<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1997
REGISTRATION NO. 333-36827
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
USWEB CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
<TABLE>
<CAPTION>
DELAWARE 7373 870551650
<S> <C> <C>
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
---------------
USWEB CORPORATION
2880 LAKESIDE DRIVE, SUITE 300
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 300
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.
MATTHEW B. SWARTZ, ESQ. EDA S. L. TAN, ESQ.
WILSON SONSINI GOODRICH & ROSATI SUSAN H. MAC CORMAC, ESQ.
PROFESSIONAL CORPORATION MORRISON & FOERSTER LLP
650 PAGE MILL ROAD 425 MARKET STREET
PALO ALTO, CALIFORNIA 94304 SAN FRANCISCO, CA 94105
(650) 493-9300 (415) 268-7000
---------------
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. [_]
---------------
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 NOVEMBER 7, 1997
PROSPECTUS
5,000,000 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 $9.00 and $11.00 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 8.
-----------
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 $1,700,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
750,000 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>
A STRATEGIC PARTNER FOR THE INFORMATION AGE
[ART]
[Logo of Zenith]
[Logo of Hammacher Schlemmer]
[Logo of Microsoft]
[Logo of Epic]
[Logo of Thomasville]
[Logo of Harley Davidson]
[Logo of Polk Audio]
[Logo of Charles Schwab]
[Logo of Burger King]
[Logo of Chevron]
[Logo of Toshiba]
[Logo of Northwestern Mutual Life]
[Logo of Sony Music]
[Logo of World Economic Forum]
[Logo of REI]
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 and services offered by USWeb are trademarks, registered
trademarks, service marks or registered service marks of USWeb Corporation.
This Prospectus also includes product names, trade names and trademarks of
other companies.
USWeb Logo
----------
A Strategic Partner for the
Information Age
2
<PAGE>
STRATEGIC ALLIANCES [Map of the United States with star
representing USWeb headquarters and
dots representing USWeb Consulting
offices]
[LOGO OF INTEL]
[LOGO OF MICROSOFT]
[LOGO OF HEWLETT-PACKARD]
SERVICES
[LOGO OF SUN MICROSYSTEMS]
[LOGO OF REUTERS] [_] STRATEGY CONSULTING
[LOGO OF PANDESIC] 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.
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, frequently using
predefined USWeb Business Solutions.
[_] IMPLEMENTATION AND INTEGRATION
In the implementation phase, USWeb
integrates the solution with
the client's infrastructure. USWeb
tests the solution created in
the development phase, readies it to
be deployed into a full production
environment, then deploys the
solution internally or at a USWeb data
center.
[_] 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>
GATE-FOLD TWO
[SCREEN SHOT #1]
USWeb built an e-business Extranet solution for Harley-Davidson to communicate
with its 800 independently owned dealerships to automate business-critical
processes for technical documentation distribution and warranty claims.
[SCREEN SHOT #2]
USWeb worked with Chevron's Project Resources Division to build an Intranet site
as a primary communication and management tool for Chevron's divisional
operations. The functionally rich solution centralizes operational resources
to improve decision-making quality and project execution by Chevron's
geographically dispersed divisions.
[SCREEN SHOT #3]
USWeb designed and deployed an Intranet solution to serve as a vital
communications link and business tool between Thomasville Furniture Industries
headquarters and dealers to view real-time reports concerning order status,
inventory and credit histories.
<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 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 identify,
acquire and integrate qualified Internet professional services firms
efficiently.
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 nine months ended September 30, 1997 were
Barnes & Noble, 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 Intel, Microsoft, Hewlett-Packard, Pandesic LLC
(the Internet company from 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 consistent 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 November 5, 1997, the Company
had acquired eight companies and signed definitive acquisition agreements with
eleven others.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after due
diligence review and negotiation, such companies can be acquired on a basis
considered fair to the Company and its stockholders, the Company may proceed
with such acquisitions. Other than as described in this Prospectus, none of
these potential acquisitions is currently considered to be pending or probable.
The Company is also considering joint venture or acquisition transactions
outside the United States. The Company expects most of its future joint
ventures or acquisitions to include the issuance of additional shares of the
Company's Common Stock in the future. The Company recently filed a "shelf"
Registration Statement on Form S-4 to register 16,666,667 shares of its Common
Stock for use in future acquisitions. See "Risk Factors--Risks Related to
Acquisitions," "--Management of Growth; Integration of Acquisitions," "Use of
Proceeds," "Dilution," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of Internet Professional
Service Firms," and "Business--Strategy" and "--Consulting Office Network
Development."
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,
Suite 300, 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.
4
<PAGE>
THE OFFERING
Common Stock offered by the Company...
5,000,000 shares
Common Stock to be outstanding after
the offering..........................
30,068,454 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 30,
1997. Includes (i) approximately 1,250,000 shares of Common Stock to be
issued to Intel Corporation in a private placement to be closed
contemporaneously with this offering, (ii) 778,118 shares of Common Stock
issued in connection with the acquisition or probable acquisition of three
entities in transactions which were recognized subsequent to September 30,
1997 and (iii) 222,222 shares of Common Stock issued in connection with a
private placement which was closed subsequent to September 30, 1997.
Excludes (i) 9,300,000 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which 7,365,972 shares were issuable
upon exercise of outstanding options at a weighted average exercise price
of $7.85 per share, (ii) 809,271 shares of Common Stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$6.81 per share, (iii) 333,333 shares of Common Stock reserved for issuance
under the Company's Affiliate Warrant Program, of which 223,536 shares were
issuable upon exercise of outstanding warrants at a weighted average
exercise price of $2.73 per share, (iv) 1,000,000 shares of Common Stock
reserved for issuance under the Company's 1997 Employee Stock Purchase
Plan, (v) 1,222,004 shares of Common Stock considered probable of issuance
upon the consummation of acquisitions of entities that are included in the
Company's Consolidated Financial Statements as of September 30, 1997, (vi)
additional shares of Common Stock that are considered probable of issuance
as stock bonuses and acquisition purchase price adjustments and (vii)
16,666,667 shares of Common Stock registered pursuant to a Registration
Statement on Form S-4 for use in future acquisitions. See "Risk Factors--
Dilution," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition of Internet Professional Services
Firms," "Business--Consulting Office Network Development" and "--Strategic
Relationships," "Management--Employee Benefit Plans," "Underwriting" and
Notes 1, 9, 10 and 13 to Consolidated Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION (1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL
- ----------
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Revenues--Services.... $ -- $ -- $ -- $ -- $ 59 $ 2,186 $ 5,623
Revenues--Other....... -- 100 411 1,309 436 258 114
Gross profit.......... -- 100 333 1,179 198 12 124
Loss from operations.. (2,556) (2,743) (3,977) (4,689) (5,850) (11,410) (18,099)
Net loss.............. (2,525) (2,670) (3,946) (4,667) (5,843) (15,400) (18,027)
Pro forma:
Net loss per
share (2)........... $ (0.09) $ (0.09) $ (0.14) $ (0.16) $ (0.20) $ (0.53) $ (0.62)
Shares outstanding
(2)................. 28,453 28,695 28,866 28,953 28,955 29,081 29,266
PRO FORMA (3)
PRO FORMA CONSOLIDATED
STATEMENT OF
OPERATIONS DATA:
Revenues--Services.... $ 3,804 $ 4,131 $ 5,120 $ 5,912 $ 7,046 $ 8,090 $ 9,593
Revenues--Other....... -- 75 190 704 159 77 68
Gross profit (loss)... 648 422 176 847 832 367 799
Loss from operations.. (17,230) (13,398) (15,145) (17,588) (14,551) (16,566) (17,689)
Net loss.............. (17,246) (13,361) (15,153) (17,633) (14,600) (20,560) (17,659)
Pro forma:
Net loss per share
(2)................. $ (0.60) $ (0.45) $ (0.50) $ (0.57) $ (0.47) $ (0.65) $ (0.55)
Shares outstanding
(2)................. 28,833 29,518 30,179 30,786 31,306 31,826 32,347
SUPPLEMENTAL (3)(4)
PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS
DATA BEFORE
ACQUISITION-RELATED
NON-CASH CHARGES:
Revenues--Services.... $ 3,804 $ 4,131 $ 5,120 $ 5,912 $ 7,046 $ 8,090 $ 9,593
Revenues--Other....... -- 75 190 704 159 77 68
Gross profit before
stock compensation... 1,566 1,418 1,365 2,109 2,094 1,629 2,061
Operating loss before
acquisition-related
non-cash charges..... (2,274) (2,971) (4,932) (6,631) (5,942) (8,213) (9,915)
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
ACTUAL PRO FORMA (5) AS ADJUSTED (6)
------- ------------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 1,939 $11,841 $56,641
Working capital....................... (593) 5,401 50,201
Total assets.......................... 31,386 54,206 99,006
Mandatorily Redeemable Convertible
Preferred Stock...................... 32,490 -- --
Total stockholders' equity (deficit).. (12,492) 37,811 82,611
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF
----------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1996 1996 1996 1997 1997 1997
-------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Total employees....... 30 50 58 69 106 238 431
Company-owned offices. -- -- -- -- 4 13 20
Affiliate offices..... -- -- 16 27 31 23 22
Consulting offices.... -- -- 16 27 35 36 42
</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) See computation of pro forma net loss per share in "Pro Forma Selected
Consolidated Financial Data."
