $ -- $ 2,245
Other........................................ 1,820 100 694
-------- ------- --------
Total revenues............................. 1,820 100 2,939
-------- ------- --------
Cost of revenues:
Services..................................... -- -- 2,171
Other........................................ 208 -- 211
Stock compensation (Note 9).................. -- -- 347
-------- ------- --------
Total cost of revenues..................... 208 -- 2,729
-------- ------- --------
Gross profit................................... 1,612 100 210
-------- ------- --------
Operating expenses:
Marketing, sales and support................. 12,764 4,301 8,335
General and administrative................... 2,813 1,098 3,762
Acquired in-process technology (Note 1)...... -- -- 2,848
Stock compensation (Note 9).................. -- -- 948
Amortization of intangible assets (Note 1)... -- -- 1,577
-------- ------- --------
Total operating expenses................... 15,577 5,399 17,470
-------- ------- --------
Loss from operations........................... (13,965) (5,299) (17,260)
Interest income................................ 215 114 69
Interest expense............................... (58) (10) (52)
Impairment of investee carried at cost......... -- -- (4,000)
-------- ------- --------
Net loss....................................... $(13,808) $(5,195) $(21,243)
======== ======= ========
Pro forma:
Net loss per share (Note 2).................. $ (.54) $ (.20) $ (.82)
======== ======= ========
Weighted average shares outstanding (Note 2). 25,749 25,581 26,024
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL ACCUMU- STOCKHOLDERS'
---------------- PAID-IN NOTE LATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
--------- ------ ---------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock
to Founders............ 5,000,000 $ -- $ 1 $ -- $ -- $ 1
Issuance of Common Stock
for trade name rights.. 66,667 -- -- -- -- --
Conversion of notes
payable into Common
Stock.................. 500,000 1 499 -- -- 500
Issuance of Common Stock
for note receivable.... 533,333 1 1,999 (2,000) -- --
Collection of note
receivable............. -- -- -- 600 -- 600
Exercise of stock
options................ 281,000 -- 30 -- -- 30
Issuance of Affiliate
warrants............... -- -- 169 -- -- 169
Stock compensation
expense................ -- -- 16 -- -- 16
Net loss................ -- -- -- -- (13,808) (13,808)
--------- ---- ------- ------- -------- --------
Balance December 31,
1996................... 6,381,000 2 2,714 (1,400) (13,808) (12,492)
Exercise of stock
options (Unaudited).... 21,354 -- -- -- -- --
Common Stock issued for
acquired businesses
(Unaudited)............ 3,282,958 3 11,117 -- -- 11,120
Issuance of Affiliate
warrants (Unaudited)... -- -- 41 -- -- 41
Collection of note
receivable (Unaudited). -- -- -- 1,400 -- 1,400
Stock compensation
expense (Unaudited).... -- -- 1,295 -- 1,295
Net loss (Unaudited).... -- -- -- -- (21,243) (21,243)
--------- ---- ------- ------- -------- --------
Balance June 30, 1997
(Unaudited)............ 9,685,312 $ 5 $15,167 $ -- $(35,051) $(19,879)
========= ==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(13,808) $(5,195) $(21,243)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 263 75 367
Provision for doubtful accounts............. -- -- 471
Stock, option and warrant costs and
expenses................................... 185 -- 1,354
Amortization of intangible assets........... -- -- 1,577
Acquired in-process technology.............. -- -- 2,848
Impairment of investee carried at cost...... -- -- 4,000
Changes in assets and liabilities:
Accounts receivable........................ (137) -- (444)
Other current assets....................... (54) (36) (77)
Other assets............................... (137) (112) 226
Accounts payable........................... 906 287 132
Accrued expenses........................... 2,190 929 2,005
-------- ------- --------
Net cash used in operating activities..... (10,592) (4,052) (8,784)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment......... (1,059) (773) (1,009)
Cash used in acquisitions, net of cash
acquired..................................... -- -- (93)
Purchase of investment in affiliate........... (2,850) -- (1,150)
-------- ------- --------
Net cash used in investing activities..... (3,909) (773) (2,252)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Mandatorily
Redeemable Convertible Preferred Stock....... 16,200 9,939 16,290
Proceeds from issuance of Common Stock........ 31 4 --
Proceeds from issuance of notes payable....... 500 500 --
Proceeds from collection of note receivable... 600 -- 1,400
Proceeds from capital lease financing......... 522 419 --
Principal payments on capital lease........... (132) (12) (541)
-------- ------- --------
Net cash provided by financing activities. 17,721 10,850 17,149
-------- ------- --------
Increase in cash and cash equivalents.......... 3,220 6,025 6,113
Cash and cash equivalents, beginning of period. -- -- 3,220
-------- ------- --------
Cash and cash equivalents, end of period....... $ 3,220 $ 6,025 $ 9,333
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 1--THE COMPANY AND PRO FORMA INFORMATION:
USWeb Corporation (the "Company") was incorporated in Utah on December 6,
1995 ("inception"). Through a nationwide network of wholly owned subsidiaries
and franchised Affiliates, the Company provides Internet professional services
including strategy consulting, analysis and design, technology development,
implementation and integration, audience development and maintenance.
From inception through May 31, 1996, the Company's operating activities
related primarily to recruiting personnel, raising capital, preparing and
securing approval of its Uniform Franchise Offering Circular, acquiring
operating assets and developing technical and marketing materials. The Company
signed its first franchise agreement in April 1996, recognized its first
revenues in June 1996 and signed its first definitive acquisition agreement in
March 1997.
During the six months ended June 30, 1997, the Company recognized the
acquisition of all of the outstanding shares of eight franchised Affiliates
("Controlled Affiliates") in separate transactions as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
EFFECTIVE SHARES PURCHASE
ACQUIRED AFFILIATE DATE ISSUED PRICE
- ------------------ -------------- --------- ----------
<S> <C> <C> <C>
USWeb San Francisco (formerly XCom Corpora-
tion)..................................... March 16, 1997 383,210 $ 1,609
USWeb Seattle (formerly Cosmix Corpora-
tion)..................................... April 1, 1997 119,774 503
USWeb Milwaukee (formerly Fetch Interac-
tive, Inc.)............................... April 1, 1997 464,838 1,387
USWeb LA Metro (formerly NewLink Corpora-
tion)..................................... April 1, 1997 425,700 1,537
USWeb Atlanta (formerly InterNetOffice,
LLC)...................................... May 1, 1997 510,646 1,568
USWeb Silicon Valley (formerly NetWORKERS
Corporation).............................. May 1, 1997 135,415 569
USWeb DC (formerly Infopreneurs Inc.)...... June 1, 1997 1,008,170 3,173
USWeb Phoenix (formerly Netphaz Corpora-
tion)..................................... June 1, 1997 235,205 774
--------- -------
3,282,958 $11,120
========= =======
</TABLE>
The acquisitions have been accounted for using the purchase method of
accounting, and accordingly, the recognized purchase price has been allocated
to the tangible and identifiable intangible assets acquired and liabilities
assumed on the basis of their fair values on the acquisition dates.
Approximately $2,848 of the aggregate recognized purchase price was allocated
to in-process technology. The amounts were immediately charged to operations
because such in-process technology had not reached the stage of technological
feasibility at the acquisition dates and had no alternative future use.
Approximately $1,090 was allocated to existing technology and is being
amortized over its estimated useful life of six months. The purchase price in
excess of identified tangible and intangible assets in the amount of $7,030 was
allocated to goodwill and is being amortized over its estimated useful life of
12 to 24 months. See Notes 2 and 13.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined by the Board of Directors based upon a number of
considerations. For acquisitions recognized through June 30, 1997, the fair
value of the Company's Common Stock was estimated to be $4.2 per share,
determined primarily by reference to the $15,811 amount allocated to 2,818,193
shares of Series C Mandatorily Redeemable Convertible Preferred Stock
(excluding approximately $1,690 allocated to detachable warrants to acquire
704,549 shares of Series C Mandatorily Redeemable Convertible Preferred Stock).
See Note 7. The fair values of purchased existing and in-process technologies
were determined by management using a risk-adjusted income valuation approach.
The various purchase agreements require that fifty percent of the shares
issuable at the acquisition date be placed in escrow for a period of twelve
months. The shares placed in escrow will either be issued to the
F-8
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
previous owners of the acquired entities or returned to the Company based upon
the results of the purchase price adjustments, as defined for each Controlled
Affiliate. The Company has excluded from the recognized purchase price
calculations 635,526 shares that it estimates are not probable of issuance at
the end of the respective escrow periods. Additionally, the purchase price
adjustment for each Controlled Affiliate allows for the issuance of additional
stock-based consideration in the event a Controlled Affiliate's valuation
calculated at the 6 and 12 month dates following the acquisition increases.
Any purchase price changes resulting from such adjustments will be recognized
as adjustments to goodwill and will be amortized over the remaining period of
expected benefit.
The terms of the signed definitive agreements for each acquisition provide
for the transfer of management control of the target entity on dates that
precede the legal consummation of the transaction and physical exchange of
consideration. On the designated effective dates, the Company (1) assumes the
risks and rewards of ownership including the rights to all revenues and
responsibility for all operating costs and expenses, (2) the target company
employees become employees of the Company and (3) the terms of purchase price
adjustment provisions become effective. For business acquisitions recognized
through June 30, 1997, the purchase accounting effects of transactions
occurring between the designated effective dates and the legal closing dates
were not material.
The following pro forma financial information reflects the results of
operations for the year ended December 31, 1996 and the six months ended June
30, 1997, as if the acquisitions had occurred on January 1, 1996, and after
giving effect to purchase accounting adjustments. These pro forma results have
been prepared for comparative purposes only and do not purport to be
indicative of what operating results would have been had the acquisitions
actually taken place on January 1, 1996, and may not be indicative of future
operating results.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED
1996 JUNE 30, 1997
------------ -------------
(UNAUDITED)
<S> <C> <C>
Revenues............................................. $ 12,678 $ 8,071
========== ==========
Net loss............................................. $ (35,018) $ (23,416)
========== ==========
Pro forma net loss per share......................... $ (1.33) $ (.86)
========== ==========
Weighted average common shares outstanding........... 26,233,944 27,358,257
========== ==========
</TABLE>
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Use of Estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Principles of Consolidation
The accompanying unaudited interim financial statements as of June 30, 1997
and for the six months then ended, include the consolidated accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The Company's financial statements as of December 31, 1995 and for the
period from December 6, 1995 ("Inception") through December 31, 1995, reflect
immaterial transactions and have been included in the 1996 financial
statements to facilitate presentation.
F-9
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity
of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, generally
three years. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
remaining lease term, not to exceed five years.
Intangible Assets
Goodwill resulting from the acquisition of Internet technology businesses is
estimated by management to be primarily associated with the acquired workforce
and technological know how. As a result of the rapid technological changes
occurring in the Internet industry and the intense competition for qualified
Internet professionals, recorded goodwill is amortized on the straight-line
basis over the estimated periods of benefit, which range from one to two years.
For certain acquisitions where the Company expects to issue additional shares
at the end of the 12 month purchase price adjustment periods, amortization
rates have been increased to reflect amortization of the total expected
consideration based upon the estimated fair value of the incremental shares
(using the estimated Offering price at June 30, 1997 and adjusted quarterly
thereafter) at the end of the purchase price adjustment periods.
At each balance sheet date, the Company assesses the value of recorded
goodwill for possible impairment based upon a number of factors, including
turnover of the acquired workforce and the undiscounted value of expected
future operating cash flows in relation to its net investment in each
subsidiary. Since inception, the Company has not recorded any provisions for
possible impairment of intangible assets.
Completed technologies obtained through acquisition or merger are capitalized
and amortized on the straight-line basis over the estimated period of benefit
of six months.
Costs of in-process technology acquired prior to the achievement of
technological feasibility determined using the working model approach, and any
costs associated with internally developed proprietary technologies are
expensed in the period incurred.
Investments
Investments where the Company has an equity interest of less than 20% and
does not have the ability to exert significant influence are accounted for
using the cost method. At each balance sheet date, the Company assesses the
value recorded for cost-based investments based upon the undiscounted value of
expected future operating cash flows in relation to its net investment. During
the six months ended June 30, 1997, the Company recognized an impairment
provision totaling $4 million, representing the total amount of its cost basis
investment in an independent Internet consulting firm. In assessing the level
of impairment, the Company considered the entity's current financial position,
recent operating performance and the likelihood of recovery of some or all of
its investment in the event of liquidation, sale or merger.
Revenue Recognition
The Company derives its revenues from consulting service agreements, initial
franchise fees, monthly royalties from Affiliates and hosting service fees. The
initial franchise fee was waived for the first ten Affiliates and was set at
$25 for the next 40 Affiliates and $50 thereafter. The Company last entered
into a franchise agreement in March 1997 and does not expect to enter into any
additional franchise agreements in the future.
F-10
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Service revenues are recognized over the period of each engagement using
primarily the percentage of completion method using labor hours incurred as the
measure of progress towards completion. Provisions for contract adjustments and
losses are recorded in the period such items are identified. Unearned revenues
represent the amount of cash received in advance of services being performed.
Revenues from Affiliates are included in Other Revenues and are recognized in
accordance with Statement of Financial Accounting Standards No. 45, "Accounting
for Franchise Fee Revenue." Initial franchise fees, including area franchise
sales which do not depend significantly on the number of individual franchises
to be established, are recognized when all obligations required by the
franchise agreement have been substantially performed and no other material
conditions or obligations exist. Initial franchise fees are recognized as
received because all obligations required by the franchise agreement are
substantially performed concurrently with the signing of the franchise
agreement. Monthly royalties are determined by aggregating a five percent
royalty and a two percent marketing promotion fee, each of which is calculated
based on each Affiliate's adjusted gross revenues, as defined, and are
recognized as the fees are earned and become receivable from the Affiliate.
Revenues from web-site hosting services are included in Other Revenues, have
been insignificant to date and are recognized monthly as services are provided.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the year
ended December 31, 1996 and the six months ended June 30, 1997 totaled $3,223
and $1,812, respectively.
Affiliate Warrants
The fair value of warrants granted to Affiliates upon the execution of a
franchise agreement are measured at the grant date using the Black-Scholes
formula and are recognized when material, over the three year vesting period as
a cost of revenues. The fair value of warrants to be granted upon the
achievement of future Affiliate revenues are measured on the date such warrants
are earned using the Black-Scholes formula. When material, the fair value of
AGR Warrants is charged to cost of revenues over the three year vesting period
beginning with the month such warrants are earned. The exercise price of all
warrants issued and issuable to an individual Affiliate is fixed at the time of
signing of the related franchise agreement. Warrant costs in excess of the
present value of expected future franchise fees and royalties, less any direct
costs, are recognized immediately. See Note 10--Affiliate Warrant Program.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between the
fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets are
based on provisions of the enacted tax law; the effects of future changes in
tax laws or rates are not anticipated. The measurement of deferred tax assets
is reduced, if necessary, by the amount of any tax benefits that, based on
available evidence, are not expected to be realized.
F-11
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share is computed using the weighted average number of
common and common equivalent shares outstanding. The weighted average shares
outstanding excludes acquisition shares held in escrow that are not probable of
issuance and includes contingent shares which, based upon currently available
information, are probable of issuance at the end of the contingency periods.
Common equivalent shares consist of mandatorily redeemable convertible
preferred stock (using the if-converted method) and stock options and warrants
(using the treasury stock method). Common equivalent shares are excluded from
the computation if their effect is anti-dilutive, except that, pursuant to a
Securities and Exchange Commission Staff Accounting Bulletin, shares of common
stock, mandatorily redeemable convertible preferred stock (using the if-
converted method) and common equivalent shares (using the treasury stock method
and the assumed public offering price) issued within 12 months prior to the
Company's filing of a Registration Statement for the initial public offering
(the "Offering") have been included in the computation as if they were
outstanding for each period presented.
Historical net loss per share has not been presented since such amounts are
not considered meaningful due to the significant change in the Company's
capital structure that will occur in connection with the Offering.
SFAS No. 128, "Earnings Per Share," was issued in February 1997, and requires
the Company to apply the statement in its consolidated financial statements for
the year ending December 31, 1997. This pronouncement establishes new standards
for computing and presenting earnings or loss per share on a basis that is more
comparable to international accounting standards and provides for the
presentation of basic and diluted earnings or loss per share, replacing the
currently required primary and fully-diluted amounts. The basic earnings or
loss per share will be computed by dividing net income or loss by the weighted
average number of shares outstanding during the period. Diluted earnings or
loss per share will be computed in a manner similar to the current method for
calculating fully-diluted earnings or loss per share. Prior period earnings or
loss per share will be restated to conform with the new statement. Basic and
diluted pro forma net loss per share as determined by applying SFAS No. 128 is
not materially different than the as reported pro forma net loss per share.
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of this Offering, the outstanding shares of Series
A, Series B and Series C Mandatorily Redeemable Convertible Preferred Stock
will automatically convert into 6,172,833, 3,103,334 and 2,818,193 shares,
respectively, of Common Stock. In addition, warrants to purchase 704,549 shares
of Series C Mandatorily Redeemable Convertible Preferred Stock, will convert
into Warrants to purchase 704,549 shares of Common Stock. The pro forma effects
of these transactions are unaudited and have been reflected in the accompanying
consolidated pro forma balance sheet at June 30, 1997.
Interim Financial Information
The accompanying interim financial statements as of June 30, 1997 and for the
six months ended June 30, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of June 30, 1997 and the results of the Company's
operations and its cash flows for the six months ended June 30, 1996 and 1997.
The financial data and other information disclosed in these notes to
consolidated financial statements related to these periods are unaudited. The
results for the six months ended June 30, 1997 are not necessarily indicative
of the results to be expected for the year ending December 31, 1997.
F-12
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company limits its exposure to credit loss by
depositing its cash and cash equivalents with high credit quality financial
institutions. The Company believes the risk with respect to trade receivables
is mitigated, to some extent, by the fact that the Company's customer base is
geographically dispersed and is highly diversified. The Company has not
experienced any credit losses to date.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The adoption of the both
statements are required for fiscal years beginning after December 15, 1997.
Under SFAS No. 130, companies are required to report in the financial
statements, in addition to net income, comprehensive income including, as
applicable, foreign currency items, minimum pension liability adjustments and
unrealized gains and losses on certain investments in debt and equity
securities. SFAS No. 131 requires that companies report separately, in the
financial statements, certain financial and descriptive information about
operating segments, if applicable. The Company does not expect the adoption of
SFAS No. 130 or SFAS No. 131 to have a material impact on its consolidated
financial statements.
NOTE 3--SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest...................... $ 58 $ 10 $ 52
Cash paid for income taxes.................. -- -- --
Non-cash financing and investing activities:
Common Stock issued for note receivable..... 2,000 -- --
Notes payable converted into Common Stock... 500 -- --
Equipment acquired through capital lease.... 288 120 82
</TABLE>
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................... $ 137 $1,952
Less: Allowance for doubtful accounts............. -- (471)
------ ------
$ 137 $1,481
====== ======
Property and equipment net:
Computers and equipment........................... $1,149 $2,094
Furniture and fixtures............................ 124 691
Leasehold improvements............................ 74 140
------ ------
1,347 2,925
Less: Accumulated depreciation and amortization... (263) (630)
------ ------
$1,084 $2,295
====== ======
</TABLE>
F-13
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Intangible assets, net:
Goodwill.......................................... $ -- $7,030
Purchased technology.............................. -- 1,090
------ ------
-- 8,120
Less: Accumulated amortization.................... -- (1,577)
------ ------
$ -- $6,543
====== ======
Accrued expenses:
Compensation and benefits......................... $ 549 939
Marketing......................................... 1,271 1,376
Accrued financing costs........................... -- 1,050
Other............................................. 370 1,657
------ ------
$2,190 $5,022
====== ======
</TABLE>
NOTE 5--NOTES PAYABLE:
In January 1996, the Company received $500 in exchange for unsecured
convertible promissory notes. The notes were part of a bridge financing
arrangement associated with the Series A financing, were payable on demand and
bore interest at 6% per annum. The notes were repayable, at the option of the
holder, by the issuance of the Company's Common or Preferred Stock. In
February 1996 in connection with the Series A financing, the holder exercised
its conversion option and the notes were extinguished through the issuance of
500,000 shares of the Company's Common Stock.
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the year ended
December 31, 1996, as the Company has incurred net operating losses for income
tax purposes and has no carryback potential.
Deferred tax assets of approximately $4,810 at December 31, 1996, consist
primarily of federal and state net operating loss carryforwards. Based on a
number of factors, including the lack of a history of profits and the fact
that the Company competes in a developing market that is characterized by
rapidly changing technology, management believes that there is sufficient
uncertainty regarding the realization of deferred tax assets such that a full
valuation allowance has been provided.
At December 31, 1996, the Company had federal net operating loss
carryforwards of approximately $13,000 available to reduce future taxable
income, which expire in 2011. Under the Tax Reform Act of 1986, the amount of
and the benefit from net operating losses that can be carried forward may be
limited in certain circumstances including, but not limited to, a cumulative
stock ownership change of more than 50% over a three-year period, as defined.
At December 31, 1996, the effect of limitations resulting from such ownership
changes is not expected to be material. See Note 13--Subsequent Events.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS:
A total of 12,094,360 shares of Mandatorily Redeemable Convertible Preferred
Stock have been authorized for issuance, of which 6,172,833, 3,103,333 and
2,818,193 shares have been designated as Series A, Series B, and Series C,
respectively. In 1996, the Company issued 6,172,833 shares of Series A and
F-14
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
3,103,334 shares of Series B Mandatorily Redeemable Convertible Preferred
Stock ("Series A" and "Series B") at $1.62 and $2.01 per share, respectively.
In 1997, the Company issued 2,818,193 shares of Series C Mandatorily
Redeemable Convertible Preferred Stock ("Series C") at $6.21 per share
(Unaudited). The rights, preferences and privileges with respect to the
Mandatorily Redeemable Convertible Preferred Stock ("Preferred Stock") are as
follows:
Dividends
Holders of Series A, Series B and Series C are entitled to receive
noncumulative dividends at the annual rate of $0.10, $0.12 and $0.37 per
share, respectively, or, if greater (as determined on an as-converted basis),
an amount equal to that paid on the outstanding shares of Common Stock, when,
as and if declared by the Board of Directors. Such dividends are payable in
preference to any dividends for Common Stock declared by the Board of
Directors. There have been no dividends declared to date.
Conversion
Each share of Series A, Series B and Series C is convertible at the option
of the holder into shares of Common Stock based on a formula which currently
results in a one-for-one exchange ratio of Common Stock for the Preferred
Stock. This formula is subject to adjustment, as defined, which essentially
provides adjustments for holders of the Preferred Stock in the event of stock
splits or combinations. Such conversion is automatic upon the effective date
of an initial public offering of the Company's Common Stock with a per share
price of at least $15.00 and for which the aggregate proceeds to the Company
equal at least $20,000,000, net of expenses. In September 1997, the holders of
Series A, Series B and Series C waived their conversion rights requiring an
initial public offering price of $15.00 per share. A total of 12,094,360
shares of Common Stock have been reserved for issuance upon the conversion of
the Preferred Stock.
Liquidation
In the event of liquidation (but not upon a merger, sale or acquisition of
the Company), holders of Series A, Series B and Series C are entitled to a per
share distribution in preference to holders of Common Stock. This per share
distribution is equal to the original issue price of $1.62, $2.01, and $6.21,
respectively, plus any declared but unpaid dividends. In the event funds are
insufficient to make a complete distribution to the holders of Series A,
Series B and Series C, as described above, distribution shall be with equal
priority and prorated among the holders of Preferred Stock. In the event funds
are sufficient to make a complete distribution to the holders of Series A,
Series B and Series C as described above, the remaining assets will be
distributed to the holders of Series A, Series B, Series C and Common Stock
based on the number of shares of Common Stock held by each, assuming
conversion of Series A, Series B and Series C into Common Stock.
Redemption
At any time between January 1, 2001 and November 1, 2001, holders of at
least two-thirds of the outstanding shares of Series A, Series B and Series C
may request in writing (the "Qualifying Request") that the Company redeem, at
a price equal to the applicable liquidation preference per share plus any
declared but unpaid dividends, up to one-third of the shares of Series A,
Series B and Series C held by each holder at the time the Qualifying Request
is submitted on each of December 1, 2001, December 1, 2002 and December 1,
2003. To the extent the Company does not have sufficient funds legally
available to redeem all shares for which redemption is requested, the Company
shall redeem as many shares of Series A, Series B and Series C as may lawfully
be redeemed and that were submitted by holders thereof who also submitted the
Qualifying Request, and thereafter on a pro rata basis among the holders of
Series A, Series B and Series C in proportion
F-15
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
to the Series A, Series B and Series C then held by them. The Company shall
redeem the remaining shares as soon as sufficient funds are legally available.
Voting
The holders of Series A, Series B and Series C have one vote for each share
of Common Stock into which such Preferred Stock may be converted, and are
entitled, as a separate class, to elect four of the six directors.
Warrants
In connection with the lease of its facility in January 1996, the Company
issued warrants to purchase 20,000 shares of Series A at $1.62 per share. The
fair value of the warrants was not material on the date of grant. The warrants
are exercisable at any time prior to their expiration in February 2006. No
warrants had been exercised at December 31, 1996.
In connection with a master lease agreement in May 1996, the Company issued
warrants to purchase 33,333 shares of Series A at $1.62 per share. The fair
value of the warrants was not material on the date of grant. The warrants are
exercisable at any time prior to their expiration in May 2001. No warrants had
been exercised at December 31, 1996.
In connection with the issuance of the Series C shares, the Company issued
warrants to purchase a total of 704,549 shares of Series C at $7.50 per share.
The warrants are exercisable at any time prior to their expiration in May
2000. Approximately $1,690 of the proceeds received from the issuance of
Series C were allocated to the Series C warrants. The accretion of the amount
allocated to the Series C warrants for the six months ended June 30, 1997, was
immaterial.
NOTE 8--FOUNDERS STOCK:
During 1996, 5,000,000 shares of Common Stock were purchased by the
Company's five founders ("the Founders Shares"). In the event that any one of
the founders ceases to be an employee of the Company, the Company has the
right to repurchase ("the Repurchase Right"), at the original purchase price,
a declining percentage of the shares issued. However, vesting of the Founders
Shares may be accelerated in certain circumstances. As of June 30, 1997, a
total of 3,125,000 of the Founders Shares were subject to repurchase by the
Company. Additionally, in the event the Repurchase Right has lapsed and a
founder determines to sell the Founders Shares, the Company has the right of
first refusal to match any purchase offer with respect to the sale of such
shares. In the event of a change in control of the Company, or an initial
public offering of the Company's Common Stock, the Founders Shares shall
become immediately vested in full and the Repurchase Rights shall lapse. See
Note 13--Subsequent Events.
NOTE 9--STOCK-BASED COMPENSATION:
At June 30, 1997, the Company has three stock-based compensation plans,
which are described below. The Company applies APB No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for its fixed stock option plans. Had compensation cost
for the Company's three stock-based compensation plans been determined based
on the minimum value at the grant dates for awards under those plans
consistent with the method prescribed by SFAS No. 123, the Company's net loss
and loss per share would not reflect a material change.
F-16
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
STOCK OPTION PLANS
1996 Stock Option Plan
The Company has reserved an aggregate of 600,000 shares of Common Stock for
issuance under its 1996 Stock Option Plan (the "1996 Plan"). The 1996 Plan
provides for grants of options to employees and consultants (including
officers and directors) of the Company, its parent and its subsidiaries.
The exercise price of options granted under the 1996 Plan is determined by
the 1996 Plan Administrator, as defined. With respect to incentive stock
options granted under the 1996 Plan, the exercise price must be at least equal
to the fair market value per share of the Common Stock on the date of grant,
and the exercise price of any incentive stock option granted to a participant
who owns more than 10% of the voting power of all classes of the Company's
outstanding capital stock must be equal to at least 110% of fair market value
of the Common Stock on the date of grant.
Each option outstanding under the 1996 Plan may be exercised in whole or in
part at any time. Exercised but unvested shares are subject to repurchase by
the Company. Options generally vest, assuming continued service by the
optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Plan generally have a term of ten years.
1996 Equity Compensation Plan
The Company's 1996 Equity Compensation Plan (the "1996 Equity Plan")
provides for the granting to employees of incentive stock options, and for the
granting to employees and consultants of nonstatutory stock options and stock
purchase rights ("SPRs"). A total of 700,000 shares of Common Stock are
currently reserved for issuance pursuant to the 1996 Equity Plan.
The 1996 Equity Plan Administrator, as defined, has the power to determine
the terms of the options or SPRs granted, including the exercise price, the
number of shares subject to each option or SPR, the exercisability thereof,
and the form of consideration payable upon such exercise.
Each option outstanding under the 1996 Equity Plan may be exercised in whole
or in part at any time. Exercised but unvested shares are subject to
repurchase by the Company. Options generally vest, assuming continued service
by the optionee as an employee or consultant, at the rate of 25% of the shares
subject to the option on the first anniversary of the commencement of vesting
date and 1/48th of the shares each month thereafter, such that all shares
under the option vest in full four years from the date of commencement of
vesting, assuming continued service as an employee or consultant. Options
outstanding under the 1996 Equity Plan generally have a term of ten years.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability).
The repurchase option shall lapse at a rate determined by the 1996 Equity
Plan Administrator. The exercise price of all incentive stock options granted
under the 1996 Equity Plan must be at least equal to the fair market value of
the Common Stock on the date of grant. The exercise price of nonstatutory
stock options and SPRs granted under the 1996 Equity Plan is determined by the
1996 Equity Plan Administrator, but with respect to nonstatutory stock options
intended to qualify as "performance-based compensation", the exercise
F-17
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
price must at least be equal to the fair market value of the Common Stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the Company's outstanding
capital stock, the exercise price of any incentive stock option granted must
equal at least 110% of the fair market value on the grant date and the term of
such incentive stock option must not exceed five years. The term of all other
options granted under the 1996 Equity Plan may not exceed ten years.
1997 Acquisition Stock Option Plan
The Company's 1997 Acquisition Stock Option Plan (the "1997 Plan") provides
for the grant of incentive stock options to employees (including officers and
employee directors) and for the grant of nonstatutory stock options and SPRs to
employees, directors and consultants. A total of 8,000,000 shares of Common
Stock, plus annual increases equal to the lesser of (i) 400,000 shares, (ii) 5%
of the outstanding shares, or (iii) a lesser amount determined by the Board of
Directors, are currently reserved for issuance pursuant to the 1997 Plan.
The 1997 Plan Administrator, as defined, has the power to determine the terms
of the options or SPRs granted, including the exercise price of the option or
SPR, the number of shares subject to each option or SPR, the exercisability
thereof, and the form of consideration payable upon such exercise.
The restricted stock purchase agreement pursuant to which the SPR is
exercised shall grant the Company a repurchase option exercisable upon the
voluntary or involuntary termination of the purchaser's employment with the
Company for any reason (including death or disability). The repurchase option
shall lapse at a rate determined by the Administrator.
The exercise price of all incentive stock options granted under the 1997 Plan
must be at least equal to the fair market value of the Common Stock on the date
of grant. The exercise price of nonstatutory stock options and SPRs granted
under the 1997 Plan is determined by the 1997 Plan Administrator, but with
respect to nonstatutory stock options intended to qualify as "performance-based
compensation", the exercise price must at least be equal to the fair market
value of the Common Stock on the date of grant. With respect to any participant
who owns stock possessing more than 10% of the voting power of all classes of
the outstanding capital stock of the Company, its parent and its subsidiaries,
the exercise price of any incentive stock option granted must equal at least
110% of the fair market value on the grant date and the term of such incentive
stock option must not exceed five years. The term of all other options granted
under the 1997 Plan may not exceed ten years.
Minimum Value Estimates
The minimum value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted-
average assumptions used for grants during the year ended December 31, 1996 and
the six months ended June 30, 1997, respectively: dividend yield of 0.0 percent
for all periods; risk-free interest rates of 6.1 and 6.4 percent for the 1996
Plan options, 6.1 and 6.4 percent for the 1996 Equity Plan options, and 6.1 and
6.5 percent for the 1997 Acquisition Plan options; and expected lives of 4
years for all plans in all periods.
During the period from June through October 1996, the Company granted options
to purchase an aggregate of 98,667 shares of Common Stock at exercise prices
ranging from $0.30 to $0.90 per share and recorded $165 of unearned
compensation relating to such options. This amount is being amortized over the
four-year vesting period of the related options.
F-18
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the status of the Company's three fixed stock option plans as of
December 31, 1996 and June 30, 1997, and changes during the year ended December
31, 1996 and the six months ended June 30, 1997 is presented below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 JUNE 30, 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $-- 234,833 $1.86
Granted.................. 567,500 .84 3,575,684 6.75
Exercised................ (281,000) .09 (21,354) .36
Canceled................. (51,667) .21 (49,208) 3.06
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.86 3,739,955 6.54
======== =========
Options exercisable at
end of period........... 234,833 562,991
======== =========
Weighted-average minimum
value of
options granted during
the period.............. $ .66 $ --
======== =========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$.03.................... 20,000 9.1 years $ .01 20,000 $ .01
$.03 to $.90............ 139,167 9.4 years .17 139,167 .17
$3.75 to $6.75.......... 75,667 9.8 years 1.59 75,667 1.59
------- -------
234,833 234,833
======= =======
</TABLE>
Acquisition Stock Bonus Plan
During the six months ended June 30, 1997, the Company agreed to issue a
bonus payable in shares of Common Stock to employees previously employed by
Acquired Affiliates (each a "New Employee").
Under the agreements, the stock bonuses vest over a thirty-six month period
from the date of first employment by the Company and will be paid at the
conclusion of the vesting period. However, to the extent that a New Employee's
status as an employee is terminated, the New Employee will be entitled only to
the vested portion of the stock bonus and such bonus shall become due and
payable upon such New Employee's termination. The aggregate stock bonus totaled
$22,151 and is being recognized as compensation expense over the thirty-six
month vesting period. See Note 13--Subsequent Events.
401(k) Savings Plan
The Company maintains the USWeb Corporation 401(k) Savings and Retirement
Plan, a defined contribution retirement plan with a cash or deferred
arrangement as described in Section 401(k) of the Code (the "401(k) Plan"). The
401(k) Plan is intended to be qualified under Section 401(a) of the Code. All
employees of the Company are eligible to participate in the 401(k) Plan on the
first day of the month
F-19
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
concurrent with the next January 1, April 1, July 1 or October 1 following his
or her employment. The 401(k) Plan provides that each participant make
elective contributions from 1% to 15% of his or her compensation, subject to
statutory limits.
NOTE 10--AFFILIATE WARRANT PROGRAM:
In June 1996, the Company adopted the Affiliate Warrant Program (the
"Program") with the intent of attracting new Affiliates to the USWeb network
and to create performance incentives for such Affiliates. Under the Program,
each Affiliate was granted a warrant to purchase a fixed number of shares of
the Company's Common Stock upon execution of the franchise agreement (a
"Signing Warrant") and earns warrants ("AGR Warrants") to purchase additional
shares of Common Stock at the rate of one share of Common Stock per fifty
dollars of Affiliate adjusted gross revenue, as defined. The exercise price of
all warrants issued and issuable to an individual Affiliate was set at the
time of signing of the franchise agreement. Warrants vest 25% after one year
and then ratably each month over the remaining thirty-six month period.
Warrants are exercisable for a maximum period of five years from the effective
date of the Affiliate agreement. Warrants may not be exercised prior to the
earlier of the closing of an initial public offering of the Company's Common
Stock or an acquisition of the Company. A total of 333,333 shares of Common
Stock have been reserved for issuance under the Program. No Signing Warrants
are available for grant after March 31, 1997. However, all Affiliates entering
into an Affiliate agreement prior to of such date will continue to be entitled
to AGR Warrants upon generating qualifying revenues until such time when no
warrants remain available for grant.
During the year ended December 31, 1996, the Company issued Signing Warrants
to purchase 104,333 shares of Common Stock and AGR Warrants to purchase 17,715
shares of Common Stock and recognized costs estimated using the Black-Scholes
formula totaling $169. During the six months ended June 30, 1997, the Company
issued Signing Warrants to purchase 4,000 shares of Common Stock and AGR
Warrants to purchase 45,868 shares of Common Stock and recognized costs
estimated using the Black-Scholes formula totaling $41.
NOTE 11--COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities under non-cancelable operating leases
which expire through 2011. The leases provide for escalating monthly payments
which are being charged to operations ratably over the lease terms. In
addition to the minimum lease payments, the Company is responsible for
property taxes, insurance and certain other operating costs. The Company also
leases certain equipment under long-term lease agreements that are classified
as capital leases. These capital leases terminate at various dates through
April 1999.
Total equipment acquired under capitalized leases was as follows:
<TABLE>
<CAPTION>
DEC 31, JUNE 30,
1996 1997
------- -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment..................................... $702 $ 939
Furniture and fixtures...................................... 108 125
---- ------
810 1,064
Less: Accumulated depreciation.............................. (214) (398)
---- ------
596 $ 666
==== ======
</TABLE>
F-20
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The Company has a master lease agreement with a leasing company which
expires in 1999. The agreement provides a line of credit of $600 for capital
equipment purchases. At December 31, 1996, approximately $12 was available
under this agreement for equipment purchases. See Note 13--Subsequent Events.
Future minimum lease payments under all non-cancelable operating and capital
leases as of June 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OPERATING CAPITAL
DECEMBER 31, LEASES LEASES
------------ --------- -------
<S> <C> <C>
1997...................................................... $ 881 $ 245
1998...................................................... 2,000 397
1999...................................................... 2,046 290
2000...................................................... 1,914 20
2001...................................................... 1,866 --
Thereafter................................................ 8,794 --
------- -----
Total minimum payments..................................... $17,501 952
=======
Less: amount representing interest......................... (109)
-----
Present value of capital lease obligations................. 843
Less: current portion...................................... (356)
-----
Lease obligations, long-term............................... $ 487
=====
</TABLE>
Rent expense under operating leases totaled $278 and $420 for the year ended
December 31, 1996 and for the six months ended June 30, 1997 (Unaudited),
respectively.
NOTE 12--DELAWARE RE-INCORPORATION AND REVERSE STOCK SPLIT
Prior to the effective date of this Offering, the Board of Directors has
authorized the re-incorporation of the Company in Delaware and the associated
exchange of each share of Common Stock, Mandatorily Redeemable Convertible
Preferred Stock, Common Stock Options and Warrants and Redeemable Convertible
Preferred Stock Warrants into one share of each corresponding class and series
of stock options and warrants of the Delaware successor. Upon re-
incorporation, the Company will be authorized to issue 100,000,000 shares of
$.001 par value Common Stock and 1,000,000 shares of $.001 par value Preferred
Stock, and the Board of Directors will have the authority to issue the
undesignated Preferred Stock in one or more series and to fix the rights,
preferences, privileges and restrictions thereof. In addition, the Board of
Directors approved a one-for-three reverse stock split of the outstanding
shares of Common Stock. All share and per share information have been
retroactively adjusted to reflect the reverse stock split.
NOTE 13--SUBSEQUENT EVENTS:
Business acquisitions
In July through September 1997, the Company recognized the acquisition of
all of the outstanding shares of Common Stock of five companies in exchange
for shares of the Company's Common Stock. The acquired
F-21
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
companies provide Internet professional services. The following table
summarizes the companies acquired and number of shares issuable for each
acquisition:
<TABLE>
<CAPTION>
COMMON
ACQUIRED COMPANY EFFECTIVE DATE SHARES ISSUABLE
---------------- -------------- ---------------
<S> <C> <C>
Electronic Images, Inc. July 1, 1997 1,665,525
Virtual Marketing July 24, 1997 332,536
Hollywood August 29, 1997 151,624
Dream Internet Media, Inc. August 29, 1997 359,094
Cybernautics, Inc. September 29, 1997 447,183
</TABLE>
The purchase price for each of the acquired companies is subject to certain
post closing adjustments at six and twelve month intervals following the
acquisition dates. The acquisitions will be accounted for using the purchase
method of accounting and accordingly, the purchase price for each acquisition
will be allocated to the tangible and intangible assets acquired, including
goodwill, and the liabilities assumed based upon their estimated fair values
at the date of acquisition.
In connection with the acquisitions, the employees of the acquired companies
became employees of USWeb Corporation and were granted stock options to
purchase an aggregate of 2,955,962 shares of the Company's Common Stock at
exercise prices ranging from $2.25 to $3.25 per share, representing the fair
value of the Common Stock on the dates of grant as determined by the Board of
Directors. The options granted are exercisable for a maximum term of five
years and vest ratably over a term of thirty-six months from the date of
grant. In the event that the grantee's status as an employee of the Company
terminates prior to the completion of the vesting period, the employee is
entitled only to the vested portion of the options as of such date.
The Company also awarded the new employees stock bonuses totaling $23,293.
The stock bonuses vest over a thirty-six month period from the date of
employment by the Company and will be issued at the conclusion of the vesting
period. In the event that the employee terminates prior to the completion of
the vesting period, the employee is entitled only to the vested portion of the
stock bonus as of such date. The stock bonus will be recognized as
compensation expense over the three-year vesting period.
Employee Termination
During August 1997, a Company Founder terminated his employment. In
connection with the termination the Company accelerated the vesting of 111,200
shares of Founder's Stock and accordingly recognized a charge in the amount of
$1,080. Additionally, 349,502 shares of unvested Founder's Stock was
repurchased by the Company at its original issuance price of $.0001 per share.
Employee Stock Purchase Plan
In September 1997, the Board of Directors approved the 1997 Employee Stock
Purchase Plan. A total of 1,000,000 shares of Common Stock have been reserved
for issuance under this plan. Terms of the plan permit eligible employees to
purchase Common Stock through payroll deductions of up to 15% of the
employee's compensation. Amounts deducted and accumulated by the participant
are used to purchase shares of the Company's Common Stock at 85% of the lower
of the fair value of the Common Stock at the beginning or the end of the
offering period, as defined.
F-22
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock Option Grants
In September 1997, the Board of Directors granted a total of 205,013 options
to purchase shares of the Company's Common Stock at an exercise price of $3.25
per share.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Francisco
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb San Francisco (formerly
XCom Corporation) at December 31, 1996 and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-24
<PAGE>
USWEB SAN FRANCISCO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $281,000
Accounts receivable.............................................. 194,000
Other current assets............................................. 41,000
--------
Total current assets........................................... 516,000
Property and equipment, net........................................ 37,000
--------
$553,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................. $ 62,000
Accrued expenses................................................. 118,000
Unearned revenues................................................ 63,000
Current portion of notes payable................................. 37,000
--------
Total current liabilities...................................... 280,000
Notes payable, long-term portion................................... 170,000
--------
450,000
--------
Commitments and contingencies (Note 5)
Shareholders' equity:
Preferred Stock: no par value, 1,000,000 shares authorized;
340,000 shares issued and outstanding........................... --
Common Stock: no par value, 500,000 shares authorized;
285,000 shares issued and outstanding........................... 26,000
Retained earnings................................................ 77,000
--------
Total shareholders' equity..................................... 103,000
--------
$553,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenues........................................................... $1,042,000
Cost of revenues................................................... 502,000
----------
Gross profit..................................................... 540,000
----------
Operating expenses:
Marketing, sales and support..................................... 251,000
General and administrative....................................... 148,000
----------
Total operating expenses....................................... 399,000
----------
Income before income taxes......................................... 141,000
Provision for income taxes......................................... (64,000)
----------
Net income......................................................... $ 77,000
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
----------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
--------- ------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... -- $ -- -- $ -- $ -- $ --
Issuance of Preferred
Stock to Founders...... 340,000 -- -- -- -- --
Issuance of Common Stock
to Founders............ -- -- 270,000 16,000 -- 16,000
Issuance of Common Stock
for cash and other net
assets................. -- -- 15,000 10,000 -- 10,000
Net Income.............. -- -- -- -- 77,000 77,000
--------- ----- ------- ------- ------- --------
Balance at December 31,
1996................... 340,000 $ -- 285,000 $26,000 $77,000 $103,000
========= ===== ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
USWEB SAN FRANCISCO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 77,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................................... 13,000
Changes in assets and liabilities:
Accounts receivable............................................ (156,000)
Other current assets........................................... (44,000)
Accounts payable............................................... 12,000
Accrued expenses............................................... 118,000
Unearned revenues.............................................. 63,000
---------
Net cash provided by operating activities..................... 83,000
---------
Cash flows used in investing activities for
the acquisition of property and equipment......................... (13,000)
---------
Cash flows from financing activities:
Proceeds from issuance of Common Stock............................ 4,000
Proceeds from note payable........................................ 207,000
---------
Net cash provided by financing activities..................... 211,000
---------
Net increase in cash and cash equivalents.......................... 281,000
Cash and cash equivalents at beginning at period................... --
---------
Cash and cash equivalents at end of period......................... $ 281,000
=========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING ACTIVITY:
Issuance of Common Stock for net assets........................... $ 22,000
=========
SUPPLEMENTAL INFORMATION:
Cash paid for income taxes........................................ $ 7,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb San Francisco (the "Company"), formerly XCom Corporation, specializes
in electronic marketing on the Internet. The Company is a full service
developer of Internet and intranet sites, offering services in four areas:
website design, hosting, promotion and training. The Company was incorporated
in California on May 25, 1995 and recognized immaterial financing and
operating transactions from that date through December 31, 1995, which have
been included in the Company's financial statements for the year ended
December 31, 1996.
During June 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to be a part of USWeb's Affiliate network, which
included the San Francisco, CA and New York, NY locations. The relationship
with USWeb provided for increased marketing presence, technical support and
centralized hosting facilities.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
13% of revenue. Approximately 22% of accounts receivable at December 31, 1996
was due from two customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $3,000.
F-29
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Property and equipment, net:
Computers and equipment..................................... $ 45,000
Furniture and fixtures...................................... 2,000
--------
47,000
Less: Accumulated depreciation.............................. (10,000)
--------
$ 37,000
========
Accrued expenses:
Accrued income taxes........................................ $ 57,000
Accrued payroll............................................. 43,000
Other....................................................... 18,000
--------
$118,000
========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
At December 31, 1996, the Company had non-interest bearing notes payable to
three of its employees totaling $15,000. Additionally, notes payable to
relatives of the shareholders and employees of the Company totaled $42,000 at
December 31, 1996. On December 18, 1996, the Company signed a promissory note
from a private investor in the amount of $150,000. The note is payable no
later than one year from the date of execution. Interest accrues at a
specified interest rate (8.25% at December 31, 1996).
NOTE 4--INCOME TAXES:
Income tax expense for the year ended December 31, 1996 totaled $64,000 and
was composed of federal income taxes of $48,000 and various state and
municipal income taxes of $16,000. Taxes payable at December
F-30
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
31, 1996 totaled $57,000. The Company had no significant deferred tax assets
or liabilities at December 31, 1996. The Company's effective tax rate for the
year ended December 31, 1996 differed from the expected federal tax rate
primarily as a result of state and local income taxes.
NOTE 5--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $45,000 and are included in cost of revenues.
Operating Leases
Rent expense under month-to-month rental agreements for the year ended
December 31, 1996 totaled $20,000. In March 1997, the Company entered into
noncancelable operating leases for new office facilities which expire in 2002,
require the payment of insurance and maintenance and have required rental
payments of approximately $120,000 per year.
Future minimum lease payments related to office facilities and equipment
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997........................................................... $151,000
1998........................................................... 148,000
1999........................................................... 139,000
2000........................................................... 122,000
2001........................................................... 121,000
--------
Total minimum lease payments................................... $681,000
========
</TABLE>
NOTE 6--CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of convertible Preferred Stock. During 1996 the
Company issued 340,000 shares to the Founders. Compensation expense related to
the issuance of the shares was not material.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 500,000 shares of Common Stock. During the year ended December 31,
1996, the Company issued 270,000 shares of Common Stock to the Founders and
sold 15,000 shares to a third party in exchange for cash and assets valued at
$10,000. Compensation expense related to the issuance of shares to the
Founders was not material.
NOTE 8--SUBSEQUENT EVENTS:
On March 16, 1997, USWeb reached an agreement to acquire all of the
Company's outstanding shares of Common Stock and Preferred Stock, at which
time the Company became a wholly owned subsidiary of USWeb.
F-31
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of USWeb Milwaukee
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of USWeb Milwaukee (formerly Fetch
Interactive, Inc.) at June 30, 1996, and the results of its operations and its
cash flows for the year ended June 30, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 12, 1997
F-32
<PAGE>
USWEB MILWAUKEE
BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 7,000 $ 30,000
Accounts receivable................................ 139,000 271,000
Costs in excess of billings........................ 22,000 23,000
Other current assets............................... 20,000 138,000
----------- -----------
Total current assets............................. 188,000 462,000
Property and equipment, net.......................... 160,000 138,000
----------- -----------
$ 348,000 $ 600,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable................................... $ 96,000 $ 152,000
Accrued expenses................................... 23,000 281,000
Unearned revenue................................... 65,000 142,000
Notes payable...................................... 1,277,000 1,548,000
Current portion of capital lease obligations....... 79,000 86,000
----------- -----------
Total current liabilities........................ 1,540,000 2,209,000
Capital lease obligations, long-term portion......... 114,000 94,000
----------- -----------
1,654,000 2,303,000
----------- -----------
Commitments and contingencies (Note 6)
Stockholders' deficit:
Common Stock: no par value, 2,500 shares
authorized;
1,179 shares issued and outstanding...............
Additional paid-in capital......................... 218,000 218,000
Accumulated deficit................................ (1,524,000) (1,921,000)
----------- -----------
Total stockholders' deficit...................... (1,306,000) (1,703,000)
----------- -----------
$ 348,000 $ 600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE>
USWEB MILWAUKEE
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, ----------------------
1996 1996 1997
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................... $1,745,000 $1,190,000 $1,927,000
Cost of revenues........................... 1,179,000 810,000 1,583,000
---------- ---------- ----------
Gross profit............................. 566,000 380,000 344,000
---------- ---------- ----------
Operating expenses:
Marketing, sales and support............. 292,000 173,000 355,000
General and administrative............... 359,000 242,000 282,000
---------- ---------- ----------
Total operating expenses............... 651,000 415,000 637,000
---------- ---------- ----------
Loss from operations....................... (85,000) (35,000) (293,000)
Interest expense-related party............. (132,000) (102,000) (104,000)
---------- ---------- ----------
Net loss................................... $ (217,000) $ (137,000) $ (397,000)
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE>
USWEB MILWAUKEE
STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Balance at June 30, 1995............ 1,179 $218,000 $(1,307,000) $(1,089,000)
Net loss............................ (217,000) (217,000)
----- -------- ----------- -----------
Balance at June 30, 1996............ 1,179 218,000 (1,524,000) (1,306,000)
Net loss (Unaudited)................ (397,000) (397,000)
----- -------- ----------- -----------
Balance at March 31, 1997
(Unaudited)........................ 1,179 $218,000 $(1,921,000) $(1,703,000)
===== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-35
<PAGE>
USWEB MILWAUKEE
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED MARCH 31,
JUNE 30, --------------------
1996 1996 1997
---------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(217,000) $(137,000) $(397,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............... 68,000 47,000 50,000
Changes in assets and liabilities:
Accounts receivable......................... (103,000) (143,000) (132,000)
Costs in excess of billings................. (5,000) 17,000 (1,000)
Other current assets........................ 16,000 14,000 (118,000)
Accounts payable............................ 71,000 79,000 56,000
Accrued expenses............................ 8,000 7,000 258,000
Unearned revenue............................ 50,000 (15,000) 77,000
--------- --------- ---------
Net cash used in operating activities..... (112,000) (131,000) (207,000)
--------- --------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT.... (52,000) (32,000) (28,000)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable...... 228,000 211,000 271,000
Repayment of notes payable................... (32,000) (32,000) --
Principal payments on capital leases......... (49,000) (30,000) (13,000)
--------- --------- ---------
Net cash provided by financing activities. 147,000 149,000 258,000
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents.................................. (17,000) (14,000) 23,000
Cash and cash equivalents at beginning of
period....................................... 24,000 24,000 7,000
--------- --------- ---------
Cash and cash equivalents at end of period.... $ 7,000 $ 10,000 $ 30,000
========= ========= =========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Property and equipment acquired under capital
leases...................................... $ 121,000 $ 34,000 $ --
========= ========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest....................... $ 136,000 $ 102,000 $ 104,000
========= ========= =========
Cash paid for income taxes................... $ -- $ -- $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-36
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Milwaukee (the "Company"), formerly Fetch Interactive, Inc., was
incorporated in Wisconsin on June 19, 1970 and is principally engaged in
providing computer consulting, multimedia and data processing services to
customers located throughout the United States.
During September 1996, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb"), to become a part of USWeb's affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements, hosting
service fees and data processing.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Costs in excess of billings represents the costs of services performed in
advance of related billings. Unearned revenues represent the amount of
revenues received in advance of services being performed. Revenues from time
and materials agreements, hosting services and data processing are recognized
and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended June 30, 1996, sales to two customers accounted for
27% and 23% of revenues. Approximately 50% of accounts receivable at June 30,
1996 was due from three customers.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of March 31, 1997 totaled $2,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
F-37
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the nine
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the nine months ended March 31, 1996 and
1997. The financial data and other information disclosed in these notes to
financial statements related to these periods are unaudited. The results for
the nine months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ended June 30, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
--------- -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................... $ 521,000 $ 540,000
Furniture and fixtures................................ 219,000 228,000
Leasehold improvements................................ 110,000 110,000
--------- ---------
850,000 878,000
Less: Accumulated depreciation and amortization....... (690,000) (740,000)
--------- ---------
$ 160,000 $ 138,000
========= =========
</TABLE>
NOTE 3--NOTES PAYABLE:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1996 1997
---------- -----------
(UNAUDITED)
<S> <C> <C>
Demand note payable to the Company's majority
stockholder, bearing interest at 10%................ $ 702,000 $ 973,000
Demand note payable to a member of the immediate
family of the Company's majority stockholder,
bearing interest at 9.4%............................ 375,000 375,000
Demand note payable to a third party, bearing
interest at 9.5%.................................... 200,000 200,000
---------- ----------
$1,277,000 $1,548,000
========== ==========
</TABLE>
F-38
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4--RELATED PARTY TRANSACTIONS:
During 1996, approximately 27% of the Company's revenues were derived from
services to one company that is owned by the Company's majority stockholder.
Additionally, at June 30, 1996, two notes payable were outstanding to related
parties (see Note 3). Interest expense to related parties during fiscal 1996
was approximately $101,000.
NOTE 5--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred a net operating loss for the year ended June 30, 1996. At
June 30, 1996, the Company had approximately $1,186,000 of federal net
operating loss carryforwards which expire in varying amounts through 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $403,000 at June 30, 1996,
consist primarily of net operating loss carryforwards and book reserves and
accrued expenses which are not currently deductible for tax purposes. The
Company has provided a full valuation allowance on recorded deferred tax
assets because of the uncertainty regarding realization based upon the weight
of currently available information.
NOTE 6--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the nine months ended March
31, 1997 totaled $14,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires on April 30, 2007. The lease requires payment of property
taxes, insurance, maintenance and utilities. Rent expense for the year ended
June 30, 1996 totaled $74,000.
Future minimum lease payments under capital and noncancelable operating
leases, as of June 30, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL OPERATING
JUNE 30, LEASES LEASES
---------- -------- ----------
<S> <C> <C>
1997.................................................... $ 98,000 $ 148,000
1998.................................................... 84,000 159,000
1999.................................................... 35,000 162,000
2000.................................................... 6,000 149,000
2001.................................................... -- 147,000
Thereafter.............................................. -- 869,000
-------- ----------
Total minimum lease payments............................ 223,000 $1,634,000
==========
Less: amount representing interest...................... 30,000
--------
Present value of capitalized lease obligations.......... 193,000
Less: current portion................................... 79,000
--------
Long-term portion of capitalized lease obligations...... $114,000
========
</TABLE>
F-39
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment under capital lease is as follows:
<TABLE>
<CAPTION>
JUNE 30,
1996
--------
<S> <C>
Computer equipment................................................. $177,000
Furniture and fixtures............................................. 38,000
--------
215,000
Less: Accumulated depreciation..................................... (113,000)
--------
$102,000
========
</TABLE>
NOTE 7--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
Immediately prior to the agreement date, notes payable and related accrued
interest payable totaling $1,548,000 were converted into equity.
F-40
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Metro
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb LA Metro (formerly NewLink
Corporation) at December 31, 1996 and the results of its operations and its
cash flows for the year ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 17, 1997
F-41
<PAGE>
USWEB LA METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 60,000 $ 12,000
Accounts receivable................................. 95,000 110,000
Other current assets................................ 33,000 39,000
-------- --------
Total current assets.............................. 188,000 161,000
Property and equipment, net........................... 13,000 22,000
-------- --------
$201,000 $183,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 6,000
Accrued expenses.................................... 51,000 10,000
Unearned revenue.................................... -- 6,000
-------- --------
Total current liabilities......................... 57,000 22,000
Notes payable......................................... 14,000 --
-------- --------
71,000 22,000
-------- --------
Commitments and contingencies (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000 shares
authorized;
10,000 shares issued and outstanding............... 10,000 10,000
Additional paid-in capital.......................... 80,000 80,000
Retained earnings................................... 40,000 71,000
-------- --------
Total shareholders' equity........................ 130,000 161,000
-------- --------
$201,000 $183,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-42
<PAGE>
USWEB LA METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $560,000 $168,000 $203,000
Cost of revenues................................ 135,000 32,000 59,000
-------- -------- --------
Gross profit.................................. 425,000 136,000 144,000
-------- -------- --------
Operating expenses:
Marketing, sales and support.................. 38,000 7,000 14,000
General and administrative.................... 28,000 4,000 9,000
-------- -------- --------
Total operating expenses.................... 66,000 11,000 23,000
-------- -------- --------
Income from operations.......................... 359,000 125,000 121,000
Interest income, net............................ -- -- 1,000
-------- -------- --------
Income before income taxes...................... 359,000 125,000 122,000
Provision for income taxes...................... (1,000) -- (3,000)
-------- -------- --------
Net income...................................... $358,000 $125,000 $119,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
USWEB LA METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1995....................... 1,000 $ 1,000 $ 8,000 $ 9,000 $ 18,000
Issuance of Common Stock to
Founders................... 9,000 9,000 72,000 -- 81,000
Shareholder distribution.... -- -- -- (327,000) (327,000)
Net income.................. -- -- -- 358,000 358,000
------ ------- ------- --------- ---------
Balance at December 31,
1996....................... 10,000 10,000 80,000 40,000 130,000
Shareholder distribution
(Unaudited)................ -- -- -- (88,000) (88,000)
Net income (Unaudited)...... -- -- -- 119,000 119,000
------ ------- ------- --------- ---------
Balance at March 31, 1997
(Unaudited)................ 10,000 $10,000 $80,000 $ 71,000 $ 161,000
====== ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
USWEB LA METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 358,000 $125,000 $ 119,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.............. 7,000 -- 3,000
Changes in assets and liabilities:
Accounts receivable....................... (95,000) -- (15,000)
Other current assets...................... (24,000) (7,000) (8,000)
Accounts payable.......................... (3,000) (4,000) --
Accrued expenses.......................... 44,000 (4,000) (41,000)
Unearned revenue.......................... -- -- 6,000
--------- -------- ---------
Net cash provided by operating
activities............................. 287,000 110,000 64,000
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment....... (57,000) -- (10,000)
--------- -------- ---------
Net cash provided by (used in) investing
activities............................. 57,000 -- (10,000)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Shareholder distribution.................... (265,000) (14,000) (88,000)
Shareholder loan proceeds................... 11,000 -- --
Repayment of notes payable.................. -- -- (14,000)
Proceeds from issuance of Common Stock...... 81,000 -- --
--------- -------- ---------
Net cash used in financing activities... (173,000) (14,000) (102,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 57,000 96,000 (48,000)
Cash and cash equivalents at beginning of
period...................................... 3,000 3,000 60,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 60,000 $ 99,000 $ 12,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb LA Metro (the "Company"), formerly NewLink Corporation, was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on July 25, 1995 and
later elected an S Corporation tax status effective January 1, 1996.
During July, 1996, the Company entered into a franchise agreement with USWeb
Corporation ("USWeb") to become part of USWeb's Affiliate network.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenues from time and materials agreements and
hosting services are recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Concentration of Credit Risk
The Company is potentially subject to a concentration of credit risk from
its trade receivables, as a significant portion is due from one major
customer. The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. As of December 31, 1996 and for the
year then ended, one customer accounted for 92% of the Company's accounts
receivable balance and 94% of the Company's total revenues, respectively.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $2,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
F-46
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company has elected to be taxed as an S Corporation, pursuant to the
Internal Revenue Code. This election provides for all profits or losses to be
recognized in the shareholders' personal income tax returns. The provision for
income taxes represents a 1.5% franchise tax imposed by the State of
California.
The December 31, 1996 current provision for income taxes represents
applicable state franchise taxes. The California S Corporation provisions
require the payment of a 1.5% franchise tax on taxable income for the year
ended December 31, 1996.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, other
current assets, accounts payable, and accrued expenses, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1996 and 1997 are unaudited. In the opinion of
management, the unaudited interim financial statements have been prepared on
the same basis as the annual financial statements and reflect all adjustments,
which include only normal recurring adjustments, necessary to present fairly
the financial position as of March 31, 1997, and the results of the Company's
operations and its cash flows for the three months ended March 31, 1997. The
financial data and other information disclosed in these notes to financial
statements at March 31, 1997 and for the period then ended are unaudited. The
results for the three months ended March 31, 1997 are not necessarily
indicative of the results to be expected for the year ending December 31,
1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $13,000 $19,000
Furniture and fixtures............................ 1,000 5,000
------- -------
14,000 24,000
Less: Accumulated depreciation...................... (1,000) (2,000)
------- -------
$13,000 $22,000
======= =======
Accrued expenses:
Payroll........................................... $49,000 $ 5,000
Other............................................. 2,000 5,000
------- -------
$51,000 $10,000
======= =======
</TABLE>
F-47
<PAGE>
USWEB LA METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company is
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $10,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. Rent expense for the year ended December 31, 1996
and the three month period ended March 31, 1997 totaled $5,000 and $2,000,
respectively.
Future minimum lease payments under noncancelable operating as of December
31, 1996 total $6,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue
10,000 shares of $1 par value Common Stock. During the year ended December 31,
1996, the Company sold a total of 9,000 shares of Common Stock to the Founder
of the Company and two other current owners.
During 1996 the company made distributions to a shareholding, totaling
$327,000. This distribution included $62,000 of property and equipment.
NOTE 5--SUBSEQUENT EVENTS:
On April 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-48
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb Atlanta
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Atlanta (formerly
InterNetOffice, LLC) at December 31, 1996 and the results of its operations
and its cash flows for the period from May 7, 1996 (inception) through
December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-49
<PAGE>
USWEB ATLANTA
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 11,000 $ 48,000
Accounts receivable................................. 75,000 148,000
Other current assets................................ 7,000 18,000
-------- --------
Total current assets.............................. 93,000 214,000
Property and equipment, net........................... 10,000 18,000
-------- --------
$103,000 $232,000
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 26,000 $102,000
Related party payable............................... 76,000 52,000
Accrued expenses.................................... -- 17,000
-------- --------
Total current liabilities......................... 102,000 171,000
-------- --------
Commitments and contingencies (Note 4)
Stockholders' equity:
Common Stock: no par value, 841,507 shares
authorized; 525,000 and 841,507 shares issued and
outstanding........................................ 1,000 1,000
Retained earnings................................... -- 60,000
-------- --------
Total stockholders' equity........................ 1,000 61,000
-------- --------
$103,000 $232,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
USWEB ATLANTA
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $224,000 $276,000
Cost of revenues...................................... 198,000 167,000
-------- --------
Gross profit......................................... 26,000 109,000
-------- --------
Operating expenses:
Marketing, sales and support......................... 8,000 10,000
General and administrative........................... 18,000 39,000
-------- --------
Total operating expenses.......................... 26,000 49,000
-------- --------
Net income............................................ $ -- $ 60,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
USWEB ATLANTA
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock.................. 525,000 $1,000 $ -- $ 1,000
------- ------ ------- -------
Balance at December 31, 1996.............. 525,000 1,000 -- 1,000
Issuance of Common Stock (Unaudited)...... 316,507 -- -- --
Net income (Unaudited).................... -- -- 60,000 60,000
------- ------ ------- -------
Balance at March 31, 1997 (Unaudited)..... 841,507 $1,000 $60,000 $61,000
======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<PAGE>
USWEB ATLANTA
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MAY 7, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ -- $ 60,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization........................ 1,000 --
Changes in assets and liabilities:
Accounts receivable................................. (75,000) (73,000)
Other current assets................................ (7,000) (11,000)
Accounts payable.................................... 26,000 76,000
Related party payable............................... 76,000 (24,000)
Accrued expenses.................................... -- 17,000
-------- --------
Net cash provided by operating activities............. 21,000 45,000
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT................ (11,000) (8,000)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES FROM THE
ISSUANCE OF COMMON STOCK............................. 1,000 --
-------- --------
Net increase in cash and cash equivalents............. 11,000 37,000
Cash and cash equivalents at beginning of period...... -- 11,000
-------- --------
Cash and cash equivalents at end of period............ $ 11,000 $ 48,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-53
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Atlanta (the "Company"), formerly InterNetOffice, LLC, was
incorporated in Georgia as a limited liability company on May 7, 1996 for the
purpose of providing Internet development and consulting services. Following
the Company's formation, the Company entered into a franchise agreement with
USWeb Corporation ("USWeb") and in June 1996 began operating as a franchisee
under that agreement.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended December 31, 1996, sales to one customer accounted for
64% of revenues. Approximately 77% of accounts receivable at December 31, 1996
were due from two customers.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
F-54
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from May 7, 1996 (inception) through December 31, 1996 and the three
months ended March 31, 1997 totaled $3,000 and $1,000, respectively.
Income Taxes
The Company has elected to be taxed as a limited liability company (LLC),
pursuant to the Internal Revenue Code. This election provides for all profits
and losses to be recognized in the shareholders' personal income tax returns.
Accordingly, no provision for income taxes has been recorded in the
accompanying financial statements.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, related
party receivables and payables, accounts payable and accrued expenses, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the three months then ended are unaudited. The results
for the three months ended March 31, 1997 are not necessarily indicative of
the results to be expected for the year ending December 31, 1997.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment, net:
Computers and equipment........................... $ 4,000 $12,000
Furniture and fixtures............................ 7,000 6,000
Leasehold improvements............................ -- 1,000
------- -------
11,000 19,000
Less: Accumulated depreciation and amortization... (1,000) (1,000)
------- -------
$10,000 $18,000
======= =======
Accrued expenses:
Payroll and related expenses...................... $ -- $8,000
Other............................................. -- 9,000
------- -------
$ -- $17,000
======= =======
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
During the period from May 7, 1996 (inception) through December 31, 1996,
the Company shared office space and had all personnel functions performed by a
related party, NetOffice, Inc. The office space and all related costs were
allocated between the companies based on a relative square-footage space
formula. In the opinion of management, the formula represents a reasonable
allocation of expenses to the Company.
F-55
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1996, approximately $76,000 of the Company's trade payables
were payable to a related party, and less than $1,000 of receivables were due
from a related party.
The following is a summary of related party transactions for the period
December 31, 1996:
<TABLE>
<S> <C>
Personnel related expense........................................ $140,000
========
Rent expense..................................................... $ 27,000
========
Equipment and other facilities expense........................... $ 38,000
========
</TABLE>
NOTE 4--COMMITMENTS AND CONTINGENCIES:
Royalties
Under the terms of its franchise agreement with USWeb, the Company was
required to pay royalties to USWeb based upon a stipulated percentage of
adjusted gross revenue, as defined. Royalties for the year ended December 31,
1996 totaled $15,000 and are included in cost of revenues.
Operating Leases
The Company has no material operating leases at March 31, 1997. Rent expense
for the period from May 7, 1996 (inception) through December 31, 1996 and the
three months ended March 31, 1997 totaled $27,000 and $10,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorized the Company
to issue Common Stock, no par value. During the period from May 7, 1996
(inception) through December 31, 1996 and the three months ended March 31,
1997, the Company issued 525,000 and 316,507 shares, respectively, of Common
Stock to the founders of the Company, employees and other nonrelated parties.
A portion of the shares sold are subject to a right of repurchase by the
Company which lapses generally over a four year period from the earlier of
grant date or employee hire date, as applicable. At March 31, 1997, there were
316,507 shares subject to repurchase. Compensation expense related to share
issuances was not material for the year ended December 31, 1996 or for the
three months ended March 31, 1997.
NOTE 6--SUBSEQUENT EVENTS:
On May 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
USWeb DC
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of stockholders' deficit and of cash
flows present fairly, in all material respects, the financial position of
USWeb DC (formerly Infopreneurs Inc.) and its subsidiary at December 31, 1996
and the results of their operations and their cash flows for the period from
June 30, 1996 (inception) through December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our
audit of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-57
<PAGE>
USWEB DC
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 206,000 $ 3,000
Accounts receivable................................. -- 157,000
Other current assets................................ 24,000 57,000
--------- ---------
Total current assets.............................. 230,000 217,000
Property and equipment, net........................... 3,000 60,000
--------- ---------
$ 233,000 $ 277,000
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.................................... $ 16,000 $ 119,000
Accrued expenses.................................... -- 5,000
Customer deposits................................... -- 60,000
Line of credit...................................... 93,000 85,000
Notes payable....................................... 169,000 150,000
--------- ---------
Total current liabilities......................... 278,000 419,000
--------- ---------
Stockholders' deficit:
Common stock: no par value, 3,000 shares authorized;
2,060 and 2,076 shares issued and outstanding...... 150,000 165,000
Accumulated deficit................................. (195,000) (307,000)
--------- ---------
Total stockholders' deficit....................... (45,000) (142,000)
--------- ---------
$ 233,000 $ 277,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-58
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.............................................. $ 26,000 $ 184,000
Cost of revenues...................................... 45,000 160,000
--------- ---------
Gross profit (loss)................................. (19,000) 24,000
--------- ---------
Operating expenses:
Marketing, sales and support........................ 72,000 72,000
General and administrative.......................... 99,000 63,000
--------- ---------
Total operating expenses.......................... 171,000 135,000
--------- ---------
Loss from operations.................................. (190,000) (111,000)
Interest expense...................................... (5,000) (1,000)
--------- ---------
Net loss.............................................. $(195,000) $(112,000)
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-59
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
------ -------- ----------- -------------
<S> <C> <C> <C> <C>
Common Stock issued to Founders...... 1,980 $ -- $ -- $ --
Common Stock issued for notes
payable............................. 20 -- -- --
Common Stock issued for cash......... 60 150,000 -- 150,000
Net loss............................. -- -- (195,000) (195,000)
----- -------- --------- ---------
Balance at December 31, 1996......... 2,060 150,000 (195,000) (45,000)
Conversion of debt to equity
(Unaudited)......................... 6 15,000 -- 15,000
Issuance of Restricted Stock
(Unaudited)......................... 10 -- -- --
Net loss (Unaudited)................. -- -- (112,000) (112,000)
----- -------- --------- ---------
Balance at March 31, 1997
(Unaudited)......................... 2,076 $165,000 $(307,000) $(142,000)
===== ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-60
<PAGE>
USWEB DC
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 3, 1996
(INCEPTION) THREE MONTHS
THROUGH ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(195,000) $(112,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization...................... 1,000 6,000
Changes in assets and liabilities:
Accounts receivable............................... -- (157,000)
Other current assets.............................. (25,000) (34,000)
Accounts payable.................................. 16,000 103,000
Accrued expenses.................................. -- 5,000
Customer deposits................................. -- 60,000
--------- ---------
Net cash used in operating activities........... (203,000) (129,000)
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT............... (3,000) (62,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 150,000 --
Proceeds from note payable.......................... 213,000 --
Advances on line of credit.......................... 93,000 85,000
Repayment of notes payable.......................... (44,000) (4,000)
Repayment of advances on line of credit............. -- (93,000)
--------- ---------
Net cash provided by (used in) financing
activities..................................... 412,000 (12,000)
--------- ---------
Net increase (decrease) in cash...................... 206,000 (203,000)
Cash at beginning of period.......................... -- 206,000
--------- ---------
Cash at end of period................................ $ 206,000 $ 3,000
========= =========
NONCASH FINANCING ACTIVITIES:
Conversion of debt to equity........................ $ -- $ 15,000
========= =========
SUPPLEMENTAL INFORMATION:
Cash paid for interest.............................. $ 5,000 $ 1,000
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-61
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb DC (the "Company"), formerly Infopreneurs Inc., and its subsidiary
USWeb DC, Inc., were incorporated in Delaware on June 3, 1996 and September
13, 1996, respectively. The Company provides Internet and intranet consulting,
web site development, and hosting services. The Company had two franchise
agreements with USWeb Corporation ("USWeb"): USWeb DC and USWeb Philadelphia.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements and
hosting service fees.
Service revenues from fixed-price agreements are recognized over the period
of each engagement under the percentage of completion method using labor hours
incurred as a measure of progress towards completion. Provisions for contract
adjustments and losses are recorded in the period such items are identified.
Revenues from time and materials agreements and hosting services are
recognized and billed as the services are provided.
Significant Customers
During the period from June 3, 1996 (inception) through December 31, 1996,
sales to three customers accounted for 49%, 30%, and 21% of total revenues.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization as of December 31, 1996 totaled $1,000.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years.
Advertising Costs
Advertising costs are expensed as incurred in accordance with Statement of
Position 93-7, "Reporting on Advertising Costs." Advertising costs for the
period from June 3, 1996 (inception) through December 31, 1996 and for the
three months ended March 31, 1997 totaled $8,000 and $19,000, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the consolidated
accounts of the Company and it wholly owned subsidiary. All significant
intercompany transactions and balances have been eliminated in consolidation.
F-62
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including notes payable and accounts
payable, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Interim Financial Information
The accompanying financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 are unaudited. In the opinion of management, the
unaudited interim financial statements have been prepared on the same basis as
the annual financial statements and reflect all adjustments, which include
only normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 1997, and the results of the Company's operations and
its cash flows for the three months ended March 31, 1997. The financial data
and other information disclosed in these notes to financial statements at
March 31, 1997 and for the period then ended are unaudited. The results for
the three months ended March 31, 1997 are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment............................. $3,000 $64,000
Furniture and fixtures.............................. -- 1,000
Leasehold improvements.............................. -- --
------ -------
3,000 65,000
Less: Accumulated depreciation and amortization..... -- (5,000)
------ -------
$3,000 $60,000
====== =======
</TABLE>
NOTE 3--DEBT:
During June 1996, the Company negotiated a line of credit with a bank in the
amount of $100,000 and a working capital loan in the amount of $48,000. Both
were personally guaranteed by the founders of the Company and were secured by
substantially all the assets of the Company. During the period from June 3,
1996 (inception) through December 31, 1996, the Company was advanced $93,000
on the line of credit. Interest on borrowings under the line of credit and
working capital loan accrue at 10% per annum. Prior to December 31, 1996, the
Company repaid $44,000 of principal on the working capital loan plus accrued
interest. During January 1997, the Company repaid the outstanding balance of
$93,000, plus accrued interest, upon the expiration of the line of credit.
During April 1997, the Company renegotiated its working capital loan in the
amount of $48,000 and expiring April 15, 2000. The loan is secured by the
fixed assets acquired with the proceeds of the loan funds and requires the
Company to maintain compliance with certain covenants. As of September 18,
1997, the Company had repaid $34,000 of the principal amount, plus accrued
interest.
F-63
<PAGE>
USWEB DC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During September 1996, the Company obtained a $15,000 demand loan used for
the acquisition of the Philadelphia franchise. In connection with the loan, 20
shares of no par value common stock were granted to the lender. The allocation
of proceeds to the shares of common stock and resulting non-cash interest
expense were not material to the period ended December 31, 1996 or the three
months ended March 31, 1997.
During December 1996, the Company obtained a loan from a related party in
the amount of $150,000, which is payable one year from the date of execution.
The loan was secured by the Company's outstanding common stock. Interest
accrues at a specified prime rate (8.25% at December 31, 1996). The note
payable plus accrued interest was paid by USWeb Corporation in August 1997.
NOTE 4--INCOME TAXES:
No provision for federal and state income taxes has been recognized as the
Company has incurred net operating losses from June 3, 1996 (inception)
through December 31, 1996. At December 31, 1996, the Company had approximately
$194,000 of federal net operating loss carryforwards which expire in 2011
available to offset future taxable income. Under the Tax Reform Act of 1986,
the amounts of and benefits from net operating loss carryforwards may be
impaired or limited in certain circumstances. Events which may cause
limitations in the amount of net operating losses that the Company may utilize
in any one year include, but are not limited to, a cumulative ownership change
of more than 50%, as defined, over a three year period.
Deferred tax assets, aggregating approximately $75,000 at December 31, 1996,
consist primarily of net operating loss carryforwards. The Company has
provided a full valuation allowance on the deferred tax assets because of the
uncertainty regarding realization based upon the weight of currently available
information.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 3,000 shares of no par value Common Stock. During the period from
June 3, 1996 (inception) through December 31, 1996, the Company issued a total
of 2,000 shares of Common Stock to the Founders and affiliates of the Company
and sold 60 shares of Common Stock to a related party. Compensation expense
related to share issuances for the period ended December 31, 1996 and the
three months ended March 31, 1997 was not material.
NOTE 6--SUBSEQUENT EVENTS:
Equity transactions
During February 1997, the following equity transactions occurred: ten shares
of restricted common stock were granted to an employee, which vest on the
earlier of a change in control in the Company or February 14, 1998, and the
outstanding debt of $15,000 incurred in connection with the acquisition of the
Philadelphia franchise from USWeb was converted into 6 shares of common stock.
During May 1997, the Company sold 24 shares of common stock for $156,000. In
connection with the sale of such shares, the Company agreed to repurchase the
shares at their original issue price if the Company had not completed its then
anticipated merger with USWeb on or prior to September 30, 1997.
Acquisition
On June 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of USWeb.
F-64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Pittsburgh
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of USWeb Pittsburgh (formerly
Electronic Images, Inc.) at January 31, 1996 and 1997, and the results of its
operations and its cash flows for the years ended January 31, 1996 and 1997,
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse LLP
San Jose, California
September 18, 1997
F-65
<PAGE>
USWEB PITTSBURGH
BALANCE SHEET
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 251,000 $ 578,000 $ 24,000
Accounts receivable, net.................. 712,000 662,000 1,232,000
Costs in excess of billings............... 84,000 76,000 151,000
Deferred income taxes..................... 51,000 42,000 42,000
Other current assets...................... 13,000 50,000 16,000
---------- ---------- ----------
Total current assets.................... 1,111,000 1,408,000 1,465,000
Note receivable--affiliate.................. 187,000 -- 134,000
Property and equipment, net................. 570,000 989,000 950,000
Other assets................................ -- 36,000 90,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 187,000 $ 160,000 $ 86,000
Accrued expenses.......................... 204,000 244,000 410,000
Current portion of note payable........... -- 85,000 85,000
---------- ---------- ----------
Total current liabilities............... 391,000 489,000 581,000
Note payable--long term portion............. -- 272,000 249,000
Note payable--affiliate..................... -- 17,000 --
---------- ---------- ----------
391,000 778,000 830,000
Commitments (Note 5)
Shareholders' equity:
Common Stock: $1.00 par value, 10,000
shares authorized; 5,000, 5,263 and 5,263
shares issued and outstanding............ 5,000 5,000 5,000
Additional paid-in capital................ 45,000 130,000 130,000
Note receivable from shareholder.......... -- (63,000) (62,000)
Retained earnings......................... 1,427,000 1,583,000 1,736,000
---------- ---------- ----------
Total shareholders' equity.............. 1,477,000 1,655,000 1,809,000
---------- ---------- ----------
$1,868,000 $2,433,000 $2,639,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
USWEB PITTSBURGH
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
---------------------- ---------------------
1996 1997 1996 1997
---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues......................... $5,664,000 $5,996,000 $1,822,000 $1,504,000
Cost of revenues................. 4,111,000 4,719,000 955,000 1,042,000
---------- ---------- ---------- ----------
Gross profit................... 1,553,000 1,277,000 867,000 462,000
---------- ---------- ---------- ----------
Operating expenses:
Marketing, sales and support... 212,000 302,000 34,000 75,000
General and administrative..... 809,000 689,000 140,000 124,000
---------- ---------- ---------- ----------
Total operating expenses..... 1,021,000 991,000 174,000 199,000
---------- ---------- ---------- ----------
Income from operations........... 532,000 286,000 693,000 263,000
Interest expense, net............ (1,000) (14,000) -- (6,000)
Other income..................... 5,000 -- -- --
---------- ---------- ---------- ----------
Income before income taxes....... 536,000 272,000 693,000 257,000
Income tax provision............. 218,000 116,000 280,000 104,000
---------- ---------- ---------- ----------
Net income....................... $ 318,000 $ 156,000 $ 413,000 $ 153,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
USWEB PITTSBURGH
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------- FROM PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER CAPITAL EARNINGS EQUITY
------ ------ ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 31,
1995................... 5,000 $5,000 $ -- $ 45,000 $1,109,000 $1,159,000
Net income.............. -- -- -- -- 318,000 318,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1996................... 5,000 5,000 -- 45,000 1,427,000 1,477,000
----- ------ -------- -------- ---------- ----------
Issuance of Common Stock
for note receivable
from shareholder....... 263 -- (85,000) 85,000 -- --
Payment on note
receivable from
shareholder............ -- -- 22,000 -- -- 22,000
Net income.............. -- -- -- -- 156,000 156,000
----- ------ -------- -------- ---------- ----------
Balance at January 31,
1997................... 5,263 5,000 (63,000) 130,000 1,583,000 1,655,000
----- ------ -------- -------- ---------- ----------
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- 1,000 -- -- 1,000
Net income (Unaudited).. -- -- -- -- 153,000 153,000
----- ------ -------- -------- ---------- ----------
Balance as of April 30,
1997 (Unaudited)....... 5,263 $5,000 $(62,000) $130,000 $1,736,000 $1,809,000
===== ====== ======== ======== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE>
USWEB PITTSBURGH
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED JANUARY 31, APRIL 30,
------------------------ --------------------
1996 1997 1996 1997
----------- ----------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income..................... $ 318,000 $ 156,000 $ 413,000 $ 153,000
Adjustments to reconcile net
income to net cash provided by
(used in) operating
activities:
Depreciation and amortization. 223,000 414,000 87,000 123,000
Deferred income taxes......... -- 9,000 -- --
Changes in assets and
liabilities:
Accounts receivable.......... (198,000) 50,000 (265,000) (570,000)
Costs in excess of billings.. (4,000) 8,000 (54,000) (75,000)
Other current assets......... (12,000) (37,000) 2,000 34,000
Other assets................. -- (36,000) -- (54,000)
Accounts payable............. 83,000 (27,000) (106,000) (74,000)
Accrued expenses............. 36,000 40,000 251,000 166,000
----------- ----------- --------- ---------
Net cash provided by (used
in) operating activities... 446,000 577,000 328,000 (297,000)
----------- ----------- --------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT...... (480,000) (833,000) (170,000) (84,000)
----------- ----------- --------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Principal payments on note
payable....................... -- (43,000) -- (23,000)
Change in note
receivable/payable--affiliate. 281,000 204,000 (376,000) (151,000)
Proceeds from issuance of note
payable....................... -- 400,000 -- --
Payments received on note
receivable from shareholder... -- 22,000 -- 1,000
----------- ----------- --------- ---------
Net cash provided by (used
in) financing activities... 281,000 583,000 (376,000) (173,000)
----------- ----------- --------- ---------
Net increase (decrease) in cash
and cash equivalents........... 247,000 327,000 (218,000) (554,000)
Cash and cash equivalents at
beginning of period............ 4,000 251,000 251,000 578,000
----------- ----------- --------- ---------
Cash and cash equivalents at end
of period...................... $ 251,000 $ 578,000 $ 33,000 $ 24,000
=========== =========== ========= =========
SUPPLEMENTAL NONCASH INVESTING
AND FINANCING ACTIVITY:
Issuance of common stock for
shareholder
note receivable............... $ -- $ 85,000 $ -- $ --
=========== =========== ========= =========
CASH PAID DURING THE PERIOD FOR:
Interest....................... $ 1,000 $ 16,000 $ -- $ 7,000
=========== =========== ========= =========
Income taxes................... $ 171,000 $ 182,000 $ 75,000 $ 19,000
=========== =========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Pittsburgh (the "Company"), formerly Electronic Images, Inc., was
incorporated in Pennsylvania on December 24, 1987 and is engaged in full
service digital design and multi-media production specializing in digital
media communications. The Company, through June 30, 1997, was a majority owned
subsidiary of Unicorn Creative Services, Ltd. (the "Parent"). See Note 9.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
The Company derives its revenues from consulting service agreements.
Service revenues from fixed-price development agreements are recognized
under the completed-contract method whereby income is recognized only when the
contract is substantially completed and all costs and related revenues are
deferred in the balance sheet until that time. Provisions for agreement
adjustments and losses are recorded in the period such items are identified.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Significant Customers
During the year ended January 31, 1996, sales to two customers accounted for
56% and 22% of revenues. During the year ended January 31, 1997, sales to two
customers accounted for 58% and 15% of revenues. Approximately 85% and 71% of
accounts receivable at January 31, 1996 and 1997, respectively, was due from
one customer.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets,
generally three years. Leasehold improvements are amortized using the
straight-line method over the shorter of the estimated useful lives of the
assets or the remaining lease term, not to exceed five years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, notes and
accounts payable and accrued expenses, have carrying amounts which approximate
fair value due to the relatively short maturity of these instruments.
F-70
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year
and deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in the Company's financial statements or tax
returns. The measurement of current and deferred tax liabilities and assets
are based on provisions of the enacted tax law; the effects of future changes
in tax laws or rates are not anticipated. The measurement of deferred tax
assets is reduced, if necessary, by the amount of any tax benefits that, based
on available evidence, are not expected to be realized.
Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements in
accordance with provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation cost
is recognized based on the difference, if any, on the date of grant between
the fair value of the Company's stock and the amount an employee must pay to
acquire the stock.
Interim Financial Information
The accompanying balance sheet as of April 30, 1997 and the statements of
operations and of cash flows for the three-month periods ended April 30, 1996
and 1997, are unaudited. In the opinion of management, these statements have
been prepared on the same basis as the audited financial statements and
include all adjustments, consisting only of normal recurring adjustments,
necessary for the fair presentation of the results of the interim periods. The
financial data and other information disclosed in these notes to financial
statements related to these periods are unaudited. The results for the three
months ended April 30, 1997 are not necessarily indicative of the results to
be expected for the year ending January 31, 1998.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JANUARY 31,
--------------------- APRIL 30,
1996 1997 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Property and equipment:
Computers and equipment.................. $1,222,000 $2,016,000 $2,095,000
Furniture and fixtures................... 166,000 204,000 204,000
Leasehold improvements................... 150,000 151,000 156,000
---------- ---------- ----------
1,538,000 2,371,000 2,455,000
Less: accumulated depreciation........... 968,000 1,382,000 1,505,000
---------- ---------- ----------
$ 570,000 $ 989,000 $ 950,000
========== ========== ==========
Accrued expenses:
Payroll and related expenses............. $ -- $ 30,000 $ 8,000
Income taxes............................. 128,000 22,000 103,000
Payables under customer rebate program... 70,000 190,000 297,000
Other.................................... 6,000 2,000 2,000
---------- ---------- ----------
$ 204,000 $ 244,000 $ 410,000
========== ========== ==========
</TABLE>
F-71
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--RELATED PARTY TRANSACTIONS:
In July 1996, the Company issued 263 shares of Common Stock to an officer
upon exercise of stock options in exchange for two promissory notes. The first
note, for $60,000 is due on January 31, 1999 and accrues interest at the rate
of 5.88% per year. The second note, for $25,000 is due on June 30, 2001 and
accrues interest at the rate of 6.58% per year. The shares are subject to
repurchase by the Company, at the Company's then book value per share, if the
officer's employment is terminated.
The Company provides services to various customers who are members in the
parent consolidated group. Revenue from these companies totaled approximately
$1,263,000 and $1,441,000 for the years ended January 31, 1996 and 1997,
respectively. Revenue from these companies for the three months ended April
30, 1996 and 1997 totaled approximately $617,000 and $443,000, respectively.
The Parent provides services to its consolidated group and allocates
expenses incurred to its members. Expenses allocated to the Company during the
years ended January 31, 1996 and 1997 totaled $469,000 and $381,000,
respectively, and were included in general and administrative expenses.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended January 31, 1996 and 1997
and the three months ended April 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
JANUARY 31, ENDED APRIL 30,
----------------- -----------------
1996 1997 1996 1997
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal................................ $164,000 $ 81,000 $235,000 $ 87,000
State.................................. 54,000 26,000 45,000 17,000
-------- -------- -------- --------
218,000 107,000 280,000 104,000
-------- -------- -------- --------
Deferred:
Federal................................ -- 2,000 -- --
State.................................. -- 7,000 -- --
-------- -------- -------- --------
-- 9,000 -- --
-------- -------- -------- --------
Income Tax Provision..................... $218,000 $116,000 $280,000 $104,000
======== ======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
JANUARY 31, APRIL 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income taxes, net of federal bene-
fit...................................... 7% 7% 7% 7%
Nondeductible expense and other........... -- 2% -- --
----- ----- ------ ------
Effective income tax rate................. 41% 43% 41% 41%
===== ===== ====== ======
</TABLE>
F-72
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consists of the following as of January 31, 1996 and
1997 and April 30, 1997:
<TABLE>
<CAPTION>
JANUARY 31,
--------------- APRIL 30,
1996 1997 1997
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Depreciation and amortization.................. $35,000 $25,000 $25,000
Reserves not currently deductible.............. 16,000 17,000 17,000
------- ------- -------
Total deferred tax assets........................ $51,000 $42,000 $42,000
======= ======= =======
</TABLE>
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2001. The leases require payment of property taxes,
insurance, maintenance and utilities. The Company also has operating lease
agreements relating to certain equipment which expire at various dates. Rent
expense for the years ended January 31, 1996 and 1997 and the three month
period ended April 30, 1997 totaled $252,000, $192,000, and $41,000,
respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
JANUARY 31, LEASES
----------- ---------
<S> <C>
1998.............................................................. $145,000
1999.............................................................. 135,000
2000.............................................................. 124,000
2001.............................................................. 106,000
--------
Total minimum lease payments...................................... $510,000
========
</TABLE>
NOTE 6--NOTES PAYABLE
Effective February 1, 1996, the Company entered into a bank loan which bears
interest at the prime interest rate, plus 0.25% per annum. The bank's prime
interest rate was 8.25% at January 31, 1997. There was $357,000 and $334,000
outstanding under the loan, at January 31, 1997 and April 30, 1997. In May
1997, the bank loan was converted into a five year term loan bearing interest
at the bank's prime interest rate, plus 2.25% per annum. The bank loan was
obtained as part of a credit facility of the Parent's consolidated group and
is secured by property and equipment. The term loan requires principal
payments of $85,000 per year with the balance due in 2002. The term loan was
repaid in full in September 1997.
NOTE 7--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. During the year ended
January 31, 1997, the Company sold 263 shares of Common Stock to an employee
of the Company. See Note 3.
NOTE 8--STOCK OPTION PLAN:
In June 1996, the Company adopted the Electronic Images, Inc. Corporate
Officers Stock Purchase Plan (the "Plan"). The Plan provides for the granting
of non-qualified stock options to employees as determined by the Company's
Board of Directors.
F-73
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company made one grant of options under this Plan to a single employee
during the year ended January 31, 1997. The option was immediately exercised
as described in Note 3. There were no option grants under the Plan during the
three months ended April 30, 1997. Had compensation cost for the grant of
options been determined based on the fair value at the grant dates consistent
with the method prescribed by SFAS No. 122, the Company's net income would not
reflect a material change.
NOTE 9--SUBSEQUENT EVENTS:
On July 1, 1997, USWeb reached an agreement to acquire all of the Company's
outstanding shares of common stock, at which time the Company became a wholly
owned subsidiary of USWeb.
NOTE 10--RETIREMENT PLANS
The Company has elected to contribute $34,000 and $1,000 to an Employee
Stock Ownership Plan ("ESOP") for the years ended January 31, 1996 and 1997,
respectively. The plan was established by the Parent in 1984 and includes the
stock of the Parent.
During the year ended January 31, 1997, the Company established a defined
contribution 401(k) plan (the "Plan") for substantially all of its employees.
Under the Plan, employees may contribute up to 10% of their gross wages. The
Company will, at its discretion, match a percentage of the employee
contribution. For the year ended January 31, 1997 the Company elected to
contribute $30,000 to the Plan.
F-74
<PAGE>
[INSIDE BACK COVER]
[GRAPHIC TO COME]
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PRO-
SPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION
IS UNLAWFUL, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL. EXCEPT WHERE OTHERWISE
INDICATED, THIS PROSPECTUS SPEAKS AS OF THE EFFECTIVE DATE OF THE REGISTRATION
STATEMENT. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................................................... 3
Risk Factors........................................................... 7
Use of Proceeds........................................................ 16
Dividend Policy........................................................ 16
Capitalization......................................................... 17
Dilution............................................................... 18
Selected Consolidated Financial Data................................... 19
Pro Forma Consolidated Financial Information........................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 25
Business............................................................... 35
Management............................................................. 48
Certain Transactions................................................... 57
Principal Stockholders................................................. 59
Description of Capital Stock........................................... 61
Shares Eligible for Future Sale........................................ 64
Underwriting........................................................... 66
Legal Matters.......................................................... 67
Experts................................................................ 67
Additional Information................................................. 68
Index to Consolidated Financial Statements............................. F-1
</TABLE>
-----------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
===============================================================================
===============================================================================
SHARES
[USWEB LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON
FIRST ALBANY CORPORATION
, 1997
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in
connection with the sale of Common Stock being registered. All amounts are
estimates except the registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE
PAID
--------
<S> <C>
Registration Fee...................................................... $ 19,167
NASD Fee.............................................................. 6,825
Nasdaq National Market listing fee.................................... *
Printing and Engraving................................................ 200,000
Legal Fees and Expenses............................................... 350,000
Accounting Fees and Expenses.......................................... 450,000
Blue Sky Fees and Expenses............................................ 7,500
Transfer Agent Fees................................................... 10,000
Miscellaneous......................................................... *
--------
Total............................................................... $ *
========
</TABLE>
- ---------------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Reference is made to the Certificate of Incorporation of the Registrant to
be effective upon the completion of this offering, filed herewith as Exhibit
3.3; the Bylaws of the Registrant, filed herewith as Exhibit 3.4; Section 145
of the Delaware General Corporation Law; and the form of indemnification
agreement filed herewith as Exhibit 10.1 which, among other things, and
subject to certain conditions, authorize the Registrant to indemnify, or
indemnify by their terms, as the case may be, the directors and officers of
the Registrant against certain liabilities and expenses incurred by such
persons in connection with claims made by reason of their being such a
director or officer.
Section of the form of the Underwriting Agreement filed as Exhibit 1.1 to
this Registration Statement provides for indemnification by the Underwriters
and their controlling persons, on the one hand, and of the Registrant and its
controlling persons on the other hand, for certain liabilities arising under
the Securities Act of 1933, as amended (the "Act"), the Securities Exchange
Act of 1934, as amended or otherwise.
The Registrant intends to obtain directors and officers insurance providing
indemnification for certain of the Registrant's directors, officers,
affiliates, partners or employees for certain liabilities.
The indemnification provisions in the Bylaws, and the indemnification
agreements entered into between the Registrant and its directors and executive
officers, may be sufficiently broad to permit indemnification of the
Registrant's officers and directors for liabilities arising under the 1933
Act.
II-1
<PAGE>
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of Underwriting Agreement......................................... 1.1*
Certificate of Incorporation, as amended............................... 3.2*
Bylaws................................................................. 3.3*
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.......................... 10.1
</TABLE>
- ---------------------
* To be supplied by amendment.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since the Registrant's inception on December 6, 1995, the Registrant has
sold and issued the following securities (as adjusted to reflect the Company's
one-for-three reverse split of the Common Stock to be effected prior to the
closing of this offering):
1. In December, 1995, the Registrant issued and sold an aggregate of
5,000,000 shares of Common Stock to its founders pursuant to Restricted
Stock Purchase Agreements. Sales of the Common Stock were made in
reliance on the exemption from registration provided by Section 4(2) of
the Securities Act.
2. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted options to purchase an aggregate of 116,187 shares of
Common Stock to directors, employees and consultants pursuant to the
Registrant's 1996 Stock Option Plan in reliance on Rule 701 promulgated
under the Securities Act.
3. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted options to purchase an aggregate of 317,076 shares of
Common Stock to directors, employees and consultants pursuant to the
Registrant's 1996 Equity Compensation Plan in reliance on Rule 701
promulgated under the Securities Act.
4. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted options to purchase an aggregate of 6,238,920 shares
of Common Stock to directors, employees and consultants pursuant to the
Registrant's 1997 Acquisition Stock Option Plan in reliance on Rule 701
promulgated under the Securities Act.
5. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted warrants to purchase an aggregate of 171,917 shares
of Common Stock to Affiliates pursuant to the Registrant's Affiliate
Warrant Program in reliance on Rule 701 promulgated under the Securities
Act.
6. On February 20, 1996, the Registrant issued and sold 6,172,833 shares of
Series A Preferred Stock in a private placement to three investors for
aggregate consideration of $10,000,008 in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
7. On December 30, 1996, the Registrant issued and sold 3,103,333 shares of
Series B Preferred Stock in a private placement to one investor for
aggregate consideration of $6,250,000 in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
8. On May 2, May 28 and June 3, 1997, the Registrant issued and sold an
aggregate of 2,199,836 shares of Series C Preferred Stock and warrants
to purchase 439,967 shares of Series C Preferred Stock in a private
placement to 16 investors for aggregate consideration of $4,552,134 in
reliance on the exemption from registration provided by Section 4(2) of
the Securities Act.
9. During the period from February 9, 1996 through July 10, 1997, the
Registrant issued warrants to purchase an aggregate of 53,333 shares of
Series A Preferred Stock at an exercise price of $1.62 per share to 6
individuals in connection with a real estate lease agreement. The
warrants expire, if not
II-2
<PAGE>
earlier exercised, ten years from their date of issuance. Issuance of
the warrants to purchase Series A Preferred Stock was made in reliance
on the exemption from registration provided by Section 4(2) of the
Securities Act.
10. On July 19, 1996 the Registrant issued a warrant to purchase up to
18,055 shares of Common Stock at an exercise price of $0.90 per share
to an individual in connection with a consulting agreement. The warrant
expires, if not earlier exercised, on July 18, 2001. Issuance of the
warrant to purchase Common Stock was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
11. On December 4, 1996 the Registrant issued a warrant to purchase up to
33,333 shares of Common Stock at an exercise price of $0.375 per share
to an individual in connection with a consulting agreement. The warrant
expires, if not earlier exercised, on December 3, 2001. Issuance of the
warrant to purchase Common Stock was made in reliance on the exemption
from registration provided by Section 4(2) of the Securities Act.
12. On May 2, May 28 and June 3, 1997, the Registrant issued warrants to
purchase an aggregate of 704,549 shares of Series C Preferred Stock at
an exercise price of $7.50 per share to the investors who participated
in the Series C Preferred Stock private placement. The warrants expire,
if not earlier exercised, no later than May 2, May 28 and June 3, 2000,
respectively. Issuance of warrants to purchase Series C Preferred Stock
was made in reliance on Section 4(2) of the Securities Act.
13. On July 24, 1997, the Registrant issued and sold 464,838 shares of
Common Stock in a private placement to 1 investor in connection with
the acquisition of Fetch Interactive, Inc. This issuance of Common
Stock was made in reliance on Section 4(2) of the Securities Act.
14. On June 26, 1997, the Registrant issued and sold 119,774 shares of
Common Stock in a private placement to 25 investors in connection with
the acquisition of USWeb Cosmix, Inc. This issuance of Common Stock was
made in reliance on Section 4(2) of the Securities Act.
15. On August 19, 1997 the Registrant issued and sold 135,415 shares of
Common Stock in a private placement to 4 investors in connection with
the acquisition of Networkers Web Consulting Incorporated. This
issuance of Common Stock was made in reliance on Section 4(2) of the
Securities Act.
16. On August 22, 1997, the Registrant issued and sold 425,700 shares of
Common Stock in a private placement to 3 investors in connection with
the acquisition of NewLink Communications Corporation. This issuance of
Common Stock was made in reliance on Section 4(2) of the Securities
Act.
17. On September 2, 1997, the Registrant issued and sold 1,665,525 shares
of Common Stock in a private placement to 5 investors in connection
with the acquisition of Electronic Images, Inc. This issuance of Common
Stock was made in reliance on Section 4(2) of the Securities Act.
18. On September 4, 1997, the Registrant issued and sold 332,536 shares of
Common Stock in a private placement to 1 investor in connection with
the acquisition of MultiMedia Marketing and Design, Inc. This issuance
of Common Stock was made in reliance on Section 4(2) of the Securities
Act.
19. On September 30, 1997, the Registrant issued 222,222 shares of Common
Stock in a private placement to 1 accredited investor for aggregate
consideration of $2,000,000. This issuance of Common Stock was made in
reliance on the exemption from registration provided by Regulation D of
the Securities Act.
20. As of September 30, 1997, the Registrant has issued an aggregate of
317,076 shares of Common Stock pursuant to the exercise of options
issued under the 1996 Equity Compensation Plan.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement (draft dated ).
2.1 Agreement and Plan of Reorganization dated as of March 16, 1997 by and
among the Registrant, USWeb Acquisition Corporation 101 and XCom Corpo-
ration.
2.2 Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 103 and Fetch Inter-
active, Inc.
2.3 Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 106 and Newlink Com-
munications Corporation.
2.4 Agreement and Plan of Reorganization dated as of April 30, 1997 by and
among the Registrant, USWeb Acquisition Corporation 107 and
InterNetOffice, LLC.
2.5 Agreement and Plan of Reorganization dated as of March 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 102 and Infopreneurs
Inc.
2.6 Agreement and Plan of Reorganization dated as of August 28, 1997 by and
among the Registrant, USWeb Acquisition Corporation 108 and Electronic
Images, Inc.
3.1 Amended and Restated Articles of Incorporation of the Registrant.
3.2* Amended and Restated Certificate of Incorporation of the Registrant
(pre-offering).
3.3* Amended and Restated Certificate of Inforporation of the Registrant
(post-offering).
3.4* Bylaws of the Registrant (Utah).
3.5* Bylaws of the Registrant (Delaware).
4.1* Form of Registrant's Common Stock Certificate.
4.2 Amended and Restated Investors' Rights Agreement dated May 2, 1997 among
the Registrant and the other parties named therein.
4.3 Form of Registrant's Series A Preferred Stock Purchase Warrant.
4.4 Form of Registrant's Series C Preferred Stock Purchase Warrant.
4.5 Form of Registrant's Common Stock Purchase Warrant.
4.6 Form of Registrant's Signing Warrant.
4.7 Form of Registrant's AGR Warrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati regarding legality of the
securities being issued.
10.1 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.
10.2 1996 Stock Option Plan and related agreements.
10.3* 1996 Equity Compensation Plan and related agreements.
10.4 1997 Acquisition Stock Option Plan and related agreements.
10.5 1997 Employee Stock Purchase Plan.
10.6 Form of Restricted Stock Purchase Agreement between the Registrant and
certain executive officers.
10.7 Management Continuity Agreement between the Registrant and Joseph P.
Firmage.
10.8 Management Continuity Agreement between the Registrant and Tobin Corey.
10.9 Management Continuity Agreement between the Registrant and Sheldon
Laube.
10.10 Management Continuity Agreement between the Registrant and James J. Hef-
fernan.
10.11 Form of Affiliate Agreement.
11.1* Statement of computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (included in Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants (see page II-
8).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be supplied by amendment.
II-4
<PAGE>
(b) Financial Statement Schedules
None.
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions referenced in Item 14 of this Registration
Statement or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered
hereunder, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT ON FORM S-1 TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA
CLARA, STATE OF CALIFORNIA, ON THIS 30TH DAY OF SEPTEMBER, 1997.
USWEB CORPORATION
/s/ Joseph Firmage
By: _________________________________
JOSEPH FIRMAGE
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints, jointly and severally, Joseph Firmage, James
Heffernan and Sheldon Laube, and each one of them, his true and lawful
attorney-in-fact and agents, each with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration
Statement, and to sign any registration statement for the same offering
covered by this Registration Statement that is to be effective upon filing
pursuant to Rule 462(b) promulgated under the Securities Act of 1933, and all
post-effective amendments thereto, and to file the same, with all exhibits
thereto and all other documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every Act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
any of them, or his or their substitute or substitutes, may lawfully do or
cause to be done or by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Joseph Firmage Chairman of the September 30, 1997
- ------------------------------------- Board and Chief
JOSEPH FIRMAGE Executive Officer
(Principal
Executive Officer)
/s/ James Heffernan Executive Vice September 30, 1997
- ------------------------------------- President, Chief
JAMES HEFFERNAN Financial Officer,
Secretary and
Director (Principal
Financial and
Accounting Officer)
/s/ Jeffrey Ballowe Director September 30, 1997
- -------------------------------------
JEFFREY BALLOWE
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<S> <C> <C>
/s/ Robert Hoff Director September 30, 1997
- -------------------------------------
ROBERT HOFF
/s/ Gary Rieschel Director September 30, 1997
- -------------------------------------
GARY RIESCHEL
/s/ Barry Rubenstein Director September 30, 1997
- -------------------------------------
BARRY RUBENSTEIN
</TABLE>
II-7
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated September 30, 1997
relating to the financial statements of USWeb Corporation, September 18, 1997
relating to the financial statements of USWeb Atlanta, USWeb DC and
USWeb Pittsburgh, September 17, 1997 relating to the financial statements of
USWeb LA Metro and USWeb San Francisco, and September 12, 1997 relating to the
financial statements of USWeb Milwaukee, which appear in such Prospectus. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.