(3) Pro forma and supplemental consolidated statement of operations data
reflects 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, USWeb Pittsburgh, USWeb
Chicago Metro, USWeb Hollywood, USWeb Marin, USWeb Long Island, USWeb
Detroit, USWeb San Mateo, USWeb LA Central and USWeb Houston and the
probable acquisition of Reach Networks, Inc. and USWeb Boston as if each
such company had been acquired on January 1, 1996 (or inception, if later).
(4) 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.
(5) Pro forma consolidated balance sheet data gives effect to (i) acquisitions
by the Company of USWeb LA Central and USWeb Houston which occurred after
September 30, 1997 and the probable acquisitions of Reach Networks, Inc.
and USWeb Boston, as if such acquisitions occurred on September 30, 1997,
(ii) the conversion of all outstanding shares of Preferred Stock into
12,094,359 shares of Common Stock immediately prior to the closing of this
offering and (iii) the sale by the Company of $10.0 million of Common Stock
to Intel Corporation at 80% of the initial public offering price in a
private placement that will close contemporaneously with this offering. See
Note 13 to the Consolidated Financial Statements.
(6) Adjusted to give effect to the sale of 5,000,000 shares of Common Stock by
the Company at an assumed initial public offering price of $10.00 per share
and the application of the net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
----------------
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 $10.00 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 office" refers to an office managed
by an entity included in the Company's Consolidated Financial Statements 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.
7
<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 September 30,
1997 had an accumulated deficit of $53.1 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 November 5, 1997, the Company had acquired
eight companies and signed definitive acquisition agreements with eleven
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
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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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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
September 30, 1997, the Company had grown to 431 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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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's experience to date with such
additional issuances has not resulted in significant changes, they could be
material in the future. 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" and "--Examples of USWeb Internet
Solutions."
Reliance Upon Key Strategic Relationships. The Company has established a
number of strategic relationships with leading hardware and software
companies, including Intel Corporation ("Intel"), Microsoft, Hewlett-Packard,
Pandesic LLC ("Pandesic," the Internet company from 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 legal agreements related to these strategic relationships are typically
terminable at will by either party and, therefore, do not obligate the
Company's strategic partners to maintain the strategic relationship. 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
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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,
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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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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,
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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 51.5% of the outstanding Common Stock assuming
no exercise of the Underwriters' over-allotment option and 50.1% 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."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 5,000,000 shares of
Common Stock being offered by the Company hereby at an assumed initial public
offering price of $10.00 per share are estimated to be approximately
$44,800,000 (approximately $51,775,000 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 evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other candidates. If, after
due diligence review and negotiation, such companies can be acquired on a
basis considered fair to the Company and its stockholders, the Company may
proceed with such acquisitions. Other than as described in this Prospectus,
none of these potential acquisitions is currently considered to be pending or
probable. The Company is also considering joint venture or acquisition
transactions outside the United States. The Company expects most of its future
joint ventures or acquisitions to include the issuance of additional shares of
the Company's Common Stock in the future. The Company recently filed a "shelf"
Registration Statement on Form S-4 to register 16,666,667 shares of its Common
Stock for use in future acquisitions. 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--Risks Related to Acquisitions," "--Management
of Growth; Integration of Acquisitions," "--No Specific Use of Proceeds,"
"Dilution," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Acquisition of Internet Professional Service Firms,"
"--Liquidity and Capital Resources" and "Business--Strategy" and "--Consulting
Office Network Development."
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.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 (i) on an actual basis, (ii) pro forma to reflect the
acquisitions by the Company of USWeb LA Central and USWeb Houston which
occurred subsequent to September 30, 1997 and the probable acquisition of
Reach Networks, Inc. and USWeb Boston, conversion of all outstanding shares of
Preferred Stock of the Company into Common Stock, the sale by the Company of
$10.0 million of Common Stock to Intel at 80% of the initial public offering
price (approximately 1,250,000 shares assuming an initial public offering
price of $10.00 per share) in a private placement that will close
contemporaneously with this offering and (iii) as adjusted to give effect to
the sale by the Company of 5,000,000 shares of Common Stock offered hereby at
an assumed initial public offering price of $10.00 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
Pro Forma Financial Information and Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------
PRO AS
ACTUAL (1) FORMA ADJUSTED
---------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations, long-term portion............ $ 527 $ 619 $ 619
-------- -------- --------
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, pro forma and as
adjusted..................................... -- -- --
Common Stock, $.001 par value, 100,000,000
shares authorized; 12,946,098 shares issued
and outstanding actual; 26,290,457 shares
issued and outstanding pro forma; 31,290,457
shares issued and outstanding as adjusted
(2).......................................... 9 23 28
Additional paid-in capital.................... 40,577 90,866 135,661
Accumulated deficit........................... (53,078) (53,078) (53,078)
-------- -------- --------
Total stockholders' equity (deficit)........ (12,492) 37,811 82,611
-------- -------- --------
Total capitalization...................... $ 20,525 $ 38,430 $ 83,230
======== ======== ========
</TABLE>
- ---------------------
(1) Includes 222,222 shares of Common Stock issued in connection with a
private placement which was closed subsequent to September 30, 1997.
(2) Excludes (i) 9,300,000 shares of Common Stock reserved for issuance under
the Company's stock option plans, of which 7,365,972 shares were issuable
upon exercise of outstanding options at a weighted average exercise price
of $7.85 per share, (ii) 809,271 shares of Common Stock issuable upon
exercise of outstanding warrants at a weighted average exercise price of
$6.81 per share, (iii) 333,333 shares of Common Stock reserved for
issuance under the Company's Affiliate Warrant Program, of which 223,536
shares were issuable upon exercise of outstanding warrants at a weighted
average exercise price of $2.73 per share, (iv) 1,000,000 shares of Common
Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan, (v) additional shares of Common Stock that are considered
probable of issuance as stock bonuses and acquisition purchase price
adjustments and (vi) 16,666,667 shares of Common Stock registered pursuant
to a Registration Statement on Form S-4 for use in future acquisitions.
See "Risk Factors--Dilution," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Acquisition of Internet
Professional Services Firms," "Business--Consulting Office Network
Development," "Management--Employee Benefit Plans," "Underwriting" and
Notes 1, 9, 10 and 13 to Consolidated Financial Statements.
18
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of September 30,
1997 (assuming the conversion of all outstanding shares of Preferred Stock
into Common Stock) was $13,820,000, or $0.53 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 5,000,000 shares of Common Stock offered hereby (based upon an
assumed initial public offering price of $10.00 per share and after deducting
estimated underwriting discounts and commissions and estimated offering
expenses), the Company's pro forma net tangible book value at September 30,
1997 would have been $58,620,000, or $1.87 per share. This represents an
immediate increase in net pro forma tangible book value to existing
stockholders of $1.34 per share and an immediate dilution of $8.13 per share
to new investors. The following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $10.00
Pro forma net tangible book value per share as of September
30, 1997(1)................................................. $0.53
Increase in net tangible book value per share attributable to
new investors............................................... 1.34
-----
Pro forma net tangible book value per share after the offering. 1.87
------
Dilution per share to new investors............................ $ 8.13
======
</TABLE>
The following table summarizes, on a pro forma basis as of September 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 stockhold-
ers(1)................. 26,290,457 84.0% $48,291,426 49.1% $ 1.84
New investors........... 5,000,000 16.0 50,000,000 50.9 10.00
---------- ----- ----------- -----
Total................. 31,290,457 100.0% $98,291,426 100.0%
========== ===== =========== =====
</TABLE>
- ---------------------
(1) Includes approximately 1,250,000 shares of Common Stock to be issued to
Intel at 80% of the initial public offering price for an aggregate of
$10.0 million in a private placement that will close contemporaneously
with this offering.
The foregoing tables assume no exercise of the Underwriters' over-allotment
option and excludes, as of September 30, 1997, (i) 9,300,000 shares of Common
Stock reserved for issuance under the Company's stock option plans, of which
7,365,972 shares were issuable upon exercise of outstanding options at a
weighted average exercise price of $7.85 per share, (ii) 809,271 shares of
Common Stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $6.81 per share, (iii) 333,333 shares of Common
Stock reserved for issuance under the Company's Affiliate Warrant Program, of
which 223,536 shares were issuable upon exercise of outstanding warrants at a
weighted average exercise price of $2.73 per share, (iv) 1,000,000 shares of
Common Stock reserved for issuance under the Company's 1997 Employee Stock
Purchase Plan, (v) additional shares of Common Stock that are considered
probable of issuance as stock bonuses and acquisition purchase price
adjustments and (vi) 16,666,667 shares of Common Stock registered pursuant to
a Registration Statement on Form S-4 for use in future acquisitions. See "Risk
Factors--Dilution," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Acquisition of Internet Professional
Services Firms," "Business--Consulting Office Network Development,"
"Management--Employee Benefit Plans," "Underwriting" and Notes 1, 9, 10 and 13
to Consolidated Financial Statements.
19
<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 financial statements of the Company included elsewhere in this
Prospectus. The statement of operations data set forth below with respect to
the nine-month period ended September 30, 1997 and the balance sheet data at
September 30, 1997 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 nine-month
period ended September 30, 1996, 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 presentation of the Company's results of operations for those
periods. Operating results for the nine months ended September 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 unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1996 and the nine months ended September 30, 1997
reflect the effect of the acquisitions of USWeb San Francisco, USWeb Seattle,
USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb Silicon Valley, USWeb
DC, USWeb Phoenix, USWeb Pittsburgh, USWeb Chicago Metro, USWeb Hollywood,
USWeb Marin, USWeb Long Island, USWeb Detroit, USWeb San Mateo, USWeb LA
Central and USWeb Houston, and the probable acquisitions of Reach Networks,
Inc. and USWeb Boston, as if each of the acquisitions had occurred on
January 1, 1996 (or inception, if later). All intercompany transactions have
been eliminated in consolidation.
The unaudited pro forma balance sheet data reflects (i) the acquisitions of
USWeb LA Central and USWeb Houston which occurred subsequent to September 30,
1997, and the probable acquisition of Reach Networks, Inc. and USWeb Boston,
as if such acquisitions occurred on September 30, 1997, (ii) the conversion of
all outstanding shares of the Company's Preferred Stock into Common Stock upon
the closing of this offering (iii) the sale by the Company of $10.0 million of
Common Stock to Intel in a private placement that will close contemporaneously
with this offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Pro Forma Financial Information" and
Notes 1 and 2 to Consolidated Financial Statements.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------
NINE MONTHS
ENDED NINE MONTHS
YEAR ENDED SEPTEMBER 30, YEAR ENDED ENDED
DECEMBER 31, ----------------- DECEMBER 31, SEPTEMBER 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.............. $ -- $ -- $ 7,868 $ 18,967 $ 24,729
Other................. 1,820 511 808 969 304
-------- ------- -------- -------- --------
Total revenues...... 1,820 511 8,676 19,936 25,033
-------- ------- -------- -------- --------
Cost of revenues:
Services.............. -- -- 6,196 13,270 18,069
Other................. 208 78 1,180 208 1,180
Stock compensation
(2).................. -- -- 966 4,365 3,786
-------- ------- -------- -------- --------
Total cost of reve-
nues............... 208 78 8,342 17,843 23,035
-------- ------- -------- -------- --------
Gross profit............ 1,612 433 334 2,093 1,998
-------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support.............. 12,764 7,954 14,119 16,667 18,646
General and adminis-
trative.............. 2,813 1,755 7,027 6,599 11,208
Acquired in-process
technology (2)....... -- -- 6,726 9,472 --
Stock compensation
(2).................. -- -- 3,500 13,394 11,826
Amortization of intan-
gible assets (2) .... -- -- 4,321 19,322 9,124
-------- ------- -------- -------- --------
Total operating ex-
penses............. 15,577 9,709 35,693 65,454 50,804
-------- ------- -------- -------- --------
Loss from operations.... (13,965) (9,276) (35,359) (63,361) (48,806)
Interest income......... 215 170 165 227 200
Interest expense........ (58) (35) (76) (259) (213)
Impairment of investee
carried at cost........ -- -- (4,000) -- (4,000)
-------- ------- -------- -------- --------
Net loss................ $(13,808) $(9,141) $(39,270) $(63,393) $(52,819)
======== ======= ======== ======== ========
Pro forma:
Net loss per share (3). $ (0.48) $ (0.32) $ (1.35) $ (2.13) $ (1.66)
Weighted average shares
outstanding (3)....... 28,741 28,671 29,101 29,829 31,826
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............. $ 3,220 $ 1,939 $11,841
Working capital....................... 73 (593) 5,401
Total assets.......................... 7,482 31,386 54,206
Lease obligations, long term portion.. 436 527 619
Mandatorily Redeemable Convertible
Preferred Stock...................... 16,200 32,490 --
Stockholders' equity (deficit)........ (12,492) (12,492) 37,811
</TABLE>
20
<PAGE>
- ---------------------
(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) 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 Notes 1
and 13 to Consolidated Financial Statements.
(3) 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 initial 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. Pro forma net loss per share is computed on the basis
described 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.
21
<PAGE>
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma consolidated statement of operations data
reflects the acquisitions of USWeb San Francisco, USWeb Seattle, USWeb
Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb Silicon Valley, USWeb DC,
USWeb Phoenix, USWeb Pittsburgh, USWeb Chicago Metro, USWeb Hollywood, USWeb
Marin, USWeb Long Island, USWeb Detroit, USWeb San Mateo, USWeb LA Central,
USWeb Houston and the probable acquisition of Reach Networks, Inc. and USWeb
Boston, as if each of the acquisitions had occurred on January 1, 1996 (or
inception, if later). All intercompany transactions have been eliminated in
consolidation. The pro forma consolidated statement of operations data is
presented for informational purposes only and may not be indicative of the
results of operations had the acquisitions occurred on January 1, 1996 (or
inception, if later), 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>
NINE MONTHS THREE MONTHS ENDED
YEAR ENDED ENDED ----------------------------------------------------------------------
DEC. 31, SEPT. 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1996 1996 1996 1996 1997 1997 1997
---------- ----------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... $ 18,967 $ 24,729 $ 3,804 $ 4,131 $ 5,120 $ 5,912 $ 7,046 $ 8,090 $ 9,593
Other.................. 969 304 -- 75 190 704 159 77 68
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total revenues......... 19,936 25,033 3,804 4,206 5,310 6,616 7,205 8,167 9,661
-------- -------- -------- -------- -------- -------- -------- -------- --------
Cost of revenues:
Services............... 13,270 18,069 2,238 2,788 3,867 4,377 4,979 6,459 6,631
Other.................. 208 1,180 -- -- 78 130 132 79 969
Stock compensation (1). 4,365 3,786 918 996 1,189 1,262 1,262 1,262 1,262
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total cost of revenues. 17,843 23,035 3,156 3,784 5,134 5,769 6,373 7,800 8,862
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit (loss)..... 2,093 1,998 648 422 176 847 832 367 799
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Marketing, sales and
support............... 16,667 18,646 2,477 3,096 4,732 6,362 5,114 6,315 7,217
General and administra-
tive.................. 6,599 11,208 1,363 1,293 1,565 2,378 2,922 3,527 4,759
Acquired in-process
technology (1) ....... 9,472 -- 6,663 1,354 638 817 -- -- --
Stock compensation (1). 13,394 11,826 2,717 3,020 3,715 3,942 3,942 3,942 3,942
Amortization of
intangible assets (1). 19,322 9,124 4,658 5,057 4,671 4,936 3,405 3,149 2,570
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total operating ex-
penses................ 65,454 50,804 17,878 13,820 15,321 18,435 15,383 16,933 18,488
-------- -------- -------- -------- -------- -------- -------- -------- --------
Loss from operations.... (63,361) (48,806) (17,230) (13,398) (15,145) (17,588) (14,551) (16,566) (17,689)
Interest income......... 227 200 31 83 58 55 30 72 98
Interest expense........ (259) (213) (47) (46) (66) (100) (79) (66) (68)
Impairment of investee
carried at cost........ -- (4,000) -- -- -- -- -- (4,000) --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net loss................ $(63,393) $(52,819) $(17,246) $(13,361) $(15,153) $(17,633) $(14,600) $(20,560) $(17,659)
======== ======== ======== ======== ======== ======== ======== ======== ========
Pro forma:
Net loss per share (2). $ (2.13) $ (1.66) $ (0.60) $ (0.45) $ (0.50) $ (0.57) $ (0.47) $ (0.65) $ (0.55)
Weighted average shares
outstanding (2)....... 29,829 31,826 28,833 29,518 30,179 30,786 31,306 31,826 32,347
</TABLE>
22
<PAGE>
- ---------------------
(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 initial 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. Pro forma net loss per share is computed on the basis
described above and giving effect to amortization of deferred compensation
expense related to acquired companies as if acquired on January 1, 1996
(or 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.
23
<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," "Pro Forma Consolidated Financial Information" 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 and services 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 91% of total revenues for the
nine months ended September 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
September 30, 1997 had an accumulated deficit of $53.1 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."
24
<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 to date 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 effective 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 at least 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, for the nine
months ended September 30, 1997, stock compensation expense included in cost
of revenues totaled $966,000, stock compensation expense included in operating
expenses totaled $3.5 million and amortization of intangible assets totaled
$4.3 million, all of which were related to the first eight Company-owned
offices. In addition, the Company has recognized an aggregate cost of $6.7
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.
25
<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 (a) a minimum monthly payment or (b) 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 primarily 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
26
<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 primarily 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.
Corporate expenses are primarily 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.