Price Waterhouse LLP
San Jose, California
September 30, 1997
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
1.1* Form of Underwriting Agreement (draft dated ).
2.1 Agreement and Plan of Reorganization dated as of March
16, 1997 by and among the Registrant, USWeb Acquisition
Corporation 101 and XCom Corporation.
2.2 Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 103 and Fetch Interactive, Inc.
2.3 Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 106 and Newlink Communications Corporation.
2.4 Agreement and Plan of Reorganization dated as of April
30, 1997 by and among the Registrant, USWeb Acquisition
Corporation 107 and InterNetOffice, LLC.
2.5 Agreement and Plan of Reorganization dated as of March
31, 1997 by and among the Registrant, USWeb Acquisition
Corporation 102 and Infopreneurs Inc.
2.6 Agreement and Plan of Reorganization dated as of August
28, 1997 by and among the Registrant, USWeb Acquisition
Corporation 108 and Electronic Images, Inc.
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
3.2* Amended and Restated Certificate of Incorporation of the
Registrant (pre-offering).
3.3* Amended and Restated Certificate of Incorporation of the
Registrant (post-offering).
3.4* Bylaws of the Registrant (Utah).
3.5* Bylaws of the Registrant (Delaware).
4.1* Form of Registrant's Common Stock Certificate.
4.2 Amended and Restated Investors' Rights Agreement dated
May 2, 1997 among the Registrant and the other parties
named therein.
4.3 Form of Registrant's Series A Preferred Stock Purchase
Warrant.
4.4 Form of Registrant's Series C Preferred Stock Purchase
Warrant.
4.5 Form of Registrant's Common Stock Purchase Warrant.
4.6 Form of Registrant's Signing Warrant.
4.7 Form of Registrant's AGR Warrant.
5.1 Opinion of Wilson Sonsini Goodrich & Rosati regarding le-
gality of the securities being issued.
10.1 Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive offi-
cers.
10.2 1996 Stock Option Plan and related agreements.
10.3* 1996 Equity Compensation Plan and related agreements.
10.4 1997 Acquisition Stock Option Plan and related agree-
ments.
10.5 1997 Employee Stock Purchase Plan.
10.6 Form of Restricted Stock Purchase Agreement between the
Registrant and certain executive officers.
10.7 Management Continuity Agreement between the Registrant
and Joseph P. Firmage.
10.8 Management Continuity Agreement between the Registrant
and Tobin Corey.
10.9 Management Continuity Agreement between the Registrant
and Sheldon Laube.
10.10 Management Continuity Agreement between the Registrant
and James J. Heffernan.
10.11 Form of Affiliate Agreement.
11.1* Statement of computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Wilson Sonsini Goodrich & Rosati (included in
Exhibit 5.1).
23.2 Consent of Price Waterhouse LLP, Independent Accountants
(see page II-8).
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- ---------------------
* To be supplied by amendment.
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 101
AND
XCOM CORPORATION
DATED AS OF MARCH 16, 1997
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<C> <S>
Exhibit A Principal Shareholders
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
</TABLE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - THE MERGER 2
1.1 The Merger. 2
1.2 Effective Time. 2
1.3 Effect of the Merger. 2
1.4 Certificate of Incorporation; Bylaws. 2
1.5 Directors and Officers. 3
1.6 Effect of Merger on the Capital Stock of the Constituent
Corporations. 3
1.7 Surrender of Certificates. 4
1.8 No Further Ownership Rights in Company Common Stock. 6
1.9 Lost, Stolen or Destroyed Certificates. 6
1.10 Purchase Price Adjustments. 6
1.11 Parent Common Stock. 8
1.12 Tax Consequences. 8
1.13 Taking of Necessary Action; Further Action. 8
</TABLE>
ix
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE PRINCIPAL SHAREHOLDERS 9
2.1 Organization of the Company. 9
2.2 Company Capital Structure. 9
2.3 Subsidiaries. 9
2.4 Authority. 10
2.5 No Conflict. 10
2.6 Consents. 10
2.7 Company Financial Statements. 11
2.8 No Undisclosed Liabilities. 11
2.9 No Changes. 11
2.10 Tax Matters. 13
2.11 Restrictions on Business Activities. 14
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment. 15
2.13 Intellectual Property. 15
2.14 Agreements, Contracts and Commitments. 18
2.15 Interested Party Transactions. 20
2.16 Governmental Authorization. 20
2.17 Litigation. 20
2.18 Accounts Receivable. 20
2.19 Minute Books. 21
2.20 Environmental Matters. 21
2.21 Brokers' and Finders' Fees; Third Party Expenses. 22
2.22 Employee Benefit Plans and Compensation. 22
2.23 Insurance. 25
2.24 Compliance with Laws. 25
2.25 Third Party Consents. 25
2.26 Warranties; Indemnities. 25
2.27 Complete Copies of Materials. 25
2.28 Representations Complete. 25
2.29 Business Plan. 25
</TABLE>
ii
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
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<S> <C>
2.30 Backlog Report. 25
2.31 Securities Law Compliance. 26
2.32 Principal Shareholder Investment Representations. 26
ARTICLE III 27
3.1 Organization, Standing and Power. 27
3.2 Authority; Consents. 27
3.3 Capital Structure. 27
3.4 Brokers' and Finders' Fees. 28
3.5 Similar Transactions. 28
3.6 No Changes. 28
ARTICLE IV 29
4.1 Conduct of Business of the Company. 29
4.2 No Solicitation. 31
ARTICLE V 31
5.1 Parent's Right of First Refusal. 31
5.2 Market Standoff Agreement. 33
5.3 Restriction on Competition. 33
5.4 Confidentiality. 34
5.5 Expenses. 34
5.6 Public Disclosure. 34
5.7 Post-Closing Employment of Company Employees. 35
5.8 Treatment of Affiliate Warrants. 36
5.9 Access to Information. 37
5.10 Public Disclosure. 37
5.11 Consents. 37
5.12 FIRPTA Compliance. 37
5.13 Best Efforts. 37
5.14 Notification of Certain Matters. 38
5.15 Tax Returns. N/A - reserved for Sub-S corporations 38
</TABLE>
iii
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TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C>
5.16 Additional Documents and Further Assurances. 38
5.17 Section 368 Compliance. 38
5.18 Parent Policies. 38
ARTICLE VI 38
6.1 Conditions to Obligations of Each Party to Effect the Merger. 38
6.2 Additional Conditions to Obligations of Company. 39
6.3 Additional Conditions to the Obligations of Parent and Sub. 39
ARTICLE VII 41
7.1 Survival of Representations and Warranties. 41
7.2 Escrow Arrangements; Setoff. 41
ARTICLE VIII 49
8.1 Termination. 49
8.2 Effect of Termination. 50
8.3 Amendment. 50
8.4 Extension; Waiver. 51
ARTICLE IX 51
9.1 Notices. 51
9.2 Interpretation. 52
9.3 Counterparts. 52
9.4 Entire Agreement; Assignment. 52
9.5 Severability. 52
9.6 Other Remedies. 52
9.7 Governing Law. 53
9.8 Rules of Construction. 53
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of March 16, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 101, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), XCom Corporation, a California
---
corporation (the "Company"), and the individuals listed on Exhibit A attached
-------
hereto (such individuals being hereinafter referred to collectively as the
"Principal Shareholders" and individually as a "Principal Shareholder").
---------------------- ---------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of the
Company with and into Sub (the "Merger") and, in furtherance thereof, have
approved the Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to
make certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Sub following
the Merger. Each party understands and agrees that any such employee or the Sub
shall have the right to terminate any such employment at any time.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations laws of the states of Delaware
("Delaware Law") and California (the "California Law"), the Company shall be
merged with and into the Sub, the separate corporate existence of the Company
shall cease and Sub shall continue as the surviving corporation and as a wholly
owned subsidiary of Parent. Sub as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
-------
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to in writing by Parent and
the Company. The date upon which the Closing actually occurs is herein referred
to as the "Closing Date." On the Closing Date, the parties hereto shall cause
------------
the Merger to be consummated by submitting for filing an Agreement and Plan of
Merger (or like instrument) with the Secretary of State of Delaware and the
Secretary of State of California (the "Merger Articles"), in accordance with the
---------------
relevant provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of California being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of Delaware Law and
California Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
2
<PAGE>
1.5 Directors and Officers. The director(s) of Sub immediately prior
----------------------
to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Stock; Purchase Price Adjustments. As of the
---------------------------------------------
Effective Time of the Merger, each share of the Company's Common Stock, no par
value (the "Company Common Stock"), that is issued and outstanding immediately
--------------------
prior to the Effective Time (other than any dissenting shares under applicable
state law) shall, by virtue of the Merger and without any action on the part of
Sub, the Company, or the Company's shareholders (the "Company Shareholders"), be
--------------------
canceled and extinguished and each Company Shareholder shall have (i) the right
to receive such Company Shareholder's pro rata portion (based on such Company
Shareholders' equity ownership in the Company as represented to Parent by the
Company) of that number of shares of the Parent's Common Stock, par value $.001
per share (the "Parent Common Stock") equal to $2,586,666 (the "Original
-------------------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
1.6(e) below) as of the Closing Date, subject to Section 7.2 hereof, plus the
contingent right to receive additional shares of Parent Common Stock as
provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
-------------------------
The Original Purchase Price and the Purchase Price Adjustment are hereinafter
collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. N/A
-------------
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
(e) Definitions.
------------
(i) Aggregate Common Number. The "Aggregate Common Number" shall mean
-----------------------
the aggregate number of shares of Company Common Stock outstanding immediately
prior to the Effective Time.
3
<PAGE>
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
--------------------
Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
---------------------------
equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
(iv) Exchange Ratio. The "Exchange Ratio" shall mean the quotient
--------------
obtained by dividing (i) (X) the Original Purchase Price divided by (Y) the Fair
Value Per Share as of the Effective Date by (ii) the Aggregate Common Number.
For illustrative purposes only, if the Original Purchase Price were $2,000,000,
the Fair Value Per Share were $2.50 and the Aggregate Common Number were
3,400,000, then the Exchange Ratio would be ($2,000,000 / $2.50) / 3,400,000 =
.23529, so each share of Company Common Stock would be exchanged for .23529
shares of Parent's Common Stock. If the facts were the same but the Aggregate
Common Number were 1,500, then the calculation would be ($2,000,000 / $2.50)
/1,500 = 533.33, so each share of Company Common Stock would be exchanged for
533.33 shares of Parent's Common Stock.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock;
provided that, on behalf of the Company Shareholders, Parent shall deposit the
Escrow Amount into an escrow account.
4
<PAGE>
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates (the "Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 1.6, shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the Company Shareholder shall be
entitled to receive in exchange therefor a certificate representing the number
of shares issuable to such Company Shareholder as part of the Original Purchase
Price (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund (as defined in Article VII) on such holder's behalf pursuant to
Article VII hereof) and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and
in accordance with the provisions of Article VII hereof, Parent shall cause to
be distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount. Such consideration shall be beneficially owned by the
holders on whose behalf such consideration were deposited in the Escrow Fund and
shall be available to compensate Parent as provided in Article VII. Until
surrendered to the Exchange Agent, each outstanding Certificate that, prior to
the Effective Time, represented shares of Company Common Stock will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence only the right to receive Merger Consideration
pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have
5
<PAGE>
established to the satisfaction of Sub or any agent designated by it that such
tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
capital stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company capital stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock as may be required pursuant to Section 1.6(a); provided, however,
that Sub may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent, Sub or the Exchange Agent with respect
to the Certificates alleged to have been lost, stolen or destroyed.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. At the close of business on the last
--------------------
business day of the sixth full month after the Closing Date (the "First
-----
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the operation of the Parent's affiliate valuation method (the "Valuation
---------
Method"). Parent shall then calculate the "First Adjustment to Purchase Price"
- ------
as follows:
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Method; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the First Adjustment Date a number of
shares calculated as follows:
6
<PAGE>
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSCD)
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on the last
-----------------------
business day of the twelfth full month after the Closing Date (the "Second
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
the Valuation Model, attached as Exhibit B. Parent shall then calculate the
"Second Adjustment to Purchase Price" as follows:
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Method; and
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the Second Adjustment Date a number of
shares calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
7
<PAGE>
(ii) If SAPP is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the Second Adjustment Date a
number of shares calculated as follows:
SSP = (-SAPP / FVPSCD)
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
----------
Act"), by reason of Section 4(2) of the Securities Act or Regulation D
- ---
thereunder. Such shares may not be transferred or resold thereafter except in
compliance with the terms of this Agreement and following registration under the
Securities Act or in reliance on an exemption from registration under the
Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally,
represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in Exhibit C attached hereto (referencing the appropriate
---------
section and paragraph numbers), as follows:
8
<PAGE>
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy
-----------------------
of its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Exhibit C lists the directors and officers of the Company. The operations now
being conducted by the Company have not been conducted under any other name.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of __________
shares of authorized Common Stock of which __________ shares are issued and
outstanding. There are no other classes or series of capital stock of the
Company of any kind outstanding or issuable. The Company Common Stock is held
by the persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company Common Stock are duly authorized,
- ---------
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. As a result of the Merger, Parent will be the record and sole
beneficial owner of all outstanding capital stock of the Company and rights to
acquire or receive Company Capital Stock.
2.3 Subsidiaries. The Company does not have any subsidiaries or
------------
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. The Company
has never had any subsidiaries or affiliated companies and has never otherwise
owned shares in the capital of or any interest in or control, directly or
indirectly of, any other corporation, partnership association, joint venture or
other business entity.
9
<PAGE>
2.4 Authority. Each of the Company and the Principal Shareholders has
---------
all requisite corporate power and authority to enter into this Agreement to
which it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company and the Principal
Shareholders, and no further action is required on their part to authorize the
Agreement and the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by the Company and the Principal
Shareholders and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitutes the valid and binding obligation
of the Company and the Principal Shareholders, enforceable in accordance with
its terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
2.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Incorporation and Bylaws the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its properties or assets is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of,
--------
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of the State of California.
10
<PAGE>
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of December 31, 1996 and the related audited statements
of income and cash flow for year then ended (the "Audited Financials") and the
------------------
Company's unaudited balance sheet of February 28, 1997, and the related
unaudited statements of income and cash flow for the Six (6) months then ended
(the "Unaudited Financials"). The Audited Financials and the Unaudited
--------------------
Financials are correct in all material respects and have been prepared in
accordance with United States generally accepted accounting principles
("USGAAP") applied on a basis consistent throughout the periods indicated and
------
consistent with each other. The Audited and Unaudited Financials present fairly
in all material respects the financial condition, operating results and cash
flows of the Company as of the dates and during the periods indicated therein,
subject in the case of the Unaudited Financials, to normal year-end adjustments,
which will not be material in amount or significance. The Company's audited
Balance Sheet as of December 31, 1996 shall be referred to as the "Balance
-------
Sheet".
- -----
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, none
-------------------------- ---------
of the Company has any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet, or (ii) has not
arisen in the ordinary course of business consistent with past practices since
December 31, 1996.
2.9 No Changes. Except as set forth in Exhibit C, since December 31,
---------- ---------
1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
11
<PAGE>
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification the terms of any Company
-----------------
Agreement which (i) involves the payment of greater than $25,000 per annum or
which extends for more than one year, (ii) involves any payment or obligation to
any affiliate of the Company other than in the ordinary course of business as
conducted on that date and consistent with past practices, or (iii) involves the
sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
12
<PAGE>
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company or;
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and timely
filed or made a timely request for extension for all required federal, state,
local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
-------
Company [or Subsidiaries, as the case may be], or its operations and such
Returns are true and correct and have been completed in accordance with
applicable law.
(ii) The Company as of the Exchange Date (A) will have paid or
accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any Tax
nor is there any Tax deficiency outstanding, assessed or proposed against the
Company, nor has the Company executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any Tax.
13
<PAGE>
(iv) No audit or other examination of any Return of the Company, is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state, local
and foreign Taxes which have not been accrued or reserved against in accordance
with USGAAP on the Balance Sheet, whether asserted or unasserted, contingent or
otherwise.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns filed for all years as to which any applicable statute of limitations
has not expired.
(vii) There are no Liens of any sort on the assets of the Company
the relating to or attributable to Taxes other than Liens for taxes not yet due
and payable.
(viii) The Company Shareholders have no knowledge of any basis for
the assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on any material assets of the Company.
(ix) As of the Closing, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing, indemnification or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xi) The Company uses the accrual method of accounting for income
tax purposes and its tax basis in its assets for purposes of determining its
future amortization, depreciation and other federal income tax deductions is
accurately reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or otherwise binding
upon the Company which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. The
Company has not entered into any agreement under which the Company is restricted
from providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
14
<PAGE>
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Company
Financials or in Exhibit C and except for liens for taxes not yet due and
---------
payable and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
customers of the Company's [and the Subsidiaries'] current and former customers
(the "Customer Information"). No third party possesses any claims or rights
--------------------
with respect to use of the Customer Information.
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks;
15
<PAGE>
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded, and all documentation related
to any of the foregoing throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of Company's United States and foreign: (i)
---------
patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreement, to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholders, all
- -
other parties to the contracts, licenses and agreements listed in Exhibit C are,
---------
in compliance with, and have not breached any term of, the contracts, licenses
and agreements. Following the Closing Date, Sub will be permitted to exercise
all of the Company's [and the Subsidiaries'] rights under the contracts,
licenses and agreements listed in Exhibit C without the payment of any
---------
additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
16
<PAGE>
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any lien or encumbrance; and (ii) the Company owns, or has
- -
the right, pursuant to a valid Contract to use or operate under, all other
Intellectual Property of the Company.
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity),
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company under development by the Company and the performance of
all services provided or contemplated to be provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between the
---------
Company and any other person wherein or whereby the Company has agreed to, or
assumed, any obligation or duty to indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement by the
Company or such other Person of the Intellectual Property rights of any other
person.
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement, or performance
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company and
---------
the Principal Shareholders, no person is infringing or misappropriating any of
the Intellectual Property of Company.
17
<PAGE>
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material, a defamatory statement or material, or
violates any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or is
---------
not bound by:
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
18
<PAGE>
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
---------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
or
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company has not breached, violated or defaulted under, or received
notice that it has breached, violated or defaulted under, any of the terms or
conditions of any agreement, contract, license or commitment to which it is a
party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated to
- ---------
the Company pursuant thereto. The Company has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
19
<PAGE>
2.15 Interested Party Transactions. No officer, director or Principal
-----------------------------
Shareholder of the Company (nor any ancestor, sibling, descendant or spouse of
any of such persons, or any trust, partnership or corporation in which any of
such persons has or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or sold, or furnishes
or sells, services or products that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that purchases from or
sells or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any Contract; provided, that ownership of no more than one percent
(1%) of the outstanding voting stock of a publicly traded corporation shall not
be deemed an "interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each
-------------------------- ---------
consent, license, permit, grant or other authorization issued to the Company by
a governmental entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principals Shareholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Shareholders, is there any reasonable basis therefor) by or
before any governmental entity. No governmental entity has at any time
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of its products or services in the present manner or style thereof.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of March 13, 1997, ("Accounts Receivable") along
-------------------
with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company [and its Subsidiaries]
arose in the ordinary course of business, are carried at values determined in
accordance with USGAAP consistently applied and are collectible except to the
extent of reserves therefor set forth in the Balance Sheet. No person has any
Lien on any of such Accounts Receivable and no request or agreement for
deduction or discount has been made with respect to any of such Accounts
Receivable.
20
<PAGE>
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or, to the Company's or Principal
Shareholders' knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has either the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
21
<PAGE>
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any "Employee"
(as defined below), and pursuant to which the Company has or may have any
material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee;
(b) Schedule. Exhibit C contains an accurate and complete list of
--------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust; (iv)
the most recent summary plan description together with the most recent summary
of material modifications, if any, required under
22
<PAGE>
ERISA with respect to each Company Employee Plan; (v) all IRS determination
letters and rulings relating to Company Employee Plans and copies of all
applications and correspondence to or from the IRS or the Department of Labor
("DOL") with respect to any Company Employee Plan; (vi) if the Employee Plan is
funded, the most recent annual and periodic accounting of Employee Plan assets;
and (vii) all communications material to any Employee or Employees relating to
any Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company have performed all
------------------------
obligations required to be performed by them under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iii) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (iv) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (v) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C,
------------------------------ ---------
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
23
<PAGE>
(h) Continuing Liabilities. No Employee Plan provides, or has any
----------------------
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any reason,
except as may be required by statute, and the Company has not represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(i) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety, discrimination, or
harassment matters involving any Employee, including, without limitation,
charges of unfair labor practices, discrimination, or harassment complaints,
which, if adversely determined, would, individually or in the aggregate, result
in liability to the Company, Parent or Sub. The Company has not engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, Parent or Sub. The Company
is not presently, or has in the past, been a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees and
no collective bargaining agreement is being negotiated by the Company.
24
<PAGE>
2.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company are otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholders have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, are not in
--------------------
violation of, and have not received any notices of violation with respect to,
any foreign, federal, state or local statute, law or regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
---------
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Representations Complete. None of the representations or guarantees
------------------------
made by the Company or the Principal Shareholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
- -
Company or the Principal Shareholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company
Shareholders in connection with soliciting their consent to this Agreement and
the Merger, contains or will contain at the Closing, any untrue statement of a
material fact, or omits or will omit at the Closing to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
2.29 Business Plan. The Company has provided to Parent a current,
-------------
accurate and detailed business plan for the Company's planned operations during
the twelve months following the Closing Date which includes, without limitation,
a description of the Company's capital requirements, staffing needs, and a pro
forma income statement. The business plan is attached to Exhibit C hereto.
---------
2.30 Backlog Report. The Company has provided to Parent a detailed and
---------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
25
<PAGE>
2.31 Securities Law Compliance. The Company will make no distribution
-------------------------
of any security issued by Parent unless such distribution is in compliance with
applicable state and federal securities laws.
2.32 Principal Shareholder Investment Representations. Each of the
------------------------------------------------
Principal Shareholders represents and warrants to the Parent as follows:
(a) Experience. The Principal Shareholder is able to assess the
----------
technology, markets, management and strategy of the Parent and to fend for
itself in transactions such as the one contemplated by this Agreement, has such
knowledge and experience in financial and business matters that the Principal
Shareholder is capable of evaluating the merits and risks inherent in holding
stock of the Parent, and has the ability to bear the economic risks of the
investment.
(b) Investment. The Principal Shareholder accepts the shares of the
----------
Parent Common Stock as investment for the Principal Shareholder's own account
and not with the view to, or for resale in connection with, any distribution
thereof. The Principal Shareholder understands that the Parent Common Stock has
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
The Principal Shareholder further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Parent Common
Stock. The Principal Shareholder understands and acknowledges that the
provision of Parent Common Stock pursuant to this Agreement will not be
registered under the Securities Act on the ground that the issuance of
securities hereunder is exempt from the registration requirements of the
Securities Act.
(c) Rule 144. The Principal Shareholder acknowledges that the Parent
--------
Common Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
Principal Shareholder is aware of the provisions of Rule 144 promulgated under
the Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions. The Principal
Shareholder covenants that, in the absence of an effective registration
statement covering the stock in question, the Principal Shareholder will sell,
transfer, or otherwise dispose of the Parent Common Stock only in a manner
consistent with the Principal Shareholder's representations and covenants set
forth herein. In connection therewith, the Principal Shareholder acknowledges
that the Parent will make a notation on its stock books regarding the
restrictions on transfers set forth in this Article and will transfer securities
on the books of the Parent only to the extent not inconsistent therewith.
(d) No Public Market. The Principal Shareholder understands that no
----------------
public market now exists for any of the securities issued by the Parent, and
that no public market may ever exist for such securities.
26
<PAGE>
(e) Access to Data. The Principal Shareholder has received and
--------------
reviewed information about the Parent and has had an opportunity to review and
discuss the Parent's business, management and financial affairs with its
management. The Principal Shareholder understands that such discussions, as
well as any written information issued by the Parent, were intended to describe
the aspects of the Parent's business and prospects which the Parent believes to
be material, but were not necessarily a thorough or exhaustive description.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub.
This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the valid and binding obligations of Parent and Sub, enforceable in
accordance with its terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement by Parent and Sub does not, and, as
of the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Incorporation or Bylaws of Parent or Sub or (ii) any agreement or instrument,
permit, judgment, statute, law, rule or regulation applicable to Parent or Sub.
No consent, waiver, approval, or registration, declaration or filing with, any
Governmental Entity or any third party is required by or with respect to any of
the Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 29,767,708 shares were issued and
outstanding as of December 31, 1996, and 27,988,501 shares of Preferred Stock,
$.001 par value, of which 18,518,500 shares
27
<PAGE>
are designated Series A Preferred Stock, all of which are issued and
outstanding, and 9,310,001 shares are designated Series B Preferred Stock, all
of which are issued and outstanding. All such shares have been duly authorized,
and all such issued and outstanding shares have been validly issued, are fully
paid and nonassessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof. Parent has
also reserved (i) 3,900,000 shares of Common Stock for issuance to employees and
consultants pursuant to Parent's 1996 Stock Option Plan, (ii) 160,000 shares of
Series A Preferred Stock for issuance upon the exercise of outstanding warrants
to purchase Series A Preferred Stock (the "Warrant Stock"), (iii) 160,000 shares
-------------
of Common Stock for issuance upon conversion of the Warrant Stock and (iv)
1,000,000 shares of Common Stock for issuance upon the exercise of outstanding
warrants to purchase Common Stock. In February, 1997, the Board of Directors of
the Company approved (i) increasing the authorized shares of Common Stock to
100,000,000 shares, (ii) increasing the number of authorized shares of Preferred
Stock to 37,764,153 shares, in preparation for a sale of Series C Preferred
Stock, and (iii) adopting the Company's 1997 Acquisition Stock Option Plan,
reserving 10,000,000 shares of Common Stock thereunder; all of these actions are
currently pending. There are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will
--------------------------
it incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due to
the Sellers upon such recalculation shall be issued promptly to the Company
Shareholders.
3.6 No Changes. Except as otherwise disclosed in this Agreement, there
----------
have been no material adverse changes to the Parent's financial condition or
operating information from the information contained in the Franchise Offering
Circular dated effective December 23, 1996, and the Confidential Offering
Memorandum dated February 1997, relating to Parent's $18,000,000 Series C
Preferred Stock Offering.
28
<PAGE>
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees (except to the extent
that Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
---------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or
29
<PAGE>
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement, except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free reorganization
hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements (or the
notes thereto);
30
<PAGE>
(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (s) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
date of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or either Company Shareholder receives prior to the Effective Time or the
termination of this Agreement any offer or proposal relating to any of the
above, the Company or the Company Shareholder, as applicable shall immediately
notify Parent thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
(including transfer by gift or
31
<PAGE>
operation of law), or any Shares held by a transferee (either being sometimes
referred to herein as the "Holder") may be sold, the Parent or its assignee(s)
shall have a right of first refusal to purchase such Shares on the terms and
conditions set forth in this Section (the "Right of First Refusal").
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
--------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash consideration with such other cash or
non-cash consideration as shall be determined by the Board of Directors of the
Parent in good faith.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Parent, and the Parent or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the
32
<PAGE>
benefit of the Holder's immediate family shall be exempt from the provisions of
this Section. "Immediate Family" as used herein shall mean spouse, lineal
descendant or antecedent, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
5.2 Market Standoff Agreement. Each Company Shareholder hereby agrees
--------------------------
that if so requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any Shares of the Company
under the Securities Act, such Company Shareholder shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of the Company during the
180-day period following the date of the final Prospectus contained in a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the general public in
an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
---------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, no Principal Shareholder shall:
(i) engage in, including as an employee, consultant or
otherwise, or own any interest (except as a passive investor of less than five
percent (5%) of total debt and equity) in any business or other activity that
would compete with the Parent's; or
(ii) divert or attempt to divert any existing or prospective
business or customers of the Parent (including any affiliates of the Parent) to
any other person or entity, by direct or indirect inducement or otherwise, or do
or perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with the Parent or its affiliates; or
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
---------------------
33
<PAGE>
(i) This Section shall apply in the SMSA where the Company is
located.
(ii) In the event that any other provision of this Section 5.3
or the application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall
use their best efforts to replace the provision that is contrary to law
with a legal one approximating to the extent possible the original intent
of the parties.
(iii) In the event that a Principal Shareholder, who also is a
New Employee, is terminated from employment by Parent without cause at any time
within three (3) years of the Closing Date, then the term of the restrictions
imposed by this Section 5.3 shall be reduced to six (6) months and that
terminated Principal Shareholder/New Employee shall receive severance benefits
from Parent equal to six (6) months salary and employee benefits.
5.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (e) which is disclosed in the
course of any litigation between any of the parties hereto; it being understood
that the parties may disclose relevant information and knowledge to their
respective employees and agents on a need to know basis, provided that the
parties cause such employees and agents to treat such information and knowledge
confidentially.
5.5 Expenses. Whether or not the Acquisition is consummated, all fees
--------
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any
-----------------
applicable rule of a stock exchange or quotation system upon which a parties'
securities are listed, prior to the Closing Date, no disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by the Company or the Principal Shareholders unless approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholders' obligation to
comply with applicable securities laws.
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<PAGE>
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of the
Closing Date, effective as of close of business on the Closing Date. Parent
will hire on the Closing Date, effective as of the close of business on the
Closing Date, on an "at will" basis and subject to Parent's terms, conditions
and policies of employment, if any, each of those persons who are employed by
Company and are terminated by Company on the Closing Date pursuant to the
foregoing sentence. Nothing contained in this Section is intended or shall be
deemed to (a) require Parent to employ such persons for any fixed or pre-
determined time after the Closing, or (b) confer upon any employee of Company,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section are intended to set
forth an agreement among Parent and Company, and are not intended to benefit any
persons not party to this Agreement, including such employees. Parent and
Company hereby agree to adopt the alternate procedure of Rev. Proc. 96-60 for
purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
- ---------
Employees incentive stock options to purchase Parent Common Stock in an
aggregate number equal to the number of shares paid as the Original Purchase
Price. Such incentive stock options shall be issued to the New Employees, and
in the amounts, requested by the Company in writing at the Closing. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option on the Closing Date as determined in good faith and
authorized by the Board of Directors of the Parent. Such options shall not be
exercisable at the date of grant, but shall become exercisable as to one-thirty-
sixth (1/36) of the shares subject to such option each month after the effective
date of this Agreement, provided, however, that no option shall become
exercisable with respect to any shares at any time following the date that the
New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee will be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New Employee will make any required
withholding payment to the Parent. New Employee also acknowledges that there
may be state or local tax due upon exercise of the option, and that any such tax
is the obligation of the New Employee and not the Parent. The terms of the
options as described in this paragraph are subject to the definitive form of
option agreement attached hereto as Exhibit D.
---------
35
<PAGE>
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the options described in Section 5.7(b) above. Such
bonus payment shall be paid in Common Stock and shall be, as to each New
Employee, for such number of shares of Parent Common Stock as shall be equal, on
the date paid, and in the good faith judgment of the Parent's Board of
Directors, to the aggregate exercise price of the exercisable portion of the
option granted to the New Employee described in the foregoing paragraph. New
Employee acknowledges that there may be federal, state or local tax due upon
receipt of the bonus, that Parent may withhold any applicable taxes from New
Employee's regular pay or, if insufficient, that New Employee will make any
required withholding payment to Parent, and that any such tax is the obligation
of the New Employee and not the Parent.
(d) In addition to the stock option (the "Original Option") and stock
bonus grants described in subsections (b) and (c) of this Section, in the event
that any additional shares of Parent's Common Stock are issued pursuant to the
Purchase Price Adjustment provisions of Section 1.10, an additional option, in
form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
Option"), and an additional stock bonus commitment (the "Additional Stock
Bonus") proportionate to the Additional Option, in form and substance
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee of Parent or Sub who
received an Original Option. The number of shares subject to any such
Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to all Original Options granted. For each recipient,
the number of shares granted in the Additional Stock Bonus shall be
proportionate to the Additional Option. Any such Additional Options and
Additional Stock Bonuses shall be granted at the next regularly scheduled
meeting of the Parent's board of directors following the date of any Purchase
Price Adjustment pursuant to Section 1.10.
5.8 Treatment of Affiliate Warrants. To the extent that any affiliate
-------------------------------
of the Company has received or has the right to receive any warrants under
Parent's Affiliate Warrant Program, the warrants received or to be received
thereunder shall remain in full force and effect and, to the extent required to
make calculations of shares issuable under such warrants, Parent shall estimate
in good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
36
<PAGE>
5.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.9 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.10 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld.
5.11 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.12 FIRPTA Compliance. On the Closing Date, the Company shall deliver
-----------------
to Parent a properly executed statement in a form reasonably acceptable to
Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.13 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
37
<PAGE>
5.14 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.14 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.15 Tax Returns. N/A - reserved for Sub-S corporations
-----------
5.16 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.17 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
5.18 Parent Policies. Sellers acknowledge that Parent has implemented
---------------
policies regarding the operation of subsidiary entities such as the Company will
be following the Merger. Sellers acknowledge and agree that such policies, or
any such amended or replacement policies that are reasonably similar in scope,
nature or effect, are anticipated to be in place following the Merger, and
Sellers hereby indicate their intention to act in substantial compliance with
all such policies. Such policies shall not provide for Parent overhead
allocations from Parent to Company or Sub, unless otherwise agreed in advance by
the parties.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted,
38
<PAGE>
entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
------------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and Sub
in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
39
<PAGE>
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and
the Principal Shareholders in this Agreement are true and correct in all
material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit E.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1996.
(g) Company Shareholder Approval. Each of the Company Shareholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Shareholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
40
<PAGE>
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholders' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Section 2.10 hereof or relating to environmental laws or matters
set forth in Section 2.20 hereof, shall survive until ninety (90) days following
the expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax or environmental laws or
matters. All of the Parent's and Sub's representations and warranties contained
herein or in any instrument delivered pursuant to this Agreement shall terminate
at the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
forth herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Company Shareholder shall be the pro rata amount calculated pursuant to
Section 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, seek indemnification for Losses
directly from the Principal Shareholders, but only after first proceeding
against the Escrow Fund so long as it exists and is not subject to other claims.
Nothing herein shall limit the liability of the Parent, the Company or the
Principal Shareholders for any breach of any representation, warranty or
covenant if the Merger does not close. Parent may not receive any shares from
the Escrow Fund (other than as a Purchase Price Adjustment) unless Officer's
Certificates (as defined in subsection (d) below) identifying losses, the
aggregate of which exceed $25,000, have been delivered to the Shareholder
Representative (as defined below) and the Escrow Agent as provided in paragraph
(d) below. The Company Shareholders shall not have any right of contribution
from the Company with respect to any Loss claimed by Parent or Sub after the
Effective Time.
41
<PAGE>
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
-------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period. As soon as all such
claims have been resolved, the Escrow Agent shall deliver to the Company
Shareholders the remaining portion of the Escrow Fund not required to satisfy
such claims. Deliveries of Escrow Amounts to the Company Shareholders pursuant
to this Section 7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which
----------
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
42
<PAGE>
(d) Claims Upon Escrow Fund.
-----------------------
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of Parent
(an "Officer's Certificate"): (A) stating that Parent has paid or accrued
---------------------
Losses, and (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid or accrued,
or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 7.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, cash or
shares of Parent Common Stock (at the election of Parent) held in the Escrow
Fund in an amount equal to such Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Section 7.2(d) hereof, provided that no such payment or delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Shareholders out of the Escrow Fund pursuant to this Section
7.2, Parent shall deliver to the Shareholder Representative an Officer's
Certificate: (A) stating that Parent has paid or accrued Losses and (B)
specifying in reasonable detail the individual items of Losses included in the
amount so stated, the date each such item was paid or accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(g) Actions Against Company Shareholders. In the event that Parent
------------------------------------
has elected to pursue indemnity directly from the Principal Shareholders, the
Principal Shareholders shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, wire transfer to Parent the amount of
such Loss, unless the Company or the Principal Shareholders, as the case may be,
contest such claim by following the procedures set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
twenty business day period ending three days prior to the date of the Officer's
Certificate stating the
43
<PAGE>
claim with respect to which such shares are delivered, and (ii) if the Parents'
Common Stock is not so publicly traded, the fair market value per share as
determined by the Parent's board of directors in good faith on the date closest
to the date of the Officer's Certificate.
(i) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall object in writing
to any claim or claims made in any Officer's Certificate within thirty (30) days
after delivery of such Officer's Certificate, the Shareholder Representative and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Shareholder Representative
and Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If any claim against the Escrow Fund was
sought, such memorandum shall be furnished to the Escrow Agent and the Escrow
Agent shall be entitled to rely on any such memorandum and make payment out of
the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith negotiation
(or in any event after 60 days from the date of the Officer's Certificate),
either Parent or the Shareholder Representative may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by three arbitrators.
Parent and the Shareholder Representative shall each select one arbitrator, and
the two arbitrators so selected shall select a third arbitrator. The
arbitrators shall set a limited time period and establish procedures designed to
reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys' fees and
costs, to the same extent as a court of law or equity, should the arbitrators
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of a majority of the three arbitrators as to the validity and amount of
any claim in such Officer's Certificate shall be binding and conclusive upon the
parties to this Agreement. Notwithstanding anything in Section 7.2(e) hereof,
the Escrow Agent shall be entitled to act in accordance with such decision and
make or withhold payments out of the Escrow Fund in accordance therewith. Such
decision shall be written and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment, decree or order awarded
by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
44
<PAGE>
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent believes may result in Losses, Parent shall notify the
Shareholder Representative of such claim, and the Shareholder Representative
shall be entitled, at the Company Shareholders' expense, to participate in any
defense of such claim. Parent shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Shareholder Representative, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim pursuant to this
Section 7.2. In the event that the Shareholder Representative has consented to
any such settlement, the Company Shareholders shall have no standing to object
under any provision of this Article 7.2 to the amount of any claim by Parent
against the Escrow Fund with respect to such settlement.
(k) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, John B. Witchel shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
--------------------------
each Company Shareholder, for and on behalf of shareholders of the Company, to
give and receive notices and communications, to authorize delivery to Parent of
payments from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the shareholders
of the Company from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Shareholder Representative may not
be removed unless a majority-in-interest of the Company Shareholders agree to
such removal and to the identity of the substituted agent. No bond shall be
required of the Shareholder Representative, and the Shareholder Representative
shall not receive compensation for services as such. Notices or communications
to or from the Shareholder Representative shall constitute notice to or from
each of the Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders shall
severally indemnify the Shareholder Representative and hold him or her harmless
against any loss, liability or expense incurred without negligence or bad faith
on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholders
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
45
<PAGE>
(l) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(m) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer of
Parent and the Shareholder Representative, and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or parties. The
Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow
Agent while acting in good faith and in the exercise of reasonable judgment, and
any act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow
46
<PAGE>
Agent be liable or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In addition, the Escrow
Agent may consult with the legal counsel in connection with Escrow Agent's
duties under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by such Escrow Agent in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and the Escrow Amount and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite what
may be set forth elsewhere in this Agreement. In such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action
of interpleader, in arbitration or otherwise, as the circumstances may require,
requiring the Parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and shares of Parent Common Stock held in escrow, except all
cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties to this Agreement; provided,
however, that no such resignation shall become effective until the appointment
of a successor escrow agent which shall be accomplished as follows: the parties
shall use their best efforts to agree on a successor escrow agent within thirty
(30) days after receiving such notice. If Parent and the Shareholder
Representative fail to agree upon a successor escrow agent within such time, the
Escrow Agent shall have the right to appoint a successor escrow agent authorized
to do business in the state of California. The successor escrow agent shall
execute and deliver an instrument accepting such appointment and it shall,
without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent. Thereafter, the Escrow Agent shall be discharged from any further
duties and liability under this Agreement.
47
<PAGE>
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
7.3 Indemnity.
---------
(a) The Principal Shareholders hereby agree to indemnify and hold
Parent and its subsidiaries, directors, officers and agents harmless against and
in respect of any loss, cost, expense, claim, liability, deficiency, judgment or
damage (hereinafter, individually, a "Loss"; and collectively, "Losses")
incurred by Parent, its subsidiaries, officers, directors and agents (i) as a
result of any inaccuracy in or breach of a representation or warranty of the
Company or the Principal Shareholders contained in this Agreement or any failure
by the Company or any Principal Shareholder to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of the
Company and the Principal Shareholders to perform their obligations hereunder.
(b) Parent hereby agrees to indemnify and hold the Company and its
subsidiaries, directors, officers and agents harmless against and in respect of
any loss, cost, expense, claim, liability, deficiency, judgment or damage
(hereinafter, individually, a "Loss"; and collectively, "Losses") incurred by
the Company, its subsidiaries, officers, directors and agents (i) as a result of
any inaccuracy in or breach of a representation or warranty of Parent contained
in this Agreement or any failure by Parent to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of Parent
to perform its obligations hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the third
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date; provided, however, that the representations and warranties with respect to
Taxes (Section 2.10) and environmental laws (Section 2.20) shall survive until
the expiration of the applicable statute of limitations, if any.
(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (a "Notice") to
the Parent, or the Surviving Corporation and the Shareholder Representative, as
the case may be, briefly stating the nature and basis of such claim. In the
case of Losses arising by reason of any third-party claim, the Notice shall be
given within 25 days of the filing or other
48
<PAGE>
written assertion of any such claim against Parent, but the failure of Parent to
give the Notice within such time period shall not relieve the Company and the
Principal Shareholders of any liability that the Company and the Principal
Shareholders may have to Parent except to the extent that the Company and the
Principal Shareholders are actually prejudiced thereby; provided, however, that
any such notice shall be given no later than the date of the expiration of the
applicable indemnification obligation of the Company and the Principal
Shareholders as set forth in Section 7.3(c) above. The indemnified party shall
provide the other party on request all information and documentation reasonably
necessary to support and verify any Losses which the indemnified party believes
give rise to a claim for indemnification hereunder and shall give reasonable
access to all books, records and personnel in the possession or under the
control of that party which would have bearing on such claim.
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholders. Failing
such agreement, the arbitration shall be conducted by three independent
arbitrators, none of whom shall have any competitive interest with Parent or the
Company and the Principal Shareholders. Parent shall choose one such
arbitrator, the Company and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent and the Company
and the Principal Shareholders. Each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration except that the arbitrator can
compel one party to pay all or a portion of the other party's costs and
expenses.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by April 15, 1997; (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by
49
<PAGE>
any Governmental Entity, which would: (i) prohibit Parent's or Sub's ownership
or operation of any portion of the business of the Company or (ii) compel Parent
or the Company to dispose of or hold separate all or a portion of the business
or assets of the Sub or Parent as a result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are in
material breach of their respective obligations under this Agreement and there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company, or their respective officers, directors or shareholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
50
<PAGE>
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company or to a Principal Shareholder to:
John B. Witchel
4 Carl Street
San Francisco, CA 94117
Attention:
Telecopy No.: 415/284.1235
51
<PAGE>
with a copy to:
Joshua M. Glantz
243 East 78th Street - #12
New York, NY 10021
Attention:
Telecopy No.: 212/393.9431
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
52
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
COMPANY USWEB CORPORATION
By: By:
President
Title:
ESCROW AGENT USWEB ACQUISITION CORPORATION 101
By: By:
Title: Title:
PRINCIPAL SHAREHOLDERS
_______________________________________ _______________________________________
John B. Witchel, Principal Shareholder Roger D. McAulay, Principal Shareholder
_______________________________________
Joshua M. Glantz, Principal Shareholder
53
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares*
John Brown Witchel 500,001
Roger Douglas McAulay 344,889
Joshua Michael Glantz 86,222
- ----------------
*On an as fully converted to Common Stock, fully diluted basis.
54
<PAGE>
EXHIBIT B
Valuation Model
55
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
56
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
57
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
58
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 103
AND
FETCH INTERACTIVE, INC.
DATED AS OF MARCH 31, 1997
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- -----------------------------
Exhibit A Principal Shareholder
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<C> <S> <C>
ARTICLE I - THE MERGER 2
1.1 The Merger. 2
1.2 Effective Time. 2
1.3 Effect of the Merger. 2
1.4 Certificate of Incorporation; Bylaws. 2
1.5 Directors and Officers. 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations. 3
1.7 Surrender of Certificates. 4
1.8 No Further Ownership Rights in Company Common Stock. 6
1.9 Lost, Stolen or Destroyed Certificates. 6
1.10 Purchase Price Adjustments. 6
1.11 Parent Common Stock. 8
1.12 Tax Consequences. 8
1.13 Taking of Necessary Action; Further Action. 8
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF
THE COMPANY AND THE PRINCIPAL SHAREHOLDERS 9
2.1 Organization of the Company. 9
2.2 Company Capital Structure. 9
2.3 Subsidiaries. 9
2.4 Authority. 10
2.5 No Conflict. 10
2.6 Consents. 10
2.7 Company Financial Statements. 11
2.8 No Undisclosed Liabilities. 11
2.9 No Changes. 11
2.10 Tax Matters. 13
2.11 Restrictions on Business Activities. 14
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment. 15
2.13 Intellectual Property. 15
2.14 Agreements, Contracts and Commitments. 18
2.15 Interested Party Transactions. 20
2.16 Governmental Authorization. 20
2.17 Litigation. 20
2.18 Accounts Receivable. 20
2.19 Minute Books. 21
2.20 Environmental Matters. 21
2.21 Brokers' and Finders' Fees; Third Party Expenses. 22
2.22 Employee Benefit Plans and Compensation. 22
2.23 Insurance. 25
2.24 Compliance with Laws. 25
2.25 Third Party Consents. 25
2.26 Warranties; Indemnities. 25
2.27 Complete Copies of Materials. 25
2.28 Representations Complete. 25
2.29 Business Plan. 25
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
2.30 Backlog Report. 25
2.31 Securities Law Compliance. 26
2.32 Principal Shareholder Investment Representations. 26
ARTICLE III 27
3.1 Organization, Standing and Power. 27
3.2 Authority; Consents. 27
3.3 Capital Structure. 27
3.4 Brokers' and Finders' Fees. 28
3.5 Similar Transactions. 28
3.6 No Changes. 28
ARTICLE IV 29
4.1 Conduct of Business of the Company. 29
4.2 No Solicitation. 31
ARTICLE V 31
5.1 Parent's Right of First Refusal. 31
5.2 Market Standoff Agreement. 33
5.3 Restriction on Competition. 33
5.4 Confidentiality. 34
5.5 Expenses. 34
5.6 Public Disclosure. 34
5.7 Post-Closing Employment of Company Employees. 35
5.8 Treatment of Affiliate Warrants. 36
5.9 Access to Information. 37
5.10 Public Disclosure. 37
5.11 Consents. 37
5.12 FIRPTA Compliance. 37
5.13 Best Efforts. 37
5.14 Notification of Certain Matters. 38
5.15 Tax Returns. N/A - reserved for Sub-S corporations 38
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
5.16 Additional Documents and Further Assurances. 38
5.17 Section 368 Compliance. 38
5.18 Parent Policies. 38
ARTICLE VI 38
6.1 Conditions to Obligations of Each Party to Effect the Merger. 38
6.2 Additional Conditions to Obligations of Company. 39
6.3 Additional Conditions to the Obligations of Parent and Sub. 39
ARTICLE VII 41
7.1 Survival of Representations and Warranties. 41
7.2 Escrow Arrangements; Setoff. 41
ARTICLE VIII 49
8.1 Termination. 49
8.2 Effect of Termination. 50
8.3 Amendment. 50
8.4 Extension; Waiver. 51
ARTICLE IX 51
9.1 Notices. 51
9.2 Interpretation. 52
9.3 Counterparts. 52
9.4 Entire Agreement; Assignment. 52
9.5 Severability. 52
9.6 Other Remedies. 52
9.7 Governing Law. 53
9.8 Rules of Construction. 53
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of March 31, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 103, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), FETCH Interactive, Inc., a Wisconsin
---
corporation (the "Company"), and the individual listed on Exhibit A attached
------- ---------
hereto (such individual being hereinafter referred to individually as a
"Principal Shareholder").
---------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of the
Company with and into Sub (the "Merger") and, in furtherance thereof, have
approved the Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholder, Parent and Sub desire to make
certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Sub following
the Merger. Each party understands and agrees that any such employee or the Sub
shall have the right to terminate any such employment at any time.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations laws of the states of Delaware
("Delaware Law") and Wisconsin (the "Wisconsin Law"), the Company shall be
merged with and into the Sub, the separate corporate existence of the Company
shall cease and Sub shall continue as the surviving corporation and as a wholly
owned subsidiary of Parent. Sub as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
-------
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to in writing by Parent and
the Company. The date upon which the Closing actually occurs is herein referred
to as the "Closing Date." On the Closing Date, the parties hereto shall cause
------------
the Merger to be consummated by submitting for filing an Agreement and Plan of
Merger (or like instrument) with the Secretary of State of Delaware and the
Secretary of State of Wisconsin (the "Merger Articles"), in accordance with the
---------------
relevant provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of Wisconsin being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of Delaware Law and
Wisconsin Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
2
<PAGE>
1.5 Directors and Officers. The director(s) of Sub immediately prior
----------------------
to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Stock; Purchase Price Adjustments. As of the
---------------------------------------------
Effective Time of the Merger, each share of the Company's Common Stock, no par
value (the "Company Common Stock"), that is issued and outstanding immediately
--------------------
prior to the Effective Time (other than any dissenting shares under applicable
state law) shall, by virtue of the Merger and without any action on the part of
Sub, the Company, or the Company's shareholders (the "Company Shareholders"), be
--------------------
canceled and extinguished and each Company Shareholder shall have (i) the right
to receive such Company Shareholder's pro rata portion (based on such Company
Shareholders' equity ownership in the Company as represented to Parent by the
Company) of that number of shares of the Parent's Common Stock, par value $.001
per share (the "Parent Common Stock") equal to $3,137,653 (The "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(e) below) as of the Closing Date, subject to Section 7.2 hereof, plus the
contingent right to receive additional shares of Parent Common Stock as
provided in Section 1.10 of this Agreement (The "Purchase Price Adjustment").
-------------------------
the Original Purchase Price and the Purchase Price Adjustment are hereinafter
collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. N/A
-------------
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
(e) Definitions.
-----------
(i) Aggregate Common Number. The "Aggregate Common Number" shall
-----------------------
mean the aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
3
<PAGE>
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
--------------------
Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
---------------------------
equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
(iv) Exchange Ratio. The "Exchange Ratio" shall mean the quotient
--------------
obtained by dividing (i) (X) the Original Purchase Price divided by (Y) the Fair
Value Per Share as of the Effective Date by (ii) the Aggregate Common Number.
For illustrative purposes only, if the Original Purchase Price were $2,000,000,
the Fair Value Per Share were $2.50 and the Aggregate Common Number were
3,400,000, then the Exchange Ratio would be ($2,000,000 / $2.50) / 3,400,000 =
.23529, so each share of Company Common Stock would be exchanged for .23529
shares of Parent's Common Stock. If the facts were the same but the Aggregate
Common Number were 1,500, then the calculation would be ($2,000,000 / $2.50)
/1,500 = 533.33, so each share of Company Common Stock would be exchanged for
533.33 shares of Parent's Common Stock.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
--------
Agent") in the Merger.
- -----
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock;
provided that, on behalf of the Company Shareholders, Parent shall deposit the
Escrow Amount into an escrow account.
4
<PAGE>
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates (the "Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 1.6, shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the Company Shareholder shall be
entitled to receive in exchange therefor a certificate representing the number
of shares issuable to such Company Shareholder as part of the Original Purchase
Price (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund (as defined in Article VII) on such holder's behalf pursuant to
Article VII hereof) and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and
in accordance with the provisions of Article VII hereof, Parent shall cause to
be distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount. Such consideration shall be beneficially owned by the
holders on whose behalf such consideration were deposited in the Escrow Fund and
shall be available to compensate Parent as provided in Article VII. Until
surrendered to the Exchange Agent, each outstanding Certificate that, prior to
the Effective Time, represented shares of Company Common Stock will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence only the right to receive Merger Consideration
pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have
5
<PAGE>
established to the satisfaction of Sub or any agent designated by it that such
tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
capital stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company capital stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock as may be required pursuant to Section 1.6(a); provided, however,
that Sub may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent, Sub or the Exchange Agent with respect
to the Certificates alleged to have been lost, stolen or destroyed.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. At the close of business on the last
--------------------
business day of the sixth full month after the Closing Date (the "First
-----
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the operation of the Parent's affiliate valuation method (the "Valuation
---------
Method"). Parent shall then calculate the "First Adjustment to Purchase Price"
- ------
as follows:
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Method; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the First Adjustment Date a number of
shares calculated as follows:
6
<PAGE>
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay to
Parent from the Escrow Amount promptly after the First Adjustment Date a number
of shares calculated as follows:
FSP = (-FAPP / FVPSCD)
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on the last
-----------------------
business day of the twelfth full month after the Closing Date (the "Second
------
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the Valuation Model, attached as Exhibit B. Parent shall then calculate the
--------------- ---------
"Second Adjustment to Purchase Price" as follows:
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Method; and
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the Second Adjustment Date a number of
shares calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
7
<PAGE>
(ii) If SAPP is less than zero, then the Escrow Agent shall pay to
Parent from the Escrow Amount promptly after the Second Adjustment Date a number
of shares calculated as follows:
SSP = (-SAPP / FVPSCD)
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
----------
Act"), by reason of Section 4(2) of the Securities Act or Regulation D
- ---
thereunder. Such shares may not be transferred or resold thereafter except in
compliance with the terms of this Agreement and following registration under the
Securities Act or in reliance on an exemption from registration under the
Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDER
The Company and the Principal Shareholder hereby, jointly and severally,
represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in Exhibit C attached hereto (referencing the appropriate
---------
section and paragraph numbers), as follows:
8
<PAGE>
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Wisconsin. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy
- ------------------------
of its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Exhibit C lists the directors and officers of the Company. The operations now
- ---------
being conducted by the Company have not been conducted under any other name.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 2,500
shares of authorized Common Stock of which 1,179 shares are issued and
outstanding. There are no other classes or series of capital stock of the
Company of any kind outstanding or issuable. The Company Common Stock is held
by the persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company Common Stock are duly authorized,
- ---------
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. As a result of the Merger, Parent will be the record and sole
beneficial owner of all outstanding capital stock of the Company and rights to
acquire or receive Company Capital Stock.
2.3 Subsidiaries. The Company does not have any subsidiaries or
------------
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. The Company
has never had any subsidiaries or affiliated companies and has never otherwise
owned shares in the capital of or any interest in or control, directly or
indirectly of, any other corporation, partnership association, joint venture or
other business entity.
9
<PAGE>
2.4 Authority. Each of the Company and the Principal Shareholder has all
---------
requisite corporate power and authority to enter into this Agreement to which it
is a party and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company and the Principal
Shareholder, and no further action is required on their part to authorize the
Agreement and the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by the Company and the Principal
Shareholder and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitutes the valid and binding obligation
of the Company and the Principal Shareholder, enforceable in accordance with its
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies. The Principal
Shareholder owns all property interests which are the subject of this Agreement
as his sole and separate property, and that he has sole authority to transfer
such interests, as contemplated by this Agreement.
2.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Incorporation and Bylaws the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its properties or assets is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of,
--------
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of the State of Wisconsin.
10
<PAGE>
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of December 31, 1996 and the related audited statements
of income and cash flow for year then ended (the "Audited Financials") and the
------------------
Company's unaudited balance sheet of February 28, 1997, and the related
unaudited statements of income and cash flow for the Six (6) months then ended
(the "Unaudited Financials"). The Audited Financials and the Unaudited
--------------------
Financials are correct in all material respects and have been prepared in
accordance with United States generally accepted accounting principles
("USGAAP") applied on a basis consistent throughout the periods indicated and
------
consistent with each other. The Audited and Unaudited Financials present fairly
in all material respects the financial condition, operating results and cash
flows of the Company as of the dates and during the periods indicated therein,
subject in the case of the Unaudited Financials, to normal year-end adjustments,
which will not be material in amount or significance. The Company's audited
Balance Sheet as of December 31, 1996 shall be referred to as the "Balance
-------
Sheet".
- -----
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, none
-------------------------- ---------
of the Company has any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet, or (ii) has not
arisen in the ordinary course of business consistent with past practices since
December 31, 1996.
2.9 No Changes. Except as set forth in Exhibit C, since December 31,
---------- ---------
1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
11
<PAGE>
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification the terms of any Company
-----------------
Agreement which (i) involves the payment of greater than $25,000 per annum or
which extends for more than one year, (ii) involves any payment or obligation to
any affiliate of the Company other than in the ordinary course of business as
conducted on that date and consistent with past practices, or (iii) involves the
sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
12
<PAGE>
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company or;
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and timely
filed or made a timely request for extension for all required federal, state,
local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
-------
Company [or Subsidiaries, as the case may be], or its operations and such
Returns are true and correct and have been completed in accordance with
applicable law.
(ii) The Company as of the Exchange Date (A) will have paid or accrued
all Taxes it is required to pay or accrue as shown on the Returns and (B) will
have withheld and timely remitted with respect to its employees all income taxes
and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any Tax
nor is there any Tax deficiency outstanding, assessed or proposed against the
Company, nor has the Company executed any waiver of any statute of limitations
on or extending the period for the assessment or collection of any Tax.
13
<PAGE>
(iv) No audit or other examination of any Return of the Company, is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state, local
and foreign Taxes which have not been accrued or reserved against in accordance
with USGAAP on the Balance Sheet, whether asserted or unasserted, contingent or
otherwise.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns filed for all years as to which any applicable statute of limitations
has not expired.
(vii) There are no Liens of any sort on the assets of the Company
the relating to or attributable to Taxes other than Liens for taxes not yet due
and payable.
(viii) The Company Shareholders have no knowledge of any basis for
the assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on any material assets of the Company.
(ix) As of the Closing, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing, indemnification or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xi) The Company uses the accrual method of accounting for income tax
purposes and its tax basis in its assets for purposes of determining its future
amortization, depreciation and other federal income tax deductions is accurately
reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or otherwise binding
upon the Company which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. The
Company has not entered into any agreement under which the Company is restricted
from providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
14
<PAGE>
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Company
Financials or in Exhibit C and except for liens for taxes not yet due and
---------
payable and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
customers of the Company's [and the Subsidiaries'] current and former customers
(the "Customer Information"). No third party possesses any claims or rights
--------------------
with respect to use of the Customer Information.
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks;
15
<PAGE>
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded, and all documentation related
to any of the foregoing throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of Company's United States and foreign: (i)
---------
patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreement, to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholder, all other
- -
parties to the contracts, licenses and agreements listed in Exhibit C are, in
---------
compliance with, and have not breached any term of, the contracts, licenses and
agreements. Following the Closing Date, Sub will be permitted to exercise all
of the Company's [and the Subsidiaries'] rights under the contracts, licenses
and agreements listed in Exhibit C without the payment of any additional amounts
---------
or consideration other than ongoing fees, royalties or payments which the
Company would otherwise be required to pay.
16
<PAGE>
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any lien or encumbrance; and (ii) the Company owns, or has
- -
the right, pursuant to a valid Contract to use or operate under, all other
Intellectual Property of the Company.
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity),
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company under development by the Company and the performance of
all services provided or contemplated to be provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between the
---------
Company and any other person wherein or whereby the Company has agreed to, or
assumed, any obligation or duty to indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement by the
Company or such other Person of the Intellectual Property rights of any other
person,
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholder regarding the scope of such agreement, or performance
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company and
---------
the Principal Shareholder, no person is infringing or misappropriating any of
the Intellectual Property of Company.
17
<PAGE>
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material, a defamatory statement or material, or
violates any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or is
---------
not bound by:
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
18
<PAGE>
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
----------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
or
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated
- ---------
to the Company pursuant thereto. The Company has obtained, or will obtain prior
to the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
19
<PAGE>
2.15 Interested Party Transactions. No officer, director or Principal
-----------------------------
Shareholder of the Company (nor any ancestor, sibling, descendant or spouse of
any of such persons, or any trust, partnership or corporation in which any of
such persons has or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or sold, or furnishes
or sells, services or products that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that purchases from or
sells or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any Contract; provided, that ownership of no more than one percent
(1%) of the outstanding voting stock of a publicly traded corporation shall not
be deemed an "interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each
-------------------------- ---------
consent, license, permit, grant or other authorization issued to the Company by
a governmental entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholder' knowledge threatened,
against the Company, its properties or any of its officers or directors, nor, to
the knowledge of the Principal Shareholder, is there any reasonable basis
therefor. There is no investigation pending or, to the Company's or Principals
Shareholders' knowledge threatened, against the Company, its properties or any
of its officers or directors (nor, to the best knowledge of the Principal
Shareholder, is there any reasonable basis therefor) by or before any
governmental entity. No governmental entity has at any time challenged or
questioned the legal right of the Company to manufacture, offer or sell any of
its products or services in the present manner or style thereof.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of March 13, 1997, ("Accounts Receivable") along
-------------------
with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company [and its Subsidiaries]
arose in the ordinary course of business, are carried at values determined in
accordance with USGAAP consistently applied and are collectible except to the
extent of reserves therefor set forth in the Balance Sheet. No person has any
Lien on any of such Accounts Receivable and no request or agreement for
deduction or discount has been made with respect to any of such Accounts
Receivable.
20
<PAGE>
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or, to the Company's or Principal Shareholder'
knowledge, as a result of any actions of any third party or otherwise, in, on or
under any property, including the land and the improvements, ground water and
surface water thereof, that the Company has at any time owned, operated,
occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has either the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits")
---------------------
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholder' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholder are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
21
<PAGE>
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any "Employee"
(as defined below), and pursuant to which the Company has or may have any
material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee;
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under
22
<PAGE>
ERISA or the Code in connection with each Company Employee Plan or related
trust; (iv) the most recent summary plan description together with the most
recent summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (v) all IRS determination letters and
rulings relating to Company Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Company Employee Plan; (vi) if the Employee Plan is funded, the
most recent annual and periodic accounting of Employee Plan assets; and (vii)
all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company have performed all
------------------------
obligations required to be performed by them under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholder threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iii) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (iv) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholder threatened by the IRS
or DOL with respect to any Company Employee Plan; and (v) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C,
------------------------------ ---------
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not]represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
23
<PAGE>
(h) Continuing Liabilities. No Employee Plan provides, or has any
----------------------
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any reason,
except as may be required by statute, and the Company has not represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(i) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the knowledge of the Company and the Principal Shareholder,
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety, discrimination, or
harassment matters involving any Employee, including, without limitation,
charges of unfair labor practices, discrimination, or harassment complaints,
which, if adversely determined, would, individually or in the aggregate, result
in liability to the Company, Parent or Sub. The Company has not engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, Parent or Sub. The Company
is not presently, or has in the past, been a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees and
no collective bargaining agreement is being negotiated by the Company.
24
<PAGE>
2.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company are otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholder have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, are not in
--------------------
violation of, and have not received any notices of violation with respect to,
any foreign, federal, state or local statute, law or regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
---------
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Representations Complete. None of the representations or guarantees
------------------------
made by the Company or the Principal Shareholder (as modified by the Exhibit C),
---------
nor any statement made in Exhibit C or any certificate furnished by the Company
---------
or the Principal Shareholder pursuant to this Agreement, or furnished in or in
connection with documents mailed or delivered to the Company Shareholders in
connection with soliciting their consent to this Agreement and the Merger,
contains or will contain at the Closing, any untrue statement of a material
fact, or omits or will omit at the Closing to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
2.29 Business Plan. The Company has provided to Parent a current,
-------------
accurate and detailed business plan for the Company's planned operations during
the twelve months following the Closing Date which includes, without limitation,
a description of the Company's capital requirements, staffing needs, and a pro
forma income statement. The business plan is attached to Exhibit C hereto.
---------
2.30 Backlog Report. The Company has provided to Parent a detailed and
---------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
25
<PAGE>
2.31 Securities Law Compliance. The Company will make no distribution
-------------------------
of any security issued by Parent unless such distribution is in compliance with
applicable state and federal securities laws.
2.32 Principal Shareholder Investment Representations. Each of the
-------------------------------------------------
Principal Shareholder represents and warrants to the Parent as follows:
(a) Experience. The Principal Shareholder is able to assess the
----------
technology, markets, management and strategy of the Parent and to fend for
itself in transactions such as the one contemplated by this Agreement, has such
knowledge and experience in financial and business matters that the Principal
Shareholder is capable of evaluating the merits and risks inherent in holding
stock of the Parent, and has the ability to bear the economic risks of the
investment.
(b) Investment. The Principal Shareholder accepts the shares of the
----------
Parent Common Stock as investment for the Principal Shareholder's own account
and not with the view to, or for resale in connection with, any distribution
thereof. The Principal Shareholder understands that the Parent Common Stock has
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
The Principal Shareholder further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Parent Common
Stock. The Principal Shareholder understands and acknowledges that the
provision of Parent Common Stock pursuant to this Agreement will not be
registered under the Securities Act on the ground that the issuance of
securities hereunder is exempt from the registration requirements of the
Securities Act.
(c) Rule 144. The Principal Shareholder acknowledges that the Parent
--------
Common Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
Principal Shareholder is aware of the provisions of Rule 144 promulgated under
the Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions. The Principal
Shareholder covenants that, in the absence of an effective registration
statement covering the stock in question, the Principal Shareholder will sell,
transfer, or otherwise dispose of the Parent Common Stock only in a manner
consistent with the Principal Shareholder's representations and covenants set
forth herein. In connection therewith, the Principal Shareholder acknowledges
that the Parent will make a notation on its stock books regarding the
restrictions on transfers set forth in this Article and will transfer securities
on the books of the Parent only to the extent not inconsistent therewith.
(d) No Public Market. The Principal Shareholder understands that no
----------------
public market now exists for any of the securities issued by the Parent, and
that no public market may ever exist for such securities.
26
<PAGE>
(e) Access to Data. The Principal Shareholder has received and
--------------
reviewed information about the Parent and has had an opportunity to review and
discuss the Parent's business, management and financial affairs with its
management. The Principal Shareholder understands that such discussions, as
well as any written information issued by the Parent, were intended to describe
the aspects of the Parent's business and prospects which the Parent believes to
be material, but were not necessarily a thorough or exhaustive description.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub.
This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the valid and binding obligations of Parent and Sub, enforceable in
accordance with its terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement by Parent and Sub does not, and, as
of the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Incorporation or Bylaws of Parent or Sub or (ii) any agreement or instrument,
permit, judgment, statute, law, rule or regulation applicable to Parent or Sub.
No consent, waiver, approval, or registration, declaration or filing with, any
Governmental Entity or any third party is required by or with respect to any of
the Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 29,767,708 shares were issued and
outstanding as of December 31, 1996, and 27,988,501 shares of Preferred Stock,
$.001 par value, of which 18,518,500 shares
27
<PAGE>
are designated Series A Preferred Stock, all of which are issued and
outstanding, and 9,310,001 shares are designated Series B Preferred Stock, all
of which are issued and outstanding. All such shares have been duly authorized,
and all such issued and outstanding shares have been validly issued, are fully
paid and nonassessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof. Parent has
also reserved (i) 3,900,000 shares of Common Stock for issuance to employees and
consultants pursuant to Parent's 1996 Stock Option Plan, (ii) 160,000 shares of
Series A Preferred Stock for issuance upon the exercise of outstanding warrants
to purchase Series A Preferred Stock (the "Warrant Stock"), (iii) 160,000 shares
-------------
of Common Stock for issuance upon conversion of the Warrant Stock and (iv)
1,000,000 shares of Common Stock for issuance upon the exercise of outstanding
warrants to purchase Common Stock. In February, 1997, the Board of Directors of
the Company approved (i) increasing the authorized shares of Common Stock to
100,000,000 shares, (ii) increasing the number of authorized shares of Preferred
Stock to 37,764,153 shares, in preparation for a sale of Series C Preferred
Stock, and (iii) adopting the Company's 1997 Acquisition Stock Option Plan,
reserving 10,000,000 shares of Common Stock thereunder; all of these actions are
currently pending. There are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will
--------------------------
it incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due
to the Sellers upon such recalculation shall be issued promptly to the Company
Shareholders.
3.6 No Changes. Except as otherwise disclosed in this Agreement, there
----------
have been no material adverse changes to the Parent's financial condition or
operating information from the information contained in the Franchise Offering
Circular dated effective December 23, 1996, and the Confidential Offering
Memorandum dated February 1997, relating to Parent's $18,000,000 Series C
Preferred Stock Offering.
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ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees (except to the extent
that Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
----------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or
29
<PAGE>
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement, except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free reorganization
hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements (or the
notes thereto);
30
<PAGE>
(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (s) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
date of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholder will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or either Company Shareholder receives prior to the Effective Time or the
termination of this Agreement any offer or proposal relating to any of the
above, the Company or the Company Shareholder, as applicable shall immediately
notify Parent thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
(including transfer by gift or
31
<PAGE>
operation of law), or any Shares held by a transferee (either being sometimes
referred to herein as the "Holder") may be sold, the Parent or its assignee(s)
shall have a right of first refusal to purchase such Shares on the terms and
conditions set forth in this Section (the "Right of First Refusal").
-----------------------
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
--------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash consideration with such other cash or
non-cash consideration as shall be determined by the Board of Directors of the
Parent in good faith.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Parent, and the Parent or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the
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<PAGE>
benefit of the Holder's immediate family shall be exempt from the provisions of
this Section. "Immediate Family" as used herein shall mean spouse, lineal
descendant or antecedent, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
5.2 Market Standoff Agreement. Each Company Shareholder hereby agrees
--------------------------
that if so requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any Shares of the Company
under the Securities Act, such Company Shareholder shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of the Company during the
180-day period following the date of the final Prospectus contained in a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the general public in
an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
---------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, no Principal Shareholder shall:
(i) engage in, including as an employee, consultant or
otherwise, or own any interest (except as a passive investor of less than five
percent (5%) of total debt and equity) in any business or other activity that
would compete with the Parent's; or
(ii) divert or attempt to divert any existing or prospective
business or customers of the Parent (including any affiliates of the Parent) to
any other person or entity, by direct or indirect inducement or otherwise, or do
or perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with the Parent or its affiliates; or
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
---------------------
33
<PAGE>
(i) This Section shall apply in the SMSA where the Company
is located.
(ii) In the event that any other provision of this Section
5.3 or the application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(iii) In the event that a Principal Shareholder, who also is
a New Employee, is terminated from employment by Parent without cause at any
time within three (3) years of the Closing Date, then the term of the
restrictions imposed by this Section 5.3 shall be reduced to six (6) months and
that terminated Principal Shareholder/New Employee shall receive severance
benefits from Parent equal to six (6) months salary and employee benefits.
5.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (e) which is disclosed in the
course of any litigation between any of the parties hereto; it being understood
that the parties may disclose relevant information and knowledge to their
respective employees and agents on a need to know basis, provided that the
parties cause such employees and agents to treat such information and knowledge
confidentially.
5.5 Expenses. Whether or not the Acquisition is consummated, all fees
--------
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any
-----------------
applicable rule of a stock exchange or quotation system upon which a parties'
securities are listed, prior to the Closing Date, no disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by the Company or the Principal Shareholder unless approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholder' obligation to comply
with applicable securities laws.
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<PAGE>
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of the
Closing Date, effective as of close of business on the Closing Date. Parent
will hire on the Closing Date, effective as of the close of business on the
Closing Date, on an "at will" basis and subject to Parent's terms, conditions
and policies of employment, if any, each of those persons who are employed by
Company and are terminated by Company on the Closing Date pursuant to the
foregoing sentence. Nothing contained in this Section is intended or shall be
deemed to (a) require Parent to employ such persons for any fixed or pre-
determined time after the Closing, or (b) confer upon any employee of Company,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section are intended to set
forth an agreement among Parent and Company, and are not intended to benefit any
persons not party to this Agreement, including such employees. Parent and
Company hereby agree to adopt the alternate procedure of Rev. Proc. 96-60 for
purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
- ---------
Employees incentive stock options to purchase Parent Common Stock in an
aggregate number equal to the number of shares paid as the Original Purchase
Price. Such incentive stock options shall be issued to the New Employees, and
in the amounts, requested by the Company in writing at the Closing. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option on the Closing Date as determined in good faith and
authorized by the Board of Directors of the Parent. Such options shall not be
exercisable at the date of grant, but shall become exercisable as to one-thirty-
sixth (1/36) of the shares subject to such option each month after the effective
date of this Agreement, provided, however, that no option shall become
exercisable with respect to any shares at any time following the date that the
New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee will be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New Employee will make any required
withholding payment to the Parent. New Employee also acknowledges that there
may be state or local tax due upon exercise of the option, and that any such tax
is the obligation of the New Employee and not the Parent. The terms of the
options as described in this paragraph are subject to the definitive form of
option agreement attached hereto as Exhibit D.
---------
35
<PAGE>
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the options described in Section 5.7(b) above. Such
bonus payment shall be paid in Common Stock on the earlier of (i) the date three
years subsequent to the Closing Date or (ii) with respect to any individual New
Employee, the date of Employee Termination. Such bonus shall be, as to each New
Employee, for such number of shares of Parent Common Stock as shall be equal, on
the date paid, and in the good faith judgment of the Parent's Board of
Directors, to the aggregate exercise price of the exercisable portion of the
option granted to the New Employee described in the foregoing paragraph. New
Employee acknowledges that there may be federal, state or local tax due upon
receipt of the bonus, that Parent may withhold any applicable taxes from New
Employee's regular pay or, if insufficient, that New Employee will make any
required withholding payment to Parent, and that any such tax is the obligation
of the New Employee and not the Parent.
(d) In addition to the stock option (the "Original Option") and stock
bonus grants described in subsections (b) and (c) of this Section, in the event
that any additional shares of Parent's Common Stock are issued pursuant to the
Purchase Price Adjustment provisions of Section 1.10, an additional option, in
form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
Option"), and an additional stock bonus commitment (the "Additional Stock
Bonus") proportionate to the Additional Option, in form and substance
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee of Parent or Sub who
received an Original Option. The number of shares subject to any such
Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to all Original Options granted. For each recipient,
the number of shares granted in the Additional Stock Bonus shall be
proportionate to the Additional Option. Any such Additional Options and
Additional Stock Bonuses shall be granted at the next regularly scheduled
meeting of the Parent's board of directors following the date of any Purchase
Price Adjustment pursuant to Section 1.10.
5.8 Treatment of Affiliate Warrants. To the extent that any affiliate
-------------------------------
of the Company has received or has the right to receive any warrants under
Parent's Affiliate Warrant Program, the warrants received or to be received
thereunder shall remain in full force and effect and, to the extent required to
make calculations of shares issuable under such warrants, Parent shall estimate
in good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
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<PAGE>
5.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.9 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.10 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld.
5.11 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.12 FIRPTA Compliance. On the Closing Date, the Company shall deliver
-----------------
to Parent a properly executed statement in a form reasonably acceptable to
Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.13 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
37
<PAGE>
5.14 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the (A) Company or
the Principal Shareholder or (B) Parent, respectively, contained in this
Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii)
any failure of the Company or Parent, as the case may be, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
it hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.14 shall not limit or otherwise affect any remedies available to
the party receiving such notice.
5.15 Tax Returns. N/A - reserved for Sub-S corporations
----------- ----------------------------------------
5.16 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.17 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
5.18 Parent Policies. Sellers acknowledge that Parent has implemented
---------------
policies regarding the operation of subsidiary entities such as the Company will
be following the Merger. Sellers acknowledge and agree that such policies, or
any such amended or replacement policies that are reasonably similar in scope,
nature or effect, are anticipated to be in place following the Merger, and
Sellers hereby indicate their intention to act in substantial compliance with
all such policies. Such policies shall not provide for Parent overhead
allocations from Parent to Company or Sub, unless otherwise agreed in advance by
the parties.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
-------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted,
38
<PAGE>
entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
------------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and Sub
in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
-----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
39
<PAGE>
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholder in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholder and executed on behalf of the Company by its Chief Executive Officer
to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and the
Principal Shareholder in this Agreement are true and correct in all material
respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit E.
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1996.
(g) Company Shareholder Approval. Each of the Company Shareholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Shareholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
40
<PAGE>
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholder' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Section 2.10 hereof or relating to environmental laws or matters
set forth in Section 2.20 hereof, shall survive until ninety (90) days following
the expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax or environmental laws or
matters. All of the Parent's and Sub's representations and warranties contained
herein or in any instrument delivered pursuant to this Agreement shall terminate
at the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
-----------
forth herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Company Shareholder shall be the pro rata amount calculated pursuant to
Section 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, seek indemnification for Losses
directly from the Principal Shareholder, but only after first proceeding against
the Escrow Fund so long as it exists and is not subject to other claims.
Nothing herein shall limit the liability of the Parent, the Company or the
Principal Shareholder for any breach of any representation, warranty or covenant
if the Merger does not close. Parent may not receive any shares from the Escrow
Fund (other than as a Purchase Price Adjustment) unless Officer's Certificates
(as defined in subsection (d) below) identifying losses, the aggregate of which
exceed $25,000, have been delivered to the Shareholder Representative (as
defined below) and the Escrow Agent as provided in paragraph (d) below. The
Company Shareholders shall not have any right of contribution from the Company
with respect to any Loss claimed by Parent or Sub after the Effective Time.
41
<PAGE>
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
----------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
-------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period. As soon as all such
claims have been resolved, the Escrow Agent shall deliver to the Company
Shareholders the remaining portion of the Escrow Fund not required to satisfy
such claims. Deliveries of Escrow Amounts to the Company Shareholders pursuant
to this Section 7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock split)
("New Shares") in respect of Parent Common Stock in the Escrow Fund which have
----------
not been released from the Escrow Fund shall be added to the Escrow Fund and
become a part thereof. New Shares issued in respect of shares of Parent Common
Stock which have been released from the Escrow Fund shall not be added to the
Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
42
<PAGE>
(d) Claims Upon Escrow Fund.
------------------------
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of Parent
(an "Officer's Certificate"): (A) stating that Parent has paid or accrued
Losses, and (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid or accrued,
or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 7.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, cash or
shares of Parent Common Stock (at the election of Parent) held in the Escrow
Fund in an amount equal to such Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Section 7.2(d) hereof, provided that no such payment or delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Shareholders out of the Escrow Fund pursuant to this Section
7.2, Parent shall deliver to the Shareholder Representative an Officer's
Certificate: (A) stating that Parent has paid or accrued Losses and (B)
specifying in reasonable detail the individual items of Losses included in the
amount so stated, the date each such item was paid or accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(g) Actions Against Company Shareholders. In the event that Parent
------------------------------------
has elected to pursue indemnity directly from the Principal Shareholder, the
Principal Shareholder shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, wire transfer to Parent the amount of
such Loss, unless the Company or the Principal Shareholder, as the case may be,
contest such claim by following the procedures set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
ten business day period ending three days prior to the date of the Officer's
Certificate stating the claim
43
<PAGE>
with respect to which such shares are delivered, and (ii) if the Parents' Common
Stock is not so publicly traded, the fair market value per share as determined
by the Parent's board of directors in good faith on the date closest to the date
of the Officer's Certificate.
(i) Resolution of Conflicts; Arbitration.
-------------------------------------
(i) In case the Shareholder Representative shall object in writing
to any claim or claims made in any Officer's Certificate within thirty (30) days
after delivery of such Officer's Certificate, the Shareholder Representative and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Shareholder Representative
and Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If any claim against the Escrow Fund was
sought, such memorandum shall be furnished to the Escrow Agent and the Escrow
Agent shall be entitled to rely on any such memorandum and make payment out of
the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation (or in any event after 60 days from the date of the Officer's
Certificate), either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Shareholder Representative shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the arbitrators, to
discover relevant information from the opposing parties about the subject matter
of the dispute. The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a court of law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Notwithstanding anything in
Section 7.2(e) hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
44
<PAGE>
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent believes may result in Losses, Parent shall notify the
Shareholder Representative of such claim, and the Shareholder Representative
shall be entitled, at the Company Shareholders' expense, to participate in any
defense of such claim. Parent shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Shareholder Representative, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim pursuant to this
Section 7.2. In the event that the Shareholder Representative has consented to
any such settlement, the Company Shareholders shall have no standing to object
under any provision of this Article 7.2 to the amount of any claim by Parent
against the Escrow Fund with respect to such settlement.
(k) Shareholder Representative.
---------------------------
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any shareholder, Bruce A. Findley shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
--------------------------
each Company Shareholder, for and on behalf of shareholders of the Company, to
give and receive notices and communications, to authorize delivery to Parent of
payments from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the shareholders
of the Company from time to time upon not less than thirty (30) days prior
written notice to Parent; provided that the Shareholder Representative may not
be removed unless a majority-in-interest of the Company Shareholders agree to
such removal and to the identity of the substituted agent. No bond shall be
required of the Shareholder Representative, and the Shareholder Representative
shall not receive compensation for services as such. Notices or communications
to or from the Shareholder Representative shall constitute notice to or from
each of the Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any act
done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders
shall severally indemnify the Shareholder Representative and hold him or her
harmless against any loss, liability or expense incurred without negligence or
bad faith on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholders
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
45
<PAGE>
(l) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(m) Escrow Agent's Duties.
----------------------
(i) The Escrow Agent shall be obligated only for the performance
of such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive after
the date of this Agreement which are signed by an officer of Parent and the
Shareholder Representative, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law, and is hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case the Escrow Agent obeys or complies with any such order, judgment or decree
of any court, the Escrow Agent shall not be liable to any of the parties hereto
or to any other person by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except for
gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow
46
<PAGE>
Agent be liable or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In addition, the Escrow
Agent may consult with the legal counsel in connection with Escrow Agent's
duties under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by such Escrow Agent in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement, its
terms or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent may hold all
documents and the Escrow Amount and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent may be required, despite what may be
set forth elsewhere in this Agreement. In such event, the Escrow Agent will not
be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader, in arbitration or otherwise, as the circumstances may require,
requiring the Parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and shares of Parent Common Stock held in escrow, except all
cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties to this Agreement; provided,
however, that no such resignation shall become effective until the appointment
of a successor escrow agent which shall be accomplished as follows: the parties
shall use their best efforts to agree on a successor escrow agent within thirty
(30) days after receiving such notice. If Parent and the Shareholder
Representative fail to agree upon a successor escrow agent within such time, the
Escrow Agent shall have the right to appoint a successor escrow agent authorized
to do business in the state of California. The successor escrow agent shall
execute and deliver an instrument accepting such appointment and it shall,
without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent. Thereafter, the Escrow Agent shall be discharged from any further
duties and liability under this Agreement.
47
<PAGE>
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
7.3 Indemnity.
----------
(a) The Principal Shareholder hereby agree to indemnify and hold
Parent and its subsidiaries, directors, officers and agents harmless against and
in respect of any loss, cost, expense, claim, liability, deficiency, judgment or
damage (hereinafter, individually, a "Loss"; and collectively, "Losses")
incurred by Parent, its subsidiaries, officers, directors and agents (i) as a
result of any inaccuracy in or breach of a representation or warranty of the
Company or the Principal Shareholder contained in this Agreement or any failure
by the Company or any Principal Shareholder to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of the
Company and the Principal Shareholder to perform their obligations hereunder.
(b) Parent hereby agrees to indemnify and hold the Company and its
subsidiaries, directors, officers and agents harmless against and in respect of
any loss, cost, expense, claim, liability, deficiency, judgment or damage
(hereinafter, individually, a "Loss"; and collectively, "Losses") incurred by
the Company, its subsidiaries, officers, directors and agents (i) as a result of
any inaccuracy in or breach of a representation or warranty of Parent contained
in this Agreement or any failure by Parent to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of Parent
to perform its obligations hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the third
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date; provided, however, that the representations and warranties with respect to
Taxes (Section 2.10) and environmental laws (Section 2.20) shall survive until
the expiration of the applicable statute of limitations, if any.
(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (a "Notice") to
the Parent, or the Surviving Corporation and the Shareholder Representative, as
the case may be, briefly stating the nature and basis of such claim. In the
case of Losses arising by reason of any third-party claim, the Notice shall be
given within 25 days of the filing or other
48
<PAGE>
written assertion of any such claim against Parent, but the failure of Parent to
give the Notice within such time period shall not relieve the Company and the
Principal Shareholder of any liability that the Company and the Principal
Shareholder may have to Parent except to the extent that the Company and the
Principal Shareholder are actually prejudiced thereby; provided, however, that
any such notice shall be given no later than the date of the expiration of the
applicable indemnification obligation of the Company and the Principal
Shareholder as set forth in Section 7.3(c) above. The indemnified party shall
provide the other party on request all information and documentation reasonably
necessary to support and verify any Losses which the indemnified party believes
give rise to a claim for indemnification hereunder and shall give reasonable
access to all books, records and personnel in the possession or under the
control of that party which would have bearing on such claim.
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholder. Failing such
agreement, the arbitration shall be conducted by three independent arbitrators,
none of whom shall have any competitive interest with Parent or the Company and
the Principal Shareholder. Parent shall choose one such arbitrator, the Company
and the Principal Shareholder shall choose one such arbitrator, and such two
arbitrators shall mutually select a third arbitrator. Any decision of two such
arbitrators shall be binding on Parent and the Company and the Principal
Shareholder. Each party shall pay its own costs and expenses (including counsel
fees) of any such arbitration except that the arbitrator can compel one party to
pay all or a portion of the other party's costs and expenses.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by April 30, 1997; (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by
49
<PAGE>
any Governmental Entity, which would: (i) prohibit Parent's or Sub's ownership
or operation of any portion of the business of the Company or (ii) compel Parent
or the Company to dispose of or hold separate all or a portion of the business
or assets of the Sub or Parent as a result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholder and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholder are in
material breach of their respective obligations under this Agreement and there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholder if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company, or their respective officers, directors or shareholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
50
<PAGE>
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company or to a Principal Shareholder to:
Fetch Interactive, Inc.
17125 W. Cleveland Avenue
New Berlin, WI 53151
Attention: John Ruf
Telecopy No.: 414/784.1070
51
<PAGE>
with a copy to:
Shearer Lanctot & Noelke
44 Montgomery Street - Suite 3585
San Francisco, CA 94104
Attention: Carl Noelke
Telecopy No.: 415/986.1851
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
52
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholder
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
COMPANY USWEB CORPORATION
By: Bruce A. Findley By:
President
Title:
ESCROW AGENT USWEB ACQUISITION CORPORATION 103
By: By:
Title: Title:
PRINCIPAL SHAREHOLDER
__________________________________
Bruce A. Findley
53
<PAGE>
EXHIBIT A
---------
Principal Shareholder
Name Number of Shares/*/
Bruce A. Findley 1,187
- -----------------------
/*/On an as fully converted to Common Stock, fully diluted basis.
54
<PAGE>
EXHIBIT B
Valuation Model
55
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
56
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
57
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
58
<PAGE>
EXHIBIT 2.3
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 106
AND
NEWLINK COMMUNICATIONS CORPORATION
DATED AS OF MARCH 31, 1997
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- -----------------------------
Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
TABLE OF CONTENTS
PAGE
ARTICLE I - THE MERGER
1.1 The Merger. 2
1.2 Effective Time. 2
1.3 Effect of the Merger. 2
1.4 Certificate of Incorporation; Bylaws. 2
1.5 Directors and Officers. 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.3
1.7 Surrender of Certificates. 4
1.8 No Further Ownership Rights in Company Common Stock. 6
1.9 Lost, Stolen or Destroyed Certificates. 6
1.10 Purchase Price Adjustments. 6
1.11 Parent Common Stock. 8
1.12 Tax Consequences. 8
1.13 Taking of Necessary Action; Further Action. 8
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS 9
2.1 Organization of the Company. 9
2.2 Company Capital Structure. 9
2.3 Subsidiaries. 9
2.4 Authority. 10
2.5 No Conflict. 10
2.6 Consents. 10
2.7 Company Financial Statements. 11
2.8 No Undisclosed Liabilities. 11
2.9 No Changes. 11
2.10 Tax Matters. 13
2.11 Restrictions on Business Activities. 14
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
Equipment. 15
2.13 Intellectual Property. 15
2.14 Agreements, Contracts and Commitments. 18
2.15 Interested Party Transactions. 20
2.16 Governmental Authorization. 20
2.17 Litigation. 20
2.18 Accounts Receivable. 20
2.19 Minute Books. 21
2.20 Environmental Matters. 21
2.21 Brokers' and Finders' Fees; Third Party Expenses. 22
2.22 Employee Benefit Plans and Compensation. 22
2.23 Insurance. 25
2.24 Compliance with Laws. 25
2.25 Third Party Consents. 25
2.26 Warranties; Indemnities. 25
2.27 Complete Copies of Materials. 25
2.28 Representations Complete. 25
2.29 Business Plan. 254
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
2.30 Backlog Report. 25
2.31 Securities Law Compliance. 26
2.32 Principal Shareholder Investment Representations. 26
ARTICLE III 27
3.1 Organization, Standing and Power. 27
3.2 Authority; Consents. 27
3.3 Capital Structure. 27
3.4 Brokers' and Finders' Fees. 28
3.5 Similar Transactions. 28
3.6 No Changes. 28
ARTICLE IV 29
4.1 Conduct of Business of the Company. 29
4.2 No Solicitation. 31
ARTICLE V 31
5.1 Parent's Right of First Refusal. 31
5.2 Market Standoff Agreement. 33
5.3 Restriction on Competition. 33
5.4 Confidentiality. 34
5.5 Expenses. 34
5.6 Public Disclosure. 34
5.7 Post-Closing Employment of Company Employees. 35
5.8 Treatment of Affiliate Warrants. 37
5.9 Access to Information. 37
5.10 Public Disclosure. 37
5.11 Consents. 37
5.12 FIRPTA Compliance. 37
5.13 Best Efforts. 38
5.14 Notification of Certain Matters. 38
5.15 Tax Returns. N/A - reserved for Sub-S corporations 38
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
5.16 Additional Documents and Further Assurances. 38
5.17 Section 368 Compliance. 38
5.18 Parent Policies. 39
ARTICLE VI 39
6.1 Conditions to Obligations of Each Party to Effect the Merger. 39
6.2 Additional Conditions to Obligations of Company. 39
6.3 Additional Conditions to the Obligations of Parent and Sub. 40
ARTICLE VII 41
7.1 Survival of Representations and Warranties. 41
7.2 Escrow Arrangements; Setoff. 41
ARTICLE VIII 49
8.1 Termination. 49
8.2 Effect of Termination. 50
8.3 Amendment. 50
8.4 Extension; Waiver. 51
ARTICLE IX 51
9.1 Notices. 51
9.2 Interpretation. 52
9.3 Counterparts. 52
9.4 Entire Agreement; Assignment. 52
9.5 Severability. 52
9.6 Other Remedies. 52
9.7 Governing Law. 53
9.8 Rules of Construction. 53
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of March 31, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 106, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), NewLink Communications Corporation, a
---
California corporation (the "Company"), and the individuals listed on Exhibit A
-------
attached hereto (such individuals being hereinafter referred to collectively as
the "Principal Shareholders" and individually as a "Principal Shareholder").
---------------------- ---------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of the
Company with and into Sub (the "Merger") and, in furtherance thereof, have
approved the Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to
make certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Sub following
the Merger. Each party understands and agrees that any such employee or the Sub
shall have the right to terminate any such employment at any time.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations laws of the states of Delaware
("Delaware Law") and California (the "California Law"), the Company shall be
merged with and into the Sub, the separate corporate existence of the Company
shall cease and Sub shall continue as the surviving corporation and as a wholly
owned subsidiary of Parent. Sub as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
-------
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to in writing by Parent and
the Company. The date upon which the Closing actually occurs is herein referred
to as the "Closing Date." On the Closing Date, the parties hereto shall cause
------------
the Merger to be consummated by submitting for filing an Agreement and Plan of
Merger (or like instrument) with the Secretary of State of Delaware and the
Secretary of State of California (the "Merger Articles"), in accordance with the
---------------
relevant provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of California being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of Delaware Law and
California Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
2
<PAGE>
1.5 Directors and Officers. The director(s) of Sub immediately prior
----------------------
to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Stock; Purchase Price Adjustments. As of the
---------------------------------------------
Effective Time of the Merger, each share of the Company's Common Stock, no par
value (the "Company Common Stock"), that is issued and outstanding immediately
--------------------
prior to the Effective Time (other than any dissenting shares under applicable
state law) shall, by virtue of the Merger and without any action on the part of
Sub, the Company, or the Company's shareholders (the "Company Shareholders"), be
--------------------
canceled and extinguished and each Company Shareholder shall have (i) the right
to receive such Company Shareholder's pro rata portion (based on such Company
Shareholders' equity ownership in the Company as represented to Parent by the
Company) of that number of shares of the Parent's Common Stock, par value $.001
per share (the "Parent Common Stock") equal to $2,873,475 (the "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(e) below) as of the closing date, subject to Section 7.2 hereof, plus the
contingent right to receive additional shares of Parent Common Stock as
provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
-------------------------
The Original Purchase Price and the Purchase Price Adjustment are hereinafter
collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. N/A
-------------
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
(e) Definitions.
-----------
(i) Aggregate Common Number. The "Aggregate Common Number"
-----------------------
shall mean the aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
3
<PAGE>
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
--------------------
Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
---------------------------
equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
(iv) Exchange Ratio. The "Exchange Ratio" shall mean the
--------------
quotient obtained by dividing (i) (X) the Original Purchase Price divided by (Y)
the Fair Value Per Share as of the Effective Date by (ii) the Aggregate Common
Number. For illustrative purposes only, if the Original Purchase Price were
$2,000,000, the Fair Value Per Share were $2.50 and the Aggregate Common Number
were 3,400,000, then the Exchange Ratio would be ($2,000,000 / $2.50) /
3,400,000 = .23529, so each share of Company Common Stock would be exchanged for
.23529 shares of Parent's Common Stock. If the facts were the same but the
Aggregate Common Number were 1,500, then the calculation would be ($2,000,000 /
$2.50) /1,500 = 533.33, so each share of Company Common Stock would be exchanged
for 533.33 shares of Parent's Common Stock.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
--------
Agent") in the Merger.
- -----
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock;
provided that, on behalf of the Company Shareholders, Parent shall deposit the
Escrow Amount into an escrow account.
4
<PAGE>
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates (the "Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 1.6, shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions as Parent may reasonably specify) and (ii) instructions for use
in effecting the surrender of the Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate for cancellation to the Exchange
Agent or to such other agent or agents as may be appointed by Parent, together
with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, the Company Shareholder shall be
entitled to receive in exchange therefor a certificate representing the number
of shares issuable to such Company Shareholder as part of the Original Purchase
Price (less the number of shares of Parent Common Stock to be deposited in the
Escrow Fund (as defined in Article VII) on such holder's behalf pursuant to
Article VII hereof) and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and
in accordance with the provisions of Article VII hereof, Parent shall cause to
be distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount. Such consideration shall be beneficially owned by the
holders on whose behalf such consideration were deposited in the Escrow Fund and
shall be available to compensate Parent as provided in Article VII. Until
surrendered to the Exchange Agent, each outstanding Certificate that, prior to
the Effective Time, represented shares of Company Common Stock will be deemed
from and after the Effective Time, for all corporate purposes, other than the
payment of dividends, to evidence only the right to receive Merger Consideration
pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have
5
<PAGE>
established to the satisfaction of Sub or any agent designated by it that such
tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
capital stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company capital stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
Certificates shall have been lost, stolen or destroyed, the Exchange Agent shall
issue in exchange for such lost, stolen or destroyed Certificates, upon the
making of an affidavit of that fact by the holder thereof, such shares of Parent
Common Stock as may be required pursuant to Section 1.6(a); provided, however,
that Sub may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent, Sub or the Exchange Agent with respect
to the Certificates alleged to have been lost, stolen or destroyed.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. At the close of business on the last
--------------------
business day of the sixth full month after the Closing Date (the "First
-----
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the operation of the Parent's affiliate valuation method (the "Valuation
---------
Method"). Parent shall then calculate the "First Adjustment to Purchase Price"
- ------
as follows:
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Method; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the First Adjustment Date a number of
shares calculated as follows:
6
<PAGE>
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSCD)
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on the last
-----------------------
business day of the twelfth full month after the Closing Date (the "Second
------
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the Valuation Model, attached as Exhibit B. Parent shall then calculate the
--------------- ---------
"Second Adjustment to Purchase Price" as follows:
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Method; and
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the Second Adjustment Date a number of
shares calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
7
<PAGE>
(ii) If SAPP is less than zero, then the Escrow Agent shall pay
to Parent from the Escrow Amount promptly after the Second Adjustment Date a
number of shares calculated as follows:
SSP = (-SAPP / FVPSCD)
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
----------
Act"), by reason of Section 4(2) of the Securities Act or Regulation D
- ---
thereunder. Such shares may not be transferred or resold thereafter except in
compliance with the terms of this Agreement and following registration under the
Securities Act or in reliance on an exemption from registration under the
Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally,
represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in Exhibit C attached hereto (referencing the appropriate
---------
section and paragraph numbers), as follows:
8
<PAGE>
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy
-----------------------
of its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Exhibit C lists the directors and officers of the Company. The operations now
- ---------
being conducted by the Company have not been conducted under any other name.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 10,000
shares of authorized Common Stock of which 10,000 shares are issued and
outstanding. There are no other classes or series of capital stock of the
Company of any kind outstanding or issuable. The Company Common Stock is held
by the persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company Common Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. As a result of the Merger, Parent will be the record and sole
beneficial owner of all outstanding capital stock of the Company and rights to
acquire or receive Company Capital Stock.
2.3 Subsidiaries. The Company does not have any subsidiaries or
------------
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. The Company
has never had any subsidiaries or affiliated companies and has never otherwise
owned shares in the capital of or any interest in or control, directly or
indirectly of, any other corporation, partnership association, joint venture or
other business entity.
9
<PAGE>
2.4 Authority. Each of the Company and the Principal Shareholders has
---------
all requisite corporate power and authority to enter into this Agreement to
which it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company and the Principal
Shareholders, and no further action is required on their part to authorize the
Agreement and the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by the Company and the Principal
Shareholders and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitutes the valid and binding obligation
of the Company and the Principal Shareholders, enforceable in accordance with
its terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
2.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Incorporation and Bylaws the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its properties or assets is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
--------
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of the State of California.
10
<PAGE>
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of December 31, 1996 and the related audited statements
of income and cash flow for year then ended (the "Audited Financials") and the
------------------
Company's unaudited balance sheet of March 31, 1997, and the related unaudited
statements of income and cash flow for the Six (6) months then ended (the
"Unaudited Financials"). The Audited Financials and the Unaudited Financials
--------------------
are correct in all material respects and have been prepared in accordance with
United States generally accepted accounting principles ("USGAAP") applied on a
--------
basis consistent throughout the periods indicated and consistent with each
other. The Audited and Unaudited Financials present fairly in all material
respects the financial condition, operating results and cash flows of the
Company as of the dates and during the periods indicated therein, subject in the
case of the Unaudited Financials, to normal year-end adjustments, which will not
be material in amount or significance. The Company's audited Balance Sheet as
of December 31, 1996 shall be referred to as the "Balance Sheet".
---------------
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, none
-------------------------- ---------
of the Company has any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet, or (ii) has not
arisen in the ordinary course of business consistent with past practices since
December 31, 1996.
2.9 No Changes. Except as set forth in Exhibit C, since December 31,
---------- ---------
1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
11
<PAGE>
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification the terms of any Company
- -------------------
Agreement which (i) involves the payment of greater than $25,000 per annum or
which extends for more than one year, (ii) involves any payment or obligation to
any affiliate of the Company other than in the ordinary course of business as
conducted on that date and consistent with past practices, or (iii) involves the
sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
12
<PAGE>
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company or;
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- -----
or, collectively, "Taxes," means (i) any and all federal, state, local and
--------
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and
timely filed or made a timely request for extension for all required federal,
state, local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
---------
Company or its operations and such Returns are true and correct and have been
completed in accordance with applicable law.
(ii) The Company as of the Closing Date (A) will have paid or
accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
13
<PAGE>
(iv) No audit or other examination of any Return of the Company,
is presently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against in
accordance with USGAAP on the Balance Sheet, whether asserted or unasserted,
contingent or otherwise.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal and state income and all state sales and
use Returns filed for all years as to which any applicable statute of
limitations has not expired.
(vii) There are no Liens of any sort on the assets of the Company
the relating to or attributable to Taxes other than Liens for taxes not yet due
and payable.
(viii) The Company Shareholders have no knowledge of any basis
for the assertion of any claim relating or attributable to Taxes which, if
adversely determined, would result in any Lien on any material assets of the
Company.
(ix) As of the Closing, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing,
indemnification or allocation agreement nor does the Company owe any amount
under any such agreement.
(xi) The Company uses the accrual method of accounting for
income tax purposes and its tax basis in its assets for purposes of determining
its future amortization, depreciation and other federal income tax deductions is
accurately reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or otherwise binding
upon the Company which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. The
Company has not entered into any agreement under which the Company is restricted
from providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
14
<PAGE>
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Company
Financials or in Exhibit C and except for liens for taxes not yet due and
---------
payable and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
customers of the Company's current and former customers (the "Customer
--------
Information"). No third party possesses any claims or rights with respect to
- -----------
use of the Customer Information.
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks;
15
<PAGE>
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded, and all documentation related
to any of the foregoing throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of Company's United States and foreign: (i)
---------
patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreement, to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by this
Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholders, all
- -
other parties to the contracts, licenses and agreements listed in Exhibit C are,
---------
in compliance with, and have not breached any term of, the contracts, licenses
and agreements. Following the Closing Date, Sub will be permitted to exercise
all of the Company's rights under the contracts, licenses and agreements listed
in Exhibit C without the payment of any additional amounts or consideration
---------
other than ongoing fees, royalties or payments which the Company would otherwise
be required to pay.
16
<PAGE>
(f) Except as set forth in Exhibit C: (i) no person has any rights
---------
to use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any lien or encumbrance; and (ii) the Company owns, or has
- -
the right, pursuant to a valid Contract to use or operate under, all other
Intellectual Property of the Company.
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity),
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company under development by the Company and the performance of
all services provided or contemplated to be provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between
---------
the Company and any other person wherein or whereby the Company has agreed to,
or assumed, any obligation or duty to indemnify, hold harmless or otherwise
assume or incur any obligation or liability with respect to the infringement by
the Company or such other Person of the Intellectual Property rights of any
other person,
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement, or performance
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company
---------
and the Principal Shareholders, no person is infringing or misappropriating any
of the Intellectual Property of Company.
17
<PAGE>
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material, a defamatory statement or material, or
violates any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or
---------
is not bound by:
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
18
<PAGE>
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
----------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
or
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated to
- ---------
the Company pursuant thereto. The Company has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
19
<PAGE>
2.15 Interested Party Transactions. No officer, director or Principal
-----------------------------
Shareholder of the Company (nor any ancestor, sibling, descendant or spouse of
any of such persons, or any trust, partnership or corporation in which any of
such persons has or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or sold, or furnishes
or sells, services or products that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that purchases from or
sells or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any Contract; provided, that ownership of no more than one percent
(1%) of the outstanding voting stock of a publicly traded corporation shall not
be deemed an "interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each
-------------------------- ---------
consent, license, permit, grant or other authorization issued to the Company by
a governmental entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principals Shareholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Shareholders, is there any reasonable basis therefor) by or
before any governmental entity. No governmental entity has at any time
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of its products or services in the present manner or style thereof.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of March 31, 1997, ("Accounts Receivable") along
-------------------
with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company arose in the ordinary
course of business, are carried at values determined in accordance with USGAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth in the Balance Sheet. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount has
been made with respect to any of such Accounts Receivable.
20
<PAGE>
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or, to the Company's or Principal
Shareholders' knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has either the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits")
---------------------
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
21
<PAGE>
2.21 Brokers' and Finders' Fees: Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any "Employee"
(as defined below), and pursuant to which the Company has or may have any
material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee;
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under
22
<PAGE>
ERISA or the Code in connection with each Company Employee Plan or related
trust; (iv) the most recent summary plan description together with the most
recent summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (v) all IRS determination letters and
rulings relating to Company Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Company Employee Plan; (vi) if the Employee Plan is funded, the
most recent annual and periodic accounting of Employee Plan assets; and (vii)
all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company have performed all
------------------------
obligations required to be performed by them under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iii) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (iv) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (v) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to
-------------------
or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C,
------------------------------ ---------
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not]represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
23
<PAGE>
(h) Continuing Liabilities. No Employee Plan provides, or has any
----------------------
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any reason,
except as may be required by statute, and the Company has not represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(i) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
------
pending, or to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety, discrimination, or
harassment matters involving any Employee, including, without limitation,
charges of unfair labor practices, discrimination, or harassment complaints,
which, if adversely determined, would, individually or in the aggregate, result
in liability to the Company, Parent or Sub. The Company has not engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, Parent or Sub. The Company
is not presently, or has in the past, been a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees and
no collective bargaining agreement is being negotiated by the Company.
24
<PAGE>
2.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company are otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholders have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, are not in
--------------------
violation of, and have not received any notices of violation with respect to,
any foreign, federal, state or local statute, law or regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Representations Complete. None of the representations or guarantees
------------------------
made by the Company or the Principal Shareholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
- - ---------
Company or the Principal Shareholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company
Shareholders in connection with soliciting their consent to this Agreement and
the Merger, contains or will contain at the Closing, any untrue statement of a
material fact, or omits or will omit at the Closing to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
2.29 Business Plan. The Company has provided to Parent a current,
-------------
accurate and detailed business plan for the Company's planned operations during
the twelve months following the Closing Date which includes, without limitation,
a description of the Company's capital requirements, staffing needs, and a pro
forma income statement. The business plan is attached to Exhibit C hereto.
---------
2.30 Backlog Report. The Company has provided to Parent a detailed and
---------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
25
<PAGE>
2.31 Securities Law Compliance. The Company will make no distribution
-------------------------
of any security issued by Parent unless such distribution is in compliance with
applicable state and federal securities laws.
2.32 Principal Shareholder Investment Representations. Each of the
------------------------------------------------
Principal Shareholders represents and warrants to the Parent as follows:
(a) Experience. The Principal Shareholder is able to assess the
----------
technology, markets, management and strategy of the Parent and to fend for
itself in transactions such as the one contemplated by this Agreement, has such
knowledge and experience in financial and business matters that the Principal
Shareholder is capable of evaluating the merits and risks inherent in holding
stock of the Parent, and has the ability to bear the economic risks of the
investment.
(b) Investment. The Principal Shareholder accepts the shares of the
----------
Parent Common Stock as investment for the Principal Shareholder's own account
and not with the view to, or for resale in connection with, any distribution
thereof. The Principal Shareholder understands that the Parent Common Stock has
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
The Principal Shareholder further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Parent Common
Stock. The Principal Shareholder understands and acknowledges that the
provision of Parent Common Stock pursuant to this Agreement will not be
registered under the Securities Act on the ground that the issuance of
securities hereunder is exempt from the registration requirements of the
Securities Act.
(c) Rule 144. The Principal Shareholder acknowledges that the Parent
--------
Common Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
Principal Shareholder is aware of the provisions of Rule 144 promulgated under
the Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions. The Principal
Shareholder covenants that, in the absence of an effective registration
statement covering the stock in question, the Principal Shareholder will sell,
transfer, or otherwise dispose of the Parent Common Stock only in a manner
consistent with the Principal Shareholder's representations and covenants set
forth herein. In connection therewith, the Principal Shareholder acknowledges
that the Parent will make a notation on its stock books regarding the
restrictions on transfers set forth in this Article and will transfer securities
on the books of the Parent only to the extent not inconsistent therewith.
(d) No Public Market. The Principal Shareholder understands that no
----------------
public market now exists for any of the securities issued by the Parent, and
that no public market may ever exist for such securities.
26
<PAGE>
(e) Access to Data. The Principal Shareholder has received and
--------------
reviewed information about the Parent and has had an opportunity to review and
discuss the Parent's business, management and financial affairs with its
management. The Principal Shareholder understands that such discussions, as
well as any written information issued by the Parent, were intended to describe
the aspects of the Parent's business and prospects which the Parent believes to
be material, but were not necessarily a thorough or exhaustive description.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub.
This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the valid and binding obligations of Parent and Sub, enforceable in
accordance with its terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement by Parent and Sub does not, and, as
of the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Incorporation or Bylaws of Parent or Sub or (ii) any agreement or instrument,
permit, judgment, statute, law, rule or regulation applicable to Parent or Sub.
No consent, waiver, approval, or registration, declaration or filing with, any
Governmental Entity or any third party is required by or with respect to any of
the Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 29,767,708 shares were issued and
outstanding as of December 31, 1996, and 27,988,501 shares of Preferred Stock,
$.001 par value, of which 18,518,500 shares
27
<PAGE>
are designated Series A Preferred Stock, all of which are issued and
outstanding, and 9,310,001 shares are designated Series B Preferred Stock, all
of which are issued and outstanding. All such shares have been duly authorized,
and all such issued and outstanding shares have been validly issued, are fully
paid and nonassessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof. Parent has
also reserved (i) 3,900,000 shares of Common Stock for issuance to employees and
consultants pursuant to Parent's 1996 Stock Option Plan, (ii) 160,000 shares of
Series A Preferred Stock for issuance upon the exercise of outstanding warrants
to purchase Series A Preferred Stock (the "Warrant Stock"), (iii) 160,000 shares
-------------
of Common Stock for issuance upon conversion of the Warrant Stock and (iv)
1,000,000 shares of Common Stock for issuance upon the exercise of outstanding
warrants to purchase Common Stock. In February, 1997, the Board of Directors of
the Company approved (i) increasing the authorized shares of Common Stock to
100,000,000 shares, (ii) increasing the number of authorized shares of Preferred
Stock to 37,764,153 shares, in preparation for a sale of Series C Preferred
Stock, and (iii) adopting the Company's 1997 Acquisition Stock Option Plan,
reserving 10,000,000 shares of Common Stock thereunder; all of these actions are
currently pending. There are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will
--------------------------
it incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due
to the Sellers upon such recalculation shall be issued promptly to the Company
Shareholders.
3.6 No Changes. Except as otherwise disclosed in this Agreement, there
----------
have been no material adverse changes to the Parent's financial condition or
operating information from the information contained in the Franchise Offering
Circular dated effective December 23, 1996, and the Confidential Offering
Memorandum dated February 1997, relating to Parent's $18,000,000 Series C
Preferred Stock Offering.
28
<PAGE>
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees (except to the extent
that Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
---------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or
29
<PAGE>
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation
or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others
or amend the terms of any outstanding loan agreement, except in the ordinary
course of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free
reorganization hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements (or the
notes thereto);
30
<PAGE>
(r) Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (s) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
date of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or either Company Shareholder receives prior to the Effective Time or the
termination of this Agreement any offer or proposal relating to any of the
above, the Company or the Company Shareholder, as applicable shall immediately
notify Parent thereof, including information as to the identity of the offeror
or the party making any such offer or proposal and the specific terms of such
offer or proposal, as the case may be, and such other information related
thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
(including transfer by gift or
31
<PAGE>
operation of law), or any Shares held by a transferee (either being sometimes
referred to herein as the "Holder") may be sold, the Parent or its assignee(s)
shall have a right of first refusal to "Right of First Refusal").
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
--------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash consideration with such other cash or
non-cash consideration as shall be determined by the Board of Directors of the
Parent in good faith.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Parent, and the Parent or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the
32
<PAGE>
benefit of the Holder's immediate family shall be exempt from the provisions of
this Section. "Immediate Family" as used herein shall mean spouse, lineal
descendant or antecedent, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
5.2 Market Standoff Agreement. Each Company Shareholder hereby agrees that
-------------------------
if so requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any Shares of the Company
under the Securities Act, such Company Shareholder shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of the Company during the
180-day period following the date of the final Prospectus contained in a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the general public in
an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
--------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, no Principal Shareholder shall:
(i) engage in, including as an employee, consultant or
otherwise, or own any interest (except as a passive investor of less than five
percent (5%) of total debt and equity) in any business or other activity that
would compete with the Parent's; or
(ii) divert or attempt to divert any existing or prospective
business or customers of the Parent (including any affiliates of the Parent) to
any other person or entity, by direct or indirect inducement or otherwise, or do
or perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with the Parent or its affiliates; or
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
--------------------
33
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(i) This Section shall apply in the SMSA where the Company
is located.
(ii) In the event that any other provision of this Section 5.3
or the application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(iii) In the event that a Principal Shareholder, who also is a
New Employee, is terminated from employment by Parent without cause at any time
within three (3) years of the Closing Date, then the term of the restrictions
imposed by this Section 5.3 shall be reduced to six (6) months and that
terminated Principal Shareholder/New Employee shall receive severance benefits
from Parent equal to six (6) months salary and employee benefits.
5.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (e) which is disclosed in the
course of any litigation between any of the parties hereto; it being understood
that the parties may disclose relevant information and knowledge to their
respective employees and agents on a need to know basis, provided that the
parties cause such employees and agents to treat such information and knowledge
confidentially.
5.5 Expenses. Whether or not the Acquisition is consummated, all fees
--------
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any
-----------------
applicable rule of a stock exchange or quotation system upon which a parties'
securities are listed, prior to the Closing Date, no disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by the Company or the Principal Shareholders unless approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholders' obligation to
comply with applicable securities laws.
34
<PAGE>
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of the
Closing Date, effective as of close of business on the Closing Date. Parent
will hire on the Closing Date, effective as of the close of business on the
Closing Date, on an "at will" basis and subject to Parent's terms, conditions
and policies of employment, if any, each of those persons who are employed by
Company and are terminated by Company on the Closing Date pursuant to the
foregoing sentence. Nothing contained in this Section is intended or shall be
deemed to (a) require Parent to employ such persons for any fixed or pre-
determined time after the Closing, or (b) confer upon any employee of Company,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section are intended to set
forth an agreement among Parent and Company, and are not intended to benefit any
persons not party to this Agreement, including such employees. Parent and
Company hereby agree to adopt the alternate procedure of Rev. Proc. 96-60 for
purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
- ---------
Employees incentive stock options to purchase Parent Common Stock in an
aggregate number equal to the number of shares paid as the Original Purchase
Price. Such incentive stock options shall be issued to the New Employees, and
in the amounts, requested by the Company in writing at the Closing. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option on the Closing Date as determined in good faith and
authorized by the Board of Directors of the Parent. Such options shall not be
exercisable at the date of grant, but shall become exercisable as to one-thirty-
sixth (1/36) of the shares subject to such option each month after the effective
date of this Agreement, provided, however, that no option shall become
exercisable with respect to any shares at any time following the date that the
New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee will be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New Employee will make any required
withholding payment to the Parent. New Employee also acknowledges that there
may be state or local tax due upon exercise of the option, and that any such tax
is the obligation of the New Employee and not the Parent. The terms of the
options as described in this paragraph are subject to the definitive form of
option agreement attached hereto as Exhibit D.
---------
35
<PAGE>
(c) Also in connection with hiring the New Employees, Parent agrees
to issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the options described in Section 5.7(b) above. Such
bonus payment shall be paid in Common Stock on the earlier of (i) the date three
years subsequent to the Closing Date or (ii) with respect to any individual New
Employee, the date of Employee Termination. Such bonus shall be, as to each New
Employee, for such number of shares of Parent Common Stock as shall be equal, on
the date paid, and in the good faith judgment of the Parent's Board of
Directors, to the aggregate exercise price of the exercisable portion of the
option granted to the New Employee described in the foregoing paragraph. The
bonus payment described in this paragraph shall be made to such New Employee on
the earlier of: (i) in the event that the New Employee's employment by Parent or
any wholly owned subsidiary of Parent terminates before the date three years
subsequent to the date of this Agreement, on the date of such termination (but
only that number of shares required pursuant to this paragraph), (ii) if on the
date three years subsequent to the date of this Agreement the Parent shall have
a class of equity securities that has been publicly traded on a national
exchange or quotation system for at leasy 180 days, then on such date three
years subsequent to the date of this Agreement, and (iii) in the event that on
the date three years subsequent to the date of this Agreement the Parent shall
not have a class of equity securities that has been publicly traded on a
national securities exchange or quotation system for at least 180 days, then on
the first business day after the date three years subsequent to the date of this
Agreement that the Parent shall have a class of equity securities that has been
publicly traded on a national securities exchange or quotation system for 180
days. New Employee acknowledges that there may be federal, state or local tax
due upon receipt of the bonus, that Parent may withhold any applicable taxes
from New Employee's regular pay or, if insufficient, that New Employee will make
any required withholding payment to Parent, and that any such tax is the
obligation of the New Employee and not the Parent.
(d) In addition to the stock option (the "Original Option") and stock
bonus grants described in subsections (b) and (c) of this Section, in the event
that any additional shares of Parent's Common Stock are issued pursuant to the
Purchase Price Adjustment provisions of Section 1.10, an additional option, in
form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
Option"), and an additional stock bonus commitment (the "Additional Stock
Bonus") proportionate to the Additional Option, in form and substance
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee of Parent or Sub who
received an Original Option. The number of shares subject to any such
Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to the total of Original Options granted to then
remaining employees. For each recipient, the number of shares granted in the
Additional Stock Bonus shall be proportionate to the Additional Option. Any
such Additional Options and Additional Stock Bonuses shall be granted at the
next regularly scheduled meeting of the Parent's board of directors following
the date of any Purchase Price Adjustment pursuant to Section 1.10.
36
<PAGE>
5.8 Treatment of Affiliate Warrants. To the extent that any affiliate
-------------------------------
of the Company has received or has the right to receive any warrants under
Parent's Affiliate Warrant Program, the warrants received or to be received
thereunder shall remain in full force and effect and, to the extent required to
make calculations of shares issuable under such warrants, Parent shall estimate
in good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
5.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.9 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.10 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld.
5.11 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.12 FIRPTA Compliance. On the Closing Date, the Company shall deliver
-----------------
to Parent a properly executed statement in a form reasonably acceptable to
Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
37
<PAGE>
5.13 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.14 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.14 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.15 Preparation of Tax Returns. The Principal Shareholders shall
--------------------------
prepare or cause to be prepared and file or cause to be filed all income Tax
Returns for the Company for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. Such returns shall be prepared in
accordance with applicable law and past practices consistently applied. The
Principal Shareholders shall permit Parent to review and comment on each such
Tax Return prior to filing. The Principal Shareholders shall reimburse the
Company for any income Taxes of the Company with respect to all periods or
portions thereof ending on or prior to the Closing Date.
5.16 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.17 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
38
<PAGE>
5.18 Parent Policies. Sellers acknowledge that Parent has implemented
---------------
policies regarding the operation of subsidiary entities such as the Company will
be following the Merger. Sellers acknowledge and agree that such policies, or
any such amended or replacement policies that are reasonably similar in scope,
nature or effect, are anticipated to be in place following the Merger, and
Sellers hereby indicate their intention to act in substantial compliance with
all such policies. Such policies shall not provide for Parent overhead
allocations from Parent to Company or Sub, unless otherwise agreed in advance by
the parties.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
39
<PAGE>
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and
Sub in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and
the Principal Shareholders in this Agreement are true and correct in all
material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
40
<PAGE>
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit E.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1996.
(g) Company Shareholder Approval. Each of the Company Shareholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Shareholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholders' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Section 2.10 hereof or relating to environmental laws or matters
set forth in Section 2.20 hereof, shall survive until ninety (90) days following
the expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax or environmental laws or
matters. All of the Parent's and Sub's representations and warranties contained
herein or in any instrument delivered pursuant to this Agreement shall terminate
at the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
forth herein at Parent's cost and expense. The
41
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Escrow Agent may execute this Agreement following the date hereof and prior to
the Effective Time, and such later execution, if so executed after the date
hereof, shall not affect the binding nature of this Agreement as of the date
hereof between the other signatories hereto. The portion of the Escrow Amount
contributed on behalf of each Company Shareholder shall be the pro rata amount
calculated pursuant to Section 1.6(a) of this Agreement. In addition to seeking
indemnification under Section 7.3 from the Escrow Fund and setting off amounts
from the Purchase Price Adjustment, Parent may, in its discretion, seek
indemnification for Losses directly from the Principal Shareholders, but only
after first proceeding against the Escrow Fund so long as it exists and is not
subject to other claims. Nothing herein shall limit the liability of the Parent,
the Company or the Principal Shareholders for any breach of any representation,
warranty or covenant if the Merger does not close. Parent may not receive any
shares from the Escrow Fund (other than as a Purchase Price Adjustment) unless
Officer's Certificates (as defined in subsection (d) below) identifying losses,
the aggregate of which exceed $28,750, have been delivered to the Shareholder
Representative (as defined below) and the Escrow Agent as provided in paragraph
(d) below. The Company Shareholders shall not have any right of contribution
from the Company with respect to any Loss claimed by Parent or Sub after the
Effective Time.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
-------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period. As soon as all such
claims have been resolved, the Escrow Agent shall deliver to the Company
Shareholders the remaining portion of the Escrow Fund not required to satisfy
such claims. Deliveries of Escrow Amounts to the Company Shareholders pursuant
to this Section 7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which
----------
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of
42
<PAGE>
shares of Parent Common Stock which have been released from the Escrow Fund
shall not be added to the Escrow Fund but shall be distributed to the record
holders thereof. Cash dividends on Parent Common Stock shall not be added to the
Escrow Fund but shall be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund.
------------------------
(i) Upon receipt by the Escrow Agent at any time on or before
the last day of the Escrow Period of a certificate signed by any officer of
Parent (an Officer's Certificate"): (A) stating that Parent has paid or accrued
Losses, and (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid or accrued,
or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 7.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable, cash or
shares of Parent Common Stock (at the election of Parent) held in the Escrow
Fund in an amount equal to such Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Section 7.2(d) hereof, provided that no such payment or delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Shareholders out of the Escrow Fund pursuant to this Section
7.2, Parent shall deliver to the Shareholder Representative an Officer's
Certificate: (A) stating that Parent has paid or accrued Losses and (B)
specifying in reasonable detail the individual items of Losses included in the
amount so stated, the date each such item was paid or accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(g) Actions Against Company Shareholders. In the event that Parent
------------------------------------
has elected to pursue indemnity directly from the Principal Shareholders, the
Principal Shareholders shall
43
<PAGE>
promptly, and in no event later than 30 days after delivery of the Officer's
Certificate, wire transfer to Parent the amount of such Loss, unless the Company
or the Principal Shareholders, as the case may be, contest such claim by
following the procedures set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
twenty business day period ending three days prior to the date of the Officer's
Certificate stating the claim with respect to which such shares are delivered,
and (ii) if the Parents' Common Stock is not so publicly traded, the fair market
value per share as determined by the Parent's board of directors in good faith
on the date closest to the date of the Officer's Certificate.
(i) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate within thirty
(30) days after delivery of such Officer's Certificate, the Shareholder
Representative and Parent shall attempt in good faith to agree upon the rights
of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties. If any claim
against the Escrow Fund was sought, such memorandum shall be furnished to the
Escrow Agent and the Escrow Agent shall be entitled to rely on any such
memorandum and make payment out of the Escrow Fund in accordance with the terms
thereof.
(ii) If no such agreement can be reached after good faith
negotiation (or in any event after 60 days from the date of the Officer's
Certificate), either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Shareholder Representative shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the arbitrators, to
discover relevant information from the opposing parties about the subject matter
of the dispute. The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a court of law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Notwithstanding anything in
Section 7.2(e) hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
44
<PAGE>
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(j) Third-Party Claims. In the event Parent becomes aware of a
------------------
third-party claim which Parent believes may result in Losses, Parent shall
notify the Shareholder Representative of such claim, and the Shareholder
Representative shall be entitled, at the Company Shareholders' expense, to
participate in any defense of such claim. Parent shall have the right in its
sole discretion to settle any such claim; provided, however, that except with
the consent of the Shareholder Representative, no settlement of any such claim
with third-party claimants shall be determinative of the amount of any claim
pursuant to this Section 7.2. In the event that the Shareholder Representative
has consented to any such settlement, the Company Shareholders shall have no
standing to object under any provision of this Article 7.2 to the amount of any
claim by Parent against the Escrow Fund with respect to such settlement.
(k) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, Michael E. Kacaba shall
be appointed as agent and attorney-in-fact (the "Shareholder Representative")
for each Company Shareholder, for and on behalf of shareholders of the Company,
to give and receive notices and communications, to authorize delivery to Parent
of payments from the Escrow Fund in satisfaction of claims by Parent, to object
to such deliveries, to agree to, negotiate, enter into settlements and
compromises of, and demand arbitration and comply with orders of courts and
awards of arbitrators with respect to such claims, and to take all actions
necessary or appropriate in the judgment of the Shareholder Representative for
the accomplishment of the foregoing. Such agency may be changed by the
shareholders of the Company from time to time upon not less than thirty (30)
days prior written notice to Parent; provided that the Shareholder
Representative may not be removed unless a majority-in-interest of the Company
Shareholders agree to such removal and to the identity of the substituted agent.
No bond shall be required of the Shareholder Representative, and the Shareholder
Representative shall not receive compensation for services as such. Notices or
communications to or from the Shareholder Representative shall constitute notice
to or from each of the Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder
45
<PAGE>
Representative while acting in good faith and in the exercise of reasonable
judgment. The Company Shareholders shall severally indemnify the Shareholder
Representative and hold him or her harmless against any loss, liability or
expense incurred without negligence or bad faith on the part of the Shareholder
Representative and arising out of or in connection with the acceptance or
administration of the Shareholders Representative's duties hereunder, including
the reasonable fees and expenses of any legal counsel retained by the
Shareholder Representative.
(l) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(m) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer of
Parent and the Shareholder Representative, and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or parties. The
Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow
Agent while acting in good faith and in the exercise of reasonable judgment, and
any act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
46
<PAGE>
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered, or permitted by such Escrow Agent in good faith in
accordance with the advice of counsel. The Escrow Agent is not responsible for
determining and verifying the authority of any person acting or purporting to
act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and the Escrow Amount and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite what
may be set forth elsewhere in this Agreement. In such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action
of interpleader, in arbitration or otherwise, as the circumstances may require,
requiring the Parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and shares of Parent Common Stock held in escrow, except all
cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the parties to this Agreement;
provided, however, that no such resignation shall become effective until the
appointment of a successor escrow agent which shall be accomplished as follows:
the parties shall use their best efforts to agree on a successor escrow agent
within thirty (30) days after receiving such notice. If Parent and the
Shareholder Representative fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to
47
<PAGE>
appoint a successor escrow agent authorized to do business in the state of
California. The successor escrow agent shall execute and deliver an instrument
accepting such appointment and it shall, without further acts, be vested with
all the estates, properties, rights, powers, and duties of the predecessor
Escrow Agent as if originally named as Escrow Agent. Thereafter, the Escrow
Agent shall be discharged from any further duties and liability under this
Agreement.
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
7.3 Indemnity.
---------
(a) The Principal Shareholders hereby agree to indemnify and hold
Parent and its subsidiaries, directors, officers and agents harmless against and
in respect of any loss, cost, expense, claim, liability, deficiency, judgment or
damage (hereinafter, individually, a "Loss"; and collectively, "Losses")
incurred by Parent, its subsidiaries, officers, directors and agents (i) as a
result of any inaccuracy in or breach of a representation or warranty of the
Company or the Principal Shareholders contained in this Agreement or any
failure by the Company or any Principal Shareholder to perform or comply with
any covenant contained in this Agreement and (ii) by reason of the failure of
the Company and the Principal Shareholders to perform their obligations
hereunder.
(b) Parent hereby agrees to indemnify and hold the Company and its
subsidiaries, directors, officers and agents harmless against and in respect of
any loss, cost, expense, claim, liability, deficiency, judgment or damage
(hereinafter, individually, a "Loss"; and collectively, "Losses") incurred by
the Company, its subsidiaries, officers, directors and agents (i) as a result of
any inaccuracy in or breach of a representation or warranty of Parent contained
in this Agreement or any failure by Parent to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of Parent
to perform its obligations hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the third
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date; provided, however, that the representations and warranties with respect to
Taxes (Section 2.10) and environmental laws (Section 2.20) shall survive until
the expiration of the applicable statute of limitations, if any.
48
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(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (a "Notice") to
the Parent, or the Surviving Corporation and the Shareholder Representative, as
the case may be, briefly stating the nature and basis of such claim. In the
case of Losses arising by reason of any third-party claim, the Notice shall be
given within 25 days of the filing or other written assertion of any such claim
against Parent, but the failure of Parent to give the Notice within such time
period shall not relieve the Company and the Principal Shareholders of any
liability that the Company and the Principal Shareholders may have to Parent
except to the extent that the Company and the Principal Shareholders are
actually prejudiced thereby; provided, however, that any such notice shall be
given no later than the date of the expiration of the applicable indemnification
obligation of the Company and the Principal Shareholders as set forth in Section
7.3(c) above. The indemnified party shall provide the other party on request
all information and documentation reasonably necessary to support and verify any
Losses which the indemnified party believes give rise to a claim for
indemnification hereunder and shall give reasonable access to all books, records
and personnel in the possession or under the control of that party which would
have bearing on such claim.
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholders. Failing
such agreement, the arbitration shall be conducted by three independent
arbitrators, none of whom shall have any competitive interest with Parent or the
Company and the Principal Shareholders. Parent shall choose one such
arbitrator, the Company and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent and the Company
and the Principal Shareholders. Each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration except that the arbitrator can
compel one party to pay all or a portion of the other party's costs and
expenses.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by May 31, 1997; (ii) there shall be a final nonappealable order of a
federal or state court in effect
49
<PAGE>
preventing consummation of the Merger; or (iii) there shall be any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any governmental entity that would make consummation of the Merger
illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Parent's or Sub's ownership or operation of any portion of the business of the
Company or (ii) compel Parent or the Company to dispose of or hold separate all
or a portion of the business or assets of the Sub or Parent as a result of the
Merger;
(d) by Parent if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are
in material breach of their respective obligations under this Agreement and
there has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company, or their respective officers, directors or shareholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
50
<PAGE>
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company or to a Principal Shareholder to:
Michael E. Kacaba
5110 Goldleaf Circle - Suite 275
Los Angeles, CA 90056
Telecopy No.: (213)290.3050
51
<PAGE>
with a copy to:
Attention:
Telecopy No.:
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
52
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
COMPANY USWEB CORPORATION
By: By:
President
Title:
ESCROW AGENT USWEB ACQUISITION CORPORATION 106
By: By:
Title: Title:
PRINCIPAL SHAREHOLDERS
__________________________________
Michael E. Kacaba
53
<PAGE>
__________________________________
Ronald M. Hom
__________________________________
David M. Johnson
(ATTACH SPOUSAL CONSENTS AS REQUIRED)
54
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares*
Michael E. Kacaba 3,333.34
Ronald M. Hom 3,333.33
David M. Johnson 3,333.33
- -------------------------
*On an as fully converted to Common Stock, fully diluted basis.
55
<PAGE>
EXHIBIT B
Valuation Model
56
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
57
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
58
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
59
<PAGE>
EXHIBIT 2.4
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 107
AND
INTERNETOFFICE, LLC
DATED AS OF APRIL 30, 1997
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- -----------------------------
Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER 2
1.1 The Merger. 2
1.2 Effective Time. 2
1.3 Effect of the Merger. 2
1.4 Certificate of Incorporation; Operating Agreement. 2
1.5 Directors and Officers. 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations. 3
1.7 Surrender of Certificates. 4
1.8 No Further Ownership Rights in Company Membership Units. 6
1.9 Lost, Stolen or Destroyed Certificates. 6
1.10 Purchase Price Adjustments. 6
1.11 Parent Common Stock. 8
1.12 Tax Consequences. 8
1.13 Taking of Necessary Action; Further Action. 8
</TABLE>
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL
SHAREHOLDERS 9
2.1 Organization of the Company. 9
2.2 Company Capital Structure. 9
2.3 Subsidiaries. 9
2.4 Authority. 10
2.5 No Conflict. 10
2.6 Consents. 10
2.7 Company Financial Statements. 11
2.8 No Undisclosed Liabilities. 11
2.9 No Changes. 11
2.10 Tax Matters. 13
2.11 Restrictions on Business Activities. 14
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
Equipment. 15
2.13 Intellectual Property. 15
2.14 Agreements, Contracts and Commitments. 18
2.15 Interested Party Transactions. 20
2.16 Governmental Authorization. 20
2.17 Litigation. 20
2.18 Accounts Receivable. 20
2.19 Minute Books. 20
2.20 Environmental Matters. 21
2.21 Brokers' and Finders' Fees; Third Party Expenses. 22
2.22 Employee Benefit Plans and Compensation. 22
2.23 Insurance. 25
2.24 Compliance with Laws. 25
2.25 Third Party Consents. 25
2.26 Warranties; Indemnities. 25
2.27 Complete Copies of Materials. 25
2.28 Representations Complete. 25
2.29 Business Plan. 25
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.30 Backlog Report. 25
2.31 Securities Law Compliance. 26
2.32 Principal Shareholder Investment Representations. 26
ARTICLE III 27
3.1 Organization, Standing and Power. 27
3.2 Authority; Consents. 27
3.3 Capital Structure. 27
3.4 Brokers' and Finders' Fees. 28
3.5 Similar Transactions. 28
3.6 No Changes. 29
ARTICLE IV 29
4.1 Conduct of Business of the Company. 29
4.2 No Solicitation. 31
ARTICLE V 32
5.1 Parent's Right of First Refusal. 32
5.2 Market Standoff Agreement. 33
5.3 Restriction on Competition. 33
5.4 Confidentiality. 34
5.5 Expenses. 35
5.6 Public Disclosure. 35
5.7 Post-Closing Employment of Company Employees. 35
5.8 Treatment of Affiliate Warrants. 37
5.9 Access to Information. 37
5.10 Public Disclosure. 37
5.11 Consents. 37
5.12 FIRPTA Compliance. 37
5.13 Best Efforts. 38
5.14 Notification of Certain Matters. 38
5.15 Tax Returns. N/A - reserved for Sub-S corporations 38
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.16 Additional Documents and Further Assurances. 38
5.17 Section 368 Compliance. 38
5.18 Parent Policies. 39
ARTICLE VI 39
6.1 Conditions to Obligations of Each Party to Effect the Merger. 39
6.2 Additional Conditions to Obligations of Company. 39
6.3 Additional Conditions to the Obligations of Parent and Sub. 40
ARTICLE VII 41
7.1 Survival of Representations and Warranties. 41
7.2 Escrow Arrangements; Setoff. 41
ARTICLE VIII 49
8.1 Termination. 49
8.2 Effect of Termination. 50
8.3 Amendment. 50
8.4 Extension; Waiver. 51
ARTICLE IX 51
9.1 Notices. 51
9.2 Interpretation. 52
9.3 Counterparts. 52
9.4 Entire Agreement; Assignment. 52
9.5 Severability. 52
9.6 Other Remedies. 52
9.7 Governing Law. 53
9.8 Rules of Construction. 53
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of April 30, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 107, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), Internetoffice, LLC, a Georgia
---
limited liability company (the "Company"), and the individuals listed on Exhibit
------- -------
A attached hereto (such individuals being hereinafter referred to collectively
- -
as the "Principal Shareholders" and individually as a "Principal Shareholder").
---------------------- ---------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective members
that Parent acquire the Company through the statutory merger of the Company with
and into Sub (the "Merger") and, in furtherance thereof, have approved the
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding Membership Units of the Company shall be converted into the right to
receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to
make certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Sub following
the Merger. Each party understands and agrees that any such employee or the Sub
shall have the right to terminate any such employment at any time.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
1
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations laws of the states of Delaware
("Delaware Law") and the limited liability company laws of the State of Georgia
(the "Georgia Law"), the Company shall be merged with and into the Sub, the
separate corporate existence of the Company shall cease and Sub shall continue
as the surviving corporation and as a wholly owned subsidiary of Parent. Sub as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
-------
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California, unless another place or time is agreed to in writing by Parent and
the Company. The date upon which the Closing actually occurs is herein referred
to as the "Closing Date." On the Closing Date, the parties hereto shall cause
------------
the Merger to be consummated by submitting for filing an Agreement and Plan of
Merger (or like instrument) with the Secretary of State of Delaware and the
Secretary of State of Georgia (the "Merger Articles"), in accordance with the
---------------
relevant provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of Georgia being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of Delaware Law and the
limited liability company laws of the State of Georgia. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time, all the
property, rights, privileges, powers and franchises of the Company and Sub shall
vest in the Surviving Corporation, and all debts, liabilities and duties of the
Company and Sub shall become the debts, liabilities and duties of the Surviving
Corporation.
1.4 Certificate of Incorporation; Operating Agreement.
-------------------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Operating Agreement of Sub, as in effect immediately prior to
the Effective Time, shall be the Operating Agreement of the Surviving
Corporation until thereafter amended.
2
<PAGE>
1.5 Directors and Officers. The director(s) of Sub immediately prior
----------------------
to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Operating Agreement of the Surviving Corporation. The
officers of Sub immediately prior to the Effective Time shall be the initial
officers of the Surviving Corporation, each to hold office in accordance with
the Operating Agreement of the Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Membership Units for Stock; Purchase Price
------------------------------------------------------
Adjustments. As of the Effective Time of the Merger, each of the Company's
- -----------
Membership Units, (the "Company Membership Units"), that is issued and
------------------------
outstanding immediately prior to the Effective Time (other than any dissenting
Company Membership Units under applicable state law) shall, by virtue of the
Merger and without any action on the part of Sub, the Company, or the Company's
Members (the "Company Members"), be canceled and extinguished and each Company
---------------
member shall have (i) the right to receive such Company member's pro rata
portion (based on such Company members' equity ownership in the Company as
represented to Parent by the Company) of that number of shares of the Parent's
Common Stock, (the "Parent Common Stock") equal to $4,859,478 (the "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(e) below) as of the Closing Date, subject to Section 7.2 hereof, plus the
contingent right to receive additional shares of Parent Common Stock as
provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
-------------------------
The Original Purchase Price may be adjusted to reflect rounding pursuant to
Section 1.6(d). The Original Purchase Price and the Purchase Price Adjustment
are hereinafter collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. N/A
-------------
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Membership Units), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Membership Units occurring after the
date hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
3
<PAGE>
(e) Definitions.
------------
(i) Aggregate Common Number. The "Aggregate Common Number" shall
-----------------------
mean the aggregate number of shares of Company Membership Units outstanding
immediately prior to the Effective Time.
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
--------------------
Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
---------------------------
equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
(iv) Exchange Ratio. The "Exchange Ratio" shall mean the quotient
--------------
obtained by dividing (i) (X) the Original Purchase Price divided by (Y) the Fair
Value Per Share as of the Effective Date by (ii) the Aggregate Common Number.
For illustrative purposes only, if the Original Purchase Price were $2,000,000,
the Fair Value Per Share were $2.50 and the Aggregate Common Number were
3,400,000, then the Exchange Ratio would be ($2,000,000 / $2.50) / 3,400,000 =
.23529, so each share of Company Membership Units would be exchanged for .23529
shares of Parent's Common Stock. If the facts were the same but the Aggregate
Common Number were 1,500, then the calculation would be ($2,000,000 / $2.50)
/1,500 = 533.33, so each share of Company Membership Units would be exchanged
for 533.33 shares of Parent's Common Stock.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
--------
Agent") in the Merger.
- -----
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Membership Units;
provided that, on behalf of the Company Members, Parent shall deposit the Escrow
Amount into an escrow account.
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Members (i) a
letter of transmittal (which
4
<PAGE>
shall specify that delivery shall be effected, and risk of loss and title to the
Company Membership Units, which immediately prior to the Effective Time
represented all Company Membership Interests which were converted into the right
to receive the Merger Consideration pursuant to Section 1.6, shall pass, only
upon delivery of a written power (the "Transfer Power") to the Exchange Agent
and shall be in such form and have such other provisions as Parent may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for the Merger Consideration. Upon surrender of a
Certificate for cancellation to the Exchange Agent which Transfer Power shall be
in such form and have such other provisions as Parent may reasonably specify)
and (ii) instructions for use in executing and delivering the Transfer Powers in
exchange for the Merger Consideration. Upon a surrender of a Transfer Power for
cancellation of Company Membership Units to the Exchange Agent or to such other
agent or agents as may be appointed by Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the Company Member shall be entitled to receive in
exchange therefor a certificate representing the number of shares issuable to
such Company Member as part of the Original Price (less the number of shares of
Parent Common Stock to be deposited in the Escrow Fund (as defined in Article
VII) on such holder's behalf pursuant to Article VII hereof and the Company
Membership Units transferred by the Transfer Power shall forthwith be canceled
and such Membership Interests extinguished. As soon as practicable after the
Effective Time, and subject to and in accordance with the provisions of Article
VII hereof, Parent shall cause to be distributed to the Escrow Agent (as defined
in Article VII) a certificate or certificates representing that number of shares
of Parent Common Stock equal to the Escrow Amount. Such consideration shall be
beneficially owned by the holders on whose behalf such consideration were
deposited in the Escrow Fund and shall be available to compensate Parent as
provided in Article VII. Until the holder of Company Membership Units properly
executes and delivers a Transfer Power to the Exchange Agent, each holder's
outstanding Company Membership Units will be deemed from and after the Effective
Time, for all purposes, other than the payment of dividends, to evidence only
the right to receive Merger Consideration pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Membership Units
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the
5
<PAGE>
person requesting such exchange will have paid to Sub or any agent designated by
it any transfer or other taxes required by reason of the issuance of a
certificate for shares of Parent Common Stock in any name other than that of the
registered holder of the Certificate surrendered or have established to the
satisfaction of Sub or any agent designated by it that such tax has been paid or
is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Membership Units for any amount properly paid to a public official pursuant to
any applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Membership Units in accordance with the terms hereof shall be deemed to have
been issued in full satisfaction of all rights pertaining to such shares of
Company capital stock, and there shall be no further registration of transfers
on the records of the Surviving Corporation of shares of Company capital stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. N/A - reserved for Stock
--------------------------------------
Corporations.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. At the close of business on the last
---------------------
business day of the sixth full month after the Closing Date (the "First
-----
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the operation of the Parent's affiliate valuation model (the "Valuation Model").
---------------
Parent shall then calculate the "First Adjustment to Purchase Price" as follows:
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Model; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to the
Company Members promptly after the First Adjustment Date a number of shares
calculated as follows:
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
6
<PAGE>
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay to
Parent from the Escrow Amount promptly after the First Adjustment Date a number
of shares calculated as follows:
FSP = (-FAPP / FVPSCD)
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on the last
-----------------------
business day of the twelfth full month after the Closing Date (the "Second
------
Adjustment Date"), the Parent shall conduct a valuation of the Sub according to
- ---------------
the Valuation Model, attached as Exhibit B. Parent shall then calculate the
--------------- ---------
"Second Adjustment to Purchase Price" as follows:
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Model; and
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay to the
Company Members promptly after the Second Adjustment Date a number of shares
calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
(ii) If SAPP is less than zero, then the Escrow Agent shall pay to
Parent from the Escrow Amount promptly after the Second Adjustment Date a number
of shares calculated as follows:
SSP = (-SAPP / FVPSCD)
7
<PAGE>
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
----------
Act"), by reason of Section 4(2) of the Securities Act or Regulation D
- ---
thereunder. Such shares may not be transferred or resold thereafter except in
compliance with the terms of this Agreement and following registration under the
Securities Act or in reliance on an exemption from registration under the
Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally,
represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in Exhibit C attached hereto (referencing the appropriate
---------
section and paragraph numbers), as follows:
8
<PAGE>
2.1 Organization of the Company. The Company is a limited liability
---------------------------
company duly organized, validly existing and in good standing under the limited
liability company laws of the State of Georgia. The Company has the corporate
power to own its properties and to carry on its business as now being conducted.
The Company is duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the business, assets (including intangible
assets), financial condition, results of operations or prospects of the Company
(hereinafter referred to as a "Material Adverse Effect"). The Company has
-----------------------
delivered a true and correct copy of its Articles of Organization and Operating
Agreement, each as amended to date, to Parent. Exhibit C lists the directors
---------
and officers of the Company. The operations now being conducted by the Company
have not been conducted under any other name.
2.2 Company Capital Structure.
(a) The authorized capitalization of the Company consists of 842,507
Membership Units, all of which are issued and outstanding. There are no other
classes or series of capital stock of the Company of any kind outstanding or
issuable. The Company Membership Units are held by the persons, with the
domicile addresses and in the amounts set forth on Exhibit C. All outstanding
---------
Company Membership Units are duly authorized, validly issued, fully paid and
non-assessable and not subject to preemptive rights created by statute, the
Articles of Organization or Operating Agreement of the Company or any agreement
to which the Company is a party or by which it is bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party
or by which it is bound obligating the Company to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of the Company or obligating the
Company to grant, extend, accelerate the vesting of, change the price of,
otherwise amend or enter into any such option, warrant, call, right, commitment
or agreement. As a result of the Merger, Parent will be the record and sole
beneficial owner of all outstanding Membership Units of the Company and rights
to acquire or receive Membership Units.
2.3 Subsidiaries. The Company does not have any subsidiaries or
------------
affiliated companies and does not otherwise own any shares in the capital of or
any interest in, or control, directly or indirectly, any other corporation,
partnership, association, joint venture or other business entity. The Company
has never had any subsidiaries or affiliated companies and has never otherwise
owned shares in the capital of or any interest in or control, directly or
indirectly of, any other corporation, partnership association, joint venture or
other business entity.
9
<PAGE>
2.4 Authority. Each of the Company and the Principal Shareholders has
---------
all requisite corporate power and authority to enter into this Agreement to
which it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company and the Principal
Shareholders, and no further action is required on their part to authorize the
Agreement and the transactions contemplated hereby and thereby. This Agreement
has been duly executed and delivered by the Company and the Principal
Shareholders and, assuming the due authorization, execution and delivery by the
other parties hereto and thereto, constitutes the valid and binding obligation
of the Company and the Principal Shareholders, enforceable in accordance with
its terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
2.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Organization and Operating Agreement the Company, (ii) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which the Company or any of its properties
or assets is subject, or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets.
2.6 Consents. No consent, waiver, approval, order or authorization of,
--------
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of the State of Georgia.
10
<PAGE>
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of December 31, 1996 and the related audited statements
of income and cash flow for year then ended (the "Audited Financials") and the
------------------
Company's unaudited balance sheet of April 30, 1997, and the related unaudited
statements of income and cash flow for the Six (6) months then ended (the
"Unaudited Financials"). The Audited Financials and the Unaudited Financials
--------------------
are correct in all material respects and have been prepared in accordance with
United States generally accepted accounting principles ("USGAAP") applied on a
------
basis consistent throughout the periods indicated and consistent with each
other. The Audited and Unaudited Financials present fairly in all material
respects the financial condition, operating results and cash flows of the
Company as of the dates and during the periods indicated therein, subject in the
case of the Unaudited Financials, to normal year-end adjustments, which will not
be material in amount or significance. The Company's audited Balance Sheet as
of December 31, 1996 shall be referred to as the "Balance Sheet".
-------------
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, none
-------------------------- ---------
of the Company has any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet, or (ii) has not
arisen in the ordinary course of business consistent with past practices since
December 31, 1996.
2.9 No Changes. Except as set forth in Exhibit C, since December 31,
---------- ---------
1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Organization or operating
Agreement of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
11
<PAGE>
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification the terms of any Company
-----------------
Agreement which (i) involves the payment of greater than $25,000 per annum or
which extends for more than one year, (ii) involves any payment or obligation to
any affiliate of the Company other than in the ordinary course of business as
conducted on that date and consistent with past practices, or (iii) involves the
sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
12
<PAGE>
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company or;
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and timely
filed or made a timely request for extension for all required federal, state,
local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
-------
Company, or its operations and such Returns are true and correct and have been
completed in accordance with applicable law.
(ii) The Company as of the Closing Date (A) will have paid or accrued
all Taxes it is required to pay or accrue as shown on the Returns and (B) will
have withheld and timely remitted with respect to its employees all income taxes
and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
13
<PAGE>
(iv) No audit or other examination of any Return of the Company, is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state, local
and foreign Taxes which have not been accrued or reserved against in accordance
with USGAAP on the Balance Sheet, whether asserted or unasserted, contingent or
otherwise.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns filed for all years as to which any applicable statute of limitations
has not expired.
(vii) There are no Liens of any sort on the assets of the Company
the relating to or attributable to Taxes other than Liens for taxes not yet due
and payable.
(viii) The Company Members have no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on any material assets of the Company.
(ix) As of the Closing, there will not be any contract, agreement,
plan or arrangement, including but not limited to the provisions of this
Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing, indemnification or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xi) The Company uses the accrual method of accounting for income tax
purposes and its tax basis in its assets for purposes of determining its future
amortization, depreciation and other federal income tax deductions is accurately
reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or otherwise binding
upon the Company which has or may have the effect of prohibiting or impairing
any business practice of the Company, any acquisition of property (tangible or
intangible) by the Company or the conduct of business by the Company. The
Company has not entered into any agreement under which the Company is restricted
from providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
14
<PAGE>
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the Company
Financials or in Exhibit C and except for liens for taxes not yet due and
---------
payable and such imperfections of title and encumbrances, if any, which are not
material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
Company's current and former customers (the "Customer Information"). No third
--------------------
party possesses any claims or rights with respect to use of the Customer
Information.
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks;
15
<PAGE>
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded, and all documentation related
to any of the foregoing throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of Company's United States and foreign: (i)
---------
patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreement, to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholders, all
- -
other parties to the contracts, licenses and agreements listed in Exhibit C are,
---------
in compliance with, and have not breached any term of, the contracts, licenses
and agreements. Following the Closing Date, Sub will be permitted to exercise
all of the Company's rights under the contracts, licenses and agreements listed
in Exhibit C without the payment of any additional amounts or consideration
---------
other than ongoing fees, royalties or payments which the Company would otherwise
be required to pay.
16
<PAGE>
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any lien or encumbrance; and (ii) the Company owns, or has
- -
the right, pursuant to a valid Contract to use or operate under, all other
Intellectual Property of the Company.
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity),
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company under development by the Company and the performance of
all services provided or contemplated to be provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between the
---------
Company and any other person wherein or whereby the Company has agreed to, or
assumed, any obligation or duty to indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement by the
Company or such other Person of the Intellectual Property rights of any other
person,
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement, or performance
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company and
---------
the Principal Shareholders, no person is infringing or misappropriating any of
the Intellectual Property of Company.
17
<PAGE>
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material, a defamatory statement or material, or
violates any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or is
---------
not bound by:
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing or
retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
18
<PAGE>
(vii) any lease of personal property having a value individually
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
---------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development agreement,
or
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company has not breached, violated or defaulted under, or
receivednotice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated to
- ---------
the Company pursuant thereto. The Company has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
19
<PAGE>
2.15 Interested Party Transactions. No officer, director or Principal
-----------------------------
Shareholder of the Company (nor any ancestor, sibling, descendant or spouse of
any of such persons, or any trust, partnership or corporation in which any of
such persons has or has had an interest), has or has had, directly or
indirectly, (i) an interest in any entity which furnished or sold, or furnishes
or sells, services or products that the Company furnishes or sells, or proposes
to furnish or sell, or (ii) any interest in any entity that purchases from or
sells or furnishes to, the Company, any goods or services or (iii) a beneficial
interest in any Contract; provided, that ownership of no more than one percent
(1%) of the outstanding voting stock of a publicly traded corporation shall not
be deemed an "interest in any entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each
-------------------------- ---------
consent, license, permit, grant or other authorization issued to the Company by
a governmental entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principals Shareholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Shareholders, is there any reasonable basis therefor) by or
before any governmental entity. No governmental entity has at any time
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of its products or services in the present manner or style thereof.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of April 30, 1997, ("Accounts Receivable") along
-------------------
with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company arose in the ordinary
course of business, are carried at values determined in accordance with USGAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth in the Balance Sheet. No person has any Lien on any of such
Accounts Receivable and no request or agreement for deduction or discount has
been made with respect to any of such Accounts Receivable.
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its Members or actions by written consent since the time of
incorporation of the Company.
20
<PAGE>
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
------------------
safely maintained. No Hazardous Materials are present as a result of the
deliberate actions of the Company or, to the Company's or Principal
Shareholders' knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has either the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits")
---------------------
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
21
<PAGE>
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company for the benefit of any "Employee"
(as defined below), and pursuant to which the Company has or may have any
material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee;
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under
22
<PAGE>
ERISA or the Code in connection with each Company Employee Plan or related
trust; (iv) the most recent summary plan description together with the most
recent summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (v) all IRS determination letters and
rulings relating to Company Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Company Employee Plan; (vi) if the Employee Plan is funded, the
most recent annual and periodic accounting of Employee Plan assets; and (vii)
all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plans, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company have performed all
------------------------
obligations required to be performed by them under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iii) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (iv) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (v) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C,
------------------------------ ---------
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not]represented, promised or
contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
23
<PAGE>
(h) Continuing Liabilities. No Employee Plan provides, or has any
----------------------
liability to provide, life insurance, medical or other employee benefits to any
Employee upon his or her retirement or termination of employment for any reason,
except as may be required by statute, and the Company has not represented,
promised or contracted (whether in oral or written form) to any Employee (either
individually or to Employees as a group) that such Employee(s) would be provided
with life insurance, medical or other employee welfare benefits upon their
retirement or termination of employment, except to the extent required by
statute.
(i) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of employment and wages and hours, in each case,
with respect to Employees; (ii) has withheld all amounts required by law or by
agreement to be withheld from the wages, salaries and other payments to
Employees; (iii) is not liable for any arrears of wages or any taxes or any
penalty for failure to comply with any of the foregoing; and (iv) is not liable
for any payment to any trust or other fund or to any governmental or
administrative authority, with respect to unemployment compensation benefits,
social security or other benefits for Employees (other than routine payments to
be made in the normal course of business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety, discrimination, or
harassment matters involving any Employee, including, without limitation,
charges of unfair labor practices, discrimination, or harassment complaints,
which, if adversely determined, would, individually or in the aggregate, result
in liability to the Company, Parent or Sub. The Company has not engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, Parent or Sub. The Company
is not presently, or has in the past, been a party to, or bound by, any
collective bargaining agreement or union contract with respect to Employees and
no collective bargaining agreement is being negotiated by the Company.
24
<PAGE>
2.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company are otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholders have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
2.24 Compliance with Laws. The Company has complied with, are not in
--------------------
violation of, and have not received any notices of violation with respect to,
any foreign, federal, state or local statute, law or regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
---------
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Representations Complete. None of the representations or guarantees
------------------------
made by the Company or the Principal Shareholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
- - ---------
Company or the Principal Shareholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company Members in
connection with soliciting their consent to this Agreement and the Merger,
contains or will contain at the Closing, any untrue statement of a material
fact, or omits or will omit at the Closing to state any material fact necessary
in order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
2.29 Business Plan. The Company has provided to Parent a current,
-------------
accurate and detailed business plan for the Company's planned operations during
the twelve months following the Closing Date which includes, without limitation,
a description of the Company's capital requirements, staffing needs, and a pro
forma income statement. The business plan is attached to Exhibit C hereto.
---------
2.30 Backlog Report. The Company has provided to Parent a detailed and
---------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
25
<PAGE>
2.31 Securities Law Compliance. The Company will make no distribution
-------------------------
of any security issued by Parent unless such distribution is in compliance with
applicable state and federal securities laws.
2.32 Principal Shareholder Investment Representations. Each of the
-------------------------------------------------
Principal Shareholders represents and warrants to the Parent as follows:
(a) Experience. The Principal Shareholder is able to assess the
----------
technology, markets, management and strategy of the Parent and to fend for
itself in transactions such as the one contemplated by this Agreement, has such
knowledge and experience in financial and business matters that the Principal
Shareholder is capable of evaluating the merits and risks inherent in holding
stock of the Parent, and has the ability to bear the economic risks of the
investment.
(b) Investment. The Principal Shareholder accepts the shares of the
----------
Parent Common Stock as investment for the Principal Shareholder's own account
and not with the view to, or for resale in connection with, any distribution
thereof. The Principal Shareholder understands that the Parent Common Stock has
not been registered under the Securities Act by reason of a specific exemption
from the registration provisions of the Securities Act which depends upon, among
other things, the bona fide nature of the investment intent as expressed herein.
The Principal Shareholder further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to any third person with respect to any of the Parent Common
Stock. The Principal Shareholder understands and acknowledges that the
provision of Parent Common Stock pursuant to this Agreement will not be
registered under the Securities Act on the ground that the issuance of
securities hereunder is exempt from the registration requirements of the
Securities Act.
(c) Rule 144. The Principal Shareholder acknowledges that the Parent
--------
Common Stock must be held indefinitely unless subsequently registered under the
Securities Act or an exemption from such registration is available. The
Principal Shareholder is aware of the provisions of Rule 144 promulgated under
the Securities Act which permit limited resale of shares purchased in a private
placement subject to the satisfaction of certain conditions. The Principal
Shareholder covenants that, in the absence of an effective registration
statement covering the stock in question, the Principal Shareholder will sell,
transfer, or otherwise dispose of the Parent Common Stock only in a manner
consistent with the Principal Shareholder's representations and covenants set
forth herein. In connection therewith, the Principal Shareholder acknowledges
that the Parent will make a notation on its stock books regarding the
restrictions on transfers set forth in this Article and will transfer securities
on the books of the Parent only to the extent not inconsistent therewith.
(d) No Public Market. The Principal Shareholder understands that no
----------------
public market now exists for any of the securities issued by the Parent, and
that no public market may ever exist for such securities.
26
<PAGE>
(e) Access to Data. The Principal Shareholder has received and
--------------
reviewed information about the Parent and has had an opportunity to review and
discuss the Parent's business, management and financial affairs with its
management. The Principal Shareholder understands that such discussions, as
well as any written information issued by the Parent, were intended to describe
the aspects of the Parent's business and prospects which the Parent believes to
be material, but were not necessarily a thorough or exhaustive description.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub.
This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the valid and binding obligations of Parent and Sub, enforceable in
accordance with its terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement by Parent and Sub does not, and, as
of the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Organization or Operating Agreement of Parent or Sub or (ii) any agreement or
instrument, permit, judgment, statute, law, rule or regulation applicable to
Parent or Sub. No consent, waiver, approval, or registration, declaration or
filing with, any Governmental Entity or any third party is required by or with
respect to any of the Parent or Sub in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 50,000,000 shares of
Common Stock, $.001 par value, of which 29,767,708 shares were issued and
outstanding as of December 31, 1996, and 27,988,501 shares of Preferred Stock,
$.001 par value, of which are designated
27
<PAGE>
Series A Preferred Stock, 18,518,500 shares all of which are issued and
outstanding, and 9,310,001 shares are designated Series B Preferred Stock, all
of which are issued and outstanding. All such shares have been duly authorized,
and all such issued and outstanding shares have been validly issued, are fully
paid and nonassessable and are free of any liens or encumbrances other than any
liens or encumbrances created by or imposed upon the holders thereof. Parent has
also reserved (i) 3,900,000 shares of Common Stock for issuance to employees and
consultants pursuant to Parent's 1996 Employee Stock Option Plans, (ii) 160,000
shares of Series A Preferred Stock for issuance upon the exercise of outstanding
warrants to purchase Series A Preferred Stock (the "Warrant Stock"), (iii)
-------------
160,000 shares of Common Stock for issuance upon conversion of the Warrant Stock
and (iv) 1,000,000 shares of Common Stock for issuance upon the exercise of
warrants issued or outstanding warrants to purchase issuable pursuant to the
Company's Affiliate Warrants Program. In February, 1997, the Board of Directors
of the Company approved (i) increasing the authorized shares of Stock to
100,000,000 shares, (ii) increasing the number of authorized shares of Preferred
Stock to 37,764,153 shares, in preparation for a sale of Series C Preferred
Stock, and (iii) adopting the Company's 1997 Acquisition Stock Option Plan,
reserving 10,000,000 shares of Common Stock for issuance thereunder; all of
these actions are currently pending Common Stock. In February, 1997, the Board
of Directors of the Company approved (i) increasing the authorized shares of
Common Stock to 100,000,000 shares, (ii) increasing the number of authorized
shares of Preferred Stock to 37,764,153 shares, in preparation for a sale of
Series C Preferred Stock, and (iii) adopting the Company's 1997 Acquisition
Stock Option Plan, reserving 10,000,000 shares of Common Stock thereunder; all
of these actions are currently pending. There are no other options, warrants,
calls, rights, commitments or agreements of any character to which Parent is a
party or by which it is bound obligating Parent to issue, deliver, sell,
repurchase or redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Parent or obligating Parent to
grant, extend or enter into any such option, warrant, call, right, commitment or
agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will
--------------------------
it incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due
to the Sellers upon such recalculation shall be issued promptly to the Company
Members.
28
<PAGE>
3.6 No Changes. Except as otherwise disclosed in this Agreement, there
----------
have been no material adverse changes to the Parent's financial condition or
operating information from the information contained in the Franchise Offering
Circular dated effective December 23, 1996, and the Confidential Offering
Memorandum dated February 1997, relating to Parent's $18,000,000 Series C
Preferred Stock Offering.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, the Company agrees (except to the extent
that Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
----------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in
29
<PAGE>
respect of, in lieu of or in substitution for shares of capital stock of the
Company, or repurchase, redeem or otherwise acquire, directly or indirectly, any
shares of its capital stock (or options, warrants or other rights exercisable
therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Articles of Organization or
Operating Agreement;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement, except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free reorganization
hereunder;
30
<PAGE>
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Financial Statements (or the
notes thereto);
(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (s) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
date of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or either Company member receives prior to the Effective Time or the termination
of this Agreement any offer or proposal relating to any of the above, the
Company or the Company member, as applicable shall immediately notify Parent
thereof, including information as to the identity of the offeror or the party
making any such offer or proposal and the specific terms of such offer or
proposal, as the case may be, and such other information related thereto as
Parent may reasonably request.
31
<PAGE>
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
(including transfer by gift or operation of law), or any Shares held by a
transferee (either being sometimes referred to herein as the "Holder") may be
sold, the Parent or its assignee(s) shall have a right of first refusal to
purchase such Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
--------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash consideration with such other cash or
non-cash consideration as shall be determined by the Board of Directors of the
Parent in good faith.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares
32
<PAGE>
in the hands of such Proposed Transferee. If the Shares described in the Notice
are not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Parent, and the Parent or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the benefit of the
Holder's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, brother or sister, or domestic partner. In such case, the
transferee or other recipient shall receive and hold the Shares so transferred
subject to the provisions of this Section, and there shall be no further
transfer of such Shares except in accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
5.2 Market Standoff Agreement. Each Company member hereby agrees that
--------------------------
if so requested by the Company or any representative of the underwriters in
connection with any registration of the offering of any Shares of the Company
under the Securities Act, such Company member shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of the Company during the
180-day period following the date of the final Prospectus contained in a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the general public in
an underwritten public offering under the Securities Act. The Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
---------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, no Principal Shareholder shall:
(i) engage in, including as an employee, consultant or otherwise,
or own any interest (except as a passive investor of less than five percent (5%)
of total debt and equity) in any business or other activity that would compete
with the Parent's; or
(ii) divert or attempt to divert any existing or prospective
business or customers of the Parent (including any affiliates of the Parent) to
any other person or entity, by direct or indirect inducement or otherwise, or do
or perform, directly or indirectly, any other act injurious or prejudicial to
the goodwill associated with the Parent or its affiliates; or
33
<PAGE>
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
---------------------
(i) This Section shall apply in the SMSA where the Company is
located, except that this Section shall not apply to activities of the Principal
Shareholders relating to (A) Faxweb(R), (B) ISP Helpdesk Software, ( C ) ISP
Customer Service Software, and (D) ISP Billing Software. This section shall
prevent Principal Shareholders from being employed full-time by or owning
greater than a 10% interest in a business which prepares complete Web sites for
customers on a professional services basis, but this Section shall not prevent
Principal Shareholders from being employed by, consulting for, or otherwise
forming relationships with businesses which otherwise provide products and
services related to the Internet.
(ii) In the event that any other provision of this Section 5.3 or
the application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(iii) In the event that a Principal Shareholder, who also is a
New Employee, is terminated from employment by Parent without cause at any time
within three (3) years of the Closing Date, then the term of the restrictions
imposed by this Section 5.3 shall be reduced to six (6) months and that
terminated Principal Shareholder/New Employee shall receive severance benefits
from Parent equal to six (6) months salary and employee benefits.
5.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (e) which is disclosed in the
course of any litigation between any of the parties hereto; it being understood
that the parties may disclose relevant information and knowledge to their
respective employees and agents on a need to know basis, provided that the
parties cause such employees and agents to treat such information and knowledge
confidentially.
34
<PAGE>
5.5 Expenses. Whether or not the Acquisition is consummated, all fees
--------
and expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any
-----------------
applicable rule of a stock exchange or quotation system upon which a parties'
securities are listed, prior to the Closing Date, no disclosure (whether or not
in response to an inquiry) of the subject matter of this Agreement shall be made
by the Company or the Principal Shareholders unless approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholders' obligation to
comply with applicable securities laws.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of the
Closing Date, effective as of close of business on the Closing Date. Parent
will hire on the Closing Date, effective as of the close of business on the
Closing Date, on an "at will" basis and subject to Parent's terms, conditions
and policies of employment, if any, each of those persons who are employed by
Company and are terminated by Company on the Closing Date pursuant to the
foregoing sentence. Nothing contained in this Section is intended or shall be
deemed to (a) require Parent to employ such persons for any fixed or pre-
determined time after the Closing, or (b) confer upon any employee of Company,
past, present, or future, any rights of employment of any nature, it being
understood and agreed that the provisions of this Section are intended to set
forth an agreement among Parent and Company, and are not intended to benefit any
persons not party to this Agreement, including such employees. Parent and
Company hereby agree to adopt the alternate procedure of Rev. Proc. 96-60 for
purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
- ---------
Employees incentive stock options to purchase Parent Common Stock in an
aggregate number equal to the number of shares paid as the Original Purchase
Price. Such incentive stock options shall be issued to the New Employees, and
in the amounts, requested by the Company in writing at the Closing. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option on the Closing Date as determined in good faith and
authorized by the Board of Directors of the Parent. Such options shall not be
exercisable at the date of grant, but shall become exercisable as to one-thirty-
sixth (1/36) of the shares subject to such option each month after the effective
date of this Agreement, provided, however, that no option shall become
exercisable with respect to any shares at any time following the date that the
New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
35
<PAGE>
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee will be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New Employee will make any required
withholding payment to the Parent. New Employee also acknowledges that there
may be state or local tax due upon exercise of the option, and that any such tax
is the obligation of the New Employee and not the Parent. The terms of the
options as described in this paragraph are subject to the definitive form of
option agreement attached hereto as Exhibit D.
---------
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the options described in Section 5.7(b) above. Such
bonus payment shall be paid in Common Stock on the earlier of (i) the date three
years subsequent to the Closing Date or (ii) with respect to any individual New
Employee, the date of Employee Termination. Such bonus shall be, as to each New
Employee, for such number of shares of Parent Common Stock as shall be equal, on
the date paid, and in the good faith judgment of the Parent's Board of
Directors, to the aggregate exercise price of the exercisable portion of the
option granted to the New Employee described in the foregoing paragraph. New
Employee acknowledges that there may be federal, state or local tax due upon
receipt of the bonus, that Parent may withhold any applicable taxes from New
Employee's regular pay or, if insufficient, that New Employee will make any
required withholding payment to Parent, and that any such tax is the obligation
of the New Employee and not the Parent.
(d) In addition to the stock option (the "Original Option") and stock
bonus grants described in subsections (b) and (c) of this Section, in the event
that any additional shares of Parent's Common Stock are issued pursuant to the
Purchase Price Adjustment provisions of Section 1.10, an additional option, in
form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
Option"), and an additional stock bonus commitment (the "Additional Stock
Bonus") proportionate to the Additional Option, in form and substance
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee of Parent or Sub who
received an Original Option. The number of shares subject to any such
Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to the total of Original Options granted to then-
remaining employees. For each recipient, the number of shares granted in the
Additional Stock Bonus shall be proportionate to the Additional Option. Any
such Additional Options and Additional Stock Bonuses shall be granted at the
next regularly scheduled meeting of the Parent's board of directors following
the date of any Purchase Price Adjustment pursuant to Section 1.10.
36
<PAGE>
5.8 Treatment of Affiliate Warrants. To the extent that any affiliate
-------------------------------
of the Company has received or has the right to receive any warrants under
Parent's Affiliate Warrant Program, the warrants received or to be received
thereunder shall remain in full force and effect and, to the extent required to
make calculations of shares issuable under such warrants, Parent shall estimate
in good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
5.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.9 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.10 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld.
5.11 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.12 FIRPTA Compliance. On the Closing Date, the Company shall deliver
-----------------
to Parent a properly executed statement in a form reasonably acceptable to
Parent for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
37
<PAGE>
5.13 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.14 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.14 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.15 Preparation of Tax Returns. The Principal Shareholders shall
--------------------------
prepare or cause to be prepared and file or cause to be filed all income Tax
Returns for the Company for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. Such returns shall be prepared in
accordance with applicable law and past practices consistently applied. The
Principal Shareholders shall permit Parent to review and comment on each such
Tax Returns prior to filing. The Principal Shareholders shall reimburse the
Company for any income Taxes of the Company with respect to all periods or
portions thereof ending on or prior to the Closing Date.
5.16 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.17 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
38
<PAGE>
5.18 Parent Policies. The Company and Principal Shareholders acknowledge
---------------
that Parent has implemented policies regarding the operation of subsidiary
entities such as the Company will be following the Merger. The Company and
Principal Shareholders acknowledge and agree that such policies, or any such
amended or replacement policies that are reasonably similar in scope, nature or
effect, are anticipated to be in place following the Merger, and the Company and
Principal Shareholders hereby indicate their intention to act in substantial
compliance with all such policies. Such policies shall not provide for Parent
overhead allocations from Parent to Company or Sub, unless otherwise agreed in
advance by the parties.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
-------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
------------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
39
<PAGE>
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and Sub
in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
-----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and the
Principal Shareholders in this Agreement are true and correct in all material
respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
40
<PAGE>
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
(e) Shareholder Certificate. Each of the Company Members shall have
-----------------------
executed and delivered to Parent a Shareholder Certificate in the form attached
hereto as Exhibit E.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1996.
(g) Company Member Approval. Each of the Company Members shall have
-----------------------
approved this Agreement and the Merger and the transactions contemplated
thereby, and no Company Member shall have exercised, or have any continuing
right to exercise, appraisal, dissenters' or similar rights by virtue of the
Merger.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholders' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Section 2.10 hereof or relating to environmental laws or matters
set forth in Section 2.20 hereof, shall survive until ninety (90) days following
the expiration of all applicable statutes of limitations, or extensions thereof,
governing each Tax or Returns related to such Tax or environmental laws or
matters. All of the Parent's and Sub's representations and warranties contained
herein or in any instrument delivered pursuant to this Agreement shall terminate
at the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Members will be deemed to have received and deposited with the Escrow Agent (as
defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Member. On and after the Effective Time, the Escrow Amount shall
form an escrow fund (the "Escrow Fund") to be governed by the terms set forth
-----------
herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective
41
<PAGE>
Time, and such later execution, if so executed after the date hereof, shall not
affect the binding nature of this Agreement as of the date hereof between the
other signatories hereto. The portion of the Escrow Amount contributed on behalf
of each Company Member shall be the pro rata amount calculated pursuant to
Section 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, seek indemnification for Losses
directly from the Principal Shareholders, but only after first proceeding
against the Escrow Fund so long as it exists and is not subject to other claims.
Nothing herein shall limit the liability of the Parent, the Company or the
Principal Shareholders for any breach of any representation, warranty or
covenant if the Merger does not close. Parent may not receive any shares from
the Escrow Fund (other than as a Purchase Price Adjustment) unless Officer's
Certificates (as defined in subsection (d) below) identifying losses, the
aggregate of which exceed $31,000, have been delivered to the Shareholder
Representative (as defined below) and the Escrow Agent as provided in paragraph
(d) below. The Company Members shall not have any right of contribution from the
Company with respect to any Loss claimed by Parent or Sub after the Effective
Time.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
-------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
termination of such Escrow Period with respect to facts and circumstances
existing prior to the termination of such Escrow Period. As soon as all such
claims have been resolved, the Escrow Agent shall deliver to the Company Members
the remaining portion of the Escrow Fund not required to satisfy such claims.
Deliveries of Escrow Amounts to the Company Members pursuant to this Section
7.2(b) shall be made in proportion to their respective original contributions to
the Escrow Fund.
(c) Protection of Escrow Fund.
--------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock split)
("New Shares") in respect of Parent Common Stock in the Escrow Fund which have
----------
not been released from the Escrow Fund shall be added to the Escrow Fund and
become a part thereof. New Shares issued in respect of shares of Parent Common
Stock which have been released from the Escrow Fund shall not be
42
<PAGE>
added to the Escrow Fund but shall be distributed to the record holders thereof.
Cash dividends on Parent Common Stock shall not be added to the Escrow Fund but
shall be distributed to the record holders thereof.
(iii) Each Company Member shall have voting rights with respect
to the shares of Parent Common Stock contributed to the Escrow Fund by such
Company Member (and on any voting securities added to the Escrow Fund in respect
of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund.
------------------------
(i) Upon receipt by the Escrow Agent at any time on or before the last
day of the Escrow Period of a certificate signed by any officer of Parent (an
"Officer's Certificate"): (A) stating that Parent has paid or accrued Losses,
---------------------
and (B) specifying in reasonable detail the individual items of Losses included
in the amount so stated, the date each such item was paid or accrued, or the
basis for such anticipated liability, and the nature of the misrepresentation,
breach of warranty or covenant to which such item is related, the Escrow Agent
shall, subject to the provisions of Section 7.2(e) hereof, deliver to Parent out
of the Escrow Fund, as promptly as practicable, cash or shares of Parent Common
Stock (at the election of Parent) held in the Escrow Fund in an amount equal to
such Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Members Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Member Representative to make such
delivery. After the expiration of such thirty (30) day period, the Escrow Agent
shall make delivery of the Escrow Amount from the Escrow Fund in accordance with
Section 7.2(d) hereof, provided that no such payment or delivery may be made if
the Member Representative shall object in a written statement to the claim made
in the Officer's Certificate, and such statement shall have been delivered to
the Escrow Agent prior to the expiration of such thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Members out of the Escrow Fund pursuant to this Section 7.2,
Parent shall deliver to the Member Representative an Officer's Certificate: (A)
stating that Parent has paid or accrued Losses and (B) specifying in reasonable
detail the individual items of Losses included in the amount so stated, the date
each such item was paid or accrued, or the basis for such anticipated liability,
and the nature of the misrepresentation, breach of warranty or covenant to which
such item is related.
(g) Actions Against Principal Shareholders. In the event that Parent
--------------------------------------
has elected to pursue indemnity directly from the Principal Shareholders, the
Principal Shareholders shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, wire transfer
43
<PAGE>
to Parent the amount of such Loss, unless the Company or the Principal
Shareholders, as the case may be, contest such claim by following the procedures
set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
ten business day period ending three days prior to the date of the Officer's
Certificate stating the claim with respect to which such shares are delivered,
and (ii) if the Parents' Common Stock is not so publicly traded, the fair market
value per share as determined by the Parent's board of directors in good faith
on the date closest to the date of the Officer's Certificate.
(i) Resolution of Conflicts; Arbitration.
-------------------------------------
(i) In case the Member Representative shall object in writing to
any claim or claims made in any Officer's Certificate within thirty (30) days
after delivery of such Officer's Certificate, the Member Representative and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Member Representative and
Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If any claim against the Escrow Fund was
sought, such memorandum shall be furnished to the Escrow Agent and the Escrow
Agent shall be entitled to rely on any such memorandum and make payment out of
the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation (or in any event after 60 days from the date of the Officer's
Certificate), either Parent or the Member Representative may demand arbitration
of the matter unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration; and in
either such event the matter shall be settled by arbitration conducted by three
arbitrators. Parent and the Member Representative shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The arbitrators shall set a limited time period and establish procedures
designed to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys' fees and
costs, to the same extent as a court of law or equity, should the arbitrators
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of a majority of the three arbitrators as to the validity and amount of
any claim in such Officer's Certificate shall be binding and conclusive upon the
parties to this Agreement. Notwithstanding anything in Section 7.2(e) hereof,
the Escrow Agent shall be entitled to act in accordance with such decision and
make or withhold payments out of the Escrow Fund in accordance therewith. Such
decision shall be written and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment, decree or order awarded
by the arbitrators.
44
<PAGE>
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent believes may result in Losses, Parent shall notify the
Member Representative of such claim, and the Member Representative shall be
entitled, at the Company Members' expense, to participate in any defense of such
claim. Parent shall have the right in its sole discretion to settle any such
claim; provided, however, that except with the consent of the Member
Representative, no settlement of any such claim with third-party claimants shall
be determinative of the amount of any claim pursuant to this Section 7.2. In
the event that the Member Representative has consented to any such settlement,
the Company Members shall have no standing to object under any provision of this
Section 7.2 to the amount of any claim by Parent against the Escrow Fund with
respect to such settlement.
(k) Member Representative.
---------------------
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any Member, Charles R. Bobo II shall be
appointed as agent and attorney-in-fact (the "Member Representative") for each
---------------------
Company Members, for and on behalf of the Members of the Company, to give and
receive notices and communications, to authorize delivery to Parent of payments
from the Escrow Fund in satisfaction of claims by Parent, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Member Representative for the accomplishment
of the foregoing. Such agency may be changed by the members of the Company from
time to time upon not less than thirty (30) days prior written notice to Parent;
provided that the Member Representative may not be removed unless a majority-in-
interest of the Company Members agree to such removal and to the identity of the
substituted agent. No bond shall be required of the Member Representative, and
the Member Representative shall not receive compensation for services as such.
Notices or communications to or from the Member Representative shall constitute
notice to or from each of the Company Members or their permitted transferees.
(ii) The Member Representative shall not be liable for any act
done or omitted hereunder as Member Representative while acting in good faith
and in the exercise of reasonable judgment. The Company Members shall severally
indemnify the Member Representative and hold him or her harmless against any
loss, liability or expense incurred without negligence or bad faith on the part
of the Member Representative and arising out of or in connection with the
acceptance or administration of the members Representative's duties hereunder,
including the reasonable fees and expenses of any legal counsel retained by the
Member Representative.
45
<PAGE>
(l) Actions of the Member Representative. A decision, act, consent or
------------------------------------
instruction of the Member Representative shall constitute a decision of all the
Company Members and shall be final, binding and conclusive upon each of such
Company Member, and the Escrow Agent and Parent may rely upon any such decision,
act, consent or instruction of the Member Representative as being the decision,
act, consent or instruction of each and every such Company Member. The Escrow
Agent and Parent are hereby relieved from any liability to any person for any
acts done by them in accordance with such decision, act, consent or instruction
of the Member Representative.
(m) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the performance
of such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive after
the date of this Agreement which are signed by an officer of Parent and the
Member Representative, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard
any and all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law, and is hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court. In
case the Escrow Agent obeys or complies with any such order, judgment or decree
of any court, the Escrow Agent shall not be liable to any of the parties hereto
or to any other person by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow
46
<PAGE>
Agent be liable or responsible for forgeries, fraud, impersonations, or
determining the scope of any representative authority. In addition, the Escrow
Agent may consult with the legal counsel in connection with Escrow Agent's
duties under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by such Escrow Agent in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement, its
terms or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent may hold all
documents and the Escrow Amount and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent may be required, despite what may be
set forth elsewhere in this Agreement. In such event, the Escrow Agent will not
be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader, in arbitration or otherwise, as the circumstances may require,
requiring the Parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and shares of Parent Common Stock held in escrow, except all
cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns agree
jointly and severally to indemnify and hold Escrow Agent harmless against any
and all losses, claims, damages, liabilities, and expenses, including reasonable
costs of investigation, counsel fees, including allocated costs of in-house
counsel and disbursements that may be imposed on the Escrow Agent or incurred by
the Escrow Agent in connection with the performance of the Escrow Agent's duties
under this Agreement, including but not limited to any litigation arising from
this Agreement or involving its subject matter other than arising out of its
gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties to this Agreement; provided,
however, that no such resignation shall become effective until the appointment
of a successor escrow agent which shall be accomplished as follows: the parties
shall use their best efforts to agree on a successor escrow agent within thirty
(30) days after receiving such notice. If Parent and the Member Representative
fail to agree upon a successor escrow agent within such time, the Escrow Agent
shall have the right to appoint a successor escrow agent authorized to do
business in the state of California. The successor escrow agent shall execute
and deliver an instrument accepting such appointment and it shall, without
further acts, be vested with all the estates, properties, rights, powers, and
duties of the predecessor Escrow Agent as if originally named as Escrow Agent.
Thereafter, the Escrow Agent shall be discharged from any further duties and
liability under this Agreement.
47
<PAGE>
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
7.3 Indemnity.
----------
(a) The Principal Shareholders hereby agree to indemnify and hold
Parent and its subsidiaries, directors, officers and agents harmless against and
in respect of any loss, cost, expense, claim, liability, deficiency, judgment or
damage (hereinafter, individually, a "Loss"; and collectively, "Losses")
incurred by Parent, its subsidiaries, officers, directors and agents (i) as a
result of any inaccuracy in or breach of a representation or warranty of the
Company or the Principal Shareholders contained in this Agreement or any failure
by the Company or any Principal Shareholder to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of the
Company and the Principal Shareholders to perform their obligations hereunder.
(b) Parent hereby agrees to indemnify and hold the Company and its
subsidiaries, directors, officers and agents harmless against and in respect of
any loss, cost, expense, claim, liability, deficiency, judgment or damage
(hereinafter, individually, a "Loss"; and collectively, "Losses") incurred by
the Company, its subsidiaries, officers, directors and agents (i) as a result of
any inaccuracy in or breach of a representation or warranty of Parent contained
in this Agreement or any failure by Parent to perform or comply with any
covenant contained in this Agreement and (ii) by reason of the failure of Parent
to perform its obligations hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the third
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date; provided, however, that the representations and warranties with respect to
Taxes (Section 2.10) and environmental laws (Section 2.20) shall survive until
the expiration of the applicable statute of limitations, if any.
(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (a "Notice") to
the Parent, or the Surviving Corporation and the Member Representative, as the
case may be, briefly stating the nature and basis of such claim. In the case of
Losses arising by reason of any third-party claim, the Notice shall be given
within 25 days of the filing or other written
48
<PAGE>
assertion of any such claim against Parent, but the failure of Parent to give
the Notice within such time period shall not relieve the Company and the
Principal Shareholders of any liability that the Company and the Principal
Shareholders may have to Parent except to the extent that the Company and the
Principal Shareholders are actually prejudiced thereby; provided, however, that
any such notice shall be given no later than the date of the expiration of the
applicable indemnification obligation of the Company and the Principal
Shareholders as set forth in Section 7.3(c) above. The indemnified party shall
provide the other party on request all information and documentation reasonably
necessary to support and verify any Losses which the indemnified party believes
give rise to a claim for indemnification hereunder and shall give reasonable
access to all books, records and personnel in the possession or under the
control of that party which would have bearing on such claim.
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholders. Failing
such agreement, the arbitration shall be conducted by three independent
arbitrators, none of whom shall have any competitive interest with Parent or the
Company and the Principal Shareholders. Parent shall choose one such
arbitrator, the Company and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent and the Company
and the Principal Shareholders. Each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration except that the arbitrator can
compel one party to pay all or a portion of the other party's costs and
expenses.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by May 15, 1997; (ii) there shall be a final nonappealable order of a
federal or state court in effect preventing consummation of the Merger; or (iii)
there shall be any statute, rule, regulation or order enacted, promulgated or
issued or deemed applicable to the Merger by any governmental entity that would
make consummation of the Merger illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by
49
<PAGE>
any Governmental Entity, which would: (i) prohibit Parent's or Sub's ownership
or operation of any portion of the business of the Company or (ii) compel Parent
or the Company to dispose of or hold separate all or a portion of the business
or assets of the Sub or Parent as a result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are in
material breach of their respective obligations under this Agreement and there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company, or their respective officers, directors or members, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Members approve this Agreement, this Agreement may be amended by the
parties hereto at any time by execution of an instrument in writing signed on
behalf of each of the parties hereto.
50
<PAGE>
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company or to a Principal Shareholder to:
Charles R. Bobo II
3300 NE Expressway - Suite 8-A
Atlanta, GA 30341
Telecopy No.: 404/249.6803
51
<PAGE>
with a copy to:
Lawler & Tanner
200 Galleria Parkway - Suite 1640
Atlanta, GA 30339
Attention: Greg Jacobs
Telecopy No.: 770/563.8810
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
52
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
COMPANY USWEB CORPORATION
By:__________________________ By:______________________
President Title:
ESCROW AGENT USWEB ACQUISITION CORPORATION 107
By: _________________________ By:______________________
Title: Title:
PRINCIPAL SHAREHOLDERS
_______________________
Charles R. Bobo II
_______________________
Paulette Collins
_______________________
Sonya M. Brooks
53
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- -----------------------------
Exhibit A Principal Shareholders
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
54
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Membership Units*
Charles R. Bobo II 532,555
Paulette Collins 155,060
Sonya M. Brooks 94,072
- ----------
*On an as fully converted to Common Stock, fully diluted basis.
55
<PAGE>
EXHIBIT B
Valuation Model
56
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
57
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
58
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
59
<PAGE>
EXHIBIT 2.5
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWeb Corporation
USWeb Acquisition Corporation 102
AND
Infopreneurs Inc.
Dated as of March 31, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - THE MERGER......................................................... 2
1.1 The Merger.............................................................. 2
1.2 Effective Time.......................................................... 2
1.3 Effect of the Merger.................................................... 2
1.4 Certificate of Incorporation; Bylaws.................................... 2
1.5 Directors and Officers.................................................. 2
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations... 3
1.7 Surrender of Certificates............................................... 4
1.8 No Further Ownership Rights in Company Common Stock..................... 5
1.9 Lost, Stolen or Destroyed Certificates.................................. 5
1.10 Purchase Price Adjustments.............................................. 6
1.11 Parent Common Stock..................................................... 8
1.12 Taking of Necessary Action; Further Action.............................. 8
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND
THE PRINCIPAL SHAREHOLDERS........................................ 8
2.1 Organization of the Company............................................. 8
2.2 Company Capital Structure............................................... 9
2.3 Subsidiaries............................................................ 9
2.4 Authority............................................................... 9
2.5 No Conflict............................................................. 10
2.6 Consents................................................................ 10
2.7 Company Financial Statements............................................ 10
2.8 No Undisclosed Liabilities.............................................. 10
2.9 No Changes.............................................................. 11
2.10 Tax Matters............................................................. 12
2.11 Restrictions on Business Activities..................................... 14
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition
of Equipment............................................................ 14
2.13 Intellectual Property................................................... 15
2.14 Agreements, Contracts and Commitments................................... 18
2.15 Interested Party Transactions........................................... 20
2.16 Governmental Authorization.............................................. 20
2.17 Litigation.............................................................. 20
2.18 Accounts Receivable..................................................... 20
2.19 Minute Books............................................................ 20
</TABLE>
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<TABLE>
<S> <C>
2.20 Environmental Matters................................................... 21
2.21 Brokers' and Finders' Fees; Third Party Expenses........................ 21
2.22 Employee Benefit Plans and Compensation................................. 22
2.23 Insurance............................................................... 24
2.24 Compliance with Laws.................................................... 24
2.25 Third Party Consents.................................................... 25
2.26 Warranties; Indemnities................................................. 25
2.27 Complete Copies of Materials............................................ 25
2.28 Representations Complete................................................ 25
2.29 Business Plan........................................................... 25
2.30 Backlog Report.......................................................... 25
2.31 Principal Shareholder Investment Representations........................ 25
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB................. 26
3.1 Organization, Standing and Power........................................ 26
3.2 Authority; Consents..................................................... 26
3.3 Capital Structure....................................................... 26
3.4 Brokers' and Finders' Fees.............................................. 27
3.5 No Changes.............................................................. 27
3.6 Issuance of Parent Common Stock......................................... 28
3.7 Representations Complete................................................ 28
3.8 Complete Copies of Materials............................................ 28
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME............................... 28
4.1 Conduct of Business of the Company...................................... 28
4.2 No Solicitation......................................................... 31
ARTICLE V - ADDITIONAL AGREEMENTS............................................. 31
5.1 Parents Right of First Refusal.......................................... 31
5.2 Market Standoff Agreement............................................... 33
5.3 Restriction on Competition.............................................. 33
5.4 Confidentiality......................................................... 34
5.5 Expenses................................................................ 35
5.6 Public Disclosure....................................................... 35
5.7 Post-Closing Employment of Company Employees............................ 35
5.8 Treatment of Affiliate Warrants......................................... 37
5.9 Access to Information................................................... 37
5.10 Consents................................................................ 38
5.11 FIRPTA Compliance....................................................... 38
</TABLE>
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<TABLE>
<S> <C>
5.12 Best Efforts............................................................ 38
5.13 Notification of Certain Matters......................................... 38
5.14 Preparation of Tax Returns.............................................. 38
5.15 Additional Documents and Further Assurances............................. 39
5.16 Section 368 Compliance.................................................. 39
5.17 Parent Policies......................................................... 39
5.18 Similar Transactions.................................................... 39
5.19 Operation of Sub During Adjustment Periods.............................. 39
ARTICLE VI - CONDITIONS TO THE MERGER.......................................... 40
6.1 Conditions to Obligations of Each Party to Effect the Merger............ 40
6.2 Additional Conditions to Obligations of Company......................... 41
6.3 Additional Conditions to the Obligations of Parent and Sub.............. 41
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW............... 43
7.1 Survival of Representations and Warranties.............................. 43
7.2 Escrow Arrangements; Setoff............................................. 43
7.3 Indemnity............................................................... 50
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER............................... 52
8.1 Termination............................................................. 52
8.2 Effect of Termination................................................... 53
8.3 Amendment............................................................... 53
8.4 Extension; Waiver....................................................... 53
ARTICLE IX - GENERAL PROVISIONS................................................ 54
9.1 Notices................................................................. 54
9.2 Interpretation.......................................................... 55
9.3 Counterparts............................................................ 55
9.4 Entire Agreement; Assignment............................................ 55
9.5 Severability............................................................ 55
9.6 Other Remedies.......................................................... 55
9.7 Governing Law........................................................... 56
9.8 Rules of Construction................................................... 56
</TABLE>
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INDEX OF EXHIBITS
Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit C-1 Parent Capital Structure as of June 30, 1997
Exhibit D Form of Shareholder Certificate
Exhibit E Option Agreement
Exhibit F Form of Employment Agreement
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of March 31, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 102, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), Infopreneurs Inc., a Delaware
---
corporation (the "Company"), and the individuals listed on Exhibit A attached
------- ---------
hereto (such individuals being hereinafter referred to collectively as the
"Principal Shareholders" and individually as a "Principal Shareholder").
---------------------- ---------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe
it is in the best interests of each company and their respective shareholders
that Parent acquire the Company through the statutory merger of the Company with
and into Sub (the "Merger") and, in furtherance thereof, have approved the
------
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Fifty Percent (50%) of the shares of Common Stock of Parent otherwise
payable in connection with the Merger shall be placed in a one-year escrow for
the purposes of (i) satisfying damages, losses, expenses and other similar
charges which result from breaches of representations, warranties or covenants
or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to make
certain representations, warranties, covenants and other agreements in
connection with the Merger.
E. The parties hereto desire that each employee of the Company prior to
the Merger shall be offered an opportunity of employment by the Sub following
the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
I.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations law of the state of Delaware
("Delaware Law"), the Company shall be merged with and into the Sub, the
--------------
separate corporate existence of the Company shall cease and Sub shall continue
as the surviving corporation and as a wholly owned subsidiary of Parent. Sub as
the surviving corporation after the Merger is hereinafter sometimes referred to
as the "Surviving Corporation."
---------------------
I.2 Effective Time. Unless this Agreement is earlier terminated pursuant
--------------
to Section 8.1, the closing of the Merger (the "Closing") will take place as
-------
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
unless another place or time is agreed to in writing by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date." On the Closing Date, the parties hereto shall cause the Merger
------------
to be consummated by submitting for filing an Agreement and Plan of Merger (or
like instrument) with the Secretary of State of Delaware (the "Merger
------
Articles"), in accordance with the relevant provisions of applicable law (the
- --------
time of filing with the Secretary of State of Delaware being referred to herein
as the "Effective Time").
--------------
I.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in the applicable provisions of Delaware Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
I.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
I.5 Directors and Officers. The director(s) of Sub immediately prior to
----------------------
the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation,
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each to hold office in accordance with the Bylaws of the Surviving Corporation.
I.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Stock; Purchase Price Adjustments. As of the
---------------------------------------------
Effective Time of the Merger, each share of the Company's Common Stock, no par
value (the "Company Common Stock"), that is issued and outstanding immediately
--------------------
prior to the Effective Time (other than any dissenting shares under applicable
state law) shall, by virtue of the Merger and without any action on the part of
Sub, the Company, or the Company's shareholders (the "Company Shareholders"), be
--------------------
canceled and extinguished and each Company Shareholder shall have (i) the right
to receive, subject to Section 7.2 hereof, such Company Shareholder's pro rata
portion (based on such Company Shareholders' equity ownership in the Company as
represented to Parent by the Company) of that number of shares of the Parent's
Common Stock, par value $.001 per share (the "Parent Common Stock") equal to
-------------------
$6,805,146 (the "Original Purchase Price") divided by $2.25, plus (ii) the
-----------------------
contingent right to receive additional shares of Parent Common Stock as
provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
-------------------------
The Original Purchase Price and the Purchase Price Adjustment are hereinafter
collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. The Company has no option plans.
-------------
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock occurring after the date hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustments pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
(e) Definitions.
-----------
(i) Aggregate Common Number. The "Aggregate Common Number" shall mean
----------------------- -----------------------
the aggregate number of shares of Company Common Stock outstanding immediately
prior to the Effective Time.
(ii) Fair Value Per Share. The Fair Value Per Share of Parent's
--------------------
Common Stock, as of any particular date, shall mean, if the Parent's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Parent's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
-3-
<PAGE>
value per share of such Parent's Common Stock as most recently determined by the
Parent's Board of Directors acting in good faith prior to the date of the
occurrence of the event requiring such determination.
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
--------------------------- -------------
equal to Fifty Percent (50%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The Escrow Agent shall be the
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
I.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
--------
Agent") in the Merger.
- -----
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock;
provided that, on behalf of the Company Shareholders, Parent shall deposit the
Escrow Amount into the Escrow Fund.
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal substantially consistent with the terms of this Agreement
(which shall specify that delivery shall be effected, and risk of loss and title
to the certificates (the "Certificates"), which immediately prior to the
------------
Effective Time represented outstanding shares of Company Common Stock whose
shares were converted into the right to receive the Merger Consideration
pursuant to Section 1.6, shall pass only upon delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other provisions as
Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the Company Shareholder shall receive in exchange
therefor, as soon as practicable thereafter, a certificate representing the
number of shares issuable to such Company Shareholder as part of the Original
Purchase Price (less the number of shares of Parent Common Stock to be deposited
in the Escrow Fund (as defined in Article VII) on such holder's behalf pursuant
to Article VII hereof) and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and
in accordance with the provisions of Article VII hereof, Parent shall cause to
be distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount. Such consideration shall be beneficially owned by the
holders on whose behalf such consideration were deposited in the Escrow Fund and
shall be available to compensate Parent as provided in Article VII. Until
surrendered to the Exchange Agent, each
-4-
<PAGE>
outstanding Certificate that, prior to the Effective Time, represented shares of
Company Common Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence only the
right to receive Merger Consideration pursuant to Section 1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock issuable upon conversion of the shares of Company Common Stock
represented thereby until the holder of record of such Certificate shall
surrender such Certificate. Subject to applicable law, following surrender of
any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have established to the satisfaction of Sub or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
I.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
capital stock, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company capital stock which
were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
I.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common Stock
as may be required pursuant to Section 1.6(a); provided, however, that Sub
-6-
<PAGE>
may, in its discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed Certificates to deliver a
bond in such sum as it may reasonably direct as indemnity against any claim that
may be made against Parent, Sub or the Exchange Agent with respect to the
Certificates alleged to have been lost, stolen or destroyed.
I.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. On or before January 10, 1998, the Parent
--------------------
shall conduct a valuation of the Sub as of the close of business on December 31,
1997 (the "First Adjustment Date") according to the operation of the Parent's
---------------------
affiliate Valuation Model (the "Valuation Model"), attached as Exhibit B.
--------------- ---------
Parent shall then calculate the "First Adjustment to Purchase Price" as follows:
----------------------------------
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Model; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to the
Company Shareholders promptly after the First Adjustment Date a number of shares
calculated as follows:
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall pay to
Parent no earlier than 10 days after, but no later than 30 days after, delivery
by Parent of its calculation of the FAPP to both the Escrow Agent and the
Shareholder Representative from the Escrow Amount a number of shares calculated
as follows:
FSP = (-FAPP / $2.25)
where FSP is the "First Shares Payment"; and
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
-6-
<PAGE>
(b) Twelve-Month Adjustment. On or before July 10, 1998, the Parent
-----------------------
shall conduct a valuation of the Sub as of the close of business on June 30,
1998 (the "Second Adjustment Date") according to the Valuation Model. Parent
----------------------
shall then calculate the "Second Adjustment to Purchase Price" as follows:
-----------------------------------
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Model; and
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay to the
Company Shareholders a number of shares calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
(ii) If SAPP is less than zero, then the Escrow Agent shall pay to
Parent no earlier than 10 days after, but no later than 30 days after, delivery
by Parent of its calculation of the FAPP to both the Escrow Agent and the
Shareholder Representative from the Escrow Amount promptly after the Second
Adjustment Date a number of shares calculated as follows:
SSP = (-SAPP / $2.25)
where SSP is the "Second Shares Payment"; and
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
(c) Valuation Model Determination. In conducting any valuation of Sub
-----------------------------
for purposes of this Section 1.10, Parent shall employ only those financial and
accounting principles, practices and procedures that were used to determine the
Original Purchase Price in accordance with the Valuation Model (including,
without limitation, Parent's determination of appropriate accruals,
classifications and reserves). The parties hereto agree that: (i) the
"Subjective Incremental Multiplier" referred to in the Valuation Model is based
- ----------------------------------
upon the quality of the chief executive officer of Sub, the quality of Sub's
finance staff, the quality of Sub's sales and marketing staff, the quality of
-7-
<PAGE>
Sub's technology staff, the quality of Sub's operations staff, the scaleability
of Sub's overall enterprise, and the referenceability of Sub's customer
accounts; (ii) the evaluation of Sub's performance in each such area shall be
made by Parent at Parent's sole discretion; and (iii) if any "Loss" (as defined
----
in Section 7.3(a) below) adversely affects either the FADV or the SADV (or
both), then Parent must either (A) claim indemnification for such Loss pursuant
to (and subject in all respects to the provisions of) Article VII hereof, in
which case Parent must eliminate any negative impact of such Loss from the FADV,
or the SADV, or both (as applicable), or (B) calculate the FADV, or the SADV, or
both (as applicable) while taking such Loss into full account in calculating
such valuations, in which case Parent (or any other indemnified party) shall be
prohibited from claiming indemnification for such Loss pursuant to Article VII
hereof.
I.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger have not been registered under the Securities Act of
1933, as amended (the "Securities Act"). Such shares may not be transferred or
--------------
resold thereafter except in compliance with the terms of this Agreement and
following registration under the Securities Act or in reliance on an exemption
from registration under the Securities Act.
I.12 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally
(except for Section 2.31, as to which the Company and the Principal Shareholders
represent and warrant only severally), represent and warrant to Parent and Sub
as of the date of this Agreement, subject to such exceptions as are specifically
disclosed in Exhibit C attached hereto (referencing the appropriate section and
---------
paragraph numbers), as follows. For purposes of this Article II and Article IV
below, any representation, warranty or covenant made by the Company shall be
deemed to have been made by each of the Company and any subsidiary of the
Company. If the Closing has not occurred on or before June 30, 1997, the
Company shall prepare a revised version of Exhibit C as of such date, and all
---------
representations, warranties and covenants shall be deemed delivered as of such
date.
II.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company
-8-
<PAGE>
is duly qualified to do business and in good standing as a foreign corporation
in each jurisdiction in which the failure to be so qualified would have a
material adverse effect on the business, assets (including intangible assets),
financial condition, results of operations or prospects of the Company
(hereinafter referred to as a "Material Adverse Effect"). The Company has
-----------------------
delivered a true and correct copy of its Articles of Incorporation and Bylaws,
each as amended to date, to Parent. Exhibit C lists the directors and officers
---------
of the Company. The operations now being conducted by the Company have not been
conducted under any other name.
II.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of 3,000
shares of authorized Common Stock of which 2,100 shares are currently issued and
will be outstanding on the Closing Date. There are no other classes or series
of capital stock of the Company of any kind outstanding or issuable. The
Company Common Stock is owned by the persons, with the domicile addresses and in
the amounts set forth on Exhibit C. All outstanding shares of Company Common
---------
Stock are duly authorized, validly issued, fully paid and non-assessable and not
subject to preemptive rights created by statute, the Articles of Incorporation
or Bylaws of the Company or any agreement to which the Company is a party or by
which it is bound.
(b) Except as set forth in Exhibit C, there are no options, warrants,
---------
calls, rights, commitments or agreements of any character, written or oral, to
which the Company is a party or by which it is bound obligating the Company to
issue, deliver, sell, repurchase or redeem, or cause to be issued, delivered,
sold, repurchased or redeemed, any shares of the capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement.
II.3 Subsidiaries. Except as set forth in Exhibit C, (i) the Company does
------------ ---------
not have any subsidiaries or affiliated companies and does not otherwise own any
shares in the capital of or any interest in, or control, directly or indirectly,
any other corporation, partnership, association, joint venture or other business
entity, and (ii) the Company has never had any subsidiaries or affiliated
companies and has never otherwise owned shares in the capital of or any interest
in or control, directly or indirectly, of any other corporation, partnership
association, joint venture or other business entity.
II.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement to which it
is a party and to consummate the transactions contemplated hereby and thereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby and thereby have been duly authorized by all
necessary corporate action (except for obtaining stockholder approval) on the
part of the Company and the Principal Shareholders, and no further action is
required on their part to authorize the Agreement and the transactions
contemplated hereby and thereby (except for obtaining stockholder approval).
This Agreement has been duly executed and delivered by the Company and the
Principal Shareholders and, assuming the due authorization, execution and
delivery by the other
-9-
<PAGE>
parties hereto and thereto, constitutes the valid and binding obligation of the
Company and the Principal Shareholders, enforceable in accordance with its
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies.
II.5 No Conflict. The execution and delivery of this Agreement does not,
-----------
and the consummation of the transactions contemplated hereby and thereby will
not, conflict with, or result in any violation of, or default under (with or
without notice or lapse of time, or both), or give rise to a right of
termination, cancellation, modification or acceleration of any obligation or
loss of any benefit under (any such event, a "Conflict") (i) any provision of
--------
the Articles of Incorporation and Bylaws the Company, (ii) any mortgage,
indenture, lease, contract or other agreement or instrument, permit, concession,
franchise or license to which the Company or any of its properties or assets is
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or its properties or assets.
II.6 Consents. No consent, waiver, approval, order or authorization of,
--------
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement or the consummation
of the transactions contemplated hereby, except for (i) such consents, waivers,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable securities laws thereby, and (ii) the filing of
the Agreement of Merger with the Secretary of State of the State of Delaware.
II.7 Company Financial Statements. Exhibit C sets forth copies of (i) the
---------------------------- ---------
Company's unaudited balance sheet as of December 31, 1996 and the related
unaudited statement of income for the seven-month period then ended (the "1996
----
Financials"), and (ii) the Company's unaudited balance sheet as of June 30, 1997
- ----------
and the related unaudited statement of income for the six-month period then
ended (the "1997 Financials") (the 1996 Financials and the 1997 Financials being
---------------
sometimes collectively referred to herein as the "Company Financials"). The
------------------
Company Financials are correct in all material respects and have been prepared
in accordance with United States generally accepted accounting principles
("USGAAP") applied on a basis consistent throughout the periods indicated and
------
consistent with each other. The Company Financials present fairly in all
material respects the financial condition and the results of operations of the
Company as of the dates and during the periods indicated therein, subject in the
case of the 1997 Financials to normal year-end adjustments applied on a
consistent basis. The Company's audited balance sheet as of December 31, 1996
(including the notes and schedules thereto), which shall be delivered by the
Company to Parent and Merger Sub prior to the Effective Time pursuant to Section
6.3(h) hereof, shall be referred to herein as the "Balance Sheet."
-------------
II.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, the
-------------------------- ---------
Company has no liability, indebtedness, obligation, expense, claim, deficiency,
guaranty or endorsement of any type,
-10-
<PAGE>
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with USGAAP),
which individually or in the aggregate (i) has not been reflected in the Balance
Sheet, or (ii) has not arisen in the ordinary course of business consistent with
past practices since December 31, 1996.
II.9 No Changes. Except as set forth in Exhibit C, since December 31,
---------- ---------
1996, there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification of the terms of any
-----------------
Company Agreement which (i) involves the payment by the Company of greater than
$25,000 per annum or which extends for more than one year, (ii) involves any
Company payment or obligation to any affiliate of the Company other than in the
ordinary course of business as conducted on that date and consistent with past
practices, or (iii) involves the sale of any material assets;
-11-
<PAGE>
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against, or investigation of, the Company or its affairs;
(p) notice of any claim of ownership by a third party of the Company's
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or may have a
Material Adverse Effect on the Company; or
(t) negotiation or agreement by the Company or any officer or employee
thereof to do any of the things described in the preceding clauses (a) through
(s) (other than negotiations with Parent and its representatives regarding the
transactions contemplated by this Agreement).
II.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or
-12-
<PAGE>
measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes, together with all interest, penalties and
additions imposed with respect to such amounts; (ii) any liability for the
payment of any amounts of the type described in clause (i) as a result of being
a member of an affiliated, consolidated, combined or unitary group for any
period; and (iii) any liability for the payment of any amounts of the type
described in clause (i) or (ii) as a result of any express or implied obligation
to indemnify any other person or as a result of any obligations under any
agreements or arrangements with any other person with respect to such amounts
and including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and timely
filed or made a timely request for extension for all required federal, state,
local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
-------
Company or its operations which are required to be filed on or prior to the
Closing Date, and such Returns are true and correct and have been completed in
accordance with applicable law.
(ii) The Company as of the Closing Date (A) will have paid or accrued
all Taxes it is required to pay or accrue as shown on the Returns and (B) will
have withheld and timely remitted with respect to its employees all income taxes
and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of the Company, is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state, local
and foreign Taxes which have not been accrued or reserved against in accordance
with USGAAP on the Balance Sheet, whether asserted or unasserted, contingent or
otherwise, relating to the seven-month period ended December 31, 1996.
(vi) The Company has made available to Parent or its legal counsel,
copies of all foreign, federal and state income and all state sales and use
Returns filed for all years as to which any applicable statute of limitations
has not expired.
(vii) There is no mortgage, pledge, security interest or lien or
other
-13-
<PAGE>
encumbrance (each a "Lien") of any sort on the assets of the Company
----
relating to or attributable to Taxes other than Liens for taxes not yet due and
payable.
(viii) The Company Shareholders have no knowledge of any basis for
the assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on any material assets of the Company.
(ix) As of the Closing, there will not be any contract, agreement,
plan or arrangement (except as may be contemplated in the provisions of this
Agreement) covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing, indemnification or
allocation agreement nor does the Company owe any amount under any such
agreement.
(xi) The Company uses the accrual method of accounting for income tax
purposes and its tax basis in its assets for purposes of determining its future
amortization, depreciation and other federal income tax deductions is accurately
reflected on the Company's tax books and records.
II.11 Restrictions on Business Activities. Except as set forth in Exhibit
----------------------------------- -------
C, there is no agreement (noncompete or otherwise), commitment, judgment,
- -
injunction, order or decree to which the Company or any Principal Shareholder is
a party or otherwise binding upon the Company which has or may have the effect
of prohibiting or impairing any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or the conduct
of business by the Company. The Company has not entered into any agreement
under which the Company is restricted from providing services to customers or
potential customers or any class of customers, in any geographic area, during
any period of time or in any segment of the market.
II.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms, and there is not, under any of such leases, any existing
default or event of default (or event which with notice or lapse of time, or
both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in the
-14-
<PAGE>
Company Financials or in Exhibit C and except for Liens for taxes not yet due
---------
and payable and such imperfections of title and encumbrances, if any, which are
not material in character, amount or extent, and which do not detract from the
value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
Company's current and former customers (the "Customer Information"). Other
--------------------
than normal rights of Company's customers to their own information, no third
party possesses any claims or rights with respect to use of the Customer
Information.
II.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
---------------------
rights in, arising out of, or associated therewith: (i) all United States and
foreign patents and applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part thereof; (ii)
all inventions (whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology, technical data and
customer lists, and all documentation relating to any of the foregoing; (iii)
all copyrights, copyrights registrations and applications therefor, and all
other rights corresponding thereto throughout the world; (iv) all mask works,
mask work registrations and applications therefor, and all other rights
corresponding thereto throughout the world; (v) all industrial designs and any
registrations and applications therefor throughout the world; (vi) all trade
names, logos, common law trademarks and service marks; trademark and service
mark registrations and applications therefor throughout the world; (vii) all
databases and data collections and all rights therein throughout the world; and
(viii) all computer software including all source code, object code, firmware,
development tools, files, records and data, all media on which any of the
foregoing is recorded, and all documentation related to any of the foregoing
throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of the
Company as it currently is operated or is reasonably anticipated to be operated
in the future, but shall specifically not include any rights in or to materials
created for clients as "work-made-for-hire" or which are subject to an exclusive
------------------
assignment or license in favor of clients of the Company.