27
<PAGE>
PRO FORMA RESULTS OF OPERATIONS
The following table presents unaudited pro forma quarterly results of
operations as a percentage of pro forma total revenues. 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. See "Pro Forma Consolidated Financial Information" following the
notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEAR NINE MONTHS THREE MONTHS ENDED
ENDED ENDED ----------------------------------------------------------------
DEC. 31, SEPT 30, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 1997 1996 1996 1996 1996 1997 1997 1997
-------- ----------- -------- -------- --------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Services............... 95 % 99 % 100 % 98 % 96 % 89 % 98 % 99 % 99 %
Other.................. 5 1 -- 2 4 11 2 1 1
---- ---- ---- ---- ---- ---- ---- ---- ----
Total revenues......... 100 100 100 100 100 100 100 100 100
---- ---- ---- ---- ---- ---- ---- ---- ----
Cost of revenues:
Services............... 67 72 59 66 73 66 69 79 69
Other.................. 1 5 -- -- 1 2 2 1 10
Stock compensation (1). 22 15 24 24 22 19 18 15 13
---- ---- ---- ---- ---- ---- ---- ---- ----
Total cost of revenues. 90 92 83 90 96 87 89 95 92
---- ---- ---- ---- ---- ---- ---- ---- ----
Gross profit............ 10 8 17 10 4 13 11 5 8
---- ---- ---- ---- ---- ---- ---- ---- ----
Operating expenses:
Marketing, sales and
support............... 84 74 65 74 89 96 71 77 75
General and
administrative........ 33 45 36 31 29 36 41 43 49
Acquired in-process
technology (1)........ 48 -- 175 32 12 12 -- -- --
Stock compensation (1). 67 47 71 72 70 60 55 48 41
Amortization of
intangible assets (1). 97 36 122 120 88 75 47 39 27
---- ---- ---- ---- ---- ---- ---- ---- ----
Total operating ex-
penses................. 329 202 469 329 288 279 214 207 192
---- ---- ---- ---- ---- ---- ---- ---- ----
Loss from operations.... (319) (194) (452) (319) (284) (266) (203) (202) (184)
Interest income......... 1 1 1 2 1 1 -- 1 1
Interest expense........ (1) (1) (1) (1) (1) (1) (1) (1) (1)
Impairment of investee
carried at cost........ -- (16) -- -- -- -- -- (49)
---- ---- ---- ---- ---- ---- ---- ---- ----
Net loss................ (319)% (210)% (452)% (318)% (284)% (266)% (204)% (251)% (184)%
==== ==== ==== ==== ==== ==== ==== ==== ====
</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 SEPTEMBER 30 AND JUNE 30, 1997
Revenues. Total revenues increased 18% to $9.7 million for the three months
ended September 30, 1997 from $8.2 million for the three months ended June 30,
1997. This increase was primarily attributable to growth in service revenues
generated by Company-owned offices consolidated by the Company in its
financial statements as of June 30, 1997, which increased 38% to $3.7 million
for the three months ended September 30, 1997 from $2.7 million for the three
months ended June 30, 1997. Revenues generated by the other Company-owned
offices, which were consolidated in the Company's financial statements after
June 30, 1997, increased 9% to $5.9 million from $5.4 million during the same
period. Other revenues decreased 12% to $68,000 for the three months ended
September 30, 1997 from $77,000 for the three months ended June 30, 1997.
28
<PAGE>
Cost of Revenues. Total cost of revenues increased 14% to $8.9 million for
the three months ended September 30, 1997 from $7.8 million for the three
months ended June 30, 1997. The increase in total cost of revenues was
primarily attributable to an $890,000 increase in cost of other revenues
associated with affiliate warrants and hosting costs. Cost of service revenues
as a percentage of service revenues decreased to 69% for the three months
ended September 30, 1997 from 79% for the three months ended June 30, 1997,
primarily due to the improved utilization of consulting employees.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased 14% to $7.2 million for the three months ended September 30, 1997
from $6.3 million for the three months ended June 30, 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 35% to $4.8 million for the three months ended September 30, 1997
from $3.5 million for the three months ended June 30, 1997. This increase was
primarily attributable to increases in personnel to support the growth in the
Company's operations and expenses incurred in connection with office
expansions.
Stock Compensation. Stock compensation expenses totaled $3.9 million for
each of the three month periods ended September 30 and June 30, 1997,
reflecting the amortization of stock bonuses awarded to employees of Company-
owned offices.
Amortization of Intangible Assets. Amortization of intangible assets
decreased to $2.6 million for the three months ended September 30, 1997 from
$3.1 million for the three months ended June 30, 1997. This decrease was
primarily attributable to the completion of the amortization of capitalized
technologies and goodwill of Company-owned offices.
Impairment of Investee. During the three 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 Utopia, Inc., 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. No such charges were recorded during
the three months ended September 30, 1997.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the three month periods ended September 30 and June 30, 1997,
because the Company incurred net operating losses in each of those periods.
Net Loss. Net losses for the three months ended September 30, 1997 and
June 30, 1997 were $17.7 million and $20.6 million, respectively. The decrease
in the net loss was primarily attributable to the $4.0 million impairment
charge relating to an investee carried at cost recorded during the three-month
period ended June 30, 1997, and was partially offset by an increase in total
operating expenses to $18.5 million for the three months ended September 30,
1997 from $16.9 million for the three months ended June 30, 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Total revenues increased 88% to $25.0 million for the nine months
ended September 30, 1997 from $13.3 million for the nine months ended
September 30, 1996. This increase was primarily attributable to increased
service revenues generated by the Company-owned offices, which increased 89%
to $24.7 million for the nine months ended September 30, 1997 from $13.1
million for the nine months ended September 30, 1996. Other revenues increased
to $304,000 for the nine months ended September 30, 1997 from $265,000 for the
nine months ended September 30, 1996. This increase was primarily attributable
to increased hosting revenues.
29
<PAGE>
Cost of Revenues. Cost of revenues increased 90% to $23.0 million for the
nine months ended September 30, 1997 from $12.1 million for the nine months
ended September 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 increased 103% to $18.1 million
for the nine months ended September 30, 1997 from $8.9 million for the nine
months ended September 30, 1996. Cost of service revenues as a percentage of
service revenues increased to 73% for the nine months ended September 30, 1997
from 68% for the nine months ended September 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 81% to $18.6 million for the nine months ended September 30, 1997
from $10.3 million for the nine months ended September 30, 1996. This increase
was primarily attributable to USWeb branding campaigns and increases in
personnel to support the growth in the Company's operations.
General and Administrative Expenses. General and administrative expenses
increased 167% to $11.2 million for the nine months ended September 30, 1997
from $4.2 million for the nine months ended September 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 growth in the Company's operations.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $8.7 million during the nine months ended
September 30, 1996. This amount represented all acquired in-process technology
for entities acquired by the Company. No such charges were recorded during the
nine months ended September 30, 1997.
Stock Compensation Expenses. Stock compensation expenses increased 24% to
$11.8 million for the nine months ended September 30, 1997 from $9.5 million
for the nine months ended September 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 $9.1 million for the nine months ended September 30, 1997 from
$14.4 million for the nine months ended September 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 nine months ended September 30, 1997.
Impairment of Investee. During the nine months ended September 30, 1997, the
Company recognized an impairment provision totaling $4.0 million, representing
the total amount of its cost basis investment in Utopia, Inc., an independent
Internet consulting firm.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the nine month periods ended September 30, 1997 and 1996 because
the Company incurred net operating losses in each of those periods.
Net Loss. Net losses for the nine months ended September 30, 1997 and 1996
were $52.8 million and $45.8 million, respectively. The increase in the net
loss was primarily attributable to the $4.0 million impairment charge relating
to an investee carried at cost recorded during the nine month period ended
September 30, 1997 as well as by the operating expense increase to $50.8
million from $47.0 million for the nine months ended September 30, 1997 and
1996, respectively.
YEAR ENDED DECEMBER 31, 1996.
Revenues. Total revenues for the year ended December 31, 1996 were $19.9
million. This amount comprised primarily of service revenues generated by the
Company-owned offices totaling $19.0 million, with the remaining $0.9 million
from monthly royalty revenues received from Affiliates.
30
<PAGE>
Cost of Revenues. Cost of revenues totaled $17.8 million for the year ended
December 31, 1996. This amount consisted primarily of cost of services, stock
compensation and other costs totaling $13.3 million, $4.3 million and $0.2
million, respectively. Cost of service revenues as a percentage of service
revenues was 70% for the year ended December 31, 1996. The stock compensation
expense was primarily attributable to the acquisition by the Company of two
Internet professional services firms.
Marketing, Sales and Support Expenses. Marketing sales and support expenses
totaled $16.7 million for the year ended December 31, 1996. This amount
consisted primarily of costs incurred for advertising and promotional expenses
to build the USWeb brand and personnel to support the growth of the Company's
operations.
General and Administrative Expenses. General and administrative expenses
totaled $6.6 million for the year ended December 31, 1996. This amount
consisted primarily of costs for personnel to support the growth in the
Company's operations.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $9.5 million during the year ended December 31,
1996. This amount represented all acquired in-process technology for entities
acquired by the Company during the year ended December 31, 1996.
Stock Compensation Expense. Stock compensation expense totaled $13.4 million
for the year ended December 31, 1996, reflecting the amortization of stock
bonuses awarded to employees of Company-owned offices .
Amortization of Intangible Assets. Amortization of intangible assets totaled
$19.3 million for the year ended December 31, 1996, reflecting the completion
of the amortization of certain technologies and goodwill of Company-owned
offices.
Income Taxes. No provision for federal and state income taxes was recorded
for the year ended December 31, 1996, because the Company incurred net
operating losses during the period.
Net Loss. Net loss for the year ended December 31, 1996 totaled $63.4
million. Gross profits of $2.1 million, or 10% of total revenues, for the year
ended December 31, 1996 was offset by $65.5 million of operating expenses.
HISTORICAL RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30 AND JUNE 30, 1997
Revenues. Total revenues increased to $5.7 million for the three months
ended September 30, 1997 from $2.4 million for the three months ended June 30,
1997. This increase was primarily attributable to growth in service revenues
generated by Company-owned offices, which increased to $5.6 million for the
three months ended September 30, 1997 from $2.2 million for the three months
ended June 30, 1997.
Cost of Revenues. Cost of revenues increased to $5.6 million for the three
months ended September 30, 1997 from $2.4 million for the three months ended
June 30, 1997. The increase in cost of revenues was primarily attributable to
the costs associated with the increased service fees generated by the Company-
owned offices.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $5.8 million for the three months ended September 30, 1997 from
$4.6 million for the three months ended June 30, 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 $3.3 million for the three months ended September 30, 1997 from
$2.3 million for the three months ended June 30, 1997. This increase was
primarily attributable to increases in personnel to support the growth in the
Company's operations.
31
<PAGE>
Stock Compensation. Stock compensation expenses increased to $2.6 million
for the three month period ended September 30, 1997 from $912,000 for the
three month period ended June 30, 1997. This increase was primarily
attributable to the recognition of acquisitions by the Company of additional
Internet professional services firms during the three months ended September
30, 1997.
Amortization of Intangible Assets. Amortization of intangible assets
increased to $2.7 million for the three months ended September 30, 1997 from
$1.5 million for the three months ended June 30, 1997.This increase was
primarily attributable to the recognition of acquisitions by the Company of
additional Internet professional services firms during the three months ended
September 30, 1997.
Income Taxes. No provision for federal and state income taxes was recorded
for either of the three month periods ended September 30 and June 30, 1997
because the Company incurred net operating losses in each of those periods.
Net Loss. Net losses for the three months ended September 30, 1997 and June
30, 1997 were $18.0 million and $15.4 million, respectively. The increase in
the net loss was primarily attributable to the $6.8 million increase in
operating expenses and was partially offset by the $4.0 million impairment
charge relating to an investee carried at cost recorded during the three month
period ended June 30, 1997.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Revenues. Total revenues increased to $8.7 million for the nine months ended
September 30, 1997 from $511,000 for the nine months ended September 30, 1996.
This increase was primarily attributable to the Company beginning its
acquisition program in the first quarter of 1997. No service revenues were
recorded for the nine months ended September 30, 1996 because during this
period the Company did not have any Company-owned offices and instead derived
its revenues from initial fees and monthly royalties from Affiliates. .
Cost of Revenues. Cost of revenues increased to $8.3 million for the nine
months ended September 30, 1997 from $78,000 for the nine months ended
September 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.
Marketing, Sales and Support Expenses. Marketing, sales and support expenses
increased to $14.1 million for the nine months ended September 30, 1997 from
$8.0 million for the nine months ended September 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 Internet professional services firms with those of the Company
in the first nine months of 1997.
General and Administrative Expenses. General and administrative expenses
increased to $7.0 million for the nine months ended September 30, 1997 from
$1.8 million for the nine months ended September 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 Internet professional services firms with those of the Company
in the first nine months of 1997.
Acquired In-Process Technology. The Company recognized the cost of acquired
in-process technology totaling $6.7 million for the nine months ended
September 30, 1997. The Company did not record any such expenses for the nine
months ended September 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 $3.5 million for the
nine month period ended September 30, 1997. The Company did not record any
such expenses for the nine months ended September 30, 1996 because the Company
did not acquire any entities during such period.
32
<PAGE>
Amortization of Intangible Assets. Amortization of intangible assets was
$4.3 million for the nine months ended September 30, 1997. The Company did not
record any such expenses for the nine months ended September 30, 1996 because
the Company did not acquire any entities during such period.
Impairment of Investee. During the nine months ended September 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 nine month periods ended September 30, 1997 and 1996 because
the Company has incurred net operating losses in each of those periods.
Net Loss. Net losses for the nine months ended September 30, 1997 and 1996
were $39.3 million and $9.1 million, respectively. The larger net loss was
primarily attributable to a $26.0 million increase in operating expenses and a
$4.0 million impairment charge relating to an investee carried at cost.
YEAR ENDED DECEMBER 31, 1996
Revenues. Total revenues for the year ended December 31, 1996 was $1.8
million and comprised revenues generated from initial franchise fees and
monthly royalties received from Affiliates.
Cost of Revenues. Cost of revenues totaled $0.2 million for the year ended
December 31, 1996 and comprised of costs associated with the generation of
initial franchise fees and monthly royalties received from Affiliates.
Marketing, Sales and Support Expenses. Marketing sales and support expenses
totaled $12.8 million for the year ended December 31, 1996. This amount was
comprised primarily of costs incurred for advertising and promotional expenses
to build the USWeb brand and personnel to support the growth of the Company's
operations.
General and Administrative Expenses. General and administrative expenses
totaled $2.8 million for the year ended December 31, 1996 and comprised
primarily of costs of personnel to support the growth in the Company's
operations.
Income Taxes. No provision for federal and state income taxes was recorded
for the year ended December 31, 1996, because the Company incurred net
operating losses during the period.
Net Loss. Net loss for the year ended December 31, 1996 totaled $13.8
million. Gross profits of $1.6 million, or 89% of total revenues, for the year
ended December 31, 1996 were offset by $15.6 million of operating expenses.
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
33
<PAGE>
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 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 September 30, 1997, the Company had approximately $1.9 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 September 30, 1997, the Company used approximately $27.2
million and approximately $2.7 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
Common Stock totaling approximately $2.0 million, the issuance of $500,000 in
promissory notes that were subsequently converted into Common Stock and
equipment lease obligations totaling approximately $599,000.
In October 1997, the Company entered into a credit agreement with a leasing
company which provides a line of credit for capital equipment purchases of up
to a maximum of $3.0 million. There are presently no borrowings outstanding
under this credit facility. 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.
In November, 1997, the Company entered into a loan facility from a bank. The
terms of the loan facility will allow the Company to borrow up to a maximum of
$2.0 million, secured by substantially all of the
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Company's assets. The loan will accrue interest at the bank's prime rate plus
1% and will mature at the earlier of the date the Company receives the
proceeds of this offering or December 31, 1997.
In addition to the 5,000,000 shares of Common Stock to be sold by the
Company in this offering, contemporaneously with this offering the Company
intends to sell to Intel in a private placement a number of shares of Common
Stock equal to $10,000,000 divided by 80% of the price per share at which the
Company's Common Stock will be sold to the public (1,250,000 shares at a
purchase price of $8.00 per share, based on an assumed initial public offering
price of $10.00 per share). Such sale will be effected pursuant to a separate
agreement with Intel entered into in November 1997 and not pursuant to the
Underwriting Agreement. In connection with this private placement, the Company
will pay to Hambrecht & Quist LLC, a managing underwriter of this offering, a
placement fee equal to 3.5% of the gross proceeds of the Intel private
placement.
The Company believes that the net proceeds from this offering, combined with
current cash balances, borrowings available under its credit facilities and
proceeds from the private placement, 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" and
"Underwriting."
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BUSINESS
OVERVIEW
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 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 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 or distributors. 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 42 Company-owned and Affiliate offices nationwide as of
September 30, 1997. The Company's services include strategy consulting;
analysis and design; technology development; implementation and integration;
audience development; and maintenance.
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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
. 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 20 locations across the United
States, including Atlanta, Austin, Chicago, Detroit, Los Angeles, Milwaukee,
New York,
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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 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 Intel, Microsoft, Hewlett-Packard,
Pandesic LLC (the Internet company from 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.
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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 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
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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.
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.
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.
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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.
The foregoing examples of the Company's Internet solutions show the breadth
of the Company's Internet solution capabilities. Because each USWeb client and
its needs is different from others, the Internet solutions in these examples
may be more extensive and successful than others that do not achieve all the
goals of a particular client. There can be no assurance that any particular
client project will meet the client's objectives, stay within budgeted expense
levels, be completed at the desired or scheduled date or otherwise allow the
Company's clients to realize the intended benefits of a project. 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 solutions or services as meeting their needs, or if the Company
fails to market those solutions or services effectively, the Company will be
unsuccessful in maintaining and strengthening its brand, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Risk Factors--Uncertain Maintenance and
Strengthening of the USWeb Brand" and "--Potential Liability to Clients."
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 42 consulting
offices, 20 of which were Company-owned and 22 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.
The Company regularly evaluates potential acquisition candidates, is
currently holding preliminary discussions with a number of such candidates and
is in active negotiations with a number of such other
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candidates. If, after due diligence review and negotiation, such companies can
be acquired on a basis considered fair to the Company and its stockholders,
the Company may proceed with such acquisitions. Other than as described in
this Prospectus, none of these potential acquisitions is currently considered
to be pending or probable. The Company is also considering joint venture or
acquisition transactions outside the United States. The Company expects most
of its future joint ventures or acquisitions to include the issuance of
additional shares of the Company's Common Stock in the future. The Company
recently filed a "shelf" Registration Statement on Form S-4 to register
16,666,667 shares of its Common Stock for use in future acquisitions. See
"Risk Factors--Risks Related to Acquisitions," "--Management of Growth;
Integration of Acquisitions," "Use of Proceeds," "Dilution" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Acquisition of Internet Professional Service Firms."