-15-
<PAGE>
(b) Exhibit C lists all of the Company's United States and foreign:
---------
(i) patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
--------------------------------
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C include
---------
all contracts, licenses and agreements to which the Company is a party with
respect to any Intellectual Property with a value or cost in excess of $10,000,
other than "shrink wrap" and similar commercial end-user licenses.
-----------
(e) The contracts, licenses and agreements listed in Exhibit C with
---------
respect to any Intellectual Property (the "Intellectual Property Contracts") are
-------------------------------
in full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of any Intellectual Property Contract.
The Company is in compliance with, and has not breached any term of any
Intellectual Property Contract, and, to the knowledge of the Company and the
Principal Shareholders, all other parties to the Intellectual Property Contracts
are in compliance with, and have not breached any term of, such contracts.
Following the Closing Date, Sub will be permitted to exercise all the Company's
rights under the Intellectual Property Contracts without the payment of any
additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any Lien; and (ii) the Company owns, or has the right,
- -
pursuant to a valid Contract to use or operate under, all other Intellectual
Property of the Company.
-16-
<PAGE>
(h) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including its design,
development, manufacture and sale of its products (including with respect to
products currently under development) and provision of services, does not
infringe or misappropriate the Intellectual Property of any other person,
violate the rights of any person (including rights to privacy or publicity), or
constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) The Company owns or has the right to all Intellectual Property
necessary to the conduct of its business as it currently is conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company or under development by the Company and the performance
of all services provided or contemplated to be provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between the
---------
Company and any other person wherein or whereby the Company has agreed to, or
assumed, any obligation or duty to indemnify, hold harmless or otherwise assume
or incur any obligation or liability with respect to the infringement by the
Company or such other Person of the Intellectual Property rights of any other
person,
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement or performance
under such agreement, including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company and
---------
the Principal Shareholders, no person is infringing or misappropriating any of
the Intellectual Property of Company.
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or against any customer of the Company, related to any
product or service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) The Company has, and enforces, a policy requiring each employee
and
-17-
<PAGE>
contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms and all current and former
employees and contractors of the Company have executed such an agreement.
(q) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of the Company, constitutes obscene material, a defamatory statement or
material, or violates any rights, including rights of publicity or privacy, of
any person.
II.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or is
---------
not bound by (other than pursuant to applicable law):
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property having a value
individually in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other
than as set forth in agreements listed in Exhibit C,
---------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
-18-
<PAGE>
(x) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development
agreement, or
(xvi) any other agreement, contract or commitment that
involves $25,000 or more or is not cancelable without penalty within thirty (30)
days.
(b) The Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor does the Company or any
--------
Principal Shareholder know of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not, to the knowledge of the Company or any Principal Shareholder,
- ---------
subject to any default thereunder by any party obligated to the Company pursuant
thereto. The Company has obtained, or will obtain prior to the Closing Date,
all necessary consents, waivers and approvals of parties to any Contract as are
required thereunder in connection with the Merger so that all such Contracts
will remain in effect without modification after the Closing.
II.15 Interested Party Transactions. Except as set forth in Exhibit C, no
----------------------------- ---------
officer, director or Principal Shareholder of the Company (nor any ancestor,
sibling, descendant or spouse of any of such persons, or any trust, partnership
or corporation in which any of such persons has or has had an interest), has or
has had, directly or indirectly, (i) an interest in any entity which furnished
or sold, or furnishes or sells, services or products that the Company furnishes
or sells, or proposes to furnish or sell, or (ii) any interest in any entity
that purchases from or sells or furnishes to, the Company, any goods or services
or (iii) a beneficial interest in any Contract; provided, that ownership of no
more than one percent (1%) of the outstanding voting stock of a publicly traded
corporation shall not be deemed an "interest in any entity" for purposes of this
----------------------
Section 2.15.
-19-
<PAGE>
II.16 Governmental Authorization. Exhibit C accurately lists each
-------------------------- ---------
consent, license, permit, grant or other authorization issued to the Company by
a Governmental Entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company Authorizations"). The Company Authorizations are
----------------------
in full force and effect and constitute all Company Authorizations required to
permit the Company to operate or conduct its business or hold any interest in
its properties or assets.
II.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principal Shareholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Shareholders, is there any reasonable basis therefor) by or
before any Governmental Entity. No Governmental Entity has at any time
challenged or questioned the legal right of the Company to manufacture, offer or
sell any of its products or services in the present manner or style thereof.
II.18 Accounts Receivable.
-------------------
(a) Prior to the Closing, the Company will make available to Parent a
list of all accounts receivable of the Company as of May 31, 1997 ("Accounts
--------
Receivable"), along with a range of days elapsed since invoice.
- ----------
(b) All Accounts Receivable of the Company arose in the ordinary
course of business, are carried at values determined in accordance with USGAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth in the Company Financials. No person has any Lien on any of
such Accounts Receivable and no request or agreement for deduction or discount
has been made with respect to any of such Accounts Receivable.
II.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
II.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos,
-20-
<PAGE>
petroleum, and urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material"),
------------------
but excluding office and janitorial supplies properly and safely maintained. No
Hazardous Materials are present as a result of the deliberate actions of the
Company or, to the Company's or Principal Shareholders' knowledge, as a result
of any actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water thereof,
during the period that the Company has owned, operated, occupied or leased such
property.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect, nor has the
Company disposed of, transported, sold, or manufactured any product containing
a Hazardous Material (any or all of the foregoing being collectively referred to
as "Hazardous Materials Activities") in violation of any rule, regulation,
------------------------------
treaty or statute promulgated by any Governmental Entity in effect prior to or
as of the date hereof to prohibit, regulate or control Hazardous Materials or
any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
-------
permits, licenses, clearances and consents (the "Environmental Permits")
---------------------
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders have no knowledge of any fact or circumstance which
could involve the Company in any environmental litigation or impose upon the
Company any environmental liability.
II.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set
------------------------------------------------
forth in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
II.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
-21-
<PAGE>
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement established by the Company
providing for bonuses, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits of any kind,
whether formal or informal, funded or unfunded and whether or not legally
binding, including without limitation, any plan which is or has been maintained,
con tributed to, or required to be contributed to, by the Company for the
benefit of any "Employee" (as defined below), and pursuant to which the Company
--------
has or may have any material liability, contingent or otherwise;
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company; and
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee.
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent (i)
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or (ii) as required or contemplated by the terms
of this Agreement), or to enter into any Company Employee Plan or Employee
Agreement, nor does it have any intention or commitment to do any of the
foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust; (iv)
the most recent summary plan description together with the most recent summary
of material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (v) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and corre spondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Company
---
Employee Plan; (vi) if the Employee Plan is funded, the most recent annual and
periodic accounting of Employee Plan assets; and (vii) all communications
material to any Employee or Employees relating to any Employee Plan and any
proposed Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any liability to the
Company.
-22-
<PAGE>
(d) Employee Plan Compliance. (i) The Company has performed all
------------------------
obligations required to be performed by it under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
----------------------
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iii) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Closing Date in accordance with its terms, without liability to the Company,
Parent or Sub (other than ordinary administration expenses typically incurred in
a termination event); (iv) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Shareholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (v) the Company is not
subject to any penalty or tax with respect to any Company Employee Plan under
Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C
------------------------------ ---------
or as contemplated by the terms of this Agreement, no Company Employee Plan
provides, or has any liability to provide, life insurance, medical or other
employee benefits to any Employee upon his or her retirement or termination of
employment for any reason, except as may be required by statute, and the Company
has not represented, promised or contracted (whether in oral or written form) to
any Employee (either individually or to Employees as a group) that such
Employee(s) would be provided with life insurance, medical or other employee
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) No Conflicts. The execution of this Agreement and the
------------
consummation of the transactions contemplated hereby will not constitute an
event under any Employee Plan, Employee Agreement, trust or loan that will or
may result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(i) Employment Matters. Except as set forth in Exhibit C, the Company
------------------ ---------
(i) is in compliance with all applicable laws, rules and regulations respecting
employment, employment practices, terms and conditions of employment and wages
and hours, in each case, with respect to Employees; (ii) has withheld all
amounts required by law or by agreement to be withheld from the
-23-
<PAGE>
wages, salaries and other payments to Employees; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits for Employees (other
than routine payments to be made in the normal course of business and consistent
with past practice).
(j) Labor. No work stoppage or labor strike against the Company is
-----
pending, or to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or, to the knowledge of the
Principal Shareholders, threatened with any labor dispute, grievance, or
litigation relating to labor, safety, discrimination, or harassment matters
involving any Employee, including, without limitation, charges of unfair labor
practices, discrimination, or harassment complaints, which, if adversely
determined, would, individually or in the aggregate, result in liability to the
Company, Parent or Sub. The Company has not engaged in any unfair labor
practices which could, individually or in the aggregate, directly or indirectly
result in a liability to the Company, Parent or Sub. The Company is not
presently, or has in the past, been a party to, or bound by, any collective
bargaining agreement or union contract with respect to Employees and no
collective bargaining agreement is being negotiated by the Company.
II.23 Insurance. Exhibit C lists all insurance policies and fidelity
--------- ---------
bonds covering the assets, business, equipment, properties, operations,
employees, officers and directors of the Company. There is no claim by the
Company pending under any of such policies or bonds as to which coverage has
been questioned, denied or disputed by the underwriters of such policies or
bonds. All premiums due and payable under all such policies and bonds have been
paid and the Company is otherwise in compliance with the terms of such policies
and bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company and the Principal Shareholders have no knowledge of any
threatened termination of, or premium increase with respect to, any of such
policies.
II.24 Compliance with Laws. The Company has complied with, is not in
--------------------
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
II.25 Third Party Consents. Except as set forth in Exhibit C, no consent
-------------------- ---------
or approval is needed from any third party in order to effect the Merger or any
of the transactions contemplated by this Agreement.
II.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any material respect. Exhibit C also indicates all
---------
warranty and indemnity claims in excess of $25,000 made against the Company.
-24-
<PAGE>
II.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
II.28 Representations Complete. None of the representations or warranties
------------------------
made by the Company or the Principal Shareholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
---------
Company or the Principal Shareholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company
Shareholders in connection with soliciting their consent to this Agreement and
the Merger, contains or will contain at the Closing, any untrue statement of a
material fact, or omits or will omit at the Closing to state any material fact
necessary in order to make the statements contained herein or therein, in the
light of the circumstances under which made, not misleading.
II.29 Business Plan. The Company will provide to Parent a true and
-------------
complete copy of a business plan for the Company's planned operations during the
period beginning July 1, 1997 and ending June 30, 1998 (the "Business Plan"),
-------------
which will include, without limitation, a description of the Company's capital
requirements, staffing needs, and a pro forma income statement. The Business
Plan is attached to Exhibit C hereto.
---------
II.30 Backlog Report. The Company has provided to Parent a detailed and
--------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
II.31 Principal Shareholder Investment Representations. Each Principal
------------------------------------------------
Shareholder, severally and not jointly, hereby makes all of the representations
and warranties set forth in Section 1 of the Shareholder's Certificate attached
hereto as Exhibit D as if such representations and warranties were set forth in
---------
full herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
III.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including tangible assets), financial
condition, results of operations or prospects of Parent or Sub. Parent has
delivered to the Company a true and correct copy of the Articles of
Incorporation and Bylaws, each
-25-
<PAGE>
as amended to date, of each of Parent and Sub.
III.2 Authority; Consents. Each of Parent and Sub has all requisite
-------------------
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub and
no further action is required on their part to authorize the Agreement and the
transactions contemplated hereby and thereby. This Agreement has been duly
executed and delivered by Parent and Sub and constitutes the valid and binding
obligations of Parent and Sub, enforceable in accordance with its terms, subject
to the laws of general application relating to bankruptcy, insolvency and the
relief of debtors and rules of law governing specific performance, injunctive
relief or other equitable remedies. The execution and delivery of this Agreement
by Parent and Sub does not, and, as of the Closing, the consummation of the
transactions contemplated hereby and thereby will not, Conflict with (i) any
provision of the respective Articles of Incorporation or Bylaws of Parent or
Sub, (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to which Parent or Sub or
any of their respective properties or assets is subject, or (iii) any judgment,
order, decree, statute, law, ordinance rule or regulation applicable to Parent
or Sub. No consent, waiver, approval, or registration, declaration or filing
with, any Governmental Entity or any third party, including a party to any
agreement with Parent or Sub (so as not to trigger any Conflict), is required by
or with respect to any of the Parent or Sub in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby.
III.3 Capital Structure.
-----------------
(a) (i) The authorized stock of Parent consists of 50,000,000 shares
of Common Stock, $.001 par value, of which 19,137,001 shares are issued and
outstanding and 27,988,501 shares of Preferred Stock, $.001 par value, of which
18,678,500 shares are designated Series A Preferred Stock, 18,518,500 of which
are issued and outstanding, and 9,310,001 shares are designated Series B
Preferred Stock, all of which are issued and outstanding. All such shares have
been duly authorized, and all such issued and outstanding shares have been
validly issued, are fully paid and nonassessable and are free of any liens or
encumbrances other than any liens or encumbrances created by or imposed upon the
holders thereof. Parent has also reserved (i) 3,900,000 shares of Common Stock
for issuance to employees and consultants pursuant to Parent's 1996 Stock Option
Plan and 1996 Equity Compensation Plan, (ii) 160,000 shares of Series A
Preferred Stock for issuance upon the exercise of outstanding warrants to
purchase Series A Preferred Stock (the "Warrant Stock"), (iii) 160,000 shares of
-------------
Common Stock for issuance upon conversion of the Warrant Stock, (iv) 1,000,000
shares of Common Stock for issuance upon the exercise of warrants to purchase
Common Stock issued or issuable pursuant to the Company's 1997 Affiliate Warrant
Program, (v) 300,000 shares of Common Stock for issuance upon the exercise of
other warrants to purchase Common Stock, and (vi) 10,000,000 shares of Common
Stock for issuance under the Parent's 1997 Acquisition Stock Option Plan. There
are no other options, warrants, calls, rights, commitments or agreements of any
character to which Parent is a party or by which it is bound obligating Parent
to issue, deliver, sell, repurchase
-26-
<PAGE>
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(ii) If the Closing has not occurred on or before June 30, 1997, the
Company shall prepare a revised version of Section 3(a)(i) above as of such
date, and attach it hereto as Exhibit C-1.
-----------
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable
and not subject to any unwaived preemptive rights.
III.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will it
--------------------------
incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
III.5 No Changes. Except as otherwise disclosed in this Agreement or in
----------
Exhibit C-1 hereto, there have been no material adverse changes to the Parent's
- -----------
financial condition or operating results from the information contained in (i)
Parent's Franchise Offering Circular dated effective December 23, 1996, (ii) the
Confidential Offering Memorandum dated February 1997, relating to Parent's
Series C Preferred Stock offering, (iii) the Parent's audited balance sheet as
of December 31, 1996 and statements of operations and cash flows for the year
then ended (the "Parent Audited Financial Statements") and (iv) if the Closing
-----------------------------------
shall not have occurred on or before June 30, 1997, (A) the Parent's unaudited
pro forma consolidated balance sheet as of June 30, 1997, and the related
unaudited pro forma consolidated statements of income and cash flows for the
six-month period then ended (the "Parent Unaudited Financial Statements"), and
-------------------------------------
(B) an updated version of the Audited Financial Statements, all of which Parent
shall deliver to the Company prior to the Closing. The Offering Circular, the
Confidential Offering Memorandum, the Parent Audited Financial Statements, and
the Parent Unaudited Financial Statements are collectively referred to herein as
the "Parent Documents." Each financial statement included in the Parent
----------------
Documents has been prepared in accordance with USGAAP applied on a consistent
basis throughout the periods indicated, and fairly presents the financial
condition, results of operations and cash flows of the Parent and its
subsidiaries as of the dates and for the periods indicated therein, subject in
the case of the Parent Unaudited Financial Statements, to normal year-end
adjustments applied on a consistent basis.
III.6 Issuance of Parent Common Stock. Parent shall at all times reserve
-------------------------------
sufficient shares of Parent Common Stock to satisfy any issuances required to be
made to the Company Shareholders and New Employees in accordance with Parent's
obligations under this Agreement.
III.7 Representations Complete. None of the representations or warranties
------------------------
made by Parent or Sub, nor any of the statements made in Exhibit C-1 or any
-----------
certificate furnished by Parent or Sub pursuant to this Agreement, or furnished
in connection with the Merger, contains or will
-27-
<PAGE>
contain at the Closing or at the time it was furnished to the Company
Shareholders with respect to obtaining the approval referred to in Section
6.2(e) hereof any untrue statement of a material fact, or omits or will omit on
the Closing Date or at the time it was furnished to the Company Shareholders
with respect to the approval referred to in Section 6.2(e) hereof to state any
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which made, not misleading.
III.8 Complete Copies of Materials. Parent has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by the Company, the Principal Shareholders or their
respective counsel.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
IV.1 Conduct of Business of the Company. During the period from the date
----------------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement or set forth on
Exhibit C, the Company shall not, without the prior written consent of Parent:
- ---------
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in
-28-
<PAGE>
Exhibit C;
- ---------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities con vertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement, except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the
-29-
<PAGE>
value of inventory or writing off notes or accounts receivable other than in the
ordinary course of business;
(p) Take any action which could jeopardize the tax-free reorganization
hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Company Financials (or the
notes thereto);
(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (s) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
If the Closing shall not have occurred on or before June 30, 1997, the
Parent shall be deemed to have consented to any action taken by the Company that
would otherwise constitute a breach of a covenant set forth in this Section 4.1,
provided that each such action is set forth on the revised version of Exhibit C
- -------- ---- ---------
prepared as of such date.
IV.2 No Solicitation. Until the earlier of the Effective Time or the date
---------------
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible
-30-
<PAGE>
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets by any person, other than by Parent. In addition to the
foregoing, if the Company or any Principal Shareholder receives prior to the
Effective Time or the termination of this Agreement any offer or proposal
relating to any of the above, the Company or the Principal Shareholder, as
applicable shall immediately notify Parent thereof, including information as to
the identity of the offeror or the party making any such offer or proposal and
the specific terms of such offer or proposal, as the case may be, and such other
information related thereto as Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
V.1 Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
------
(including transfer by gift or operation of law), or any Shares held by a
transferee (either being sometimes referred to herein as the "Holder") may be
------
sold, the Parent or its assignee(s) shall have a right of first refusal to
purchase such Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
----------------------
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
-------------------
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
-------------
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Parent or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
-------------- ---------------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash considera tion with such other cash or
non-cash consideration as shall be determined by the Board of Directors of the
Parent in good faith. If the Shares are being transferred by gift (other than
pursuant to Section 5.1(g) below), the Parent Purchase Price shall be the
product of the Fair Value
-31-
<PAGE>
Per Share multiplied by the number of Shares proposed to be gifted.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by wire
transfer, by cancellation of all or a portion of any outstanding indebtedness of
the Holder to the Parent (or, in the case of repurchase by an assignee, to the
assignee), or by any combination thereof within 30 days after receipt of the
Notice or in the manner and at the times set forth in the Notice; provided,
--------
however, that no claims by Parent for indemnification for Losses from the Escrow
- -------
Fund or the Principal Shareholders which have been disputed by the Principal
Shareholders shall be considered "indebtedness" for purposes of this Section
------------
5.1(e).
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Parent, and the Parent or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the benefit of the
Holders immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
----------------
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so transferred subject to the provisions of
this Section, and there shall be no further transfer of such Shares except in
accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
V.2 Market Standoff Agreement. Each Company Shareholder hereby agrees
-------------------------
that if so requested by the Parent or any representative of the underwriters in
connection with any registration of the offering of any Shares under the
Securities Act, such Company Shareholder shall not sell or otherwise transfer,
pledge, hypothecate or otherwise decrease his market risk or beneficial
ownership in any Shares or other securities of the Parent during the 180-day
period following the date of the final Prospectus contained in a registration
statement of the Parent filed under the
-32-
<PAGE>
Securities Act; provided, however, that such restriction shall only apply to the
first registration statement of the Parent to become effective under the
Securities Act which includes securities to be sold on behalf of the Parent to
the general public in an underwritten public offering under the Securities Act.
The Parent may impose stop-transfer instructions with respect to securities
subject to the foregoing restrictions until the end of such 180-day period.
V.3 Restriction on Competition.
--------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, no Principal Shareholder shall:
(i) engage in, including as an employee, consultant or otherwise, or
own any interest (except as a passive investor of less than five percent (5%) of
total debt and equity) in any business or other activity that would compete with
the Parent's; or
(ii) divert or attempt to divert any existing or prospective business
or customers of the Parent (including any affiliates of the Parent) to any other
person or entity, by direct or indirect inducement or otherwise, or do or
perform, directly or indirectly, any other act injurious or prejudicial to the
goodwill associated with the Parent or its affiliates; or
(iii) solicit any person for employment who is at that time
already employed by Parent or any of its affiliates, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her employment.
(b) Scope of Restriction.
--------------------
(i) This Section shall apply in the SMSA where the Company is
located.
(ii) In the event that any other provision of this Section 5.3 or the
application of any such provision shall be held to be prohibited or
unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(iii) In the event that a Principal Shareholder, who also is a New
Employee, is terminated from employment by Parent without cause at any time
within three (3) years of the Closing Date, then the term of the restrictions
imposed by this Section 5.3 shall be reduced to six (6) months and that
terminated Principal Shareholder/New Employee shall receive severance benefits
from Parent equal to six (6) months salary and employee benefits. For the
purposes solely of this Agreement, "cause" for a Principal Shareholder's
-----
termination shall exist at
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any time upon the occurrence of any of the following events:
(c) acts of dishonesty by the Principal Shareholder;
(d) gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
(e) the Principal Shareholder's conviction of a crime relating to his
employment, or of any felony;
(f) physical or mental disability of the Principal Shareholder which
prevents performance of his duties for a consecutive period of at least 120
days, or at least 150 days in a period of 200 days; or
(g) death of the Principal Shareholder.
V.4 Confidentiality. Each of the parties hereto hereby agrees to keep
---------------
such information or knowledge obtained pursuant to the negotiation and execution
of this Agreement, or the effectuation of the transactions contemplated hereby,
confidential; provided, however, that the foregoing shall not apply to
-------- -------
information or knowledge which (a) a party can demonstrate was already lawfully
in its possession prior to the disclosure thereof by the other party, (b) is or
becomes generally known to the public and did not become so known through any
violation of law or this Agreement by the non-disclosing party, (c) is later
lawfully acquired by such party from other sources, or (d) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure; it being understood that the
parties may disclose relevant information and knowledge to their respective
employees and agents on a need to know basis, provided that the parties cause
such employees and agents to treat such information and knowledge
confidentially.
V.5 Expenses. Whether or not the Acquisition is consummated, all fees and
--------
expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
V.6 Public Disclosure. Unless otherwise required by law or any applicable
-----------------
rule of a stock exchange or quotation system upon which a parties' securities
are listed, prior to the Closing Date, no disclosure (whether or not in response
to an inquiry) of the subject matter of this Agreement shall be made by the
Company or the Principal Shareholders unless (a) approved by Parent prior to
release, provided that such approval shall not be unreasonably withheld, subject
to Parent's and the Company's or the Principal Shareholders' obligation to
comply with applicable securities laws or fiduciary obligations, and (b) except
that the Company and the Principal Shareholders shall be entitled to disclose
information necessary to respond to or explain any
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<PAGE>
materially inaccurate public disclosure made by Parent or Sub concerning this
Agreement or the transactions contemplated hereby.
V.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate each employee of Company on and as of the
Closing Date, effective as of close of business on the Closing Date. Except as
provided in Section 5.19 hereof Parent will hire on the Closing Date, effective
as of the close of business on the Closing Date, on an "at will" basis and
-------
subject to Parent's terms, conditions and policies of employment, if any, each
of those persons who are employed by Company and are terminated by Company on
the Closing Date pursuant to the foregoing sentence. Nothing contained in this
Section is intended or shall be deemed to (a) require Parent to employ such
persons for any fixed or pre-determined time after the Closing, or (b) confer
upon any employee of Company, past, present, or future, any rights of employment
of any nature, it being understood and agreed that the provisions of this
Section are intended to set forth an agreement among Parent and Company, and are
not intended to benefit any persons not party to this Agreement, including such
employees. Parent and Company hereby agree to adopt the alternate procedure of
Rev. Proc. 96-60 for purposes of employer payroll withholding.
(b) In connection with hiring the Company's employees (the "New
---
Employees") as set forth in Section 5.7(a) above, Parent shall grant to the New
- ---------
Employees stock options (each an "Original Option") to purchase Parent Common
---------------
Stock in an aggregate number equal to the number of shares paid as the Original
Purchase Price. Such stock options shall be incentive stock options to the
extent permissible under applicable law. Such incentive stock options shall be
issued to the New Employees, and in the amounts, requested by the Company in
writing at the Closing. The exercise price of each option shall be the fair
market value of the Common Stock subject to such option on the Closing Date as
determined in good faith and authorized by the Board of Directors of the Parent.
Such options shall not be exercisable at the date of grant, but shall become
exercisable as to one-thirty-sixth (1/36) of the shares subject to such option
each month after the Closing Date, provided, however, that no option shall
become exercisable with respect to any shares at any time following the date
that the New Employee to whom the option was granted ceases to be an employee or
consultant of the Parent (an "Employee Termination"), and provided further that
--------------------
the term of any such option shall expire if not exercised, and to the extent not
exercisable, ninety (90) days after the date of the Employee Termination.
Accordingly, any New Employee who receives an option must exercise it (but only
to the extent then exercisable), if at all, within ninety (90) days after an
Employee Termination. Notwithstanding the foregoing, in the event of any
Employee Termination due to the death or disability of the New Employee, the New
Employee or his estate shall have twelve (12) months to exercise the option to
the extent it was exercisable on the date of the Employee Termination;
thereafter, the option shall terminate as to any unexercised portion. New
Employee acknowledges that New Employee may be taxed under the Code on the
difference between the fair market value of shares purchased pursuant to any
exercised option less the exercise price paid on the date of any such exercise
and that the Parent may withhold any applicable taxes from New Employee's
regular pay or, if insufficient, that New
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<PAGE>
Employee will make any required withholding payment to the Parent. New Employee
also acknowledges that there may be state or local tax due upon exercise of the
option, and that any such tax is the obligation of the New Employee and not the
Parent. The terms of the options as described in this paragraph are subject to
the definitive form of option agreement attached hereto as Exhibit E.
---------
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock equal to the
aggregate exercise price of the Original Options (the "Stock Bonus"). The Stock
-----------
Bonus shall be, as to each New Employee, for such number of shares of Parent
Common Stock as shall be equal, on the date paid, and in the good faith judgment
of the Parent's Board of Directors, to the aggregate exercise price of the
exercisable portion of such New Employee's Original Option. The Stock Bonus
shall be made to such New Employee on the earlier of: (i) in the event that the
New Employee's employment by Parent or any wholly owned subsidiary of Parent
terminates before the date five years subsequent to the date of this Agreement,
on the date of such termination (but only that number of shares required
pursuant to this paragraph), (ii) if on the date three years subsequent to the
date of this Agreement the Parent shall have a class of equity securities that
has been publicly traded on a national exchange or quotation system for at least
180 days, then on such date three years subsequent to the date of this Agreement
and (iii) in the event that on the date three years subsequent to the date of
this Agreement the Parent shall not have a class of equity securities that has
been publicly traded on a national securities exchange or quotation system for
at least 180 days, then on the first business day after the date three years
subsequent to the date of this Agreement that the Parent shall have a class of
equity securities that has been publicly traded on a national securities
exchange or quotation system for 180 days. New Employee acknowledges that there
may be federal, state or local tax due upon receipt of the Stock Bonus, that
Parent may withhold any applicable taxes from New Employee's regular pay or, if
insufficient, that New Employee will make any required withholding payment to
Parent, and that any such tax is the obligation of the New Employee and not the
Parent.
(d) In addition to the Original Option and the Stock Bonus, in the
event that any additional shares of Parent's Common Stock are issued pursuant to
the Purchase Price Adjustment provisions of Section 1.10, an additional option,
in form and substance substantially similar to the Original Option (but with an
exercise price determined based on the date of issuance) (the "Additional
----------
Option"), and an additional stock bonus commitment (the "Additional Stock
- ------ ----------------
Bonus") proportionate to the Additional Option, in form and substance
- -----
substantially similar to that described in paragraph (c) of this Section, shall
be issued by the Parent to any then-remaining employee or consultant of Parent
or Sub who received an Original Option. The number of shares subject to any
such Additional Option shall be calculated by taking the number of shares issued
pursuant to such Purchase Price Adjustment provisions multiplied by three (3)
and then determining the individual recipients' pro rata share based on the
number of shares subject to each recipient's Original Option compared to the
number of shares subject to the total of Original Options granted to then
remaining employees and consultants. For each recipient, the number of shares
granted in the Additional Stock Bonus shall be proportionate to the Additional
Option. Any
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<PAGE>
such Additional Options and Additional Stock Bonuses shall be granted at the
next regularly scheduled meeting of the Parent's board of directors following
the date of any Purchase Price Adjustment pursuant to Section 1.10.
V.8 Treatment of Affiliate Warrants. To the extent that any affiliate of
-------------------------------
the Company has received or has the right to receive any warrants under Parent's
Affiliate Warrant Program, the warrants received or to be received thereunder
shall remain in full force and effect and, to the extent required to make
calculations of shares issuable under such warrants, Parent shall estimate in
good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
V.9 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. No information or knowledge obtained in any investigation pursuant to
this Section 5.9 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
V.10 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
V.11 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
V.12 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that, other than as set forth in or contemplated by this Agreement,
- -------- ----
neither the Parent nor the Company or any Principal Shareholder shall be
required to agree to any divestiture by the Parent or the Company or any of the
Parent's or the Company's subsidiaries or affiliates of shares of capital
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<PAGE>
stock or of any business, assets or property of the Parent or its affiliates or
of the Company or its affiliates, or the imposition of any material limitation
on the ability of any of them to conduct their businesses or to own or exercise
control of such assets, properties and stock.
V.13 Notification of Certain Matters. The Company shall give prompt notice
-------------------------------
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.13 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
V.14 Preparation of Tax Returns. The Principal Shareholders shall prepare
--------------------------
or cause to be prepared and file or cause to be filed all Tax Returns for the
Company for all periods ending on or prior to the Closing Date which are
required to be filed after the Closing Date. Such returns shall be prepared in
accordance with applicable law and past practices consistently applied. The
Principal Shareholders shall permit Parent to review and comment on each such
Tax Return prior to filing; provided, however, that any such review by Parent
-------- -------
shall be completed prior to, and the Principal Shareholders shall be entitled to
cause such Tax Returns to be filed by, any applicable filing deadline. Parent
shall cause Sub to afford the Principal Shareholders access during normal
business hours to all of the books and records (financial and otherwise) of the
Sub or the Company relating to any period prior to the Closing Date and
necessary for the preparation of such tax Returns, and to cause the Tax Returns
to be properly executed, timely filed and vigorously defended in any audit or
other review by the applicable tax authorities. To the extent not reserved
against or provided for in the Company Financials or the Company's accounts
existing on or prior to the Closing Date, the Principal Shareholders shall
reimburse the Company for any Taxes of the Company with respect to all periods
or portions thereof ending on or prior to the Closing Date.
V.15 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
V.16 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code").
----
V.17 Parent Policies. The Company and Principal Shareholders acknowledge
---------------
that Parent has implemented policies regarding the operation of subsidiary
entities such as the Company will be following the Merger. The Company and
Principal Shareholders acknowledge and agree that
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<PAGE>
such policies, or any such amended or replacement policies that are reasonably
similar in scope, nature or effect, are anticipated to be in place following the
Merger, and the Company and Principal Shareholders hereby indicate their
intention to act in substantial compliance with all such policies subject to the
provisions of Section 5.19 hereof. Such policies shall not provide for Parent
overhead allocations from Parent to Company or Sub, unless otherwise agreed in
advance by the parties.
V.18 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due
to the Company Shareholders upon such recalculation shall be issued promptly to
the Company Shareholders.
V.19 Operation of Sub During Adjustment Periods. In consideration of, and
------------------------------------------
to accommodate the unusually high rate of growth projected for, the Surviving
Corporation in the Business Plan (which has been thoroughly reviewed by and
agreed to by the Parent after numerous changes and modifications to accomodate
the Parent's needs and desires going forward), the Parent, Sub, the Company and
the Principal Shareholders agree to the following:
(a) The Parent and each Principal Shareholder shall have entered into
an employment agreement substantially in the form attached hereto as Exhibit F.
---------
(b) Until the close of business on the last business day of the
twelfth full month after the Closing Date:
(i) Sub shall have the same geographic terms it had while operating as
a franchisee of Parent prior to the transaction contemplated hereby until Parent
and the Principal Shareholders shall mutually agree otherwise.
(ii) If the Shareholder Representative of Sub so requests in writing
(the "Funding Request"), Parent agrees to transfer to Sub's bank account within
---------------
five (5) days of receipt of a Funding Request sufficient cash to fund (1) the
operating losses of Sub (without taking into account any non-cash charges, such
as depreciation or amortization) plus (2) any other expenditures of cash which
Sub reflects to make which are not reflected in the computation of the operating
loss, it being the intention of the parties hereto that the funding commitment
by Parent to Sub pursuant to this Section 5.19(b)(ii) is based on negative
cashflow that is not affected by non-cash occurrences. The calculation of the
sum of (1) and (2) above must be set forth in the Funding Request and is subject
to the review of Parent to ensure a correct computation. The maximum amount of
funds that Parent shall be obligated to transfer pursuant to this subsection
5.19(b)(ii) shall
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<PAGE>
be the Monthly Limit (as defined below) in any particular calendar month and
$1,200,000 in the aggregate. The Monthly Limit shall initially be set at
$250,000 for the month of July 1997, and shall be increased (or decreased) for
each successive calendar month by the amount by which the aggregate amount of
funds transferred by Parent pursuant to this subsection 5.19(b)(ii) is lower (or
greater) than the prior month's Monthly Limit. For example, if in the first
month Parent transfers $200,000, then the Monthly Limit in the second month
shall be increased to $300,000; if in the second month the Parent transfers
$350,000, then the Monthly Limit in the third month shall be reduced to
$250,000. Notwithstanding the foregoing, Parent's obligation to provide funds to
Sub pursuant to this subsection 5.19(b)(ii) shall terminate and be nonrenewable
if the cumulative sum from July 1, 1997 to the last day of any calendar month
subsequent to the Closing Date of either the "Total Revenues" or the "Profit (or
Loss) Before Taxes" of the Sub is below (or above in the case of a projected
loss) 100% of the projected cumulative sum set forth in the Business Plan to the
last day of such calendar month.
(iii) Parent agrees not to direct Sub to take any action
materially inconsistent with the Business Plan unless (A) substantially all of
Parent's subsidiaries are being directed to take similar action or (B) the
action is designed to increase Sub's valuation as calculated by the Valuation
Model.
(c) The Principal Shareholders shall have the right to cause the Sub
to retain as consultants, under four-year contracts, any non-employee Company
Shareholders, and such consultants shall have the same rights and privileges as
all other Company Shareholders (including, without limitation, the right to
participate (i) as Company Shareholders in all Purchase Price Adjustments, and
(ii) as New Employees with respect to the Original Options, Additional Options,
and the Stock Bonus and the Additional Stock Bonus(es) referred to in Section
5.7 hereof), other than any rights granted to each Principal Shareholder
pursuant to Section 5.19(a) above and the form of employment agreement attached
hereto as Exhibit F.
---------
ARTICLE VI
CONDITIONS TO THE MERGER
VI.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted,
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<PAGE>
entered, enforced or deemed applicable to the Merger, which makes the
consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against the Parent, Sub or the
Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
VI.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company and the Principal Shareholders to consummate and effect this
Agreement and the transactions contemplated hereby shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and Sub in
this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be performed
by the Parent on or before such date have been so performed in all material
respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition, results of operations of the
Parent.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of the Parent, taken as a whole since
December 31, 1996.
(e) Company Stockholder Approval. The Company's stockholders shall
----------------------------
have approved the Agreement and the Merger and the transactions contemplated
thereby in accordance with Delaware Law.
VI.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of
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<PAGE>
Parent and Sub to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and the
Principal Shareholders in this Agreement are true and correct in all material
respects; and
(ii) all covenants and obligations of this Agreement to be performed
by the Company on or before such date have been so performed in all material
respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit E.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued) or financial
condition of the Company since December 31, 1996.
(g) Company Shareholder Approval. The Company Shareholders shall have
----------------------------
approved this Agreement and the Merger and the transactions contemplated
thereby, and no Company Shareholder shall have exercised, or have any continuing
right to exercise, appraisal, dissenters' or similar rights by virtue of the
Merger.
(h) Audited 1996 Financial Statements. The Company shall have
---------------------------------
delivered to Parent a copy of the Company's audited balance sheet as of December
31, 1996 and the related
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<PAGE>
audited statements of income and cash flows for the seven-month period then
ended, together with the notes thereto and auditors' report thereon.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
VII.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholders' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the date that
is 18 months after the Effective Time; provided, however, that the
representations and warranties relating or pertaining to any Tax or Returns
related to such Tax set forth in Section 2.10 hereof or relating to
environmental laws or matters set forth in Section 2.20 hereof, shall survive
until ninety (90) days following the expiration of all applicable statutes of
limitations, or extensions thereof, governing each Tax or Returns related to
such Tax or environmental laws or matters. All of the Parent's and Sub's
representations and warranties contained herein or in any instrument delivered
pursuant to this Agreement shall terminate on the date that is 18 months after
the Effective Time.
VII.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
-----------
forth herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Company Shareholder shall be the pro rata amount calculated pursuant to Sec
tion 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, seek indemnification for Losses
directly from the Principal Shareholders, but only after first proceeding
against the Escrow Fund so long as it exists and is not subject to other claims.
[Nothing herein shall limit the liability of Parent, the Company or the
Principal Shareholders for any breach of any representation, warranty or
covenant, if the Merger does not close] Parent may not receive any shares from
the Escrow Fund (other than as a Purchase Price Adjustment) unless Officer's
Certificates (as defined in subsection (d) below) identifying losses, the
aggregate of which exceed $136,000, have been delivered to the Shareholder
Representative (as defined below) and the Escrow Agent as provided
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<PAGE>
in paragraph (d) below. The Company Shareholders shall not have any right of
contribution from the Company with respect to any Loss claimed by Parent or Sub
after the Effective Time.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
- --------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
such amount (or some portion thereof) together with the aggregate amount
remaining in the Escrow Fund is necessary to satisfy any unsatisfied claims
specified in any Officer's Certificate delivered to the Escrow Agent prior to
the first anniversary of the Effective Time with respect to facts and
circumstances existing prior to such first anniversary of the Effective Time.
As soon as all such claims have been resolved, the Escrow Agent shall deliver to
the Company Shareholders the remaining portion of the Escrow Fund not required
to satisfy such claims. Deliveries of Escrow Amounts to the Company
Shareholders pursuant to this Section 7.2(b) shall be made in proportion to
their respective original contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund during
the Escrow Period, shall treat such fund as a trust fund in accordance with the
terms of this Agreement and not as the property of Parent and shall hold and
dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock split)
("New Shares") in respect of Parent Common Stock in the Escrow Fund which have
- ------------
not been released from the Escrow Fund shall be added to the Escrow Fund and
become a part thereof. New Shares issued in respect of shares of Parent Common
Stock which have been released from the Escrow Fund shall not be added to the
Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund. Upon receipt by the Escrow Agent at any
-----------------------
time on or before the last day of the Escrow Period of a certificate signed by
any officer of Parent (an "Officer's Certificate"): (A) stating that Parent has
---------------------
paid or accrued Losses, and (B) specifying in
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reasonable detail the individual items of Losses included in the amount so
stated, the date each such item was paid or accrued, or the basis for such
anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related, the Escrow Agent shall,
subject to the provisions of Section 7.2(e) hereof, deliver to Parent out of the
Escrow Fund, as promptly as practicable, cash or shares of Parent Common Stock
(at the election of Parent) held in the Escrow Fund in an amount equal to such
Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Section 7.2(d) hereof, provided that no such payment or delivery
may be made if the Shareholder Representative shall object in a written
statement to the claim made in the Officer's Certificate, and such statement
shall have been delivered to the Escrow Agent prior to the expiration of such
thirty (30) day period.
(f) Indemnification and Setoff Claims. In the event Parent shall have
---------------------------------
incurred any Losses for which Parent wishes to seek indemnification directly
from the Company Shareholders out of the Escrow Fund pursuant to this Section
7.2, Parent shall deliver to the Shareholder Representative an Officer's
Certificate: (A) stating that Parent has paid or accrued Losses and (B)
specifying in reasonable detail the individual items of Losses included in the
amount so stated, the date each such item was paid or accrued, or the basis for
such anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(g) Actions Against Principal Shareholders. In the event that Parent
--------------------------------------
has elected to pursue indemnity directly from the Principal Shareholders, the
Principal Shareholders shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, wire transfer to Parent the amount of
such Loss, unless the Company or the Principal Shareholders, as the case may be,
contest such claim by following the procedures set forth in Section 7.2(i).
(h) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
ten business day period ending three days prior to the date of the Officer's
Certificate stating the claim with respect to which such shares are delivered,
and (ii) if the Parents' Common Stock is not so publicly traded, the fair market
value per share as determined by the Parent's board of directors in good faith
on the date closest to the date of the Officer's Certificate.
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(i) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall object in writing to
any claim or claims made in any Officer's Certificate within thirty (30) days
after delivery of such Officer's Certificate, the Shareholder Representative and
Parent shall attempt in good faith to agree upon the rights of the respective
parties with respect to each of such claims. If the Shareholder Representative
and Parent should so agree, a memorandum setting forth such agreement shall be
prepared and signed by both parties. If any claim against the Escrow Fund was
sought, such memorandum shall be furnished to the Escrow Agent and the Escrow
Agent shall be entitled to rely on any such memorandum, and comply with the
terms thereof.
(ii) If no such agreement can be reached after good faith negotiation
(or in any event after 60 days from the date of the Officer's Certificate),
either Parent or the Shareholder Representative may demand arbitration of the
matter unless the amount of the damage or loss is at issue in pending litigation
with a third party, in which event arbitration shall not be commenced until such
amount is ascertained or both parties agree to arbitration; and in either such
event the matter shall be settled by arbitration conducted by three arbitrators.
Parent and the Shareholder Representative shall each select one arbitrator, and
the two arbitrators so selected shall select a third arbitrator. The
arbitrators shall set a limited time period and establish procedures designed to
reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys' fees and
costs, to the same extent as a court of law or equity, should the arbitrators
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of a majority of the three arbitrators as to the validity and amount of
any claim in such Officer's Certificate shall be binding and conclusive upon the
parties to this Agreement. Notwith standing anything in Section 7.2(e) hereof,
the Escrow Agent shall be entitled to act in accordance with such decision and
make or withhold payments out of the Escrow Fund in accordance therewith. Such
decision shall be written and shall be supported by written findings of fact and
conclusions which shall set forth the award, judgment, decree or order awarded
by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association. The arbitrators
shall determine how all expenses relating to the arbitration shall be paid,
including without limitation, the respective expenses of each party, the fees of
each arbitrator and the administrative fee of the American Arbitration
Association.
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent believes may result in Losses, Parent shall notify the
Shareholder
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Representative of such claim, and the Shareholder Representative shall be
entitled, at the Company Shareholders' expense, to participate in any defense of
such claim. Parent shall have the right in its sole discretion to settle any
such claim; provided, however, that except with the consent of the Shareholder
Representative, no settlement of any such claim with third-party claimants shall
be determinative of the amount of any claim pursuant to this Section 7.2. In the
event that the Shareholder Representative has consented to any such settlement,
the Company Shareholders shall have no standing to object under any provision of
this Section 7.2 to the amount of any claim by Parent against the Escrow Fund
with respect to such settlement.
(k) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any shareholder, Andrew Taubman shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
--------------------------
each Company Shareholder, for and on behalf of share holders of the Company, to
give and receive notices and communications, to authorize delivery to Parent of
payments from the Escrow Fund in satisfaction of claims by Parent, to object to
such deliveries, to agree to, negotiate, enter into settlements and compromises
of, and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of the Shareholder Representative for the
accomplishment of the foregoing. Such agency may be changed by the Company
Shareholders from time to time upon not less than ten (10) days prior written
notice to Parent; provided that the Shareholder Representative may not be
removed unless a majority-in-interest of the Company Shareholders agree to such
removal and to the identity of the substituted agent. No bond shall be required
of the Shareholder Representative, and the Shareholder Representative shall not
receive compensation for services as such. Notices or communications to or from
the Shareholder Representative shall constitute notice to or from each of the
Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any act
done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders
shall severally indemnify the Shareholder Representative and hold him or her
harmless against any loss, liability or expense incurred without negligence or
bad faith on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholders
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
(l) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability
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to any person for any acts done by them in accordance with such decision, act,
consent or instruction of the Shareholder Representative.
(m) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the performance of
such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive after
the date of this Agreement which are signed by an officer of Parent and the
Shareholder Representative, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the written advice of outside counsel shall be
conclusive evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to disregard any
and all warnings given by any of the parties hereto or by any other person,
excepting only orders or process of courts of law, and is hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case the Escrow Agent obeys or complies with any such order, judgment or
decree of any court, the Escrow Agent shall not be liable to any of the parties
hereto or to any other person by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except for
gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected in any
act taken, suffered, or permitted by such Escrow Agent in good faith in
accordance with the written advice of outside counsel. The Escrow Agent is not
responsible for
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determining and verifying the authority of any person acting or purporting to
act on behalf of any party to this Agreement.
(vi) If any controversy arises between the parties to this Agreement,
or with any other party, concerning the subject matter of this Agreement, its
terms or conditions, the Escrow Agent will not be required to determine the
controversy or to take any action regarding it. The Escrow Agent may hold all
documents and the Escrow Amount and may wait for settlement of any such
controversy by final appropriate legal proceedings or other means as, in the
Escrow Agent's discretion, the Escrow Agent may be required, despite what may be
set forth elsewhere in this Agreement. In such event, the Escrow Agent will not
be liable for damage.
Furthermore, the Escrow Agent may at its option, file an action of
interpleader, in arbitration or otherwise, as the circumstances may require,
requiring the Parties to answer and litigate any claims and rights among
themselves. The Escrow Agent is authorized to deposit with the clerk of the
court all documents and shares of Parent Common Stock held in escrow, except all
cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct.
(viii) The Escrow Agent may resign at any time upon giving at least
thirty (30) days written notice to the parties to this Agreement; provided,
however, that no such resignation shall become effective until the appointment
of a successor escrow agent which shall be accomplished as follows: the
parties shall use their best efforts to agree on a successor escrow agent within
thirty (30) days after receiving such notice. If Parent and the Shareholder
Representative fail to agree upon a successor escrow agent within such time, the
Escrow Agent shall have the right to appoint a successor escrow agent authorized
to do business in the state of California. The successor escrow agent shall
execute and deliver an instrument accepting such appointment and it shall,
without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent. Thereafter, the Escrow Agent shall be discharged from any further
duties and liability under this Agreement.
(n) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder
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shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
VII.3 Indemnity.
---------
(a) Principal Shareholder Indemnity. The Principal Shareholders
-------------------------------
hereby agree to indemnify and hold Parent and its subsidiaries, directors,
officers and agents harmless against and in respect of any loss, cost, expense,
claim, liability, deficiency, judgment or damage (hereinafter, individually, a
"Loss"; and collectively, "Losses") incurred by Parent, its subsidiaries,
- ----- ------
officers, directors and agents (i) as a result of any inaccuracy in or breach of
a representation or warranty of the Company or the Principal Shareholders
contained in this Agreement or any failure by the Company or any Principal
Shareholder to perform or comply with any covenant contained in this Agreement
and (ii) by reason of the failure of the Company and the Principal Shareholders
to perform their obligations hereunder.
(b) Parent Indemnity. Parent hereby agrees to indemnify and hold the
----------------
Company, the Preferred Shareholders and the Company's directors, officers and
agents harmless against and in respect of any loss, cost, expense, claim,
liability, deficiency, judgment or damage (hereinafter, individually, a "Loss";
----
and collectively, "Losses") incurred by the Company, its officers, directors and
------
agents (i) as a result of any inaccuracy in or breach of a representation or
warranty of Parent contained in this Agreement or any failure by Parent to
perform or comply with any covenant contained in this Agreement and (ii) by
reason of the failure of Parent to perform its obligations hereunder.
(c) Tax Indemnity. Parent shall indemnify and hold harmless each
-------------
Company Shareholder and New Employee against any tax, cost (including interest
and penalties), expense, claim, liability, deficiency, judgment or damage
(collectively, "Tax Losses") (i) arising solely as a result of any final
----------
determination by a Governmental Entity that the Merger does not constitute a
reorganization within the meaning of Section 368(a) of the Code and/or (ii) in
connection with the portion of any proceeding conducted by a Governmental Entity
that is related solely to such determination. In determining the amount of
indemnification under this Section 7.3(c), the parties shall deduct from the
applicable Tax Losses any reduction in taxes that the Company Shareholder (or
New Employee) is able to realize at the time of such final determination by the
timely filing of an amended tax return solely as a result of any increase in
such Company Shareholder's (or New
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Employee's) basis in the Parent Common Stock occurring solely as a result of
such final determination. Upon notification of any claim for indemnification
arising under this Section 7.3(c), Parent shall have the right (but not the
obligation) to assume timely the defense of that portion of any audit or
litigation which (i) relates solely to the issue of whether the Merger
constitutes a reorganization with the meaning of Section 368(a) of the Code, and
(ii) could result in the payment of amounts under this Section 7.3(c), and upon
Parent's assumption of such defense, Parent will conduct such defense at
Parent's expense until a final determination is concluded.
(d) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the date
that is 18 months after the Effective Date, but shall not terminate as to any
Loss (or a potential claim by an appropriate party) asserted in good faith prior
to such date; provided, however, that the representations and warranties with
respect to Taxes (Section 2.10) and, environmental laws (Section 2.20), and the
tax indemnification (Section 7.3(c)) shall survive until the expiration of the
applicable statute of limitations, if any.
(e) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions of this Article, the indemnified
party shall assert a claim for indemnification by written notice (a "Notice") to
------
the Parent, or the Surviving Corporation and the Shareholder Representative, as
the case may be, briefly stating the nature and basis of such claim. In the
case of Losses arising by reason of any third-party claim, the Notice shall be
given within 25 days of the filing or other written assertion of any such claim
against Parent, but the failure of Parent to give the Notice within such time
period shall not relieve the Company and the Principal Shareholders of any
liability that the Company and the Principal Shareholders may have to Parent
except to the extent that the Company and the Principal Shareholders are
actually prejudiced thereby; provided, however, that any such notice shall be
given no later than the date of the expiration of the applicable indemnification
obli gation of the Company and the Principal Shareholders as set forth in
Section 7.3(d) above. The indemnified party shall provide the other party on
request all information and documentation reasonably necessary to support and
verify any Losses which the indemnified party believes give rise to a claim for
indemnification hereunder and shall give reasonable access to all books, records
and personnel in the possession or under the control of that party which would
have bearing on such claim.
(f) Limitations on Indemnification.
------------------------------
(i) No amounts shall be paid by the Parent or the Principal
Shareholders for indemnification pursuant to this Section 7.3 unless the
aggregate amount payable hereunder for all Losses is in excess of $136,000, in
which event only the amount of Losses in excess of $136,000 shall be payable by
the Parent or the Principal Shareholders hereunder.
(ii) Notwithstanding the foregoing, no amount shall be paid by the
Parent for indemnification pursuant to Section 7.3(c) unless:
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(A) for a Company Shareholder, the amount payable pursuant to such
section is in excess of the product of (1) the number of shares of Parent Common
Stock received by such Company Shareholder pursuant to Section 1.6(a) hereof
divided by the aggregate number of shares of Parent Common Stock received by all
Company Shareholders pursuant to Section 1.6(a) hereof, multiplied by (2)
$136,000; or
(B) for a New Employee who is not also a Company Shareholder, the
amount payable pursuant to such section is in excess of the product of (1) the
number of shares of Parent Common Stock subject to the Original Option received
by such New Employee pursuant to Section 5.7(b) hereof divided by the aggregate
number of shares of Parent Common Stock subject to all Original Options received
by all New Employees pursuant to Section 5.7(b) hereof, multiplied by (2)
$136,000.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
VIII.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by September 30, 1997; (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any governmental entity that
would make consummation of the Merger illegal;
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Parent's or Sub's ownership or operation of any portion of the business of the
Company; (ii) compel Parent or the Company to dispose of or hold separate all or
a portion of the business or assets of the Sub or Parent as a result of the
Merger; or (iii) have any material adverse effect upon the Surviving Corporation
before the Closing that would materially adversely affect any aspect of the
valuation of Sub after the Effective Time in connection with the determination
of any Purchase Price Adjustments before the Closing.
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the
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Company (provided that, no cure period shall be required for a breach which by
its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are in
material breach of their respective obligations under this Agreement and there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
VIII.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub or the
Company, or their respective officers, directors or shareholders, provided that
each party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
VIII.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
VIII.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
IX.1 Notices. All notices and other communications hereunder shall be in
-------
writing and
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shall be deemed given if delivered personally or by commercial messenger or
courier service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company, to:
Infopreneurs Inc.
c/o USWeb D.C.
7220 Wisconsin Avenue, 4th Floor
Bethesda, Maryland 20814
Attention: Mr. Andrew E. Taubman
Telecopy No.: (301) 652-5778
with a copy to:
Blumenfeld & Cohen
Sumner Square - Suite 700
1615 M Street, N.W.
Washington, DC 20036
Attention: Glenn Manishin, Esq.
Telecopy No.: (202) 955-6460
(c) if to the Principal Shareholders, to:
Mr. Andrew E. Taubman
c/o USWeb D.C.
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<PAGE>
7220 Wisconsin Avenue, 4th Floor
Bethesda, Maryland 20814
Telecopy No.: (301) 652-5778
IX.2 Interpretation. The words "include," "includes" and "including" when
-------------- ------- -------- ---------
used herein shall be deemed in each case to be followed by the words "without
-------
limitation." The table of contents and headings contained in this Agreement are
- ----------
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IX.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
IX.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto and
----------------------------
the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) are not intended to confer upon any other person any
rights or remedies hereunder, except as expressly set forth herein; and (c)
shall not be assigned by operation of law or otherwise except as otherwise
specifically provided.
IX.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision; provided,
--------
however, that no such replacement provision relating to the Merger Consideration
- -------
or the matters set forth in Sections 5.7 and/or 5.19 hereof shall become
effective without the prior written consent of the Parent, the Company and the
Principal Shareholders.
IX.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
IX.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California,
-55-
<PAGE>
in connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
IX.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
IX.9 Arbitration. Any controversy arising out of this Agreement, including
-----------
a claim by an indemnified party pursuant to Section 7.3 hereof, shall be finally
settled by arbitration in Santa Clara County, California in accordance with the
then current Commercial Arbitration Rules of the American Arbitration
Association; and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. Such arbitration shall be
conducted by an arbitrator chosen by mutual agreement of Parent and the
Principal Shareholders. Failing such agreement, the arbitration shall be
conducted by three independent arbitrators, none of whom shall have any
competitive interest with Parent or the Principal Shareholders. Parent shall
choose one such arbitrator and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent, Sub and the
Company and the Principal Shareholders. Each party shall pay its own costs and
expenses (including counsel fees) of any such arbitration except that the
arbitrator can compel one party to pay all or a portion of the other party's
costs and expenses.
-56-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their duly authorized respective officers, and the Principal
Shareholders have personally signed this Agreement, all on this 31st day of
March 1997.
INFOPRENEURS INC. USWEB CORPORATION
Signature:_______________ Signature:_________________
Name:____________________ Name:______________________
Title:___________________ Title:_____________________
ESCROW AGENT USWEB ACQUISITION CORPORATION 102
Signature:_______________ Signature:_________________
Name:____________________ Name:______________________
Title:___________________ Title:_____________________
PRINCIPAL SHAREHOLDERS
____________________________
Andrew Taubman
____________________________
Mark Lupke
-57-
<PAGE>
EXHIBIT A
---------
PRINCIPAL SHAREHOLDERS
NAME NUMBER OF SHARES
OF PARENT COMMON
STOCK TO BE ISSUED ON
THE CLOSING DATE
Andrew Taubman 1,144,993
Mark Lupke 426,312
<PAGE>
EXHIBIT B
---------
VALUATION MODEL
The following spreadsheet was prepared using Microsoft Excel 97. All
references to cell numbers and formulas are based upon the standard notations
used in this application.
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT C-1
-----------
PARENT CAPITAL STRUCTURE AS OF JUNE 30, 1997
The authorized stock of Parent consists of 100,000,000 shares of Common
Stock, $.001 par value, of which 23,423,331 shares are issued and outstanding,
and 38,188,501 shares of Preferred Stock, $.001 par value, of which 18,678,500
shares are designated Series A Preferred Stock, 18,518,500 of which are issued
and outstanding, 9,310,001 shares are designated Series B Preferred Stock, all
of which are issued and outstanding, and 10,200,000 shares are designated Series
C Preferred Stock, 8,454,580 of which are issued and outstanding. All such
shares have been duly authorized, and all such issued and outstanding shares
have been validly issued, are fully paid and nonassessable and are free of any
liens or encumbrances other than any liens or encumbrances created by or imposed
upon the holders thereof. Parent has also reserved (i) 3,900,000 shares of
Common Stock for issuance to employees and consultants pursuant to Parent's 1996
Stock Option Plan and 1996 Equity Compensation Plan, (ii) 160,000 shares of
Series A Preferred Stock and 2,113,647 shares of Series C Preferred Stock for
issuance upon the exercise of outstanding warrants to purchase Series A
Preferred Stock and Series C Preferred Stock, respectively (the "Warrant
-------
Stock"), (iii) 2,273,647 shares of Common Stock for issuance upon conversion of
- -----
the Warrant Stock, (iv) 1,000,000 shares of Common Stock for issuance upon the
exercise of outstanding warrants to purchase Common Stock issued or issuable
pursuant to the Company's 1997 Affiliate Warrant Program, (v) 300,000 shares of
Common Stock for issuance upon the exercise of other warrants to purchase Common
Stock, and (vi) 10,000,000 shares of Common Stock for issuance pursuant to the
exercise of options issued or issuable under the Parent's 1997 Acquisition Stock
Option Plan. There are no other options, warrants, calls, rights, commitments or
agreements of any character to which Parent is a party or by which it is bound
obligating Parent to issue, deliver, sell, repurchase or redeem, or cause to be
issued, delivered, sold, repurchased or redeemed, any shares of the capital
stock of Parent or obligating Parent to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement.
<PAGE>
EXHIBIT D
---------
USWEB CORPORATION
1997 ACQUISITION STOCK OPTION PLAN
NOTICE OF GRANT
Unless otherwise defined herein, the terms defined in the 1997 Acquisition
Stock Option Plan (the "Plan") shall have the same defined meanings in this
----
Notice of Grant.
[Optionee's Name and Address]
- -----------------------------
- -----------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Stock Option Agreement,
as follows:
Grant Number
-------------------------------------------
Date of Grant [
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Vesting Commencement Date [Closing Date]
--------------
Exercise Price per Share $
------------------
Total Number of Shares Granted
------------------
<PAGE>
Total Exercise Price $
------------------
Type of Option: _____________ Incentive Stock Option
_____________ Nonstatutory Stock Option
Term/Expiration Date:
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Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
One-thirty-sixth (1/36th) of the Shares subject to this Option shall vest
upon each monthly anniversary of the Vesting Commencement Date, for so long as
[Optionee's] [Andrew Taubman's] full-time employment or consulting relationship
with the Company continues.
Termination Period:
------------------
This Option may be exercised for three (3) months after termination of
employment or consulting relationship, or such longer period as may be
applicable upon death or Disability of Optionee as provided in the Plan, but in
no event later than the Term/Expiration Date as provided above.
<PAGE>
USWEB CORPORATION
1997 ACQUISITION STOCK OPTION PLAN
OPTION AGREEMENT
1. Grant of Option. USWeb Corporation (the "Company"), hereby grants to
--------------- -------
the Optionee (the "Optionee") named in the Notice of Grant, an option (the
--------
"Option") to purchase the total number of shares of Common Stock (the "Shares")
- ------- ------
set forth in the Notice of Grant, at the exercise price per share set forth in
the Notice of Grant (the "Exercise Price") subject to the terms, definitions and
--------------
provisions of the 1997 Acquisition Stock Option Plan (the "Plan") adopted by the
----
Company, which is incorporated herein by reference. Unless otherwise defined
herein, the terms defined in the Plan shall have the same defined meanings in
this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
- -----
defined in Section 422 of the Code. However, if this Option is intended to be
an Incentive Stock Option, to the extent that it exceeds the $100,000 rule of
Code Section 422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
---
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) This Option may not be exercised for a fraction of a Share.
(b) In the event of Optionee's death, disability or other
termination of the Optionee's Continuous Status as an Employee or Consultant,
the exercisability of the Option is governed by Sections 6, 7 and 8 below,
subject to the limitation contained in subsection 2(i)(c).
(c) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Grant.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by (A) payment of the Exercise Price and (B) the Investment
Representation Statement attached hereto as Exhibit B completed and executed by
---------
the Optionee. This Option shall be deemed to be exercised upon receipt by the
Company of
<PAGE>
such written notice accompanied by the Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless
such issuance and such exercise shall comply with all relevant provisions of law
and the requirements of any stock exchange or national market system upon which
the Common Stock is then listed. Assuming such compliance, for income tax
purposes the Shares shall be considered transferred to the Optionee on the date
on which the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B.
4. Method of Payment. Payment of the Exercise Price shall be by any of
-----------------
the following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(iv) to the extent authorized by the Company, delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan proceeds required
to pay the Exercise Price.
5. Restrictions on Exercise. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event an Optionee's Continuous
---------------------------
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
----------------
exercise this Option during the Termination Period
<PAGE>
set out in the Notice of Grant. To the extent that Optionee was not entitled to
exercise this Option at the date of such termination, or if Optionee does not
exercise this Option within the time specified herein, the Option shall
terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his or her Disability, Optionee may, but
only within twelve (12) months from the date of such termination (and in no
event later than the expiration date of the term of such Option as set forth in
the Notice of Grant) exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee is not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
8. Death of Optionee. In the event of termination of Optionee's
-----------------
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within twelve (12) months
following the date of death (but in no event later than the date of expiration
of the term of this Option as set forth in Section 10 below), by Optionee's
estate or by a person who acquired the right to exercise the Option by bequest
or inheritance, but only to the extent the Optionee could exercise the Option at
the date of death.
9. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
11. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGU LATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(i) Exercise of an ISO. If this Option qualifies as an ISO, there
------------------
will be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
-3-
<PAGE>
(ii) Exercise of an NSO. There may be a regular federal income tax
------------------
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(iii) Disposition of Shares. In the case of an NSO, if Shares are
---------------------
held for at least one year, any gain realized on disposition of the Shares will
be treated as long-term capital gain for federal income tax purposes. In the
case of an ISO, if Shares transferred pursuant to the Option are held for at
least one year after exercise and are disposed of at least two years after the
Date of Grant, any gain realized on disposition of the Shares will also be
treated as long-term capital gain for federal income tax purposes. If Shares
purchased under an ISO are disposed of within such one-year period or within two
years after the Date of Grant, any gain realized on such disposition will be
treated as compensation income (taxable at ordinary income rates) to the extent
of the difference between the Exercise Price and the lesser of (1) the Fair
Market Value of the Shares on the date of exercise, or (2) the sale price of the
Shares.
(iv) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
USWeb Corporation
By:
-------------------------
-4-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSUL TANCY OR EMPLOYMENT BY THE
COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 1997 ACQUISITION STOCK OPTION
PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY
RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
Dated:_______________________ ____________________________
Optionee
Residence Address:
-5-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms
and conditions of the Plan and this Option Agreement. In consideration of USWeb
Corporation's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the under signed hereby agrees to
be irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
Spouse of Optionee
-6-
<PAGE>
EXHIBIT A
---------
USWEB CORPORATION
1997 ACQUISITION STOCK OPTION PLAN
EXERCISE NOTICE
USWeb Corporation
3000 Lakeside Drive
Santa Clara, CA 95054
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
--------
_________ shares of the Common Stock (the "Shares") of USWeb Corporation (the
"Company") under and pursuant to the 1997 Acquisition Stock Option Plan, as
amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option
Agreement dated ________, 19___ (the "Stock Option Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Stock Option Agreement and agrees
to abide by and be bound by their terms and conditions.
3. Rights as Shareholder. Until the stock certificate evidencing such
---------------------
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 11 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee
disposes of the Shares either to a transferee or to the Company if the Company
exercises the Right of First Refusal hereunder. Upon such exercise, Optionee
shall have no further rights as a holder of the Shares so purchased except the
right to receive payment for the Shares so purchased in accordance with the
provisions of this Agreement, and Optionee shall forthwith cause the
certificate(s) evidencing the Shares so purchased to be surrendered to the
Company for transfer or cancellation.
4. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
<PAGE>
(i) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee (the "Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
(ii) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection
(iii) below.
(iii) Purchase Price. The purchase price (the "Purchase Price") for
--------------
the Shares purchased by the Company or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the cash equivalent value of the non-cash consideration shall be
determined by the Administrator in good faith. If the Shares are being
transferred by gift (other than pursuant to paragraph (vi) below), the Purchase
Price shall be the product of the Fair Value Per Share (as defined below)
multiplied by the number of Shares proposed to be gifted. The Fair Value Per
Share of a Share, as of any particular date, shall mean, if the Company's Common
Stock is then traded on an exchange or national quotation system, the average
closing price per share of Company's Common Stock as traded on such exchange or
national quotation system during the 10 trading day period ending three business
days prior to the date of determination or, if not so traded, the fair market
value per share of such Company's Common Stock as most recently determined by
the Company's Board of Directors acting in good faith prior to the date of the
occurrence of the event requiring such determination.
(iv) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash, by check, by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(v) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the
<PAGE>
Company and/or its assignees shall again be offered the Right of First Refusal
before any Shares held by the Holder may be sold or otherwise transferred.
(vi) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so transferred subject to the provisions of
this Section, and there shall be no further transfer of such Shares except in
accordance with the terms of this Section.
(vii) Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate ninety (90) days after the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act").
5. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. Market Standoff Agreement. Each Optionee hereby agrees that if so
-------------------------
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of any Shares of the Company under the
Securities Act, such Optionee shall not sell or otherwise transfer, pledge,
hypothecate or otherwise decrease his market risk or beneficial ownership in any
Shares or other securities of the Company during the 180-day period following
the date of the final Prospectus contained in a registration statement of the
Company filed under the Securities Act; provided, however, that such restriction
shall only apply to the first registration statement of the Company to become
effective under the Securities Act which includes securities to be sold on
behalf of the Company to the general public in an underwritten public offering
under the Securities Act. The Company may impose stop-transfer instructions
with respect to securities subject to the foregoing restrictions until the end
of such 180-day period.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(i) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below, or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by state or federal securities laws
at the time of the issuance of the Shares:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN
-3-
<PAGE>
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND
MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED
UNLESS AND UNTIL REGISTERED UNDER THE ACT OR THE ISSUER OF THE SHARES (THE
"ISSUER") HAS RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
SATISFACTORY TO THE ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER OR
ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF
FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THE SHARES REPRESENTED HEREBY.
(ii) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instruc tions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(iii) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
8. Successors and Assigns. The Company may assign any of its rights
----------------------
under this Agreement to single or multiple assignees, and this Agreement shall
inure to the benefit of the successors and assigns of the Company. Subject to
the restrictions on transfer herein set forth, this Agreement shall be binding
upon Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator of the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Administrator shall be final
and binding on the Company and on Optionee.
10. Governing Law; Severability. This Agreement shall be governed by and
---------------------------
construed in
-4-
<PAGE>
accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
11. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or three
(3) days after deposit in the United States mail by certified mail, with postage
and fees prepaid, addressed to the other party at its address as shown below
beneath its signature, or to such other address as such party may designate in
writing from time to time to the other party.
12. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
13. Delivery of Payment. Optionee herewith delivers to the Company the
-------------------
full Exercise Price for the Shares.
14. Entire Agreement. The Plan, the Notice of Grant, and the Stock Option
----------------
Agreement are incorporated herein by reference. This Agreement, the Plan, the
Notice of Grant, the Stock Option Agreement and the Investment Representation
Statement (if applicable) constitute the entire agreement of the parties and
supersede in their entirety all prior undertakings and agreements of the Company
and Optionee with respect to the subject matter hereof.
Submitted by: Accepted by:
OPTIONEE: USWeb Corporation
By:___________________
Its:__________________
(Signature)
Address: Address:
- ------- -------
3000 Lakeside Drive
Santa Clara, CA 95054
-5-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : USWEB CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company and any other legend required
under then applicable state or federal securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted
<PAGE>
securities" acquired, directly or indirectly from the issuer thereof, in a non-
public offering subject to the satisfaction of certain conditions. Rule 701
provides that if the issuer qualifies under Rule 701 at the time of the grant of
the Option to the Optionee, the exercise will be exempt from registration under
the Securities Act. In the event the Company becomes subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") ninety (90) days thereafter (or such longer period
as any market stand-off agreement may require) the Securities exempt under Rule
701 may be resold, subject to the satisfaction of certain of the conditions
specified by Rule 144, including: (1) the resale being made through a broker in
an unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Exchange Act); and, in the case of an
affiliate, (2) the availability of certain public information about the Company,
(3) the amount of Securities being sold during any three month period not
exceeding the limitations specified in Rule 144(e), and (4) the timely filing of
a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters (the "Managing Underwriter") in connection
with any registration of the offering of any securities of the Company under the
Securities Act, Optionee shall not sell or otherwise transfer any Shares or
other securities of the Company during the 180-day period (or such longer period
of time as may be requested in writing by the Managing Underwriter and agreed to
in writing by the Company) (the "Market Standoff Period") following the date of
the final Prospectus included in a registration statement of the Company filed
under the Securities Act; provided, however, that such restriction shall only
apply to the first registration statement of the Company to become effec tive
under the Securities Act which includes securities to be sold on behalf of the
Company to the general public in an underwritten public offering under the
Securities Act. The Company may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such Market
Standoff Period.
-2-
<PAGE>
(e) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A under the Securities Act, or
some other registration exemption will be required; and that, notwithstanding
the fact that Rules 144 and 701 are not exclusive, the Staff of the Securities
and Exchange Commission has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rules 144 or 701 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk. Optionee understands that no
assurances can be given that any such other registration exemption will be
available in such event.
Signature of Optionee:
Date:______________________
-3-
<PAGE>
EXHIBIT E
---------
FORM OF SHAREHOLDER CERTIFICATE
<PAGE>
SHAREHOLDER'S CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of March 31, 1997, as amended (the "Agreement"),
---------
entered into by and among USWeb Corporation, a Utah corporation ("Parent"),
------
Infopreneurs Inc. a Delaware corporation (the "Company"), USWeb Acquisition
-------
Corporation 102, a Delaware corporation and wholly owned subsidiary of Parent
("Sub"), the Company will merge (the "Merger") with and into Sub and all shares
- ----- ------
of the Company's Common Stock will be exchanged for certain consideration set
forth in the Agreement (the "Merger Consideration"). Unless otherwise
--------------------
indicated, capitalized terms not defined herein have the meanings set forth in
the Agreement.
The undersigned understands that the execution of this Certificate is a
condition precedent to Parent and Sub's obligation to consummate the Merger and
to the receipt of Merger Consideration in the Merger (pursuant to the terms and
conditions of the Agreement).
The undersigned hereby represents and warrants as follows:
B. Investment Representations.
--------------------------
(a) The Parent Common Stock issued to the undersigned will be acquired
for investment for the undersigned's own account, not as a nominee or agent, and
not with a view to the sale or distribution of any part thereof, and the
undersigned has no present intention of selling, granting any participation in,
or otherwise distributing the same. The undersigned represents that the entire
legal and beneficial interest of the Parent Common Stock will be held for the
undersigned's account only, and neither in whole or in part for any other
person. By executing this Shareholder's Certificate, the undersigned further
represents that the undersigned has no present contract, undertaking, agreement
or arrangement with any person to sell, transfer, or grant participation to such
person or to any third person, with respect to any of the Parent Common Stock.
(b) The undersigned understands and acknowledges that the issuance of
the Parent Common Stock pursuant to the Agreement is being effected on the basis
that the issuance of such securities is exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act") and that
--------
the Parent's reliance upon such exemption is predicated upon the undersigned's
representations.
(c) The undersigned further represents that he: (i) has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the undersigned's prospective investment in
the shares of Parent Common Stock; (ii) has received all the information it has
requested from the Parent and the Company it considers necessary or appropriate
for deciding whether to accept the Parent Common Stock; (iii) has the ability to
bear the economic risks of the undersigned's prospective investment; (iv) is
able, without materially
<PAGE>
impairing his financial condition, to hold the Parent Common Stock for an
indefinite period of time and to suffer complete loss on his investment;
and (v) if applicable, is an "accredited investor" within the meaning of
-------------------
Rule 501 of Regulation D promulgated under the 1933 Act.
(d) Each certificate representing Parent Company Stock issued pursuant
hereto to the undersigned and any shares issued or issuable in respect of any
such Parent Common Stock upon any stock split, stock dividend, recapitalization,
or similar event, shall be stamped or otherwise imprinted with legends in the
following form (in addition to any legend required under applicable state
securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRA
TION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES OF THE AGREEMENT
COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING THEIR TRANSFER MAY BE
OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF THE CORPORATION AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT THE
PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS ARE
BINDING ON TRANSFEREES OF THESE SHARES.
(e) The certificates evidencing the Parent Common Stock shall also
bear any legend required pursuant to any state, local or foreign law governing
such securities.
(f) The undersigned understands and acknowledges that the Parent
Common Stock has not been registered under the 1933 Act and Parent Common Stock
must be held indefinitely unless subsequently registered under the 1933 Act or
an exemption from such registration is available and neither Parent nor the
Company is under any obligation to register the Parent Common Stock.
(g) The undersigned acknowledges that the Parent Common Stock shall
not be transferable except upon the conditions specified in this Certificate and
in the Agreement. Each Company Shareholder will cause any proposed transferee
of the Parent Company Stock held by such Company Shareholder to agree to take
and hold such Parent Company Stock subject to the
-2-
<PAGE>
provisions and upon the conditions specified in this Certificate and in the
Agreement.
(h) Prior to any proposed transfer of any Parent Common Stock, unless
there is in effect a registration statement under the Securities Act covering
the proposed transfer, the undersigned shall give written notice to the Company
of his intention to effect such transfer. Each such notice shall describe the
manner and circumstances of the proposed transfer in sufficient detail, and
shall, if the Parent so requests, be accompanied (except in transactions in
compliance with Rule 144) by either (i) a written opinion of legal counsel
reasonably satisfactory to Parent, addressed to Parent, to the effect that the
proposed transfer of Parent Common Stock may be effected without registration
under the 1933 Act, or (ii) a "No Action" letter from the Commission to the
---------
effect that the transfer of such securities without registration will not result
in a recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Parent Common Stock shall be
entitled to transfer such shares of Parent Common Stock in accordance with the
terms of the notice delivered by the holder to Parent, subject to any right of
first refusal on transfer in favor of the Parent. Each certificate evidencing
the shares of Parent Common Stock transferred as above provided shall bear the
appropriate restrictive legend set forth in Section (d) above, except that such
certificate shall not bear such restrictive legend if in the opinion of counsel
for Parent such legend is not required in order to establish compliance with any
provisions of the 1933 Act, which opinion will not be unreasonably withheld.
(i) The undersigned has had an opportunity to review with his own tax
advisors the tax consequences to the undersigned of the Merger and the
transactions contemplated by the Agreement. The undersigned understands that he
must rely solely on his advisors and not on any statements or representations by
Parent, the Company or any of their agents. The undersigned understands that,
except as set forth in Section 7.3(c) of the Agreement, he (and not Parent or
the Company) shall be responsible for his own tax liability that may arise as a
result of the Merger or the transactions contemplated by the Agreement.
(j) The undersigned will have sufficient assets, after completion of
the Merger, to satisfy all of the undersigned's obligations to its creditors as
the same become due and payable.
C. Acknowledgment of Escrow Setoff and Market Standoff Agreement. The
-------------------------------------------------------------
undersigned has carefully reviewed the Agreement, and understands and agrees
that:
(a) Pursuant to such Agreement, 50% of the Original Purchase Price
which would otherwise be payable to the undersigned at the Effective Time of the
Merger will be deemed to have been received by the undersigned and deposited
with the Escrow Agent, without any act of the undersigned, and that the amounts
deposited with the Escrow Agent shall be available to satisfy Losses and
adjustments to the Original Purchase Price as set forth in the Agreement.
(b) Pursuant to the Agreement, Parent may, in its sole discretion,
seek (i) indemnification from the Principal Shareholders for Losses incurred by
the Parent, and Parent may elect to seek any such amounts from the Escrow Fund
to compensate Parent for Losses incurred, or
-3-
<PAGE>
(ii) Parent may seek Purchase Price Adjustments from the Escrow Fund, in each
event of which the Escrow Amount otherwise payable to the undersigned shall be
reduced without any act of the undersigned.
(c) Each Company Shareholder is restricted from selling or otherwise
transferring, pledging, hypothecating or otherwise decreasing his or her market
risk or beneficial ownership in any Shares or other securities of the Parent
during the 180-day period following the date of the final Prospectus contained
in a registration statement of the Parent filed under the Securities Act;
provided, however, that such restriction shall only apply to the first
registration statement of the Parent to become effective under the Securities
Act which includes securities to be sold on behalf of the Parent to the general
public in an underwritten public offering under the Securities Act. The Parent
may impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such 180-day period.
D. Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of Andrew Taubman as the Shareholder
Representative (as such term is defined in the Agreement) and authorizes such
Shareholder Representative to act as the undersigned's duly constituted
attorney-in-fact in connection with the matters set forth in the Agreement,
until such time as a successor of such Shareholder Representative is elected by
a majority-in-interest of the Company Shareholders. The undersigned
acknowledges and agrees that any decision, act, consent or instruction of the
Shareholder Representative shall constitute a decision, act, consent or
instruction of the undersigned and shall be final, binding and conclusive on the
undersigned, and that Parent and the Escrow Agent may rely upon any such
decision, act, consent or instruction of the Shareholder Representative as being
the decision, act, consent or instruction of the undersigned.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of August, 1997.
Signature
Print Name
<PAGE>
Exhibit 2.6
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 108
ELECTRONIC IMAGES, INC.
AND
CERTAIN SHAREHOLDERS OF ELECTRONIC IMAGES, INC.
DATED AS OF AUGUST 28, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I -- THE MERGER................................................................. 2
1.1 The Merger.................................................................... 2
1.2 Effective Time................................................................ 2
1.3 Effect of the Merger.......................................................... 2
1.4 Certificate of Incorporation; Bylaws.......................................... 2
1.5 Directors and Officers........................................................ 2
1.6 Effect of Merger on the Capital Stock of the Constituent
Corporations.................................................................. 3
1.7 Surrender of Certificates..................................................... 4
1.8 No Further Ownership Rights in Company Common Stock........................... 5
1.9 Lost, Stolen or Destroyed Certificates........................................ 5
1.10 Purchase Price Adjustments.................................................... 5
1.11 Parent Common Stock........................................................... 7
1.12 Tax Consequences.............................................................. 7
1.13 Taking of Necessary Action; Further Action.................................... 7
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS 8
2.1 Organization of the Company................................................... 8
2.2 Company Capital Structure..................................................... 8
2.3 Subsidiaries.................................................................. 8
2.4 Authority..................................................................... 9
2.5 No Conflict................................................................... 9
2.6 Consents...................................................................... 9
2.7 Company Financial Statements.................................................. 9
2.8 No Undisclosed Liabilities.................................................... 10
2.9 No Changes.................................................................... 10
2.10 Tax Matters................................................................... 12
2.11 Restrictions on Business Activities........................................... 13
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of Equipment 13
2.13 Intellectual Property......................................................... 14
2.14 Agreements, Contracts and Commitments......................................... 17
2.15 Interested Party Transactions................................................. 18
2.16 Governmental Authorization.................................................... 18
2.17 Litigation.................................................................... 19
2.18 Accounts Receivable........................................................... 19
2.19 Minute Books.................................................................. 19
2.20 Environmental Matters......................................................... 19
2.21 Brokers' and Finders' Fees; Third Party Expenses.............................. 20
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.22 Employee Benefit Plans and Compensation....................................... 20
2.23 Insurance..................................................................... 23
2.24 Compliance with Laws.......................................................... 23
2.25 Third Party Consents.......................................................... 23
2.26 Warranties; Indemnities....................................................... 23
2.27 Complete Copies of Materials.................................................. 23
2.28 Business Plan................................................................. 23
2.29 Backlog Report................................................................ 23
2.30 [Intentionally Omitted........................................................ 23
2.31 Principal Shareholder Investment Representations.............................. 23
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB......................... 24
3.1 Organization, Standing and Power.............................................. 24
3.2 Authority; Consents........................................................... 24
3.3 Capital Structure............................................................. 24
3.4 Brokers' and Finders' Fees.................................................... 25
3.5 Similar Transactions.......................................................... 25
3.6 No Changes.................................................................... 25
3.7 Parent Financial Statements................................................... 25
3.8 Litigation.................................................................... 26
ARTICLE IV -- CONDUCT PRIOR TO THE EFFECTIVE TIME....................................... 26
4.1 Conduct of Business of the Company............................................ 26
4.2 No Solicitation............................................................... 28
ARTICLE V -- ADDITIONAL AGREEMENTS...................................................... 29
5.1 Parent's Right of First Refusal............................................... 29
5.2 Market Standoff Agreement..................................................... 30
5.3 Restriction on Competition.................................................... 30
5.4 Confidentiality............................................................... 32
5.5 Expenses...................................................................... 32
5.6 Public Disclosure............................................................. 32
5.7 Treatment of Affiliate Warrants............................................... 32
5.8 Access to Information......................................................... 32
5.9 Consents...................................................................... 33
5.10 FIRPTA Compliance............................................................. 33
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.11 Best Efforts.................................................................. 33
5.12 Notification of Certain Matters............................................... 33
5.13 Preparation of Tax Returns.................................................... 33
5.14 Additional Documents and Further Assurances................................... 33
5.15 Section 368 Compliance........................................................ 34
5.16 Parent Policies............................................................... 34
5.17 Rule 144...................................................................... 34
ARTICLE VI -- CONDITIONS TO THE MERGER.................................................. 34
6.1 Conditions to Obligations of Each Party to Effect the Merger.................. 34
6.2 Additional Conditions to Obligations of Company............................... 35
6.3 Additional Conditions to the Obligations of Parent and Sub.................... 35
ARTICLE VII -- SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW....................... 36
7.1 Survival of Representations and Warranties.................................... 36
7.2 Escrow Arrangements; Setoff................................................... 37
7.3 Indemnity..................................................................... 44
ARTICLE VIII -- TERMINATION, AMENDMENT AND WAIVER....................................... 45
8.1 Termination................................................................... 45
8.2 Effect of Termination......................................................... 46
8.3 Amendment..................................................................... 46
8.4 Extension; Waiver............................................................. 46
ARTICLE IX -- GENERAL PROVISIONS........................................................ 46
9.1 Notices....................................................................... 46
9.2 Interpretation................................................................ 47
9.3 Counterparts.................................................................. 48
9.4 Entire Agreement; Assignment.................................................. 48
9.5 Severability.................................................................. 48
9.6 Other Remedies................................................................ 48
9.7 Governing Law................................................................. 48
9.8 Rules of Construction......................................................... 48
</TABLE>
-iii-
<PAGE>
INDEX OF EXHIBITS
Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Form of Shareholder Certificate
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of August 28, 1997, among USWeb Corporation, a Utah corporation
("Parent"), USWeb Acquisition Corporation 108, a Delaware corporation and a
------
wholly owned subsidiary of Parent ("Sub"), Electronic Images, Inc., a
---
Pennsylvania corporation (the "Company"), and the shareholders of the Company
-------
listed on Exhibit A attached hereto (such shareholders being hereinafter
---------
referred to collectively as the "Principal Shareholders" and individually as a
----------------------
"Principal Shareholder").
- ----------------------
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe
it is in the best interests of each company and their respective shareholders
that Parent acquire the Company through the statutory merger of the Company with
and into Sub (the "Merger") and, in furtherance thereof, have approved the
------
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company shall be converted into the
right to receive shares of Common Stock of Parent.
C. Forty-five percent (45%) of the shares of Common Stock of Parent
otherwise payable in connection with the Merger shall be placed in a one-year
escrow for the purposes of (i) satisfying damages, losses, expenses and other
similar charges which result from breaches of representations, warranties or
covenants or (ii) making adjustments to the purchase price paid by the Parent.
D. The Company, the Principal Shareholders, Parent and Sub desire to make
certain representations, warranties, covenants and other agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the corporations laws of the states of Delaware
("Delaware Law") and Pennsylvania ("Pennsylvania Law"), the Company shall be
- -------------- ----------------
merged with and into the Sub, the separate corporate existence of the Company
shall cease and Sub shall continue as the surviving corporation and as a wholly
owned subsidiary of Parent. Sub as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."
---------------------
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
--------------
to Section 8.1, the closing of the Merger (the "Closing") will take place as
-------
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
unless another place or time is agreed to in writing by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date." On the Closing Date, the parties hereto shall cause the Merger
- -------------
to be consummated by submitting for filing an Agreement and Plan of Merger (or
like instrument) with the Secretary of State of Delaware and the Secretary of
State of Pennsylvania (the "Merger Articles"), in accordance with the relevant
---------------
provisions of applicable law (the later of the times of filing with the
Secretary of State of Delaware and the Secretary of State of Pennsylvania being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
--------------------
shall be as provided in the applicable provisions of Delaware Law and
Pennsylvania Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, all the property, rights, privileges, powers and
franchises of the Company and Sub shall vest in the Surviving Corporation, and
all debts, liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Certificate of Incorporation; Bylaws.
------------------------------------
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation.
(b) The Bylaws of Sub, as in effect immediately prior to the Effective
Time, shall be the Bylaws of the Surviving Corporation until thereafter amended.
1.5 Directors and Officers. The director(s) of Sub immediately prior to
----------------------
the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
-2-
<PAGE>
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.
---------------------------------------------------------------------
(a) Exchange of Stock; Purchase Price Adjustments. As of the
---------------------------------------------
Effective Time of the Merger, each share of the Company's Common Stock, $1.00
par value (the "Company Common Stock"), that is issued and outstanding
--------------------
immediately prior to the Effective Time (other than any Dissenting Shares (as
defined and to the extent provided in Section 1.7)) dissenting shares under
applicable state law) shall, by virtue of the Merger and without any action on
the part of Sub, the Company, or the Company's shareholders (the "Company
-------
Shareholders"), be canceled and extinguished and each Company Shareholder shall
- ------------
have (i) the right to receive such Company Shareholder's pro rata portion (based
on such Company Shareholder's equity ownership in the Company as represented to
Parent by the Company) of that number of shares of the Parent's Common Stock,
par value $.001 per share (the "Parent Common Stock") equal to $11,242,293 (the
-------------------
"Original Purchase Price") divided by $2.25, subject to Section 7.2 hereof, plus
-----------------------
(ii) the contingent right to receive from Sub additional shares of Parent Common
Stock as provided in Section 1.10 of this Agreement (the "Purchase Price
--------------
Adjustment"). The Original Purchase Price and the Purchase Price Adjustment are
- ----------
hereinafter collectively referred to as the "Merger Consideration."
--------------------
(b) [Intentionally Omitted]
(c) Adjustments to Parent Common Stock. The number of shares of
----------------------------------
Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Common Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Common Stock occurring after the date
hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including the Purchase Price Adjustment pursuant
to Section 1.10 below, or pursuant to any stock option or stock bonus issued to
a Company employee that becomes an employee of Parent or Sub following the
Merger. In lieu thereof, the number of shares otherwise issued or issuable
shall be rounded to the nearest whole share, with one-half share or more being
rounded up.
(e) Definitions.
-----------
(i) Aggregate Common Number. The "Aggregate Common Number"
-----------------------
shall mean the aggregate number of shares of Company Common Stock outstanding
immediately prior to the Effective Time.
(ii) Fair Value Per Share. The Fair Value Per Share of
--------------------
Parent's Common Stock, as of any particular date, shall mean, if the Parent's
Common Stock is then traded on an exchange or national quotation system, the
average closing price per share of Parent's Common Stock as traded on such
exchange or national quotation system during the 10 trading day period ending
three business days prior to the date of determination or, if not so traded, the
fair market value per share of such Parent's Common Stock as most recently
determined by the Parent's Board of Directors acting in good faith.
-3-
<PAGE>
(iii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
--------------------------- -------------
equal to forty-five percent (45%) of the number of shares of Parent Common Stock
constituting the Original Purchase Price. The "Escrow Agent" shall be the
------------
secretary of the Parent, or his designee, so long as the Parent is a privately
held company. Thereafter, any transfer agent for the Parent's Common Stock may
be appointed Escrow Agent.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. The Secretary of Parent or such other entity
--------------
reasonably designated by Parent shall serve as exchange agent (the "Exchange
--------
Agent") in the Merger.
- -----
(b) Parent to Provide Common Stock. Promptly after the Effective
------------------------------
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the Original Purchase Price issuable pursuant to
Section 1.6(a) in exchange for outstanding shares of Company Common Stock;
provided that, on behalf of the Company Shareholders, Parent shall deposit the
Escrow Amount into an escrow account.
(c) Exchange Procedures. Promptly after the Effective Time, the
-------------------
Surviving Corporation shall cause to be mailed to each Company Shareholder (i) a
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the certificates (the "Certificates") which
------------
immediately prior to the Effective Time represented outstanding shares of
Company Common Stock whose shares were converted into the right to receive the
Merger Consideration pursuant to Section 1.6, shall pass, only upon delivery of
the Certificates to the Exchange Agent and shall be in such form and have such
other provisions substantially consistent with the provisions of this Agreement
as Parent may reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. Upon
surrender of a Certificate for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the Company Shareholder shall be entitled to receive in
exchange therefor a certificate representing the number of shares issuable to
such Company Shareholder as part of the Original Purchase Price (less the number
of shares of Parent Common Stock to be deposited in the Escrow Fund (as defined
in Article VII) on such holder's behalf pursuant to Article VII hereof) and the
Certificate so surrendered shall forthwith be canceled. As soon as practicable
after the Effective Time, and subject to and in accordance with the provisions
of Article VII hereof, Parent shall cause to be distributed to the Escrow Agent
(as defined in Article VII) a certificate or certificates representing that
number of shares of Parent Common Stock equal to the Escrow Amount. Such
consideration shall be beneficially owned by the holders on whose behalf such
consideration were deposited in the Escrow Fund and shall be available to
compensate Parent as provided in Article VII. Until surrendered to the Exchange
Agent, each outstanding Certificate that, prior to the Effective Time,
represented shares of Company Common Stock will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment of dividends,
to evidence only the right to receive Merger Consideration pursuant to Section
1.6 hereof.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
------------------------------------------------
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a
-4-
<PAGE>
record date after the Effective Time will be paid to the holder of any
unsurrendered Certificate with respect to the shares of Parent Common Stock
issuable upon conversion of the shares of Company Common Stock represented
thereby until the holder of record of such Certificate shall surrender such
Certificate. Subject to applicable law, following surrender of any such
Certificate, there shall be paid to the record holder of the certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends or
other distributions with a record date after the Effective Time theretofore paid
with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
----------------------
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Sub or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered or have established to the satisfaction of Sub or any
agent designated by it that such tax has been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this
------------
Section 1.7, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Common Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.8 No Further Ownership Rights in Company Common Stock. All shares of
---------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof shall be deemed to have been
issued in full satisfaction of all rights pertaining to such shares of Company
Common Stock capital stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Company
Common Stock capital stock which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and exchanged
as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any Certificates
--------------------------------------
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of an
affidavit of that fact by the holder thereof, such shares of Parent Common Stock
as may be required pursuant to Section 1.6(a); provided, however, that Sub may,
in its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed Certificates to deliver a bond in
such sum as it may reasonably direct as indemnity against any claim that may be
made against Parent, Sub or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
-5-
<PAGE>
(a) Six-Month Adjustment. At the close of business on December 1,1997
--------------------
(the "First Adjustment Date"), the Parent shall conduct a valuation of the Sub
---------------------
according to the operation of the Parent's affiliate valuation method set forth
on Exhibit B attached hereto (the "Valuation Method"), which is the valuation
--------- ----------------
method used to determine the Original Purchase Price. Parent shall then
calculate the "First Adjustment to Purchase Price" as follows:
FAPP = FADV - OPP
where FAPP is the First Adjustment to Purchase Price;
FADV is the First Adjustment Date Value as calculated on the First
Adjustment Date using the Valuation Method; and
OPP is the Original Purchase Price.
(i) If FAPP is greater than zero, then the Parent shall pay to
the Company Shareholders promptly after the First Adjustment Date a number of
shares calculated as follows:
FSP = (FAPP / FVPSFAD) x .25
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent shall
pay to Parent from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSCD)
where FSP is the "First Shares Payment";
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. At the close of business on June 1, 1998
-----------------------
(the "Second Adjustment Date"), the Parent shall conduct a valuation of the Sub
----------------------
according to the Valuation Method. Parent shall then calculate the "Second
Adjustment to Purchase Price" as follows:
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
SADV is the Second Adjustment Date Value as calculated on the Second
Adjustment Date using the Valuation Method; and
-6-
<PAGE>
FADV is the First Adjustment Date Value.
(i) If SAPP is greater than zero, then the Parent shall pay
to the Company Shareholders promptly after the Second Adjustment Date a number
of shares calculated as follows:
SSP = (SAPP / FVPSSAD) x .25
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSSAD is the Fair Value Per Share of the Parent's Common Stock on
the Second Adjustment Date.
(ii) If SAPP is less than zero, then the Escrow Agent shall
pay to Parent from the Escrow Amount promptly after the Second Adjustment Date a
number of shares calculated as follows:
SSP = (-SAPP / FVPSCD)
where SSP is the "Second Shares Payment";
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSCD is the Fair Value Per Share of the Parent's Common Stock on the
Closing Date.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be issued in a transaction exempt from
registration under the Securities Act, by reason of Section 4(2) of the
Securities Act or Regulation D thereunder. Such shares may not be transferred
or resold thereafter except in compliance with the terms of this Agreement and
following registration under the Securities Act or in reliance on an exemption
from registration under the Securities Act.
1.12 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger will constitute a reorganization within the meaning of Section 368 of the
Internal Revenue Code of 1986, as amended (the "Code"). Each party has
----
consulted its own tax advisors with respect to the tax consequences of the
Merger.
1.13 Taking of Necessary Action; Further Action. If, at any time after the
------------------------------------------
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the
Company, Parent and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
-7-
<PAGE>
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and severally,
represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in Exhibit C attached hereto (referencing the appropriate
---------
section and paragraph numbers), as follows; provided, however, that each
Principal Shareholder makes the representations and warranties set forth in
Section 2.4, 2.11 and 2.31 only as to the Company and itself, as the case may
be, and not as to any other Principal Shareholder:
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Pennsylvania. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy
- ------------------------
of its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Exhibit C lists the directors and officers of the Company. The operations now
- ---------
being conducted by the Company have not been conducted under any other name.
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of 10,000
shares of authorized Common Stock, of which 5,263 shares are issued and
outstanding. There are no other classes or series of capital stock of the
Company of any kind outstanding or issuable. The Company Common Stock is held
by the persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company Common Stock are duly authorized,
- ---------
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound.
(b) There are no options, warrants, calls, rights, commitments or
agreements of any character, written or oral, to which the Company is a party or
by which it is bound obligating the Company to issue, deliver, sell, repurchase
or redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of the Company or obligating the Company to grant,
extend, accelerate the vesting of, change the price of, otherwise amend or enter
into any such option, warrant, call, right, commitment or agreement.
2.3 Subsidiaries. Except as set forth on Exhibit C, the Company does not
------------ ---------
have any subsidiaries or affiliated companies and does not otherwise own any
shares in the capital of or any interest in, or control, directly or indirectly,
any other corporation, partnership, association, joint venture or other business
entity. The Company has never had any subsidiaries or affiliated companies and
has
-8-
<PAGE>
never otherwise owned shares in the capital of or any interest in or control,
directly or indirectly of, any other corporation, partnership association, joint
venture or other business entity.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company and the Principal Shareholders, and no further action is required on
their part to authorize the Agreement and the transactions contemplated hereby
and thereby. This Agreement has been duly executed and delivered by the Company
and the Principal Shareholders and, assuming the due authorization, execution
and delivery by the other parties hereto and thereto, constitutes the valid and
binding obligation of the Company and the Principal Shareholders, enforceable in
accordance with its terms, subject to the laws of general application relating
to bankruptcy, insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other equitable remedies.
2.5 No Conflict. Except as set forth in Exhibit C, the execution and
----------- ---------
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby will not, conflict with, or result in any violation of, or
default under (with or without notice or lapse of time, or both), or give rise
to a right of termination, cancellation, modification or acceleration of any
obligation or loss of any benefit under (any such event, a "Conflict") (i) any
--------
provision of the Articles of Incorporation and Bylaws of the Company, (ii) any
mortgage, indenture, lease, contract or other agreement or instrument, permit,
concession, franchise or license to which the Company or any of its properties
or assets is subject, or (iii) any judgment, order, decree, statute, law,
ordinance, rule or regulation applicable to the Company or its properties or
assets.
2.6 Consents. Except as set forth on Exhibit C, no consent, waiver,
-------- ---------
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other federal, state,
county, local or other foreign governmental authority, instrumentality, agency
or commission ("Governmental Entity") or any third party, including a party to
-------------------
any agreement with the Company (so as not to trigger any Conflict), is required
by or with respect to the Company in connection with the execution and delivery
of this Agreement or the consummation of the transactions contemplated hereby,
except for (i) such consents, waivers, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
securities laws thereby, (ii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and (iii) the filing of the
Agreement of Merger with the Secretary of State of the Commonwealth of
Pennsylvania.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
balance sheet as of January 31, 1997 and the related statements of income and
cash flow for year then ended, as reviewed by Deloitte & Touche LLP, independent
certified public accountants (the "Reviewed Financials"), and the Company's
-------------------
unaudited balance sheet of May 31, 1997, and the related unaudited statements of
income and cash flow for the four months then ended (the "Unaudited
---------
Financials"). The Reviewed Financials and the Unaudited Financials are correct
in all material respects and have been prepared in accordance with United States
generally accepted accounting principles ("USGAAP"), applied on a basis
------
consistent throughout the periods indicated and consistent with each other
except that the Unaudited Financials do
-9-
<PAGE>
not contain notes. The Reviewed and Unaudited Financials present fairly in all
material respects the financial condition, operating results and cash flows of
the Company as of the dates and during the periods indicated therein, subject in
the case of the Unaudited Financials, to normal year-end adjustments, which
will not be material in amount or significance. The Company's balance sheet as
of May 31, 1997 shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, the
-------------------------- ---------
Company does not have any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with USGAAP), which individually or in the
aggregate (i) has not been reflected in the Balance Sheet; (ii) has not arisen
in the ordinary course of business consistent with past practices since May 31,
1997; (iii) has not been specifically identified as a liability in Exhibit C
---------
hereto; (iv) is not an executory obligation under a Company Agreement listed in
Exhibit C hereto; or (v) has not arisen under a Company Agreement not required
- ---------
to be set forth in Exhibit C hereto.
---------
2.9 No Changes. Except as set forth in Exhibit C, since May 31, 1997,
---------- ---------
there has not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on that date and consistent with past practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(d) destruction of, damage to or loss of any material assets,
material business or material customer of the Company (whether or not covered by
insurance);
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change
in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company's capital stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
capital stock;
-10-
<PAGE>
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officers, directors, employees or
consultants, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person;
(j) any agreement, contract, lease or commitment (collectively a
"Company Agreement") or any extension or modification of the terms of any
- ------------------
Company Agreement which (i) involves the payment of greater than $25,000 per
annum or which extends for more than one year, (ii) involves any payment or
obligation to any affiliate of the Company other than in the ordinary course of
business as conducted on that date and consistent with past practices, or (iii)
involves the sale of any material assets;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties except in the ordinary course of business as conducted on
that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) the commencement or notice or, to the knowledge of the Company
and the Principal Shareholders, threat of commencement of any lawsuit or
proceeding against, or investigation of, the Company;
(p) notice of any claim of ownership by a third party of the
Company's Intellectual Property (as defined in Section 2.13 below) or notice of
infringement by the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of capital
stock, or securities exchangeable, convertible or exercisable therefor, or of
any other of its securities;
(r) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.13 below) to
the Company;
(s) any event or condition of any character that has or, to the
knowledge of the Company and the Principal Shareholders, may have a Material
Adverse Effect on the Company; or
-11-
<PAGE>
(t) negotiation or agreement by the Company, or any officer or
employee thereof to do any of the things described in the preceding clauses (a)
through (s) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
------------------- ---
or, collectively, "Taxes," means (i) any and all federal, state, local and
-----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Exhibit C:
---------------------- ---------
(i) The Company as of the Closing Date will have prepared and
timely filed or made a timely request for extension for all required federal,
state, local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
- ---------
Company or its operations and such Returns are true and correct and have been
completed in accordance with applicable law.
(ii) The Company as of the Closing Date (A) will have paid or
accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax imposed upon the Company.
(iv) No audit or other examination of any Return of the
Company is presently in progress, nor has the Company been notified of any
request for such an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against in
accordance with USGAAP on the Balance Sheet, whether asserted or unasserted,
contingent or otherwise, for periods prior to May 31, 1997.
-12-
<PAGE>
(vi) The Company has made available to Parent or its legal
counsel copies of all foreign, federal and state income and all state sales and
use Returns filed for all years as to which any applicable statute of
limitations has not expired.
(vii) There is no mortgage, pledge, security interest or lien
or other encumbrance (each a "Lien") of any sort on the assets of the Company
relating to or attributable to Taxes other than Liens for taxes not yet due and
payable.
(viii) The Company Shareholders have no knowledge of any basis
for the assertion of any claim relating or attributable to Taxes which, if
adversely determined, would result in any Lien on any material assets of the
Company.
(ix) As of the Closing, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under Sections 162, 280G or
404 of the Code.
(x) The Company is not a party to a tax sharing,
indemnification or allocation agreement nor does the Company owe any amount
under any such agreement.
(xi) The Company uses the accrual method of accounting for
income tax purposes and its tax basis in its assets for purposes of determining
its future amortization, depreciation and other federal income tax deductions is
accurately reflected on the Company's tax books and records.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any Principal Shareholder is a party or, to the knowledge
of the Company and the Principal Shareholders, is otherwise legally binding upon
the Company which has or reasonably could be expected to have the effect of
prohibiting or impairing any acquisition of property (tangible or intangible) by
the Company or the conduct of business by the Company as heretofore conducted.
The Company has not entered into any agreement under which the Company is
restricted from providing services to customers or potential customers or any
class of customers, in any geographic area, during any period of time or in any
segment of the market.
2.12 Title to Properties; Absence of Liens and Encumbrances; Condition of
--------------------------------------------------------------------
Equipment.
- ---------
(a) The Company does not own any real property, nor has it ever owned
any real property. Exhibit C sets forth a list of all real property currently
---------
leased by the Company, the name of the lessor, the date of the lease and each
amendment thereto and, with respect to any current lease, the aggregate annual
rental and/or other fees payable under any such lease. All such current leases
are in full force and effect, are valid and effective in accordance with their
respective terms. Neither the Company nor, to the knowledge of the Company and
the Principal Shareholders, any other party to any
-13-
<PAGE>
such lease is in default (or has caused an event which with notice or lapse of
time, or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case of
leased or licensed properties and assets, valid leasehold or licensed interests
in, all of its tangible properties and assets, real, personal and mixed, used or
held for use in its business, free and clear of any Liens, except as reflected
in the Company Financials or in Exhibit C and except for Liens for taxes not yet
---------
due and payable and such imperfections of title and encumbrances, if any, which
are not material in character, amount or extent, and which do not detract from
the value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Exhibit C lists all material items of equipment (the "Equipment")
--------- ---------
owned or leased by the Company and such Equipment is, taken as a whole, (i)
adequate for the conduct of the business of the Company as currently conducted
and (ii) in good operating condition, regularly and properly maintained, subject
to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to
Company's current and former customers (the "Customer Information"). No third
--------------------
party possesses any claims or rights with respect to use of the Customer
Information (other than any right of each customer to Customer Information about
itself).
2.13 Intellectual Property.
---------------------
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following
---------------------
and all rights in, arising out of, or associated therewith: (i) all United
States and foreign patents and applications therefor and all reissues,
divisions, renewals, extensions, provisionals, continuations and continuations-
in-part thereof; (ii) all inventions (whether patentable or not), invention
disclosures, improvements, trade secrets, proprietary information, know how,
technology, technical data and customer lists, and all documentation relating to
any of the foregoing; (iii) all copyrights, copyrights registrations and
applications therefor, and all other rights corresponding thereto throughout the
world; (iv) all mask works, mask work registrations and applications therefor,
and all other rights corresponding thereto throughout the world; (v) all
industrial designs and any registrations and applications therefor throughout
the world; (vi) all trade names, logos, common law trademarks and service marks;
trademark and service mark registrations and applications therefor throughout
the world; (vii) all databases and data collections and all rights therein
throughout the world; and (viii) all computer software including all source
code, object code, firmware, development tools, files, records and data, all
media on which any of the foregoing is recorded, and all documentation related
to any of the foregoing throughout the world.