As of November 5, 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 40
San Diego, CA
Irvine, CA
New York, NY
USWeb Seattle............. Seattle, WA April 1997 28
USWeb Milwaukee........... Milwaukee, WI April 1997 33
USWeb LA Metro............ Los Angeles, CA April 1997 16
USWeb Silicon Valley...... Santa Clara, CA May 1997 15
USWeb Atlanta............. Atlanta, GA May 1997 23
Austin, TX
USWeb DC ................. Washington, D.C. June 1997 22
Philadelphia, PA
USWeb Phoenix............. Phoenix, AZ June 1997 16
USWeb Pittsburgh.......... Pittsburgh, PA July 1997 57
USWeb Chicago Metro....... Chicago, IL July 1997 13
USWeb DreamMedia (3)...... Hollywood, CA August 1997 14
USWeb Hollywood (3)....... Hollywood, CA August 1997 4
USWeb Marin............... Sausalito, CA September 1997 39
USWeb Long Island......... Long Island, NY September 1997 9
USWeb Detroit............. Detroit, MI September 1997 13
USWeb San Mateo........... San Mateo, CA September 1997 11
USWeb Houston............. Houston, TX November 1997 13
USWeb LA Central.......... Culver City, CA November 1997 23
Reach Networks, Inc....... New York, NY Pending 22
USWeb Boston.............. Waltham, MA Pending 42
Palo Alto, CA
</TABLE>
- ---------------------
(1) The Company consolidates the target entity's financial statements as of
the date USWeb establishes effective control of the target entity, which
date is generally in advance of the legal completion of the underlying
merger.
(2) Represents the number of full-time employees as of September 30, 1997.
(3) USWeb DreamMedia and USWeb Hollywood will combine their operations into a
single wholly owned subsidiary of the Company following the consummation
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
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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 22 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 nine months ended September 30, 1997, initial fees and
monthly royalty payments together represented 7.8% 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
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 11.4% of the Company's pro forma total revenues for the nine months ended
September 30, 1997. The Company's top 10 clients accounted for 30.4% of the
Company's pro forma total revenues during such period.
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The Company provides Internet professional services to clients in a variety
of industries, as indicated by the selected 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
Ingram Micro Rolling Stone
Barnes & Noble Magazine
BellSouth Marcus & Millichap
Catalina Marketing Microsoft Silicon Graphics
Charles Schwab National Geographic Sony Music
Chevron New York Magazine Thomasville Furniture
Computer Curriculum Corp. Polk Audio Toshiba
Epic Records 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
nine months ended September 30, 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.
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.
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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
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.
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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 consistent,
professional 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] Intel. In November 1997, the Company entered into a Relationship
Agreement with Intel pursuant to which the Company and Intel will jointly
define and develop a program designed to establish and promote end-to-end e-
business solutions running on high-end Intel Architecture-based platforms.
Activities under the program will range from creation of specific business
solutions to joint advertising. These programs will be administered by
representatives of each party. As a part of this relationship, Intel will
purchase $10.0 million of the Company's Common Stock in a private placement
transaction closing contemporaneously with this offering. See "Underwriting."
[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 formed Pandesic LLC 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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[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 contractual agreements regarding these strategic relationships do not
cover the entire scope of the strategic relationship and are typically
terminable at will by either party. In the event that any strategic
relationship is discontinued either in connection with termination of an
agreement or otherwise, 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 September 30, 1997 the Company had 431 employees, of which 78 were
located at the Company's headquarters office in Santa Clara, California and
353 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. All Company-owned offices also lease their facilities. The
Company believes its current facilities are adequate to meet its needs for the
foreseeable future. No facilities have been identified for acquisition in
connection with potential acquisition candidates and the Company does not
anticipate acquiring property or buildings in 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 30, 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 May 1997.
Mr. Rubenstein is President, a director and a shareholder of InfoMedia
Associates, Ltd. which is a General Partner of the 21st Century Partnerships.
Mr. Rubenstein is also Chief Executive Officer of Wheatley Partners, L.L.C.,
the General Partner of Wheatley Foreign Partners, L.P. Seneca Ventures and
Woodland Venture Fund, each of which is an investment partnership. 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 also serves as a director of
Infonautics, Inc., The Milbrook Press, Inc. and Source Media 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 accountants, 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 him 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
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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 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. Further, he 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, his
employment will be at will. In the event that he 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, he 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 7 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
52
<PAGE>
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 OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION COMPENSATION
- --------------------------- ---- ---------- --------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Joseph Firmage.......... 1996 $ 200,000(1) $ -- -- $115,216(2) $ 140(3)
Chairman and Chief
Executive Officer and
Director
Tobin Corey............. 1996 197,307(4) 5,582 -- 48,787(2) 193(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) Consists of payments made in reimbursement for relocation expenses for Mr.
Firmage and Mr. Corey.
(3) Consists of life insurance premiums paid on behalf of Mr. Firmage, Mr.
Corey, Mr. Heffernan, Mr. Laube and Mr. Campbell.
(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 the Company's
agreement with Mr. Campbell.
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."
53
<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 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 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 30, 1997, the Company had outstanding options to purchase
116,188 shares of Common Stock under the 1996 Plan held by an aggregate of 58
persons at a weighted average exercise price of $0.83 per share. As of
September 30, 1997, options to purchase an aggregate of 317,077 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
54
<PAGE>
October 1996 and by the stockholders in December 1996 and amended in September
1997. Unless terminated sooner by the Board of Directors, the 1996 Equity Plan
will terminate automatically in December 2006. 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, no existing employee, director
or consultant may be granted options to purchase more than an aggregate of
150,000 shares of Common Stock in any fiscal year and no newly hired employee,
director or consultant may be granted options to purchase more than an
aggregate of 300,000 shares of Common Stock in any fiscal year.
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 the 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 it would not otherwise be exercisable. If the Administrator
makes
55
<PAGE>
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 30, 1997, the Company had outstanding options to purchase
587,060 shares of Common Stock under the 1996 Equity Plan held by an aggregate
of 270 persons at a weighted average exercise price of $8.33 per share. As of
September 30, 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 (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.
56
<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 it 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 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 30, 1997, the Company had outstanding options to purchase
6,662,724 shares of Common Stock under the 1997 Plan held by an aggregate of
287 persons at a weighted average exercise price of $7.93 per share. As of
September 30, 1997, no options to purchase shares of Common Stock under the
1997 Plan had been exercised.
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
57
<PAGE>
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.
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 and earns additional warrants to purchase 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 following 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. As of September 30, 1997, the
Company had issued warrants under the program to purchase an aggregate of
223,536 shares of Common Stock at a weighted average exercise price of $2.73
per share. See Note 10 to Consolidated Financial Statements.
58
<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 12,077 500,000
SoftVen No. 2 Investment
Enterprise
Partnership (2)........ 4,625,000 3,103,333 -- -- --
21st Century
Communications
Partners, L.P. (3)..... -- -- 805,153 201,288 --
The Cutler Group (4).... 308,333 -- 24,892 6,223 958,982
</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 of Series C Preferred Stock and warrants to
purchase 136,473 shares of Series C Preferred Stock held by 21st Century
Communications Partners, L.P., 185,668 shares of Series C Preferred Stock
and warrants to purchase 46,417 shares of Series C Preferred Stock held by
21st Century Communications T-E Partners, L.P., and 73,591 shares of
Series C Preferred Stock and warrants to purchase 18,398 shares of Series
C Preferred Stock held by 21st Century Communications Foreign Partners,
L.P., each of which is an affiliate of 21st Century Communications
Partners, L.P., a general partnership of which Barry Rubenstein, who
serves on the Company's Board of Directors, is a general partner. Mr.
Rubenstein disclaims beneficial ownership of such shares.
(4) Includes 24,892 shares of Series C Preferred Stock, 533,333 shares of
Common Stock and warrants to purchase 6,223 shares of Series C Preferred
Stock held by Storie Partners, an affiliate of The Cutler Group. Frank
Cutler, principal of The Cutler Group, has a shared ownership interest in
these shares and warrants. Also includes 8,982 shares of Common Stock
held by Frank Cutler, principal of the Cutler Group.
59
<PAGE>
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>
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
$.0003 per share.
60
<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 30, 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 31.3% 24.8%
Jeffrey Ballowe (2)........... 7,443,323 31.3 24.8
Gary Rieschel (2)............. 7,443,323 31.3 24.8
Robert Hoff (3)............... 1,793,719 7.5 6.0
Crosspoint Venture Partners... 1,793,719 7.5 6.0
Joseph Firmage (4)............ 1,779,993 7.5 5.9
Barry Rubenstein (5).......... 1,610,303 6.8 5.4
The Cutler Group (6).......... 1,298,430 5.5 4.3
Tobin Corey (7)............... 932,360 3.9 3.1
James Heffernan (8)........... 762,549 3.2 2.5
Sheldon Laube (9)............. 762,549 3.2 2.5
Kenneth Campbell (10)......... 413,047 1.7 1.4
All executive officers and
directors as a group
(8 persons) (11)............. 15,497,843 65.1% 51.5%
</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 30, 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 23,818,454 shares of Common
Stock outstanding as of September 30, 1997 and 30,068,454 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 warrants to purchase 12,077 shares held by Crosspoint Venture
Partners. Mr. Hoff is a general partner of Crosspoint Venture Partners.
Mr. Hoff disclaims beneficial ownership of all such shares.
(4) 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
such shares.
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(5) Includes 545,893 shares and warrants to purchase 136,473 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 10,062 shares held by Wheatley
Foreign Partners, L.P. Mr. Rubenstein is President of InfoMedia
Associates, Ltd., a general partner of 21st Century Communications
Partners, L.P., 21st Century Communications T-E Partners, L.P. and 21st
Century Communications Foreign Partners, L.P. Mr. Rubenstein is also a
member and CEO of Wheatley Partners, LLC, a general partner of Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P. Mr. Rubenstein
disclaims beneficial ownership of such shares.
(6) Includes 558,225 shares and warrants to purchase 6,223 shares held by
Storie Partners, an affiliate of The Cutler Group. Frank Cutler,
principal of The Cutler Group, has a shared ownership interest in these
shares and warrants. Also includes 8,982 shares held by Frank Cutler,
principal of The Cutler Group.
(7) Includes 200,457 shares held by certain relatives of Mr. Corey. Mr. Corey
disclaims beneficial ownership of all such shares.
(8) Includes 115,000 shares held by certain relatives of Mr. Heffernan. Mr.
Heffernan disclaims beneficial ownership of all such shares.
(9) Includes 20,000 shares held by certain relatives of Mr. Laube. Mr. Laube
disclaims beneficial ownership of all such shares.
(10) Includes 26,333 shares held by certain relatives of Mr. Campbell. Mr.
Campbell disclaims beneficial ownership of all such shares.
(11) See notes (2)-(5) and (8)-(10) above.
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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 101,000,000 shares, consisting of 100,000,000 shares of
Common Stock, par value $0.001 per share, and 1,000,000 shares of undesignated
Preferred Stock, par value $0.001 per share.
COMMON STOCK
As of September 30, 1997 there were 23,818,454 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
As of September 30, 1997, the Company had warrants outstanding to purchase
1,032,807 shares of its Common Stock at a weighted average exercise price per
share of $5.93.
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.
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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 "Management--Affiliate Warrant
Program."
REGISTRATION RIGHTS
After this offering, the holders of 14,377,693 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. All such shares
represent shares of Common Stock issuable upon the conversion of shares of
Preferred Stock and Common Stock issued in certain financing transactions.
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
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<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
ChaseMellon Shareholder Services 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be 30,818,454 shares of Common
Stock outstanding. The 5,000,000 shares (or up to 5,750,000 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 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 30, 1997, options to purchase approximately 7,366,000
shares of Common Stock were outstanding under the Company's stock option
plans.
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After the closing of this offering, the holders of approximately 14,378,000
shares of Common Stock, including approximately 758,000 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 (first saleable on , 1998) 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 180-day lock-up period, approximately 15,237,000
shares of Common Stock will become immediately saleable. In addition,
approximately 2,490,000 shares of Common Stock issuable upon exercise of
outstanding options and approximately 659,000 shares of Common Stock issuable
upon exercise of outstanding warrants will become saleable after the 180-day
lock-up period.
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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.............................................................. 5,000,000
=========
</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 750,000 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.
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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.
In addition to the 5,000,000 shares of Common Stock to be sold by the
Company in this offering, contemporaneously with this offering the Company
intends to sell to Intel in a private placement a number of shares of Common
Stock equal to $10,000,000 divided by 80% of the price per share at which the
Company's Common Stock will be sold to the public (1,250,000 shares at a
purchase price of $8.00 per share, based on an assumed initial public offering
price of $10.00 per share). Such sale will be effected pursuant to a separate
agreement with Intel entered into in November 1997 and not pursuant to the
Underwriting Agreement. In connection with this private placement, the Company
will pay to Hambrecht & Quist LLC, a managing Underwriter of this offering, a
placement fee equal to 3.5% of the gross proceeds of the Intel private
placement.
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
approximately 7,000 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 included in this Prospectus and Registration
Statement have been audited by Price Waterhouse LLP independent accountants.
The companies and periods covered by these audits are indicated in the
individual reports of Price Waterhouse LLP. Such financial statements have
been so included in reliance on the reports of Price Waterhouse LLP given on
the authority of said firm as experts in auditing and accounting.
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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.
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USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
USWEB CORPORATION
Report of Independent Accountants.......................................... F-4
Consolidated Balance Sheet................................................. F-5
Consolidated Statement of Operations....................................... F-6
Consolidated Statement of Stockholders' Equity (Deficit)................... F-7
Consolidated Statement of Cash Flows....................................... F-8
Notes to Consolidated Financial Statements................................. F-9
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Overview................................................................... F-28
Pro Forma Consolidated Statement of Operations............................. F-31
Pro Forma Consolidated Balance Sheet....................................... F-32
Notes to Pro Forma Consolidated Financial Information...................... F-33
USWEB SAN FRANCISCO (FORMERLY XCOM CORPORATION)
Report of Independent Accountants.......................................... F-34
Balance Sheet.............................................................. F-35
Statement of Operations.................................................... F-36
Statement of Shareholders' Equity.......................................... F-37
Statement of Cash Flows.................................................... F-38
Notes to Financial Statements.............................................. F-39
USWEB MILWAUKEE (FORMERLY FETCH INTERACTIVE, INC.)
Report of Independent Accountants.......................................... F-42
Balance Sheet.............................................................. F-43
Statement of Operations.................................................... F-44
Statement of Stockholders' Deficit......................................... F-45
Statement of Cash Flows.................................................... F-46
Notes to Financial Statements.............................................. F-47
USWEB LA METRO (FORMERLY NEWLINK CORPORATION)
Report of Independent Accountants.......................................... F-51
Balance Sheet.............................................................. F-52
Statement of Operations.................................................... F-53
Statement of Shareholders' Equity.......................................... F-54
Statement of Cash Flows.................................................... F-55
Notes to Financial Statements.............................................. F-56
USWEB ATLANTA (FORMERLY INTERNETOFFICE, LLC)
Report of Independent Accountants.......................................... F-59
Balance Sheet.............................................................. F-60
Statement of Operations.................................................... F-61
Statement of Stockholders' Equity.......................................... F-62
Statement of Cash Flows.................................................... F-63
Notes to Financial Statements.............................................. F-64
USWEB DC (FORMERLY INFOPRENEURS INC.)
Report of Independent Accountants.......................................... F-67
Consolidated Balance Sheet................................................. F-68
Consolidated Statement of Operations....................................... F-69
Consolidated Statement of Stockholders' Deficit............................ F-70
Consolidated Statement of Cash Flows....................................... F-71
Notes to Consolidated Financial Statements................................. F-72
</TABLE>
F-1
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB PITTSBURGH (FORMERLY ELECTRONIC IMAGES, INC.)
Report of Independent Accountants......................................... F-75
Balance Sheet............................................................. F-76
Statement of Operations................................................... F-77
Statement of Shareholders' Equity......................................... F-78
Statement of Cash Flows................................................... F-79
Notes to Financial Statements............................................. F-80
USWEB CHICAGO METRO (FORMERLY MULTIMEDIA MARKETING & DESIGN INC.)
Report of Independent Accountants......................................... F-85
Balance Sheet............................................................. F-86
Statement of Operations................................................... F-87
Statement of Shareholders' Equity......................................... F-88
Statement of Cash Flows................................................... F-89
Notes to Financial Statements............................................. F-90
USWEB HOLLYWOOD (FORMERLY KANDH, INC.)
Report of Independent Accountants......................................... F-92
Balance Sheet............................................................. F-93
Statement of Operations................................................... F-94
Statement of Shareholders' Equity......................................... F-95
Statement of Cash Flows................................................... F-96
Notes to Financial Statements............................................. F-97
USWEB HOLLYWOOD (FORMERLY DREAMMEDIA, INC.)
Report of Independent Accountants......................................... F-98
Balance Sheet............................................................. F-99
Statement of Operations................................................... F-100
Statement of Shareholders' Equity......................................... F-101
Statement of Cash Flows................................................... F-102
Notes to Financial Statements............................................. F-103
USWEB MARIN (FORMERLY INTERNET CYBERNAUTICS, INC.)
Report of Independent Accountants......................................... F-105
Balance Sheet............................................................. F-106
Statement of Operations................................................... F-107
Statement of Shareholders' Equity......................................... F-108
Statement of Cash Flows................................................... F-109
Notes to Financial Statements............................................. F-110
USWEB LONG ISLAND (FORMERLY SYNERGETIX SYSTEMS INTEGRATION, INC.)
Report of Independent Accountants......................................... F-115
Balance Sheet............................................................. F-116
Statement of Operations................................................... F-117
Statement of Shareholders' Equity......................................... F-118
Statement of Cash Flows................................................... F-119
Notes to Financial Statements............................................. F-120
</TABLE>
F-2
<PAGE>
USWEB CORPORATION
INDEX TO FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
USWEB DETROIT (FORMERLY ONLINE MARKETING COMPANY)
Report of Independent Accountants......................................... F-124
Balance Sheet............................................................. F-125
Statement of Operations................................................... F-126
Statement of Shareholders' Equity (Deficit)............................... F-127
Statement of Cash Flows................................................... F-128
Notes to Financial Statements............................................. F-129
USWEB SAN MATEO (FORMERLY ZENDATTA, INC.)
Report of Independent Accountants......................................... F-132
Balance Sheet............................................................. F-133
Statement of Operations................................................... F-134
Statement of Shareholders' Equity......................................... F-135
Statement of Cash Flows................................................... F-136
Notes to Financial Statements............................................. F-137
USWEB LA CENTRAL (FORMERLY W3-DESIGN)
Report of Independent Accountants......................................... F-139
Balance Sheet............................................................. F-140
Statement of Operations................................................... F-141
Statement of Shareholders' Equity......................................... F-142
Statement of Cash Flows................................................... F-143
Notes to Financial Statements............................................. F-144
USWEB HOUSTON (FORMERLY USWEB-APEX, INC.)
Report of Independent Accountants......................................... F-147
Combined Balance Sheet.................................................... F-148
Combined Statement of Operations.......................................... F-149
Combined Statement of Shareholders' Equity................................ F-150
Combined Statement of Cash Flows.......................................... F-151
Notes to Combined Financial Statements.................................... F-152
REACH NETWORKS, INC.