"Intellectual Property of Company" shall mean any Intellectual
--------------------------------
Property that: (i) is owned by or exclusively licensed to the Company, or (ii)
which is necessary to the operation of the Company, including the design,
manufacture and use of the products or performance of the services of
-14-
<PAGE>
the Company as it currently is operated or is reasonably anticipated to be
operated in the future, but shall specifically not include any rights in or to
materials created for clients as "work-made-for-hire" or which are subject to an
exclusive assignment or license in favor of clients of the Company.
(b) Exhibit C lists all of the Company's United States and foreign:
---------
(i) patents, patent applications (including provisional applications); (ii)
registered trademarks, applications to register trademarks, intent-to-use
applications, or other registrations related to trademarks; (iii) registered
copyrights and applications for copyright registration; (iv) mask work
registrations and applications to register mask works; and (v) any other
Intellectual Property of Company that is the subject of an application,
certificate or registration filed with, issued by, or recorded by, any state,
government or other public legal authority (all of the foregoing, the
"Registered Intellectual Property").
(c) Each item of Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Registered Intellectual Property have been made and all
necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(d) The contracts, licenses and agreements listed in Exhibit C
---------
include all contracts, licenses and agreements, to which the Company is a party
with respect to any Intellectual Property with a value or cost in excess of
$10,000, other than "shrink wrap" and similar commercial end-user licenses.
(e) The contracts, licenses and agreements listed in Exhibit C are in
---------
full force and effect. The consummation of the transactions contemplated by
this Agreement will neither violate nor result in the breach, modification,
cancellation, termination, or suspension of the contracts, licenses and
agreements listed in Exhibit C. The Company is in compliance with, and has not
---------
breached any term of, the contracts, licenses and agreements listed in Exhibit
-------
C, and, to the knowledge of the Company and the Principal Shareholders, all
- -
other parties to the contracts, licenses and agreements listed in Exhibit C are,
---------
in compliance with, and have not breached any term of, the contracts, licenses
and agreements. Following the Closing Date, Sub will be permitted to exercise
all of the Company's rights under the contracts, licenses and agreements listed
in Exhibit C without the payment of any additional amounts or consideration
---------
other than ongoing fees, royalties or payments which the Company would otherwise
be required to pay.
(f) Except as set forth in Exhibit C: (i) no person has any rights to
---------
use any of the Intellectual Property of the Company; and (ii) the Company has
not granted to any Person, or authorized any Person to retain, any rights in the
Intellectual Property of Company.
(g) Except as set forth in Exhibit C: (i) the Company owns and has
---------
good and exclusive title to each item of Intellectual Property listed in Exhibit
-------
C, free and clear of any Lien; and (ii) the Company owns, or has the right,
- -
pursuant to a valid Contract to use or operate under, all other Intellectual
Property of the Company.
-15-
<PAGE>
(h) The operation of the business of the Company as it currently is
conducted, including its design, development, manufacture and sale of its
products (including with respect to products currently under development) and
provision of services, to the knowledge of the Company and the Principal
Shareholders, does not infringe or misappropriate the Intellectual Property of
any other person, violate the rights of any person (including rights to privacy
or publicity), or constitute unfair competition.
(i) The Company has not received notice from any person that the
operation of the business of the Company, including its design, development,
manufacture and sale of its products (including with respect to products
currently under development) and provision of its services, infringes or
misappropriates the Intellectual Property of any person, violates the rights of
any person (including rights to privacy or publicity), or constitutes unfair
competition.
(j) To the knowledge of the Company and the Principal Shareholders,
the Company owns or has the right to all Intellectual Property necessary to the
conduct of its business as it currently is conducted, including, without
limitation, the design, development, manufacture and sale of all products
currently manufactured or sold by the Company or under development by the
Company and the performance of all services provided or contemplated to be
provided by the Company.
(k) Exhibit C lists all contracts, licenses and agreements between
---------
the Company and any other person wherein or whereby the Company has agreed to,
or assumed, any obligation or duty to indemnify, hold harmless or otherwise
assume or incur any obligation or liability with respect to the infringement by
the Company or such other Person of the Intellectual Property rights of any
other person.
(l) Except as listed in Exhibit C, there are no contracts, licenses
---------
and agreements between the Company and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
the Principal Shareholders regarding the scope of such agreement or performance
under such agreement, including with respect to any payments to be made or
received by the Company thereunder.
(m) Except as listed in Exhibit C, to the knowledge of the Company
---------
and the Principal Shareholders, no person is infringing or misappropriating any
of the Intellectual Property of Company.
(n) Except as listed in Exhibit C, there are no claims asserted
---------
against the Company or, to the knowledge of the Company and the Principal
Shareholders, against any customer of the Company, related to any product or
service of the Company.
(o) No Intellectual Property of Company or product or service of the
Company is subject to any outstanding decree, order, judgment, or stipulation
restricting in any manner the use or licensing thereof by the Company.
(p) Except as set forth on Exhibit C, the Company has, and enforces,
---------
a policy requiring each employee and contractor to execute proprietary
information and confidentiality
-16-
<PAGE>
agreements substantially in the Company's standard forms and all current and
former employees and contractors of the Company have executed such an agreement.
(q) To the knowledge of the Company and the Principal Shareholders,
no (i) product, service or publication of the Company, (ii) material published
or distributed by the Company or (iii) conduct or statement of the Company,
constitutes obscene material, a defamatory statement or material, or violates
any rights, including rights of publicity or privacy, of any person.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) Except as set forth in Exhibit C, the Company does not have, or
---------
is not bound by:
(i) any collective bargaining agreement,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal property involving future payments
in excess of $25,000,
(viii) any agreement of indemnification or guaranty, other than
as set forth in agreements listed in Exhibit C,
---------
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000,
-17-
<PAGE>
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any distribution, joint marketing or development
agreement, or
(xvi) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
The Company has not breached, violated or defaulted under, or received
notice that it has breached, violated or defaulted under, any of the terms or
conditions of any material agreement, contract, license or commitment to which
it is a party, by which it benefits or by which it is bound (any such agreement,
contract, license or commitment, a "Contract"), nor is the Company or any
--------
Principal Shareholder aware of any event that would constitute such a breach,
violation or default with the lapse of time, giving of notice or both. Each
Contract is in full force and effect and, except as otherwise disclosed in
Exhibit C, is not subject to any default thereunder by any party obligated to
- ---------
the Company pursuant thereto. The Company has obtained, or will obtain prior to
the Closing Date, all necessary consents, waivers and approvals of parties to
any Contract as are required thereunder in connection with the Merger so that
all such Contracts will remain in effect without modification after the Closing.
2.15 Interested Party Transactions. Except as set forth in Exhibit C, no
----------------------------- ---------
Principal Shareholder or, to the knowledge of the Company and the Principal
Shareholders, no officer or director of the Company (nor any ancestor, sibling,
descendant or spouse of any of such persons, or any trust, partnership or
corporation in which any of such persons has or has had an interest), has or has
had, directly or indirectly, (i) an interest in any entity which furnished or
sold, or furnishes or sells, services or products that the Company furnishes or
sells, or proposes to furnish or sell, or (ii) any interest in any entity that
purchases from or sells or furnishes to, the Company, any goods or services or
(iii) a beneficial interest in any Contract; provided, that ownership of no more
than one percent (1%) of the outstanding voting stock of a publicly traded
corporation shall not be deemed an "interest in any entity" for purposes of this
Section 2.15.
2.16 Governmental Authorization. Exhibit C accurately lists each consent,
-------------------------- ---------
license, permit, grant or other authorization issued to the Company by a
Governmental Entity (i) pursuant to which the Company currently operates or
holds any interest in any of its properties or (ii) which is required for the
operation of its business or the holding of any such interest (herein
collectively called "Company
-------
-18-
<PAGE>
Authorizations"). The Company Authorizations are in full force and effect and
- --------------
constitute all Company Authorizations required to permit the Company to operate
or conduct its business or hold any interest in its properties or assets.
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or the Principal Shareholders' knowledge
threatened, against the Company or its properties or against any of its
officers or directors relating to the performance of duties on behalf of the
Company, nor, to the knowledge of the Principal Shareholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principals Shareholders' knowledge threatened, against the Company
or its properties, or against any of its officers or directors relating to the
performance of duties on behalf of the Company (nor, to the best knowledge of
the Principal Shareholders, is there any reasonable basis therefor) by or before
any Governmental Entity. No Governmental Entity has at any time challenged or
questioned the legal right of the Company to manufacture, offer or sell any of
its products or services in the present manner or style thereof.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of May 31, 1997 ("Accounts Receivable"), along with
-------------------
a range of days elapsed since invoice.
(b) Except as set forth on Exhibit C, all Accounts Receivable of the
---------
Company arose in the ordinary course of business, are carried at values
determined in accordance with USGAAP consistently applied and, to the
knowledge of the Company and the Principal Shareholders, are collectible except
to the extent of reserves therefor set forth in the Balance Sheet. No person
has any Lien on any of such Accounts Receivable and no request or agreement for
deduction or discount has been made with respect to any of such Accounts
Receivable.
2.19 Minute Books. The minutes of the Company made available to counsel
------------
for Parent are the only minutes of the Company and contain a reasonably accurate
summary of all meetings of the Board of Directors (or committees thereof) of the
Company and its shareholders or actions by written consent since the time of
incorporation of the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PBS, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous Material"), but excluding office and janitorial supplies properly and
- -------------------
safely maintained. No Hazardous Materials are present as a
-19-
<PAGE>
result of the deliberate actions of the Company or, to the Company's or
Principal Shareholders' knowledge, as a result of any actions of any third party
or otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
------------------------------
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Closing Date, nor has either the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
------------------------------
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental
-------
approvals, permits, licenses, clearances and consents (the "Environmental
-------------
Permits") necessary for the conduct of the Company's Hazardous Material
- -------
Activities and other businesses of the Company as such activities and businesses
are currently being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
-------------------------
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Principal Shareholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Shareholders are not aware of any fact or circumstance which could
involve the Company in any environmental litigation or impose upon the Company
any environmental liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
------------------------------------------------
in Exhibit C, the Company has not incurred, nor will it incur, directly or
---------
indirectly, any liability for brokers' or finders' fees or agents' commissions
or any similar charges in connection with the Agreement or any transaction
contemplated hereby. Exhibit C sets forth the principal terms and conditions of
---------
any agreement, written or oral, with respect to such fees. Exhibit C sets forth
---------
the Company's current reasonable estimate of all third party expenses expected
to be incurred by the Company in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
---------------------------------------
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
(i) "Employee Plan" shall refer to any plan, program, policy,
-------------
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, performance awards, stock or stock-related awards,
fringe benefits or other employee benefits of any kind, whether formal or
informal, funded or unfunded and whether or not legally binding, including
without limitation, any plan which is or has been maintained, contributed to, or
required to be
-20-
<PAGE>
contributed to, by the Company for the benefit of any "Employee" (as defined
below), and pursuant to which the Company has or may have any material
liability, contingent or otherwise;
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company; and
(iii) "Employee Agreement" shall refer to each employment,
------------------
severance, consulting or similar agreement or contract between the Company and
any Employee.
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement, together with a schedule
of all liabilities, whether or not accrued, under each such Company Employee
Plan. The Company does not have any plan or commitment, whether legally binding
or not, to establish any new Company Employee Plan or Employee Agreement, to
modify any Company Employee Plan or Employee Agreement (except to the extent
required by law or to conform any such Company Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Company Employee Plan or Employee Agreement, nor does it have any
intention or commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent: (i) correct and
---------
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under ERISA or
the Code in connection with each Company Employee Plan or related trust; (iv)
the most recent summary plan description together with the most recent summary
of material modifications, if any, required under ERISA with respect to each
Company Employee Plan; (v) all IRS determination letters and rulings relating to
Company Employee Plans and copies of all applications and correspondence to or
from the IRS or the Department of Labor ("DOL") with respect to any Company
Employee Plan; (vi) if the Employee Plan is funded, the most recent annual and
periodic accounting of Employee Plan assets; and (vii) all communications
material to any Employee or Employees relating to any Employee Plan and any
proposed Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any liability to the
Company.
(d) Employee Plan Compliance. Except as set forth in Exhibit C, (i)
------------------------ ---------
The Company has performed in all material respects all obligations required to
be performed by it under each Employee Plan and each Employee Plan has been
established and maintained in all material respects in accordance with its terms
and in material compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) no "prohibited transaction,"
within the meaning of Section 4975 of the Code or Section 406 of ERISA, has
occurred with respect to any Company Employee Plan; (iii) there are no actions,
suits or claims pending, or, to the knowledge of the Company or the Principal
Shareholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan
-21-
<PAGE>
or against the assets of any Employee Plan; (iii) each Employee Plan can be
amended, terminated or otherwise discontinued after the Closing Date in
accordance with its terms, without liability to the Company, Parent or Sub
(other than ordinary administration expenses typically incurred in a termination
event); (iv) there are no inquiries or proceedings pending or, to the knowledge
of the Company or any Principal Shareholders threatened by the IRS or DOL with
respect to any Company Employee Plan; and (v) the Company is not subject to any
penalty or tax with respect to any Company Employee Plan under Section 402(i) of
ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
-------------------
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. Except as set forth in Exhibit C,
------------------------------ ---------
no Company Employee Plan provides, or has any liability to provide, life
insurance, medical or other employee benefits to any Employee upon his or her
retirement or termination of employment for any reason, except as may be
required by statute, and the Company has not represented, promised or contracted
(whether in oral or written form) to any Employee (either individually or to
Employees as a group) that such Employee(s) would be provided with life
insurance, medical or other employee welfare benefits upon their retirement or
termination of employment, except to the extent required by statute.
(h) No Conflicts. Except as set forth on Exhibit C, the execution of
------------ ---------
this Agreement and the consummation of the transactions contemplated hereby will
not (either alone or upon the occurrence of any additional or subsequent events)
constitute an event under any Employee Plan, Employee Agreement, trust or loan
that will or may result in any payment (whether of severance pay or otherwise),
acceleration, forgiveness of indebtedness, vesting, distribution, increase in
benefits or obligation to fund benefits with respect to any Employee.
(i) Employment Matters. Except as set forth on Exhibit C, the Company
------------------ ---------
(i) is in compliance in all material respects with all applicable laws, rules
and regulations respecting employment, employment practices, terms and
conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any arrears of wages or any taxes or any penalty for failure to
comply with any of the foregoing; and (iv) is not liable for any payment to any
trust or other fund or to any governmental or administrative authority, with
respect to unemployment compensation benefits, social security or other benefits
for Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(j) Labor. No work stoppage or labor strike against the Company is
-----
pending or, to the knowledge of the Company and the Principal Shareholders,
threatened. The Company is not involved in or, to the knowledge of the Company
and the Principal Shareholders, threatened with any labor dispute, grievance, or
litigation relating to labor, safety, discrimination, or harassment matters
-22-
<PAGE>
involving any Employee, including, without limitation, charges of unfair labor
practices, discrimination, or harassment complaints, which, if adversely
determined, would, individually or in the aggregate, result in liability to the
Company, Parent or Sub. The Company has not engaged in any unfair labor
practices which could, individually or in the aggregate, directly or indirectly
result in a material liability to the Company, Parent or Sub. The Company is
not presently, or has in the past, been a party to, or bound by, any collective
bargaining agreement or union contract with respect to Employees and no
collective bargaining agreement is being negotiated by the Company.
2.23 Insurance. Exhibit C lists all insurance policies and fidelity bonds
--------- ---------
covering the assets, business, equipment, properties, operations, employees,
officers and directors of the Company. There is no claim by the Company pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and the Company
is otherwise in compliance with the terms of such policies and bonds (or other
policies and bonds providing substantially similar insurance coverage). The
Company and the Principal Shareholders have no knowledge of any threatened
termination of, or premium increase with respect to, any of such policies.
2.24 Compliance with Laws. The Company has complied in all material
--------------------
respects with, is not in violation of, and has not received any notices of
violation with respect to, any foreign, federal, state or local statute, law or,
to the knowledge of the Company and the Principal Shareholders, regulation.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent or
-------------------- ---------
approval is needed from any third party in order to effect the Merger or any of
the transactions contemplated by this Agreement.
2.26 Warranties; Indemnities. Exhibit C sets forth a summary of all
----------------------- ---------
warranties and indemnities relating to products sold or services rendered by the
Company, and no warranty or indemnity has been given by the Company which
differs therefrom in any respect. Exhibit C also indicates all warranty and
---------
indemnity claims in excess of $25,000 made against the Company.
2.27 Complete Copies of Materials. The Company has delivered or made
----------------------------
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.28 Business Plan. The Company has provided to Parent a current business
-------------
plan for the Company's planned operations during the twelve months following the
Closing Date which includes, without limitation, a description of the Company's
capital requirements, staffing needs, and a pro forma income statement. The
business plan is attached to Exhibit C hereto. The Company does not represent
---------
that the future results of operations of its business will equal or exceed those
set forth in such business plan, but the Company does represent that the
business plan was developed in good faith and upon a reasonable basis.
-23-
<PAGE>
2.29 Backlog Report. The Company has provided to Parent a detailed and
--------------
accurate list of all orders booked but not yet completed, giving the status of
each order as of a recent date. The backlog report is attached to Exhibit C
---------
hereto.
2.30 [Intentionally Omitted]
2.31 Principal Shareholder Investment Representations. Each Principal
------------------------------------------------
Shareholder, severally and not jointly, hereby makes all of the representations
and warranties set forth in Section 1 of the Shareholder Certificate attached
hereto as Exhibit D as if such representations and warranties were set forth in
---------
full herein.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Utah. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Delaware. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby. Parent and Sub have delivered true and correct copies of
their respective Articles of Incorporation and Bylaws, each as amended to date,
to the Company.
3.2 Authority; Consents. Parent and Sub have all requisite corporate
-------------------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub.
This Agreement has been duly executed and delivered by Parent and Sub and
constitutes the valid and binding obligations of Parent and Sub, enforceable in
accordance with its terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and rules of law
governing specific performance, injunctive relief or other equitable remedies.
The execution and delivery of this Agreement by Parent and Sub does not, and, as
of the Closing, the consummation of the transactions contemplated hereby and
thereby will not, Conflict with (i) any provision of the respective Articles of
Incorporation or Bylaws of Parent or Sub or (ii) any agreement or instrument,
permit, judgment, statute, law, rule or regulation applicable to Parent or Sub.
No consent, waiver, approval, or registration, declaration or filing with, any
Governmental Entity or any third party is required by or with respect to any of
the Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
3.3 Capital Structure.
-----------------
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<PAGE>
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $.001 par value, of which 23,423,331 shares were issued and
outstanding as of June 30, 1997, and 38,188,501 shares of Preferred Stock, $.001
par value, of which 18,678,500 shares are designated Series A Preferred Stock,
18,518,500 of which are issued and outstanding, 9,310,001 shares are designated
Series B Preferred Stock, all of which are issued and outstanding, and
10,200,000 shares are designated Series C Preferred Stock, 8,454,580 of which
are issued and outstanding. All such shares have been duly authorized, and all
such issued and outstanding shares have been validly issued, are fully paid and
nonassessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof. Parent has also
reserved (i) 3,900,000 shares of Common Stock for issuance to employees and
consultants pursuant to Parent's 1996 Stock Option Plan and 1996 Equity
Compensation Plan, (ii) 160,000 shares of Series A Preferred Stock and 2,113,647
shares of Series C Preferred Stock for issuance upon the exercise of outstanding
warrants to purchase Series A Preferred Stock and Series C Preferred Stock,
respectively (the "Warrant Stock"), (iii) 2,273,647 shares of Common Stock for
-------------
issuance upon conversion of the Warrant Stock, (vi) 1,000,000 shares of Common
Stock for issuance upon the exercise of warrants issued or available for grant
pursuant to the Company's Affiliate Warrant Program, (vii) 24,000,000 shares of
Common Stock for issuance upon the exercise of options issued or available for
grant pursuant to the Company's 1997 Acquisition Stock Option Program, and
(viii) 300,000 shares of Common Stock for issuance upon the conversion of other
outstanding warrants to purchase Common Stock. There are no other options,
warrants, calls, rights, commitments or agreements of any character to which
Parent is a party or by which it is bound obligating Parent to issue, deliver,
sell, repurchase or redeem, or cause to be issued, delivered, sold, repurchased
or redeemed, any shares of the capital stock of Parent or obligating Parent to
grant, extend or enter into any such option, warrant, call, right, commitment or
agreement.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid and non-assessable.
3.4 Brokers' and Finders' Fees. The Parent has not incurred, nor will it
--------------------------
incur, directly or indirectly, any liability for brokers' or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
3.5 Similar Transactions. Each party understands and agrees that the
--------------------
Parent may acquire other entities that are in a business similar to that of the
Company. In the event that, prior to the Second Adjustment Date, Parent
acquires another entity similar to the Company on terms substantially more
favorable to the equity owners of such entity after taking into account the
similarities and differences of the businesses, then the valuation of the
Company at the First Adjustment Date and the Second Adjustment Date shall be
recalculated to take into account such favorable treatment and the First
Adjustment to Purchase Price and Second Adjustment to Purchase Price shall be
recalculated promptly on such more favorable basis. Any additional shares due
to the Sellers upon such recalculation shall be issued promptly to the Company
Shareholders.
3.6 No Changes. Except as otherwise disclosed in this Agreement, there
----------
have been no material adverse changes to the Parent's financial condition or
operating information from the information contained in the Franchise Offering
Circular dated effective December 23, 1996, and the
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Confidential Offering Memorandum dated February 1997 (the "Offering
--------
Memorandum"), relating to Parent's Series C Preferred Stock offering.
- ----------
3.7 Parent Financial Statements. Parent's balance sheet as of December
---------------------------
31, 1996 and the related statements of operations and cash flow for year then
ended (the "Parent Financials") are correct in all material respects. The
-----------------
Parent Financials present fairly in all material respects the financial
condition, operating results and cash flows of the Company as of the dates and
during the periods indicated therein.
3.8 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to Parent's and Sub's knowledge threatened, against Parent or Sub,
their respective properties or any of their respective officers or directors,
nor, to the knowledge of Parent and Sub, is there any reasonable basis therefor.
There is no investigation pending or, to Parent's and Sub's knowledge
threatened, against Parent or Sub, their respective properties or any of their
respective officers or directors (nor, to the knowledge of Parent and Sub, is
there any reasonable basis therefor) by or before any governmental entity. No
governmental entity has at any time challenged or questioned the legal right of
Parent or Sub to manufacture, offer or sell any of its products or services in
the present manner or style thereof.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date
----------------------------------
of this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay debts and Taxes when due, to pay or perform other
obligations when due, and, to the extent consistent with such business, use all
reasonable efforts consistent with past practice and policies to preserve intact
the Company's present business organization, keep available the services of
present officers and key employees and preserve relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of business of the Company, and any material event involving the
Company. Except as expressly contemplated by this Agreement, the Company shall
not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
(b) Transfer to any person or entity any rights to the Intellectual
Property of the Company;
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(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in Exhibit C;
---------
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its properties
or assets, except in the ordinary course of business and consistent with past
practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others;
(l) Grant any loans to others or purchase debt securities of others or
amend the terms of any outstanding loan agreement, except in the ordinary course
of business and consistent with past practices;
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
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<PAGE>
(n) Adopt or amend any employee benefit plan, or enter into any
employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free reorganization
hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $10,000 (in
any one case) or $25,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
any such payment, discharge or satisfaction in the ordinary course of business;
(r) Make or change any material election in respect of Taxes, adopt or
change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(t) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (s) above, or any other action that would
prevent the Company from performing or cause the Company not to perform its
covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the date
---------------
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company permit any of the Company's officers, directors, agents,
representatives or affiliates to) directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent, relating to the possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets, (c) enter into an agreement with any person, other than Parent,
providing for the acquisition of the Company (whether by way of merger, purchase
of capital stock, purchase of assets or otherwise) or any material portion of
its or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets by
any person, other than by Parent. In addition to the foregoing, if the Company
or any Principal Shareholder receives prior to the Effective Time or the
termination of this Agreement any offer or proposal relating to any of the
above, the Company or such Principal Shareholder, as applicable shall
immediately notify Parent thereof, including information as to the identity of
the offeror or the party
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<PAGE>
making any such offer or proposal and the specific terms of such offer or
proposal, as the case may be, and such other information related thereto as
Parent may reasonably request.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to this Agreement (the "Shares") may be sold or otherwise transferred
------
(including transfer by gift or operation of law), or any Shares held by a
transferee (either being sometimes referred to herein as the "Holder") may be
------
sold, the Parent or its assignee(s) shall have a right of first refusal to
purchase such Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
----------------------
(b) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
-------------------
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
-------------
at the Offered Price to the Parent or its assignee(s).
(c) Exercise of Right of First Refusal. At any time within (15) days
----------------------------------
after receipt of the Notice, the Parent or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (d)
below.
(d) Purchase Price. The purchase price ("Parent Purchase Price") for
-------------- ---------------------
the Shares purchased by the Parent or its assignee(s) under this Section shall
be the Offered Price. If the Offered Price includes consideration other than
cash, the Parent may match such non-cash consideration with such other cash or
non-cash consideration as shall be mutually agreed to by Parent and the Holder.
If Parent and Holder cannot agree on the value of the proposed non-cash
consideration, then they shall submit the determination of the value of such
consideration to a mutually agreeable third-party appraiser.
(e) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 15 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(f) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Parent or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee
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<PAGE>
at the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within 120 days after the date of the Notice and
provided further that any such sale or other transfer is effected in accordance
with any applicable securities laws and the Proposed Transferee agrees in
writing that the provisions of this Section shall continue to apply to the
Shares in the hands of such Proposed Transferee. If the Shares described in the
Notice are not transferred to the Proposed Transferee within such period, a new
Notice shall be given to the Parent, and the Parent or its assignees shall again
be offered the Right of First Refusal before any Shares held by the Holder may
be sold or otherwise transferred.
(g) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the benefit of the
Holder's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so transferred subject to the provisions of
this Section, and there shall be no further transfer of such Shares except in
accordance with the terms of this Section.
(h) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Parent to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission (the "SEC")
---
under the Securities Act.
5.2 Market Standoff Agreement. Each Company Shareholder hereby agrees
-------------------------
that if so requested by Parent or any representative of the underwriters in
connection with any registration of the offering of any Shares of Parent under
the Securities Act, such Company Shareholder shall not sell or otherwise
transfer, pledge, hypothecate or otherwise decrease his market risk or
beneficial ownership in any Shares or other securities of Parent during the 180-
day period following the date of the final Prospectus contained in a
registration statement of the Company filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of Parent to become effective under the Securities Act which includes
securities to be sold on behalf of Parent to the general public in an
underwritten public offering under the Securities Act. Parent may impose stop-
transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such 180-day period.
5.3 Restriction on Competition.
--------------------------
(a) Restricted Activities. For a period of three (3) years beginning
---------------------
on the Closing Date, each Principal Shareholder other than Unicorn Creative
Services, Ltd. severally agrees that he or it shall not, directly or indirectly,
(i) engage in or own any interest (except as a passive investor
of less than five percent (5%) of total debt and equity) in any Competing
Business;
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<PAGE>
(ii) divert or attempt to divert any current or prospective
customers of the Company or any wholly owned subsidiary or franchisee of the
Company to any Competing Business, by any means including, but not limited to,
direct or indirect inducement; or
(iii) solicit any person for employment who is at that time
already employed by the Company, or any wholly owned subsidiary or franchisee of
the Company, or otherwise directly or indirectly induce or seek to induce such
person to leave his or her employment.
For purposes of subsection (i) above, the term "Competing Business"
shall mean and be limited to any business which derives the majority of its
revenues from Web site, intranet or Internet development or consulting services.
For purposes of subsections (ii) and (iii) above, the term "Competing Business"
shall mean and be limited to any business which offers Web site, intranet or
Internet development or consulting services.
(b) Scope. The restrictions set forth in this Section 5.3 shall apply
-----
in and be restricted to the Greater Pittsburgh Standard Metropolitan Statistical
Area, as defined by the U.S. Census Bureau or any successor agency thereof.
(c) Severability. In the event that any other provision of this
------------
Section 5.3 or the application of any provision shall be held to be prohibited
or unenforceable in any jurisdiction, such provision shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability. The remaining provisions of this covenant to refrain from
competition shall remain in full force and effect, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction. The parties shall use
their best efforts to replace the provision that is contrary to law with a legal
one approximating to the extent possible the original intent of the parties.
(d) Termination of Principal Shareholder Without Cause. In the event
--------------------------------------------------
that a Principal Shareholder, who following the Merger becomes an employee of
Parent, is terminated from employment by Parent without cause at any time within
three (3) years of the Closing Date, then the term of the restrictions imposed
by this Section 5.3 shall be reduced to six (6) months and that terminated
Principal Shareholder shall receive severance benefits from Parent equal to six
(6) months' salary and employee benefits. For the purposes solely of this
Agreement, "cause" for a Principal Shareholder's termination shall exist at any
-----
time upon the occurrence of any of the following events;
(i) material acts of dishonesty by the Principal Shareholder;
(ii) gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
(iii) willful disregard of, or failure to follow, written
instructions specifically addressed to the Principal Shareholder from Parent's
officers or board of directors to do any legal act related to the Company's
business;
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<PAGE>
(iv) physical or mental disability of the Principal Shareholder
which prevents performance of his duties for a consecutive period of at least
120 days, or at least 150 days in a period of 200 days; or
(v) death of the Principal Shareholder.
5.4 Confidentiality. Each of the parties hereto hereby severally agrees
---------------
to keep such information or knowledge obtained pursuant to the negotiation and
execution of this Agreement, or the effectuation of the transactions
contemplated hereby, confidential; provided, however, that the foregoing shall
not apply to information or knowledge which (a) a party can demonstrate was
already lawfully in its possession prior to the disclosure thereof by the other
party, (b) is or becomes generally known to the public and did not become so
known through any violation of law or this Agreement by the non-disclosing
party, (c) is later lawfully acquired by such party from other sources, (d) is
required to be disclosed by order of court or government agency after seeking
any reasonably available protection against general disclosure or (e) which is
disclosed in the course of any litigation between any of the parties hereto; it
being understood that the parties may disclose relevant information and
knowledge to their respective employees and agents on a need to know basis,
provided that the parties cause such employees and agents to treat such
information and knowledge confidentially.
5.5 Expenses. Whether or not the Acquisition is consummated, all fees and
--------
expenses incurred in connection with the Acquisition including, without
limitation, all legal, accounting, financial advisory, consulting and all other
fees and expenses of third parties incurred by a party in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby, shall be the obligation of the respective
party incurring such fees and expenses.
5.6 Public Disclosure. Unless otherwise required by law or any applicable
-----------------
rule of a stock exchange or quotation system upon which a party's securities are
listed, prior to the Closing Date, no public disclosure (whether or not in
response to an inquiry) of the subject matter of this Agreement shall be made by
any party unless approved by the other parties prior to release, provided that
such approval shall not be unreasonably withheld, subject to the parties'
obligations to comply with applicable securities laws.
5.7 Treatment of Affiliate Warrants. To the extent that any affiliate of
-------------------------------
the Company has received or has the right to receive any warrants under Parent's
Affiliate Warrant Program, the warrants received or to be received thereunder
shall remain in full force and effect and, to the extent required to make
calculations of shares issuable under such warrants, Parent shall estimate in
good faith the business measures of the Surviving Corporation as necessary to
such calculations, with the intent of preserving the economic value of such
warrants to the holders thereof following the completion of the acquisition
contemplated hereby.
5.8 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions
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imposed by applicable law) of the Company as Parent may reasonably request. The
Company agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements promptly upon request.
No information or knowledge obtained in any investigation pursuant to this
Section 5.8 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.9 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Exhibit C) so as to preserve all rights of, and benefits to, the
---------
Company thereunder.
5.10 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
-----------------
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.11 Best Efforts. Subject to the terms and conditions provided in this
------------
Agreement, each of the parties hereto shall use its best efforts to take
promptly, or cause to be taken, all actions, and to do promptly, or cause to be
done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated
hereby to obtain all necessary waivers, consents and approvals and to effect all
necessary registrations and filings and to remove any injunctions or other
impediments or delays, legal or otherwise, in order to consummate and make
effective the transactions contemplated by this Agreement for the purpose of
securing to the parties hereto the benefits contemplated by this Agreement;
provided that Parent shall not be required to agree to any divestiture by Parent
or the Company or any of Parent's subsidiaries or affiliates of shares of
capital stock or of any business, assets or property of Parent or its affiliates
or of the Company or its affiliates, or the imposition of any material
limitation on the ability of any of them to conduct their businesses or to own
or exercise control of such assets, properties and stock.
5.12 Notification of Certain Matters. The Company shall give prompt notice
-------------------------------
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent, respectively, contained in this Agreement to
be untrue or inaccurate at or prior to the Effective Time and (ii) any failure
of the Company or Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.12 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.13 Preparation of Tax Returns. The Principal Shareholders shall prepare
--------------------------
or cause to be prepared and file or cause to be filed all income Tax Returns for
the Company for all periods ending on or prior to the Closing Date which are
filed after the Closing Date. Such returns shall be prepared in accordance with
applicable law and past practices consistently applied. The Principal
Shareholders shall permit Parent to review and comment on each such Tax Return
prior to filing.
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<PAGE>
5.14 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.15 Section 368 Compliance. From and after the Effective Time, neither
----------------------
Parent, Sub, or the Company shall take any action that will cause the Merger not
to be treated as a reorganization within the meaning of Section 368 of the Code.
5.16 Parent Policies. The Company and Principal Shareholders acknowledge
---------------
that Parent has implemented policies regarding the operation of subsidiary
entities such as the Company will be following the Merger. The Company and
Principal Shareholders acknowledge and agree that such policies, or any such
amended or replacement policies that are reasonably similar in scope, nature or
effect, are anticipated to be in place following the Merger, and the Company and
Principal Shareholders hereby indicate their intention to act in substantial
compliance with all such policies. Such policies shall not provide for Parent
overhead allocations from Parent to Company or Sub, unless otherwise agreed in
advance by the parties.
5.17 Rule 144. If the Company shall have filed a registration statement
--------
pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, as amended, and the rules and regulations thereunder (the "Exchange Act")
------------
or a registration statement pursuant to the requirements of the Securities Act,
the Company shall file the reports required to be filed by it under the
Securities Act and the Exchange Act, and will take such further action as any
Principal Shareholder may reasonably request, all to the extent required from
time to time to enable such Principal Shareholder to sell shares of Parent
Common Stock without registration under the Securities Act within the limitation
of the exemptions provided by (a) Rule 144 under the Securities Act, as such
Rule may be amended from time to time, or (b) any similar rule or regulation
hereafter adopted by the SEC. Upon the request of any Principal Shareholder,
Parent will deliver to it a written statement as to whether it has complied with
such requirements.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any
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<PAGE>
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the Merger, which makes the consummation of the
Merger illegal.
(b) Litigation. There shall be no action, suit, claim or proceeding
----------
of any nature pending, or overtly threatened, against Parent, Sub or the
Company, their respective properties or any of their officers or directors
relating to the performance of their duties for Parent, Sub or the Company, as
applicable, arising out of, or in any way connected with, the Merger or the
other transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
-----------------------------------------------
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Certificate of the Parent. Company shall have been provided with
-------------------------
a certificate executed on behalf of the Parent by its President to the effect
that, as of the Effective Time:
(i) all representations and warranties made by the Parent and
Sub in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by the Parent on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
the Parent, taken as a whole.
(d) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
financial condition or results of operations of the Parent since December 31,
1996.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
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(a) Representations, Warranties and Covenants. The representations
-----------------------------------------
and warranties of the Company and the Principal Shareholders in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with by it as of the Effective Time.
(b) Certificate of the Company and Principal Shareholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company and
the Principal Shareholders in this Agreement are true and correct in all
material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(c) Claims. There shall not have occurred any claims (whether or not
------
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or may have a Material
Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Shareholder Certificate. Each of the Company Shareholders shall
-----------------------
have executed and delivered to Parent a Shareholder Certificate in the form
attached hereto as Exhibit D.
---------
(f) No Material Adverse Changes. There shall not have occurred any
---------------------------
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since May 31, 1997.
(g) Company Shareholder Approval. Each of the Company Shareholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Shareholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's and
------------------------------------------
the Principal Shareholders' representations and warranties in this Agreement,
including all exhibits hereto, or in any certificate delivered at the Closing
pursuant hereto shall terminate on the second anniversary of the
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<PAGE>
Effective Time. All of Parent's and Sub's representations and warranties
contained herein or in any certificate delivered at the Closing pursuant hereto
shall terminate on the second anniversary of the Effective Time.
7.2 Escrow Arrangements; Setoff.
---------------------------
(a) Escrow Fund; Setoff from Purchase Price Adjustments. As partial
---------------------------------------------------
security for the indemnity provided for in Section 7.3 and the Purchase Price
Adjustments provided for in Section 1.10, (i) at the Effective Time, the Company
Shareholders will be deemed to have received and deposited with the Escrow Agent
(as defined in Section 1.6(e)(iii) above) the Escrow Amount (plus any additional
shares that may be issued upon any stock split, stock dividend or
recapitalization effected by Parent after the Effective Time) without any act of
any Company Shareholder. On and after the Effective Time, the Escrow Amount
shall form an escrow fund (the "Escrow Fund") to be governed by the terms set
-----------
forth herein at Parent's cost and expense. The Escrow Agent may execute this
Agreement following the date hereof and prior to the Effective Time, and such
later execution, if so executed after the date hereof, shall not affect the
binding nature of this Agreement as of the date hereof between the other
signatories hereto. The portion of the Escrow Amount contributed on behalf of
each Company Shareholder shall be the pro rata amount calculated pursuant to
Section 1.6(a) of this Agreement. In addition to seeking indemnification under
Section 7.3 from the Escrow Fund and setting off amounts from the Purchase Price
Adjustment, Parent may, in its discretion, subject to the provisions of Section
7.2(f), seek indemnification for Losses directly from the Principal
Shareholders, but only after first proceeding against the Escrow Fund so long as
it exists and is not subject to other claims. Nothing herein shall limit the
liability of the Parent, the Company or the Principal Shareholders for any
breach of covenant if the Merger does not close as a result of such breach.
Parent may not receive any shares from the Escrow Fund (other than as a Purchase
Price Adjustment) unless Officer's Certificates (as defined in subsection (d)
below) identifying losses, the aggregate of which exceed $200,000, have been
delivered to the Shareholder Representative (as defined below) and the Escrow
Agent as provided in paragraph (d) below. The Company Shareholders shall not
have any right of contribution from the Company with respect to any Loss claimed
by Parent or Sub after the Effective Time.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
--------------------------------------------------------------
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
Pacific Time, on the date of the first anniversary of the Effective Time (the
"Escrow Period"); provided that the Escrow Period shall not terminate with
- --------------
respect to such amount (or some portion thereof) if in the reasonable judgment
of Parent, subject to the objection of the Shareholder Representative and the
subsequent arbitration of the matter in the manner provided in this Section 7.2,
subject to Section 7.2(f), such amount (or some portion thereof) together with
the aggregate amount remaining in the Escrow Fund is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate delivered to the
Escrow Agent prior to termination of such Escrow Period with respect to facts
and circumstances existing prior to the termination of such Escrow Period. As
soon as all such claims have been resolved, the Escrow Agent shall deliver to
the Company Shareholders the remaining portion of the Escrow Fund not required
to satisfy such claims as their interests therein then exist. Deliveries of
Escrow Amounts to the Company Shareholders pursuant to this Section 7.2(b) shall
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<PAGE>
be made in proportion to their respective original contributions to the Escrow
Fund except to the extent that the provisions of Section 7.2(f) require
otherwise.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split)("New Shares") in respect of Parent Common Stock in the Escrow Fund which
-----------
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund. Upon receipt by the Escrow Agent at any
-----------------------
time on or before the last day of the Escrow Period of a certificate signed by
any officer of Parent (an "Officer's Certificate"): (A) stating that Parent has
---------------------
paid or accrued Losses, and (B) specifying in reasonable detail the individual
items of Losses included in the amount so stated, the date each such item was
paid or accrued, or the basis for such anticipated liability, and the nature of
the misrepresentation, breach of warranty or covenant to which such item is
related, the Escrow Agent shall, subject to the provisions of Section 7.2(e)
hereof, deliver to Parent out of the Escrow Fund, as promptly as practicable,
shares of Parent Common Stock held in the Escrow Fund in an amount equal to such
Losses.
(e) Objections to Claims. At the time of delivery of any Officer's
--------------------
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representative and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery to Parent of any
Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent shall
have received written authorization from the Shareholder Representative to make
such delivery. After the expiration of such thirty (30) day period, the Escrow
Agent shall make delivery of the Escrow Amount from the Escrow Fund in
accordance with Sections 7.2(d) and 7.2(g) hereof, provided that no such payment
or delivery may be made if the Shareholder Representative shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent prior to the expiration
of such thirty (30) day period.
(f) Maximum Liability. The total liability for any Principal
-----------------
Shareholder under this Agreement for Losses shall not exceed the aggregate
number of shares of Parent Common Stock that
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<PAGE>
such shareholder is entitled to receive pursuant to Section 1.6(a) hereunder, or
any proceeds from the sale thereof (the "Indemnification Shares"). The
----------------------
Indemnified Persons (as defined below) agree that they will look first to the
Escrow Fund and next to the shares of Parent Common Stock held by the Principal
Shareholders for the satisfaction of their claims under the indemnity provisions
set forth herein and costs and expenses related thereto. The Indemnified Persons
further agree that no Principal Shareholder shall be personally liable with
respect to such claims beyond the Indemnification Shares, and that the
Indemnification Shares shall be the only assets of Principal Shareholders to
which the Indemnified Persons shall have recourse. In addition, notwithstanding
anything to the contrary contained or implied in this Agreement, except as
provided in the next sentence, the shares of Parent Common Stock delivered out
of escrow to satisfy an indemnification claim shall be allocated pro rata
amongst the Principal Shareholders in proportion to the number of shares of
Parent Common Stock initially delivered into escrow by each Principal
Shareholder. However, shares delivered out of escrow to satisfy an
indemnification claim for breach by a Principal Shareholder of his or its
individual representations under Section 2.4, 2.11 or 2.31 or for a breach by a
Principal Shareholder of his or its obligations under the provisions of Article
V shall be made solely from the shares of Parent Common Stock of such breaching
Principal Shareholder then held in escrow.
(g) Indemnification and Setoff Claims. In the event Parent or an
---------------------------------
Indemnified Person shall have incurred any Losses, Parent shall deliver to the
Shareholder Representative an Officer's Certificate: (A) stating that Parent or
such Indemnified Person has paid or accrued Losses and (B) specifying in
reasonable detail the individual items of Losses included in the amount so
stated, the date each such item was paid or accrued, or the basis for such
anticipated liability, and the nature of the misrepresentation, breach of
warranty or covenant to which such item is related.
(h) Actions Against Principal Shareholders. In the event that all
--------------------------------------
shares have been paid out of the Escrow Fund to compensate Parent or any other
Indemnified Person for Losses, the Principal Shareholders shall promptly, and in
no event later than 30 days after delivery of the Officer's Certificate, wire
transfer to Parent the amount of such Loss, unless the Company or the Principal
Shareholders, as the case may be, contest such claim by following the procedures
set forth in Section 7.2(j).
(i) Valuation of Parent Common Stock. For the purposes of determining
--------------------------------
the number of shares of Parent Common Stock to be delivered to Parent out of the
Escrow Fund as indemnity pursuant to Section 7.3 hereof, the shares of Parent
Common Stock shall be valued at (i) if the Parent's Common Stock shall be
publicly traded, a price equal to the average closing price of the Parent Common
Stock in trading on the relevant stock exchange or quotation system during the
ten business day period ending three days prior to the date of the Officer's
Certificate stating the claim with respect to which such shares are delivered,
and (ii) if the Parent's Common Stock is not so publicly traded, the fair market
value per share as determined by the Parent's board of directors in good faith
on the date closest to the date of the Officer's Certificate.
(j) Resolution of Conflicts; Arbitration.
------------------------------------
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<PAGE>
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate within thirty
(30) days after delivery of such Officer's Certificate, the Shareholder
Representative and Parent shall attempt in good faith to agree upon the rights
of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties. If any claim
against the Escrow Fund was sought, such memorandum shall be furnished to the
Escrow Agent and the Escrow Agent shall be entitled to rely on any such
memorandum and make payment out of the Escrow Fund in accordance with the terms
thereof.
(ii) If no such agreement can be reached after good faith
negotiation (or in any event after 60 days from the date of the Officer's
Certificate), either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Shareholder Representative shall each select
one arbitrator, and the two arbitrators so selected shall select a third
arbitrator. The arbitrators shall set a limited time period and establish
procedures designed to reduce the cost and time for discovery while allowing the
parties an opportunity, adequate in the sole judgment of the arbitrators, to
discover relevant information from the opposing parties about the subject matter
of the dispute. The arbitrators shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the same extent as a court of law or equity, should the
arbitrators determine that discovery was sought without substantial
justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Notwithstanding anything in
Section 7.2(e) hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow Fund in
accordance therewith. Such decision shall be written and shall be supported by
written findings of fact and conclusions which shall set forth the award,
judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Santa Clara County, California under the rules then in effect of the American
Arbitration Association. The arbitrators shall determine how the fees of each
arbitrator and the administrative fee of the American Arbitration Association
shall be paid. All other expenses shall be paid by the party incurring such
expenses.
(k) Third-Party Claims.
------------------
(i) In the event Parent becomes aware of a third-party claim
which Parent believes may result in Losses, Parent shall notify the Shareholder
Representative of such claim, and the Shareholder Representative shall be
entitled, at the Company Shareholders' expense, to participate in any defense of
such claim.
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<PAGE>
(ii) Parent shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Shareholder Representative, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim pursuant to this
Section 7.2. In the event that the Shareholder Representative has consented to
any such settlement, the Company Shareholders shall have no standing to object
under any provision of this Section 7.2 to the amount of any claim by Parent
against the Escrow Fund with respect to such settlement.
(iii) Parent shall provide the Shareholder Representative with a
copy of any written settlement proposal (a "Settlement Proposal") received from
a third party claimant promptly following Parent's receipt of such Settlement
Proposal. The Shareholder Representative shall advise Parent in writing within
10 business days following Shareholder Representative's receipt of the
Settlement Proposal whether the Shareholder Representative wishes to agree to
the Settlement Proposal. In the event that the Shareholder Representative
notifies Parent that it wishes to agree to a Settlement Proposal but Parent
declines to do so, then the liability of the Company Shareholders shall be
limited to that amount for which they would have been liable under the
Settlement Proposal, plus the attorneys' fees and other litigation costs of the
Parent incurred prior to the date the Parent provided the Shareholder
Representative with the Settlement Proposal.
(l) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, Unicorn Creative
Services, Ltd. shall be appointed as agent and attorney-in-fact (the
"Shareholder Representative") for each Company Shareholder, for and on behalf of
--------------------------
shareholders of the Company, to give and receive notices and communications, to
authorize delivery to Parent of payments from the Escrow Fund in satisfaction of
claims by Parent, to object to such deliveries, to agree to, negotiate, enter
into settlements and compromises of, and demand arbitration and comply with
orders of courts and awards of arbitrators with respect to such claims, and to
take all actions necessary or appropriate in the judgment of the Shareholder
Representative for the accomplishment of the foregoing. Such agency may be
changed by the shareholders of the Company from time to time upon not less than
thirty (30) days prior written notice to Parent; provided that the Shareholder
Representative may not be removed unless a majority-in-interest of the Company
Shareholders agree to such removal and to the identity of the substituted agent.
No bond shall be required of the Shareholder Representative, and the Shareholder
Representative shall not receive compensation for services as such. Notices or
communications to or from the Shareholder Representative shall constitute notice
to or from each of the Company Shareholders or their permitted transferees.
(ii) The Shareholder Representative shall not be liable for any
act done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders
shall severally indemnify the Shareholder Representative and hold him or her
harmless against any loss, liability or expense incurred without negligence or
bad faith on the part of the Shareholder Representative and arising out of or in
connection with the acceptance or administration of the Shareholders
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Shareholder Representative.
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<PAGE>
(m) Actions of the Shareholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Shareholder Representative shall constitute a
decision of all the Company Shareholders and shall be final, binding and
conclusive upon each of such Company Shareholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Shareholder Representative as being the decision, act, consent or instruction of
each and every such Company Shareholder. The Escrow Agent and Parent are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(n) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer of
Parent and the Shareholder Representative, and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or parties. The
Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow
Agent while acting in good faith and in the exercise of reasonable judgment, and
any act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration
of any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's
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<PAGE>
duties under this Agreement and shall be fully protected in any act taken,
suffered, or permitted by such Escrow Agent in good faith in accordance with the
advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and the Escrow Amount and may wait for settlement of any
such controversy by final appropriate legal proceedings or other means as, in
the Escrow Agent's discretion, the Escrow Agent may be required, despite what
may be set forth elsewhere in this Agreement. In such event, the Escrow Agent
will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader, in arbitration or otherwise, as the circumstances may
require, requiring the Parties to answer and litigate any claims and rights
among themselves. The Escrow Agent is authorized to deposit with the clerk of
the court all documents and shares of Parent Common Stock held in escrow, except
all cost, expenses, charges and reasonable attorney fees incurred by the Escrow
Agent due to the interpleader action and which the parties jointly and severally
agree to pay. Upon initiating such action, the Escrow Agent shall be fully
released and discharged of and from all obligations and liability imposed by the
terms of this Agreement.
(vii) For any Escrow Agent that is not the secretary or an
employee of Parent, the parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on the Escrow Agent or
incurred by the Escrow Agent in connection with the performance of the Escrow
Agent's duties under this Agreement, including but not limited to any litigation
arising from this Agreement or involving its subject matter other than arising
out of its gross negligence or willful misconduct (the "Escrow Agent
Indemnification Obligation"). For any Escrow Agent that is the secretary or an
employee of Parent, Parent and its successors and assigns agree to assume the
Escrow Agent Indemnification Obligation.
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the parties to this Agreement;
provided, however, that no such resignation shall become effective until the
appointment of a successor escrow agent which shall be accomplished as follows:
the parties shall use their best efforts to agree on a successor escrow agent
within thirty (30) days after receiving such notice. If Parent and the
Shareholder Representative fail to agree upon a successor escrow agent within
such time, the Escrow Agent shall have the right to appoint a successor escrow
agent authorized to do business in the state of California. The successor escrow
agent shall execute and deliver an instrument accepting such appointment and it
shall, without further acts, be vested with all the estates, properties, rights,
powers, and duties of the predecessor Escrow Agent as if originally named as
Escrow Agent. Thereafter, the Escrow Agent shall be discharged from any further
duties and liability under this Agreement.
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<PAGE>
(o) Fees. All fees of the Escrow Agent for performance of its duties
----
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent. It is understood that the fees and usual charges agreed
upon for services of the Escrow Agent shall be considered compensation for
ordinary services as contemplated by this Agreement. In the event that the
conditions of this Agreement are not promptly fulfilled, or if the Escrow Agent
renders any service not provided for in this Agreement, or if the parties hereto
request a substantial modification of its terms, or if any controversy arises,
or if the Escrow Agent is made a party to, or intervenes in, any litigation
pertaining to the Escrow Fund or its subject matter, the Escrow Agent shall be
reasonably compensated for such extraordinary services and reimbursed for all
costs, attorney's fees, including allocated costs of in-house counsel, and
expenses occasioned by such default, delay, controversy or litigation. The
Parent promises to pay these sums upon demand.
7.3 Indemnity.
---------
(a) Indemnification by Principal Shareholders. The Principal
-----------------------------------------
Shareholders hereby agree to indemnify and hold Parent and its subsidiaries,
directors, officers and agents (collectively, the "Indemnified Persons")
-------------------
harmless against and in respect of any loss, cost, expense, claim, liability,
deficiency, judgment or damage (hereinafter, individually, a "Loss"; and
----
collectively, "Losses") incurred by Parent, its subsidiaries, officers,
------
directors and agents as a result of any inaccuracy in or breach of a
representation or warranty of the Company or any Principal Shareholder contained
in this Agreement; provided, however, no Principal Shareholder shall have any
liability or indemnification obligation resulting from a breach of a
representation or warranty set forth in Section 2.4, 2.11 or 2.31 by another
Principal Shareholder to the extent the representation relates to such other
Principal Shareholder. In addition, each Principal Shareholder hereby severally
agrees to indemnify and hold harmless the Indemnified Persons against any Loss
which results from a failure by the Company or such Principal Shareholder to
perform or comply with any covenant contained in this Agreement or by reason of
such Principal Shareholder failing to perform any obligation required of it
hereunder; provided, however, that no Principal Shareholder shall have any
liability or indemnification obligation resulting from a breach by another
Principal Shareholder of the provisions of Article V hereof.
(b) Indemnification by Parent. Parent hereby agrees to indemnify and
-------------------------
hold the Company and its subsidiaries, directors, officers and agents harmless
against and in respect of any Loss incurred by the Company, its subsidiaries,
officers, directors and agents (i) as a result of any inaccuracy in or breach of
a representation or warranty of Parent contained in this Agreement or any
failure by Parent to perform or comply with any covenant contained in this
Agreement and (ii) by reason of the failure of Parent to perform its obligations
hereunder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time on the second
anniversary of the Effective Date, but shall not terminate as to any Loss (or a
potential claim by an appropriate party) asserted in good faith prior to such
date.
(d) Procedure for Indemnification. In the event that either party
-----------------------------
shall incur or suffer any Losses in respect of which indemnification may be
sought by such party pursuant to the provisions
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<PAGE>
of this Article, the indemnified party shall assert a claim for indemnification
by written notice (a "Notice") to the Parent, or the Surviving Corporation and
the Shareholder Representative, as the case may be, briefly stating the nature
and basis of such claim. In the case of Losses arising by reason of any third-
party claim, the Notice shall be given within 25 days of the filing or other
written assertion of any such claim against Parent, but the failure of Parent to
give the Notice within such time period shall not relieve the Company and the
Principal Shareholders of any liability that the Company and the Principal
Shareholders may have to Parent except to the extent that the Company and the
Principal Shareholders are actually prejudiced thereby; provided, however, that
any such notice shall be given no later than the date of the expiration of the
applicable indemnification obligation of the Company and the Principal
Shareholders as set forth in Section 7.3(c) above. The indemnified party shall
provide the other party on request all information and documentation reasonably
necessary to support and verify any Losses which the indemnified party believes
give rise to a claim for indemnification hereunder and shall give reasonable
access to all books, records and personnel in the possession or under the
control of that party which would have bearing on such claim.
(e) Arbitration. Any controversy involving a claim by an indemnified
-----------
party pursuant to this Section 7.3 shall be finally settled by arbitration in
Santa Clara County, California in accordance with the then current Commercial
Arbitration Rules of the American Arbitration Association; and judgment upon the
award rendered by the arbitrator may be entered in any court having jurisdiction
thereof. Such arbitration shall be conducted by an arbitrator chosen by mutual
agreement of Parent and the Company and the Principal Shareholders. Failing
such agreement, the arbitration shall be conducted by three independent
arbitrators, none of whom shall have any competitive interest with Parent or the
Company and the Principal Shareholders. Parent shall choose one such
arbitrator, the Company and the Principal Shareholders shall choose one such
arbitrator, and such two arbitrators shall mutually select a third arbitrator.
Any decision of two such arbitrators shall be binding on Parent and the Company
and the Principal Shareholders. Each party shall pay its own costs and expenses
(including counsel fees) of any such arbitration except that the arbitrator can
compel one party to pay all or a portion of the other party's costs and
expenses.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
-----------
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by September 15, 1997; (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any governmental entity that
would make consummation of the Merger illegal;
-45-
<PAGE>
(c) by Parent or the Company if there shall be any action taken, or
any statute, rule, regulation or order enacted, promulgated or issued or deemed
applicable to the Merger by any Governmental Entity, which would: (i) prohibit
Parent's or Sub's ownership or operation of any portion of the business of the
Company or the Sub or (ii) compel Parent or the Company to dispose of or hold
separate all or a portion of the business or assets of the Sub or Parent as a
result of the Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company or the Principal Shareholders and such breach has not been cured within
ten (10) calendar days after written notice to the Company (provided that, no
cure period shall be required for a breach which by its nature cannot be cured);
(e) by the Company if neither it nor the Principal Shareholders are in
material breach of their respective obligations under this Agreement and there
has been a material breach of any representation, warranty, covenant or
agreement contained in this Agreement on the part of Parent or Sub and such
breach has not been cured within ten (10) calendar days after written notice to
Parent (provided that, no cure period shall be required for a breach which by
its nature cannot be cured); or
(f) by Parent, Sub, Company, or Principal Shareholders if an event
having a Material Adverse Effect on the Company shall have occurred after the
date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
---------------------
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub or the Company,
or their respective officers, directors or shareholders, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.4 and 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after
---------
the Company Shareholders approve this Agreement, this Agreement may be amended
by the parties hereto at any time by execution of an instrument in writing
signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent
-----------------
and Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
-46-
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
USWeb Corporation
2880 Lakeside Drive
Santa Clara, California 95054
Attention: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (415) 493-6811
(b) if to Company or to a Principal Shareholder, to:
Electronic Images, Inc.
313 E. Carson Street
Pittsburgh, Pennsylvania 15219
Attention: Marco Cardamone
Telecopy No.: (412) 481-9627
with copies to:
Cohen & Grigsby, P.C.
2900 CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222
Attention: Mark Baseman, Esq.
Telecopy No.: (412) 394-4956
-47-
<PAGE>
Davis & Gilbert
1740 Broadway
New York, New York 10019
Attention: Michael Ditzian, Esq.
Telecopy No.: (212) 468-4888
9.2 Interpretation. The words "include," "includes" and "including" when
--------------
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, and Exhibits hereto;
----------------------------
and the documents and instruments and other agreements among the parties hereto
referenced herein: (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings both written and oral, among the parties with respect to the
subject matter hereof; (b) except for the rights and obligations of the
Shareholder Representative, are not intended to confer upon any other person any
rights or remedies hereunder; and (c) shall not be assigned by operation of law
or otherwise except as otherwise specifically provided, except that Parent and
Sub may assign their respective rights and delegate their respective obligations
hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or
------------
the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to
replace such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except for a cause of action arising out of the fraud
--------------
of a party to this Agreement and the right of any party not to close this
transaction if a closing condition is not met, the indemnification provisions
set forth in Article 7 of this Agreement shall be the sole and exclusive remedy
of the parties hereto and in lieu of all other rights and remedies for Losses
arising out of any party's breach of any representation or warranty or failure
to perform any covenant or agreement contained in or made pursuant to this
Agreement. Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon such
party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
-48-
<PAGE>
9.7 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, State of California, in
connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
---------------------
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
-49-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Shareholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
ELECTRONIC IMAGES, INC. USWEB CORPORATION
Signature: Signature:
--------------------------- -------------------------
Name: Name:
--------------------------- -------------------------
Title: Title:
--------------------------- -------------------------
ESCROW AGENT USWEB ACQUISITION CORPORATION 108
Signature: Signature:
--------------------------- -------------------------
Name: Name:
--------------------------- -------------------------
Title: Title:
--------------------------- -------------------------
<PAGE>
PRINCIPAL SHAREHOLDERS
------------------------------------
(Name of Shareholder)
Signature:
--------------------------
Name:
-------------------------------
Title:
-------------------------------
------------------------------------
(Name of Shareholder)
Signature:
--------------------------
Name:
-------------------------------
Title:
------------------------------
------------------------------------
(Name of Shareholder)
Signature:
--------------------------
Name:
-------------------------------
Title:
------------------------------
<PAGE>
EXHIBIT A
---------
PRINCIPAL SHAREHOLDERS
Image Design and Technology, Inc.
Marco Cardamone
Unicorn Creative Services, Ltd.
Joseph Stafura
<PAGE>
EXHIBIT B
---------
VALUATION MODEL
<PAGE>
EXHIBIT C
---------
SCHEDULE OF EXCEPTIONS
<PAGE>
EXHIBIT D
---------
FORM OF SHAREHOLDER CERTIFICATE
<PAGE>
SHAREHOLDER CERTIFICATE
[WORDS IN BOLD AND BRACKETS ARE FOR UNICORN CERTIFICATE ONLY]
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of August ____, 1997, as amended (the "Agreement"),
---------
entered into by and among USWeb Corporation, a Utah corporation ("Parent"),
------
Electronic Images, Inc., a Pennsylvania corporation (the "Company"), USWeb
-------
Acquisition Corporation 108, a Delaware corporation and wholly owned subsidiary
of Parent ("Sub"), the Company will merge (the "Merger") with and into Sub and
--- ------
all shares of the Company's Common Stock will be exchanged for certain
consideration set forth in the Agreement (the "Merger Consideration"). Unless
--------------------
otherwise indicated, capitalized terms not defined herein have the meanings set
forth in the Agreement.
The undersigned understands that the execution of this Certificate is a
condition precedent to Parent and Sub's obligation to consummate the Merger and
to the receipt of Merger Consideration in the Merger (pursuant to the terms and
conditions of the Agreement).
The undersigned hereby represents and warrants as follows:
(a) Investment Representations.
--------------------------
(i) The Parent Common Stock issued to the undersigned will be
acquired for investment for the undersigned's own account, not as a nominee or
agent, and not with a view to the sale or distribution of any part thereof, and
the undersigned has no present intention of selling, granting any participation
in, or otherwise distributing the same, [OTHER THAN PURSUANT TO THE
"ARRANGEMENT" (AS DEFINED BELOW)]. The undersigned represents that the entire
legal and beneficial interest of the Parent Common Stock will be held for the
undersigned's account only, and neither in whole or in part for any other
person. By executing this Shareholder's Certificate, the undersigned further
represents that the undersigned has no present contract, undertaking, agreement
or arrangement with any person to sell, transfer, or grant participation to such
person or to any third person, with respect to any of the Parent Common Stock[,
OTHER THAN AN ARRANGEMENT (THE "ARRANGEMENT") WITH ONE INDIVIDUAL PURSUANT TO
-----------
WHICH THE UNDERSIGNED INTENDS TO SELL NO MORE THAN 1,250,000 SHARES OF PARENT
COMMON STOCK TO SUCH INDIVIDUAL OR TO A BUSINESS ENTITY OWNED OR CONTROLLED BY
SUCH INDIVIDUAL. THE UNDERSIGNED REPRESENTS THAT IN CONNECTION WITH THE CLOSING
OF THE ARRANGEMENT, THE PURCHASER OF THE SHARES OF PARENT COMMON STOCK WILL
EXECUTE AND DELIVER TO PARENT A CERTIFICATE IN THE FORM ATTACHED HERETO A
EXHIBIT A.]
- ---------
(ii) The undersigned understands and acknowledges that the issuance
of the Parent Common Stock pursuant to the Agreement is being effected on the
basis that the issuance of such securities is exempt from registration pursuant
to Section 4(2) of the Securities Act of 1933, as amended (the "1933 Act") and
--------
that the Parent's reliance upon such exemption is predicated upon the
undersigned's representations.
<PAGE>
(iii) The undersigned further represents that he: (i) has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the undersigned's prospective investment in
the shares of Parent Common Stock; (ii) has received all the information it has
requested from the Parent and the Company it considers necessary or appropriate
for deciding whether to accept the Parent Common Stock; (iii) has the ability to
bear the economic risks of the undersigned's prospective investment; (iv) is
able, without materially impairing his financial condition, to hold the Parent
Common Stock for an indefinite period of time and to suffer complete loss on his
investment; and (v) if applicable, is an "accredited investor" within the
-------------------
meaning of Rule 501 of Regulation D promulgated under the 1933 Act.
(iv) Each certificate representing Parent Company Stock issued
pursuant hereto to the undersigned and any shares issued or issuable in respect
of any such Parent Common Stock upon any stock split, stock dividend,
recapitalization, or similar event, shall be stamped or otherwise imprinted with
legends in the following form (in addition to any legend required under
applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES
OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS
ARE BINDING ON TRANSFEREES OF THESE SHARES.
(v) The certificates evidencing the Parent Common Stock shall also
bear any legend required pursuant to any state, local or foreign law governing
such securities.
(vi) The undersigned understands and acknowledges that the Parent
Common Stock has not been registered under the 1933 Act and Parent Common Stock
must be held indefinitely unless subsequently registered under the 1933 Act or
an exemption from such
<PAGE>
registration is available and neither Parent nor the Company is under any
obligation to register the Parent Common Stock.
(vii) The undersigned acknowledges that the Parent Common Stock shall
not be transferable except upon the conditions specified in this Certificate and
in the Agreement. Each Company Shareholder will cause any proposed transferee
of the Parent Company Stock held by such Company Shareholder to agree to take
and hold such Parent Company Stock subject to the provisions and upon the
conditions specified in this Certificate and in the Agreement.
(viii) Prior to any proposed transfer of any Parent Common Stock,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the undersigned shall give written notice to the
Company of his intention to effect such transfer. Each such notice shall
describe the manner and circumstances of the proposed transfer in sufficient
detail, and shall, if the Parent so requests, be accompanied (except in
transactions in compliance with Rule 144) by either (i) a written opinion of
legal counsel reasonably satisfactory to Parent, addressed to Parent, to the
effect that the proposed transfer of Parent Common Stock may be effected without
registration under the 1933 Act, or (ii) a "No Action" letter from the
---------
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such Parent
Common Stock shall be entitled to transfer such shares of Parent Common Stock in
accordance with the terms of the notice delivered by the holder to Parent,
subject to any right of first refusal on transfer in favor of the Parent. Each
certificate evidencing the shares of Parent Common Stock transferred as above
provided shall bear the appropriate restrictive legend set forth in Section (d)
above, except that such certificate shall not bear such restrictive legend if in
the opinion of counsel for Parent such legend is not required in order to
establish compliance with any provisions of the 1933 Act, which opinion will not
be unreasonably withheld.
(ix) The undersigned has had an opportunity to review with his own
tax advisors the tax consequences to the undersigned of the Merger and the
transactions contemplated by the Agreement. The undersigned understands that he
must rely solely on his advisors and not on any statements or representations by
Parent, the Company or any of their agents. The undersigned understands that,
except as set forth in Section 7.3(c) of the Agreement, he (and not Parent or
the Company) shall be responsible for his own tax liability that may arise as a
result of the Merger or the transactions contemplated by the Agreement.
(x) The undersigned will have sufficient assets, after completion
of the Merger, to satisfy all of the undersigned's obligations to its creditors
as the same become due and payable.
(b) Acknowledgment of Escrow Setoff and Market Standoff Agreement. The
-------------------------------------------------------------
undersigned has carefully reviewed the Agreement, and understands and agrees
that:
(i) Pursuant to such Agreement, 45% of the Original Purchase Price
which would otherwise be payable to the undersigned at the Effective Time of the
Merger will be deemed to have been received by the undersigned and deposited
with the Escrow Agent, without any act of the
<PAGE>
undersigned, and that the amounts deposited with the Escrow Agent shall be
available to satisfy Losses and adjustments to the Original Purchase Price as
set forth in the Agreement.
(ii) Each Company Shareholder hereby agrees that if so requested by
the Company or any representative of the underwriters in connection with any
registration of the offering of any Shares of the Company under the Securities
Act, such Company Shareholder shall not sell or otherwise transfer, pledge,
hypothecate or otherwise decrease his market risk or beneficial ownership in any
Shares or other securities of the Company during the 180-day period following
the date of the final Prospectus contained in a registration statement of the
Company filed under the Securities Act; provided, however, that such restriction
shall only apply to the first registration statement of the Company to become
effective under the Securities Act which includes securities to be sold on
behalf of the Company to the general public in an underwritten public offering
under the Securities Act. The Company may impose stop-transfer instructions
with respect to securities subject to the foregoing restrictions until the end
of such 180-day period.
(c) Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of Unicorn Creative Services, Ltd. as
the Shareholder Representative (as such term is defined in the Agreement) and
authorizes such Shareholder Representative to act as the undersigned's duly
constituted attorney-in-fact in connection with the matters set forth in the
Agreement, until such time as a successor of such Shareholder Representative is
elected by a majority-in-interest of the Company Shareholders. The undersigned
acknowledges and agrees that any decision, act, consent or instruction of the
Shareholder Representative shall constitute a decision, act, consent or
instruction of the undersigned and shall be final, binding and conclusive on the
undersigned, and that Parent and the Escrow Agent may rely upon any such
decision, act, consent or instruction of the Shareholder Representative as being
the decision, act, consent or instruction of the undersigned.
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of _________________, 1997.
---------------------------------
Signature
---------------------------------
Print Name
<PAGE>
EXHIBIT A
---------
SHAREHOLDER CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of August ___, 1997 (the "Agreement"), entered into by
---------
and among USWeb Corporation, a Utah corporation ("Parent"), Electronic Images,
------
Inc., a Pennsylvania corporation (the "Company"), USWeb Acquisition Corporation
-------
108, a Delaware corporation and wholly owned subsidiary of Parent ("Sub"), the
---
Company will merge (the "Merger") with and into Sub and all shares of the
------
Company's Common Stock, including those shares owned by Unicorn Creative
Services, Ltd. ("Unicorn"), will be exchanged for certain consideration set
-------
forth in the Agreement (the "Merger Consideration"). Unless otherwise
--------------------
indicated, capitalized terms not defined herein have the meanings set forth in
the Agreement.
The undersigned understands that the execution of this Certificate is a
condition precedent to both Parent and Sub's obligation to consummate the Merger
and to the sale of shares of Parent Common Stock by Unicorn to the undersigned
(the "Stock Sale").
----------
The undersigned hereby represents and warrants as follows:
(a) Investment Representations.
--------------------------
(i) The Parent Common Stock sold to the undersigned in the Stock
Sale will be acquired for investment for the undersigned's own account, not as a
nominee or agent, and not with a view to the sale or distribution of any part
thereof, and the undersigned has no present intention of selling, granting any
participation in, or otherwise distributing the same. The undersigned represents
that the entire legal and beneficial interest of the Parent Common Stock will be
held for the undersigned's account only, and neither in whole or in part for any
other person. By executing this Shareholder's Certificate, the undersigned
further represents that the undersigned has no present contract, undertaking,
agreement or arrangement with any person to sell, transfer, or grant
participation to such person or to any third person, with respect to any of the
Parent Common Stock.
(ii) The undersigned understands and acknowledges that the issuance
of Parent Common Stock to Unicorn pursuant to the Agreement is being effected on
the basis that the issuance of such securities is exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933, as amended (the "1933
----
Act") and that the Parent's reliance upon such exemption is predicated upon the
- ---
undersigned's representations.
(iii) The undersigned further represents that it: (i) has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks of the undersigned's prospective the shares of
Parent Common Stock; (ii) has the ability to bear the economic risks of the
undersigned's prospective investment; (iii) is able, without materially
impairing its financial condition, to hold the Parent Common Stock for an
indefinite period of time
<PAGE>
and to suffer complete loss on its investment; and (iv) if applicable, is an
"accredited investor" within the meaning of Rule 501 of Regulation D promulgated
-------------------
under the 1933 Act.
(iv) Each certificate representing Parent Company Stock sold to the
undersigned and any shares issued or issuable in respect of any such Parent
Common Stock upon any stock split, stock dividend, recapitalization, or similar
event, shall be stamped or otherwise imprinted with legends in the following
form (in addition to any legend required under applicable state securities
laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THESE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. COPIES
OF THE AGREEMENT COVERING THE PURCHASE OF THESE SHARES AND RESTRICTING
THEIR TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY
THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE
CORPORATION AT THE PRINCIPAL EXECUTIVE OFFICES OF THE CORPORATION.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER, AS SET FORTH IN AN AGREEMENT BETWEEN THE
CORPORATION AND THE REGISTERED HOLDER, A COPY OF WHICH IS ON FILE AT
THE PRINCIPAL OFFICE OF THE CORPORATION. SUCH TRANSFER RESTRICTIONS
ARE BINDING ON TRANSFEREES OF THESE SHARES.
(v) The certificates evidencing the Parent Common Stock shall also
bear any legend required pursuant to any state, local or foreign law governing
such securities.
(vi) The undersigned understands and acknowledges that the Parent
Common Stock has not been registered under the 1933 Act and Parent Common Stock
must be held indefinitely unless subsequently registered under the 1933 Act or
an exemption from such registration is available and neither Parent nor the
Company is under any obligation to register the Parent Common Stock.
(vii) The undersigned acknowledges that the Parent Common Stock shall
not be transferable except upon the conditions specified in this Certificate and
in the Agreement. The undersigned will cause any proposed transferee of the
Parent Common Stock held by such Company Shareholder to agree to take and hold
such Parent Common Stock subject to the provisions and upon the conditions
specified in this Certificate and in the Agreement.
-2-
<PAGE>
(viii) Prior to any proposed transfer of any Parent Common Stock,
unless there is in effect a registration statement under the Securities Act
covering the proposed transfer, the undersigned shall give written notice to the
Company of its intention to effect such transfer. Each such notice shall
describe the manner and circumstances of the proposed transfer in sufficient
detail, and shall, if the Parent so requests, be accompanied (except in
transactions in compliance with Rule 144) by either (A) a written opinion of
legal counsel reasonably satisfactory to Parent, addressed to Parent, to the
effect that the proposed transfer of Parent Common Stock may be effected without
registration under the 1933 Act, or (B) a "No Action" letter from the Commission
---------
to the effect that the transfer of such securities without registration will not
result in a recommendation by the staff of the Commission that action be taken
with respect thereto, whereupon the holder of such Parent Common Stock shall be
entitled to transfer such shares of Parent Common Stock in accordance with the
terms of the notice delivered by the holder to Parent, subject to any right of
first refusal on transfer in favor of the Parent. Each certificate evidencing
the shares of Parent Common Stock transferred as above provided shall bear the
appropriate restrictive legend set forth in paragraph (iv) above, except that
such certificate shall not bear such restrictive legend if in the opinion of
counsel for Parent such legend is not required in order to establish compliance
with any provisions of the 1933 Act, which opinion will not be unreasonably
withheld.
(b) Market Standoff Agreement. The undersigned agrees that if so requested
-------------------------
by the Company or any representative of the underwriters in connection with any
registration of the offering of any Shares of the Parent under the Securities
Act, the undersigned shall not sell or otherwise transfer, pledge, hypothecate
or otherwise decrease its market risk or beneficial ownership in any Shares or
other securities of the Parent during the 180-day period following the date of
the final Prospectus contained in a registration statement of the Parent filed
under the Securities Act; provided, however, that such restriction shall only
apply to the first registration statement of the Parent to become effective
under the Securities Act which includes securities to be sold on behalf of the
Parent to the general public in an underwritten public offering under the
Securities Act. The Parent may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such 180-
day period.
(c) Parent's Right of First Refusal.
-------------------------------
(i) Before any shares acquired by the undersigned pursuant to the
Stock Sale (the "Shares") may be sold or otherwise transferred (including
------
transfer by gift or operation of law), or any Shares held by a transferee
(either being sometimes referred to herein as the "Holder") may be sold, the
------
Parent or its assignee(s) shall have a right of first refusal to purchase such
Shares on the terms and conditions set forth in this Section (the "Right of
--------
First Refusal").
- -------------
(ii) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Parent a written notice (the "Notice") stating: (i) the Holder's
------
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
-------------------
number of Shares to be transferred to each Proposed Transferee; and (iv) the
-3-
<PAGE>
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
-------------
at the Offered Price to the Parent or its assignee(s).
(iii) Exercise of Right of First Refusal. At any time within (15)
----------------------------------
days after receipt of the Notice, the Parent or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (iv)
below.
(iv) Purchase Price. The purchase price ("Parent Purchase Price")
-------------- ---------------------
for the Shares purchased by the Parent or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the Parent may match such non-cash consideration with such other cash
or non-cash consideration as shall be mutually agreed to by Parent and the
Holder. If Parent and Holder cannot agree on the value of the proposed non-cash
consideration, then they shall submit the determination of the value of such
consideration to a mutually agreeable third-party appraiser.
(v) Payment. Payment of the Parent Purchase Price shall be made, at
-------
the option of the Parent or its assignee(s), in cash (by check), by cancellation
of all or a portion of any outstanding indebtedness of the Holder to the Parent
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 15 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(vi) Holder's Right to Transfer. If all of the Shares proposed in
--------------------------
the Notice to be transferred to a given Proposed Transferee are not purchased by
the Parent or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Parent, and the Parent or its assignees shall again be offered the
Right of First Refusal before any Shares held by the Holder may be sold or
otherwise transferred.
(vii) Exception for Certain Family Transfers. Anything to the
--------------------------------------
contrary contained in this Section notwithstanding, the transfer of any or all
of the Shares during the Holder's lifetime or on the Holder's death by will or
intestacy to the Holder's immediate family or a trust for the benefit of the
Holder's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
----------------
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so transferred subject to the provisions of
this Section, and there shall be no further transfer of such Shares except in
accordance with the terms of this Section.
-4-
<PAGE>
(viii) Termination of Right of First Refusal. The Right of First
-------------------------------------
Refusal shall terminate as to any Shares 90 days after the first sale of Common
Stock of the Parent to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of August, 1997.
------------------------------------
Signature
------------------------------------
Print Name
<PAGE>
Exhibit 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
USWEB CORPORATION
ARTICLE I
The name of the corporation is USWeb Corporation.
ARTICLE II
The purpose of the corporation is to engage in any lawful act or activity
for which a corporation may be organized under the Utah Revised Business
Corporation Act.
ARTICLE III
The aggregate number of shares that the corporation shall have authority to
issue is 138,188,501, divided into 100,000,000 shares of Common Stock, each with
$.001 par value, and 38,188,501 shares of Preferred Stock, each with $.001 par
value. The Preferred Stock shall be issued in three series, which shall be
designated "Series A Preferred Stock," consisting of 18,678,500 shares, "Series
B Preferred Stock," consisting of 9,310,001 shares, and "Series C Preferred
Stock," consisting of 10,200,000 shares. The terms and provisions of the
Common Stock and the Preferred Stock are as follows:
1. Definitions. For purposes of this Article, the following definitions
-----------
shall apply:
(a) "Company" shall mean USWeb Corporation.
-------
(b) "Common Stock" shall mean the Common Stock, $.001 par value.
------------
(c) "Convertible Securities" shall mean any evidences of
----------------------
indebtedness, shares or other securities (other than shares of Preferred Stock)
convertible into or exchangeable for Common Stock.
(d) "Liquidation Preference" shall mean $0.540541 per share for the
----------------------
Series A Preferred Stock, $0.6713211 per share for the Series B Preferred Stock,
and $2.07 per share for the Series C Preferred Stock.
<PAGE>
(e) "Options" shall mean rights, options or warrants to subscribe for,
-------
purchase or otherwise acquire Common Stock or Convertible Securities.
(f) "Original Issue Date" shall mean February 20, 1996 for the Series
-------------------
A Preferred Stock; December 13, 1996 for the Series B Preferred Stock; and, for
the Series C Preferred Stock, the date upon which shares of Series C Preferred
Stock are first issued.
(g) "Original Issue Price" shall mean $0.540541 per share for the
--------------------
Series A Preferred Stock, $0.6713211 per share for the Series B Preferred Stock,
and $2.07 per share for the Series C Preferred Stock.
(h) "Preferred Stock" shall mean the Series A Preferred Stock, Series
---------------
B Preferred Stock and Series C Preferred Stock, each with $.001 par value.
2. Dividends.
---------
(a) Dividend Preference. The holders of outstanding shares of
-------------------
Preferred Stock shall be entitled to receive dividends, out of any assets at the
time legally available therefor, prior and in preference to any declaration or
payment of any dividend (payable other than in Common Stock) on the Common
Stock, at the rate of $0.0324 per share of Series A Preferred Stock per annum,
$0.0403 per share of Series B Preferred Stock per annum and $0.1242 per share of
Series C Preferred Stock per annum or, if greater (as determined on an as-
converted basis for the Preferred Stock), an amount equal to that paid on the
outstanding shares of Common Stock, when, as and if declared by the Board of
Directors of the Company; provided, however, that the Board of Directors is
-------- -------
under no obligation to pay dividends to such holders, and such dividends, if
any, shall be noncumulative. No rights shall accrue to the holders of the
Preferred Stock if dividends are not declared in any prior year. Such dividends
may be payable quarterly or otherwise as the Board of Directors may from time to
time determine. If and to the extent that the Board of Directors shall declare
and set aside for payment any other and further amount of cash or property as a
Distribution (as defined herein), such Distribution shall be made with equal
priority to the Common Stock and the Preferred Stock, with each share of
Preferred Stock being treated for such purpose as if it had been converted into
Common Stock at the then-effective Conversion Rate (as defined in Section 4(a)).
For such purpose, all shares of Preferred Stock held by each holder of Preferred
Stock shall be aggregated, and any resulting fractional share of Common Stock
shall be disregarded.
(b) Priority of Dividends. The Company shall make no Distribution (as
---------------------
defined below) to the holders of shares of Common Stock in any fiscal year
unless and until dividends shall have been paid, or declared and set apart, upon
all shares of Preferred Stock.
(c) Distribution. As used in this section, "Distribution" means the
------------
transfer of cash or property without consideration, whether by way of dividend
or otherwise (except a dividend in shares of the Company) or the purchase of
shares of the Company (other than in connection with the repurchase of shares of
Common Stock issued to or held by employees, consultants, officers and
-2-
<PAGE>
directors upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase) for cash or property.
(d) Consent to Certain Distributions. The holders of outstanding
--------------------------------
shares of Preferred Stock shall be deemed to have consented to all distributions
or payments to existing or terminated employees, consultants, officers and
directors of the Company in connection with the termination of employment by or
services to the Company and relating to the repurchase of shares of capital
stock issued to or held by such individuals pursuant to agreements with the
Company for such repurchases.
3. Liquidation Rights.
------------------
(a) Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Company, either voluntary or involuntary, but
excluding any sale, merger or acquisition of the Company, the holders of the
Preferred Stock shall be entitled to receive, out of the assets of the Company,
the Liquidation Preference specified for each share of Preferred Stock then held
by them plus an amount equal to all declared and unpaid dividends thereon, if
any, to the date that payment is made, before any payment shall be made or any
assets distributed to the holders of Common Stock.
(b) Priority. If upon the liquidation, dissolution or winding up of
--------
the Company, the assets to be distributed among the holders of the Preferred
Stock are insufficient to permit the payment to such holders of the full
Liquidation Preference for their shares, then the entire assets of the Company
legally available for distribution shall be distributed with equal priority and
pro rata among the holders of the Preferred Stock in proportion to the numbers
of shares of Preferred Stock held by them multiplied by the Liquidation
Preference for such shares of Preferred Stock.
(c) Remaining Assets. After the payment to the holders of Preferred
----------------
Stock of the full preferential amounts specified herein, any remaining assets of
the Company shall be distributed ratably to the holders of the Company's capital
stock then outstanding, with each share of Preferred Stock being treated for
such purpose as if it had been converted into Common Stock at the then effective
Conversion Rate. For such purpose, all shares of Preferred Stock held by each
holder of Preferred Stock shall be aggregated, and any resulting fractional
share of Common Stock shall be disregarded.
4. Conversion. The holders of the Preferred Stock shall have conversion
----------
rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Preferred Stock shall be
----------------
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share at the office of the Company or any transfer agent for
the Preferred Stock, into that number of fully-paid and nonassessable shares of
Common Stock that is equal to the Original Issue Price divided by the
appropriate Conversion Price (as hereinafter defined). The Conversion Price for
the Series A Preferred Stock shall initially be $0.540541, and shall be subject
to adjustment as provided herein.
-3-
<PAGE>
The Conversion Price for the Series B Preferred Stock shall initially be
$0.6713211, and shall be subject to adjustment as provided herein. The
Conversion Price for the Series C Preferred Stock shall initially be $2.07, and
shall be subject to adjustment as provided herein. (The number of shares of
Common Stock into which each share of Preferred Stock may be converted is
hereinafter referred to as the "Conversion Rate" for each such series.) Upon any
decrease or increase in the Conversion Price or the Conversion Rate for a
series, as described in this Section 4, the Conversion Rate or Conversion Price
for such series, as the case may be, shall be appropriately increased or
decreased.
(b) Automatic Conversion. Each share of Preferred Stock shall
--------------------
automatically be converted into shares of Common Stock at the then-effective
Conversion Rate for such share immediately (i) upon the consummation of a firmly
underwritten public offering on Form S-1 or SB-2 (or successor form(s)) that
results in proceeds to the Company in the public offering of at least
$20,000,000 (net of underwriting discounts and commissions and offering
expenses) and is at a price per share greater than $5.00 (a "Qualifying Public
Offering"); or (ii) upon receipt by the Company of the consent to such
conversion by the holders of a majority of the shares of Common Stock issued or
issuable upon the conversion of all issued and outstanding shares of Preferred
Stock, which consent may not be unreasonably withheld; or (iii) immediately
prior to the effectiveness of a Change of Control. For purposes of this Section
4(b), a "Change of Control" shall mean the occurrence of any of the following
events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) other than SOFTBANK Corporation
and/or any of its affiliates becomes the "beneficial owner" (as defined in Rule
13d-3 under said Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) The sale, lease, exchange, disposition or other transfer by
the Company of all or substantially all of the Company's assets.
(c) Mechanics of Conversion. No fractional shares of Common Stock
-----------------------
shall be issued upon conversion of Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the Company shall pay
cash equal to such fraction multiplied by the then fair market value of such
fractional shares as determined by the Board of Directors of the Company. Before
any holder of Preferred Stock shall be entitled to convert the same into full
shares of Common Stock, and to receive certificates therefor, he shall surrender
the certificate or certificates therefor, duly endorsed, at the office of the
Company or of any transfer agent for the Preferred Stock, and shall
-4-
<PAGE>
give written notice to the Company at such office that he elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to paragraph 4(b) above, the outstanding shares of Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Company or its transfer agent; provided further, however, that the Company
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such automatic conversion unless either the certificates
evidencing such shares of Preferred Stock are delivered to the Company or its
transfer agent as provided above, or the holder notifies the Company or its
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the Company from
any loss incurred by it in connection with such certificates.
The Company shall, as soon as practicable after such delivery, or after
such agreement and indemnification, issue and deliver at such office to such
holder of Preferred Stock, a certificate or certificates for the number of
shares of Common Stock to which he shall be entitled as aforesaid and a check
payable to the holder in the amount of any cash amounts payable as the result of
a conversion into fractional shares of Common Stock, plus any declared and
unpaid dividends on the converted Preferred Stock. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of such surrender of the shares of Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date; provided, however, that if
the conversion is in connection with an underwritten offer of securities
registered pursuant to the Securities Act of 1933, as amended, the conversion
may, at the option of any holder tendering Preferred Stock for conversion, be
conditioned upon the closing of the sale of securities pursuant to such
offering, in which event the person(s) entitled to receive the Common Stock
issuable upon such conversion of the Preferred Stock shall not be deemed to have
converted such Preferred Stock until immediately prior to the closing of the
sale of such securities.
(d) Adjustments to Conversion Price.
-------------------------------
(i) Special Definition. For purposes of this paragraph 4(d),
------------------
"Additional Shares of Common" shall mean all shares of Common Stock issued (or,
pursuant to paragraph 4(d)(iii), deemed to be issued) by the Company after the
Original Issue Date of a particular series of Preferred Stock, other than shares
of Common Stock issued or issuable :
(1) upon conversion of shares of Preferred Stock;
(2) to the Company's employees, officers, directors and consultants as
may be determined by the Company's Board of Directors from time to time;
(3) as a dividend or distribution on Preferred Stock or pursuant to
any event for which adjustment is made pursuant to paragraph 4(d)(vi), (vii) or
(viii) hereof; and
-5-
<PAGE>
(4) pursuant to commercial borrowing, secured lending or lease
financing transactions approved by the Board of Directors.
(ii) No Adjustment of Conversion Price. No adjustment in the
---------------------------------
Conversion Price of a particular share of Preferred Stock shall be made in
respect of the issuance of Additional Shares of Common unless the consideration
per share for an Additional Share of Common issued or deemed to be issued by the
Company is less than the Conversion Price in effect on the date of, and
immediately prior to, such issue for such share of Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common.
-------------------------------------------
(1) Options and Convertible Securities. In the event the Company at
----------------------------------
any time or from time to time after the Original Issue Date of a particular
series of Preferred Stock shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities or exercise of such Options, shall be
deemed to be Additional Shares of Common issued as of the time of such issue or,
in case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common shall not be deemed
to have been issued unless the consideration per share (determined pursuant to
paragraph 4(d)(v) hereof) of such Additional Shares of Common would be less than
the Conversion Price of such series of Preferred Stock in effect on the date of
and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
are deemed to be issued:
(a) no further adjustment in the Conversion Price of such series of
Preferred Stock shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(b) if such Options or Convertible Securities by their terms provide,
with the passage of time or otherwise, for any increase or decrease in the
consideration payable to the Company, or increase or decrease in the number of
shares of Common Stock issuable, upon the exercise, conversion or exchange
thereof, the Conversion Price of such series of Preferred Stock computed upon
the original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effec tive, be recomputed to reflect such
increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities;
-6-
<PAGE>
(c) no readjustment pursuant to clause (b) above shall have the effect
of increasing the Conversion Price of such series of Preferred Stock to an
amount which exceeds the lower of (i) the Conversion Price of such series of
Preferred Stock on the original adjustment date, or (ii) the Conversion Price of
such series of Preferred Stock that would have resulted from any issuance of
Additional Shares of Common between the original adjustment date and such
readjustment date;
(d) upon the expiration of any such Options or any rights of
conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Prices computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto) and any
subsequent adjustments based thereon shall, upon such expiration, be recomputed
as if:
i) in the case of Convertible Securities or Options for
Common Stock, the only Additional Shares of Common issued were the shares of
Common Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Company for the
issue of such exercised Options plus the consideration actually received by the
Company upon such exercise or for the issue of all such Convertible Securities
which were actually converted or exchanged, plus the additional consideration,
if any, actually received by the Company upon such conversion or exchange, and
ii) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Company for the Additional Shares of Common deemed to have been
then issued was the consideration actually received by the Company for the issue
of such exercised Options, plus the consideration deemed to have been received
by the Company (determined pursuant to paragraph 4(d)(v)) upon the issue of the
Convertible Securities with respect to which such Options were actually
exercised; and
(e) if such record date shall have been fixed and such Options or
Convertible Securities are not issued on the date fixed therefor, the adjustment
previously made in the Conversion Prices which became effective on such record
date shall be canceled as of the close of business on such record date, and
thereafter the Conversion Prices shall be adjusted pursuant to this paragraph
4(d)(iii) as of the actual date of their issuance.
(2) Stock Dividends. In the event the Company at any time or from
---------------
time to time after the Original Issue Date of a particular series of Preferred
Stock shall declare or pay any dividend on the Common Stock payable in Common
Stock, and with respect to which no similar Common Stock dividend is to be
distributed to holders of such series of Preferred Stock, then and in any such
event, Additional Shares of Common shall be deemed to have been issued
immediately after the close of business on the record date for the determination
of holders of any class of securities entitled to receive such dividend and the
applicable Conversion Price for the Preferred Stock in effect immediately prior
to the close of business on such record date shall, concurrently with the
effectiveness of such stock dividend, be proportionately adjusted.
-7-
<PAGE>
(iv) Adjustment of Conversion Price Upon Issuance of Additional
----------------------------------------------------------
Shares of Common. In the event the Company shall issue Additional Shares of
- ----------------
Common (including Additional Shares of Common deemed to be issued pursuant to
paragraph 4(d)(iii)) without consideration or for a consideration per share less
than the applicable Conversion Price for the Preferred Stock in effect on the
date of and immediately prior to such issue, then and in such event, the
applicable Conversion Price of the Preferred Stock shall be reduced,
concurrently with such issue, to a price (calculated to the nearest cent)
determined by multiplying such Conversion Price by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of shares of Common Stock which the
aggregate consideration received by the Company for the total number of
Additional Shares of Common so issued would purchase at such Conversion Price;
and the denominator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of such Additional
Shares of Common so issued; and provided further that, for the purposes of this
paragraph 4(d)(iv), all shares of Common Stock issuable upon exercise,
conversion or exchange of outstanding Options, Preferred Stock and Convertible
Securities, as the case may be, shall be deemed to be outstanding, and
immediately after any Additional Shares of Common are deemed issued pursuant to
paragraph 4(d)(iii), such Additional Shares of Common shall be deemed to be
outstanding.
(v) Determination of Consideration. For purposes of this subsection
------------------------------
4(d), the consideration received by the Company for the issue of any Additional
Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration shall:
-----------------
(a) insofar as it consists of cash, be computed at the aggregate
amount of cash received by the Company excluding amounts paid or payable for
accrued interest or accrued dividends;
(b) insofar as it consists of property other than cash, be computed at
the fair value thereof at the time of such issue, as determined in good faith by
the Board of Directors; and
(c) in the event Additional Shares of Common are issued together with
other shares or securities or other assets of the Company for consideration
which covers both, be the proportion of such consideration so received, computed
as provided in clauses (a) and (b) above, as determined in good faith by the
Board of Directors.
(2) Options and Convertible Securities. The consideration per share
----------------------------------
received by the Company for Additional Shares of Common deemed to have been
issued pursuant to paragraph 4(d)(iii)(1), relating to Options and Convertible
Securities, shall be determined by dividing
(x) the total amount, if any, received or receivable by the Company as
consideration for the issue of such Options or Convertible Securities, plus the
minimum aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without
-8-
<PAGE>
regard to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(y) the maximum number of shares of Common Stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) issuable upon the exercise of such
Options or the conversion or exchange of such Convertible Securities.
(3) Stock Dividends. Any Additional Shares of Common deemed to have
---------------
been issued relating to stock dividends shall be deemed to have been issued for
no consideration.
(vi) Adjustments for Subdivisions or Combinations of Common
------------------------------------------------------
Stock. In the event the outstanding shares of Common Stock shall be subdivided
(including by stock split or payment of a dividend in Common Stock) into a
greater number of shares of Common Stock, the Conversion Prices in effect
immediately prior to such subdivision shall, concurrently with the effectiveness
of such subdivision, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined (including by reverse stock split or
reclassification) into a lesser number of shares of Common Stock, the Conversion
Prices in effect immediately prior to such combination shall, concurrently with
the effectiveness of such combination, be proportionately increased.
Adjustments to Conversion Prices then in effect shall become effective
retroactively with respect to conversions made subsequent to the record date in
the case of a dividend, and shall become effective as of the effective date in
the case of a subdivision or combination.
(vii) Adjustments for Other Distributions. In the event the
-----------------------------------
Company at any time or from time to time makes or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in securities of the Company other than shares of Common Stock and other
than as otherwise adjusted in this Section 4, then and in each such event
provision shall be made (including, if applicable, an adjustment to one or more
Conversion Prices after such record date) so that the holders of Preferred Stock
shall receive upon conversion thereof, in addition to the number of shares of
Common Stock receivable thereupon, the amount of securities of the Company which
they would have received had their Preferred Stock then converted into Common
Stock immediately prior to such event and had they thereafter, during the period
from the date of such event to and including the date of conversion, retained
such securities receivable by them as aforesaid during such period, subject to
all other adjustments called for during such period under this Section 4 with
respect to the rights of the holders of the Preferred Stock.
(viii) Adjustments for Reclassification, Exchange and Substitution.
-----------------------------------------------------------
If the Common Stock issuable upon conversion of the Preferred Stock shall be
changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), the Conversion Prices then in effect shall, concurrently with the
effectiveness of such reorganization
-9-
<PAGE>
or reclassification, be proportionately adjusted such that the Preferred Stock
shall be convertible into, in lieu of the number of shares of Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of
Common Stock that would have been subject to receipt by the holders upon
conversion of the Preferred Stock immediately before that change.
(ix) Series C Conversion Price Adjustment upon Initial Public
--------------------------------------------------------
Offering. If the initial public offering price per share set forth in the
- --------
definitive underwriting agreement for the Company's firmly underwritten initial
public offering is greater than three times the Conversion Price then in effect
for the Series C Preferred Stock, then such Conversion Price shall, effective as
of the date of filing of such registration statement, be increased by 20%.
(e) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
the Company at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Preferred Stock a certificate setting forth such adjustment or readjustment and
showing in detail the facts upon which such adjustment or readjustment is based.
The Company shall, upon the written request at any time of any holder of
Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Prices at the time in effect, and (iii) the number of shares of
Common Stock and the amount, if any, of other property which at the time would
be received upon the conversion of Preferred Stock.
(f) Notices of Record Date. In the event that the Company shall
----------------------
propose at any time:
(i) to declare any dividend or distribution upon its Common Stock,
whether in cash, property, stock or other securities, whether or not a regular
cash dividend and whether or not out of earnings or earned surplus;
(ii) to offer for subscription pro rata to the holders of any
class or series of its stock any additional shares of stock of any class or
series or other rights;
(iii) to effect any reclassification or recapitalization of its
Common Stock outstanding involving a change in the Common Stock; or
(iv) to merge with or into any other corporation, or sell, lease
or convey all or substantially all its property or business, or to liquidate,
dissolve or wind up;
then, in connection with each such event, the Company shall send to the holders
of the Preferred Stock at least 20 days' prior written notice of the date on
which a record shall be taken for such dividend, distribution or subscription
rights (and specifying the date on which the holders of Common Stock
-10-
<PAGE>
shall be entitled thereto) or for determining rights to vote in respect of the
matters referred to in (iii) and (iv) above.
Each such written notice shall be given by first class mail, postage
prepaid, addressed to the holders of Preferred Stock at the address for each
such holder as shown on the books of the Company.
(g) Reservation of Stock Issuable Upon Conversion. The Company shall
---------------------------------------------
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Preferred Stock, such number of its shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all then
outstanding shares of the Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of the Preferred Stock, the
Company will take such corporate action as may, in the opinion of its counsel,
be necessary to increase its authorized but unissued shares of Common Stock to
such number of shares as shall be sufficient for such purpose.
5. Redemption. If, at any time between January 1, 2001 and November 1,
----------
2001, holders of at least two-thirds of the outstanding shares of Preferred
Stock (or shares of Common Stock issued or issuable upon conversion thereof) so
request in writing (a "Qualifying Request"), the Company shall redeem, at the
applicable Redemption Price (defined below), up to one-third of the shares of
Preferred Stock held by each holder of outstanding Preferred Stock at the time
the Qualifying Request is submitted to the Company (the "Redeemable Portion") on
each of December 1, 2001, December 1, 2002 and December 1, 2003 (each a
"Redemption Date") in accordance with the terms and provisions set forth below.
Upon receipt of a Qualifying Request, the Company shall give notice pursuant to
this Section 5 to all holders of the then outstanding Preferred Stock at the
address of each such holder appearing on the books of the Company or given by
such holder to the Company for the purpose of notice. Any holder of Preferred
Stock shall be entitled to submit its Redeemable Portion in response to a
Redemption Notice (defined below). Subject to the foregoing, in the event the
Company receives a Qualifying Request, the Company shall redeem on each
Redemption Date the applicable Redeemable Portion. No redemption obligation
shall arise, however, if and to the extent that the Company at such Redemption
Date shall be prohibited by applicable law from effecting such redemption. If
the funds of the Company legally available for redemption of shares of Preferred
Stock on any Redemption Date are insufficient to redeem the total number of
shares of Preferred Stock submitted for redemption on such Redemption Date,
those funds which are legally available will be used to first redeem as many
shares of Preferred Stock as may be lawfully redeemed and that were submitted
for redemption by holders thereof who also submitted the Qualifying Request (the
"Qualifying Request Shares"). The shares of Preferred Stock that were submitted
for redemption but not so redeemed shall remain outstanding and entitled to all
the rights and preferences provided herein. At any time thereafter when
additional funds of the Company are legally available for the redemption of
shares of Preferred Stock such funds will immediately be used to redeem the
balance of the shares which the Company has become obliged to redeem on any
Redemption Date (or such lesser maximum amount that shall be lawful at such
time), but which it has not redeemed.
-11-
<PAGE>
(a) Notice. Upon receipt of a Qualifying Request, the Company shall
------
give, not less than 60 days prior to each Redemption Date, written notice (the
"Redemption Notice") to all holders of the Preferred Stock. Subject to the
possible restrictions contained in the prior paragraph, the applicable
Redeemable Portion shall be redeemed on the applicable Redemption Date at the
applicable Redemption Price, which shall equal the applicable Conversion Price
plus any declared and unpaid dividends on the Preferred Stock (the "Redemption
Price"). The Redemption Notice shall further require each holder submitting
shares for redemption to surrender to the Company on or before the Redemption
Date, at the place designated in the Redemption Notice, such holder's
certificate or certificates representing the shares of Preferred Stock to be
redeemed. On or prior to the Redemption Date, each holder of shares of
Preferred Stock submitted for redemption shall surrender the certificate or
certificates evidencing such shares to the Company, at the place designated in
the Redemption Notice, and shall thereupon be entitled to receive payment of the
appropriate Redemption Price. The Company shall be under no obligation to
redeem shares of Preferred Stock (i) for which no stock certificate or affidavit
of lost stock certificate is surrendered on or prior to such Redemption Date or
(ii) to the extent that any such redemption would be in violation of applicable
law.
(b) Cessation of Rights. Subject to the penultimate sentence of the
-------------------
first paragraph of this Section 5, from and after the applicable Redemption
Date, unless there shall have been a default in payment of the appropriate
Redemption Price, all rights of the holders of shares of the Preferred Stock
submitted for redemption in response to a Redemption Notice (except the right to
receive the Redemption Price without interest upon surrender of their
certificate or certificates) shall cease with respect to such shares, and such
shares shall not thereafter be outstanding for any purpose whatsoever. The
shares of Preferred Stock not submitted for redemption shall remain outstanding
and entitled to all rights and preferences provided herein.
(c) Deposit of Redemption Price. Two days prior to each Redemption
---------------------------
Date, the Company shall deposit in cash the Redemption Price of all outstanding
shares of the Preferred Stock submitted for redemption in response to the
Redemption Notice, and not yet redeemed or converted, with a bank or trust
company having aggregate capital and surplus in excess of $50,000,000 as a trust
fund for the benefit of the respective holders of the shares designated for
redemption and not yet redeemed. Simultaneously, the Company shall deposit
irrevocable instructions and authority to such bank or trust company to pay, on
and after the Redemption Date, the Redemption Price of the Preferred Stock to
the holders thereof upon surrender of their certificates. Any monies deposited
by the Company pursuant to this Section 5(c) for the redemption of shares that
are thereafter converted into shares of Common Stock pursuant to Section 4 above
no later than the close of business on the Redemption Date shall be returned to
the Company forthwith upon such conversion. The balance of any monies deposited
by the Company pursuant to this Section 5(c) remaining unclaimed at the
expiration of six (6) months following the Redemption Date shall thereafter be
returned to the Company, provided that the shareholder to which such monies
would be payable hereunder shall be entitled, upon proof of its ownership of the
Preferred Stock and payment of any bond requested by the Company, to receive
such monies but without interest from the applicable Redemption Date.
-12-
<PAGE>
6. Voting. Except as otherwise expressly provided herein or as required
------
by law, the holders of Preferred Stock and the holders of Common Stock shall
vote together and not as separate classes.
(a) Preferred Stock. Each holder of shares of Preferred Stock shall
---------------
be entitled to the number of votes equal to the number of shares of Common Stock
into which such shares of Preferred Stock held by such holder of Preferred Stock
could then be converted. The holders of shares of the Preferred Stock shall be
entitled to vote on all matters on which the Common Stock shall be entitled to
vote, unless otherwise required by applicable law. The holders of the Preferred
Stock shall be entitled to notice of any shareholders' meeting in accordance
with the Bylaws of the Company. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Preferred Stock held by each
holder could be converted) shall be disregarded.
(b) Common Stock. Each holder of shares of Common Stock shall be
------------
entitled to one vote for each share thereof held.
(c) Election of Directors. The holders of the Preferred Stock, voting
---------------------
together as a single class, shall be entitled to elect four directors. The
holders of the Common Stock, voting together as a class, shall be entitled to
elect one director. Any vacancies on the Board of Directors shall be filled by
vote of the holders of the Common Stock and the Preferred Stock, voting together
as a single class.
7. Amendments and Changes.
----------------------
(a) No Series Voting. Other than as provided by law, there shall be
----------------
no series voting.
(b) Approval by Class. As long as any of the Preferred Stock shall be
-----------------
issued and outstanding, the Company shall not, without first obtaining the
approval (by vote or consent as provided by law) of the holders of a majority of
the total number of shares of the Preferred Stock then outstanding:
(i) amend or repeal any provision of, or add any provision to, the
Company's Amended and Restated Articles of Incorporation or Bylaws, if such
amendment would (x) alter or change the rights, preferences, privileges or
powers of, or the restrictions provided for the benefit of, a series of
Preferred Stock, (y) increase the authorized number of shares of the Preferred
Stock or any series thereof or (z) authorize, create or issue shares of any
class or series of stock having any preference or priority superior to the
Preferred Stock with respect to dividends or upon liquidation. In addition, if
a proposed amendment would alter or change the rights, preferences, privileges
or powers of, or the restrictions provided for the benefit of, a series of
Preferred Stock in such a manner as to affect that particular series adversely
and disproportionately as compared to the other series of Preferred Stock, then
the proposed amendment must be approved (by vote or consent
-13-
<PAGE>
as provided by law) by the holders of a majority of the total number of shares
of that particular series of Preferred Stock;
(ii) redeem or repurchase any issued and outstanding shares of
the Company's capital stock (except for repurchases of shares of capital stock
from employees of the Company at the same price per share as the Company
originally sold such stock to such employees);
(iii) sell, convey, or otherwise dispose of all or substantially
all of its assets or merge into or consolidate with any other corporation (other
than a wholly-owned subsidiary corporation) or effect any transaction or series
of related transactions in which more than fifty percent (50%) of the voting
power of the Company is disposed of; or
(iv) amend this Section 7(b).
8. Notices. Any notice required by the provisions of this Article III to
-------
be given to the holders of Preferred Stock shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each holder of record
at such holder's address appearing on the books of the Company.
ARTICLE IV
No action may be taken by the shareholders of the Company except at an
annual or special meeting of the Company unless such action is taken pursuant to
consents in writing, setting forth the action so taken, and signed by the
holders of a majority of the outstanding shares of Preferred Stock and Common
Stock, voting together as a single class.
ARTICLE V
1. Limitation of Directors' Liability.
----------------------------------
The liability of the directors of the Company for monetary damages shall be
eliminated to the fullest extent permissible under the Utah Revised Business
Corporation Act or any other applicable law as now in effect or as hereafter
adopted or amended.
2. Indemnification of Corporate Agents.
-----------------------------------
The Company is authorized to provide indemnification to directors,
officers, employees, fiduciaries and agents (as defined in Section 901 of the
Utah Revised Business Corporation Act) through Bylaw provisions, agreements with
agents, vote of shareholders or disinterested directors or otherwise.
-14-
<PAGE>
3. Repeal or Modification.
----------------------
Any repeal or modification of the foregoing provisions of this Article V
shall not adversely affect any right of indemnification or limitation of
liability of an agent of the Company relating to acts or omissions occurring
prior to such repeal or modification.
ARTICLE VI
The holders of capital stock shall not have pre-emptive rights to acquire
additional shares of Common Stock or treasury stock, except as separately
provided by contractual arrangement.
ARTICLE VII
These Articles of Incorporation shall be interpreted as though the Company
were incorporated under the Utah Revised Business Corporation Act, as amended
from time to time.
------------------------------
-15-
<PAGE>
EXHIBIT 4.2
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
----------------------------------------------
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is
entered into as of May 2, 1997 by and among USWeb Corporation, a Utah
corporation (the "Company"), each of Joseph P. Firmage, Tobin J. Corey, James J.
Heffernan, Sheldon Laube and Kenneth Campbell (each a "Founder" and
collectively, the "Founders") and the persons listed on Exhibit A hereto (the
---------
"Investors").
RECITALS
A. The Company sold and issued to certain of the Investors (the "Series A
Holders") 18,500,000 shares of the Series A Preferred Stock of the Company
pursuant to that certain Stock Purchase Agreement between the Company and the
Series A Holders dated as of February 12, 1996 (the "Stock Purchase Agreement"),
and the Company sold and issued to one of the Investors (the "Series B Holder")
9,310,001 shares of the Series B Preferred Stock of the Company pursuant to the
Stock Purchase Agreement. Pursuant to that certain Investor Rights Agreement
dated as of February 20, 1996 (the "Prior Agreement") the Company granted to
such Series A Holders and Series B Holders certain rights.
B. Pursuant to that certain Series C Preferred Stock Purchase Agreement
of even date herewith (the "Series C Agreement"), the Company has agreed to sell
to certain of the Investors (the "Series C Holders") up to a total of 8,695,652
shares of the Series C Preferred Stock of the Company and warrants (the
"Warrants") to purchase up to a total of 1,440,000 shares of Series C Preferred
Stock of the Company and, as an inducement for such Series C Holders to purchase
such shares and Warrants, the Company, the Series A Holders and the Series B
Holder have agreed to enter into this Agreement to supersede, amend and restate
the rights granted to the Series A Holders and Series B Holder in the Prior
Agreement (all rights of first refusal under Section 2 of such Prior Agreement
in respect of the Series C Preferred Stock hereby being expressly waived). The
shares of Common Stock, Series A Preferred Stock and Series B Preferred Stock
sold pursuant to the Stock Purchase Agreement and the shares of Series C
Preferred Stock sold pursuant the Series C Agreement and issuable upon exercise
of the Warrants are collectively referred to herein as the "Preferred Shares."
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 - Registration Rights; Restrictions on Transferability....... 2
1.1 Certain Definitions........................................ 2
1.2 Restrictions............................................... 3
1.3 Restrictive Legend......................................... 3
1.4 Notice of Proposed Transfers............................... 4
1.5 Requested Registration..................................... 5
1.6 Company Registration....................................... 6
1.7 Registration on Form S-3................................... 7
1.8 Limitations on Subsequent "Piggyback" Registration Rights.. 8
1.9 Expenses of Registration................................... 8
1.10 Registration Procedures.................................... 9
1.11 Indemnification............................................ 9
1.12 Information by Holder...................................... 10
1.13 Rule 144 Reporting......................................... 11
1.14 Transfer of Registration Rights............................ 11
1.15 Market Standoff Agreement.................................. 11
1.16 Termination of Rights...................................... 12
SECTION 2 - Right of First Offer....................................... 12
2.1 Investor's Right of First Offer............................ 12
2.2 Transfer of Right of First Offer........................... 14
2.3 Termination of Right of First Offer........................ 14
SECTION 3 - Affirmative Covenants of the Company....................... 14
3.1 Financial Information...................................... 14
3.2 Inspection................................................. 15
3.3 Proprietary Information Agreement.......................... 15
3.4 Termination of Covenants................................... 15
SECTION 4 - Voting Agreement........................................... 15
4.1 Election of Directors...................................... 15
4.2 SOFTBANK Cooperation....................................... 15
4.3 Termination of Voting Agreement............................ 15
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SECTION 5 - Miscellaneous.............................................. 16
5.1 Assignment................................................. 16
5.2 Third Parties.............................................. 16
5.3 Governing Law.............................................. 16
5.4 Counterparts............................................... 16
5.5 Notices.................................................... 16
5.6 Severability............................................... 16
5.7 Amendment and Waiver....................................... 16
5.8 Rights of Holders.......................................... 17
5.9 Delays or Omissions........................................ 17
</TABLE>
-ii-
<PAGE>
SECTION 1
Registration Rights;
-------------------
Restrictions on Transferability
-------------------------------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Conversion Shares" means the Common Stock issued or issuable upon
-----------------
conversion of the Preferred Shares.
"Holder" shall mean any person entering into this Agreement with the
------
Company or holding Registrable Securities to whom the rights under this
Agreement have been transferred in accordance with Section 1.14 hereof.
"Initial Public Offering" shall mean the Company's first firmly
-----------------------
underwritten public offering on Registration Statement Form S-1 or Form SB-2 (or
successor form(s)).
"Initiating Holders" shall mean the Investors or transferees of the
------------------
Investors under Section 1.14 hereof who in the aggregate are Holders of not less
than fifty percent (50%) of the total voting power of the Registrable
Securities.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 1.5, 1.6 and 1.7 hereof, including, without
limitation, all registration, qualification and filing fees, printing expenses,
escrow fees, fees and disbursements of counsel for the Company and one special
counsel for the Holders, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company which shall be paid in any
event by the Company).
"Registrable Securities" means (a) the Conversion Shares, (b) all New
----------------------
Securities purchased by Investors pursuant to the right of first offer set forth
in Section 2 below ("the Investor New Securities"), (c) all shares owned or
controlled by a Founder and (d) any Common Stock of the Company issued or
issuable in respect of the Preferred Shares or Conversion Shares or other
securities issued or issuable with respect to the Preferred Shares or Conversion
Shares upon any stock split, stock dividend, recapitalization, or similar event,
or any Common Stock otherwise issued or issuable with respect to the Preferred
Shares or Conversion Shares; provided, however, that shares of Common Stock or
-----------------
other securities shall only be treated as Registrable Securities if and so long
as
-2-
<PAGE>
they have not been (x) sold to or through a broker or dealer or underwriter in a
public distribution or a public securities transaction, or (y) sold in a
transaction exempt from the registration and prospectus delivery requirements of
the Securities Act so that all transfer restrictions and restrictive legends
with respect thereto are removed upon the consummation of such sale.
"Restricted Securities" shall mean the securities of the Company
---------------------
required to bear the legend set forth in Section 1.3 hereof.
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar or successor federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
the Holders and all fees and disbursements of counsel for the Holders other than
one special counsel (as limited by Section 1.9).
1.2 Restrictions. The Preferred Shares, the Conversion Shares and any
------------
Investor New Securities shall not be sold, assigned, transferred or pledged
except upon the conditions specified in this Agreement, which conditions are
intended to ensure compliance with the provisions of the Securities Act. The
Investors will cause any proposed purchaser, assignee, transferee or pledgee of
the Preferred Shares, the Conversion Shares and any Investor New Securities to
agree to take and hold such securities subject to the provisions and upon the
conditions specified in this Agreement.
1.3 Restrictive Legend. Each certificate representing (a) the Preferred
------------------
Shares, (b) the Conversion Shares, (c) any Investor New Securities and (d) any
other securities issued in respect of the securities referenced in clauses (a),
(b), (c) and (d) upon any stock split, stock dividend, recapitalization,
merger, consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 1.4 below) be stamped or otherwise imprinted with a legend
in substantially the following form (in addition to any legend required under
applicable state securities laws):
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR PLEDGED
IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE COMPANY RECEIVES AN
OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE
OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF SAID ACT."
"THE SHARES REPRESENTED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
ACCORDANCE WITH THE TERMS OF AGREEMENTS AMONG THE COMPANY, CERTAIN
SHAREHOLDERS OF THE COMPANY AND THE ORIGINAL SHAREHOLDER, COPIES OF
WHICH ARE ON FILE WITH THE SECRETARY OF THE COMPANY."
-3-
<PAGE>
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A VOTING
AGREEMENT BETWEEN THE COMPANY AND THE ORIGINAL SHAREHOLDER, A COPY OF
WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND BY ACCEPTING
ANY INTEREST IN SUCH SHARES THE PERSON ACCEPTING SUCH INTEREST SHALL
BE DEEMED TO AGREE TO AND SHALL BECOME BOUND BY ALL THE PROVISIONS OF
SAID VOTING AGREEMENT."
Each Holder consents to the Company making a notation on its records
and giving instructions to any transfer agent of the Restricted Securities in
order to implement the restrictions on transfer established in this Section 1.
1.4 Notice of Proposed Transfers. The holder of each certificate
----------------------------
representing Restricted Securities, by acceptance thereof, agrees to comply in
all respects with the provisions of this Section 1. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities, unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied at such holder's expense by either (a) an unqualified written
opinion of legal counsel who shall, and whose legal opinion shall be, reasonably
satisfactory to the Company, addressed to the Company, to the effect that the
proposed transfer of the Restricted Securities may be effected without
registration under the Securities Act, or (b) a "no action" letter from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, or (c) any other evidence reasonably
satisfactory to counsel to the Company, whereupon the holder of such Restricted
Securities shall be entitled to transfer such Restricted Securities in
accordance with the terms of the notice delivered by the holder to the Company.
The Company will not require such a legal opinion or "no action" letter (x) in
any transaction in compliance with Rule 144, (y) in any transaction in which an
Investor which is a corporation distributes Restricted Securities after six (6)
months after the purchase thereof solely to its majority owned subsidiaries or
affiliates for no consideration, or (z) in any transaction in which an Investor
which is a partnership distributes Restricted Securities after six (6) months
after the purchase thereof solely to partners thereof for no consideration;
provided that each transferee agrees in writing to be subject to the terms of
- --------
this Section 1. Each certificate evidencing the Restricted Securities
transferred as above provided shall bear, except if such transfer is made
pursuant to Rule 144, the appropriate restrictive legends set forth in this
Section 1, except that such certificate shall not bear such restrictive legend
if, in the opinion of counsel for such holder and the Company, such legend is
not required in order to establish compliance with any provisions of the
Securities Act or this Agreement.
-4-
<PAGE>
1.5 Requested Registration.
----------------------
(a) Request for Registration. In case the Company shall receive from
------------------------
Initiating Holders a written request that the Company effect any registration,
qualification or compliance with respect to the Registrable Securities, the
Company will:
(i) promptly give written notice of the proposed registration,
qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to effect
such registration, qualification or compliance (including, without limitation,
the execution of an undertaking to file post-effective amendments, appropriate
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder or
Holders joining in such request as are specified in a written request received
by the Company within twenty (20) days after receipt of the written notice from
the Company;
provided, however, that the Company shall not be obligated to take any action to
- ------------------
effect any such registration, qualification or compliance pursuant to this
Section 1.5:
(A) In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
(B) Prior to January 1, 2001;
(C) After the Company has effected two (2) such
registrations pursuant to this subparagraph 1.5(a), each such registration has
been declared or ordered effective and the securities offered pursuant to each
such registration have been sold; or
(D) If the anticipated gross proceeds to be received by
such Holders are less than $10,000,000.
Subject to the foregoing clauses (A) through (D), the Company shall file a
registration statement covering the Registrable Securities so requested to be
registered as soon as practicable after receipt of the request or requests of
the Initiating Holders.
(b) Underwriting. In the event that a registration pursuant to
------------
Section 1.5 is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the notice given pursuant to
Section 1.5(a)(i). The right of any Holder to registration pursuant to Section
1.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements
-5-
<PAGE>
required by this Section 1.5 and the inclusion of such Holder's Registrable
Securities in the underwriting, to the extent requested and provided herein.
The Company shall (together with all Holders proposing to distribute their
securities through such underwriting) enter into an underwriting agreement in
customary form with the managing underwriter selected for such underwriting by a
majority in interest of the Initiating Holders (which managing underwriter shall
be reasonably acceptable to the Company). Notwithstanding any other provision
of this Section 1.5, if the managing underwriter advises the Initiating Holders
in writing that marketing factors require a limitation of the number of shares
to be underwritten, then the Company shall so advise all Holders of Registrable
Securities and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all
Holders thereof in proportion, as nearly as practicable, to the respective
amounts of Registrable Securities held by such Holders at the time of filing the
registration statement. No Registrable Securities excluded from the
underwriting by reason of the underwriter's marketing limitation shall be
included in such registration. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the underwriters may round
the number of shares allocated to any Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holders. The
Registrable Securities or other securities so withdrawn shall also be withdrawn
from registration, and such Registrable Securities shall not be transferred in a
public distribution prior to ninety (90) days (one hundred eighty (180) days in
the case of the Company's Initial Public Offering) after the date of the final
prospectus used in such public offering.
1.6 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time, the
----------------------
Company shall determine to register any of its securities, either for its own
account or the account of a security holder other than (i) a registration
relating solely to employee benefit plans, or (ii) a registration relating
solely to a Commission Rule 145 transaction, the Company will:
(i) promptly give to each Holder written notice thereof; and
(ii) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests made within twenty (20) days after receipt of such written notice
from the Company by any Holder, but only to the extent that such inclusion will
not diminish the number of securities included by the Company or by holders of
the Company's securities who have demanded such registration.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.6(a)(i). In such event, the right of any Holder
-6-
<PAGE>
to registration pursuant to Section 1.6 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company (or by the
holders who have demanded such registration, as the case may be).
Notwithstanding any other provision of this Section 1.6, if the managing
underwriter determines in its sole discretion that marketing factors require a
limitation of the number of shares to be underwritten, the managing underwriter
may limit the number of Registrable Securities to be included in the
registration and underwriting, on a pro rata basis based on the total number of
securities (including, without limitation, Registrable Securities owned by each
participating Holder) entitled to be included in such registration; but in no
event shall (i) the amount of securities of the participating Holders included
in the offering be reduced below 30% of the total amount of securities included
in such offering, unless such offering is the initial public offering of the
Company's securities, in which case the participating Holders may be excluded if
the managing underwriter makes the determination described above and no other
shareholder's securities are included or (ii) notwithstanding (i) above, any
shares being sold by a Holder exercising a registration right pursuant to
Section 1.5 hereof be excluded from such offering except in accordance with the
terms of Section 1.5(b) hereof. To facilitate the allocation of shares in
accordance with the above provisions, the Company or the under writers may
round the number of shares allocated to any Holder or other holder to the
nearest 100 shares. If any Holder or other holder disapproves of the terms of
any such underwriting, he or she may elect to withdraw therefrom by written
notice to the Company and the managing underwriter. Any securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration, and
shall not be transferred in a public distribution prior to ninety (90) days (one
hundred eighty (180) days in the case of the Company's Initial Public Offering)
after the date of the final prospectus included in the registration statement
relating thereto.
(c) Right to Terminate Registration. The Company shall have the
-------------------------------
right to terminate or withdraw any registration initiated by it under this
Section 1.6 prior to the effectiveness of such registration, whether or not any
Holder has elected to include securities in such registration.
1.7 Registration on Form S-3.
------------------------
(a) If any Holder or Holders of Registrable Securities requests that
the Company file a registration statement on Form S-3 (or any successor form to
Form S-3) for a public offering of shares of the Registrable Securities, the
reasonably anticipated aggregate price to the public of which, net of
underwriting discounts and commissions, would exceed $1,000,000, and the Company
is a registrant entitled to use Form S-3 to register the Registrable Securities
for such an offering, the Company shall use its best efforts to cause such
Registrable Securities to be registered for the offering on such form. The
Company will (i) promptly give written notice of the proposed registration to
all other Holders, and (ii) as soon as practicable, use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act and any other
-7-
<PAGE>
governmental requirements or regulations) as may be so requested and as would
permit or facilitate the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request, together with all or
such portion of the Registrable Securities of any Holder or Holders joining in
such request as are specified in a written request received by the Company
within twenty (20) days after receipt of written notice from the Company. The
substantive provisions of Section 1.5(b) shall be applicable to each
registration initiated under this Section 1.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 1.7: (i) in any particular
jurisdiction in which the Company would be required to execute a general consent
to service of process in effecting such registration, qualification or
compliance unless the Company is already subject to service in such jurisdiction
and except as may be required by the Securities Act; or (ii) if the Company
shall furnish to such Holders a certificate signed by the President of the
Company stating that, in the good faith judgment of the Board of Directors, it
would be seriously detrimental to the Company or its shareholders for
registration statements to be filed in the near future, then the Company's
obligation to use its best efforts to file a registration statement shall be
deferred for a period not to exceed one hundred twenty (120) days from the
receipt of the request to file such registration by such Holder or Holders.
1.8 Limitations on Subsequent "Piggyback" Registration Rights. From and
---------------------------------------------------------
after the date hereof, the Company shall not, without the consent of the holders
of at least 50% of the voting power of the Conversion Shares, enter into any
agreement granting any holder or prospective holder of any securities of the
Company registration rights with respect to such securities unless (a) such new
registration rights, including market standoff obligations, are on a pari passu
basis with those rights of the Holders hereunder or (b) such new registration
rights, including market standoff obligations, are subordinate to the
registration rights granted Holders in Sections 1.5, 1.6 and 1.7 hereof.
1.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with the first registration pursuant to Section 1.5 and any
registration pursuant to Sections 1.6 and 1.7 shall be borne by the Company. If
a registration proceeding is begun upon the request of Initiating Holders
pursuant to Section 1.5, but such request is subsequently withdrawn, then the
Holders of Registrable Securities to have been registered may either: (i) bear
all Registration Expenses of such proceeding, pro rata on the basis of the
number of shares to have been registered, in which case the Company shall be
deemed not to have effected a registration pursuant to subparagraph 1.5(a)
hereof; or (ii) require the Company to bear all Registration Expenses of such
proceeding, in which case the Company shall be deemed to have effected a
registration pursuant to subparagraph 1.5(a) hereof. Notwithstanding the
foregoing, however, if at the time of the withdrawal, the Holders have learned
of a material adverse change in the condition, business or prospects of the
Company from that known to the Holders at the time of their request, of which
the Company had knowledge at the time of the request, then the Holders shall not
be required to pay any of said Registration Expenses. In such case, the Company
shall be deemed not to have effected a registration pursuant to subparagraph
1.5(a) of this Agreement. Unless otherwise stated, all Selling Expenses
relating to securities registered on behalf of the Holders shall be borne by the
Holders of the registered securities included in such registration pro rata on
the basis of the number of shares so registered.
-8-
<PAGE>
1.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 1,
the Company will keep each Holder advised in writing as to the initiation of
each registration, qualification and compliance and as to the completion
thereof. At its expense the Company will:
(a) Prepare and file with the Commission a registration statement
with respect to such securities and use its best efforts to cause such
registration statement to become and remain effective for at least ninety (90)
days or until the distribution described in the registration statement has been
completed; and
(b) Furnish to the Holders participating in such registration and to
the underwriters of the securities being registered such reasonable number of
copies of the registration statement, preliminary prospectus, final prospectus
and such other documents as such underwriters may reasonably request in order to
facilitate the public offering of such securities.
1.11 Indemnification.
---------------
(a) The Company will indemnify each Holder, each of its officers and
directors and partners, and each person controlling such Holder within the
meaning of Section 15 of the Securities Act, with respect to which registration,
qualification or compliance has been effected pursuant to this Section 1, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they were made, not misleading, or any violation by the Company of any
rule or regulation promulgated under the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act") or any state securities laws
applicable to the Company in connection with any such registration,
qualification or compliance, and the Company will reimburse each such Holder,
each of its officers and directors, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for any
legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, as such expenses are incurred, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability or expense arises out of or is based on any untrue statement or
omission or alleged untrue statement or omission, made in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder, controlling person or underwriter and stated to be
specifically for use therein.
(b) Each Holder will, if Registrable Securities held by such Holder
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify
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<PAGE>
the Company, each of its directors and officers, each underwriter, if any, of
the Company's securities covered by such a registration statement, each person
who controls the Company or such underwriter within the meaning of Section 15 of
the Securities Act, and each other such Holder, each of its officers and
directors and each person controlling such Holder within the meaning of Section
15 of the Securities Act, against all claims, losses, damages and liabilities
(or actions in respect thereof) arising out of or based on any untrue statement
(or alleged untrue statement) of a material fact contained in any such
registration statement, prospectus, offering circular or other document, or any
omission (or alleged omission) to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, and will reimburse the
Company, such Holders, such directors, officers, persons, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, as such expenses are incurred, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided further that in no event shall any indemnity under this Section 1.11(b)
exceed the gross proceeds from the offering received by such Holder.
(c) Each party entitled to indemnification under this Section 1.11
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that an Indemnified Party (together with all
other Indemnified Parties which may be represented without conflict by one
counsel) shall have the right to retain one separate counsel, with the fees and
expenses to be paid by the Indemnifying Party, if representation of such
Indemnified Party by the counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 1 unless the failure to give such notice is materially prejudicial to an
Indemnifying Party's ability to defend such action. No Indemnifying Party, in
the defense of any such claim or litigation, shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving by
the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect of such claim or litigation.
1.12 Information by Holder. The Holder or Holders of Registrable
---------------------
Securities included in any registration shall furnish to the Company such
information regarding such Holder or Holders, the Registrable Securities held by
them and the distribution proposed by such Holder or Holders as the
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<PAGE>
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this Section
1.
1.13 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may at any time permit the
sale of the Restricted Securities to the public without registration, after such
time as a public market exists for the Common Stock of the Company, the Company
agrees to use its best efforts to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Exchange Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) So long as an Investor owns any Restricted Securities, to furnish
to the Investor forthwith upon request a written statement by the Company as to
its compliance with the reporting requirements of said Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public) and of the Exchange Act (at any time after it has become subject to such
reporting requirements), a copy of the most recent annual or quarterly report of
the Company, and such other reports and documents of the Company and other
information in the possession of or reasonably obtainable by the Company as an
Investor may reasonably request in availing itself of any rule or regulation of
the Commission allowing an Investor to sell any such securities without
registration.
1.14 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Investors under Sections 1.5, 1.6 and 1.7 may be
assigned to a transferee or assignee reasonably acceptable to the Company in
connection with any transfer or assignment of Registrable Securities by an
Investor (together with any affiliate); provided that (a) such transfer may
--------
otherwise be effected in accordance with applicable securities laws; (b) written
notice of such assignment is given to the Company; (c) the Registrable
Securities to be assigned or transferred represent (1) at least one percent (1%)
of the outstanding capital stock of the Company on the date of transfer or (2)
all of the Registrable Securities owned or controlled by the transferring
Holder; and (d) the transferee executes a written agreement to be bound by the
terms of this Agreement.
1.15 Market Standoff Agreement. Each Holder agrees in connection with any
-------------------------
registration of the Company's securities (other than a registration of
securities in a Rule 145 transaction or with respect to an employee benefit
plan) that, upon request of the Company or the underwriters managing any
underwritten offering of the Company's securities, not to sell, make any short
sale of, loan, grant any option for the purchase of, pledge, hypothecate or
otherwise directly or indirectly dispose of any Registrable Securities (other
than those included in the registration) or other capital stock of the Company
or securities exchangeable or convertible into capital stock of the Company
without the prior written consent of the Company or such underwriters, as the
case may be, for such
-11-
<PAGE>
period of time (not to exceed one hundred eighty (180) days (ninety (90) days in
any public offering subsequent to the Initial Public Offering) from the date of
the final prospectus used in such registration) as may be requested by the
Company or such managing underwriters; provided, that the officers and
--------
directors of the Company who own stock of the Company also agree to such
restrictions. The certificates for the Preferred Shares shall contain, for so
long as such market standoff provision remains in place, a legend in
substantially the following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER INCLUDING A MARKET STANDOFF AGREEMENT BETWEEN THE
COMPANY AND THE ORIGINAL SHAREHOLDER THAT PROHIBITS SALE OR TRANSFER OF
SUCH SHARES FOR A PERIOD OF UP TO 180 DAYS FOLLOWING THE DATE OF THE FINAL
PROSPECTUS FOR THE PUBLIC OFFERING OF THE ISSUER'S COMMON STOCK. THIS
AGREEMENT IS BINDING UPON TRANSFEREES. A COPY OF THE AGREEMENT IS ON FILE
WITH THE SECRETARY OF THE ISSUER.
1.16 Termination of Rights. The rights of any particular Holder to cause
---------------------
the Company to register Registrable Securities under Sections 1.5, 1.6 and 1.7
shall terminate with respect to such Holder on the earlier of (i) the date when
all of such Holder's Registrable Securities may be sold pursuant to Rule 144(k)
or similar or successor Rule and (ii) the date three (3) years after the
effective date of the Company's Initial Public Offering.
SECTION 2
Right of First Offer
--------------------
2.1 Investor's Right of First Offer.
-------------------------------
(a) Right of First Offer. Subject to the terms and conditions
--------------------
contained in this Section 2.1, the Company hereby grants to each Investor the
right of first offer to purchase its Pro Rata Portion (as defined below) of any
New Securities (as defined in subsection 2.1(b)) which the Company may, from
time to time, propose to sell and issue. An Investor's "Pro Rata Portion" for
purposes of this Section 2.1 is the ratio that (x) the sum of the number of
shares of the Company's Common Stock then held by such Investor, and the number
of shares of the Company's Common Stock issuable upon conversion of the
Preferred Stock then held by such Investor and the number of shares of the
Company's Common Stock or Preferred Stock issuable upon conversion or exercise
of any other securities then held by such Investor bears to (y) the sum of the
total number of shares of the Company's Common Stock then outstanding, the
number of shares of the Company's Common Stock issuable upon conversion of the
then outstanding Preferred Stock and the number of shares of the Company's
Common Stock or Preferred Stock issuable upon conversion or exercise of then
outstanding securities.
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<PAGE>
(b) Definition of New Securities. Except as set forth below, "New
----------------------------
Securities" shall mean any shares of capital stock of the Company, including
Common Stock and Preferred Stock, whether authorized or not, and rights, options
or warrants to purchase said shares of Common Stock or Preferred Stock, and
securities of any type whatsoever that are, or may become, convertible into said
shares of Common Stock or Preferred Stock. Notwithstanding the foregoing, "New
Securities" does not include (i) the Preferred Shares or the Conversion Shares,
(ii) securities offered to the public generally pursuant to a registration
statement under the Securities Act, (iii) securities issued pursuant to the
acquisition of another business entity by the Company by merger, purchase of
substantially all of the assets or shares, or other reorganization whereby the
Company or its shareholders own not less than a majority of the voting power of
the surviving or successor corporation, (iv) shares of the Company's Common
Stock or related options convertible into or exercisable for such Common Stock
issued to employees, officers and directors of, and consultants, customers, and
vendors to, the Company, pursuant to any arrangement approved by the Board of
Directors of the Company, (v) shares of the Company's Common Stock or related
options convertible into or exercisable for such Common Stock issued to any
bank, equipment or real property lessor or other similar institution if and to
the extent that the transaction in which such sale or grant is to be made is
approved by the Company's Board of Directors, (vi) stock issued pursuant to any
rights or agreements, including, without limitation, convertible securities,
options and warrants, provided that the Company shall have complied with the
right of first offer established by this Section 2.1 with respect to the bona
fide initial sale or grant by the Company of such rights or agreements, or (vii)
stock issued in connection with any stock split, stock dividend or
recapitalization by the Company.
(c) Notice of Right. In the event the Company proposes to undertake
---------------
an issuance of New Securities, it shall give each Investor written notice of its
intention, describing the type of New Securities and the price and terms upon
which the Company proposes to issue the same. The Investors shall have fifteen
(15) days from the date of receipt of any such notice to agree to purchase
shares of such New Securities (up to the amount referred to in subsection
2.1(a)), for the price and upon the terms specified in the notice, by giving
written notice to the Company and stating therein the quantity of New Securities
to be purchased. If the Investor elects to purchase such Investor's full pro
rata share (an "Electing Investor"), then such Electing Investor shall have a
right of over-allotment such that if any other Investor fails to purchase such
Investor's full pro rata share of the New Securities, the Electing Investor may
purchase, on a pro rata basis with other Electing Investors, that portion of the
New Securities (the "Remaining Securities") which such other Investors elected
not to purchase. Each such Electing Investor shall specify in its notification
to the Company whether it also elects to purchase its pro rata portion of the
Remaining Securities, if any.
(d) Exercise of Right. If any Investor exercises its right of first
-----------------
offer hereunder, the closing of the purchase of the New Securities with respect
to which such right has been exercised shall take place within forty-five (45)
calendar days after the Investor gives notice of such exercise, which period of
time shall be extended in order to comply with applicable laws and regulations.
Upon exercise of such right of first offer, the Company and the Investor shall
be legally obligated to consummate the purchase contemplated thereby and shall
use their best efforts to secure any approvals required in connection therewith.
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<PAGE>
(e) Lapse and Reinstatement of Right. In the event an Investor fails
--------------------------------
to exercise the right of first offer provided in this Section 2.1 within said
fifteen (15) day period, the Company shall have ninety (90) days thereafter to
sell or enter into an agreement (pursuant to which the sale of New Securities
covered thereby shall be closed, if at all, within sixty (60) days from the date
of said agreement) to sell the New Securities not elected to be purchased by
such Investor at the price and upon the terms no more favorable to the
purchasers of such securities than specified in the Company's notice. In the
event the Company has not sold the New Securities or entered into an agreement
to sell the New Securities within said ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60) days
from the date of said agreement), the Company shall not thereafter issue or sell
any New Securities without first offering such securities to the Investors in
the manner provided above.
2.2 Transfer of Right of First Offer. The right of first offer granted
--------------------------------
under Section 2.1 of this Agreement may be assigned to a transferee or assignee
reasonably acceptable to the Company in connection with any transfer of Company
capital stock held by an Investor; provided that (a) such transfer may
--------
otherwise be effected in accordance with applicable securities laws; (b) written
notice of such assignment is given to the Company; (c) the capital stock to be
assigned or transferred represents (1) at least one percent (1%) of the
outstanding capital stock of the Company on the date of transfer or (2) all of
the Registrable Securities owned or controlled by the transferring Holder; and
(d) the transferee executes a written agreement to be bound by the terms of this
Agreement.
2.3 Termination of Right of First Offer. The right of first offer granted
-----------------------------------
under Section 2.1 of this Agreement shall terminate on and be of no further
force or effect upon the effective date of the Company's Initial Public Offering
or upon a Change of Control of the Company (as defined in Article III of the
Company's Amended and Restated Articles of Incorporation).
SECTION 3
Affirmative Covenants of the Company
------------------------------------
The Company hereby covenants and agrees as follows:
3.1 Financial Information. So long as an Investor is a holder of 100,000
---------------------
Preferred Shares or shares of Common Stock issued upon the conversion thereof
(as adjusted for any stock splits, consolidations and the like), the Company
will furnish to such Investor the following reports:
(a) As soon as practicable after the end of each fiscal year, and in
any event within ninety (90) days thereafter, consolidated balance sheets of the
Company and its subsidiaries, if any, as of the end of such fiscal year, and
consolidated statements of income and cash flows of the Company and its
subsidiaries, if any, for such year, prepared in accordance with generally
accepted accounting principles applied on a consistent basis and setting forth
in each case in comparative form the figures for the previous fiscal year, all
in reasonable detail and audited by independent public accountants of national
standing selected by the Company.
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<PAGE>
(b) As soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, unaudited balance sheets of the Company and its subsidiaries, if
any, as of the end of each such quarter, and consolidated statements of income
and cash flows of the Company and its subsidiaries, if any, for each such
quarter, all prepared in accordance with generally accepted accounting
principles.
3.2 Inspection. The Company shall permit each Investor, at such
----------
Investor's expense, to visit and inspect the Company's properties, to examine
its books of account and records and to discuss the Company's affairs, finances
and accounts with its officers, all at such reasonable times as may be requested
by the Investor; provided, however, that the Company shall not be obligated
pursuant to this Section 3.2 to provide access to any information which it
reasonably considers to be a trade secret or similar confidential information.
3.3 Proprietary Information Agreement. The Company shall require each
---------------------------------
person employed by the Company who shall, in the ordinary course of their
employment, have access to the Company's confidential and proprietary
information, to execute a proprietary information agreement in substantially the
form previously provided to the Investor.
3.4 Termination of Covenants. The covenants set forth in Sections 3.1,
------------------------
3.2 and 3.3 shall terminate on, and be of no further force or effect after, the
effective date of the Company's Initial Public Offering.
SECTION 4
Voting Agreement
----------------
4.1 Election of Directors. Prior to each election of directors, SOFTBANK
---------------------
shall nominate two directors (the "SOFTBANK" Nominees"), Crosspoint Venture
Partners (1996) shall nominate one director (the "Crosspoint Nominee") and 21st
Century Communications Partners, L.P. shall nominate one director (the "Series C
Nominee"). The holders of a majority of the Common Stock shall nominate one
director (the "Common Stock Nominee"). The Investors hereby agree to vote all
voting securities owned or controlled by them to elect the SOFTBANK Nominees,
the Crosspoint Nominee, the Series C Nominee and the Common Stock Nominee. The
sixth director shall initially be James J. Heffernan, and the seventh director's
position shall be vacant until filled as set forth in the Company's Articles of
Incorporation and Bylaws. Neither the Company, the Investors, nor any officer,
director, shareholder, partner, employee or agent of any such party, makes any
representation or warranty as to the fitness or competence of any nominee
hereunder to serve on the Board of Directors of the Company by virtue of such
Investor's execution of this Agreement or by the act of such Investor in voting
for such nominee pursuant to this Agreement.
4.2 SOFTBANK Cooperation. SOFTBANK acknowledges and agrees that it is the
--------------------
intention of the Founders to carry out an initial public offering of the Company
at the earliest commercially reasonable time in order to provide a liquidity
opportunity for Founders and Investors.
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<PAGE>
SOFTBANK agrees that it will not take any action that is not consistent with
furthering this intention.
4.3 Termination of Voting Agreement. The provisions of Sections 4.1 and
-------------------------------
4.2 of this Agreement shall terminate and be of no further force and effect upon
the effective date of the Company's Initial Public Offering or upon a Change of
Control (as defined in Article III of the Company's Amended and Restated
Articles of Incorporation).
SECTION 5
Miscellaneous
-------------
5.1 Assignment. Except as otherwise provided herein, the terms and
----------
conditions of this Agreement shall inure to the benefit of and be binding upon
the respective successors and assigns of the parties hereto.
5.2 Third Parties. Nothing in this Agreement, express or implied, is
-------------
intended to confer upon any party, other than the parties hereto, and their
respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
herein.
5.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California as applied to agreements entered into
and performed in the State of California solely by residents thereof.
5.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.5 Notices. Any notice required or permitted by this Agreement shall be
-------
in writing and shall be sent by facsimile transmission or by prepaid registered
or certified mail, return receipt requested, addressed to the other party and
such party's legal counsel at the address shown below or at such other address
of which such party gives notice hereunder. Such notice shall be deemed to have
been given three (3) days after deposit in the mail, postage prepaid, if sent by
mail and on the next business day if sent by facsimile transmission.
5.6 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, portions of such provisions, or such
provisions in their entirety, to the extent necessary, shall be severed from
this Agreement, and the balance of this Agreement shall be enforceable in
accordance with its terms.
5.7 Amendment and Waiver. Any provision of this Agreement may be amended
--------------------
or waived with the written consent of the Company and the Holders of at least a
majority of the
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<PAGE>
outstanding shares of the Registrable Securities. Any amendment or waiver
effected in accordance with this paragraph shall be binding upon each Holder of
Registrable Securities and the Company; provided, however, that no such
-------- -------
amendment shall be effective with respect to any Holder if such amendment
materially adversely affects any of the rights granted pursuant to the Agreement
to such Holder (the "Uniquely Affected Holder") in a manner different from the
manner in which such amendment affects all other Holders, unless such amendment
is consented to in writing by the Uniquely Affected Holder. If such Holder does
not so consent, then the amendment shall be effective as to all Holders other
than the Uniquely Affected Holder. In addition, the Company may waive
performance of any obligation owing to it, as to some or all of the Holders of
Registrable Securities, or agree to accept alternatives to such performance,
without obtaining the consent of any Holder of Registrable Securities. In the
event that an underwriting agreement is entered into between the Company and any
Holder, and such underwriting agreement contains terms differing from this
Agreement, as to any such Holder the terms of such underwriting agreement shall
govern.
5.8 Rights of Holders. Each Holder of Registrable Securities shall have
-----------------
the right to exercise or refrain from exercising any right or rights that such
Holder may have by reason of this Agreement, including, without limitation, the
right to consent to the waiver or modification of any obligation under this
Agreement, and such Holder shall not incur any liability to any other holder of
any securities of the Company as a result of exercising or refraining from
exercising any such right or rights.
5.9 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to any party to this Agreement, upon any breach or
default of the other party, shall impair any such right, power or remedy of such
non-breaching party nor shall it be construed to be a waiver of any such breach
or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any party of any breach or default under this
Agreement, or any waiver on the part of any party of any provisions or
conditions of this Agreement, must be made in writing and shall be effective
only to the extent specifically set forth in such writing.
5.10 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the rights set
forth herein. Without in any manner limiting the foregoing, the parties hereto
agree that this Agreement supersedes and replaces the Prior Agreement, and that
the Prior Agreement shall hereafter have no further force or effect.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Investor Rights
Agreement as of the date first above written.
USWEB CORPORATION "FOUNDERS"
Signature:___________________ ___________________________________
Joseph P. Firmage
Name:________________________
Title:_______________________ ___________________________________
Tobin J. Corey
___________________________________
James J. Heffernan
___________________________________
Sheldon Laube
___________________________________
Kenneth Campbell
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]
<PAGE>
"INVESTORS"
___________________________________
Name:______________________________
(Please print or type)
Signature:_________________________
Its:_______________________________
___________________________________
Name:______________________________
(Please print or type)
Signature:_________________________
Its:_______________________________
___________________________________
Name:______________________________
(Please print or type)
Signature:_________________________
Its:_______________________________
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]
<PAGE>
USWEB CORPORATION
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
MAY 2, 1997
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
Investor Legal Counsel
- -------- -------------
<S> <C>
21st Century Communications Partners, L.P. Olshan Grundman Frome & Rosenzweig LLP
767 5th Avenue, 45th Floor 550 Park Avenue
New York, NY 10153-4590 New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
21st Century Communications T-E Partners, L.P. Olshan Grundman Frome & Rosenzweig LLP
P.O. Box 1062, G.T. 550 Park Avenue
Grand Cayman, B.W.I New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
21st Century Communications Foreign Partners, L.P. Olshan Grundman Frome & Rosenzweig LLP
767 5th Avenue, 45th Floor 550 Park Avenue
New York, NY 10153-4590 New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
Wheatley Partners L.P. Olshan Grundman Frome & Rosenzweig LLP
P.O. Box 1062, G.T. 550 Park Avenue
Grand Cayman, B.W.I New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
Wheatley Foreign Partners L.P. Olshan Grundman Frome & Rosenzweig LLP
767 5th Avenue, 45th Floor 550 Park Avenue
New York, NY 10153-4590 New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
South Ferry No. 2 Olshan Grundman Frome & Rosenzweig LLP
767 5th Avenue, 45th Floor 550 Park Avenue
New York, NY 10022 New York, NY 10022
Attn: Matthew Smith Attn: Steven Wolosky
Attractor Investment Management, Inc.
535 Madison Avenue, 35th Floor
New York, NY 10022
Attn: Gigi Brisson
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Investor Legal Counsel
- -------- -------------
<S> <C>
Trend Micro Incorporated
Tokyo Head Office
Saisyo Building, 3F
8-1-14 Nishi-Gotanda, Shinagawa-ku
Tokyo, 141 Japan
Attn: Shinji Yamauchi
Crosspoint Venture Partners Brobeck, Phleger & Harrison LLP
18552 MacArthur Boulevard, Suite 400 4675 MacArthur Court
Irvine, CA 92715 Newport Beach, CA 92660
Attn: Robert Hoff Attn: Bruce Hallett
The Cutler Group Brobeck, Phleger & Harrison LLP
11 Smithcliffs Road 4675 MacArthur Court
Laguna Beach, CA 92651 Newport Beach, CA 92660
Attn: Frank Cutler Attn: Bruce Hallett
Philip Mahoney
c/o Cornish & Carey
5201 Great America Parkway, Suite 10
Santa Clara, CA 95054
James McNiel
18 Central Dr
Glen Head, NY 11546
Chris Ronzoni
99 Birch Lane
Manhassett, NY 11030
Softven No. 2 Invesment Enterprise Partnership Sullivan & Cromwell
c/o SOFTBANK Holdings Inc. 125 Broad Street
333 West San Carlos Street, Ste. 1225 New York, NY 10004
San Jose, CA 95011 Attn: Stpehen Grant
Attn: Gary Rieschel
WS Investment Company 96A
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Mark Bonham
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Investor Legal Counsel
- -------- -------------
<S> <C>
WS Investment Company 97A
c/o Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Attn: Mark Bonham
Mark Bonham
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
Christopher Boyd
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, CA 94304
</TABLE>
-3-
<PAGE>
EXHIBIT 4.3
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD,
DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT
(I) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (III)
RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
NO. USWEB CORPORATION , 199
---- --------- --
SERIES A PREFERRED STOCK PURCHASE WARRANT
This certifies that, for value received, (together with
--------------------
any registered assignee(s), the "Holder") is entitled, upon the terms and
subject to the conditions hereinafter set forth, at any time on or after the
date hereof and at or prior to 11:59 p.m., Pacific Time, on February 9, 2006
(the "Expiration Time"), but not thereafter, to acquire from USWeb Corporation,
a Utah corporation (the "Company"), in whole or from time to time in part, up to
fully paid and nonassessable shares of Series A Preferred Stock of the
- --------
Company ("Warrant Stock") at a purchase price per share (the "Exercise Price")
of . Such number of shares, type of security and Exercise Price are
------------
subject to adjustment as provided herein, and all references to "Warrant Stock"
and "Exercise Price" herein shall be deemed to include any such adjustment or
series of adjustments.
1. TERM
1.1 Commencement of Exercisability. The Warrant is exercisable
------------------------------
beginning on (the "Grant Date").
--------------------
1.2 Termination and Expiration. If not earlier exercised, the
--------------------------
Warrant shall expire on the tenth anniversary of the Grant Date.
1.3 Exceptions. Notwithstanding the foregoing, the Warrant shall
----------
terminate, if not earlier exercised, in the event of the initial public offering
of the Company's capital stock or in the event of an acquisition of the Company,
in each case as more fully set forth below:
(a) Initial Public Offering. In the event the Company
-----------------------
undertakes an initial public offering of its capital stock with aggregate gross
proceeds to the Company of not less than five million dollars ($5,000,000) and
with a price per share of not less than $5.00 (a "Qualified IPO"), the Company
shall give notice of such intention (and otherwise communicate with the Holder
during the pendency of such transaction) in the same manner as it communicates
with the holders of a majority of the issued and outstanding shares of Series A
Preferred Stock; if the Warrant is otherwise exercisable pursuant to the
provisions of the Warrant, the Holder may, in its discretion, exercise same and
request registration of the shares in the Qualified IPO pursuant to the
registration rights granted to the Holder in Section 7 below; if the Warrant is
not so exercised, then, in addition to such Company obligations under such
registration rights the Company shall give the Holder not less
<PAGE>
than twenty (20) business days notice of the expected date of closing of the
Qualified IPO (the "Closing"); the Holder shall, not less than three (3)
business days prior to the Closing, deliver an irrevocable notice under Section
3 below or deposit an amount of money equal to the aggregate exercise price of
this Warrant into the trust account of the Company's attorneys with irrevocable
instructions to pay such amount to the Company immediately prior to the Closing
of the Qualified IPO; in such event, the Holder shall be deemed to have
exercised the Warrant immediately prior to the Closing and simultaneously
converted the shares of Series A Preferred Stock into shares of Common Stock; at
or promptly following the Closing, the Company shall cause its transfer agent to
deliver to the Holder a certificate representing the shares of Common Stock so
purchased; the Warrant shall expire upon the Closing if not previously exercised
pursuant to this Section 1.3(a) or otherwise pursuant to the terms of the
Warrant; if the Closing does not occur, the Warrant shall be deemed to continue
pursuant to the other terms and restrictions of the Warrant, and the irrevocable
notice given under Section 3 below or the funds deposited with the Company's
attorneys shall be promptly returned to the Holder.
(b) Change in Control or Acquisition of the Company. In the
-----------------------------------------------
event the Company is proposed to be acquired in a bona fide transaction (the
"Acquisition") (i.e., not a mere recapitalization, reincorporation for the
purpose of changing corporate domicile, or similar transaction), regardless of
the form of the transaction (e.g., merger, consolidation, sale or lease of
assets or sale of stock), the Company shall give the Holder not less than
fifteen (15) business day's notice of the record date for determining the
shareholders of the Company entitled to vote on (or otherwise approve) the
Acquisition; the Company shall provide the Holder with all information with
respect to the Acquisition that is otherwise provided to shareholders of the
Company at such time and from time to time during the pendency of the
Acquisition, including (but not limited to) the proposed price to be paid in the
proposed Acquisition; if the Warrant is otherwise exercisable at such time, then
the Holder shall have the right to exercise same on or prior to the record date
of shareholders eligible to vote (or otherwise approve) with respect to the
proposed Acquisition; if the Warrant is not exercised on or prior to such record
date, the Warrant shall expire upon the occurrence of the closing of the
Acquisition.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to
time at or prior to the Expiration Time by the surrender of this Warrant and the
Notice of Exercise form attached hereto duly executed to the headquarter's
office of the Company at the address set forth on the signature page hereof (or
such other office or agency of the Company as it may designate by notice in
writing to the registered holder hereof at the address of such holder appearing
on the books of the Company), and upon payment of the Exercise Price for the
shares thereby purchased (by cash or by check or bank draft payable to the order
of the Company or by cancellation of indebtedness of the Company to the holder
hereof, if any, at the time of exercise in an amount equal to the purchase price
of the shares thereby purchased); whereupon the holder of this Warrant shall be
entitled to receive from the Company a stock certificate in proper form
representing the number of shares of Warrant Stock so purchased, and a new
Warrant in substantially identical form and dated as of such exercise for the
purchase of that number of shares of Warrant Stock equal to the difference, if
any, between the number of shares of Warrant Stock subject hereto and the number
of shares of Warrant Stock as to which this Warrant is so exercised.
3. CONVERSION OF WARRANT
The Holder shall have the right to convert this Warrant, in whole or in
part, at any time (including, but not limited to, the occurrence of either a
Qualified IPO or the Acquisition of the Company) and from time to time at or
prior to the Expiration Time by the surrender of this Warrant and the Notice of
Conversion form attached hereto duly executed to the headquarter's office of the
Company at the address set forth on the
-2-
<PAGE>
signature page hereof (or such other office or agency of the Company as it may
designate by notice in writing to the Holder at the address of such Holder
appearing on the books of the Company), into shares of Warrant Stock as provided
in this Section 3. Upon exercise of this conversion right, the Holder shall be
entitled to receive that number of shares of the Company's Preferred Stock
computed by using the following formula:
Y= X (A-B)/A
Y = the number of shares of Series A Preferred Stock to be issued to the
Holder.
A = the Fair Market Value (as defined below) of one share of the Company's
Series A Preferred Stock on the date of conversion of this Warrant.
B = the Exercise Price for one share of the Company's Series A Preferred
Stock under this Warrant.
X = the number of shares of Series A Preferred Stock purchasable under this
Warrant.
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon conversion of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
(a) if the conversion right is being exercised in connection with the
initial public offering of the Company's Common Stock (the "Common
Stock"), the initial public offering price per share (before deducting
commissions, discounts or expenses) at which the Common Stock is sold
to the public in such offering;
(b) if the conversion right is being exercised in connection with a
Acquisition, the price per share to be paid to the Company's Series A
Preferred Stock shareholders or Common Stock shareholders, as the case
may be, by the acquiring entity;
(c) in all other cases, the fair value as determined in good faith by the
Company's Board of Directors.
Upon conversion of this Warrant in accordance with this Section 3, the
Holder hereof shall be entitled to receive a certificate for the number of
shares of Warrant Stock determined in accordance with the foregoing, and a new
Warrant in substantially identical form and dated as of such conversion for the
purchase of that number of shares of Warrant Stock equal to the difference, if
any, between the number of shares of Warrant Stock subject hereto and the number
of shares of Warrant Stock as to which this Warrant is so converted.
4. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
Certificates for shares purchased hereunder or issuable upon conversion
hereof shall be delivered to the Holder within a reasonable time after the date
on which this Warrant shall have been exercised or converted in accordance with
the terms hereof. The Company hereby represents and warrants that all shares of
Warrant Stock which may be issued upon the exercise or conversion of this
Warrant will, upon such exercise
-3-
<PAGE>
or conversion, be duly and validly authorized and issued, fully paid and
nonassessable and free from all taxes, liens and charges in respect of the
issuance thereof (other than liens or charges created by or imposed upon the
holder of the Warrant Stock). The Company agrees that the shares so issued shall
be and shall for all purposes be deemed to have been issued to such holder as
the record owner of such shares as of the close of business on the date on which
this Warrant shall have been exercised or converted in accordance with the terms
hereof. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise or conversion of this Warrant. With respect to any
fraction of a share called for upon the exercise or conversion of this Warrant,
an amount equal to such fraction multiplied by the Fair Market Value of a share
of Warrant Stock on the date of exercise or conversion shall be paid in cash or
check to the Holder.
5. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise or
conversion of this Warrant shall be made without charge to the Holder for any
issue or transfer tax or other incidental expense in respect of the issuance of
such certificate, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder or in such name
or names as may be directed by the Holder provided, however, that in the event
certificates for shares of Warrant Stock are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise or conversion
shall be accompanied by the Assignment Form attached hereto duly executed by the
Holder.
6. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise or conversion
hereof.
7. REGISTRATION RIGHTS
The shares of Common Stock issuable upon conversion of the Warrant Stock
issuable upon exercise or conversion of this Warrant shall be entitled to the
registration rights (if any) granted by the Company to the holders of a majority
of the issued and outstanding shares of Series A Preferred Stock (if any)
pursuant to a written agreement among the Company and such holders.
-4-
<PAGE>
8. COMPANY'S RIGHT OF FIRST REFUSAL
Before any Warrants, or if exercised, any shares of Series A Preferred
Stock or Common Stock (the "Converted Shares") held by the Holder or any
transferee may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder shall deliver to the
---------------------------
Company a written notice (the "Notice") stating: (i) the Holder's bona fide
intention to sell or otherwise transfer such Warrants or Converted Shares, as
the case may be; (ii) the name of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Warrants or Converted Shares to be
transferred to each Proposed Transferee; and (iv) the bona fide cash price or
other consideration for which the Holder proposes to transfer the Warrants or
the Converted Shares (the "Offered Price"), and the Holder shall offer the
Warrants or the Converted Shares at the Offered Price to the Company or its
assignee(s).
(b) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Warrants or Converted Shares proposed to be transferred to any one or more
of the Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Warrants or Converted Shares purchased by the Company or its assignee(s) under
this Section shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(d) Payment. Payment of the Purchase Price shall be made in cash (by
-------
check) within 45 days of receipt of the Notice.
(e) Holder's Right to Transfer. If all of the Warrants or Converted
--------------------------
Shares proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the Company or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Warrants or Converted Shares
to that Proposed Transferee at the Offered Price or at a higher price, provided
that such sale or other transfer is consummated within 120 days after the date
of the Notice and provided further that any such sale or other transfer is
effected in accordance with any applicable securities laws and the Proposed
Transferee agrees in writing that the provisions of this Section shall continue
to apply to the Warrants or Converted Shares in the hands of such Proposed
Transferee. If the Warrants or Converted Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company or its assignees shall again be offered
the Right of First Refusal before any Warrants or Converted Shares held by the
Holder may be sold or otherwise transferred.
(f) Exception for Certain Transfers. The Warrant or Converted Shares
-------------------------------
may be transferred without the Company being offered the Right of First Refusal
in the following transactions; provided that any Transferee shall agree to the
terms of this Section 8 as to the Warrant or any Converted Shares:
(1) A Holder's transfer of the Warrant or Converted Shares in whole or
in part to the Company or to any shareholder of the Company.
-5-
<PAGE>
(2) A Holder's transfer of the Warrant or Converted Shares in whole or
in part to a person who, at the time of such transfer, is an officer or director
of the Company.
(3) A Holder's transfer of the Warrant or Converted Shares in whole or
in part pursuant to and in accordance with the terms of any merger,
consolidation, reclassification of shares or capital reorganization of the
corporate shareholder, or pursuant to a sale of all or substantially all of the
stock or assets of a corporate shareholder.
(4) A transfer by a Holder which is a limited or general partnership
to any or all of its partners or former partners or any professional employee
(or entity of which such employees are the beneficiaries) of such partnership.
Any such transfer shall be made upon surrender of this Warrant or Converted
Shares together with the Assignment Form attached hereto properly endorsed.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
1933 Act.
9. MARKET STAND-OFF AGREEMENT
The Holder hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any shares of the Company under the Securities Act of 1993, as
amended (the "Securities Act"), the Holder shall not sell or otherwise transfer
any shares or other securities of the Company during the 180-day period
following the date of the final Prospectus contained in a registration statement
of the Company filed under the Securities Act; provided, however, that such
restriction shall only apply to the first registration statement of the Company
to become effective under the Securities Act which includes securities to be
sold on behalf of the Company to the public in an underwritten public offering
under the Securities Act. The Company may impose stop-transfer instructions
with respect to securities subject to the foregoing restrictions until the end
of such 180-day period.
10. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the above-mentioned office or agency of the Company, for a new Warrant in
substantially identical form and dated as of such exchange. The Company shall
maintain at the above-mentioned office or agency a registry showing the name and
address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer, exercise or conversion, in accordance with
its terms, at such office or agency of the Company, and the Company shall be
entitled to rely in all respects, prior to written notice to the contrary, upon
such registry.
-6-
<PAGE>
11. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the Holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
12. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday, then such action may be taken or such right may be exercised
on the next succeeding business day.
13. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
Automatic Conversion, etc. The Exercise Price and the number and type of
- --------------------------
securities or other property issuable upon exercise of this Warrant shall be
appropriately and proportionately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization, automatic
conversion, redemption or other similar event affecting the number or character
of outstanding shares of Warrant Stock, other than an adjustment to the
conversion price of the Warrant Stock pursuant to the antidilution provisions
set forth in the Company's Articles, so that the number and type of securities
or other property issuable upon exercise of this Warrant shall be equal to that
which would have been issuable with respect to the number of shares of Warrant
Stock subject hereto at the time of such event, had such shares of Warrant Stock
then been outstanding.
(b) Certificate as to Adjustments. In case of any adjustment in the
-----------------------------
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the Holder in
the form of a certificate, certified and confirmed by an officer of the Company,
setting forth such adjustment and showing in reasonable detail the facts upon
which adjustment is based.
14. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Warrant
Stock or securities into which the Warrant Stock is convertible for the purpose
of determining the holders thereof who are entitled to receive any dividend or
other distribution,
-7-
<PAGE>
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person,
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
(d) a sale of substantially all of the outstanding capital stock of
the Company or the issuance of new shares representing the majority of the
Company's right to vote, or
(e) the initial public offering of the Company's Common Stock,
then and in each such event the Company will mail to the Holder a notice
specifying the record date for voting or the date of closing , as applicable, of
any event (a)-(e) above. Such notice shall be delivered to the Holder at least
fifteen (15) days prior to the date of the relevant event.
15. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Warrant Stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise or
conversion of this Warrant;
(b) during the period this Warrant or the Warrant Stock issuable
hereunder is outstanding, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon conversion of the Warrant Stock issuable upon exercise or
conversion of this Warrant;
(c) the issuance of this Warrant shall constitute full authority to
the Company's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise or conversion of this Warrant;
(d) the Company has all requisite legal and corporate power to execute
and deliver this Warrant, to sell and issue the Warrant Stock hereunder, to
issue the Common Stock issuable upon conversion of the Warrant Stock and to
carry out and perform its obligations under the terms of this Warrant; and
(e) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale, issuance
and delivery of the Warrant Stock and the Common Stock issuable upon conversion
of the Warrant Stock, the grant of registration rights as provided herein and
the performance of the Company's obligations hereunder has been taken;
-8-
<PAGE>
(f) the Warrant Stock and the Common Stock issuable upon conversion of
the Warrant Stock, when issued in compliance with the provisions of this Warrant
and the Articles, will be validly issued, fully paid and nonassessable, and free
of any liens or encumbrances, and will be issued in compliance with all
applicable federal and state securities laws; and
(g) the issuance of the Warrant Stock and the Common Stock issuable
upon conversion of the Warrant Stock will not be subject to any preemptive
rights, rights of first refusal or similar rights.
[This space left blank intentionally]
-9-
<PAGE>
16. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer.
Dated: February 9, 1996. USWEB CORPORATION
-----------------------------------------------
By:
-----------------------------------------------
Title:
--------------------------------------------
Address:
------------------------------------------
------------------------------------------
-10-
<PAGE>
NOTICE OF EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to purchase shares of Series A
------------
Preferred Stock of USWeb Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
-------------------------------------------------
(Name)
--------------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- ------------------ ----------------------------------------------
(Date)
<PAGE>
NOTICE OF CONVERSION
To: USWeb Corporation
(1) The undersigned hereby elects to convert that portion of the attached
Warrant representing the right to purchase shares of Series A Preferred
----------
Stock into such number of shares of Common Stock of USWeb Corporation as is
determined pursuant to Section 3 of such Warrant, which conversion shall be
effected pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
--------------------------------------------------
(Name)
--------------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- ----------------- ------------------------------------------------
(Date)
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
- --------------------------------------------------------------------------------
(Please Print)
whose address is
----------------------------------------------------------------
(Please Print)
Dated:
--------------------------------------------------------
Holder's Signature:
-------------------------------------------
Holder's Address:
---------------------------------------------
--------------------------------------------------------------
Guaranteed Signature:
----------------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
<PAGE>
EXHIBIT 4.4
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD,
DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT
(I) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (III)
RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
NO. USWEB CORPORATION , 199
------ ---------- -
SERIES C PREFERRED STOCK PURCHASE WARRANT
This certifies that, for value received, Warrantholder (together with any
registered assignee(s), the "Holder") is entitled, upon the terms and subject to
the conditions hereinafter set forth, at any time on or after the date hereof
and at or prior to 11:59 p.m., Pacific Time, on June 2, 2000 (the "Expiration
Time"), but not thereafter, to acquire from USWeb Corporation, a Utah
corporation (the "Company"), in whole or from time to time in part, up to
-------
shares fully paid and nonassessable shares of Series C Preferred Stock of the
Company ("Warrant Stock") at a purchase price per share (the "Exercise Price")
of . Such number of shares, type of security and Exercise Price are subject
------
to adjustment as provided herein, and all references to "Warrant Stock" and
"Exercise Price" herein shall be deemed to include any such adjustment or series
of adjustments.
1. TERM AND EXERCISABILITY
1.1 Termination and Expiration. If not earlier exercised, the
--------------------------
Warrant shall expire at the Expiration Time.
1.2 Exception for Change of Control. Notwithstanding the foregoing,
-------------------------------
in the event of a Change of Control (as defined below), the Company shall give
the Holder not less than fifteen (15) business days notice of the record date
for determining the shareholders of the Company entitled to vote on (or
otherwise approve) the Change of Control; the Company shall provide the Holder
with all information with respect to the Change of Control that is otherwise
provided to shareholders of the Company at such time and from time to time
during the pendency of the Change of Control, including (but not limited to) the
proposed price to be paid in the proposed Change of Control; the Holder shall
have the right to exercise the Warrant on or prior to the record date of
shareholders eligible to vote (or otherwise approve) with respect to the
proposed Change of Control; if the Warrant is not exercised on or prior to such
record date, the Warrant shall expire upon the
<PAGE>
occurrence of the closing of the Change of Control. A "Change of Control" shall
mean the occurrence of any of the following events:
(a) Any "person" (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended) other than SOFTBANK Corporation
and/or any of its affiliates becomes the "beneficial owner" (as defined in Rule
13d-3 under said Act), directly or indirectly, of securities of the Company
representing fifty percent (50%) or more of the total voting power represented
by the Company's then outstanding voting securities; or
(b) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(c) Effectiveness of an agreement for the sale, lease, exchange,
disposition or other transfer by the Company of all or substantially all of the
Company's assets.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to time
at or prior to the expiration or termination hereof by the surrender of this
Warrant and the Notice of Exercise form attached hereto duly executed to the
headquarters office of the Company at the address set forth on the signature
page hereof (or such other office or agency of the Company as it may designate
by notice in writing to the registered holder hereof at the address of such
holder appearing on the books of the Company), and upon payment of the Exercise
Price for the shares thereby purchased (by cash or by check or bank draft
payable to the order of the Company or by cancellation of indebtedness of the
Company to the holder hereof, if any, at the time of exercise in an amount equal
to the purchase price of the shares thereby purchased); whereupon the holder of
this Warrant shall be entitled to receive from the Company a stock certificate
in proper form representing the number of shares of Warrant Stock so purchased,
and a new Warrant in substantially identical form and dated as of such exercise
for the purchase of that number of shares of Warrant Stock equal to the
difference, if any, between the number of shares of Warrant Stock subject hereto
and the number of shares of Warrant Stock as to which this Warrant is so
exercised.
3. CONVERSION OF WARRANT
The Holder shall have the right to convert this Warrant, in whole or in
part, at any time (including, but not limited to, upon a Change of Control) and
from time to time at or prior to the expiration or termination hereof by the
surrender of this Warrant and the Notice of Conversion form attached hereto duly
executed to the headquarters office of the Company at the address set forth on
-2-
<PAGE>
the signature page hereof (or such other office or agency of the Company as it
may designate by notice in writing to the Holder at the address of such Holder
appearing on the books of the Company), into shares of Warrant Stock as provided
in this Section 3. Upon exercise of this conversion right, the Holder shall be
entitled to receive that number of shares of the Company's Series C Preferred
Stock computed by using the following formula:
X (A-B)
Y = --------
A
<TABLE>
<S> <C>
Y = the number of shares of Series C Preferred Stock to be issued to the Holder.
A = the Fair Market Value (as defined below) of one share of the Company's
Series C Preferred Stock on the date of conversion of this Warrant.
B = the Exercise Price.
X = the number of shares of Warrant Stock to be converted into shares of Series C
Preferred Stock pursuant to this Section 3.
</TABLE>
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon conversion of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
(a) if the conversion right is being exercised in connection with
the initial public offering (the "IPO") of the Company's Common Stock
(the "Common Stock"), the IPO price per share (before deducting
commissions, discounts or expenses) at which the Common Stock is sold
to the public in the IPO, multiplied by the number of shares of Common
Stock into which a share of Series C Preferred Stock is convertible at
the time of the exercise of the conversion right (the "Conversion
Rate").
(b) if the conversion right is being exercised in connection with
a Change of Control, the price per share to be paid to the holders of
the Company's Series C Preferred Stock by the acquiring entity, or, if
no such price per share has been established, the price per share to
be paid to the holders of the Company's Common Stock multiplied by the
Conversion Rate.
(c) if the conversion right is being exercised after the IPO
(other than in connection with a Change of Control), then (i) if the
Company's Common Stock is listed on a national securities exchange,
the average of last sale prices for the Company's Common Stock for the
15 trading days prior to the date the Company receives the Warrant and
duly
-3-
<PAGE>
executed Notice of Conversion (the "Notice Receipt Date"), multiplied
by the Conversion Rate, or (ii) if the Company's Common Stock is
listed on The Nasdaq Stock Market, the average of the average bid and
ask price for each of the fifteen (15) trading days prior to the
Notice Receipt Date, multiplied by the Conversion Rate.
(d) in all other cases, the fair value as determined in good
faith by the Company's Board of Directors.
Upon conversion of this Warrant in accordance with this Section 3, the
Holder hereof shall be entitled to receive a certificate for the number of
shares of Warrant Stock determined in accordance with the foregoing, and a new
Warrant in substantially identical form and dated as of such conversion for the
purchase of that number of shares of Warrant Stock equal to the difference, if
any, between the number of shares of Warrant Stock subject hereto and the number
of shares of Warrant Stock as to which this Warrant is so converted.
4. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
Certificates for shares purchased hereunder or issuable upon conversion
hereof shall be delivered to the Holder within a reasonable time after the date
on which this Warrant shall have been exercised or converted in accordance with
the terms hereof. The Company agrees that the shares so issued shall be and
shall for all purposes be deemed to have been issued to such holder as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been exercised or converted in accordance with the terms
hereof. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise or conversion of this Warrant. With respect to any
fraction of a share called for upon the exercise or conversion of this Warrant,
an amount equal to such fraction multiplied by the Fair Market Value of a share
of Warrant Stock on the date of exercise or conversion shall be paid in cash or
check to the Holder.
5. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise or
conversion of this Warrant shall be made without charge to the Holder for any
issue or transfer tax or other incidental expense in respect of the issuance of
such certificate, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder or in such name
or names as may be directed by the Holder provided, however, that in the event
certificates for shares of Warrant Stock are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise or conversion
shall be accompanied by the Assignment Form attached hereto duly executed by the
Holder.
6. NO RIGHTS AS SHAREHOLDER
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise or conversion
hereof.
-4-
<PAGE>
7. NO ASSIGNMENT
This Warrant may not be sold or otherwise transferred (including by gift or
operation of law) without the prior written consent of the Company, which prior
written consent shall not be unreasonably withheld.
8. MARKET STAND-OFF AGREEMENT
The Holder hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any shares of the Company under the Securities Act of 1933, as
amended (the "Securities Act"), the Holder shall not sell or otherwise transfer
any shares or other securities of the Company during the 180-day period
following the date of the final Prospectus contained in a registration statement
of the Company filed under the Securities Act (the "IPO Prospectus"); provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such 180-day period.
9. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the headquarters of the Company, for a new Warrant in substantially identical
form and dated as of such exchange. The Company shall maintain at its
headquarters office a registry showing the name and address of the registered
holder of this Warrant. This Warrant may be surrendered for exchange, transfer,
exercise or conversion, in accordance with its terms, at such headquarters
office, and the Company shall be entitled to rely in all respects, prior to
written notice to the contrary, upon such registry.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the Holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
11. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday, then such action may be taken or such right may be exercised
on the next succeeding business day.
12. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
-5-
<PAGE>
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
Automatic Conversion, etc. The Exercise Price and the number and type of
- --------------------------
securities or other property issuable upon exercise of this Warrant shall be
appropriately and proportionately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization, automatic
conversion of the Series C Preferred Stock, redemption or other similar event
affecting the number or character of outstanding shares of Warrant Stock, other
than an adjustment to the conversion price of the Warrant Stock pursuant to the
antidilution provisions set forth in the Company's Articles of Incorporation, so
that the number and type of securities or other property issuable upon exercise
of this Warrant shall be equal to that which would have been issuable with
respect to the number of shares of Warrant Stock subject hereto at the time of
such event, had such shares of Warrant Stock then been outstanding.
(b) Certificate as to Adjustments. In case of any adjustment in the
-----------------------------
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the Holder in
the form of a certificate, certified and confirmed by an officer of the Company,
setting forth such adjustment and showing in reasonable detail the facts upon
which adjustment is based.
13. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Warrant
Stock or securities into which the Warrant Stock is convertible for the purpose
of determining the holders thereof who are entitled to receive any dividend or
other distribution,
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any Change of Control,
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
(d) a sale of substantially all of the outstanding capital stock of
the Company or the issuance of new shares representing the majority of the
Company's right to vote, or
(e) the IPO,
then and in each such event the Company will mail to the Holder a notice
specifying the record date for voting or the date of closing , as applicable, of
any event (a)-(e) above. Such notice shall be delivered to the Holder at least
15 days prior to the date of the relevant event.
-6-
<PAGE>
14. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Series C Preferred Stock (or other
securities for which this Warrant becomes exercisable pursuant to Section 12(a)
above) a sufficient number of shares to provide for the issuance of Warrant
Stock upon the exercise or conversion of this Warrant;
(b) during the period this Warrant or the Warrant Stock issuable
hereunder is outstanding, the Company will reserve from its authorized and
unissued Common Stock a sufficient number of shares to provide for the issuance
of Common Stock upon conversion of the Warrant Stock issuable upon exercise or
conversion of this Warrant;
(c) the issuance of this Warrant shall constitute full authority to
the Company's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise or conversion of this Warrant;
(d) the Company has all requisite legal and corporate power to execute
and deliver this Warrant, to sell and issue the Warrant Stock hereunder, to
issue the Common Stock issuable upon conversion of the Warrant Stock and to
carry out and perform its obligations under the terms of this Warrant; and
(e) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale, issuance
and delivery of the Warrant Stock and the Common Stock issuable upon conversion
of the Warrant Stock, and the performance of the Company's obligations hereunder
has been taken;
(f) the Warrant Stock and the Common Stock issuable upon conversion of
the Warrant Stock, when issued in compliance with the provisions of this Warrant
and the Company's Articles of Incorporation, will be validly issued, fully paid
and nonassessable, and free of any liens or encumbrances (other than liens or
encumbrances created by or imposed upon the holder of the Warrant Stock), and
will be issued in compliance with all applicable federal and state securities
laws; and
(g) the issuance of the Warrant Stock and the Common Stock issuable
upon conversion of the Warrant Stock will not be subject to any preemptive
rights, rights of first refusal or similar rights (other than such rights as are
created by or imposed upon the holder of the Warrant Stock).
15. GOVERNING LAW
-7-
<PAGE>
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
-8-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer.
Dated: May __, 1997. USWEB CORPORATION
Signature:
-----------------------------------
Name:
----------------------------------------
Title:
--------------------------------------
Address: 2880 Lakeside Drive, Suite 350
Santa Clara, CA 95054
-9-
<PAGE>
NOTICE OF EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to purchase __________ shares of Series C
Preferred Stock of USWeb Corporation pursuant to the terms of the attached
Warrant, and tenders herewith payment of the purchase price in full.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
-------------------------------------------------
(Name)
-------------------------------------------------
-------------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- --------------------------- --------------------------------------------------
(Date) (Signature)
-10-
<PAGE>
NOTICE OF CONVERSION
To: USWeb Corporation
(1) The undersigned hereby elects to convert that portion of the attached
Warrant representing the right to purchase ________ shares of Series C Preferred
Stock into such number of shares of Series C Preferred Stock of USWeb
Corporation as is determined pursuant to Section 3 of such Warrant, which
conversion shall be effected pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
-------------------------------------------------
(Name)
-------------------------------------------------
-------------------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- --------------------------- --------------------------------------------------
(Date) (Signature)
-11-
<PAGE>
EXHIBIT 4.5
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE OR CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
ANY APPLICABLE STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD,
DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT
(i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO, (ii) AN OPINION OF
COUNSEL FOR THE HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (iii)
RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION
TO THE EFFECT THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
NO. ____ USWEB CORPORATION _______________
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, _____________ (together with any
registered assignee(s), the "Holder") is entitled, upon the terms and subject to
the conditions hereinafter set forth, at any time on or after the date hereof
and at or prior to _____ p.m., Pacific Time, on __________ (the "Expiration
Time"), but not thereafter, to acquire from USWeb Corporation, a Utah
corporation (the "Company"), in whole or from time to time in part, up to
__________ fully paid and nonassessable shares of Common Stock of the Company
("Warrant Stock") at a purchase price per share (the "Exercise Price") of
$_____. Such number of shares, type of security and Exercise Price are subject
to adjustment as provided herein, and all references to "Warrant Stock" and
"Exercise Price" herein shall be deemed to include any such adjustment or series
of adjustments. All capitalized terms not otherwise defined herein shall have
the same definitions as set forth in the Company's 1996 Stock Option Plan.
1. TERM AND EXERCISABILITY
1.1 Exercisability. Subject to Section 1.2 below, this Warrant shall
--------------
become exercisable as to 25% of the Warrant Stock on ___________ (the "Vesting
Date"), provided that the Holder's Continuous Status as an Employee or
Consultant has not terminated prior to such date. This Warrant shall become
exercisable as to a further 1/48th of the Warrant Stock upon each monthly
anniversary of the Vesting Date, provided that the provided that the Holder's
Continuous Status as an Employee or Consultant has not terminated prior to such
monthly anniversary.
1.2 Acquisition. In the event of a merger of the Company with or
-----------
into another corporation (other than a merger effected for the sole purpose of
changing the Company's domicile), or the sale of substantially all of the assets
of the Company (either event, an "Acquisition"), this Warrant shall be assumed
or an equivalent warrant substituted by the successor corporation or a parent or
subsidiary of the successor corporation. In the event that the successor
corporation refuses
<PAGE>
to assume or substitute for the Warrant, the Holder shall have the right to
exercise the Warrant as to all of the Warrant Stock, including Warrant Stock as
to which it would not otherwise be exercisable. If the Warrant is exercisable in
lieu of assumption or substitution in the event of an Acquisition, the
Administrator shall notify the Holder that the Warrant shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Warrant shall terminate upon the expiration of such period. For the purposes
of this Section 1.2, the Warrant shall be considered assumed if, following the
Acquisition, the Warrant confers the right to purchase or receive, for each
share of Warrant Stock subject to the Warrant immediately prior to the
Acquisition, the consideration (whether stock, cash, or other securities or
property) received in the Acquisition by holders of Common Stock for each share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding shares).
1.3 Termination and Expiration.
--------------------------
(a) Termination of Relationship. In the event Holder's Continuous
---------------------------
Status as an Employee or Consultant terminates, Holder may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Warrant at any time during the 90 days following the Termination
Date (and in no event later than the Expiration Time). To the extent that
Holder was not entitled to exercise this Warrant at the Termination Date, or if
Holder does not exercise this Warrant within such 90-day period, the Warrant
shall terminate.
(b) Disability of Holder. Notwithstanding the provisions of Section
--------------------
1.3(a) above, in the event of termination of an Holder's Continuous Status as an
Employee or Consultant as a result of his Disability, Holder may, but only
within 12 months from the date of such termination (and in no event later than
the Expiration Time) exercise the Warrant to the extent otherwise entitled to
exercise it at the Termination Date. To the extent that Holder is not entitled
to exercise the Warrant at the Termination Date, or if Holder does not exercise
such Warrant to the extent so entitled within the time specified herein, the
Warrant shall terminate.
(c) Death of Holder. In the event of termination of Holder's
---------------
Continuous Status as an Employee or Consultant as a result of the death of
Holder, the Warrant may be exercised at any time within 12 months following the
date of death (but in no event later than the Expiration Time), by Holder's
estate or by a person who acquired the right to exercise the Warrant by bequest
or inheritance, but only to the extent the Holder could exercise the Warrant at
the date of death.
(d) Expiration. If not earlier exercised or terminated pursuant to
----------
Sections 1.3(a) though 1.3(c) above, the Warrant shall expire at the Expiration
Time.
2. EXERCISE OF WARRANT
The purchase rights represented by this Warrant are exercisable by the
registered holder hereof, in whole or in part, at any time and from time to time
at or prior to the expiration or
-2-
<PAGE>
termination hereof by the surrender of this Warrant and the Notice of Exercise
form attached hereto duly executed to the headquarters office of the Company at
the address set forth on the signature page hereof (or such other office or
agency of the Company as it may designate by notice in writing to the registered
holder hereof at the address of such holder appearing on the books of the
Company), and upon payment of the Exercise Price for the shares thereby
purchased (by cash or by check or bank draft payable to the order of the Company
or by cancellation of indebtedness of the Company to the holder hereof, if any,
at the time of exercise in an amount equal to the purchase price of the shares
thereby purchased); whereupon the holder of this Warrant shall be entitled to
receive from the Company a stock certificate in proper form representing the
number of shares of Warrant Stock so purchased, and a new Warrant in
substantially identical form and dated as of such exercise for the purchase of
that number of shares of Warrant Stock equal to the difference, if any, between
the number of shares of Warrant Stock subject hereto and the number of shares of
Warrant Stock as to which this Warrant is so exercised.
3. CONVERSION OF WARRANT
The Holder shall have the right to convert this Warrant, in whole or in
part, at any time (including, but not limited to, upon an Acquisition) and from
time to time at or prior to the expiration or termination hereof by the
surrender of this Warrant and the Notice of Conversion form attached hereto duly
executed to the headquarters office of the Company at the address set forth on
the signature page hereof (or such other office or agency of the Company as it
may designate by notice in writing to the Holder at the address of such Holder
appearing on the books of the Company), into shares of Warrant Stock as provided
in this Section 3. Upon exercise of this conversion right, the Holder shall be
entitled to receive that number of shares of the Company's Common Stock computed
by using the following formula:
X (A-B)
Y = --------
A
Y = the number of shares of Common Stock to be issued to the Holder.
A = the Fair Market Value (as defined below) of one share of the Company's
Common Stock on the date of conversion of this Warrant.
B = the Exercise Price.
X = the number of shares of Warrant Stock to be converted into shares of Common
Stock pursuant to this Section 3.
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon conversion of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
-3-
<PAGE>
(a) if the conversion right is being exercised in connection with
the initial public offering (the "IPO") of the Common Stock,
the IPO price per share (before deducting commissions,
discounts or expenses) at which the Common Stock is sold to
the public in the IPO.
(b) if the conversion right is being exercised in connection with
an Acquisition, the price per share to be paid to the holders
of the Company's Common Stock by the acquiring entity.
(c) if the conversion right is being exercised after the IPO
(other than in connection with an Acquisition), then (i) if
the Company's Common Stock is listed on a national securities
exchange, the average of last sale prices for the Company's
Common Stock for the fifteen (15) trading days prior to the
date the Company receives the Warrant and duly executed
Notice of Conversion (the "Notice Receipt Date"), or (ii) if
the Company's Common Stock is listed on The Nasdaq Stock
Market, the average of the average bid and ask price for each
of the fifteen (15) trading days prior to the Notice Receipt
Date.
(d) in all other cases, the fair value as determined in good
faith by the Company's Board of Directors.
Upon conversion of this Warrant in accordance with this Section 3, the
Holder hereof shall be entitled to receive a certificate for the number of
shares of Warrant Stock determined in accordance with the foregoing, and a new
Warrant in substantially identical form and dated as of such conversion for the
purchase of that number of shares of Warrant Stock equal to the difference, if
any, between the number of shares of Warrant Stock subject hereto and the number
of shares of Warrant Stock as to which this Warrant is so converted.
4. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
Certificates for shares purchased hereunder or issuable upon conversion
hereof shall be delivered to the Holder within a reasonable time after the date
on which this Warrant shall have been exercised or converted in accordance with
the terms hereof. The Company agrees that the shares so issued shall be and
shall for all purposes be deemed to have been issued to such holder as the
record owner of such shares as of the close of business on the date on which
this Warrant shall have been exercised or converted in accordance with the terms
hereof. No fractional shares or scrip representing fractional shares shall be
issued upon the exercise or conversion of this Warrant. With respect to any
fraction of a share called for upon the exercise or conversion of this Warrant,
an amount equal to such fraction multiplied by the Fair Market Value of a share
of Warrant Stock on the date of exercise or conversion shall be paid in cash or
check to the Holder.
-4-
<PAGE>
5. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise or
conversion of this Warrant shall be made without charge to the Holder for any
issue or transfer tax or other incidental expense in respect of the issuance of
such certificate, all of which taxes and expenses shall be paid by the Company,
and such certificates shall be issued in the name of the Holder or in such name
or names as may be directed by the Holder provided, however, that in the event
certificates for shares of Warrant Stock are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise or conversion
shall be accompanied by the Assignment Form attached hereto duly executed by the
Holder.
6. NO RIGHTS AS SHAREHOLDER
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise or conversion
hereof.
7. NO ASSIGNMENT
This Warrant may not be sold or otherwise transferred (including by gift or
operation of law) without the prior written consent of the Company, which prior
written consent shall not be unreasonably withheld.
8. COMPANY'S RIGHT OF FIRST REFUSAL
Before any Warrant Stock held by the Holder or any transferee may be sold
or otherwise transferred (including transfer by gift or operation of law), the
Company or its assignee(s) shall have a right of first refusal to purchase the
Warrant Stock on the terms and conditions set forth in this Section 8 (the
"Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder shall deliver to the
---------------------------
Company a written notice (the "Notice") stating: (i) the Holder's bona fide
intention to sell or otherwise transfer such Warrant Stock; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of shares of Warrant Stock to be transferred to each Proposed Transferee;
and (iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Warrant Stock (the "Offered Price"), and the Holder
shall offer the Warrant Stock at the Offered Price to the Company or its
assignee(s).
(b) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Warrant Stock proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
-5-
<PAGE>
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Warrant Stock purchased by the Company or its assignee(s) under this Section
shall be the Offered Price. If the Offered Price includes consideration other
than cash, the cash equivalent value of the non-cash consideration shall be
determined by the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made in cash (by
-------
check) within 45 days of receipt of the Notice.
(e) Holder's Right to Transfer. If all of the Warrant Stock proposed
--------------------------
in the Notice to be transferred to a given Proposed Transferee is not purchased
by the Company or its assignee(s) as provided in this Section, then the Holder
may sell or otherwise transfer such Warrant Stock to that Proposed Transferee at
the Offered Price or at a higher price, provided that such sale or other
transfer is consummated within 120 days after the date of the Notice and
provided further that any such sale or other transfer is effected in accordance
with any applicable securities laws and the Proposed Transferee agrees in
writing that the provisions of this Section shall continue to apply to the
Warrant Stock in the hands of such Proposed Transferee. If the Warrant Stock
described in the Notice is not transferred to the Proposed Transferee within
such period, a new Notice shall be given to the Company, and the Company or its
assignees shall again be offered the Right of First Refusal before any Warrant
Stock held by the Holder may be sold or otherwise transferred.
(f) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Warrant Stock 90 days after the date of the IPO
Prospectus (as defined below).
9. MARKET STAND-OFF AGREEMENT
The Holder hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any shares of the Company under the Securities Act of 1993, as
amended (the "Securities Act"), the Holder shall not sell or otherwise transfer
any shares or other securities of the Company during the 180-day period
following the date of the final Prospectus contained in a registration statement
of the Company filed under the Securities Act (the "IPO Prospectus"); provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the Securities Act which
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restrictions until the end of such 180-day period.
10. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the headquarters of the Company, for a new Warrant in substantially identical
form and dated as of such exchange. The Company shall maintain at its
headquarters office a registry showing the name and address of the registered
holder of this Warrant. This Warrant may be surrendered for exchange, transfer,
exercise or conversion, in accordance with its terms, at such headquarters
office, and the Company shall be entitled to rely in all respects, prior to
written notice to the contrary, upon such registry.
-6-
<PAGE>
11. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the Holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
12. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday, then such action may be taken or such right may be exercised
on the next succeeding business day.
13. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
Automatic Conversion, etc. The Exercise Price and the number and type of
- --------------------------
securities or other property issuable upon exercise of this Warrant shall be
appropriately and proportionately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization, automatic
conversion, redemption or other similar event affecting the number or character
of outstanding shares of Warrant Stock, other than an adjustment to the
conversion price of the Warrant Stock pursuant to the antidilution provisions
set forth in the Company's Articles of Incorporation, so that the number and
type of securities or other property issuable upon exercise of this Warrant
shall be equal to that which would have been issuable with respect to the number
of shares of Warrant Stock subject hereto at the time of such event, had such
shares of Warrant Stock then been outstanding.
(b) Certificate as to Adjustments. In case of any adjustment in the
-----------------------------
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the Holder in
the form of a certificate, certified and confirmed by an officer of the Company,
setting forth such adjustment and showing in reasonable detail the facts upon
which adjustment is based.
14. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Warrant
Stock or securities into which the Warrant Stock is convertible for the purpose
of determining the holders thereof who are entitled to receive any dividend or
other distribution,
-7-
<PAGE>
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any Acquisition,
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
(d) a sale of substantially all of the outstanding capital stock of
the Company or the issuance of new shares representing the majority of the
Company's right to vote, or
(e) the IPO,
then and in each such event the Company will mail to the Holder a notice
specifying the record date for voting or the date of closing, as applicable, of
any event (a)-(e) above. Such notice shall be delivered to the Holder at least
fifteen (15) days prior to the date of the relevant event.
15. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Common Stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise or
conversion of this Warrant;
(b) the issuance of this Warrant shall constitute full authority to
the Company's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise or conversion of this Warrant;
(c) the Company has all requisite legal and corporate power to execute
and deliver this Warrant, to sell and issue the Warrant Stock hereunder and to
carry out and perform its obligations under the terms of this Warrant; and
(d) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale, issuance
and delivery of the Warrant Stock and the performance of the Company's
obligations hereunder has been taken;
(e) the Warrant Stock, when issued in compliance with the provisions
of this Warrant and the Company's Articles of Incorporation, will be validly
issued, fully paid and nonassessable, and free of any liens or encumbrances
(other than liens or encumbrances created by or imposed upon the holder of the
Warrant Stock), and will be issued in compliance with all applicable federal and
state securities laws; and
-8-
<PAGE>
(f) the issuance of the Warrant Stock will not be subject to any
preemptive rights, rights of first refusal or similar rights (other than such
rights as are created by or imposed upon the holder of the Warrant Stock).
16. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer.
Dated: __________________ USWEB CORPORATION
Signature:
---------------------------
Name:
--------------------------------
Title:
-------------------------------
Address: 3000 Lakeside Drive
Santa Clara, CA 95054
-9-
<PAGE>
NOTICE OF EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to purchase __________ shares of Common
Stock of USWeb Corporation pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
----------------------------------------
(Name)
----------------------------------------
----------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- --------------------------- --------------------------------------------------
(Date) (Signature)
<PAGE>
NOTICE OF CONVERSION
To: USWeb Corporation
(1) The undersigned hereby elects to convert that portion of the attached
Warrant representing the right to purchase ________ shares of Common Stock into
such number of shares of Common Stock of USWeb Corporation as is determined
pursuant to Section 3 of such Warrant, which conversion shall be effected
pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
----------------------------------------
(Name)
----------------------------------------
----------------------------------------
(Address)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- -------------------------- --------------------------------------------------
(Date) (Signature)
<PAGE>
EXHIBIT 4.6
USWeb Corporation
SIGNING WARRANT
SUMMARY SHEET
Unless otherwise defined in this Summary Sheet, the terms defined in the
USWeb Corporation ("Company") Common Stock Purchase Warrant dated
---------------
(the "Warrant") shall have the same meanings in this Summary Sheet.
I. HOLDER
------
Name:
-----------------------------------
Address:
--------------------------------
--------------------------------
II. GRANT OF WARRANT
----------------
You have been granted the following rights to purchase Common Stock of
the Company subject to the terms of the Warrant attached hereto:
Warrant Shares:
-----------------------------------
Date of Grant:
-----------------------------------
Exercise Price per Share:
-----------------------------------
Total Exercise Price:
-----------------------------------
Expiration Date: The earlier of (i) five years from Date
of Grant or (ii) acquisition of the
Company (if the acquiring company does
not assume the Warrant).
III. VESTING SCHEDULE
----------------
So long as the holder of the warrant continues to be (i) an owner,
employee or affiliate of a Company Affiliate, (ii) an employee and/or
shareholder of the Company, or (iii) a successor in interest to a Company
Affiliate, this Warrant will vest at the following rate:
On [one year anniversary of Grant Date] as to [25% of Warrant Shares];
---------------------
and
On the last day of each subsequent month as to [1/48 of Warrant
---------------
Shares].
- ------
However, (i) this Warrant may not be exercised for vested shares until
the Company's initial public offering (the "IPO"), if any, or an acquisition of
the Company; and (ii) no Warrant Shares acquired upon exercise of the Warrant
may be sold until 180 days after an IPO.
----
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT (I) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE
HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (III) RECEIPT OF A NO-
ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
NO. USWEB CORPORATION , 1996
---------- --------------
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, (together with
--------------------
any registered assignee(s), the "Holder") is entitled, upon the terms and
subject to the conditions hereinafter set forth, at such times after the date
hereof as are set forth below, to acquire from USWeb Corporation, a Utah
corporation (the "Company"), in whole or from time to time in part, up to
fully paid and nonassessable shares of Common Stock of the Company
- --------------
("Warrant Stock") at a purchase price per share (the "Exercise Price") of
. Such number of shares, type of security and Exercise Price are
- ------------
subject to adjustment as provided herein, and all references to "Warrant Stock"
and "Exercise Price" herein shall be deemed to include any such adjustment or
series of adjustments.
1. TERM
(a) Commencement of Exercisability. The Warrant is exercisable
------------------------------
according to the schedule set forth in Section 2 hereof.
(b) Termination and Expiration. If not earlier exercised, the Warrant
--------------------------
shall expire on the fifth anniversary of the date hereof (the "Expiration
Time").
(c) Exception in Event of Change in Control or Acquisition of the
-------------------------------------------------------------
Company. Notwithstanding the foregoing, the Warrant shall terminate, if not
- -------
earlier exercised, in the event of an acquisition of the Company, unless assumed
by the acquiring entity. In the event the Company is proposed to be acquired in
a bona fide transaction (the "Acquisition") (i.e., not a mere recapitalization,
reincorporation for the purpose of changing corporate domicile, or similar
transaction), regardless of the form of the transaction (e.g., merger,
consolidation, sale or lease of assets or sale of stock), the Company shall give
the Holder not less than fifteen (15) business days' notice of the effective
date of such Acquisition; if the Warrant is otherwise exercisable at such time,
then the Holder shall have the right to exercise same on or prior to the record
date of shareholders eligible to vote (or otherwise approve) with respect to the
proposed Acquisition; if the Warrant is not exercised on or prior to such record
date, the Warrant shall expire upon the occurrence of the closing of the
Acquisition, unless assumed by the acquiring entity.
2. EXERCISE OF WARRANT
(a) Vesting Schedule. This Warrant shall vest over time according to
----------------
the following schedule (the "Vesting Schedule"), so long as the Holder continues
to be (i) an owner, employee or affiliate of a Company Affiliate, (ii) an
employee and/or shareholder of the Company, or (iii) a successor in interest to
a Company
<PAGE>
Affiliate: (i) shares of Warrant Stock shall vest on , 1997;
---------- -----------
and (ii) additional shares of Warrant Stock shall vest on or after
-------------
the last day of each subsequent month.
(b) Exercisability Event. This Warrant shall become exercisable as to
--------------------
any or all vested shares upon the earlier to occur of (and may not be exercised
for any such vested shares until) (i) the effective date of the initial public
offering (the "IPO") of the Company's Common Stock pursuant to a registration
statement on Form S-1 or Form SB-2 (or similar or successor form) under the
Securities Act of 1933, as amended (the "1933 Act") or (ii) the effective date
of an Acquisition; provided that in each such case the Holder is a franchisee of
-------------
the Company at such time and has been since the date hereof. If the Holder
ceases to be a franchisee of the Company, other than because of Holder's death,
then the Holder may exercise the Warrant for any or all vested Shares at any
time within 90 days from the date of termination. If the Holder dies while a
franchisee, the Warrant may be exercised at any time within 90 days of the date
of death by the Holder's estate or by a person who acquires the right to
exercise the Warrant by bequest or inheritance.
(c) Mechanics of Exercise. The purchase rights represented by this
---------------------
Warrant are exercisable by the Holder according to Sections 2(a) and 2(b) above,
in whole in part, prior to the Expiration Time by the surrender of this Warrant
and the Notice of Exercise form attached hereto duly executed to the
headquarters office of the Company at the address set forth on the signature
page hereof (or such other office or agency of the Company as it may designate
by notice in writing to the Holder at the address of such Holder appearing on
the books of the Company), and upon payment of the Exercise Price for the shares
thereby purchased (by cash or by check or bank draft payable to the order of the
Company or by cancellation of indebtedness of the Company to the Holder, if any,
at the time of exercise in an amount equal to the purchase price of the shares
thereby purchased); whereupon the Holder shall be entitled to receive from the
Company a stock certificate in proper form representing the number of shares of
Warrant Stock so purchased, and a new Warrant in substantially identical form
and dated as of such exercise for the purchase of that number of shares of
Warrant Stock equal to the difference, if any, between the number of shares of
Warrant Stock subject hereto and the number of shares of Warrant Stock as to
which this Warrant is so exercised.
3. NET EXERCISE OF WARRANT
The Holder shall have the right to exercise this Warrant, in whole or in
part, at or prior to the Expiration Time according to Sections 2(a) and 2(b)
above by the surrender of this Warrant and the Notice of Net Exercise form
attached hereto duly executed to the headquarters office of the Company at the
address set forth on the signature page hereof (or such other office or agency
of the Company as it may designate by notice in writing to the Holder at the
address of such Holder appearing on the books of the Company), into shares of
Warrant Stock as provided in this Section 3 (the "Net Exercise Right"). Upon
exercise of this right, the Holder shall be entitled to receive that number of
shares of the Company's Common Stock computed by using the following formula:
Y = X (A-B)/A
Y = the number of shares of Common Stock to be issued to the Holder.
A = the Fair Market Value (as defined below) of one share of the
Company's Common Stock on the date of exercise of this Warrant.
B = the Exercise Price for one share of the Company's Common Stock under
this Warrant.
X = the number of shares of Common Stock purchasable under this Warrant.
-2-
<PAGE>
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon exercise of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
(a) if the Net Exercise Right is being exercised in connection with
the IPO, the IPO price per share (before deducting commissions,
discounts or expenses) at which the Common Stock is sold to the
public in such IPO;
(b) if the Net Exercise Right is being exercised in connection with an
Acquisition, the price per share to be paid to the holders of the
Company's Common Stock by the acquiring entity;
(c) in all other cases, the fair value as determined in good faith by
the Company's Board of Directors.
Upon exercise of this Warrant in accordance with this Section 3, the Holder
hereof shall be entitled to receive a certificate for the number of shares of
Warrant Stock determined in accordance with the foregoing, and a new Warrant in
substantially identical form and dated as of such exercise for the purchase of
that number of shares of Warrant Stock equal to the difference, if any, between
the number of shares of Warrant Stock subject hereto and the number of shares of
Warrant Stock as to which this Warrant is so exercised.
4. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
Certificates for shares purchased hereunder or issuable upon exercise
hereof shall be delivered to the Holder within a reasonable time after the date
on which this Warrant shall have been exercised in accordance with the terms
hereof. The Company hereby represents and warrants that all shares of Warrant
Stock which may be issued upon the exercise of this Warrant will, upon such
exercise be duly and validly authorized and issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issuance thereof
(other than liens or charges created by or imposed upon the Holder of the
Warrant Stock). The Company agrees that the shares so issued shall be and shall
for all purposes be deemed to have been issued to such holder as the record
owner of such shares as of the close of business on the date on which this
Warrant shall have been exercised in accordance with the terms hereof. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. With respect to any fraction of a share called
for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the Fair Market Value of a share of Warrant Stock on the date of
exercise shall be paid in cash or check to the Holder.
5. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be borne by the Holder, and
such certificates shall be issued in the name of the Holder or in such name or
names as may be directed by the Holder provided, however, that in the event
certificates for shares of Warrant Stock are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder.
-3-
<PAGE>
6. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof.
7. COMPANY'S RIGHT OF FIRST REFUSAL
Before any Warrants or Common Stock (the "Exercised Shares") held by the
Holder or any transferee may be sold or otherwise transferred (including
transfer by gift or operation of law), the Company or its assignee(s) shall have
a right of first refusal to purchase them on the terms and conditions set forth
in this Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder shall deliver to the
---------------------------
Company a written notice (the "Notice") stating: (i) the Holder's bona fide
intention to sell or otherwise transfer such Warrants or Exercised Shares, as
the case may be; (ii) the name of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Warrants or Exercised Shares to be
transferred to each Proposed Transferee; and (iv) the bona fide cash price or
other consideration for which the Holder proposes to transfer the Warrants or
the Exercised Shares (the "Offered Price"), and the Holder shall offer the
Warrants or the Exercised Shares at the Offered Price to the Company or its
assignee(s).
(b) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Warrants or Exercised Shares proposed to be transferred to any one or more
of the Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Warrants or Exercised Shares purchased by the Company or its assignee(s) under
this Section shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(d) Payment. Payment of the Purchase Price shall be made in cash (by
-------
check) within 45 days of receipt of the Notice.
(e) Holder's Right to Transfer. If all of the Warrants or Exercised
--------------------------
Shares proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the Company or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Warrants or Exercised Shares
to that Proposed Transferee at the Offered Price or at a higher price, provided
that such sale or other transfer is consummated within 120 days after the date
of the Notice and provided further that any such sale or other transfer is
effected in accordance with any applicable securities laws and the Proposed
Transferee agrees in writing that the provisions of this Section shall continue
to apply to the Warrants or Exercised Shares in the hands of such Proposed
Transferee. If the Warrants or Exercised Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company or its assignees shall again be offered
the Right of First Refusal before any Warrants or Exercised Shares held by the
Holder may be sold or otherwise transferred.
(f) Exception for Certain Transfers. The Warrant or Exercised Shares
-------------------------------
may be transferred without the Company being offered the Right of First Refusal
in the following transactions; provided that any Transferee shall agree to the
terms of this Section 7 as to the Warrant or any Exercised Shares:
-4-
<PAGE>
(1) A Holder's transfer of the Warrant or Exercised Shares in
whole or in part to the Company.
(2) A Holder's transfer of the Warrant or Exercised Shares in
whole or in part to a person who, at the time of such transfer, is an officer or
director of the Company.
(3) Where the Holder is a corporation, transfer by such
corporate Holder of the Warrant or Exercised Shares in whole or in part pursuant
to and in accordance with the terms of any merger, consolidation,
reclassification of shares or capital reorganization of such corporate Holder,
or pursuant to a sale of all or substantially all of the stock or assets by such
corporate Holder.
Any such transfer shall be made upon surrender of this Warrant or Exercised
Shares together with the Assignment Form attached hereto properly endorsed.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Warrants or Exercised Shares 90 days after the
effective date of the IPO.
8. MARKET STAND-OFF AGREEMENT
The Holder hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any shares of the Company under the 1933 Act, the Holder shall not
sell or otherwise transfer, directly or indirectly, or make any agreement to
sell or otherwise transfer any shares or other securities of the Company during
the 180-day period following the date of the final prospectus contained in a
registration statement of the Company filed under the 1933 Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the 1933 Act which includes
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the 1933 Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
9. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the above-mentioned office or agency of the Company, for a new Warrant in
substantially identical form and dated as of such exchange. The Company shall
maintain at the above-mentioned office or agency a registry showing the name and
address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer, or exercise in accordance with its terms, at
such office or agency of the Company, and the Company shall be entitled to rely
in all respects, prior to written notice to the contrary, upon such registry.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the Holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
-5-
<PAGE>
11. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday, then such action may be taken or such right may be exercised
on the next succeeding business day.
12. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
Automatic Conversion, etc. The Exercise Price and the number and type of
- --------------------------
securities or other property issuable upon exercise of this Warrant shall be
appropriately and proportionately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization, automatic
conversion, redemption or other similar event affecting the number or character
of outstanding shares of Warrant Stock, so that the number and type of
securities or other property issuable upon exercise of this Warrant shall be
equal to that which would have been issuable with respect to the number of
shares of Warrant Stock subject hereto at the time of such event, had such
shares of Warrant Stock then been outstanding.
(b) Certificate as to Adjustments. In case of any adjustment in the
-----------------------------
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the Holder in
the form of a certificate, certified and confirmed by an officer of the Company,
setting forth such adjustment and showing in reasonable detail the facts upon
which adjustment is based.
13. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Warrant
Stock for the purpose of determining the holders thereof who are entitled to
receive any dividend or other distribution,
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person,
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
(d) a sale of substantially all of the outstanding capital stock of
the Company or the issuance of new shares representing the majority of the
Company's right to vote, or
(e) the initial public offering of the Company's Common Stock,
then and in each such event the Company will mail to the Holder a notice
specifying the record date for voting or the date of closing , as applicable, of
any event (a)-(e) above. Such notice shall be delivered to the Holder at least
fifteen (15) days prior to the date of the relevant event.
-6-
<PAGE>
14. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Warrant Stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to
the Company's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Company has all requisite legal and corporate power to execute
and deliver this Warrant, to sell and issue the Warrant Stock hereunder and to
carry out and perform its obligations under the terms of this Warrant; and
(d) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale, issuance
and delivery of the Warrant Stock as provided herein and the performance of the
Company's obligations hereunder has been taken;
15. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer.
Dated: , 1996 USWEB CORPORATION
--------
By:
-----------------------------------------------
Title:
--------------------------------------------
-7-
<PAGE>
NOTICE OF EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to purchase shares of Common
--------------
Stock of USWeb Corporation pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
--------------------------------------------------
(Name)
--------------------------------------------------
--------------------------------------------------
(Address)
--------------------------------------------------
(Social Security Number)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
- ------------------ --------------------------------------------------
(Date)
<PAGE>
NOTICE OF NET EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to exercise that portion of the attached
Warrant representing the right to purchase shares of Common Stock and
---------
thereby acquire such number of shares of Common Stock of USWeb Corporation as is
determined pursuant to Section 3 of such Warrant, which exercise shall be
effected pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
--------------------------------------------------
(Name)
--------------------------------------------------
--------------------------------------------------
(Address)
--------------------------------------------------
(Social Security Number)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
----------------- --------------------------------------------------
(Date)
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
- --------------------------------------------------------------------------------
(Please Print)
whose address is
----------------------------------------------------------------
(Please Print)
Dated:
-------------------------------------------------
Holder's Signature:
------------------------------------
Holder's Address:
--------------------------------------
--------------------------------------
Guaranteed Signature:
---------------------------------------
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
NOTE: Assignment of this Warrant may be made only in compliance with the
Company's right of first refusal set forth in Section 7 of the Warrant.
<PAGE>
EXHIBIT 4.7
USWEB CORPORATION
AGR WARRANT
SUMMARY SHEET
Unless otherwise defined in this Summary Sheet, the terms defined in the
USWeb Corporation ("Company") Common Stock Purchase Warrant dated
---------------
(the "Warrant") shall have the same meanings in this Summary Sheet.
I. HOLDER
------
Name:
--------------------------------------
Address:
-----------------------------------
-----------------------------------
II. GRANT OF WARRANT
----------------
You have been granted the following rights to purchase Common Stock of
the Company based on your Adjusted Gross Revenue for the period from
to and subject to the terms of the Warrant attached
- ---------------- --------------
hereto:
Warrant Shares:
---------------------------
Date of Grant:
---------------------------
Exercise Price per Share:
---------------------------
Total Exercise Price:
---------------------------
Expiration Date: The earlier of (i) five years from Date
of Grant or (ii) acquisition of the
Company (if the acquiring company does
not assume the Warrant).
III. VESTING SCHEDULE
----------------
So long as the holder of the warrant continues to be (i) an owner,
employee or affiliate of a Company Affiliate, (ii) an employee and/or
shareholder of the Company, or (iii) a successor in interest to a Company
Affiliate, this Warrant will vest at the following rate:
On [one year anniversary of Grant Date] as to [25% of Warrant Shares];
---------------------
and
<PAGE>
On the last day of each subsequent month as to [1/48 of Warrant
---------------
Shares].
- ------
However, (i) this Warrant may not be exercised for vested shares until
the Company's initial public offering (the "IPO"), if any, or an acquisition of
the Company; and (ii) no Warrant Shares acquired upon exercise of the Warrant
may be sold until 180 days after an IPO.
----
-2-
<PAGE>
THIS WARRANT AND THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE
STATE LAWS, AND NO INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED,
OFFERED, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT (I) AN EFFECTIVE
REGISTRATION STATEMENT RELATED THERETO, (II) AN OPINION OF COUNSEL FOR THE
HOLDER THAT SUCH REGISTRATION IS NOT REQUIRED OR (III) RECEIPT OF A NO-
ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT
THAT REGISTRATION UNDER THE ACT IS NOT REQUIRED.
NO. USWEB CORPORATION , 1996
----- ----------------
COMMON STOCK PURCHASE WARRANT
This certifies that, for value received, (together with
-------------------
any registered assignee(s), the "Holder") is entitled, upon the terms and
subject to the conditions hereinafter set forth, at such times after the date
hereof as are set forth below, to acquire from USWeb Corporation, a Utah
corporation (the "Company"), in whole or from time to time in part, up to
fully paid and nonassessable shares of Common Stock of the Company
- -------------
("Warrant Stock") at a purchase price per share (the "Exercise Price") of
. Such number of shares, type of security and Exercise Price are
- -------------
subject to adjustment as provided herein, and all references to "Warrant Stock"
and "Exercise Price" herein shall be deemed to include any such adjustment or
series of adjustments.
1. TERM
(a) Commencement of Exercisability. The Warrant is exercisable
------------------------------
according to the schedule set forth in Section 2 hereof.
(b) Termination and Expiration. If not earlier exercised, the Warrant
--------------------------
shall expire on the fifth anniversary of the date hereof (the "Expiration
Time").
(c) Exception in Event of Change in Control or Acquisition of the
-------------------------------------------------------------
Company. Notwithstanding the foregoing, the Warrant shall terminate, if not
- -------
earlier exercised, in the event of an acquisition of the Company, unless assumed
by the acquiring entity. In the event the Company is proposed to be acquired in
a bona fide transaction (the "Acquisition") (i.e., not a mere recapitalization,
reincorporation for the purpose of changing corporate domicile, or similar
transaction), regardless of the form of the transaction (e.g., merger,
consolidation, sale or lease of assets or sale of stock), the Company shall give
the Holder not less than fifteen (15) business days' notice of the effective
date of such Acquisition; if the Warrant is otherwise exercisable at such time,
then the Holder shall have the right to exercise same on or prior to the record
date of shareholders eligible to vote (or otherwise approve) with respect to the
proposed Acquisition; if the Warrant is not exercised on or prior to such record
date, the
<PAGE>
Warrant shall expire upon the occurrence of the closing of the Acquisition,
unless assumed by the acquiring entity.
2. EXERCISE OF WARRANT
(a) Vesting Schedule. This Warrant shall vest over time according to
----------------
the following schedule (the "Vesting Schedule"), so long as the Holder continues
to be (i) an owner, employee or affiliate of a Company Affiliate, (ii) an
employee and/or shareholder of the Company, or (iii) a successor in interest to
a Company Affiliate: (i) shares of Warrant Stock shall vest on
----------------
, 1997; and (ii) additional shares of Warrant Stock
- --------------- --------------
shall vest on or after the last day of each subsequent month.
(b) Exercisability Event. This Warrant shall become exercisable as to
--------------------
any or all vested shares upon the earlier to occur of (and may not be exercised
for any such vested shares until) (i) the effective date of the initial public
offering (the "IPO") of the Company's Common Stock pursuant to a registration
statement on Form S-1 or Form SB-2 (or similar or successor form) under the
Securities Act of 1933, as amended (the "1933 Act") or (ii) the effective date
of an Acquisition; provided that in each such case the Holder is a franchisee of
-------------
the Company at such time and has been since the date hereof. If the Holder
ceases to be a franchisee of the Company, other than because of Holder's death,
then the Holder may exercise the Warrant for any or all vested Shares at any
time within 90 days from the date of termination. If the Holder dies while a
franchisee, the Warrant may be exercised at any time within 90 days of the date
of death by the Holder's estate or by a person who acquires the right to
exercise the Warrant by bequest or inheritance.
(c) Mechanics of Exercise. The purchase rights represented by this
---------------------
Warrant are exercisable by the Holder according to Sections 2(a) and 2(b) above,
in whole in part, prior to the Expiration Time by the surrender of this Warrant
and the Notice of Exercise form attached hereto duly executed to the
headquarters office of the Company at the address set forth on the signature
page hereof (or such other office or agency of the Company as it may designate
by notice in writing to the Holder at the address of such Holder appearing on
the books of the Company), and upon payment of the Exercise Price for the shares
thereby purchased (by cash or by check or bank draft payable to the order of the
Company or by cancellation of indebtedness of the Company to the Holder, if any,
at the time of exercise in an amount equal to the purchase price of the shares
thereby purchased); whereupon the Holder shall be entitled to receive from the
Company a stock certificate in proper form representing the number of shares of
Warrant Stock so purchased, and a new Warrant in substantially identical form
and dated as of such exercise for the purchase of that number of shares of
Warrant Stock equal to the difference, if any, between the number of shares of
Warrant Stock subject hereto and the number of shares of Warrant Stock as to
which this Warrant is so exercised.
3. NET EXERCISE OF WARRANT
The Holder shall have the right to exercise this Warrant, in whole or in
part, at or prior to the Expiration Time according to Sections 2(a) and 2(b)
above by the surrender of this Warrant and the
-2-
<PAGE>
Notice of Net Exercise form attached hereto duly executed to the headquarters
office of the Company at the address set forth on the signature page hereof (or
such other office or agency of the Company as it may designate by notice in
writing to the Holder at the address of such Holder appearing on the books of
the Company), into shares of Warrant Stock as provided in this Section 3 (the
"Net Exercise Right"). Upon exercise of this right, the Holder shall be entitled
to receive that number of shares of the Company's Common Stock computed by using
the following formula:
X (A-B)
Y = --------
A
Y = the number of shares of Common Stock to be issued to the Holder.
A = the Fair Market Value (as defined below) of one share of the
Company's Common Stock on the date of exercise of this Warrant.
B = the Exercise Price for one share of the Company's Common Stock under
this Warrant.
X = the number of shares of Common Stock purchasable under this Warrant.
If the above calculation results in a negative number, then no shares of
Warrant Stock shall be issued or issuable upon exercise of this Warrant.
"Fair Market Value" of a share of Warrant Stock shall mean:
(a) if the Net Exercise Right is being exercised in connection with
the IPO, the IPO price per share (before deducting commissions,
discounts or expenses) at which the Common Stock is sold to the
public in such IPO;
(b) if the Net Exercise Right is being exercised in connection with an
Acquisition, the price per share to be paid to the holders of the
Company's Common Stock by the acquiring entity;
(c) in all other cases, the fair value as determined in good faith by
the Company's Board of Directors.
Upon exercise of this Warrant in accordance with this Section 3, the Holder
hereof shall be entitled to receive a certificate for the number of shares of
Warrant Stock determined in accordance with the foregoing, and a new Warrant in
substantially identical form and dated as of such exercise for the purchase of
that number of shares of Warrant Stock equal to the difference, if any, between
the number of shares of Warrant Stock subject hereto and the number of shares of
Warrant Stock as to which this Warrant is so exercised.
4. ISSUANCE OF SHARES; NO FRACTIONAL SHARES OR SCRIP
-3-
<PAGE>
Certificates for shares purchased hereunder or issuable upon exercise
hereof shall be delivered to the Holder within a reasonable time after the date
on which this Warrant shall have been exercised in accordance with the terms
hereof. The Company hereby represents and warrants that all shares of Warrant
Stock which may be issued upon the exercise of this Warrant will, upon such
exercise be duly and validly authorized and issued, fully paid and nonassessable
and free from all taxes, liens and charges in respect of the issuance thereof
(other than liens or charges created by or imposed upon the Holder of the
Warrant Stock). The Company agrees that the shares so issued shall be and shall
for all purposes be deemed to have been issued to such holder as the record
owner of such shares as of the close of business on the date on which this
Warrant shall have been exercised in accordance with the terms hereof. No
fractional shares or scrip representing fractional shares shall be issued upon
the exercise of this Warrant. With respect to any fraction of a share called
for upon the exercise of this Warrant, an amount equal to such fraction
multiplied by the Fair Market Value of a share of Warrant Stock on the date of
exercise shall be paid in cash or check to the Holder.
5. CHARGES, TAXES AND EXPENSES
Issuance of certificates for shares of Warrant Stock upon the exercise of
this Warrant shall be made without charge to the Holder for any issue or
transfer tax or other incidental expense in respect of the issuance of such
certificate, all of which taxes and expenses shall be borne by the Holder, and
such certificates shall be issued in the name of the Holder or in such name or
names as may be directed by the Holder provided, however, that in the event
certificates for shares of Warrant Stock are to be issued in a name other than
the name of the Holder, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the Holder.
6. NO RIGHTS AS SHAREHOLDERS
This Warrant does not entitle the Holder to any voting rights or other
rights as a shareholder of the Company prior to the exercise hereof.
7. COMPANY'S RIGHT OF FIRST REFUSAL
Before any Warrants or Common Stock (the "Exercised Shares") held by the
Holder or any transferee may be sold or otherwise transferred (including
transfer by gift or operation of law), the Company or its assignee(s) shall have
a right of first refusal to purchase them on the terms and conditions set forth
in this Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder shall deliver to the
---------------------------
Company a written notice (the "Notice") stating: (i) the Holder's bona fide
intention to sell or otherwise transfer such Warrants or Exercised Shares, as
the case may be; (ii) the name of each proposed purchaser or other transferee
("Proposed Transferee"); (iii) the number of Warrants or Exercised Shares to be
transferred to each Proposed Transferee; and (iv) the bona fide cash price or
other consideration for which the Holder proposes to transfer the Warrants or
the Exercised Shares (the "Offered Price"), and the Holder shall offer the
Warrants or the Exercised Shares at the Offered Price to the Company or its
assignee(s).
-4-
<PAGE>
(b) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Warrants or Exercised Shares proposed to be transferred to any one or more
of the Proposed Transferees, at the purchase price determined in accordance with
subsection (c) below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Warrants or Exercised Shares purchased by the Company or its assignee(s) under
this Section shall be the Offered Price. If the Offered Price includes
consideration other than cash, the cash equivalent value of the non-cash
consideration shall be determined by the Board of Directors of the Company in
good faith.
(d) Payment. Payment of the Purchase Price shall be made in cash (by
-------
check) within 45 days of receipt of the Notice.
(e) Holder's Right to Transfer. If all of the Warrants or Exercised
--------------------------
Shares proposed in the Notice to be transferred to a given Proposed Transferee
are not purchased by the Company or its assignee(s) as provided in this Section,
then the Holder may sell or otherwise transfer such Warrants or Exercised Shares
to that Proposed Transferee at the Offered Price or at a higher price, provided
that such sale or other transfer is consummated within 120 days after the date
of the Notice and provided further that any such sale or other transfer is
effected in accordance with any applicable securities laws and the Proposed
Transferee agrees in writing that the provisions of this Section shall continue
to apply to the Warrants or Exercised Shares in the hands of such Proposed
Transferee. If the Warrants or Exercised Shares described in the Notice are not
transferred to the Proposed Transferee within such period, a new Notice shall be
given to the Company, and the Company or its assignees shall again be offered
the Right of First Refusal before any Warrants or Exercised Shares held by the
Holder may be sold or otherwise transferred.
(f) Exception for Certain Transfers. The Warrant or Exercised Shares
-------------------------------
may be transferred without the Company being offered the Right of First Refusal
in the following transactions; provided that any Transferee shall agree to the
terms of this Section 7 as to the Warrant or any Exercised Shares:
(1) A Holder's transfer of the Warrant or Exercised Shares in
whole or in part to the Company.
(2) A Holder's transfer of the Warrant or Exercised Shares in
whole or in part to a person who, at the time of such transfer, is an officer or
director of the Company.
(3) Where the Holder is a corporation, transfer by such
corporate Holder of the Warrant or Exercised Shares in whole or in part pursuant
to and in accordance with the terms of any merger, consolidation,
reclassification of shares or capital reorganization of such corporate Holder,
or pursuant to a sale of all or substantially all of the stock or assets by such
corporate Holder.
-5-
<PAGE>
Any such transfer shall be made upon surrender of this Warrant or Exercised
Shares together with the Assignment Form attached hereto properly endorsed.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Warrants or Exercised Shares 90 days after the
effective date of the IPO.
8. MARKET STAND-OFF AGREEMENT
The Holder hereby agrees that if so requested by the Company or any
representative of the underwriters in connection with any registration of the
offering of any shares of the Company under the 1933 Act, the Holder shall not
sell or otherwise transfer, directly or indirectly, or make any agreement to
sell or otherwise transfer any shares or other securities of the Company during
the 180-day period following the date of the final prospectus contained in a
registration statement of the Company filed under the 1933 Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Company to become effective under the 1933 Act which includes
securities to be sold on behalf of the Company to the public in an underwritten
public offering under the 1933 Act. The Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such 180-day period.
9. EXCHANGE AND REGISTRY OF WARRANT
This Warrant is exchangeable, upon the surrender hereof by the Holder at
the above-mentioned office or agency of the Company, for a new Warrant in
substantially identical form and dated as of such exchange. The Company shall
maintain at the above-mentioned office or agency a registry showing the name and
address of the registered holder of this Warrant. This Warrant may be
surrendered for exchange, transfer, or exercise in accordance with its terms, at
such office or agency of the Company, and the Company shall be entitled to rely
in all respects, prior to written notice to the contrary, upon such registry.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT
On receipt by the Company of evidence reasonably satisfactory to the
Company of the loss, theft, destruction or mutilation of this Warrant, and in
case of any such loss, theft or destruction of this Warrant, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of any such mutilation, on surrender and cancellation of such
Warrant, the Company will execute and deliver to the Holder, in lieu thereof, a
new warrant in substantially identical form, dated as of such cancellation and
reissuance.
11. SATURDAYS, SUNDAYS AND HOLIDAYS
If the last or appointed day for the taking of any action or the expiration
of any right required or granted herein shall be a Saturday or a Sunday or shall
be a legal holiday, then such action may be taken or such right may be exercised
on the next succeeding business day.
-6-
<PAGE>
12. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES, EXERCISE PRICE
The type and number of securities of the Company issuable upon exercise of
this Warrant and the Exercise Price are subject to adjustment as set forth
below:
(a) Adjustment for Stock Splits, Stock Dividends, Recapitalizations,
----------------------------------------------------------------
Automatic Conversion, etc. The Exercise Price and the number and type of
- --------------------------
securities or other property issuable upon exercise of this Warrant shall be
appropriately and proportionately adjusted to reflect any stock dividend, stock
split, combination of shares, reclassification, recapitalization, automatic
conversion, redemption or other similar event affecting the number or character
of outstanding shares of Warrant Stock, so that the number and type of
securities or other property issuable upon exercise of this Warrant shall be
equal to that which would have been issuable with respect to the number of
shares of Warrant Stock subject hereto at the time of such event, had such
shares of Warrant Stock then been outstanding.
(b) Certificate as to Adjustments. In case of any adjustment in the
-----------------------------
Exercise Price or number and type of securities issuable on the exercise of this
Warrant, the Company will promptly give written notice thereof to the Holder in
the form of a certificate, certified and confirmed by an officer of the Company,
setting forth such adjustment and showing in reasonable detail the facts upon
which adjustment is based.
13. NOTICES OF RECORD DATE, ETC.
In the event of:
(a) any taking by the Company of a record of the holders of Warrant
Stock for the purpose of determining the holders thereof who are entitled to
receive any dividend or other distribution,
(b) any capital reorganization of the Company, any reclassification or
recapitalization of the capital stock of the Company, or any transfer of all or
substantially all the assets of the Company to, or consolidation or merger of,
the Company with or into any person,
(c) any voluntary or involuntary dissolution, liquidation or winding-
up of the Company,
(d) a sale of substantially all of the outstanding capital stock of
the Company or the issuance of new shares representing the majority of the
Company's right to vote, or
(e) the initial public offering of the Company's Common Stock,
then and in each such event the Company will mail to the Holder a notice
specifying the record date for voting or the date of closing , as applicable, of
any event (a)-(e) above. Such notice shall be delivered to the Holder at least
fifteen (15) days prior to the date of the relevant event.
-7-
<PAGE>
14. REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder that:
(a) during the period this Warrant is outstanding, the Company will
reserve from its authorized and unissued Warrant Stock a sufficient number of
shares to provide for the issuance of Warrant Stock upon the exercise of this
Warrant;
(b) the issuance of this Warrant shall constitute full authority to
the Company's officers who are charged with the duty of executing stock
certificates to execute and issue the necessary certificates for the shares of
Warrant Stock issuable upon exercise of this Warrant;
(c) the Company has all requisite legal and corporate power to execute
and deliver this Warrant, to sell and issue the Warrant Stock hereunder and to
carry out and perform its obligations under the terms of this Warrant; and
(d) all corporate action on the part of the Company, its directors and
shareholders necessary for the authorization, execution, delivery and
performance of this Warrant by the Company, the authorization, sale, issuance
and delivery of the Warrant Stock as provided herein and the performance of the
Company's obligations hereunder has been taken;
15. GOVERNING LAW
This Warrant shall be governed by and construed in accordance with the laws
of the State of California.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by a
duly authorized officer.
Dated: ____________, 1996 USWEB CORPORATION
By:
Title:
<PAGE>
NOTICE OF EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to purchase __________ shares of Common
Stock of USWeb Corporation pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price in full.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
(Name)
(Address)
(Social Security Number)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
(Date)
<PAGE>
NOTICE OF NET EXERCISE
To: USWeb Corporation
(1) The undersigned hereby elects to exercise that portion of the attached
Warrant representing the right to purchase ________ shares of Common Stock and
thereby acquire such number of shares of Common Stock of USWeb Corporation as is
determined pursuant to Section 3 of such Warrant, which exercise shall be
effected pursuant to the terms of the attached Warrant.
(2) Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
(Name)
(Address)
(Social Security Number)
(3) The undersigned represents that the aforesaid shares are being acquired
for the account of the undersigned for investment and not with a view to, or for
resale in connection with, the distribution thereof and that the undersigned has
no present intention of distributing or reselling such shares, except in
compliance with applicable federal and state securities laws.
(Date)
<PAGE>
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required
information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby
are hereby assigned to
(Please Print)
whose address is
(Please Print)
Dated:
Holder's Signature:
Holder's Address:
Guaranteed Signature:
NOTE: The signature to this Assignment Form must correspond with the name as it
appears on the face of the Warrant, without alteration or enlargement or any
change whatever, and must be guaranteed by a bank or trust company. Officers of
corporations and those acting in a fiduciary or other representative capacity
should file proper evidence of authority to assign the foregoing Warrant.
NOTE: Assignment of this Warrant may be made only in compliance with the
Company's right of first refusal set forth in Section 7 of the Warrant.
<PAGE>
EXHIBIT 5.1
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
September 30, 1997
USWeb Corporation
2880 Lakeside Drive, Suite 350
Santa Clara, CA 95054
RE: REGISTRATION STATEMENT ON FORM S-1
----------------------------------
FILE NO.
--------
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1 filed by you with
the Securities and Exchange Commission on September 30, 1997 (the
"Registration Statement") in connection with the registration under the
Securities Act of 1933, as amended, of the shares of Common Stock registered
pursuant to the Registration Statement (the "Shares"). The Shares are to be
sold as described in the Registration Statement. As your counsel in connection
with this transaction, we have examined the proceedings taken and proposed to
be taken in connection with said sale and issuance of the Shares.
It is our opinion that the Shares, when issued and sold in the manner
referred to in the Registration Statement, will be legally and validly issued,
fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectuses constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.1
USWEB CORPORATION
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this _____ day
of _________, ____, by and between USWeb Corporation, a Delaware corporation
(the "Company"), and ___________________ ("Indemnitee").
WHEREAS the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and
WHEREAS the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer or
director of the Company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or any alternative
dispute resolution mechanism, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was a director, officer, employee or agent of
the Company, or any subsidiary of the Company, or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of itself,
---------------
create a presumption that Indemnitee did not act in good faith and in a manner
which Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that Indemnitee's conduct was
unlawful.
<PAGE>
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, to the fullest extent permitted by law, amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
-----------------------------
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by
------------------
this Agreement, if Indemnitee is a director of the Company he agrees to serve at
least for the six months after the effective date of this Agreement as a
director and not to resign voluntarily during such period without the written
consent of a majority of the Board of Directors. If Indemnitee is an officer of
the Company not serving under an employment contract, he agrees to serve in such
capacity at least for the balance of the current fiscal year of the Company and
not to resign voluntarily during such period without the written consent of a
majority of the Board of Directors. Following the applicable period set forth
above, Indemnitee agrees to continue to serve in such capacity at the will of
the Company (or under separate agreement, if such agreement exists) so long as
he is duly appointed or elected and qualified in accordance with the applicable
provisions of the Bylaws of the Company or any subsidiary of the Company or
until such time as he tenders his resignation in writing. Nothing contained in
this Agreement is intended to create in Indemnitee any right to continued
employment.
3. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay
-2-
<PAGE>
such amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within thirty (30) days following delivery of a written
request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the President of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee). Notice
shall be deemed received three business days after the date postmarked if sent
by domestic certified or registered mail, properly addressed, five business days
if sent by airmail to a country outside of North America; otherwise notice shall
be deemed received when such notice shall actually be received by the Company.
In addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 14 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee
shall be entitled to receive interim payments of expenses pursuant to Subsection
3(a) unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including it Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the
-3-
<PAGE>
Company shall give prompt notice of the commencement of such proceeding to the
insurers in accordance with the procedures set forth in the respective policies.
The Company shall thereafter take all necessary or desirable action to cause
such insurers to pay, on behalf of the Indemnitee, all amounts payable as a
result of such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ his counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
---- -----
the purview of Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested Directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
-4-
<PAGE>
5. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or settlement of any civil
or criminal action, suit or proceeding, but not, however, for the total amount
thereof, the Company shall nevertheless indemnify Indemnitee for the portion of
such expenses, judgments, fines or penalties to which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
----------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from
----------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of director and officer liability insurance, Indemnitee shall be named
as an insured in such a manner as to provide Indemnitee the same rights and
benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer. Notwithstanding
the foregoing, the Company shall have no obligation to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a
subsidiary or parent of the Company.
8. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
-----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
-5-
<PAGE>
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
-6-
<PAGE>
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications under
-------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
------------------------
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware without regard to the conflict of law principles thereof.
17. Period of Limitations. No legal action shall be brought and no cause
---------------------
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
-------- -------
period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
-7-
<PAGE>
18. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing
waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
--------------------------------
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
USWEB CORPORATION
By:_____________________________
Its:____________________________
Address: 2880 Lakeside Drive Suite 350
Santa Clara, CA 95054
-9-
<PAGE>
AGREED TO AND ACCEPTED:
INDEMNITEE:
_______________________
______________________________
(signature)
Address: __________________
__________________
__________________
-10-
<PAGE>
Exhibit 10.2
USWEB CORPORATION
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE [DATE])
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees and Consultants of
the Company and any Parent or Subsidiary and to promote the success of the
Company's business. Options granted under the Plan may be Incentive Stock
Options or Nonstatutory Stock Options, as determined by the Administrator at the
time of grant of an option and subject to the applicable provisions of Section
422 of the Code and the regulations promulgated thereunder.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees appointed
-------------
pursuant to Section 4 of the Plan.
(b) "Board" means the Board of Directors of the Company.
-----
(c) "Code" means the Internal Revenue Code of 1986, as amended.
----
(d) "Committee" means a Committee appointed by the Board of Directors in
---------
accordance with Section 4 of the Plan.
(e) "Common Stock" means the Common Stock of the Company.
------------
(f) "Company" means USWeb Corporation.
-------
(g) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services and is
compensated for such services, and any director of the Company whether
compensated for such services or not. If and in the event the Company registers
any class of any equity security pursuant to the Exchange Act, the term
Consultant shall thereafter not include directors who are not compensated for
their services or are paid only a director's fee by the Company.
(h) "Continuous Status as an Employee or Consultant" means that the
----------------------------------------------
employment or consulting relationship with the Company, any Parent or Subsidiary
is not interrupted or terminated. Continuous Status as an Employee or
Consultant shall not be considered interrupted in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor. A
leave of
<PAGE>
absence approved by the Company shall include sick leave, military leave, or any
other personal leave. For purposes of Incentive Stock Options, no such leave may
exceed 90 days, unless reemployment upon expiration of such leave is guaranteed
by statute or contract, including Company policies. If reemployment upon
expiration of a leave of absence approved by the Company is not so guaranteed,
on the 181st day of such leave any Incentive Stock Option held by the Optionee
shall cease to be treated as an Incentive Stock Option and shall be treated for
tax purposes as a Nonstatutory Stock Option.
(i) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
(j) "Employee" means any person, including officers and directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(l) "Fair Market Value" means, as of any date, the value of Common Stock
-----------------
determined as follows:
(i) If the Common Stock is listed on any established stock exchange
or a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day prior to the time of determination, as reported in The Wall Street
Journal or such other source as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common Stock,
the Fair Market Value shall be determined in good faith by the Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an Option not intended to qualify as
-------------------------
an Incentive Stock Option.
(o) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(p) "Optioned Stock" means the Common Stock subject to an Option.
--------------
(q) "Optionee" means an Employee or Consultant who receives an Option.
--------
(r) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(s) "Plan" means this 1996 Stock Option Plan.
----
(t) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any successor to
----------
Rule 16b-3, as in effect when discretion is being exercised with respect to the
Plan.
(u) "Section 16(b)" means Section 16(b) of the Securities Exchange Act of
-------------
1934, as amended.
(v) "Share" means a share of the Common Stock, as adjusted in accordance
-----
with Section 11 below.
(w) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 11 of the
-------------------------
Plan, the maximum aggregate number of Shares which may be optioned and sold
under the Plan is 1,800,000 Shares. The Shares may be authorized, but unissued,
or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an option exchange program
authorized by the Administrator, the unpurchased Shares which were subject
thereto shall become available for future grant or sale under the Plan (unless
the Plan has terminated); provided, however, that Shares that have actually been
issued under the Plan shall not be returned to the Plan and shall not become
available for future distribution under the Plan, except that if unvested Shares
are repurchased by the Company at their original purchase price, and the
original purchaser of such Shares did not receive any benefits of ownership of
such Shares, such Shares shall become available for future grant under the Plan.
For purposes of the preceding sentence, voting rights shall not be considered a
benefit of Share ownership.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be administered by
------------------------------
different Committees with respect to different groups of Optionees.
-3-
<PAGE>
(ii) Section 162(m). To the extent that the Administrator determines
--------------
it to be desirable to qualify Options granted hereunder as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the Plan shall
be administered by a Committee of two or more "outside directors" within the
meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the Plan
--------------------
shall be administered by (A) the Board or (B) a Committee, which committee shall
be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange or national market
system upon which the Common Stock is then listed, the Administrator shall have
the authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock, in
accordance with Section 2(l) of the Plan;
(ii) to select the Consultants and Employees to whom Options may from
time to time be granted hereunder;
(iii) to determine whether and to what extent Options are granted
hereunder;
(iv) to determine the number of shares of Common Stock to be covered
by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent with the
terms of the Plan, of any award granted hereunder. Such terms and conditions
may include, but are not limited to, the exercise price, the time or times when
Options may be exercised, any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or the
Shares relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to determine whether and under what circumstances an Option may
be settled in cash under Section 9(e) instead of Common Stock;
-4-
<PAGE>
(viii) to reduce the exercise price of any Option to the then current
Fair Market Value if the Fair Market Value of the Common Stock covered by such
Option has declined since the date the Option was granted;
(ix) to provide for the early exercise of Options for the purchase
of unvested Shares, subject to such terms and conditions as the Administrator
may determine; and
(x) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations and
----------------------------------
interpretations of the Administrator shall be final and binding on all Optionees
and any other holders of any Options.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options may be granted to Employees and
Consultants. Incentive Stock Options may be granted only to Employees. An
Employee or Consultant who has been granted an Option may, if otherwise
eligible, be granted additional Options.
(b) Each Option shall be designated in the written option agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options.
For purposes of this Section 5(b), Incentive Stock Options shall be taken
into account in the order in which they were granted, and the Fair Market Value
of the Shares shall be determined as of the time the Option with respect to such
Shares is granted.
(c) The Plan shall not confer upon any Optionee any right with respect to
the continuation of the Optionee's employment or consulting relationship with
the Company, nor shall it interfere in any way with the Optionee's right or the
Company's right to terminate the Optionee's employment or consulting
relationship at any time, with or without cause.
(d) Upon the Company or a successor corporation issuing any class of
common equity securities required to be registered under Section 12 of the
Exchange Act or upon the Plan being assumed by a corporation having a class of
common equity securities required to be registered under Section 12 of the
Exchange Act, the following limitations shall apply to grants of Options to
Employees:
-5-
<PAGE>
(i) No Employee shall be granted, in any fiscal year of the
Company, Options to purchase more than 1,000,000 Shares.
(ii) In connection with his or her initial employment, an Employee
may be granted Options to purchase up to an additional 750,000 Shares which
shall not count against the limit set forth in subsection (i) above.
(iii) The foregoing limitations shall be adjusted proportionately in
connection with any change in the Company's capitalization as described in
Section 11.
(iv) If an Option is canceled in the same fiscal year of the Company
in which it was granted (other than in connection with a transaction described
in Section 11), the canceled Option will be counted against the limit set forth
in subsection (i) above. For this purpose, if the exercise price of an Option
is reduced, the transaction will be treated as a cancellation of the Option and
the grant of a new Option.
6. Term of Plan. The Plan shall become effective upon the earlier to occur
------------
of its adoption by the Board of Directors or its approval by the shareholders of
the Company, as described in Section 17 of the Plan. It shall continue in
effect for a term of ten (10) years unless sooner terminated under Section 13 of
the Plan.
7. Term of Option. The term of each Option shall be the term stated in the
--------------
Option Agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. However, in the case of an Incentive
Stock Option granted to an Optionee who, at the time the Option is granted, owns
stock representing more than ten percent (10%) of the voting power of all
classes of stock of the Company or any Parent or Subsidiary, the term of the
Option shall be five (5) years from the date of grant thereof or such shorter
term as may be provided in the Option Agreement.
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued pursuant to
exercise of an Option shall be such price as is determined by the Board, but
shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of the grant of such
Incentive Stock Option, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
-6-
<PAGE>
(B) granted to any Employee other than an Employee described in
the preceding paragraph, the per Share exercise price shall be no less than 100%
of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of the grant.
(b) The consideration to be paid for the Shares to be issued upon exercise
of an Option, including the method of payment, shall be determined by the
Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant) and may consist entirely of (1) cash, (2)
check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option have been owned by the Optionee for more
than six months on the date of sur render and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) delivery of a properly executed
exercise notice together with such other documentation as the Administrator and
the broker, if applicable, shall require to effect an exercise of the Option and
delivery to the Company of the sale or loan proceeds required to pay the
exercise price, or (6) any combination of the foregoing methods of payment. In
making its determination as to the type of consideration to accept, the
Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted
-----------------------------------------------
hereunder shall be exercisable at such times and under such conditions as
determined by the Administrator, including performance criteria with respect to
the Company or the Optionee, and as shall be permissible under the terms of the
Plan.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such
exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may, as authorized by the Administrator, consist of any
consideration and method of payment allowable under Section 8(b) of the Plan.
Until the issuance (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company) of the stock
certificate evidencing such Shares, no right to vote or receive dividends or any
other rights as a shareholder shall exist with respect to the Optioned Stock,
notwithstanding the exercise of the Option. The Company shall issue (or cause
to
-7-
<PAGE>
be issued) such stock certificate promptly upon exercise of the Option. No
adjustment will be made for a dividend or other right for which the record date
is prior to the date the stock certificate is issued, except as provided in
Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
(b) Termination of Employment or Consulting Relationship. Upon
----------------------------------------------------
termination of an Optionee's Continuous Status as an Employee or Consultant,
other than upon the Optionee's death or Disability, the Optionee may exercise
his or her Option, but only within such period of time as is specified in the
Notice of Grant, and only to the extent that the Optionee was entitled to
exercise it at the date of termination (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant). In
the absence of a specified time in the Notice of Grant, the Option shall remain
exercisable for three (3) months following the Optionee's termination. In the
case of an Incentive Stock Option, such period of time for exercise shall not
exceed three (3) months from the date of termination. If, on the date of
termination, the Optionee is not entitled to exercise the Optionee's entire
Option, the Shares covered by the unexercisable portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise his
or her Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
Notwithstanding the above, in the event of an Optionee's change in status
from Consultant to Employee or Employee to Consultant, an Optionee's Continuous
Status as an Employee or Consultant shall not automatically terminate solely as
a result of such change in status. However, in such event, an Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option
three months and one day following such change of status.
(c) Disability of Optionee. In the event of termination of an Optionee's
----------------------
Continuous Status as an Employee or Consultant as a result of his or her
Disability, the Optionee may, but only within twelve (12) months from the date
of such termination (and in no event later than the expiration date of the term
of his or her Option as set forth in the Option Agreement), exercise the Option
to the extent the Optionee was otherwise entitled to exercise it on the date of
such termination. To the extent that the Optionee is not entitled to exercise
the Option on the date of termination, or if the Optionee does not exercise the
Option to the extent so entitled within the time specified herein, the Option
shall terminate, and the Shares covered by the Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee, the
-----------------
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the expiration of the term of such Option
as set forth in the Notice of Grant), by the
-8-
<PAGE>
Optionee's estate or by a person who has acquired the right to exercise the
Option by bequest or inheritance, but only to the extent that the Optionee was
entitled to exercise the Option at the date of death. If, at the time of death,
the Optionee was not entitled to exercise his or her entire Option, the Shares
covered by the unexercisable portion of the Option shall immediately revert to
the Plan. If, after death, the Optionee's estate or a person who acquires the
right to exercise the Option by bequest or inheritance does not exercise the
Option within the time specified herein, the Option shall terminate, and the
Shares covered by such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options. Options may not be sold, pledged,
------------------------------
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee.
11. Adjustments Upon Changes in Capitalization or Merger.
----------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option, and the number of shares of Common Stock which have
been authorized for issuance under the Plan but as to which no Options have yet
been granted or which have been returned to the Plan upon cancellation or
expiration of an Option, as well as the price per share of Common Stock covered
by each such outstanding Option, shall be proportionately adjusted for any
increase or decrease in the number of issued shares of Common Stock resulting
from a stock split, reverse stock split, stock dividend, combination or
reclassification of the Common Stock, or any other increase or decrease in the
number of issued shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed dissolution
--------------------------
or liquidation of the Company, the Administrator shall notify each Optionee as
soon as practicable prior to the effective date of such proposed transaction.
The Administrator in its discretion may provide for an Optionee to have the
right to exercise his or her Option until ten (10) days prior to such
transaction
-9-
<PAGE>
as to all of the Optioned Stock covered thereby, including Shares as to which
the Option would not otherwise be exercisable. In addition, the Administrator
may provide that any Company repurchase option applicable to any Shares
purchased upon exercise of an Option shall lapse as to all such Shares, provided
the proposed dissolution or liquidation takes place at the time and in the
manner contemplated. To the extent it has not been previously exercised, an
Option will terminate immediately prior to the consummation of such proposed
action.
(c) Merger or Asset Sale. In the event of a merger of the Company with
--------------------
or into another corporation, or the sale of substantially all of the assets of
the Company, each outstanding Option shall be assumed or an equivalent option
substituted by the successor corporation or a Parent or Subsidiary of the
successor corporation. In the event that the successor corporation refuses to
assume or substitute for the Option, the Optionee shall have the right to
exercise the Option as to all of the Optioned Stock, including Shares as to
which it would not otherwise be exercisable. If an Option is exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee that the Option shall be fully
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option shall terminate upon the expiration of such period. For the purposes
of this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option confers the right to purchase or receive,
for each Share of Optioned Stock subject to the Option immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders of
Common Stock for each Share held on the effective date of the transaction (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding Shares); provided,
however, that if such consideration received in the merger or sale of assets was
not solely common stock of the successor corporation or its Parent, the
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option, for each Share
of Optioned Stock subject to the Option, to be solely common stock of the
successor corporation or its Parent equal in fair market value to the per share
consideration received by holders of Common Stock in the merger or sale of
assets.
12. Time of Granting Options. The date of grant of an Option shall, for all
------------------------
purposes, be the date on which the Administrator makes the determination
granting such Option, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option is so granted within a reasonable time after the date of such
grant.
13. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend, alter,
-------------------------
suspend or discontinue the Plan, but no amendment, alteration, suspension or
discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made without his or her consent. In addition, to
the extent necessary and desirable to comply with Section 422 of the
-10-
<PAGE>
Code (or any other applicable law or regulation, including the requirements of
any stock exchange or national market system upon which the Common Stock is then
listed), the Company shall obtain shareholder approval of any Plan amendment in
such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
----------------------------------
termination of the Plan shall not affect Options already granted, and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated, unless mutually agreed otherwise between the Optionee and
the Board, which agreement must be in writing and signed by the Optionee and the
Company.
14. Conditions Upon Issuance of Shares. Shares shall not be issued pursuant
----------------------------------
to the exercise of an Option unless the exercise of such Option and the issuance
and delivery of such Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the Securities Act of 1933, as
amended, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange or national market system upon which the
Common Stock is then listed or traded, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may require the
person exercising such Option to represent and warrant at the time of any such
exercise that the Shares are being purchased only for investment and without any
present intention to sell or distribute such Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
15. Reservation of Shares. The Company, during the term of this Plan, shall
---------------------
at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory body
having jurisdiction, which authority is deemed by the Company's counsel to be
necessary to the lawful issuance and sale of any Shares hereunder, shall relieve
the Company of any liability in respect of the failure to issue or sell such
Shares as to which such requisite authority shall not have been obtained.
16. Agreements. Options shall be evidenced by written agreements in such
----------
form as the Administrator shall approve from time to time.
17. Shareholder Approval. Continuance of the Plan shall be subject to
--------------------
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under applicable state and federal law and the
rules of any stock exchange or national market system upon which the Common
Stock is then listed or traded.
-11-
<PAGE>
USWEB CORPORATION
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE [DATE])
NOTICE OF GRANT
Unless otherwise defined herein, the terms defined in the 1996 Stock Option
Plan (the "Plan") shall have the same defined meanings in this Notice of Grant.
[Optionee's Name and Address]
- -----------------------------
- -----------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Stock Option Agreement,
as follows:
Grant Number ____________________
Date of Grant ____________________
Vesting Commencement Date ____________________
Exercise Price per Share $____________________
Total Number of Shares Granted ____________________
Total Exercise Price $____________________
Type of Option: ____ Incentive Stock Option
____ Nonstatutory Stock Option
Term/Expiration Date: _____________________________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
Twenty-five percent (25%) of the Shares subject to this Option shall vest
twelve (12) months after the Vesting Commencement Date, and one forty-eighth
(1/48th) of the Shares subject to the Option shall vest each month thereafter.
<PAGE>
Termination Period:
------------------
This Option may be exercised for three (3) months after termination of
employment or consulting relationship, or such longer period as may be
applicable upon death or Disability of Optionee as provided in the Plan, but in
no event later than the Term/Expiration Date as provided above.
-2-
<PAGE>
USWEB CORPORATION
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE [DATE])
OPTION AGREEMENT
1. Grant of Option. USWeb Corporation (the "Company"), hereby grants to the
---------------
Optionee (the "Optionee") named in the Notice of Grant, an option (the "Option")
to purchase the total number of shares of Common Stock (the "Shares") set forth
in the Notice of Grant, at the exercise price per share set forth in the Notice
of Grant (the "Exercise Price") subject to the terms, definitions and provisions
of the 1996 Stock Option Plan (the "Plan") adopted by the Company, which is
incorporated herein by reference. Unless otherwise defined herein, the terms
defined in the Plan shall have the same defined meanings in this Option
Agreement.
If designated in the Notice of Grant as an Incentive Stock Option ("ISO"),
this Option is intended to qualify as an Incentive Stock Option as defined in
Section 422 of the Code. However, if this Option is intended to be an Incentive
Stock Option, to the extent that it exceeds the $100,000 rule of Code Section
422(d) it shall be treated as a Nonstatutory Stock Option ("NSO").
2. Exercise of Option. This Option shall be exercisable during its term in
------------------
accordance with the Vesting Schedule set out in the Notice of Grant and with the
provisions of Section 9 of the Plan as follows:
(i) Right to Exercise.
-----------------
(a) This Option may not be exercised for a fraction of a Share.
(b) In the event of Optionee's death, disability or other termination
of the Optionee's Continuous Status as an Employee or Consultant, the
exercisability of the Option is governed by Sections 6, 7 and 8 below, subject
to the limitation contained in subsection 2(i)(c).
(c) In no event may this Option be exercised after the date of
expiration of the term of this Option as set forth in the Notice of Grant.
(ii) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
<PAGE>
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange or national market system upon which the
Common Stock is then listed. Assuming such compliance, for income tax purposes
the Shares shall be considered transferred to the Optionee on the date on which
the Option is exercised with respect to such Shares.
3. Optionee's Representations. In the event the Shares purchasable
--------------------------
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended, at the time this Option is exercised,
Optionee shall, if required by the Company, concurrently with the exercise of
all or any portion of this Option, deliver to the Company his or her Investment
Representation Statement in the form attached hereto as Exhibit B.
4. Method of Payment. Payment of the Exercise Price shall be by any of the
-----------------
following, or a combination thereof, at the election of the Optionee:
(i) cash; or
(ii) check; or
(iii) surrender of other shares of Common Stock of the Company which
(A) in the case of Shares acquired pursuant to the exercise of a Company option,
have been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a Fair Market Value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(iv) to the extent authorized by the Company, delivery of a properly
executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option and delivery to the Company of the sale or loan pro ceeds
required to pay the Exercise Price.
5. Restrictions on Exercise. This Option may not be exercised if the
------------------------
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations as promulgated by the
Federal Reserve Board. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
6. Termination of Relationship. In the event an Optionee's Continuous Status
---------------------------
as an Employee or Consultant terminates, Optionee may, to the extent otherwise
so entitled at the date of such termination (the "Termination Date"), exercise
this Option during the Termination Period set out in the Notice of Grant. To
the extent that Optionee was not entitled to exercise this Option
-2-
<PAGE>
at the date of such termination, or if Optionee does not exercise this Option
within the time specified herein, the Option shall terminate.
7. Disability of Optionee. Notwithstanding the provisions of Section 6
----------------------
above, in the event of termination of an Optionee's Continuous Status as an
Employee or Consultant as a result of his or her Disability, Optionee may, but
only within twelve (12) months from the date of such termination (and in no
event later than the expiration date of the term of such Option as set forth in
the Notice of Grant) exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination. To the extent that Optionee is not
entitled to exercise the Option at the date of termination, or if Optionee does
not exercise such Option to the extent so entitled within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
8. Death of Optionee. In the event of termination of Optionee's Continuous
-----------------
Status as an Employee or Consultant as a result of the death of Optionee, the
Option may be exercised at any time within twelve (12) months following the date
of death (but in no event later than the date of expiration of the term of this
Option as set forth in Section 10 below), by Optionee's estate or by a person
who acquired the right to exercise the Option by bequest or inheritance, but
only to the extent the Optionee could exercise the Option at the date of death.
9. Non-Transferability of Option. This Option may not be transferred in any
-----------------------------
manner otherwise than by will or by the laws of descent or distribution and may
be exercised during the lifetime of Optionee only by Optionee. The terms of
this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
10. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
11. Tax Consequences. Set forth below is a brief summary as of the date of
----------------
this Option of some of the federal tax consequences of exercise of this Option
and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE, AND THE
TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE SHOULD CONSULT A TAX
ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(i) Exercise of an ISO. If this Option qualifies as an ISO, there will
------------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Shares on the date
of exercise over the Exercise Price will be treated as an adjustment to the
alternative minimum tax for federal tax purposes and may subject the Optionee to
the alternative minimum tax in the year of exercise.
-3-
<PAGE>
(ii) Exercise of an NSO. There may be a regular federal income tax
------------------
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Shares on the date of exercise
over the Exercise Price. If Optionee is an Employee, the Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(iii) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and are disposed of at least two years after the Date of
Grant, any gain realized on disposition of the Shares will also be treated as
long-term capital gain for federal income tax purposes. If Shares purchased
under an ISO are disposed of within such one-year period or within two years
after the Date of Grant, any gain realized on such disposition will be treated
as compensation income (taxable at ordinary income rates) to the extent of the
difference between the Exercise Price and the lesser of (1) the Fair Market
Value of the Shares on the date of exercise, or (2) the sale price of the
Shares.
(iv) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
USWeb Corporation
By: ____________________________________
-4-
<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S 1996 STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT
CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he is
familiar with the terms and provisions thereof, and hereby accepts this Option
subject to all of the terms and provisions thereof. Optionee has reviewed the
Plan and this Option in their entirety, has had an opportunity to obtain the
advice of counsel prior to executing this Option and fully understands all
provisions of the Option. Optionee hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Administrator upon
any questions arising under the Plan or this Option. Optionee further agrees to
notify the Company upon any change in the residence address indicated below.
Dated: ____________________ ____________________________________________
Optionee
Residence Address:
_____________________________________________
_____________________________________________
-5-
<PAGE>
CONSENT OF SPOUSE
-----------------
The undersigned spouse of Optionee has read and hereby approves the terms and
conditions of the Plan and this Option Agreement. In consideration of USWeb
Corporation's granting his or her spouse the right to purchase Shares as set
forth in the Plan and this Option Agreement, the undersigned hereby agrees to be
irrevocably bound by the terms and conditions of the Plan and this Option
Agreement and further agrees that any community property interest shall be
similarly bound. The undersigned hereby appoints the undersigned's spouse as
attorney-in-fact for the undersigned with respect to any amendment or exercise
of rights under the Plan or this Option Agreement.
_______________________________________
Spouse of Optionee
-6-
<PAGE>
EXHIBIT A
---------
USWEB CORPORATION
1996 STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE [DATE])
EXERCISE NOTICE
USWeb Corporation
3000 Lakeside Drive
Santa Clara, CA 95054
Attention: Secretary
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
--------
_________ shares of the Common Stock (the "Shares") of USWeb Corporation (the
"Company") under and pursuant to the 1996 Stock Option Plan, as amended (the
"Plan") and the [ ] Incentive [ ] Nonstatutory Stock Option Agreement dated
________, 19___ (the "Stock Option Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Stock Option Agreement and agrees
to abide by and be bound by their terms and conditions.
3. Rights as Shareholder. Until the stock certificate evidencing such Shares
---------------------
is issued (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to the
Optioned Stock, notwithstanding the exercise of the Option. The Company shall
issue (or cause to be issued) such stock certificate promptly after the Option
is exercised. No adjustment will be made for a dividend or other right for
which the record date is prior to the date the stock certificate is issued,
except as provided in Section 11 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee
disposes of the Shares or the Company and/or its assignee(s) exercises the Right
of First Refusal hereunder. Upon such exercise, Optionee shall have no further
rights as a holder of the Shares so purchased except the right to receive
payment for the Shares so purchased in accordance with the provisions of this
Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the
Shares so purchased to be surrendered to the Company for transfer or
cancellation.
4. Company's Right of First Refusal. Before any Shares held by Optionee or
--------------------------------
any transferee (either being sometimes referred to herein as the "Holder") may
be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
<PAGE>
(a) Notice of Proposed Transfer. The Holder of the Shares shall deliver
---------------------------
to the Company a written notice (the "Notice") stating: (i) the Holder's bona
fide intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee (the "Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty (30)
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price (the "Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Administrator in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the option
-------
of the Company or its assignee(s), in cash, by check, by cancellation of all or
a portion of any outstanding indebtedness of the Holder to the Company (or, in
the case of repurchase by an assignee, to the assignee), or by any combination
thereof within 30 days after receipt of the Notice or in the manner and at the
times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the Company and/or its assignees shall again
be offered the Right of First Refusal before any Shares held by the Holder may
be sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, brother or sister. In such case, the transferee or other recipient
shall receive and hold the Shares so
-2-
<PAGE>
transferred subject to the provisions of this Section, and there shall be no
further transfer of such Shares except in accordance with the terms of this
Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate ninety (90) days after the closing of the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the Securities Act of 1933, as amended.
5. Tax Consultation. Optionee understands that Optionee may suffer adverse
----------------
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
6. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall cause
-------
the legends set forth below, or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by state or federal securities laws at
the time of the issuance of the Shares:
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED,
SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR THE ISSUER OF THE SHARES (THE "ISSUER") HAS
RECEIVED AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE
ISSUER THAT SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE WITH THE ACT.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE ISSUER
OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER
AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED
AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND
RIGHT OF FIRST REFUSAL ARE BINDING ON TRANSFEREES OF THE SHARES
REPRESENTED HEREBY.
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions
-3-
<PAGE>
to its transfer agent, if any, and that, if the Company transfers its own
securities, it may make appropriate notations to the same effect in its own
records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
7. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
8. Interpretation. Any dispute regarding the interpretation of this
--------------
Agreement shall be submitted by Optionee or by the Company forthwith to the
Administrator of the Plan, which shall review such dispute at its next regular
meeting. The resolution of such a dispute by the Administrator shall be final
and binding on the Company and on Optionee.
9. Governing Law; Severability. This Agreement shall be governed by and
---------------------------
construed in accordance with the laws of the State of California excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
10. Notices. Any notice required or permitted hereunder shall be given in
-------
writing and shall be deemed effectively given upon personal delivery or three
(3) days after deposit in the United States mail by certified mail, with postage
and fees prepaid, addressed to the other party at its address as shown below
beneath its signature, or to such other address as such party may designate in
writing from time to time to the other party.
11. Further Instruments. The parties agree to execute such further
-------------------
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
12. Delivery of Payment. Optionee herewith delivers to the Company the full
-------------------
Exercise Price for the Shares.
13. Entire Agreement. The Plan, the Notice of Grant, and the Stock Option
----------------
Agreement are incorporated herein by reference. This Agreement, the Plan, the
Notice of Grant, the Stock Option Agreement and the Investment Representation
Statement (if applicable) constitute the entire agreement of the parties and
supersede in their entirety all prior undertakings and agreements of the Company
and Optionee with respect to the subject matter hereof.
-4-
<PAGE>
Submitted by: Accepted by:
OPTIONEE: USWeb Corporation
By:_______________________________
Its:______________________________
___________________________
(Signature)
Address: Address:
- ------- -------
___________________________ 3000 Lakeside Drive
Santa Clara, CA 95054
___________________________
-5-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : USWEB CORPORATION
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Optionee's
investment intent as expressed herein. In this connection, Optionee understands
that, in the view of the Securities and Exchange Commission, the statutory basis
for such exemption may be unavailable if Optionee's representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future. Optionee
further understands that the Securities must be held indefinitely unless they
are subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or such registration is not required in the opinion of counsel
satisfactory to the Company and any other legend required under then applicable
state or federal securities laws.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the Securities Act, which, in substance, permit limited
public resale of "restricted securities" acquired, directly or indirectly from
the issuer thereof, in a non-public offering subject to the satisfaction of
certain conditions. Rule 701 provides that if the issuer
<PAGE>
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
ninety (90) days thereafter (or such longer period as any market stand-off
agreement may require) the Securities exempt under Rule 701 may be resold,
subject to the satisfaction of certain of the conditions specified by Rule 144,
including: (1) the resale being made through a broker in an unsolicited
"broker's transaction" or in transactions directly with a market maker (as said
term is defined under the Exchange Act); and, in the case of an affiliate, (2)
the availability of certain public information about the Company, (3) the amount
of Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144,
if applicable.
In the event that the Company does not qualify under Rule 701 at the time of
grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than three years, the satisfaction of the conditions set forth
in sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee hereby agrees that if so requested by the Company or any
representative of the underwriters (the "Managing Underwriter") in connection
with any registration of the offering of any securities of the Company under the
Securities Act, Optionee shall not sell or otherwise transfer any Shares or
other securities of the Company during the 180-day period (or such longer period
of time as may be requested in writing by the Managing Underwriter and agreed to
in writing by the Company) (the "Market Standoff Period") following the date of
the final Prospectus included in a registration statement of the Company filed
under the Securities Act; provided, however, that such restriction shall only
apply to the first registration statement of the Company to become effective
under the Securities Act which includes securities to be sold on behalf of the
Company to the general public in an underwritten public offering under the
Securities Act. The Company may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such Market
Standoff Period.
-2-
<PAGE>
(e) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A under the Securities Act, or some
other registration exemption will be required; and that, notwithstanding the
fact that Rules 144 and 701 are not exclusive, the Staff of the Securities and
Exchange Commission has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rules 144 or 701 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk. Optionee understands that no
assurances can be given that any such other registration exemption will be
available in such event.
Signature of Optionee:
_________________________________________
Date:____________________________, 19____
-3-
<PAGE>
EXHIBIT 10.4
USWEB CORPORATION
1997 ACQUISITION STOCK OPTION PLAN
(AS AMENDED AND RESTATED EFFECTIVE [DATE])
1. Purposes of the Plan. The purposes of this Stock Option Plan are to
--------------------
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock
Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
----------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means USWeb Corporation, a Delaware corporation.
-------
(h) "Consultant" means any person who is engaged by the Company or any
----------
Parent or Subsidiary to render consulting or advisory services to such entity.
(i) "Director" means a member of the Board of Directors of the Company.
--------
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to qualify
-------------------------
as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement between
----------------
the Company and an Optionee evidencing the terms and conditions of an individual
Option grant. The Option Agreement is subject to the terms and conditions of
the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this 1997 Acquisition Stock Option Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 12 below.
(y) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(z) "Service Provider" means an Employee, Director or Consultant.
----------------
(aa) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 below.
(bb) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 12 below.
(cc) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is [__________] Shares, plus an annual increase to be
added on each anniversary date of the adoption of the Plan equal to the lesser
of (i) [_____] Shares, (ii) [_____] percent ([__]%) of the outstanding Shares on
such date or (iii) a lesser amount determined by the Board. The Shares may be
authorized, but unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased
-3-
<PAGE>
Shares which were subject thereto shall become available for future grant or
sale under the Plan (unless the Plan has terminated). However, Shares that have
actually been issued under the Plan, upon exercise of either an Option or Stock
Purchase Right, shall not be returned to the Plan and shall not become available
for future distribution under the Plan, except that if Shares of Restricted
Stock are repurchased by the Company at their original purchase price, such
Shares shall become available for future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. The Plan may be
------------------------------
administered by different Committees with respect to different groups of Service
Providers.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the meaning of Section 162(m) of the
Code, the Plan shall be administered by a Committee of two or more "outside
directors" within the meaning of Section 162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify transactions
----------
hereunder as exempt under Rule 16b-3, the transactions contemplated hereunder
shall be structured to satisfy the requirements for exemption under Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the Plan
---------------------------
and, in the case of a Committee, the specific duties delegated by the Board to
such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be
-4-
<PAGE>
based on performance criteria), any vesting acceleration or waiver of forfeiture
restrictions, and any restriction or limitation regarding any Option or Stock
Purchase Right or the Common Stock relating thereto, based in each case on such
factors as the Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an Option
may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares withheld for this purpose shall be made in such form and under such
conditions as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) $100,000 Rule. Each Option shall be designated in the Option
-------------
Agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options
-5-
<PAGE>
shall be taken into account in the order in which they were granted. The Fair
Market Value of the Shares shall be determined as of the time the Option with
respect to such Shares is granted.
(b) No Right to Continuing Employment. Neither the Plan nor any Option
---------------------------------
or Stock Purchase Right shall confer upon an Optionee any right with respect to
continuing the Optionee's relationship as a Service Provider with the Company,
nor shall they interfere in any way with the Optionee's right or the Company's
right to terminate such relationship at any time, with or without cause.
(c) Share Limitations. The following limitations shall apply to
-----------------
grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than [_________] Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional
[_______________] Shares which shall not count against the limit set forth in
subsection (i) above.
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 15 of the Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option granted
to an Optionee who, at the time the Incentive Stock Option is granted, owns
stock representing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
term of the Incentive Stock Option shall be five (5) years from the date of
grant or such shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued upon exercise of an Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
-6-
<PAGE>
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price of less than 100% of the Fair Market Value per Share
on the date of grant pursuant to a merger or other corporate transaction.
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions which must be satisfied before the
Option may be exercised.
(c) Consideration. The consideration to be paid for the Shares to be
-------------
issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant). Such consideration may consist of
(1) cash, (2) check, (3) promissory note, (4) other Shares which (x) in the case
of Shares acquired upon exercise of an Option, have been owned by the Optionee
for more than six months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which such Option shall be exercised, (5) consideration received by
the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (6) any combination of the foregoing methods of
payment. In making its determination as to the type of consideration to accept,
the Administrator shall consider if acceptance of such consideration may be
reasonably expected to benefit the Company.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Unless the Administrator provides otherwise, vesting of
Options granted hereunder shall be tolled during any unpaid leave of absence. An
Option may not be exercised for a fraction of a Share.
-7-
<PAGE>
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 13 of the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination (but in no event
later than the expiration of the term of such Option as set forth in the Option
Agreement). In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, on the date of termination, the Optionee is not vested as to
his or her entire Option, the Shares covered by the unvested portion of the
Option shall revert to the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (but in no event later than the expiration of the term of such
Option as set forth in the Notice of Grant), by the Optionee's estate or by a
person who acquires the right to exercise the Option by bequest or
-8-
<PAGE>
inheritance, but only to the extent that the Option is vested on the date of
death. In the absence of a specified time in the Option Agreement, the Option
shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to his or
her entire Option, the Shares covered by the unvested portion of the Option
shall immediately revert to the Plan. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution. If the Option is not so exercised within the time specified
herein, the Option shall terminate, and the Shares covered by such Option shall
revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
12. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The offer shall be accepted by execution of a
Restricted Stock purchase agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at such rate as the
Administrator may determine.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
-9-
<PAGE>
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 13 of
the Plan.
13. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the extent it has not been previously exercised, an
Option or Stock Purchase Right will terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the
-10-
<PAGE>
successor corporation refuses to assume or substitute for the Option or Stock
Purchase Right, the Optionee shall fully vest in and have the right to exercise
the Option or Stock Purchase Right as to all of the Optioned Stock, including
Shares as to which it would not otherwise be vested or exercisable. If an Option
or Stock Purchase Right becomes fully vested and exercisable in lieu of
assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
14. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Stock Purchase Right is so granted within a reasonable time
after the date of such grant.
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
-11-
<PAGE>
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
-12-
<PAGE>
EXHIBIT 10.5
USWEB CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 1997 Employee Stock Purchase
Plan of USWeb Corporation.
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "Employee Stock Purchase
Plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. Definitions.
-----------
(a) "Board" shall mean the Board of Directors of the Company.
-----
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" shall mean the Common Stock of the Company.
------------
(d) "Company" shall mean USWeb Corporation, a Delaware corporation,
-------
and any Designated Subsidiary of the Company.
(e) "Compensation" shall mean all base straight time gross earnings
------------
[AND COMMISSIONS, BUT EXCLUSIVE OF PAYMENTS FOR OVERTIME, SHIFT PREMIUM,
INCENTIVE COMPENSATION, INCENTIVE PAYMENTS, BONUSES AND OTHER COMPENSATION.]
(f) "Designated Subsidiary" shall mean any Subsidiary which has been
---------------------
designated by the Board from time to time in its sole discretion as eligible to
participate in the Plan.
(g) "Employee" shall mean any individual who is an Employee of the
--------
Company for tax purposes whose customary employment with the Company is at least
twenty (20) hours per week and more than five (5) months in any calendar year.
For purposes of the Plan, the employment relationship shall be treated as
continuing intact while the individual is on sick leave or other leave of
absence approved by the Company. Where the period of leave exceeds 90 days and
the individual's right to reemployment is not guaranteed either by statute or by
contract, the employment relationship shall be deemed to have terminated on the
91st day of such leave.
(h) "Enrollment Date" shall mean the first day of each Offering
---------------
Period.
(i) "Exercise Date" shall mean the last day of each Purchase Period.
-------------
<PAGE>
(j) "Fair Market Value" shall mean, as of any date, the value of
-----------------
Common Stock determined as follows:
(1) If the Common Stock is listed on any established stock exchange or
a national market system, including without limitation the Nasdaq National
Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market
Value shall be the closing sales price for such stock (or the closing bid, if no
sales were reported) as quoted on such exchange or system for the last market
trading day on the date of such determination, as reported in The Wall Street
---------------
Journal or such other source as the Administrator deems reliable, or;
- -------
(2) If the Common Stock is regularly quoted by a recognized securities
dealer but selling prices are not reported, its Fair Market Value shall be the
mean of the closing bid and asked prices for the Common Stock on the date of
such determination, as reported in The Wall Street Journal or such other source
-----------------------
as the Board deems reliable, or;
(3) In the absence of an established market for the Common Stock, the
Fair Market Value thereof shall be determined in good faith by the Board, or;
(4) For purposes of the Enrollment Date of the first Offering Period
under the Plan, the Fair Market Value shall be the initial price to the public
as set forth in the final prospectus included within the registration statement
in Form S-1 filed with the Securities and Exchange Commission for the initial
public offering of the Company's Common Stock (the "Registration Statement").
(k) "Offering Periods" shall mean the periods of approximately twenty-
----------------
four (24) months during which an option granted pursuant to the Plan may be
exercised, commencing on the first Trading Day on or after [MAY 1] and [NOVEMBER
1] of each year and terminating on the last Trading Day in the periods ending
twenty-four months later; provided, however, that the first Offering Period
under the Plan shall commence with the first Trading Day on or after the date on
which the Securities and Exchange Commission declares the Company's Registration
Statement effective and ending on the last Trading Day on or after [OCTOBER 31,
1999]. The duration and timing of Offering Periods may be changed pursuant to
Section 4 of this Plan.
(l) "Plan" shall mean this Employee Stock Purchase Plan.
----
(m) "Purchase Price" shall mean an amount equal to 85% of the Fair
--------------
Market Value of a share of Common Stock on the Enrollment Date or on the
Exercise Date, whichever is lower.
(n) "Purchase Period" shall mean the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date,
except that the first Purchase Period of any Offering Period shall commence on
the Enrollment Date and end with the next Exercise Date.
-2-
<PAGE>
(o) "Reserves" shall mean the number of shares of Common Stock covered
--------
by each option under the Plan which have not yet been exercised and the number
of shares of Common Stock which have been authorized for issuance under the Plan
but not yet placed under option.
(p) "Subsidiary" shall mean a corporation, domestic or foreign, of
----------
which not less than 50% of the voting shares are held by the Company or a
Subsidiary, whether or not such corporation now exists or is hereafter organized
or acquired by the Company or a Subsidiary.
(q) "Trading Day" shall mean a day on which national stock exchanges
-----------
and the Nasdaq System are open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase such stock possessing five percent (5%) or more of the total combined
voting power or value of all classes of the capital stock of the Company or of
any Subsidiary, or (ii) to the extent that his or her rights to purchase stock
under all employee stock purchase plans of the Company and its subsidiaries
accrues at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of
stock (determined at the fair market value of the shares at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after [MAY 1] and [NOVEMBER 1] each year, or on such other
date as the Board shall determine, and continuing thereafter until terminated in
accordance with Section 20 hereof; provided, however, that the first Offering
Period under the Plan shall commence with the first Trading Day on or after the
date on which the Securities and Exchange Commission declares the Company's
Registration Statement effective and ending on the last Trading Day on or after
[OCTOBER 31, 1999]. The Board shall have the power to change the duration of
Offering Periods (including the commencement dates thereof) with respect to
future offerings without stockholder approval if such change is announced at
least five (5) days prior to the scheduled beginning of the first Offering
Period to be affected thereafter.
-3-
<PAGE>
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing a subscription agreement authorizing payroll deductions in the form
of Exhibit A to this Plan and filing it with the Company's payroll office prior
to the applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding [_______________ (___%)]
of the Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited to
his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the Plan
as provided in Section 10 hereof, or may increase or decrease the rate of his or
her payroll deductions during the Offering Period by completing or filing with
the Company a new subscription agreement authorizing a change in payroll
deduction rate. The Board may, in its discretion, limit the number of
participation rate changes during any Offering Period. The change in rate shall
be effective with the first full payroll period following five (5) business days
after the Company's receipt of the new subscription agreement unless the Company
elects to process a given change in participation more quickly. A participant's
subscription agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased to zero percent (0%) at any time during a
Purchase Period. Payroll deductions shall recommence at the rate provided in
such participant's subscription agreement at the beginning of the first Purchase
Period which is scheduled to end in the following calendar year, unless
terminated by the participant as provided in Section 10 hereof.
(e) At the time the option is exercised, in whole or in part, or at
the time some or all of the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the exercise of the option or the disposition of the Common Stock. At any time,
-4-
<PAGE>
the Company may, but shall not be obligated to, withhold from the participant's
compensation the amount necessary for the Company to meet applicable withholding
obligations, including any withholding required to make available to the Company
any tax deductions or benefits attributable to sale or early disposition of
Common Stock by the Employee.
7. Grant of Option. On the Enrollment Date of each Offering Period, each
---------------
eligible Employee participating in such Offering Period shall be granted an
option to purchase on each Exercise Date during such Offering Period (at the
applicable Purchase Price) up to a number of shares of the Company's Common
Stock determined by dividing such Employee's payroll deductions accumulated
prior to such Exercise Date and retained in the Participant's account as of the
Exercise Date by the applicable Purchase Price; provided that in no event shall
an Employee be permitted to purchase during each Purchase Period more than
[2,500] shares of the Company's Common Stock (subject to any adjustment pursuant
to Section 19) on the Enrollment Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
Exercise of the option shall occur as provided in Section 8 hereof, unless the
participant has withdrawn pursuant to Section 10 hereof. The option shall
expire on the last day of the Offering Period.
8. Exercise of Option. Unless a participant withdraws from the Plan as
------------------
provided in Section 10 hereof, his or her option for the purchase of shares
shall be exercised automatically on the Exercise Date, and the maximum number of
full shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period or Offering Period, subject to earlier with drawal by the
participant as provided in Section 10 hereof. Any other monies left over in a
participant's account after the Exercise Date shall be returned to the
participant. During a participant's lifetime, a participant's option to
purchase shares hereunder is exercisable only by him or her.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal.
----------
(a) A participant may withdraw all but not less than all the payroll
deductions credited to his or her account and not yet used to exercise his or
her option under the Plan at any time by giving written notice to the Company in
the form of Exhibit B to this Plan. All of the participant's payroll deductions
credited to his or her account shall be paid to such participant promptly after
receipt of notice of withdrawal and such participant's option for the Offering
Period shall be automatically terminated, and no further payroll deductions for
the purchase of shares shall be made for such Offering Period. If a participant
withdraws from an Offering Period, payroll deductions
-5-
<PAGE>
shall not resume at the beginning of the succeeding Offering Period unless the
participant delivers to the Company a new subscription agreement.
(b) A participant's withdrawal from an Offering Period shall not have
any effect upon his or her eligibility to participate in any similar plan which
may hereafter be adopted by the Company or in succeeding Offering Periods which
commence after the termination of the Offering Period from which the participant
withdraws.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee, for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Offering Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated. The preceding sentence notwithstanding, a participant who receives
payment in lieu of notice of termination of employment shall be treated as
continuing to be an Employee for the participant's customary number of hours per
week of employment during the period in which the participant is subject to such
payment in lieu of notice.
12. Interest. No interest shall accrue on the payroll deductions of a
--------
participant in the Plan.
13. Stock.
-----
(a) The maximum number of shares of the Company's Common Stock which
shall be made available for sale under the Plan shall be [_____] shares, plus an
annual increase to be added on the date of [EACH ANNUAL MEETING OF THE
STOCKHOLDERS] equal to the lesser of (i) [_____] shares, (ii) [__]% of the
outstanding shares on such date or (iii) a lesser amount determined by the
Board, subject to adjustment upon changes in capitalization of the Company as
provided in Section 19 hereof. If, on a given Exercise Date, the number of
shares with respect to which options are to be exercised exceeds the number of
shares then available under the Plan, the Company shall make a pro rata
allocation of the shares remaining available for purchase in as uniform a manner
as shall be practicable and as it shall determine to be equitable.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
-6-
<PAGE>
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary.
--------------------------
(a) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such partici pant's death subsequent to an Exercise
Date on which the option is exercised but prior to delivery to such participant
of such shares and cash. In addition, a participant may file a written
designation of a beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death prior to
exercise of the option. If a participant is married and the designated
beneficiary is not the spouse, spousal consent shall be required for such
designation to be effective.
(b) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and
in the absence of a beneficiary validly designated under the Plan who is living
at the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its discretion, may deliver such shares and/or
cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option or
to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 15 hereof) by the participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10 hereof.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
-7-
<PAGE>
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
---------------------------------------------------------------------
Merger or Asset Sale.
--------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the Reserves, the maximum number of shares each
participant may purchase each Purchase Period (pursuant to Section 7), as well
as the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration". Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date"), and
shall terminate immediately prior to the consummation of such proposed
dissolution or liquidation, unless provided otherwise by the Board. The New
Exercise Date shall be before the date of the Company's proposed dissolution or
liquidation. The Board shall notify each participant in writing, at least ten
(10) business days prior to the New Exercise Date, that the Exercise Date for
the participant's option has been changed to the New Exercise Date and that the
participant's option shall be exercised automatically on the New Exercise Date,
unless prior to such date the participant has withdrawn from the Offering Period
as provided in Section 10 hereof.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation or a Parent or
Subsidiary of the successor corporation. In the event that the successor
corporation refuses to assume or substitute for the option, any Purchase Periods
then in progress shall be shortened by setting a new Exercise Date (the "New
Exercise Date") and any Offering Periods then in progress shall end on the New
Exercise Date. The New Exercise Date shall be before the date of the Company's
proposed sale or merger. The Board shall notify each participant in writing, at
least ten (10) business days prior to the New Exercise Date, that the Exercise
Date for the participant's option has been changed to the New Exercise Date and
that the participant's option shall be exercised automatically on the New
Exercise Date, unless prior to such date the participant has withdrawn from the
Offering Period as provided in Section 10 hereof.
-8-
<PAGE>
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 19 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its stockholders. Except as provided in Section 19
hereof, no amendment may make any change in any option theretofore granted which
adversely affects the rights of any participant. To the extent necessary to
comply with Section 423 of the Code (or any successor rule or provision or any
other applicable law, regulation or stock exchange rule), the Company shall
obtain stockholder approval in such a manner and to such a degree as required.
(b) Without stockholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
21. Notices. All notices or other communications by a participant to the
-------
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or by
the person, designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, the rules and regulations promulgated thereunder, and the requirements
of any stock exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with respect to such
compliance.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are being purchased only for investment and
without any present intention to sell or distribute such shares if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned applicable provisions of law.
-9-
<PAGE>
23. Term of Plan. The Plan shall become effective upon the earlier to
------------
occur of its adoption by the Board of Directors or its approval by the
stockholders of the Company. It shall continue in effect for a term of ten (10)
years unless sooner terminated under Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-10-
<PAGE>
EXHIBIT A
---------
USWEB CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: ___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary(ies)
1. _____________________________________________________ hereby elects to
participate in the USWeb Corporation 1997 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to pur chase shares of the
Company's Common Stock in accordance with this Subscription Agreement and
the Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (up to _____%) during the Offering
Period in accordance with the Employee Stock Purchase Plan. (Please note
that no fractional percentages are permitted.)
3. I understand that said payroll deductions shall be accumulated for the
purchase of shares of Common Stock at the applicable Purchase Price
determined in accordance with the Employee Stock Purchase Plan. I
understand that if I do not withdraw from an Offering Period, any
accumulated payroll deductions will be used to automatically exercise my
option.
4. I have received a copy of the complete Employee Stock Purchase Plan. I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan. I understand that my
ability to exercise the option under this Subscription Agreement is subject
to stockholder approval of the Employee Stock Purchase Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse only):
___________________________________________________________________________
___________.
6. I understand that if I dispose of any shares received by me pursuant to the
Plan within 2 years after the Enrollment Date (the first day of the
Offering Period during which I purchased such shares) or one year after the
Exercise Date, I will be treated for federal income tax purposes as having
received ordinary income at the time of such disposition in an amount equal
to the excess of the fair market value of the shares at the time such
shares were purchased by me over the price which I paid for the shares. I
-
hereby agree to notify the Company in writing
---------------------------------------------
-11-
<PAGE>
within 30 days after the date of any disposition of my shares and I will
------------------------------------------------------------------------
make adequate provision for Federal, state or other tax withholding
-------------------------------------------------------------------
obligations, if any, which arise upon the disposition of the Common Stock.
-------------------------------------------------------------------------
The Company may, but will not be obligated to, withhold from my
compensation the amount necessary to meet any applicable withholding
obligation including any withholding necessary to make available to the
Company any tax deductions or benefits attributable to sale or early
disposition of Common Stock by me. If I dispose of such shares at any time
after the expiration of the 2-year and 1-year holding periods, I understand
that I will be treated for federal income tax purposes as having received
income only at the time of such disposition, and that such income will be
taxed as ordinary income only to the extent of an amount equal to the
lesser of (1) the excess of the fair market value of the shares at the time
of such disposition over the purchase price which I paid for the shares, or
(2) 15% of the fair market value of the shares on the first day of the
Offering Period. The remainder of the gain, if any, recognized on such
disposition will be taxed as capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)______________________________________________
(First) (Middle) (Last)
__________________________ _____________________________________________
Relationship
_____________________________________________
(Address)
-12-
<PAGE>
Employee's Social
Security Number: ____________________________________
Employee's Address: ____________________________________
____________________________________
____________________________________
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:_________________________ ________________________________________
Signature of Employee
_______________________________________
Spouse's Signature (If beneficiary other than
spouse)
-13-
<PAGE>
EXHIBIT B
---------
USWEB CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period of the USWeb Corporation
1997 Employee Stock Purchase Plan which began on ____________, 19____ (the
"Enrollment Date") hereby notifies the Company that he or she hereby withdraws
from the Offering Period. He or she hereby directs the Company to pay to the
undersigned as promptly as practicable all the payroll deductions credited to
his or her account with respect to such Offering Period. The undersigned
understands and agrees that his or her option for such Offering Period will be
automatically termi nated. The undersigned understands further that no further
payroll deductions will be made for the purchase of shares in the current
Offering Period and the undersigned shall be eligible to participate in
succeeding Offering Periods only by delivering to the Company a new Subscription
Agreement.
Name and Address of Participant:
________________________________
________________________________
________________________________
Signature:
________________________________
Date:__________________________
-14-
<PAGE>
EXHIBIT 10.6
RESTRICTED STOCK PURCHASE AGREEMENT
This Restricted Stock Purchase Agreement (the "Agreement") is made as of
___________ __, 1996, at ____________, _____, between USWeb Corporation, a Utah
corporation (the "Company"), and __________ (the "Purchaser").
The parties agree as follows:
1. Sale of Stock. The Company hereby agrees to sell to the Purchaser and
-------------
the Purchaser hereby agrees to purchase
___________________________________________ (__________) shares of the Company's
Common Stock (the "Shares"), at a per share purchase price of $.0001, for an
aggregate purchase price of $_______.
2. Payment of Purchase Price. The purchase price for the Shares may be
-------------------------
paid by cash or a check delivered to the Company at the time of execution of
this Agreement.
3. Repurchase Option.
-----------------
(a) In the event the Purchaser ceases to be an employee or consultant
of the Company for any or no reason (including death or disability) before all
of the Shares are released from the Company's repurchase option (see Section 4),
the Company shall, upon the date of such termination (as reasonably fixed and
determined by the Company) have an irrevocable, exclusive option for a period of
ninety (90) days from such date to repurchase up to that number of shares which
constitute the Unreleased Shares (as defined in Section 4) at the original
purchase price per share (the "Repurchase Price"). Said option shall be
exercised by the Company by delivering written notice to the Purchaser or the
Purchaser's executor (with a copy to the Escrow Holder) and, at the Company's
option, (i) by delivering to the Purchaser or the Purchaser's executor a check
in the amount of the aggregate Repurchase Price, or (ii) by the Company
canceling an amount of the Purchaser's indebtedness to the Company equal to the
aggregate Repurchase Price, or (iii) by a combination of (i) and (ii) so that
the combined payment and cancellation of indebtedness equals such aggregate
Repurchase Price. Upon delivery of such notice and the payment of the aggregate
Repurchase Price in any of the ways described above, the Company shall become
the legal and beneficial owner of the Shares being repurchased and all rights
and interests therein or relating thereto, and the Company shall have the right
to retain and transfer to its own name (or cancel) the number of Shares being
repurchased by the Company.
(b) Whenever the Company shall have the right to repurchase Shares
hereunder, the Company may designate and assign one or more employees, officers,
directors or stockholders of the Company or other persons or organizations to
exercise all or a part of the Company's purchase rights under this Agreement and
purchase all or a part of such Shares; provided that if the fair market value of
the Shares to be repurchased on the date of such designation or assignment (the
"Repurchase FMV") exceeds the aggregate Repurchase Price of such Shares, then
each such designee or assignee
<PAGE>
shall pay the Company cash equal to the difference between the Repurchase FMV
and the aggregate Repurchase Price of such Shares.
4. Release of Shares From Repurchase Option.
----------------------------------------
(a) One-forty-eighth (1/48th) of the Shares shall be released from the
Company's repurchase option each month after January 2, 1996; provided in each
case that the Purchaser's status as an employee or consultant has not terminated
prior to the date of any such release.
(b) Any of the Shares that have been released from the Company's
repurchase option are referred to herein as "Released Shares." Any of the
Shares that have not yet been released from the Company's repurchase option are
referred to herein as "Unreleased Shares."
(c) The Shares which have been released from the Company's repurchase
option shall be delivered to the Purchaser at the Purchaser's request (see
Section 7).
5. Restriction on Transfer. Except for the escrow described in Section 7
-----------------------
or transfer of the Shares to the Company or to its assignees contemplated by
this Agreement (including the Company's right of first refusal contained in
Section 8), none of the Shares or any beneficial interest therein shall be
transferred, encumbered or otherwise disposed of in any way until the release of
such Shares from the Company's repurchase option in accordance with the
provisions of this Agreement, other than by will or the laws of descent and
distribution.
6. Investment Representation Statement. In connection with the purchase
-----------------------------------
of the Shares, the undersigned Purchaser represents to the Company the
following:
(a) Purchaser is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledge able decision to acquire the Shares. Purchaser is
acquiring these Shares for investment for Purchaser's own account only and not
with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Purchaser acknowledges and understands that the Shares constitute
"restricted securities" under the Securities Act and have not been registered
under the Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of Purchaser's
---------
investment intent as expressed herein. In this connection, Purchaser
understands that, in the view of the Securities and Exchange Commission, the
statutory basis for such exemption may be unavailable if Purchaser's
representation was predicated solely upon a present intention to hold these
Shares for the minimum capital gains period specified under tax statutes, for a
deferred sale, for or until an increase or decrease in the market price of the
Shares, or for a period of one year or any other fixed period in the future.
Purchaser further understands that the Shares must be held indefinitely unless
they are subsequently registered under the Securities Act or an exemption from
such registration is
-2-
<PAGE>
available. Purchaser further acknowledges and understands that the Company is
under no obligation to register the Shares. Purchaser understands that the
certificate evidencing the Shares will be imprinted with a legend which
prohibits the transfer of the Shares unless they are registered or such
registration is not required in the opinion of counsel satisfactory to the
Company and any other legend required under applicable state securities laws.
(c) Purchaser is familiar with the provisions of Rule 144 promulgated
under the Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly from the issuer
thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 144 requires the resale to occur not less than two years after
the later of the date the Shares were sold by the Company or the date the Shares
were sold by an affiliate of the Company, within the meaning of Rule 144; and,
in the case of acquisition of the Shares by an affiliate, or by a non-affiliate
who subsequently holds the Shares less than three years, the following
conditions must be satisfied: (1) the resale must be made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (2) the availability of certain public information
about the Company, (3) the amount of Shares being sold during any three-month
period not exceeding the limitations specified in Rule 144(e), and (4) the
timely filing of a Form 144, if applicable.
(d) Purchaser further understands that in the event all of the
applicable require ments of Rule 144 are not satisfied, registration under the
Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rule 144 is
not exclusive, the Staff of the Securities and Exchange Commission has expressed
its opinion that persons proposing to sell private placement securities other
than in a registered offering and otherwise than pursuant to Rule 144 will have
a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Purchaser understands that no assurances can be given that any such other
registration exemption will be available in such event.
7. Escrow of Shares.
----------------
(a) To ensure the availability for delivery of the Purchaser's
Unreleased Shares upon repurchase by the Company pursuant to the Company's
repurchase option under Section 3 above, the Purchaser shall, upon execution of
this Agreement, deliver and deposit, with an escrow holder (the "Escrow Holder")
designated by the Company, the share certificates representing the Unreleased
Shares, together with the stock assignment duly endorsed in blank attached
hereto as Exhibit A-1. The Unreleased Shares and stock assignment shall be held
by the Escrow Holder, pursuant to the Joint Escrow Instructions of the Company
and Purchaser attached as Exhibit A-2 hereto, until such time as the Company's
repurchase option expires. As a further condition to the Company's obligations
under this Agreement, the spouse of Purchaser, if any, shall execute and deliver
to the Company the Consent of Spouse attached hereto as Exhibit A-3.
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<PAGE>
(b) The Escrow Holder shall not be liable for any act it may do or
omit to do with respect to holding the Unreleased Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(c) If the Company or any assignee exercises its repurchase option
hereunder, the Escrow Holder, upon receipt of written notice of such option
exercise from the proposed transferee, shall take all steps necessary to
accomplish such transfer.
(d) When the repurchase option has been exercised or expires
unexercised or a portion of the Shares has been released from such repurchase
option, upon Purchaser's request the Escrow Holder shall promptly cause a new
certificate to be issued for such released Shares and shall deliver such
certificate to the Company or the Purchaser, as the case may be.
(e) Subject to the terms hereof, the Purchaser shall have all the
rights of a stockholder with respect to such Shares while they are held in
escrow, including without limitation, the right to vote the Shares and receive
any cash dividends declared thereon. If, from time to time during the term of
the Company's repurchase option, there is (i) any stock dividend, stock split or
other change in the Shares, or (ii) any merger or sale of all or substantially
all of the assets or other acquisition of the Company, any and all new,
substituted or additional securities to which the Purchaser is entitled by
reason of the Purchaser's ownership of the Shares shall be immediately subject
to this escrow, deposited with the Escrow Holder and included thereafter as
"Shares" for purposes of this Agreement and the Company's repurchase option.
8. Company's Right of First Refusal. Before any Shares held by the
--------------------------------
Purchaser or any transferee (either being sometimes referred to herein as the
"Holder") may be sold or otherwise transferred (including transfer by gift or
operation of law), the Company or its assignee(s) shall have a right of first
refusal to purchase the Shares on the terms and conditions set forth in this
Section (the "Right of First Refusal").
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the Holder's
bona fide intention to sell or otherwise transfer such Shares; (ii) the name of
each proposed purchaser or other transferee ("Proposed Transferee"); (iii) the
number of Shares to be transferred to each Proposed Transferee; and (iv) the
bona fide cash price or other consideration for which the Holder proposes to
transfer the Shares (the "Offered Price"), and the Holder shall offer the Shares
at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within 30 days
----------------------------------
after receipt of the Notice, the Company or its assignee(s) may, by giving
written notice to the Holder, elect to purchase all, but not less than all, of
the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
(i) the Offered Price in the
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<PAGE>
case of Shares that are Released Shares, or (ii) in the case of Shares that are
Unreleased Shares, the lower of the Offered Price or the Repurchase Price as
defined in Section 3(a) hereof. If the Offered Price includes consideration
other than cash, the cash equivalent value of the non-cash consideration shall
be determined by the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within forty-five (45) days after receipt of the Notice or
in the manner and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company or its assignee(s) as provided in this Section, then the Holder may sell
or otherwise transfer such Shares to that Proposed Transferee at the Offered
Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the Company or its assignees shall again be
offered the Right of First Refusal before any Shares held by the Holder may be
sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Purchaser's lifetime or on the Purchaser's death by will or
intestacy to the Purchaser's immediate family or a trust for the benefit of the
Purchaser's immediate family shall be exempt from the provisions of this
Section. "Immediate Family" as used herein shall mean spouse, lineal descendant
or antecedent, brother or sister. In such case, the transferee or other
recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares 90 days after the first sale of Common Stock of
the Company to the general public pursuant to a registration statement filed
with and declared effective by the Securities and Exchange Commission under the
Securities Act.
9. Legends.
-------
(a) Purchaser understands and agrees that the Company shall cause the
legends set forth below, or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by the Company or by applicable state or
federal securities laws:
-5-
<PAGE>
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL SATISFACTORY TO
THE ISSUER OF THESE SHARES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR
HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND A RIGHT OF FIRST REFUSAL HELD BY THE
ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE RESTRICTED STOCK
PURCHASE AGREEMENT BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE
SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE
ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE
BINDING ON TRANSFEREES OF THESE SHARES.
(b) Stop Transfer Notices. Purchaser agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instruc tions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
10. Market Stand-Off Agreement. Purchaser hereby agrees that if so
--------------------------
requested by the Company or any representative of the underwriters in connection
with any registration of the offering of any Shares of the Company under the
Securities Act, Purchaser shall not sell or otherwise transfer any Shares or
other securities of the Company during the 180-day period following the date of
the final Prospectus contained in a registration statement of the Company filed
under the Securities Act; provided, however, that such restriction shall only
apply to the first registration statement of the Company to become effective
under the Securities Act which includes securities to be sold on behalf of the
Company to the general public in an underwritten public offering under the
Securities Act. The Company may impose stop-transfer instructions with respect
to securities subject to the foregoing restrictions until the end of such 180-
day period.
11. Adjustment for Stock Split. All references to the number of Shares
--------------------------
and the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock
-6-
<PAGE>
dividend or other change in the Shares which may be made by the Company after
the date of this Agreement.
12. Tax Consequences. The Purchaser has reviewed with the Purchaser's own
----------------
tax advisors the federal, state, local and foreign tax consequences of this
investment and the transactions contemplated by this Agreement. The Purchaser
is relying solely on such advisors and not on any statements or representations
of the Company or any of its agents. The Purchaser understands that the
Purchaser (and not the Company) shall be responsible for the Purchaser's own tax
liability that may arise as a result of this investment or the transactions
contemplated by this Agreement. The Purchaser understands that Section 83 of
the Internal Revenue Code of 1986, as amended (the "Code"), taxes as ordinary
income the difference between the purchase price for the Shares and the fair
market value of the Shares as of the date any restrictions on the Shares lapse.
In this context, "restriction" includes the right of the Company to buy back the
Shares pursuant to its repurchase option. The Purchaser understands that the
Purchaser may elect to be taxed at the time the Shares are purchased rather than
when and as the Company's repurchase option expires by filing an election under
Section 83(b) of the Code with the I.R.S. within 30 days from the date of
purchase. The form for making this election is attached as Exhibit A-4 hereto.
THE PURCHASER ACKNOWLEDGES THAT IT IS THE PURCHASER'S SOLE
RESPONSIBILITY AND NOT THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION
83(b), EVEN IF THE PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVES TO MAKE
THIS FILING ON THE PURCHASER'S BEHALF.
13. General Provisions.
------------------
(a) This Agreement shall be governed by the laws of the State of
California excluding provisions regarding conflicts of laws. This Agreement
represents the entire agreement between the parties with respect to the purchase
of Common Stock by the Purchaser.
(b) Any notice, demand or request required or permitted to be given by
either the Company or the Purchaser pursuant to the terms of this Agreement
shall be in writing and shall be deemed given when delivered personally or four
(4) days after being deposited in the U.S. Mail, First Class with postage
prepaid, and addressed to the parties at the addresses of the parties set forth
at the end of this Agreement or such other address as a party may request by
notifying the other in writing.
Any notice to the Escrow Holder shall be sent to the Company's address
with a copy to the other party not sending the notice.
(c) The rights and benefits of the Company under this Agreement shall
be transferable to any one or more persons or entities, and all covenants and
agreements hereunder shall inure to the benefit of, and be enforceable by the
Company's successors and assigns. The rights and obligations of the Purchaser
under this Agreement may only be assigned with the prior written consent of the
Company.
-7-
<PAGE>
(d) Either party's failure to enforce any provision or provisions of
this Agreement shall not in any way be construed as a waiver of any such
provision or provisions, nor prevent that party from thereafter enforcing each
and every other provision of this Agreement. The rights granted both parties
herein are cumulative and shall not constitute a waiver of either party's right
to assert all other legal remedies available to it under the circumstances.
(e) The Purchaser agrees upon request to execute any further documents
or instruments necessary or desirable to carry out the purposes or intent of
this Agreement.
(f) PURCHASER ACKNOWLEDGES AND AGREES THAT THE RELEASE OF SHARES FROM
THE REPURCHASE OPTION OF THE COMPANY PURSUANT TO SECTION 4 HEREOF IS EARNED ONLY
BY CONTINUING SERVICE AS AN EMPLOYEE OR CONSULTANT AT THE WILL OF THE COMPANY
(NOT THROUGH THE ACT OF BEING HIRED OR PURCHASING SHARES HEREUNDER). PURCHASER
FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE TRANSACTIONS
CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO NOT
CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS AN EMPLOYEE
OR CONSULTANT FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT
INTERFERE WITH PURCHASER'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE PURCHASER'S
EMPLOYMENT OR CONSULTING RELATIONSHIP AT ANY TIME, WITH OR WITHOUT CAUSE.
[This space left blank intentionally]
-8-
<PAGE>
By Purchaser's signature below, Purchaser represents that he or she is
familiar with the terms and provisions of this Agreement. Purchaser has
reviewed this Agreement, has had an opportunity to obtain the advice of counsel
prior to executing this Agreement and fully understands all provisions of this
Agreement. Purchaser agrees to notify the Company upon any change in residence.
PURCHASER: USWEB CORPORATION
_______________________________ __________________________________________
By: ______________________________________
Title: ___________________________________
-9-
<PAGE>
EXHIBIT A-1
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, _________________, hereby sell, assign and transfer
unto ____________________________________________________ (__________) shares of
the Common Stock of USWeb Corporation standing in my name on the books of said
corporation represented by Certificate No. _____ herewith and do hereby
irrevocably constitute and appoint Wilson Sonsini Goodrich & Rosati to transfer
the said stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between USWeb Corporation and the undersigned dated
______________, 1996.
Dated: _______________, _______
Signature:______________________________
INSTRUCTIONS: Please do not fill in any blanks other than the signature line.
The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
-10-
<PAGE>
EXHIBIT A-2
-----------
JOINT ESCROW INSTRUCTIONS
-------------------------
_____________, 1996
USWeb Corporation
3000 Lakeside Drive
Santa Clara, CA 95054
Attention: Secretary
As Escrow Agent for both USWeb Corporation (the "Company"), a Utah
corporation (the "Company"), and the undersigned purchaser of stock of the
Company (the "Purchaser"), you are hereby authorized and directed to hold the
documents delivered to you pursuant to the terms of that certain Restricted
Stock Purchase Agreement ("Agreement") between the Company and the undersigned,
in accordance with the following instructions:
1. In the event the Company or any assignee of the Company (referred to
collectively for convenience herein as the "Company") exercises the Company's
repurchase option set forth in the Agreement, the Company shall give to
Purchaser and you a written notice specifying the number of shares of stock to
be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, and (c) to deliver same, together with the certificate
evidencing the shares of stock to be transferred, to the Company or its
assignee, against the simultaneous delivery to you of the purchase price (by
cash, a check, evidence of cancellation of indebtedness of the Purchaser to the
Company or some combination thereof) for the number of shares of stock being
purchased pursuant to the exercise of the Company's repurchase option.
3. Purchaser irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities.
-1-
<PAGE>
Subject to the provisions of this paragraph 3, Purchaser shall exercise all
rights and privileges of a stockholder of the Company while the stock is held by
you.
4. Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 90 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Purchaser,
you shall deliver all of the same to Purchaser and shall be discharged of all
further obligations hereunder.
6. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
7. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties.
You shall not be personally liable for any act you may do or omit to do
hereunder as Escrow Agent or as attorney-in-fact for Purchaser while acting in
good faith, and any act done or omitted by you pursuant to the advice of your
own attorneys shall be conclusive evidence of such good faith.
8. You are hereby expressly authorized to disregard any and all warnings
given by any of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court.
In case you obey or comply with any such order, judgment or decree, you shall
not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
9. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
10. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
-2-
<PAGE>
11. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be an officer or agent of the Company or if you shall resign by
written notice to each party. In the event of any such termination, the Company
shall appoint a successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Joint Escrow Instructions or obligations in respect hereto, the
necessary parties hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery or ownership or right of possession of the Shares held by you
hereunder, you are authorized and directed to retain in your possession without
liability to anyone all or any part of said Shares until such disputes shall
have been settled either by mutual written agreement of the parties concerned or
by a final order, decree or judgment of a court of competent jurisdiction after
the time for appeal has expired and no appeal has been perfected, but you shall
be under no duty whatsoever to institute or defend any such proceedings.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or four (4) days
after deposit in the United States Post Office, by registered or certified mail
with postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
COMPANY: USWeb Corporation
3000 Lakeside Drive
Santa Clara, CA 95054
PURCHASER: _______________
_______________
_______________
ESCROW AGENT: Secretary
USWeb Corporation
3000 Lakeside Drive
Santa Clara, CA 95054
-3-
<PAGE>
16. By signing these Joint Escrow Instructions, you become a party hereto
only for the purpose of said Joint Escrow Instructions; you do not become a
party to the Agreement.
17. This instrument shall be binding upon and inure to the benefit of the
parties hereto, and their respective successors and permitted assigns.
18. These Joint Escrow Instructions shall be governed by, and construed
and enforced in accordance with, the laws of the State of California.
Very truly yours,
USWeb Corporation
By:____________________________________________
Title: ________________________________________
PURCHASER:
_______________________________________________
[Optionee's Name]
ESCROW AGENT:
___________________________
Corporate Secretary
-4-
<PAGE>
EXHIBIT A-3
-----------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of _____________, have read and approve the
foregoing Agreement. In consideration of granting of the right to my spouse to
purchase shares of USWeb Corporation, as set forth in the Agreement, I hereby
appoint my spouse as my attorney-in-fact in respect to the exercise of any
rights under the Agreement and agree to be bound by the provisions of the
Agreement insofar as I may have any rights in said Agreement or any shares
issued pursuant thereto under the community property laws or similar laws
relating to marital property in effect in the state of our residence as of the
date of the signing of the foregoing Agreement.
Dated: _______________, 1996
________________________________________
Signature
________________________________________
Print Name
<PAGE>
EXHIBIT A-4
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to the above-referenced Federal
Tax Code, to include in taxpayer's gross income for the current taxable year,
the amount of any compensation taxable to taxpayer in connection with his
receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME : TAXPAYER: SPOUSE:
ADDRESS: :
IDENTIFICATION NO. : TAXPAYER: SPOUSE:
TAXABLE YEAR: 1996
2. The property with respect to which the election is made is described as
follows: ___________________ shares (the "Shares") of the Common Stock of USWeb
Corporation (the "Company").
3. The date on which the property was transferred is: ______________, 1996.
4. The property is subject to the following restrictions:
The Shares may be repurchased by the Company, or its assignee, on certain
events. This right lapses with regard to a portion of the Shares based on the
continued performance of services by the taxpayer over time.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never lapse, of
such property is:
$
6. The amount (if any) paid for such property is:
$
The undersigned has submitted a copy of this statement to the person for whom
the services were performed in connection with the undersigned's receipt of the
above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
The undersigned understands that the foregoing election may not be revoked
- --------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ___________________, 1996 ____________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 1996 _____________________________________________
Spouse of Taxpayer
<PAGE>
EXHIBIT 10.7
USWEB CORPORATION
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and entered
into effective as of 2/12/96, by and between Joe Firmage (the
------- -----------
"Employee") and USWeb Corporation, a Utah corporation (the "Company").
R E C I T A L S
A. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company.
B. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon termination of employment or upon a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient incentive and encouragement to the Employee to remain with
the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided herein.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
1. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall have the meaning
assigned to it in Section 3 of this Agreement.
(b) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee or his
associates at the expense of the Company or its shareholders, (ii) committing a
felony or an act of fraud against the Company or its affiliates and (iii)
continued violations by the Employee of the Employee's obligations under this
Agreement which are
<PAGE>
demonstrably willful and deliberate on the Employee's part after there has been
delivered to the Employee a written demand for performance from the Company
which describes the basis for the Company's belief that the Employee has not
substantially performed his duties.
(c) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) other than SOFTBANK
Corporation and/or any of its affiliates (collectively, "SOFTBANK") becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) Effectiveness of an agreement for the sale, lease or
disposition by the Company of all or substantially all of the Company's assets.
(d) Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the assignment to the Employee
of any duties or the significant reduction of the Employee's duties, either of
which is inconsistent with the Employee's position with the Company and
responsibilities in effect immediately prior to such assignment, or the removal
of the Employee from such position and responsibilities; (ii) without the
Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space,
support staff and location) available to the Employee immediately prior to such
reduction; (iii) a reduction by the Company in the Base Compensation of the
Employee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced; (v) the
relocation of the Employee to a facility or a location more than 50 miles from
the Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; or (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 8 below.
(e) Disability. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or
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<PAGE>
the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
2. Duties and Scope of Employment. The Company shall employ the Employee
in the position of Chairman, CEO, President, as such position was defined in
------------------------
terms of responsibilities and compensation as of the effective date of this
Agreement; provided, however, that the Board of Directors shall have the right,
subject to the terms of this Agreement, to revise such responsibilities and
compensation as the Board in its discretion may deem necessary or appropriate.
The Employee shall continue to devote his full business efforts and time to the
Company and its subsidiaries. The Employee shall comply with and be bound by the
Company's operating policies, procedures and practices from time to time in
effect during his employment. During the term of the Employee's employment with
the Company, the Employee shall devote his full time, skill and attention to his
duties and responsibilities, and shall perform them faithfully, diligently and
competently, and the Employee shall use his best efforts to further the business
of the Company and its affiliated entities.
3. Base Compensation. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $200,000, along with
--------
such performance bonus amounts as the Board shall authorize, in its discretion,
from time to time. Such salary shall be paid periodically in accordance with
normal Company payroll. The annual compensation (including bonus amounts),
together with any increases in such compensation that the Board of Directors may
grant from time to time, is referred to in this Agreement as "Base
Compensation."
4. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company and applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the determination of any committee
administering such plan or program.
5. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
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<PAGE>
6. Severance Benefits.
(a) Termination Apart from Change of Control. In the event the
Employee's employment is terminated in an Involuntary Termination more than 60
days prior to the occurrence of a Change of Control or after the 18-month period
following a Change of Control (the "No-Change Period"), then the Employee shall
be entitled to receive severance pay equal to 12 months' Base Compensation, to
be paid out monthly at the same time as the Company's regular payroll is paid,
and any other benefits that may then be established under the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination. In the event the Employee's employment is terminated
voluntarily by the Employee during the No-Change Period, then no severance
payment shall be made unless in accordance with the Company's existing severance
and benefit plans and policies for employees generally at the time of such
termination.
(b) Termination Following A Change of Control. Subject to the
limitation on payments set forth in Section 7 below, if the Company terminates
the Employee's employment at any time 60 days or less before, or within eighteen
(18) months after, a Change of Control, and the Employee's employment is
terminated by the Company in an Involuntary Termination, or Employee voluntarily
terminates his employment with the Company, then the Employee shall be entitled
to receive severance pay in an amount equal to the Employee's Base Compensation
for the year immediately preceding or coinciding with the year of payment,
whichever is greater. Any severance payments to which the Employee is entitled
pursuant to this paragraph shall be paid in a lump sum within thirty (30) days
of the Employee's termination.
(c) Unvested Stock and Options.
(i) Subject to the limitation on payments set forth in Section 7
below, upon a Change of Control, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain
subject to the Board's discretionary authority as provided under the Company's
stock and option plans.
(ii) In addition to the above, if SOFTBANK acquires, cumulatively
and in the aggregate, more than 50% of the outstanding shares of Preferred Stock
(and/or shares of Common Stock issued upon conversion thereof) not owned by
SOFTBANK on February 21, 1996, then if the Employee's employment is terminated
by the Company following such event, other than for Cause or as a result of the
Employee's Disability or death, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain subject
to the Board's discretionary authority as provided under the Company's stock and
option plans.
(d) Termination For Cause. Notwithstanding anything else contained in
this Agreement, if the Company terminates the Employee's employment for Cause,
then the Employee
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<PAGE>
shall not be entitled to receive severance or other benefits pursuant to this
Agreement, including acceleration of exercisability of stock options or vesting
of stock purchased from the Company, except for those benefits (if any) as then
established under the Company's then existing severance and benefits plans and
policies at the time of such termination.
(e) Medical Benefits. In the event the Employee is entitled to
severance benefits pursuant to this Agreement, then in addition to such
severance benefits, the Employee shall receive Company-paid health insurance
coverage to the extent provided to such Employee immediately prior to the
Employee's termination (the "Company-Paid Coverage") for the period set forth in
this paragraph. If the Employee's health insurance coverage included the
Employee's dependents immediately prior to the Employee's termination, such
dependent shall also be covered at Company expense. Company-Paid Coverage shall
continue for twelve (12) months following termination or until the Employee
becomes covered under another employer's group health insurance plan, whichever
occurs first. For purposes of the continuation health coverage required under
COBRA, the date of the "qualifying event" giving rise to the Employee's COBRA
election period (and that of his "qualifying beneficiaries") shall be the last
date on which the Employee receives Company-Paid Coverage under this Agreement.
(f) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits pursuant to this
Agreement except (i) for those benefits (if any) as then established under the
Company's then existing severance and benefits plans and policies at the time of
such Disability or death and (ii) with respect to any stock held by Employee
that is subject to vesting, one-half of such stock, in addition to shares
already vested, shall become vested (with the Company's right of repurchase
lapsing), and with respect to any option held by Employee to buy stock of the
Company under the Company's stock option plans, the option shall become
exercisable as to an additional one-half of the total number of shares subject
to such option, in addition to shares as to which the option is already
exercisable.
7. Limitation on Payments. To the extent that any of the payments and
benefits provided for in this Agreement or otherwise payable to the Employee
constitute "parachute payments" within the meaning of Section 280G of the Code,
as amended and, but for this Section 7, would be subject to the excise tax
imposed by Section 4999 of the Code, then the Employee's benefits under Sections
6(b) and (c) above, as applicable, shall be payable either
(a) in full, or
(b) as to such lesser amount as would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the
Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis of the greatest amount of
severance benefits under Sections 6(b) and (c) above, notwithstanding that all
or some portion of such severance benefits may be taxable under Section
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<PAGE>
4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 7 shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required by
this Section 7, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7.
8. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase of stock, purchase of assets, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of
the Company's business and assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this paragraph or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
9. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or three (3) days after being mailed by U.S.
registered or certified mail, return receipt requested and postage prepaid. In
the case of the Employee, mailed notices shall be addressed to him at the home
address which he most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with the notice provisions of this Agreement. Such notice shall
indicate the specific termination provision in this Agreement relied upon, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 15 days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of
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<PAGE>
the Employee hereunder or preclude the Employee from asserting such fact or
circumstance in enforcing his rights hereunder.
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. Punitive damages shall not be awarded.
(g) No Assignment of Benefits. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this paragraph shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another
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<PAGE>
affiliate of the Company or to the Company; provided, however, that no
assignment shall be made if the net worth of the assignee is less than the net
worth of the Company at the time of assignment.
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY USWEB CORPORATION
By: /s/ James Hefferman
-----------------------------
Title: CFO
---------------------------
EMPLOYEE /s/ Joseph P. Firmage
---------------------------------
Joseph P. Firmage
---------------------------------
(Print Name)
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<PAGE>
EXHIBIT 10.8
USWEB CORPORATION
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and entered
into effective as of 2/12/96, by and between Tobin Corey (the "Employee") and
------- -----------
USWeb Corporation, a Utah corporation (the "Company").
R E C I T A L S
A. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company.
B. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon termination of employment or upon a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient incentive and encouragement to the Employee to remain with
the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided herein.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
1. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall have the meaning
assigned to it in Section 3 of this Agreement.
(b) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee or his
associates at the expense of the Company or its shareholders, (ii) committing a
felony or an act of fraud against the Company or its affiliates and (iii)
continued violations by the Employee of the Employee's obligations under this
Agreement which are
<PAGE>
demonstrably willful and deliberate on the Employee's part after there has been
delivered to the Employee a written demand for performance from the Company
which describes the basis for the Company's belief that the Employee has not
substantially performed his duties.
(c) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) other than SOFTBANK
Corporation and/or any of its affiliates (collectively, "SOFTBANK") becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) Effectiveness of an agreement for the sale, lease or
disposition by the Company of all or substantially all of the Company's assets.
(d) Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the assignment to the Employee
of any duties or the significant reduction of the Employee's duties, either of
which is inconsistent with the Employee's position with the Company and
responsibilities in effect immediately prior to such assignment, or the removal
of the Employee from such position and responsibilities; (ii) without the
Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space,
support staff and location) available to the Employee immediately prior to such
reduction; (iii) a reduction by the Company in the Base Compensation of the
Employee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced; (v) the
relocation of the Employee to a facility or a location more than 50 miles from
the Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; or (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 8 below.
(e) Disability. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or
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<PAGE>
the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
2. Duties and Scope of Employment. The Company shall employ the Employee
in the position of EVP Marketing, as such position was defined in terms of
-------------
responsibilities and compensation as of the effective date of this Agreement;
provided, however, that the Board of Directors shall have the right, subject to
the terms of this Agreement, to revise such responsibilities and compensation as
the Board in its discretion may deem necessary or appropriate. The Employee
shall continue to devote his full business efforts and time to the Company and
its subsidiaries. The Employee shall comply with and be bound by the Company's
operating policies, procedures and practices from time to time in effect during
his employment. During the term of the Employee's employment with the Company,
the Employee shall devote his full time, skill and attention to his duties and
responsibilities, and shall perform them faithfully, diligently and competently,
and the Employee shall use his best efforts to further the business of the
Company and its affiliated entities.
3. Base Compensation. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $200,000, along with
--------
such performance bonus amounts as the Board shall authorize, in its discretion,
from time to time. Such salary shall be paid periodically in accordance with
normal Company payroll. The annual compensation (including bonus amounts),
together with any increases in such compensation that the Board of Directors may
grant from time to time, is referred to in this Agreement as "Base
Compensation."
4. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company and applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the determination of any committee
administering such plan or program.
5. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
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6. Severance Benefits.
(a) Termination Apart from Change of Control. In the event the
Employee's employment is terminated in an Involuntary Termination more than 60
days prior to the occurrence of a Change of Control or after the 18-month period
following a Change of Control (the "No-Change Period"), then the Employee shall
be entitled to receive severance pay equal to 12 months' Base Compensation, to
be paid out monthly at the same time as the Company's regular payroll is paid,
and any other benefits that may then be established under the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination. In the event the Employee's employment is terminated
voluntarily by the Employee during the No-Change Period, then no severance
payment shall be made unless in accordance with the Company's existing severance
and benefit plans and policies for employees generally at the time of such
termination.
(b) Termination Following A Change of Control. Subject to the
limitation on payments set forth in Section 7 below, if the Company terminates
the Employee's employment at any time 60 days or less before, or within eighteen
(18) months after, a Change of Control, and the Employee's employment is
terminated by the Company in an Involuntary Termination, or Employee voluntarily
terminates his employment with the Company, then the Employee shall be entitled
to receive severance pay in an amount equal to the Employee's Base Compensation
for the year immediately preceding or coinciding with the year of payment,
whichever is greater. Any severance payments to which the Employee is entitled
pursuant to this paragraph shall be paid in a lump sum within thirty (30) days
of the Employee's termination.
(c) Unvested Stock and Options.
(i) Subject to the limitation on payments set forth in Section 7
below, upon a Change of Control, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain
subject to the Board's discretionary authority as provided under the Company's
stock and option plans.
(ii) In addition to the above, if SOFTBANK acquires, cumulatively
and in the aggregate, more than 50% of the outstanding shares of Preferred Stock
(and/or shares of Common Stock issued upon conversion thereof) not owned by
SOFTBANK on February 21, 1996, then if the Employee's employment is terminated
by the Company following such event, other than for Cause or as a result of the
Employee's Disability or death, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain subject
to the Board's discretionary authority as provided under the Company's stock and
option plans.
(d) Termination For Cause. Notwithstanding anything else contained in
this Agreement, if the Company terminates the Employee's employment for Cause,
then the Employee
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shall not be entitled to receive severance or other benefits pursuant to this
Agreement, including acceleration of exercisability of stock options or vesting
of stock purchased from the Company, except for those benefits (if any) as then
established under the Company's then existing severance and benefits plans and
policies at the time of such termination.
(e) Medical Benefits. In the event the Employee is entitled to
severance benefits pursuant to this Agreement, then in addition to such
severance benefits, the Employee shall receive Company-paid health insurance
coverage to the extent provided to such Employee immediately prior to the
Employee's termination (the "Company-Paid Coverage") for the period set forth in
this paragraph. If the Employee's health insurance coverage included the
Employee's dependents immediately prior to the Employee's termination, such
dependent shall also be covered at Company expense. Company-Paid Coverage shall
continue for twelve (12) months following termination or until the Employee
becomes covered under another employer's group health insurance plan, whichever
occurs first. For purposes of the continuation health coverage required under
COBRA, the date of the "qualifying event" giving rise to the Employee's COBRA
election period (and that of his "qualifying beneficiaries") shall be the last
date on which the Employee receives Company-Paid Coverage under this Agreement.
(f) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits pursuant to this
Agreement except (i) for those benefits (if any) as then established under the
Company's then existing severance and benefits plans and policies at the time of
such Disability or death and (ii) with respect to any stock held by Employee
that is subject to vesting, one-half of such stock, in addition to shares
already vested, shall become vested (with the Company's right of repurchase
lapsing), and with respect to any option held by Employee to buy stock of the
Company under the Company's stock option plans, the option shall become
exercisable as to an additional one-half of the total number of shares subject
to such option, in addition to shares as to which the option is already
exercisable.
7. Limitation on Payments. To the extent that any of the payments and
benefits provided for in this Agreement or otherwise payable to the Employee
constitute "parachute payments" within the meaning of Section 280G of the Code,
as amended and, but for this Section 7, would be subject to the excise tax
imposed by Section 4999 of the Code, then the Employee's benefits under Sections
6(b) and (c) above, as applicable, shall be payable either
(a) in full, or
(b) as to such lesser amount as would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the
Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis of the greatest amount of
severance benefits under Sections 6(b) and (c) above, notwithstanding that all
or some portion of such severance benefits may be taxable under Section
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4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 7 shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required by
this Section 7, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7.
8. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase of stock, purchase of assets, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of
the Company's business and assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this paragraph or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
9. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or three (3) days after being mailed by U.S.
registered or certified mail, return receipt requested and postage prepaid. In
the case of the Employee, mailed notices shall be addressed to him at the home
address which he most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with the notice provisions of this Agreement. Such notice shall
indicate the specific termination provision in this Agreement relied upon, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 15 days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of
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<PAGE>
the Employee hereunder or preclude the Employee from asserting such fact or
circumstance in enforcing his rights hereunder.
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. Punitive damages shall not be awarded.
(g) No Assignment of Benefits. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this paragraph shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another
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<PAGE>
affiliate of the Company or to the Company; provided, however, that no
assignment shall be made if the net worth of the assignee is less than the net
worth of the Company at the time of assignment.
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY USWEB CORPORATION
By: /s/ James Hefferman
-----------------------------
Title: CFO
---------------------------
EMPLOYEE /s/ Tobin J. Corey
---------------------------------
Tobin J. Corey
---------------------------------
(Print Name)
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EXHIBIT 10.9
USWEB CORPORATION
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and entered
into effective as of Feb. 12, 1996, by and between Sheldon Laube (the
------------- -------------
"Employee") and USWeb Corporation, a Utah corporation (the "Company").
R E C I T A L S
A. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company.
B. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon termination of employment or upon a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient incentive and encouragement to the Employee to remain with
the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided herein.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
1. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall have the meaning
assigned to it in Section 3 of this Agreement.
(b) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee or his
associates at the expense of the Company or its shareholders, (ii) committing a
felony or an act of fraud against the Company or its affiliates and (iii)
continued violations by the Employee of the Employee's obligations under this
Agreement which are
<PAGE>
demonstrably willful and deliberate on the Employee's part after there has been
delivered to the Employee a written demand from the Company to cease such
activities; and (iv) willful refusal by the Employee to carry out legally
permissible instructions from the Company after the Employee has been given
written notice by the Company of a failure to carry out such instructions and a
reasonable opportunity to correct the situation.
(c) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) other than SOFTBANK
Corporation and/or any of its affiliates (collectively, "SOFTBANK") becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) Effectiveness of an agreement for the sale, lease or
disposition by the Company of all or substantially all of the Company's assets.
(d) Involuntary Termination. "Involuntary Termination" shall mean the
Employee's voluntary resignation within 12 months of the occurrence of any one
of the following events: (i) without the Employee's express written consent, the
assignment to the Employee of any duties or the significant reduction of the
Employee's duties, either of which is inconsistent with the Employee's position
or responsibilities with the Company as set forth in this Agreement, or the
removal of the Employee from such position and responsibilities; (ii) without
the Employee's express written consent, a substantial reduction of the
facilities and perquisites (including office space, support staff and location)
available to the Employee, substantially similar to those of the Employee
undergo substantially similar reductions; (iii) a reduction by the Company in
the Base Compensation of the Employee as in effect immediately prior to such
reduction; (iv) a material reduction by the Company in the kind or level of
employee benefits to which the Employee is entitled under this Agreement with
the result that the Employee's overall benefits package is significantly
reduced; or (v) the refusal by the Employee to relocate his principal place of
employment to a facility or a location more than 50 miles from the Employee's
then present location following a written demand from the Company to undertake
such relocation. An Involuntary Termination will also include (i) any purported
termination of the Employee by the Company which is not effected for Disability
or for Cause, or any purported termination for which the grounds relied upon are
not valid, or (ii) the failure of the
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<PAGE>
Company to obtain the assumption of this agreement by any successors
contemplated in Section 8 below.
(e) Disability. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
2. Duties and Scope of Employment. The Company shall employ the Employee
in the position of Exec. Vice President & Chief Technology Officer, as such
-----------------------------------------------
position was defined in terms of responsibilities and compensation as of the
effective date of this Agreement. The Employee shall continue to devote his full
business efforts and time to the Company and its subsidiaries. The Employee
shall comply with and be bound by the Company's operating policies, procedures
and practices from time to time in effect during his employment. During the term
of the Employee's employment with the Company, the Employee shall devote his
full time, skill and attention to his duties and responsibilities, and shall
perform them faithfully, diligently and competently, and the Employee shall use
his best efforts to further the business of the Company and its affiliated
entities.
3. Base Compensation. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $260,000, along with
--------
such performance bonus amounts as the Board shall authorize, in its discretion,
from time to time. The Company shall also pay the Employee a minimum quarterly
bonus of $25,000, to be paid at the beginning of each fiscal quarter. This
annual salary and bonus (if any) may be raised from time to time by the Board of
Directors. Such salary shall be paid periodically in accordance with normal
Company payroll. "Base Compensation" will mean the annual salary, together with
any increases that the Board of Directors may grant from time to time, plus the
greater of (i) $100,000 or (ii) the sum of all bonuses granted to Employee from
the start of employment through the date of termination, divided by the total
number of months for which the Employee was employed by the Company, multiplied
by 12.
4. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company and applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the determination of any committee
administering such plan or program.
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<PAGE>
5. At-Will Employment. Except as set forth in Section 6(g) below, the
Company and the Employee acknowledge that the Employee's employment is and shall
continue to be at-will, as defined under applicable law. If the Employee's
employment terminates for any reason, including (without limitation) any
termination prior to a Change of Control, the Employee shall not be entitled to
any payments, benefits, damages, awards or compensation other than as provided
by this Agreement, and as may otherwise be available in accordance with the
Company's established employee plans and policies at the time of termination.
6. Severance Benefits.
(a) Termination Apart from Change of Control. In the event the
Employee's employment terminates in circumstances that constitute an Involuntary
Termination more than 60
days prior to the occurrence of a Change of Control or after the 18-month period
following a Change of Control (the "No-Change Period"), then the Employee shall
be entitled to receive severance pay equal to 12 months' Base Compensation, to
be paid out monthly at the same time as the Company's regular payroll is paid,
and any other benefits that may then be established under the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination. In the event the Employee resigns under circumstances that do
not constitute an Involuntary Termination during the No-Change Period, then no
severance payment shall be due unless in accordance with the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination.
(b) Termination Following A Change of Control. Subject to the
limitation on payments set forth in Section 7 below, if the Company terminates
the Employee's employment at any time 60 days or less before, or within
18 months after, a Change of Control, and the Employee's employment
terminates under circumstances that constitute an Involuntary Termination,
then the Employee shall be entitled
to receive severance pay in an amount equal to the Employee's Base Compensation
for the year immediately preceding or coinciding with the year of termination,
whichever is greater. Any severance payments to which the Employee is entitled
pursuant to this paragraph shall be paid in a lump sum within thirty (30) days
of the Employee's termination.
(c) Unvested Stock and Options.
(i) Subject to the limitation on payments set forth in Section 7
below, upon a Change of Control, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain subject
to the Board's discretionary authority as provided under the Company's stock and
option plans.
(ii) In addition to the above, if SOFTBANK acquires, cumulatively
and in the aggregate, more than 50% of the outstanding shares of Preferred Stock
(and/or shares of Common Stock issued upon conversion thereof) not owned by
SOFTBANK on February __, 1996, then if the Employee's employment is terminated
by the Company within eighteen (18) months following such event, other than for
Cause or as a result of the Employee's Disability or death, the
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<PAGE>
Company's right of repurchase in any unvested portion of any stock held by the
Employee shall lapse, and the unexercisable portion of any option held by
Employee to buy stock of the Company under the Company's stock option plans
shall become immediately exercisable in full. In all other respects, the
Employee's stock or option shall remain subject to the Board's discretionary
authority as provided under the Company's stock and option plans.
(d) Termination For Cause. Notwithstanding anything else contained in
this Agreement, if the Company terminates the Employee's employment for Cause,
then the Employee shall not be entitled to receive severance or other benefits
pursuant to this Agreement, including acceleration of exercisability of stock
options or vesting of stock purchased from the Company, except for those
benefits (if any) as then established under the Company's then existing
severance and benefits plans and policies at the time of such termination.
(e) Medical Benefits. In the event the Employee is entitled to
severance benefits pursuant to this Agreement, then in addition to such
severance benefits, the Employee shall receive Company-paid health insurance
coverage to the extent provided to such Employee immediately prior to the
Employee's termination (the "Company-Paid Coverage") for the period set forth in
this paragraph. If the Employee's health insurance coverage included the
Employee's dependents immediately prior to the Employee's termination, such
dependent shall also be covered at Company expense. Company-Paid Coverage shall
continue for twelve (12) months following the effective date of termination of
employee's employment or until the Employee becomes covered under another
employer's group health insurance plan, whichever occurs first. For purposes of
the continuation health coverage required under COBRA, the date of the
"qualifying event" giving rise to the Employee's COBRA election period (and that
of his "qualifying beneficiaries") shall be the last date on which the Employee
receives Company-Paid Coverage under this Agreement.
(f) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits pursuant to this
Agreement except (i) for those benefits (if any) as then established under the
Company's then existing severance and benefits plans and policies at the time of
such Disability or death and (ii) with respect to any stock held by Employee
that is subject to vesting, one-half of such stock, in addition to shares
already vested, shall become vested (with the Company's right of repurchase
lapsing), and with respect to any option held by Employee to buy stock of the
Company under the Company's stock option plans, the option shall become
exercisable as to an additional one-half of the total number of shares subject
to such option, in addition to shares as to which the option is already
exercisable.
(g) Initial Term. Notwithstanding anything else contained in this
Agreement, during the first two years of the term of this Agreement (the
"Initial Term"), Employee's employment with the Company may not be terminated by
the Company except for Cause or by a resolution of the Board of Directors
certifying that, in its reasonable judgment, Employee is being terminated for
Good Business Reasons. "Good Business Reasons" shall not include a termination
merely for the convenience of the Company or in order to replace the Employee
with another individual, but shall include (i) failure of the Employee to follow
written instructions of the Chief Executive Officer,
-5-
<PAGE>
President or Board of Directors of the Company after written notice of any such
failure and an opportunity for Employee for thirty days to cure any such
failure, (ii) gross negligence in the performance of the Employee's duties to
the Company (iii) repeated errors in judgment or poor performance that has a
direct and significant negative impact on the Company, its financial status or
business prospects, or (iv) Employee purposely makes negative and inaccurate
comments about the Company in circumstances where such information becomes
available to the public. If, during the Initial Term, the Employee's employment
is terminated by the Company for Good Business Reasons that do not constitute
Cause, Employee will receive the severance benefits set forth in Section 6(a)
above. If, during the Initial Term, the Employee's employment is terminated by
the Company without Cause or Good Business Reasons, then (i) Employee shall be
entitled to receive severance pay equal to 24 months' Base Compensation, to be
paid out monthly at the same time as the Company's regular payroll is paid, and
any other benefits that may then be established under the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination, and (ii) the Company's right of repurchase in any unvested
portion of any stock held by the Employee shall lapse, and the unexercisable
portion of any option held by Employee to buy stock of the Company under the
Company's stock option plans shall become immediately exercisable in full. In
all other respects, the Employee's stock or option shall remain subject to the
Board's discretionary authority as provided in the Company's stock and option
plans. Following the date two years from the effective date of this Agreement,
this Section shall be of no further force or effect.
7. Limitation on Payments. To the extent that any of the payments and
benefits provided for in this Agreement or otherwise payable to the Employee
constitute "parachute payments" within the meaning of Section 280G of the Code,
as amended and, but for this Section 7, would be subject to the excise tax
imposed by Section 4999 of the Code, then the Employee's benefits under Sections
6(b) and (c) above, as applicable, shall be payable either
(a) in full, or
(b) as to such lesser amount as would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the
Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis of the greatest amount of
severance benefits under Sections 6(b) and (c) above, notwithstanding that all
or some portion of such severance benefits may be taxable under Section 4999 of
the Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 7 shall be made in writing by an
independent public accounting firm reasonably acceptable to the Company other
than that used by the Company (the "Accountants"), whose determination shall be
conclusive and binding upon the Employee and the Company for all purposes. For
purposes of making the calculations required by this Section 7, the Accountants
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Sections 280G and 4999 of the Code. The Company and the Employee
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under
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<PAGE>
this Section. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 7.
8. Successors.
(a) Company's Successors. Any successor to the Company (whether direct
or indirect and whether by purchase of stock, purchase of assets, lease, merger,
consolidation, liquidation or otherwise) to all or substantially all of the
Company's business and assets shall assume the obligations under this Agreement
and agree expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform such
obligations in the absence of a succession. For all purposes under this
Agreement, the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this paragraph or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
9. Notice.
(a) General. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or three (3) days after being mailed by U.S. registered or
certified mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
shall be communicated by a written notice of termination to the other party
hereto given in accordance with the notice provisions of this Agreement. Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which shall be not more than 15 days after
the giving of such notice).
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the
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<PAGE>
Employee and by an authorized officer of the Company (other than the Employee).
No waiver by either party of any breach of, or of compliance with, any condition
or provision of this Agreement by the other party shall be considered a waiver
of any other condition or provision or of the same condition or provision at
another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California in accordance with the rules of the American Arbitration
Association then in effect. The prevailing party shall be entitled to recover
its attorneys' fees. Judgment may be entered on the arbitrator's award in any
court having jurisdiction. Punitive damages shall not be awarded.
(g) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or assignment,
either by voluntary or involuntary assignment or by operation of law, including
(without limitation) bankruptcy, garnishment, attachment or other creditor's
process, and any action in violation of this paragraph shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment.
(j) Counterparts. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which together will constitute
one and the same instrument.
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<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY USWEB CORPORATION
By: /s/ Joseph P. Firmage
-----------------------------
Title: CEO
---------------------------
EMPLOYEE /s/ Sheldon Laube
---------------------------------
Sheldon Laube
---------------------------------
(Print Name)
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<PAGE>
EXHIBIT 10.10
USWEB CORPORATION
MANAGEMENT CONTINUITY AGREEMENT
This Management Continuity Agreement (the "Agreement") is made and entered
into effective as of 2/12/96, by and between Jim Heffernan (the
------- -------------
"Employee") and USWeb Corporation, a Utah corporation (the "Company").
R E C I T A L S
A. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company.
B. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
C. The Board believes that it is imperative to provide the Employee with
certain benefits upon termination of employment or upon a Change of Control,
which benefits are intended to provide the Employee with financial security and
provide sufficient incentive and encouragement to the Employee to remain with
the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Board of Directors has
directed the Company, upon execution of this Agreement by the Employee, to agree
to the terms provided herein.
NOW THEREFORE, in consideration of the mutual covenants herein contained,
and in consideration of the continuing employment of Employee by the Company,
the parties agree as follows:
1. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Base Compensation. "Base Compensation" shall have the meaning
assigned to it in Section 3 of this Agreement.
(b) Cause. "Cause" shall mean (i) any act of personal dishonesty
taken by the Employee in connection with his responsibilities as an employee and
intended to result in substantial personal enrichment of the Employee or his
associates at the expense of the Company or its shareholders, (ii) committing a
felony or an act of fraud against the Company or its affiliates and (iii)
continued violations by the Employee of the Employee's obligations under this
Agreement which are
<PAGE>
demonstrably willful and deliberate on the Employee's part after there has been
delivered to the Employee a written demand for performance from the Company
which describes the basis for the Company's belief that the Employee has not
substantially performed his duties.
(c) Change of Control. "Change of Control" shall mean the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended) other than SOFTBANK
Corporation and/or any of its affiliates (collectively, "SOFTBANK") becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing fifty percent (50%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or
(ii) A merger or consolidation of the Company with any other
corporation or business entity, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) at least fifty percent
(50%) of the total voting power represented by the voting securities of the
Company or such surviving entity outstanding immediately after such merger or
consolidation; or
(iii) Effectiveness of an agreement for the sale, lease or
disposition by the Company of all or substantially all of the Company's assets.
(d) Involuntary Termination. "Involuntary Termination" shall mean (i)
without the Employee's express written consent, the assignment to the Employee
of any duties or the significant reduction of the Employee's duties, either of
which is inconsistent with the Employee's position with the Company and
responsibilities in effect immediately prior to such assignment, or the removal
of the Employee from such position and responsibilities; (ii) without the
Employee's express written consent, a substantial reduction, without good
business reasons, of the facilities and perquisites (including office space,
support staff and location) available to the Employee immediately prior to such
reduction; (iii) a reduction by the Company in the Base Compensation of the
Employee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits to which the
Employee is entitled immediately prior to such reduction with the result that
the Employee's overall benefits package is significantly reduced; (v) the
relocation of the Employee to a facility or a location more than 50 miles from
the Employee's then present location, without the Employee's express written
consent; (vi) any purported termination of the Employee by the Company which is
not effected for Disability or for Cause, or any purported termination for which
the grounds relied upon are not valid; or (vii) the failure of the Company to
obtain the assumption of this agreement by any successors contemplated in
Section 8 below.
(e) Disability. "Disability" shall mean that the Employee has been
unable to perform his duties under this Agreement as the result of his
incapacity due to physical or mental illness, and such inability, at least 26
weeks after its commencement, is determined to be total and permanent by a
physician selected by the Company or its insurers and acceptable to the Employee
or
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<PAGE>
the Employee's legal representative (such Agreement as to acceptability not
to be unreasonably withheld). Termination resulting from Disability may only be
effected after at least 30 days' written notice by the Company of its intention
to terminate the Employee's employment. In the event that the Employee resumes
the performance of substantially all of his duties hereunder before the
termination of his employment becomes effective, the notice of intent to
terminate shall automatically be deemed to have been revoked.
2. Duties and Scope of Employment. The Company shall employ the Employee
in the position of Chief Financial Officer, as such position was defined in
-----------------------
terms of responsibilities and compensation as of the effective date of this
Agreement; provided, however, that the Board of Directors shall have the right,
subject to the terms of this Agreement, to revise such responsibilities and
compensation as the Board in its discretion may deem necessary or appropriate.
The Employee shall continue to devote his full business efforts and time to the
Company and its subsidiaries. The Employee shall comply with and be bound by the
Company's operating policies, procedures and practices from time to time in
effect during his employment. During the term of the Employee's employment with
the Company, the Employee shall devote his full time, skill and attention to his
duties and responsibilities, and shall perform them faithfully, diligently and
competently, and the Employee shall use his best efforts to further the business
of the Company and its affiliated entities.
3. Base Compensation. The Company shall pay the Employee as compensation
for his services a base salary at the annualized rate of $200,000, along with
--------
such performance bonus amounts as the Board shall authorize, in its discretion,
from time to time. Such salary shall be paid periodically in accordance with
normal Company payroll. The annual compensation (including bonus amounts),
together with any increases in such compensation that the Board of Directors may
grant from time to time, is referred to in this Agreement as "Base
Compensation."
4. Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained by the
Company and applicable to other key executives of the Company, including
(without limitation) retirement plans, savings or profit-sharing plans, stock
option, incentive or other bonus plans, life, disability, health, accident and
other insurance programs, paid vacations and similar plans or programs, subject
in each case to the generally applicable terms and conditions of the applicable
plan or program in question and to the determination of any committee
administering such plan or program.
5. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason,
including (without limitation) any termination prior to a Change of Control, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
policies at the time of termination.
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<PAGE>
6. Severance Benefits.
(a) Termination Apart from Change of Control. In the event the
Employee's employment is terminated in an Involuntary Termination more than 60
days prior to the occurrence of a Change of Control or after the 18-month period
following a Change of Control (the "No-Change Period"), then the Employee shall
be entitled to receive severance pay equal to 12 months' Base Compensation, to
be paid out monthly at the same time as the Company's regular payroll is paid,
and any other benefits that may then be established under the Company's existing
severance and benefit plans and policies for employees generally at the time of
such termination. In the event the Employee's employment is terminated
voluntarily by the Employee during the No-Change Period, then no severance
payment shall be made unless in accordance with the Company's existing severance
and benefit plans and policies for employees generally at the time of such
termination.
(b) Termination Following A Change of Control. Subject to the
limitation on payments set forth in Section 7 below, if the Company terminates
the Employee's employment at any time 60 days or less before, or within eighteen
(18) months after, a Change of Control, and the Employee's employment is
terminated by the Company in an Involuntary Termination, or Employee voluntarily
terminates his employment with the Company, then the Employee shall be entitled
to receive severance pay in an amount equal to the Employee's Base Compensation
for the year immediately preceding or coinciding with the year of payment,
whichever is greater. Any severance payments to which the Employee is entitled
pursuant to this paragraph shall be paid in a lump sum within thirty (30) days
of the Employee's termination.
(c) Unvested Stock and Options.
(i) Subject to the limitation on payments set forth in Section 7
below, upon a Change of Control, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain
subject to the Board's discretionary authority as provided under the Company's
stock and option plans.
(ii) In addition to the above, if SOFTBANK acquires, cumulatively
and in the aggregate, more than 50% of the outstanding shares of Preferred Stock
(and/or shares of Common Stock issued upon conversion thereof) not owned by
SOFTBANK on February __, 1996, then if the Employee's employment is terminated
by the Company following such event, other than for Cause or as a result of the
Employee's Disability or death, the Company's right of repurchase in any
unvested portion of any stock held by the Employee shall lapse, and the
unexercisable portion of any option held by Employee to buy stock of the Company
under the Company's stock option plans shall become immediately exercisable in
full. In all other respects, the Employee's stock or option shall remain subject
to the Board's discretionary authority as provided under the Company's stock and
option plans.
(d) Termination For Cause. Notwithstanding anything else contained in
this Agreement, if the Company terminates the Employee's employment for Cause,
then the Employee
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<PAGE>
shall not be entitled to receive severance or other benefits pursuant to this
Agreement, including acceleration of exercisability of stock options or vesting
of stock purchased from the Company, except for those benefits (if any) as then
established under the Company's then existing severance and benefits plans and
policies at the time of such termination.
(e) Medical Benefits. In the event the Employee is entitled to
severance benefits pursuant to this Agreement, then in addition to such
severance benefits, the Employee shall receive Company-paid health insurance
coverage to the extent provided to such Employee immediately prior to the
Employee's termination (the "Company-Paid Coverage") for the period set forth in
this paragraph. If the Employee's health insurance coverage included the
Employee's dependents immediately prior to the Employee's termination, such
dependent shall also be covered at Company expense. Company-Paid Coverage shall
continue for twelve (12) months following termination or until the Employee
becomes covered under another employer's group health insurance plan, whichever
occurs first. For purposes of the continuation health coverage required under
COBRA, the date of the "qualifying event" giving rise to the Employee's COBRA
election period (and that of his "qualifying beneficiaries") shall be the last
date on which the Employee receives Company-Paid Coverage under this Agreement.
(f) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits pursuant to this
Agreement except (i) for those benefits (if any) as then established under the
Company's then existing severance and benefits plans and policies at the time of
such Disability or death and (ii) with respect to any stock held by Employee
that is subject to vesting, one-half of such stock, in addition to shares
already vested, shall become vested (with the Company's right of repurchase
lapsing), and with respect to any option held by Employee to buy stock of the
Company under the Company's stock option plans, the option shall become
exercisable as to an additional one-half of the total number of shares subject
to such option, in addition to shares as to which the option is already
exercisable.
7. Limitation on Payments. To the extent that any of the payments and
benefits provided for in this Agreement or otherwise payable to the Employee
constitute "parachute payments" within the meaning of Section 280G of the Code,
as amended and, but for this Section 7, would be subject to the excise tax
imposed by Section 4999 of the Code, then the Employee's benefits under Sections
6(b) and (c) above, as applicable, shall be payable either
(a) in full, or
(b) as to such lesser amount as would result in no portion of such
severance benefits being subject to excise tax under Section 4999 of the
Code,
whichever of the foregoing amounts, taking into account the applicable federal,
state and local income taxes and the excise tax imposed by Section 4999, results
in the receipt by the Employee on an after-tax basis of the greatest amount of
severance benefits under Sections 6(b) and (c) above, notwithstanding that all
or some portion of such severance benefits may be taxable under Section
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<PAGE>
4999 of the Code. Unless the Company and the Employee otherwise agree in
writing, any determination required under this Section 7 shall be made in
writing by the Company's independent public accountants (the "Accountants"),
whose determination shall be conclusive and binding upon the Employee and the
Company for all purposes. For purposes of making the calculations required by
this Section 7, the Accountants may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. The Company and the Employee shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 7.
8. Successors.
(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase of stock, purchase of assets, lease,
merger, consolidation, liquidation or otherwise) to all or substantially all of
the Company's business and assets shall assume the obligations under this
Agreement and agree expressly to perform the obligations under this Agreement in
the same manner and to the same extent as the Company would be required to
perform such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the Company's
business and assets which executes and delivers the assumption agreement
described in this paragraph or which becomes bound by the terms of this
Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, devisees and legatees.
9. Notice.
(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or three (3) days after being mailed by U.S.
registered or certified mail, return receipt requested and postage prepaid. In
the case of the Employee, mailed notices shall be addressed to him at the home
address which he most recently communicated to the Company in writing. In the
case of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with the notice provisions of this Agreement. Such notice shall
indicate the specific termination provision in this Agreement relied upon, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 15 days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of
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<PAGE>
the Employee hereunder or preclude the Employee from asserting such fact or
circumstance in enforcing his rights hereunder.
10. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor shall any such payment be
reduced by any earnings that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
San Jose, California in accordance with the rules of the American Arbitration
Association then in effect. Judgment may be entered on the arbitrator's award
in any court having jurisdiction. Punitive damages shall not be awarded.
(g) No Assignment of Benefits. The rights of any person to payments
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this paragraph shall be void.
(h) Employment Taxes. All payments made pursuant to this Agreement
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another
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<PAGE>
affiliate of the Company or to the Company; provided, however, that no
assignment shall be made if the net worth of the assignee is less than the net
worth of the Company at the time of assignment.
(j) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY USWEB CORPORATION
By: /s/ Joe Firmage
-----------------------------
Joe Firmage
Title: CEO
---------------------------
EMPLOYEE /s/ James Heffernan
---------------------------------
James J. Heffernan
---------------------------------
(Print Name)
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EXHIBIT 10.11
FORM OF AFFILIATE
AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. DEFINITIONS................................................. 1
2. GRANT OF FRANCHISE.......................................... 4
3. TERM AND RENEWAL............................................ 5
4. MARKS....................................................... 6
5. AFFILIATE OPERATIONS........................................ 7
6. OPERATING STANDARDS......................................... 8
7. OTHER OBLIGATIONS OF USWEB.................................. 11
8. ADVERTISING................................................. 11
9. ACCOUNTING AND RECORDS...................................... 12
10. PAYMENTS AND FEE............................................ 13
11. COVENANTS................................................... 14
12. TRAINING AND ASSISTANCE..................................... 16
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
13. DEFAULT AND TERMINATION..................................... 16
14. OWNERSHIP AND TRANSFER...................................... 19
15. GENERAL PROVISIONS.......................................... 22
2
</TABLE>
<PAGE>
USWEB
AFFILIATE AGREEMENT
This Affiliate Agreement is made this _____ day of __________________,
19____, (the "Effective Date") by and between USWeb Corporation, a Utah
Corporation with its principal place of business at 3000 Lakeside Drive, Santa
Clara, California 95054 ("USWeb"), and ____________________________________
_____________________________________________________________________
("Affiliate") (sometimes a "Party" or, collectively, "the Parties").
PREAMBLES
1. USWeb has developed and owns a proprietary business system (the
"USWeb System"), identified by the mark "USWeb/TM/", relating to the development
and operation of businesses offering services for the design, development,
operation, and maintenance of customer 's Intranets or sites on the Internet,
and providing customer education on related topics.
2. The USWeb System includes, and will include, without limitation,
software, products, and services for the development, operation, service, and
support of Internet Web sites for Affiliate's customers, including turnkey
development and deployment systems and specifications; development content,
aids, and templates; techniques and materials for promotion, advertising, and
marketing to customers; customer education programs, record keeping and
reporting methods; training in operation of the USWeb Business; and other
tangible and intangible property contributing to the continuity and uniformity
of the USWeb Network.
3. Affiliate's Application to become a USWeb Affiliate has been approved
by USWeb in reliance upon all of the representations made and information
contained in that Application.
4. The Parties intend this Agreement to establish the basis for ensuring
uniform standards of quality, performance, operation, and reputation of
Affiliate's USWeb business; enhancing and protecting the USWeb names and marks;
ensuring the full and fair collection of Affiliate's financial obligations to
USWeb; and, generally, providing an objective contractual basis for a fair and
mutually satisfactory business relationship between the Parties.
THEREFORE, the Parties, in consideration of the undertakings and
commitments of each Party to the other Party contained in this Agreement, and
for other good and valuable consideration, agree as follows:
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1. DEFINITIONS
These terms shall have the following meanings in this Agreement:
1.1 "USWeb" means USWeb Corporation, the Franchisor under this Agreement, which
is a Utah Corporation with its principal place of business at 3000 Lakeside
Drive, Santa Clara, California 95054, and its successors and assigns
pursuant to this Agreement.
1.2 "Affiliate" shall mean the individual, corporation, partnership, or other
legal person which is the signatory to this Agreement.
1.3 "Affiliate Associates" shall mean:
a. any officer or director, or holder of ten percent (10%) or more of any
beneficial ownership interest in any corporation owning or controlling
Affiliate, if Affiliate is a corporation; or
b. any general partner or limited partner (including any corporation and
its officers, directors and holders of ten percent (10%) or more of
the ownership of any corporation which owns or controls, directly or
indirectly, any general partner or limited partner), if Affiliate is a
partnership.
1.4 "USWeb Business" shall mean the business operated by Affiliate pursuant to
this Agreement, utilizing the USWeb System in the design, development,
operation, and maintenance of customer's Intranets or sites on the
Internet, and providing customer education on related topics.
1.5 "USWeb Network" shall mean the network of USWeb and all USWeb Businesses
operated by all USWeb Affiliates.
1.6 "USWeb System" shall mean the Marks, USWeb Proprietary Information, and all
techniques, know-how, standards, specifications, policies, procedures, and
other methods of doing business used in the operation of a USWeb Business,
as developed and modified from time to time by USWeb, as set forth in the
Operations Manual.
1.7 "Adjusted Gross Revenues" shall mean Affiliate's gross revenues from the
operation of the USWeb Business, determined using United States Generally
Accepted Accounting Principles (USGAAP), adjusted for (a) the amount of
Affiliate's unburdened direct cost for (i) computer hardware products
resold to Affiliate's customers, (ii) commercial non-custom software not
developed by Affiliate (as described in the Operations Manual) resold to
Affiliate's customers, (iii) goods
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and/or services purchased from USWeb and resold to Affiliate's customers,
and (iv) Internet access services purchased from USWeb-approved suppliers
and resold to Affiliate's customers; (b) bona fide refunds, credits, or
allowances resulting from customer change orders; and (c) taxes required to
be collected by Affiliate in connection with the operation of the USWeb
Business, which are added to the price of goods or services invoiced to
Affiliate's customers and actually paid to appropriate governmental
authorities. Adjusted Gross Revenues shall not be adjusted for any costs of
generating revenues, operating expenses (including the write off of
uncollectible accounts receivable or other bad debt expenses), non-
operating expenses, or other expenses relating to the operation of the
USWeb Business.
1.8 "Advertising & Marketing Fund" or "the Fund" shall mean the fund
administered by USWeb, pursuant to the provisions of Section 8.0 of this
Agreement.
1.9 "Authorized Offering" shall mean those products or services which are
authorized by USWeb, in its discretion from time to time during the term of
this Agreement and described in the Operations Manual, which are closely
related to accessing, establishing, or generating an Intranet or a presence
on the Internet.
1.10 "Incapacity" shall mean the inability of Affiliate to operate or oversee
the operation of the USWeb Business on a regular basis, by reason of any
continuing physical, mental, or emotional disability, chemical dependency,
or any other limitation resulting in Affiliate's inability to operate or
oversee the operation of the USWeb Business. Any dispute as to the
existence of Incapacity shall be resolved by majority decision of three
licensed medical physicians practicing in the state of the location of the
USWeb Business, with each Party selecting one medical physician, and the
two medical physicians so designated selecting the third medical physician.
The decision of the majority of the three medical physicians shall be
binding upon the Parties and all costs of making such decision shall be
borne by the Party against whom it is made.
1.11 "USWeb Intellectual Property" shall mean any and all patents, patent
applications (including any amendments, continuations, divisions,
subdivisions, substitutes, reissues, or re-examinations), inventions,
industrial models, designs, copyrights, trademarks, service marks
(including all registered, unregistered, and common law copyrights,
trademarks, or service marks), logos, slogans, characters, trade secrets,
know-how, show-how, licenses, sublicenses, and permissions to use
copyrighted materials of others ("Intellectual Property"), including USWeb
Proprietary Information and all forms of implementations incorporating
USWeb Intellectual Property, and including assignments of "derivative
works" [as defined in the U.S. Copyright Act, 17 U.S.C. (S)101 (1994)] of
USWeb Intellectual Property from Affiliate and other USWeb Affiliates,
which may be licensed or sublicensed by USWeb,
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either to Affiliate or to Affiliate's customers. USWeb Intellectual
Property shall not include any Intellectual Property developed
independently or owned by Affiliate which does not include, or is not based
upon, any USWeb Intellectual Property.
1.12 "Mark" or "Marks" shall mean the trademark and service mark USWeb/TM/, in
approved form or style as set forth from time to time in the Operations
Manual or other communication from USWeb relating to the Marks, as well as
all other trademarks, service marks, trade names, slogans, designs,
packaging, trade dress, or other descriptive, distinctive, or identifying
characteristics which may be adopted and used by USWeb for use in the USWeb
System, as set forth from time to time in the Operations Manual.
1.13 "Operations Manual" shall mean the set of materials, however published and
delivered, which sets forth the standards, specifications, policies,
procedures, methods, approved products and services, and other USWeb
Proprietary Information relating to the operation of a USWeb Business, and
all amendments, supplements, bulletins, notices, and memoranda relating to
such materials which may be provided to Affiliate by USWeb in its sole
discretion, from time to time.
1.14 "USWeb Proprietary Information" shall mean all information, in any form,
relating to the USWeb System or the operation of a USWeb Business which (a)
is not generally available and known to the general public, (b) has not
been disclosed to Affiliate on a non-confidential basis by a third party,
(c) has not been developed independently by Affiliate, or (d) has not been
publicly disclosed by a duly authorized representative of USWeb. USWeb
Proprietary Information shall include, but not be limited to, the contents
of the Operations Manual, marketing and sales information and plans,
operations, specifications, procedures, Authorized Offerings, technical and
pricing information, and other items, tangible or intangible, which relate
to the USWeb System, as modified from time to time by USWeb in its sole
discretion, but which modifications shall not materially modify any term or
condition of this Agreement.
1.15 "SMSA Class" shall mean USWeb's classification of the Standard Metropolitan
Statistical Areas ("SMSA"), as defined by the U.S. Census Bureau or its
successor, in which Affiliate's USWeb Business is located.
1.16 "Transfer" shall mean any act by Affiliate to sell, assign, transfer,
convey, give away, or encumber all or any part of its interest in this
Agreement or its interest in the franchise granted by this Agreement or a
controlling interest in any proprietorship, partnership, or corporation
that owns any interest in this Agreement or in the franchise, to any
person.
1.17 "Startup Date" shall mean the date, set forth in Exhibit A to this
Agreement, on
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<PAGE>
which Affiliate's obligations to pay Royalty & Service Fees and Advertising
& Marketing Fees shall commence.
2. GRANT OF FRANCHISE
------------------
2.1 Subject to all terms and conditions of this Agreement and to the continuing
good faith performance of such terms and conditions by Affiliate during the
term of this Agreement, USWeb grants to Affiliate a nonexclusive franchise:
a. to adopt and use the USWeb System to operate a USWeb Business in the
SMSA specified in Exhibit A to this Agreement;
b. to operate the USWeb Business continuously during business hours
necessary to complete projects in a timely manner and in compliance
with customer expectations, in accordance with the terms and
conditions of this Agreement and the Operations Manual;
c. to advertise the USWeb Business to the public as a USWeb Business; and
d. to promote, market, offer, sell, and provide to the public authorized
USWeb products and services ("Authorized Offerings"), in accordance
with the terms and conditions of this Agreement, the Operations
Manual, related licenses, and other communications from USWeb to
Affiliate from time to time.
2.2 USWeb also grants to Affiliate the following nonexclusive licenses, to be
used by Affiliate only during the term of this Agreement and only in
conjunction with the franchise granted by this Agreement:
a. a nonexclusive license to use the Marks, in accordance with USWeb's
standards and requirements for usage of the Marks, as set forth in
this Agreement, in the Operations Manual, and in other periodic
communications from USWeb to Affiliate relating to the Marks; and
b. a nonexclusive license to use USWeb Intellectual Property, as
distributed by USWeb to Affiliate from time to time during the term of
this Agreement, in accordance with the terms and conditions of any
related licenses for USWeb Intellectual Property, and in accordance
with USWeb's standards and requirements for USWeb Intellectual
Property, as set forth in this Agreement, in the Operations Manual,
and in other periodic communications from USWeb to Affiliate relating
to USWeb Intellectual Property; and
c. a nonexclusive license to use USWeb Proprietary Information, as
disclosed by USWeb to Affiliate from time to time during the term of
this Agreement,
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<PAGE>
in accordance with USWeb's standards and requirements for usage of
USWeb Proprietary Information, as set forth in this Agreement, in the
Operations Manual, and in other periodic communications from USWeb to
Affiliate relating to USWeb Proprietary Information.
2.3 USWeb shall deliver to Affiliate a current version of the Operations
Manual, which USWeb shall update and revise, from time to time during the
term of this Agreement in its sole discretion.
2.4 Subject only to Affiliate's SMSA Territory Rights, as may be set forth in
Exhibit D to this Agreement, the franchise and licenses granted to
Affiliate by this Agreement are nonexclusive and USWeb shall have, at all
times throughout the term of this Agreement and at all places, including in
the SMSA where Affiliate's USWeb Business is located, the unqualified right
to open and operate, or to franchise and license others to open and
operate, businesses utilizing the USWeb System.
3. TERM AND RENEWAL
----------------
3.1 The term of this Agreement shall be ten (10) years from the Effective Date.
3.2 If, prior to expiration of the term of this Agreement, Affiliate has
complied with Sections 3.2(a) and 3.2(b) of this Agreement, and is not
otherwise in default under this Agreement, then Affiliate may elect to
renew as a USWeb Affiliate, by complying with the provisions of Sections
3.2 and 3.3 of this Agreement, unless Affiliate has received notice from
USWeb in accordance with Section 3.5 of this Agreement that the franchise
will not be renewed. In order to qualify to renew as a USWeb Affiliate:
a. During the term of this Agreement, Affiliate must have substantially
complied with all material terms and conditions of this Agreement and
any other agreement between Affiliate and USWeb; and
b. Affiliate must have given written notice of its election to renew as a
USWeb Affiliate to USWeb not less than four (4) months and not more
than six (6) months prior to the expiration of the term of this
Agreement.
3.3 If Affiliate has complied with the requirements of Section 3.2 of this
Agreement, then the following additional conditions precedent must be
satisfied at least ninety (90) days prior to the expiration of the term of
this Agreement in order to renew as a USWeb Affiliate:
a. Affiliate must qualify under USWeb's then-current criteria for new
USWeb Affiliates, including all financial, operational, and business
suitability criteria
6
<PAGE>
then-utilized by USWeb in evaluating and approving applications to
become a USWeb Affiliate. If USWeb is not offering new franchises at
the time of Affiliate's renewal, then the requirements of this Section
3.3(a) shall be deemed waived.
b. USWeb and Affiliate must execute the then-current form of USWeb
Affiliate Agreement, including all other ancillary agreements and
legal instruments then used by USWeb in connection with the granting
of USWeb franchises; refusal by Affiliate to execute such agreements
and instruments within thirty (30) days of delivery to Affiliate shall
be deemed an election by Affiliate not to renew as a USWeb Affiliate;
c. Affiliate must satisfactorily complete USWeb's renewal training
program, provided that such training shall not be longer than the
training period then required of new USWeb Affiliates;
d. The Parties must execute and deliver a mutual general release, in a
form satisfactory to USWeb, generally releasing any and all claims the
Parties may have against each other, or their respective subsidiaries,
affiliates, or predecessors, and their respective partners, officers,
directors, agents, shareholders, and employees, for any acts or
omissions that may have arisen from the relationship of the Parties
prior to the date of the release; and
e. Affiliate shall pay to USWeb a Renewal Fee of Two Thousand Five
Hundred Dollars ($2,500).
3.4 All supplements, additions, or other modifications to this Agreement of
whatever kind, nature, and description shall terminate upon the expiration
of this Agreement or execution of the then-current form of USWeb Affiliate
Agreement. No addenda, supplements, additions, or other modifications to
this Agreement shall survive expiration or termination of this Agreement.
3.5 If USWeb elects not to renew Affiliate as a USWeb Affiliate, then USWeb
shall give Affiliate written notice of its election not to renew,
specifying the reasons for non-renewal, not later than one hundred eighty
(180) days prior to the expiration of the term of this Agreement.
4. MARKS
-----
4.1 Affiliate acknowledges and shall not contest the validity of the Marks and
acknowledges that the Marks are the sole and exclusive property of USWeb.
All goodwill associated with the Marks, including any goodwill which might
be generated by Affiliate and all other USWeb Affiliates, shall remain the
sole property
7
<PAGE>
of USWeb. Affiliate shall not oppose or seek to cancel any registration of
any of the Marks, in the United States or elsewhere, or aid or abet others
in such activities, during or after the term of this Agreement.
4.2 Affiliate shall use the Marks solely for the purposes and to the extent of
the rights, licenses, and franchise granted by this Agreement and only in
accordance with this Agreement and the Operations Manual. Affiliate shall
not use the Marks in the offering of any product or service which is not an
Authorized Offering, or in any other manner not expressly authorized by
this Agreement, by the Operations Manual, or separately in writing by
USWeb.
4.3 Affiliate shall not use the Marks, or any colorable imitation or similar
mark, directly or indirectly, for any purpose whatsoever, other than the
purposes intended by this Agreement, at any time during or after expiration
or termination of this Agreement.
4.4 Affiliate shall not license, sublicense, or grant, in any manner, any
interest in the Marks to any person at any time, during the term of, or
after expiration or termination of, this Agreement. Any such act by
Affiliate shall constitute irreparable harm to USWeb and other USWeb
Affiliates and shall constitute a material breach of this Agreement.
4.5 Affiliate shall notify USWeb immediately of any apparent infringement of or
challenge to Affiliate's use of any of the Marks or claim by any person of
any rights in any of the Marks. USWeb shall have sole discretion to take
such action, if any, as it deems appropriate, and Affiliate shall cooperate
with USWeb in all activities reasonably required by USWeb to preclude or
terminate unauthorized use of the Marks or any confusingly similar name or
Mark. Affiliate shall not be liable for attorney's fees, court costs, or
other legal expenses incurred by USWeb in pursuit of infringement actions.
Any and all damages or other amounts recovered in any such action or
proceeding shall be the sole property of USWeb.
4.6 USWeb shall indemnify and hold harmless Affiliate against all claims
arising from Affiliate's proper or authorized use of the Marks in
accordance with this Agreement and the Operations Manual. USWeb, in its
sole discretion, shall police and enforce its rights in the Marks.
4.7 Affiliate shall not use the Marks as part of any corporate or trade name,
or with any prefix, suffix, or other modifying words, terms, designs, or
symbols, or in any modified form, during or after expiration or termination
of this Agreement, except as a fictitious business name, which shall be in
the form prescribed by, and subject to the prior written approval of,
USWeb, in accordance with the policies and procedures set forth in the
Operations Manual.
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4.8 USWeb in its sole discretion from time to time, may determine that use of
certain Marks should be modified or discontinued throughout the USWeb
Network, and/or that the USWeb Network shall use one or more additional or
substitute Marks. Subject to all other terms and conditions of this
Agreement, Affiliate shall comply with USWeb's directions to implement such
changes, within a reasonable time after notice to Affiliate by USWeb.
4.9 All issues relating to the Marks shall be governed by and construed in
accordance with the Lanham Trademark Act (15 U.S.C. (S)1051, et seq.).
5. AFFILIATE OPERATIONS
--------------------
5.1 Affiliate shall comply with all terms and conditions of this Agreement and
the Operations Manual, in the operation of the USWeb Business.
5.2 The location and premises of the USWeb Business identified in Exhibit A
shall be approved in advance and in writing by USWeb. Affiliate shall
commence operations of the USWeb Business at the location, using the USWeb
System, within ninety (90) days of the Effective Date. Affiliate
acknowledges and agrees that time is of the essence in the commencement of
operations, and that Affiliate's failure to meet the time limits imposed in
this Section 5.2 of this Agreement, unless extended in writing by USWeb,
shall be a material breach of this Agreement and may be grounds for
termination of the Agreement at the sole option of USWeb, without further
liability to Affiliate.
5.3 Affiliate shall be solely responsible for compliance with applicable
federal, state, and local requirements with respect to the premises of the
USWeb Business, for the maintenance of suitable premises for the operation
of the USWeb Business during the term of this Agreement, and for all lease
payments or other financial obligations of Affiliate relating to the
premises or the USWeb Business. USWeb does not guarantee any such payments
or other financial obligations, and Affiliate may not act in any way which
might bind or obligate, or attempt to bind or obligate, USWeb to the terms
of any such lease or other financial obligations.
5.4 Affiliate shall not relocate the USWeb Business (a) from the location or
(b) outside the SMSA set forth in Exhibit A to this Agreement, without the
prior written consent of USWeb, which consent shall not be unreasonably
withheld. USWeb may impose conditions precedent to approval of any
relocation in its sole discretion. Any such relocation of the USWeb
Business shall be at Affiliate's sole expense, and USWeb shall have the
right to charge Affiliate for all costs incurred by USWeb in connection
with such relocation, including a reasonable fee for its services in
connection with any such relocation, as set forth in the Operations Manual.
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<PAGE>
6. OPERATING STANDARDS
-------------------
6.1 In order to maintain the high quality and consistent standards associated
with the USWeb System and Marks, Affiliate shall:
a. Devote full time and best efforts to establish and operate the USWeb
Business in accordance with all terms and conditions of this Agreement
and the Operations Manual; Affiliate may designate a qualified
employee for such purpose, and USWeb reserves the right to approve the
person so designated by Affiliate;
b. Maintain the condition and appearance of the premises of the USWeb
Business, consistent with USWeb's standards for USWeb Businesses; and
improve and upgrade the premises from time to time as may be required
or reasonably necessary, in accordance with standards and
specifications set forth by USWeb in the Operations Manual, the lease
for the premises, and in other communications from USWeb to Affiliate,
from time to time;
c. Promote the USWeb Business using the advertising and promotion
materials developed and made available by USWeb, from time to time.
d. Use only prescribed forms of customer agreements and licenses, as set
forth from time to time in the Operations Manual, and not enter into
any other forms of agreement with customers which would have the
effect of abrogating any provision in any prescribed form or of this
Agreement;
e. Complete and submit to USWeb, on a timely basis, the then-current
forms and reports prescribed for all USWeb Affiliates in the
Operations Manual.
f. Maintain an accounting and record keeping system, approved in
accordance with the standards and specifications set forth in the
Operations Manual, including the basic accounting information
necessary to prepare financial statements and a general ledger in
accordance with United States Generally Accepted Accounting Principles
(USGAAP) utilizing a standard chart of accounts as set forth in the
Operations Manual, with adequate and verifiable records and supporting
documentation, including, without limitation, invoices, payroll
records, check registers, sales tax records, cash receipts and
disbursements, journals, and general ledgers;
g. Except as otherwise provided in this Agreement, purchase products and
services for use in the USWeb Business that meet USWeb's standards and
specifications, as set forth in the Operations Manual; Affiliate shall
not offer to its customers any products or services through the USWeb
Business
10
<PAGE>
which are not Authorized Offerings or otherwise in accordance with
USWeb's standards and specifications;
h. Provide Internet hosting services to Affiliate's customers which are
operated only by USWeb or by approved suppliers;
i. Comply at all times with all federal, state, and municipal laws,
regulations, bylaws, orders, rulings, permits, and licensing
requirements relating to, and pay promptly any and all taxes,
assessments, fees, fines, and penalties arising out of, the operation
of the USWeb Business;
j. Respond promptly to any and all customers' inquiries or complaints and
resolve, to the customer's reasonable satisfaction, all reasonable
complaints;
k. Operate the USWeb Business in compliance with the standards,
specifications, procedures, and other requirements of the USWeb
System;
l. Use the location of the USWeb Business solely for the purpose of
operating a USWeb Business, and not for any other purpose, without the
prior written consent of USWeb;
m. Notify USWeb in writing within three (3) business days of the
commencement of any action, suit, or legal proceeding by any person,
or of the issuance of any order, writ, injunction, award, or decree of
any court, agency, or other governmental instrumentality, which may
adversely affect the operation or financial condition of the USWeb
Business, or the reputation of the USWeb Network;
n. Hire and train only competent and qualified employees; and
o. Obtain and maintain in force, at its sole expense, a policy or
policies of liability insurance, in such form and such limits (of not
less than $1 million) as USWeb, in its sole discretion, deems
necessary (including motor vehicle liability insurance, if a motor
vehicle is employed in the operation of the USWeb Business), as set
forth in the Operations Manual. All such insurance policies shall
name USWeb Corporation as an additional insured and shall provide that
USWeb will receive ten (10) days prior written notice of termination,
expiration, or cancellation of any such policy; not less than
annually, Affiliate shall submit to USWeb a copy of the certificate or
other evidence of the renewal or extension of each such insurance
policy; if Affiliate fails to comply with the obligations of this
(S)6.1(o), then USWeb shall have the right to procure such insurance
and Affiliate shall reimburse USWeb for all related costs incurred.
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<PAGE>
6.2 Affiliate shall maintain the confidentiality, both during and after the
term of this Agreement, of all USWeb Proprietary Information disclosed to
Affiliate by USWeb pursuant to this Agreement, and not disclose, duplicate,
or otherwise use in an unauthorized manner any portion of the USWeb
Proprietary Information. Affiliate shall adopt and implement reasonable
policies and procedures to prevent unauthorized use or disclosure of USWeb
Proprietary Information, including those policies and procedures relating
to Affiliate Associates set forth in the Operations Manual. Affiliate
shall not use any USWeb Proprietary Information for any purpose or in any
business activity other than in the USWeb Business, or in any manner not
contemplated by this Agreement, unless such use has been specifically
authorized or approved in writing by USWeb.
6.3 USWeb Proprietary Information shall remain, at all times, the sole property
of USWeb and shall be returned to USWeb promptly upon the expiration or
termination of this Agreement.
6.4 Affiliate shall insure, at all times, that any authorized Affiliate copies
of the Operations Manual and other USWeb Proprietary Information are
maintained in their most current version, and in the event of any dispute
as to the contents of such materials, the terms of the master copy of such
materials maintained by USWeb shall be controlling. In the event of a
conflict between the Operations Manual and this Agreement, the provisions
of this Agreement shall prevail.
6.5 Affiliate may use USWeb Intellectual Property authorized by USWeb in the
delivery of products or services to Affiliate's customers, in accordance
with the terms and conditions of various license agreements pertaining to
USWeb Intellectual Property, including license agreements with third
parties, which licenses may grant to Affiliate the right to prepare
"derivative works" [as defined in the U.S. Copyright Act, 17 U.S.C. (S)101
(1994)] from such licensed USWeb Intellectual Property. With respect to
such derivative works, Affiliate hereby assigns to USWeb all right, title,
and interest in such derivative works, including any patent, copyright,
know-how, or similar rights relating to such derivative works, under
methods and procedures set forth in the Operations Manual, from time to
time, and shall do, execute, acknowledge, and deliver all such further
acts, transfers, assignments, conveyances, or assurances as USWeb may
require to better transfer, assign, convey, grant, and assure the
assignment of and delivery of code for such derivative works to USWeb.
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<PAGE>
7. OTHER OBLIGATIONS OF USWEB
--------------------------
7.1 USWeb will revise and update the Operations Manual, from time to time,
during the term of this Agreement and distribute such revisions and updates
to Affiliate.
7.2 USWeb will test and evaluate computer hardware and software products, and
recommend certain systems and configurations for use in various parts of
the USWeb Business, in USWeb's sole discretion, in accordance with the
standards, specifications, and procedures set forth from time to time in
the Operations Manual.
7.3 USWeb will test and evaluate products and services for designation as
Authorized Offerings, in accordance with the standards, specifications, and
procedures set forth from time to time in the Operations Manual.
7.4 USWeb will sell and/or distribute products and services, including products
and services developed by other USWeb Affiliates and assigned to USWeb
pursuant to Section 6.5 of this Agreement (or future equivalents), in
USWeb's sole discretion, in accordance with the standards, specifications,
and procedures set forth from time to time in the Operations Manual.
7.5 USWeb will provide such other ongoing consultation, advice, and assistance
as USWeb, in its sole discretion, deems appropriate to assist Affiliate in
the operation of the USWeb Business, the performance of Affiliate's
obligations under this Agreement, and the maintenance of high standards and
reputation of the USWeb Network.
8. ADVERTISING
-----------
Affiliate acknowledges the value of advertising and the importance of the
standardization of advertising and promotion to the furtherance of the goodwill
and the public image of the USWeb Network. Therefore, it is agreed as follows:
8.1 USWeb, or its designee, shall develop, in its sole discretion, all creative
concepts, advertising campaigns, and marketing and promotional materials
used in the USWeb System. Affiliate shall utilize only USWeb-approved
concepts, campaigns, and materials, in accordance with this Agreement, the
Operations Manual, and other communications from USWeb, from time to time.
8.2 USWeb, or its designee, shall utilize The Advertising & Marketing Fund in
its sole discretion, for advertising, marketing, and public relations
activities to promote the sale of products or services offered by USWeb
Affiliates to produce advertising campaigns and marketing and promotional
materials for use by all USWeb Affiliates, and to assist specific USWeb
Affiliates, as well as to pay all costs
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<PAGE>
associated with the general marketing and promotion of the USWeb Network,
including, without limitation, corporate employee and other reasonable
administrative costs relating to advertising, marketing, and promotion;
engagement of advertising, public relations, and media buying firms; and
costs for development and placement of advertising campaigns in all forms
of media. The Fund will not be used directly to promote the sale of new
USWeb Affiliate Agreements.
8.3 In addition to the Advertising & Marketing Fee payable pursuant to Section
9.3 of this Agreement, Affiliate shall spend, on an annual basis, not less
than one percent (1%) of Adjusted Gross Revenues on marketing and
advertising activities related solely to Affiliate's USWeb Business.
Categories of such activities will be described, from time to time, in the
Operations Manual.
8.4 The Parties agree and acknowledge that the Advertising & Marketing Fund is
intended to maximize marketplace recognition of USWeb and acceptance of the
Marks for the benefit of the USWeb Network and that USWeb or its designee
undertake no obligation in administering the Fund to make expenditures for
any USWeb Affiliate that are equivalent or proportionate to its
contribution, or to ensure that any particular Affiliate benefits directly
or pro rata from the placement of such advertising. Affiliate shall have
no right to any refund of monies contributed to the Fund upon termination,
expiration, or transfer of this Agreement.
8.5 Affiliate shall maintain a business telephone and advertise continuously in
the classified or "Yellow Pages" of its local telephone directory under
such listing(s) and in such format as approved by USWeb. Where multiple
Affiliates serve a common geographic area covered by a common telephone
directory, such advertisements shall list all then-existing Affiliates
under a collective listing(s) and Affiliate shall contribute its equal
share in the cost of such advertising.
8.6 Affiliate shall advertise consistently with all standards, terms, and
conditions of this Agreement and the Operations Manual, and shall not
advertise or use, in advertising or any other form of promotion, the Marks
without displaying appropriate or approved copyright and trademark
registration marks or other designations, as required.
9. ACCOUNTING AND RECORDS
----------------------
9.1 Affiliate must maintain an accounting and record keeping system in
accordance with United States Generally Accepted Accounting Principles
(USGAAP), approved in accordance with the standards and specifications set
forth in the Operations Manual. This system shall utilize a standard chart
of accounts, as set forth in the Operations Manual, and shall include the
basic accounting information necessary to prepare financial statements, a
general ledger, and reports required by this
14
<PAGE>
Agreement and the Operations Manual. Affiliate shall maintain adequate and
verifiable records and supporting documentation relating to such accounting
information, in accordance with USWeb's specifications, as set forth in the
Operations Manual, including vendor and customer invoices, payroll records,
check registers, cash receipts and disbursements journals, and general
ledgers.
9.2 Affiliate shall, at its expense, submit to USWeb within ninety (90) days of
the end of Affiliate's fiscal year during the term of this Agreement, an
income statement for such fiscal year and a balance sheet as of the last
day of such fiscal year, prepared on an accrual basis (unless otherwise
required by law), including all adjustments necessary for fair presentation
of the financial statements, as adjusted and reconciled after the closing
and review of Affiliate's books and records, all in accordance with USGAAP.
Such financial statements will be certified to be true and correct by
Affiliate. USWeb reserves the right to require annual financial
statements, prepared in accordance with USGAAP, reviewed or audited by an
independent certified public accountant.
9.3 Affiliate shall submit to USWeb, within five (5) days of the end of each
calendar month, a true, correct, and complete statement of Adjusted Gross
Revenues for the previous calendar month, containing all information
required and in the format prescribed, by USWeb, as set forth in the
Operations Manual, and certified as true, correct, complete and accurate by
Affiliate.
9.4 Affiliate shall provide to USWeb copies of Affiliate's annual federal
income tax returns (if Affiliate is obligated to report under the
Securities Exchange Act of 1934, then Forms 10-K and 10-Q may be provided
in lieu of annual federal income tax returns) and quarterly (or other
periodic) sales tax returns, including all schedules, exhibits, and tables
included in such returns, within thirty (30) days of the date of filing
each such return. In the event that such returns are not filed by
Affiliate in a timely manner, Affiliate shall provide to USWeb copies of
all extensions of time filed and granted within thirty (30) days of each
such filing or granting of such extension(s).
9.5 If any statement submitted to USWeb by Affiliate discloses any underpayment
of monthly Royalty & Service Fees or Advertising & Marketing Fees, then
Affiliate shall pay to USWeb, at the time such statement is submitted, the
amount of any such underpayment. Any overpayment shall be credited to
Affiliate's account with USWeb.
9.6 USWeb or its designated agents shall have the right at all reasonable times
to examine, at its expense, the books and records of Affiliate. USWeb
shall also have the right, at any time, to have an independent audit made
of Affiliate's books and records, by auditors selected by USWeb and at
USWeb's expense. In the event
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any such inspection or audit shall disclose an under-reporting of Adjusted
Gross Revenues for any period which exceeds five percent (5%) of
Affiliate's Adjusted Gross Revenues during such period, then Affiliate
shall pay to USWeb, within ten (10) days of receipt of a demand based on
the report, the amount(s) due as a result of such under-statement, plus all
costs associated with the audit, not to exceed $10,000. Further, in the
event such audit is made necessary by the failure of Affiliate to furnish
reports or statements as required in this Agreement, Affiliate shall
reimburse USWeb for all costs of such inspection or audit, including
without limitation the charges of any independent accountant and all travel
expenses, room and board, and other reasonable expenses and compensation of
USWeb employees relating to such inspection or audit.
10. PAYMENTS AND FEE
----------------
10.1 INITIAL FRANCHISE FEE
a. Upon execution of the Agreement, Affiliate shall pay to USWeb a
nonrecurring Initial Franchise Fee in the amount of Fifty Thousand
Dollars ($50,000).
b. The Initial Franchise Fees are payable in full at the time of, and
deemed fully earned by USWeb and nonrefundable upon, Affiliate's
execution of this Agreement.
10.2 Affiliate shall pay to USWeb a monthly Royalty & Service Fee, calculated at
Five Percent (5%) of Adjusted Gross Revenues, but not less than the
following Monthly Minimum Royalty & Service Fee, determined by the SMSA
Class specified in Exhibit A to this Agreement:
<TABLE>
<CAPTION>
============================================================================
SMSA Class 1 SMSA Class 2 SMSA Class 3 SMSA Class 4 SMSA Class 5
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$3,800 $3,800 $3,100 $2,000 $1,400
============================================================================
</TABLE>
10.3 Affiliate shall pay to USWeb a monthly Advertising & Marketing Fee equal to
Two Percent (2%) of Adjusted Gross Revenues, but not less than the
following Monthly Minimum Advertising & Marketing Fee, determined by the
SMSA Class specified in Exhibit A to this Agreement:
16
<PAGE>
<TABLE>
<CAPTION>
============================================================================
SMSA Class 1 SMSA Class 2 SMSA Class 3 SMSA Class 4 SMSA Class 5
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,520 $1,520 $1,240 $800 $560
============================================================================
</TABLE>
10.4 All amounts due to USWeb shall be payable on the tenth (10th) business day
of each calendar month.
10.5 Any amount properly owing from Affiliate to USWeb for Royalty & Service
Fees, Advertising & Marketing Fees, or any other purpose whatsoever, if not
paid when due, whether such amount has been shown on any report required to
be submitted by Affiliate or has subsequently been determined by
verification, examination, or audit to have been due for any month, shall
bear interest from the date such amount was due until paid, at the lesser
of one and one-half percent (1.5%) per month of delinquency or the maximum
rate permitted by law. Affiliate acknowledges that this provision does not
constitute USWeb's agreement to accept any payments after the due date or a
commitment by USWeb to extend credit for or otherwise to finance
Affiliate's operation of the USWeb Business.
10.6 Affiliate shall pay all costs incurred by USWeb due and owing to USWeb in
connection with the operation of Affiliate's USWeb Business, including,
without limitation, the costs of enforcing the provisions of this Agreement
and the cost of all related attorney's fees, accountant's fees, court
costs, and general and administrative expenses, including travel.
10.7 Notwithstanding any designation by Affiliate, USWeb shall have the sole
discretion to apply any receipts from or on the accounts of Affiliate for
any indebtedness to USWeb.
10.8 During the initial 4 calendar months after the Startup Date, Affiliate
shall not be obligated to pay the Monthly Minimum obligations set forth in
Sections 10.2 and 10.3, and shall be obligated to pay only the percentages
of Adjusted Gross Revenues payable pursuant to those Sections.
11. COVENANTS
---------
11.1 During the term of this Agreement, neither Affiliate nor any Affiliate
Associate shall:
a. engage in, or own any interest (except as a passive investor of less
than five percent (5%) of total debt and equity) in, any business or
other activity that would compete with the USWeb Business or otherwise
conflict with the performance of Affiliate's obligations under this
Agreement, except as a USWeb Affiliate; or
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b. divert or attempt to divert any business or any customers of the USWeb
Business to any other person or entity, by direct or indirect
inducement or otherwise, or do or perform, directly or indirectly, any
other act injurious or prejudicial to the goodwill associated with
USWeb, the Marks, the USWeb Business, or the USWeb Network; or
c. solicit any person for employment with Affiliate who is at that time
already employed by USWeb or another USWeb Affiliate, or otherwise
directly or indirectly induce or seek to induce such person to leave
his or her employment.
11.2 For a period of two (2) years following expiration or termination of this
Agreement, neither Affiliate nor any Affiliate Associate shall:
a. engage in, or own any interest (except as a passive investor of less
than five percent (5%) of total debt and equity) in, any business or
other activity, in the SMSA where the USWeb Business was located, that
would compete with the former USWeb Business, except as a USWeb
Affiliate; or
b. divert or attempt to divert any business or any customers of the USWeb
Business to any other person or entity in the SMSA where the USWeb
Business was located, by direct or indirect inducement or otherwise,
or do or perform, directly or indirectly, any other act injurious or
prejudicial to the goodwill associated with USWeb, the Marks, the
USWeb Business, or the USWeb Network; or
c. solicit any person for employment who is at that time already employed
by USWeb or another USWeb Affiliate, or otherwise directly or
indirectly induce or seek to induce such person to leave his or her
employment.
11.3 Sections 11.1 and 11.2 of this Agreement shall not apply:
a. to any noncompetitive business activities of Affiliate, or of any
Affiliate Associate which have been conducted by such person(s) prior
to the Effective Date of this Agreement, as such activities are
described in Exhibit A to this Agreement; or
b. to any business activities of an Affiliate Associate which are not
conducted in any capacity as a consultant, manager, officer, or
director of any direct competitor of USWeb.
11.4 Section 11.2 of this Agreement shall not apply if Affiliate is in good
standing at the expiration of the term of this Agreement and USWeb elects
not to renew Affiliate,
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pursuant to Section 3.5 of this Agreement.
11.5 Affiliate shall adopt and implement reasonable procedures to assure
compliance by any Affiliate Associates with the obligations set forth in
Sections 11.1 and 11.2, in accordance with the policies and procedures set
forth in the Operations Manual.
11.6 Affiliate's obligations under this Section 11 shall be interpreted and
construed in accordance with the laws of the State where Affiliate's USWeb
Business is located; Section 15.10 of this Agreement shall not apply to the
interpretation or enforcement of Affiliate's obligations under this Section
11.
12. TRAINING AND ASSISTANCE
-----------------------
12.1 Prior to opening of the USWeb Business, Affiliate, or Affiliate's
designated manager, shall attend and successfully complete to USWeb's
satisfaction, an Initial Training Course of not more than four (4) days
duration, to be conducted at a location designated by USWeb. Two
additional employees of Affiliate may attend the initial training course
without additional charge. The Initial Training Course shall cover all
material aspects of the operation of a USWeb Business.
12.2 USWeb may offer, from time to time, training programs for previously
trained and experienced Affiliate personnel, to be conducted at such place
as USWeb shall designate. The content and duration of such training shall
be in USWeb's sole discretion. USWeb may charge a reasonable fee for such
additional courses.
12.3 USWeb may provide additional optional training and assistance, including
on-location training and assistance, at Affiliate's request. The content
and duration of such training and assistance shall be in USWeb's sole
discretion and Affiliate may be required to pay per diem costs and expenses
for such training and assistance, as set forth in the Operations Manual.
12.4 Affiliate, and key Affiliate personnel as may be designated by USWeb, shall
attend the USWeb Annual Conference as mandatory annual training, in order
to remain current and informed about developments in the USWeb System
including, but not limited to, methods of operations, products and
services, marketing strategies, advertising campaigns and programs, and
other matters of topical interest. Affiliate may be required, from time to
time, to pay registration fees to attend the Annual Conference.
12.5 All expenses incurred by Affiliate and its employees in attending all USWeb
training programs, including the initial training course, any optional
training, and the mandatory USWeb Annual Conference, including, without
limitation, travel, room and board, and employee compensation, shall be the
sole responsibility of Affiliate.
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13. DEFAULT AND TERMINATION
-----------------------
13.1 Except as otherwise provided in this Section 13.0, USWeb may terminate this
Agreement before the expiration of its term only for good cause. Good
cause shall include, but not be limited to, Affiliate's failure to comply
with any lawful requirement of this Agreement after being given notice of
Affiliate's failure to comply and a reasonable opportunity, which in no
event need be longer than thirty (30) days, to cure such failure.
13.2 In addition to USWeb's right to terminate this Agreement upon the failure
of Affiliate to complete development of or open the office(s) for business
(as provided in Section 4.2), USWeb may terminate this Agreement effective
immediately upon delivery of notice of termination to Affiliate without an
opportunity to cure if, during the term of this Agreement, any of the
following events occurs:
a. The discovery by USWeb that Affiliate made a material
misrepresentation in the Application or otherwise relating to the
acquisition of Affiliate's USWeb franchise or entering into this
Agreement, or that Affiliate and/or its USWeb Business has engaged in
conduct reflecting materially and unfavorably upon the operation and
reputation of USWeb, the Marks, or the USWeb Network; or
b. Affiliate is convicted of or pleads no contest to a felony or other
criminal or civil offense involving charges of moral turpitude or
that is otherwise likely to affect adversely the reputation of USWeb,
the Marks, or the USWeb Network; or
c. Affiliate and/or its USWeb Business makes any unauthorized use,
disclosure, or duplication of any portion of the Operations Manual,
any USWeb Intellectual Property, or any USWeb Proprietary Information;
or
d. Affiliate fails to obtain and maintain reasonable protection for USWeb
Proprietary Information, including the execution of appropriate
agreements with any Affiliate Associate;
e. Affiliate or any Affiliate Associate violates the covenants not to
compete in Sections 11.1 or 11.2 of this Agreement; or
f. Affiliate abandons, surrenders, or transfers control of, or fails or
refuses to actively operate the USWeb Business continuously for five
(5) days during any twelve (12) months period unless the USWeb
Business has been closed for a purpose approved by USWeb, or Affiliate
fails to relocate to an approved location within an approved period of
time following expiration or
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termination of the lease for the premises of the USWeb Business; or
g. Affiliate surrenders or transfers control of the operation of the
USWeb Business, makes or attempts to make an unauthorized direct or
indirect Transfer not in accordance with Section 14 of this Agreement,
or fails or refuses to assign this Agreement or the interest in
Affiliate of a deceased or disabled controlling owner as required by
Section 14.6 of this Agreement; or
h. Affiliate files any petition or action for relief under any
bankruptcy, insolvency, reorganization, moratorium, creditor
composition law, or any other law for the relief of or relating to
debtors; or an involuntary petition is filed under any bankruptcy law
against Affiliate, or receives an appointment of a receiver or
trustee, or makes any assignment for the benefit of creditors, or
fails to vacate or dismiss within sixty (60) days after filing any
such proceedings commenced against Affiliate by a third party; or
i. Affiliate repeatedly fails to submit when due reports or other
information or supporting records, to pay when due Royalty & Service
Fees, Advertising & Marketing Fees, amounts due for license fees or
purchases from USWeb and/or its affiliates or any other USWeb
Affiliate, or any other payments due to USWeb and/or its affiliates or
any other USWeb Affiliate, or otherwise fails to comply with this
Agreement, whether or not such failures to comply are corrected after
notice is delivered to Affiliate.
13.3 Affiliate shall be evaluated annually, in comparison to all other USWeb
Affiliates in the same SMSA Class, on (a) Adjusted Gross Revenues, (b)
customer satisfaction, based upon Network-wide survey results, and (c)
customer retention. At the end of each annual period, if Affiliate fails
to perform in the top 90% of all USWeb Affiliates in its SMSA Class for any
two or more of the three categories, then Affiliate shall be deemed in
default of this Agreement and shall have twelve (12) months, until the next
annual evaluation, to cure such default. If, at the end of the cure
period, Affiliate again fails to perform in the top 90% of all USWeb
Affiliates in its SMSA Class in any two or more of the three categories,
then this Agreement shall be terminated.
13.4 If Affiliate is in substantial compliance with this Agreement and USWeb
materially breaches this Agreement and fails to cure such breach within a
reasonable time after written notice is delivered to USWeb, Affiliate may
terminate this Agreement. Such termination shall be effective thirty (30)
days after delivery to USWeb of notice that such breach has not been cured
and Affiliate elects to terminate this Agreement. If a court of first
instance with competent jurisdiction determines by final order that USWeb
materially breached this Agreement, then Sections 11.2 and 13.5(e) of this
Agreement shall not be enforced. Affiliate shall not be precluded from
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seeking an injunction against enforcement of Sections 11.2 and 13.5(e)
pending a determination on the merits. A termination of this Agreement by
Affiliate for any reason other than a material breach of this Agreement by
USWeb and USWeb's failure to cure such breach, within a reasonable time
after USWeb's receipt of written notice from Affiliate, shall be deemed a
termination without cause.
13.5 Upon expiration or termination of this Agreement for any reason, Affiliate
shall:
a. Within fifteen (15) days after the effective date of such expiration
or termination, pay to USWeb all liquidated and ascertainable sums
owing from Affiliate to USWeb or any of its affiliates or any other
USWeb Affiliate, including all damages, costs, expenses, and
attorneys' fees incurred by USWeb as a result of the termination or
expiration; and
b. Immediately and permanently discontinue the use of the Marks, the
USWeb System, all USWeb Intellectual Property and USWeb Proprietary
Information, and any other materials which may in any way indicate
that Affiliate is or ever was operating a USWeb Business; and
c. Immediately and permanently remove, destroy, or obliterate, at
Affiliate's expense, the Marks from all signs or other displays
containing any of the Marks; if Affiliate fails to remove the Marks
within a reasonable time following termination, then USWeb shall have
the right to remove the Marks; the cost of such removal shall be borne
by Affiliate; and
d. Immediately return to USWeb all copies of the Operations Manual, all
USWeb Intellectual Property, all USWeb Proprietary Information, and
any and all other materials relating to the USWeb System; and
e. Immediately deliver to USWeb all customer lists, customer information,
and customer content managed by Affiliate, and all architecture and
usage instructions for all customer Internet or Intranet sites under
management and/or being constructed by Affiliate, and take such other
and further steps to convert all Affiliate's customers to USWeb's
account;
f. Terminate and not renew all third party supplier agreements based upon
its former status as a USWeb Affiliate, unless such termination would
constitute an uncurable breach of such agreement(s) or cause Affiliate
to incur financial penalties to the supplier as a result of such
termination; and
g. Take such action as may be required to cancel all assumed names or
equivalent registrations relating to Affiliate's use of any Marks, and
notify the local telephone company and all telephone listing agencies
of the termination
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or expiration of Affiliate's right to use any telephone number
associated with any Marks and with the USWeb Business, and to
authorize transfer of the telephone number to USWeb or its designee;
and
h. In the event Affiliate continues to operate or subsequently begins to
operate any other business, not to use any reproduction, counterfeit,
copy, or colorable imitation of the Marks either in connection with
such other business or the promotion of such business, which would be
likely to cause confusion, mistake, or deception, or to dilute USWeb's
exclusive rights in and to the Marks. Affiliate shall make such
modifications or alterations to the location of the USWeb Business
immediately upon termination or expiration of this Agreement, as may
be reasonably necessary to prevent any association between the USWeb
Network and any business subsequently operated by Affiliate or others,
subject to all other terms and conditions of this Agreement. Affiliate
shall make such specific additional changes to the location as USWeb
may reasonably request for that purpose, including, without
limitation, removal of all signage and any other distinctive physical
and structural features identifying the USWeb System.
13.6 Immediately upon the expiration or termination of this Agreement, for any
reason, all rights granted to Affiliate pursuant to this Agreement,
including all licenses of USWeb Intellectual Property and USWeb Proprietary
Information granted pursuant to Section 2.2 of this Agreement, shall
terminate immediately and concurrently with such expiration and
termination.
13.7 All obligations of USWeb and Affiliate which expressly or by their nature
survive the expiration or termination of this Agreement shall continue in
full force and effect subsequent to and notwithstanding such expiration or
termination and until they are satisfied or by their nature expire.
14. OWNERSHIP AND TRANSFER
----------------------
14.1 This Agreement and all rights and obligations set forth in this Agreement
may be transferred by USWeb and, if so, shall be binding upon and inure to
the benefit of USWeb's successors and assigns; USWeb's transferee shall
assume all USWeb's obligations in this Agreement.
14.2 Subject to all terms and conditions of this Agreement, Affiliate may make a
Transfer of this Agreement and all of Affiliate's rights and obligations
under this Agreement, which Transfer shall be binding upon and inure to the
benefit of Affiliate's successors and assigns, and subject to the following
conditions and requirements:
a. Affiliate or any Affiliate Associate shall not Transfer, by operation
of law or
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otherwise, the franchise granted by this Agreement, or any interest in
the franchise or this Agreement, without the prior written consent of
USWeb. Affiliate may not, without the prior written consent of USWeb,
fractionalize any of the rights or obligations of Affiliate under this
Agreement. Any purported assignment of any of Affiliate's rights or
obligations under this Agreement without the prior written consent of
USWeb shall be null and void and shall constitute a material breach
under this Agreement.
b. USWeb shall not unreasonably withhold its consent to any Transfer of
this Agreement when requested; provided, however, that such Transfer
shall be subject to the following conditions, in USWeb's sole
discretion:
(1) If Affiliate is an individual and desires to Transfer its rights
to a partnership or corporation, then such Transfer shall be
subject to the following conditions:
(a) The transferee corporation or partnership shall not conduct
any business other than a USWeb Business under agreement(s)
with USWeb.
(b) Affiliate shall actively manage the partnership or
corporation and shall own and/or control not less than
fifty-one percent (51%) of (i) the general partnership
interests in a partnership or (ii) the combined debt and
equity and voting power in a corporation.
(c) The transferee shall enter into a written assignment (in a
form satisfactory to USWeb), by which the transferee assumes
all of Affiliate's obligations under this Agreement.
(d) All then-outstanding financial obligations of Affiliate to
USWeb, or any of USWeb's subsidiaries, affiliates, or
assignees, or any other USWeb Affiliate, shall be satisfied
prior to Transfer.
(2) If any Transfer would be to a person other than an original
signatory to this Agreement, then such Transfer shall be subject
to the following conditions:
(a) The transferee(s) shall have a good credit rating and
competent business qualifications which meet then-current
standards for new USWeb Affiliates at the time USWeb's
approval is requested. Affiliate shall provide USWeb with
such information as USWeb may require to make such
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determination concerning each such proposed transferee(s).
(b) The transferee(s) shall not be engaged in, or own any
interest in (except as a passive investor holding not
greater than five percent (5%) of total debt and equity),
any business which competes with, or could compete with,
USWeb, the USWeb Network, any USWeb Affiliate, or the USWeb
Business, except as a USWeb Affiliate.
(c) The transferee(s) or such other person as shall be the
actual manager of the USWeb Business shall have successfully
completed and passed the then-current initial training
course for USWeb Affiliates.
(d) The transferee shall execute USWeb's then-current form of
USWeb Affiliate Agreement for a term ending on the
expiration date of this Agreement, together with such other
ancillary documents as USWeb may require for the USWeb
Business, which agreements shall supersede this Agreement in
all respects. The terms of these agreements may differ in
material respects from the terms of this Agreement,
provided, however, that the transferee shall not be required
to pay any Initial Franchise Fee.
(e) All financial obligations of Affiliate to USWeb or its
affiliates, or to any other USWeb Affiliate, shall be
satisfied prior to Transfer, and Affiliate shall not be in
default under the terms of this Agreement.
(f) Prior to Transfer, the Parties shall execute and deliver a
mutual general release, in a form satisfactory to USWeb,
generally releasing any and all claims the Parties may have
against each other, or their respective subsidiaries,
affiliates, or predecessors, and their respective partners,
officers, directors, agents, shareholders, and employees,
for any acts or omissions that may have arisen from the
relationship of the Parties prior to the effective date of
the proposed Transfer, except such claims as may not be
permitted to be released by applicable law.
(g) USWeb's approval of any Transfer or any of Affiliate's
rights under this Agreement shall in no way be deemed a
release by USWeb of Affiliate's obligations pursuant to this
Agreement.
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USWeb's consent to a Transfer shall not constitute or be
interpreted as consent for any future Transfer.
14.3 Affiliate shall have paid to USWeb a Transfer Fee equal to Five Thousand
Dollars ($5,000) for the training, supervision, administrative costs,
overhead, attorney fees, accounting, and other expenses of USWeb in
connection with such Transfer.
14.4 Affiliate shall give USWeb thirty (30) days written notice prior to any
Transfer by Affiliate, or such other period as reasonably may be required
to permit USWeb to comply with any applicable state or federal franchise
disclosure laws. Affiliate shall indemnify and hold harmless USWeb for
Affiliate's failure to comply with this Section 14.4. Payment of the
Transfer fee and all required documents must accompany this notice; the
thirty (30) days notice period shall commence upon USWeb's receipt of all
materials required by this Section 13.0.
14.5 USWeb shall have a Right of First Refusal to acquire the interest proposed
to be conveyed in any Transfer which would result in the proposed
transferee acquiring more than 20% of the equity in Affiliate. Upon
receipt of Affiliate's written notice of proposed Transfer and adequate
documentation for USWeb to determine the bona fides of the proposed
Transfer and such other information as USWeb reasonably may require to
evaluate the proposed Transfer in a diligent manner, USWeb shall have
thirty (30) days to exercise, or to decline to exercise, its Right of First
Refusal, on identical terms and conditions as those set forth in the
proposed Transfer. If the Transfer to the proposed transferee is not
completed, on materially identical terms and conditions described in the
notice of proposed Transfer and related documentation, within 120 days of
USWeb's declination of its Right of First Refusal, or if there is a
material change to the terms of the proposed Transfer, then USWeb's Right
of First Refusal shall be applicable to any subsequent proposed Transfer.
14.6 In the event of the death or Incapacity of an individual Affiliate, or any
partner of an Affiliate that is a partnership or any shareholder owning
fifty percent (50%) or more of the total debt and equity of an Affiliate
that is a corporation, the heirs, beneficiaries, devisees, or legal
representatives of such individual, partner, or shareholders, within ninety
(90) days of such event, shall apply to USWeb for the right to continue to
operate the USWeb Business for the duration of the term of this Agreement,
which right shall be granted upon the fulfillment of all of the conditions
set forth in Section 14.2 of this Agreement.
15. GENERAL PROVISIONS
------------------
15.1 This Agreement does not constitute Affiliate as an agent, legal
representative, joint venturer, partner, employee, or servant of USWeb for
any purpose whatsoever; and
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it is understood between the Parties to this Agreement that Affiliate shall
be an independent contractor and is in no way authorized to make any
contract, agreement, warranty, or representation on behalf of USWeb, or to
create any obligation, express or implied, on behalf of USWeb.
15.2 Affiliate shall defend and indemnify and hold harmless USWeb, and USWeb's
shareholders, directors, officers, employees, and agents, at Affiliate's
sole cost and expense from and against any and all claims, losses, costs,
expenses (including USWeb's reasonable attorneys' fees, in accordance with
Section 14.5 of this Agreement), damages, and liabilities ("Claims"),
however caused or incurred, whether in preparation for, response to, or
conduct or settlement (whether before or after filing of any court or other
proceeding) of actual litigation, resulting directly or indirectly from or
pertaining to the use, condition, or construction, equipping, maintenance,
or operation of the USWeb Business. Such Claims may include, without
limitation, those arising from latent or other defects in the products or
services provided in the operation of the USWeb Business, including any
Authorized Offerings, whether or not discoverable by USWeb, and those
arising from the death or injury to any person or arising from damage to
the property or business of Affiliate or USWeb, and their respective
officers, directors, employees, and agents, or any third person, firm, or
corporation, whether or not such Claims were actually or allegedly caused
wholly or in part through the active or passive negligence, or resulted
from any strict liability being imposed upon USWeb or any of its officers,
directors, employees, or agents. The indemnities and assumptions of
liabilities and obligations in this Agreement shall continue in full force
and effect subsequent to the expiration or termination of this Agreement
for any reason.
15.3 No failure of USWeb to exercise any power reserved to it by this Agreement,
or to insist upon strict compliance by Affiliate with any obligation or
condition of this Agreement, and no custom or practice of the Parties in
variance with the terms of this Agreement, shall constitute a waiver of
USWeb's right to demand exact compliance with any term or condition of this
Agreement. Waiver by USWeb of any particular default by Affiliate shall not
be binding unless in writing and executed by and shall not affect or impair
USWeb's right with respect to any subsequent default of the same or of a
different nature.
15.4 Any and all notices required or permitted under this Agreement shall be in
writing and shall be delivered personally, by air courier, or mailed by
certified mail, return receipt requested, to the respective Parties at the
following addresses unless and until a different address has been
designated by written notice to the other Party:
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<PAGE>
Notices to USWeb:
USWeb Corporation
3000 Lakeside Drive
Santa Clara, California 95054
Attention: Chief Financial Officer
Notices to Affiliate:
______________________________________________
______________________________________________
Any notice by certified mail shall be deemed to have been given three (3)
business days after the date and time of mailing. Any notice delivered
personally or sent by facsimile or electronic mail is deemed given upon
delivery or completion of transmission.
15.5 In the event that either Party to this Agreement is required to employ
legal counsel or to incur other expenses to enforce any obligation of the
other Party under this Agreement, or to defend against any claim, demand,
action, or proceeding by reason of the other Party's failure to perform any
obligation imposed upon such other Party by this Agreement, and provided
that legal action is filed and a final order in such action or the
settlement of such action establishes the other Party's default under this
Agreement, then the prevailing Party shall be entitled to recover from the
other Party the amount of all reasonable fees of such counsel (including
the cost of in-house counsel, calculated at outside counsel rates for
attorneys of comparable background and experience) and all other expenses
incurred in enforcing such obligation or in defending against such claim,
demand, action, or proceeding, whether incurred prior to, or in preparation
for, or in contemplation of the filing of such action or thereafter.
15.6 Each section, subsection, part, term, and/or provision of this Agreement
shall be considered severable, and if, for any reason, any section,
subsection, part, term, and/or provision of this Agreement is determined in
a final order by a court of competent jurisdiction to be invalid and
contrary to, or in conflict with, any existing or future law or regulation,
then such determination shall not impair the operation of or affect the
remaining sections, subsections, portions, parts, terms, and/or provisions
of this Agreement, and, to the fullest extent possible, such remainder
shall continue to be given full force and effect and to bind the Parties,
and any invalid or illegal sections, subsections, portions, parts, terms,
and/or provisions shall be deemed not part of this Agreement; provided,
however, that if such court
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<PAGE>
determines that its determination adversely affects the basic
consideration of this Agreement, then the court, at its option, may order
termination of this Agreement.
15.7 No amendment, change, or variance from this Agreement shall be binding on
either Party unless executed in writing by both Parties.
15.8 All captions used in this Agreement are intended solely for the
convenience of the Parties, and none shall be deemed to affect the meaning
or construction of any provision of this Agreement. Pronouns are used
without regard to gender or number. References to numbers of days refer to
calendar days. References to "including" are not exclusive and should be
read as "including, without limitation."
15.9 Except as otherwise provided in this Agreement, this Agreement shall be
interpreted and construed in accordance with the laws of the State of
California, excluding its conflicts of laws principles.
15.10 Any action commenced for the purpose of interpreting or enforcing any term
or condition of this Agreement shall be commenced in either the United
States District Court for the Northern District of California, San Jose
Division or the Superior Court of the State of California for the County
of Santa Clara. The Parties submit to and accept the jurisdiction and
venue of these courts and agree to be bound by any judgments and orders
rendered by these courts.
15.11 No right or remedy conferred upon or reserved to USWeb or Affiliate by
this Agreement is intended to be, nor shall be deemed, exclusive of any
other right or remedy provided in this Agreement or otherwise provided or
permitted by law or equity, but each shall be cumulative of every other
right or remedy.
15.12 This Agreement, and any Exhibits attached to this Agreement, shall be
construed together and constitute the entire, full, and complete agreement
between USWeb and Affiliate concerning the subject matter of this
Agreement, and shall supersede all prior agreements. This Agreement shall
be binding upon the Parties and their respective heirs, representatives,
and permitted assignees. This Agreement may be executed in multiple
counterparts, and each copy so executed shall be deemed an original.
15.13 USWeb expressly reserves any and all rights not explicitly granted to
Affiliate by the provisions of this Agreement.
15.14 USWeb and Affiliate acknowledge that the USWeb System and the franchise
and other licenses and rights granted by this Agreement are undertaken by
the Parties in the context of the present nature of the Internet. USWeb
and Affiliate acknowledge that the rapidly evolving nature of business
activities relating to the
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Internet and the World Wide Web makes comprehensive foresight impossible:
neither USWeb nor Affiliate can anticipate marketplace response to the
evolution of the Internet or the World Wide Web and, therefore, the
prospects for the USWeb Business. USWeb and Affiliate acknowledge their
fundamental mutual interest in providing high quality content and service
to customers and that achievement of these goals will require flexibility,
resources, and commitment to the development of the USWeb System.
15.15 Affiliate represents and acknowledges as follows:
a. Affiliate has not received, or relied upon, any warranty or guaranty,
express or implied, as to the revenues, profits, or success of the
business venture contemplated by this Agreement, including any oral or
written representations that USWeb will (1) provide customers or
locate customers for Affiliate; (2) purchase any portion of
Affiliate's products or services; (3) guarantee to Affiliate that
Affiliate will derive income in excess of any price paid for this
franchise, or refund any portion of such payment; or (4) provide any
sales program or marketing plan which will enable Affiliate to derive
income in excess of any price paid for this franchise.
b. Affiliate has received, read and understood this Agreement and USWeb's
Uniform Franchise Offering Circular and that it has no knowledge of
any representations by USWeb or its officers, directors, stockholders,
employees, or agents that are contrary to the statements made in
USWeb's Uniform Franchise Offering Circular or to the terms of this
Agreement; and that USWeb has fully and adequately explained the
provisions of each of these documents to Affiliate's satisfaction; and
that USWeb has accorded Affiliate ample time and opportunity to
consult with its own advisors about the potential benefits and risks
of entering into this Agreement.
c. Affiliate has received (i) a copy of this Agreement and all Exhibits
to this Agreement, at least five (5) business days prior to the date
on which this Agreement was executed and (ii) the disclosure document
required by the Trade Regulation Rule of the Federal Trade Commission
entitled Disclosure Requirements and Prohibitions Concerning
Franchising and Business Opportunity Ventures (the "FTC Rule"), at
least ten (10) business days prior to the date on which this Agreement
was executed.
d. Other than the information contained in USWeb's Uniform Franchise
Offering Circular, no other representation has induced Affiliate to
execute this Agreement, and there are no representations, inducements,
promises, or agreements, oral or otherwise, between the Parties not
embodied in this Agreement, which are of any force or effect with
reference to this Agreement
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or otherwise.
e. The success of the business venture contemplated to be undertaken by
Affiliate by virtue of this Agreement is speculative and depends, to a
large extent, upon the ability of Affiliate as an independent business
operator and the active participation of Affiliate in the daily
affairs of the UsWeb Business, as well as other factors. USWeb does
not make any representation or warranty, express or implied, as to the
potential success of the business venture contemplated by this
Agreement.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have duly
executed, sealed, and delivered this Agreement effective on the day and year
first above written.
USWEB CORPORATION AFFILIATE: _________________________
BY: BY:
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Name/Title Name/Title
32
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DATE: DATE:
33
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USWEB
AFFILIATE AGREEMENT
EXHIBIT A
1. AFFILIATE NAME:
2. AFFILIATE COMPANY NAME:
ADDRESS:
3. AFFILIATE #:
4. SMSA NAME:
5. SMSA CLASS:
6. APPROVED LOCATION:
7. STARTUP DATE: _______________ 1, 199___
8. EXISTING GOODS AND SERVICES ((S)11.3):
_________________________________________________________________
<PAGE>
DATE:
ACCEPTED AND AGREED TO:
USWEB CORPORATION AFFILIATE:___________________
By:___________________________ By:__________________________
Name/Title Name/Title
DATE:_________________________ DATE:________________________
<PAGE>
ADDENDUM TO AFFILIATE AGREEMENT
EXHIBIT B
The Affiliate Agreement dated ________________, 1996, is amended as follows:
A. The Initial Franchise Fee shall be reduced for Affiliates 1-50. These
reductions shall be allocated equally between Affiliates located in
"registration states" and "non registration" states. If Affiliate is among
USWeb Affiliates 1-10, then the Initial Franchise Fee is Zero ($0.00). If
Affiliate is among USWeb Affiliates 11-50, then the Initial Franchise Fee
is Twenty-Five Thousand Dollars ($25,000).
PLEASE CIRCLE AND INITIAL THE REDUCED INITIAL FRANCHISE FEE IN THE
FOLLOWING TABLE:
If Affiliate is
Aggregate Then The Initial
Nos. Franchise Fee is
------------------------------------------------------
Registration
1 - 5
1 - 10 - or - $ 0.00
Non-Registration
1 - 5
------------------------------------------------------
Registration
1 - 20
11 - 50 - or - $25,000.00
Non-Registration
1 - 20
------------------------------------------------------
<PAGE>
B. All other terms and conditions of the Affiliate Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have duly
executed, sealed, and delivered this Addendum effective on the day and year
first above written.
USWEB CORPORATION AFFILIATE:
By: By:
Name/Title Name/Title
DATE: DATE:
<PAGE>
ADDENDUM TO AFFILIATE AGREEMENT
EXHIBIT C
The Affiliate Agreement dated ________________, 1996, is amended as follows:
A. For all accounting periods prior to April 1,1997, Affiliate shall not be
required to pay the Monthly Minimum Royalty & Service Fee or Monthly
Minimum Advertising & Marketing Fee. During the period prior to April 1,
1997, Affiliate shall pay the Royalty & Service Fee and Advertising &
Marketing Fee, calculated at Five Percent (5%) and Two Percent (2%) of
Adjusted Gross Revenues pursuant to Sections 10.2 and 10.3 of the Affiliate
Agreement.
B. The Minimum Royalty and Service Fee and the Minimum Advertising and
Marketing Fee shall not be payable during the initial 4 calendar months
following the Startup Date. During the initial 4 calendar months following
the Startup Date Affiliate shall pay the Royalty & Service Fee and
Advertising & Marketing Fee, calculated at Five Percent (5%) and Two
Percent (2%) of Adjusted Gross Revenues pursuant to Sections 10.2 and 10.3
of the Affiliate Agreement.
C. During Months 5-8 following the Startup Date the Minimum Royalty and
Service Fee and the Minimum Advertising and Marketing Fee ("Minimum Monthly
Fees") payable pursuant to Section 10.2 and 10.3 of the Affiliate
Agreement, shall be reduced; during Months 5-8 following the Startup Date,
the following percentages of the Monthly Minimum Fees shall be payable:
Month 5 Month 6 Month 7 Month 8
--------------------------------------
Percentage of 50% 62.5% 75% 87.5%
--------------------------------------
Minimum Monthly Fees shall be payable in accordance with Sections 10.2 and
10.3 of this Agreement in Month 9 and thereafter.
D. All other terms and conditions of the Affiliate Agreement shall remain in
full force and effect.
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have duly
executed, sealed, and delivered this Addendum effective on the day and year
first above written.
USWEB CORPORATION AFFILIATE:
<PAGE>
BY: BY:
<PAGE>
Name/Title Name/Title
<PAGE>
DATE: DATE:
<PAGE>
SMSA TERRITORY RIGHTS
ADDENDUM
EXHIBIT D
The Affiliate Agreement dated ___________________, 1996, is amended as follows:
"SMSA Territory Rights" shall mean the rights of Affiliate to be the sole USWeb
Affiliate authorized to establish a USWeb Business in a designated SMSA,
subject to Affiliate's continuing compliance with Section D of this Addendum.
For so long as Affiliate's SMSA Territory Rights remain in full force and
effect in the designated SMSA, USWeb shall not grant additional USWeb
Affiliate Agreements, or open USWeb company-owned locations, in the designated
SMSA, except pursuant to USWeb's exercise of its Right of First Refusal to
acquire another Affiliate's USWeb Business.
Affiliate has been approved to acquire SMSA Territory Rights, and USWeb hereby
grants SMSA Territory Rights to Affiliate, in the following SMSA:
________________________________________________________________
The Fee for SMSA Territory Rights acquired by this Agreement is set forth in the
following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Reduced Initial Fee for SMSA Standard Initial Fee for SMSA
Territory Rights (until 1/31/97) Territory Rights (after 1/31/97)
- ---------------------------------------------------------------------------------------
<S> <C> <C>
SMSA Class 1 $100,000 $150,000
- ---------------------------------------------------------------------------------------
SMSA Class 2 $100,000 $150,000
- ---------------------------------------------------------------------------------------
SMSA Class 3 $ 50,000 $ 75,000
- ---------------------------------------------------------------------------------------
SMSA Class 4 $ 50,000 $ 75,000
- ---------------------------------------------------------------------------------------
SMSA Class 5 $ 50,000 $ 50,000
- ---------------------------------------------------------------------------------------
</TABLE>
Affiliate shall pay, concurrently with the execution of this Addendum, the
following SMSA Territory Rights Fee, which shall be deemed fully earned and
non-refundable by USWeb upon Affiliate's execution of this Addendum:
$___________________________.
Affiliate's SMSA Territory Rights shall be subject to the following performance
requirements and procedures:
In order to preserve the SMSA Territory Rights in the SMSA, the ratio of
Affiliate's Adjusted Gross Revenues in any calendar quarter (plus the
Adjusted Gross
<PAGE>
Revenues of any other USWeb Affiliate in the SMSA), divided by the total
number of businesses in the SMSA with more than 10 employees (as reported
by the US Bureau of the Census or comparable reporting agency) ("Adjusted
Gross Revenues Ratio"), must be equal to or greater than 66% of the
Adjusted Gross Revenues Ratios of other SMSAs served by USWeb Affiliates,
in the same SMSA Class or, for Affiliates in SMSA Class 1, the ratio for
all USWeb Affiliates in both SMSA Classes 1 and 2.
If Affiliate's Adjusted Gross Revenues Ratio falls below the 66th Percentile at
the end of any calendar quarter beginning 9 months after the Effective
Date, then Affiliate's SMSA Territory Rights shall be in default. If
Affiliate is not in default in at least one (1) of the succeeding (two)
calendar quarters, then such default shall be deemed cured. If such default
is not cured within that cure period, or if Affiliate's SMSA Territory
Rights are in default more than 12 months during any 18 months period, then
Affiliate's SMSA Territory Rights shall terminate immediately upon notice
from USWeb.
Notwithstanding any of the provisions of Section D.2 of this Addendum, UsWeb
shall not terminate Affiliate's SMSA Territory Rights earlier than 12
months after the Startup Date.
In conjunction with the purchase of these SMSA Territory Rights, Affiliate has
acquired Rights of First Refusal for SMSA Territory Rights ("RFR/STR"),
exercisable during the initial term of this Agreement, to purchase additional
SMSA Territory Rights in the following identified SMSA(s) which is/are
contiguous to the SMSA identified in paragraph B of this Addendum.
________________________________________________________________
________________________________________________________________
In order to exercise these RFR/STR, Affiliate must be in good standing under
this Agreement and this SMSA Territory Rights Addendum and otherwise qualified
to acquire SMSA Territory Rights under USWeb's then-current criteria for
granting SMSA Territory Rights. The RFR/STR may be exercised only once: if
Affiliate declines to exercise this Right and USWeb enters into an Affiliate
Agreement in the subject SMSA with the proposed USWeb Affiliate that was the
subject of USWeb's notice to Affiliate, then the RFR/STR shall expire
immediately.
All other terms and conditions of this Agreement shall remain in full force and
effect.
<PAGE>
IN WITNESS WHEREOF, the Parties, intending to be legally bound, have duly
executed, sealed, and delivered this Addendum effective on the day and year
first above written.
USWEB CORPORATION AFFILIATE:
BY: BY:
<PAGE>
Name/Title Name/Title
<PAGE>
DATE: DATE:
<PAGE>
EXHIBIT 21.1
Following are the subsidiaries of the Registrant:
. USWeb Acquisition Corporation 101 (USWeb San Francisco)
. USWeb Acquisition 103 (USWeb Milwaukee)
. USWeb Acquisition Corporation 106 (USWeb LA Metro)
. USWeb Acquisition Corporation 107 (USWeb Atlanta)
. USWeb Acquisition Corporation 102 (USWeb DC)
. USWeb Acquisition Corporation 108 (USWeb Pittsburgh)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM AUDITED
FINANCIAL STATEMENTS FOR THE YEAR ENDED 12/31/96; UNAUDITED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED 6/30/97 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 3,220 9,333
<SECURITIES> 0 0
<RECEIVABLES> 137 1,952
<ALLOWANCES> 0 (471)
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,411 11,259
<PP&E> 1,347 2,925
<DEPRECIATION> (263) (630)
<TOTAL-ASSETS> 7,482 20,310
<CURRENT-LIABILITIES> 3,338 7,212
<BONDS> 0 0
16,200 32,490
0 0
<COMMON> 1,316 15,162
<OTHER-SE> (13,808) (35,051)
<TOTAL-LIABILITY-AND-EQUITY> (12,492) (19,879)
<SALES> 1,820 2,939
<TOTAL-REVENUES> 1,820 2,939
<CGS> 208 2,729
<TOTAL-COSTS> 208 2,729
<OTHER-EXPENSES> 15,577 17,470
<LOSS-PROVISION> 0 471
<INTEREST-EXPENSE> 58 52
<INCOME-PRETAX> (13,808) (21,243)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (13,808) (21,243)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (13,808) (21,243)
<EPS-PRIMARY> (0.54) (0.82)
<EPS-DILUTED> 0 0
</TABLE>