Report of Independent Accountants......................................... F-154
Consolidated Balance Sheet................................................ F-155
Consolidated Statement of Operations...................................... F-156
Consolidated Statement of Stockholders' Equity (Deficit).................. F-157
Consolidated Statement of Cash Flows...................................... F-158
Notes to Consolidated Financial Statements................................ F-159
</TABLE>
F-3
<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 November 5,
1997. When it has been consummated, we will be in a position to furnish the
following report:
"In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, of stockholders' equity
(deficit) and of cash flows present fairly, in all material respects,
the financial position of USWeb Corporation and its subsidiaries at
December 31, 1996 and September 30, 1997, and the results of their
operations and their cash flows for the year ended December 31, 1996
and nine months ended September 30, 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
November 5, 1997
F-4
<PAGE>
USWEB CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
DECEMBER 31, ----------------------
1996 HISTORICAL PRO FORMA
------------ ---------- -----------
(UNAUDITED)
(NOTE 2)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............... $ 3,220 $ 1,939 $ 1,939
Accounts receivable, net................ 137 5,225 5,225
Other current assets.................... 54 3,104 3,104
-------- -------- --------
Total current assets.................. 3,411 10,268 10,268
Property and equipment, net............... 1,084 4,751 4,751
Intangible assets, net.................... -- 15,828 15,828
Investment in affiliate................... 2,850 -- --
Other assets.............................. 137 539 539
-------- -------- --------
$ 7,482 $ 31,386 $ 31,386
======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................ $ 906 $ 1,914 $ 1,914
Accrued expenses........................ 2,190 8,591 8,591
Current portion of lease obligations.... 242 356 356
-------- -------- --------
Total current liabilities............. 3,338 10,861 10,861
Lease obligations, long-term portion...... 436 527 527
-------- -------- --------
3,774 11,388 11,388
-------- -------- --------
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
issued and outstanding................. -- -- --
Common Stock, $0.001 par value,
100,000,000 shares authorized;
6,381,000 and 12,946,098 shares issued
and outstanding; 25,040,457 shares is-
sued and outstanding pro forma......... 2 9 21
Additional paid-in capital.............. 2,714 40,577 73,055
Note receivable......................... (1,400) -- --
Accumulated deficit..................... (13,808) (53,078) (53,078)
-------- -------- --------
Total stockholders' equity (deficit).. (12,492) (12,492) 19,998
-------- -------- --------
$ 7,482 $ 31,386 $ 31,386
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Services.................................. $ -- $ -- $ 7,868
Other..................................... 1,820 511 808
-------- ------- --------
Total revenues.......................... 1,820 511 8,676
-------- ------- --------
Cost of revenues:
Services.................................. -- -- 6,196
Other..................................... 208 78 1,180
Stock compensation (Note 9)............... -- -- 966
-------- ------- --------
Total cost of revenues.................. 208 78 8,342
-------- ------- --------
Gross profit................................ 1,612 433 334
-------- ------- --------
Operating expenses:
Marketing, sales and support.............. 12,764 7,954 14,119
General and administrative................ 2,813 1,755 7,027
Acquired in-process technology (Note 1)... -- -- 6,726
Stock compensation (Note 9)............... -- -- 3,500
Amortization of intangible assets (Note
1)....................................... -- -- 4,321
-------- ------- --------
Total operating expenses................ 15,577 9,709 35,693
-------- ------- --------
Loss from operations........................ (13,965) (9,276) (35,359)
Interest income............................. 215 170 165
Interest expense............................ (58) (35) (76)
Impairment of investee carried at cost...... -- -- (4,000)
-------- ------- --------
Net loss.................................... $(13,808) $(9,141) $(39,270)
======== ======= ========
Pro forma:
Net loss per share (Note 2)............... $ (.48) $ (.32) $ (1.35)
======== ======= ========
Weighted average shares outstanding (Note
2)....................................... 28,741 28,671 29,101
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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................ 36,077 -- -- -- -- --
Common Stock issued for
acquired businesses.... 6,662,724 7 30,022 -- -- 30,029
Issuance of Common
Stock.................. 222,222 -- 2,000 -- -- 2,000
Repurchase of Common
Stock.................. (355,925) -- -- -- -- --
Issuance of Affiliate
warrants............... -- -- 125 -- -- 125
Collection of note
receivable............. -- -- -- 1,400 -- 1,400
Stock compensation
expense................ -- -- 5,716 -- -- 5,716
Net loss................ -- -- -- -- (39,270) (39,270)
---------- ---- ------- ------- -------- --------
Balance September 30,
1997................... 12,946,098 $ 9 $40,577 $ -- $(53,078) $(12,492)
========== ==== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
USWEB CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------
1996 1996 1997
------------ ----------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(13,808) $(9,141) $(39,270)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization............ 263 159 776
Provision for doubtful accounts.......... -- -- 811
Stock, option and warrant costs and
expenses................................ 185 85 5,841
Amortization of intangible assets........ -- -- 4,321
Acquired in-process technology........... -- -- 6,726
Impairment of investee carried at cost... -- -- 4,000
Changes in assets and liabilities:
Accounts receivable..................... (137) (22) (5,724)
Other current assets.................... (54) (59) (1,050)
Other assets............................ (137) (110) (402)
Accounts payable........................ 906 542 1,008
Accrued expenses........................ 2,190 1,517 6,401
-------- ------- --------
Net cash used in operating activities.. (10,592) (7,029) (16,562)
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment...... (1,059) (188) (1,663)
Cash received from acquisitions, net of
cash used................................. -- -- 699
Purchase of investment in affiliate........ (2,850) -- (1,150)
-------- ------- --------
Net cash used in investing activities.. (3,909) (188) (2,114)
-------- ------- --------
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 23 --
Proceeds from issuance of notes payable.... 500 500 --
Proceeds from collection of note
receivable................................ 600 -- 1,400
Proceeds from capital lease financing...... 522 -- --
Principal payments on capital lease........ (132) (121) (295)
-------- ------- --------
Net cash provided by financing
activities............................ 17,721 10,341 17,395
-------- ------- --------
Increase (decrease) in cash and cash
equivalents................................ 3,220 3,124 (1,281)
Cash and cash equivalents, beginning of
period..................................... -- -- 3,220
-------- ------- --------
Cash and cash equivalents, end of period.... $ 3,220 $ 3,124 $ 1,939
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<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 nine months ended September 30, 1997, the Company recognized the
acquisition of all of the outstanding shares of sixteen businesses, including
certain franchised Affiliates ("Controlled Entities") in separate transactions
as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
ACQUIRED ENTITY (FORMER BUSINESS EFFECTIVE SHARES PURCHASE
NAME) DATE ISSUED PRICE
- -------------------------------- ------------------ --------- ---------- ---
<S> <C> <C> <C> <C>
USWeb San Francisco (XCom Corpora-
tion)............................. March 16, 1997 383,209 $ 1,609
USWeb Seattle (Cosmix Corporation). April 1, 1997 119,774 503
USWeb Milwaukee (Fetch Interactive,
Inc.)............................. April 1, 1997 464,838 1,397
USWeb LA Metro (NewLink Corpora-
tion)............................. April 1, 1997 425,700 1,537
USWeb Atlanta (InterNetOffice,
LLC).............................. May 1, 1997 510,646 1,578
USWeb Silicon Valley (NetWORKERS
Corporation)...................... May 1, 1997 135,415 569
USWeb DC (Infopreneurs Inc.)....... June 1, 1997 1,008,169 3,173
USWeb Phoenix (Netphaz Corpora-
tion)............................. June 1, 1997 235,205 776
USWeb Pittsburgh (Electronic Im-
ages, Inc.)....................... July 1, 1997 1,665,525 6,205
USWeb Chicago Metro (Multimedia
Marketing & Design Inc.).......... July 24, 1997 332,536 1,397
USWeb Hollywood (KandH, Inc.)...... August 29, 1997 151,624 1,023
USWeb Hollywood (DreamMedia, Inc.). August 29, 1997 359,094 2,424
USWeb Marin (Internet Cybernautics,
Inc).............................. September 29, 1997 447,183 4,025
USWeb Long Island (Synergetix
Systems Integration, Inc.)........ September 30, 1997 151,716 1,365
USWeb Detroit (Online Marketing
Company).......................... September 30, 1997 95,730 861
USWeb San Mateo (Zendatta, Inc.)... September 30, 1997 176,360 1,587
--------- -------
6,662,724 $30,029
========= =======
</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 $3,154 of the aggregate recognized purchase price was allocated
to net tangible assets consisting primarily of cash, accounts receivable,
property and equipment and accounts payable. The historical carrying amounts
of such net assets approximated their fair values. Approximately $6,726 was
allocated to in-process technology and was 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 $2,379 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 and liabilities assumed in
the amount of $17,770 was allocated to goodwill and is being amortized over
its estimated useful life of one to two years. See Notes 2 and 13.
F-9
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The acquisitions of the Controlled Entities have been structured as tax free
exchanges of stock, therefore, the differences between the recognized fair
values of the acquired assets, including intangible assets, and their
historical tax bases is not deductible for income tax purposes.
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined by the Board of the Directors based upon a number
of considerations. For acquisitions recognized through July 24, 1997, the fair
value of the Company's Common Stock was estimated to be $4.20 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. For acquisitions recognized from August 29, 1997 through
September 30, 1997, the fair value of the Company's Common Stock was estimated
by the Company's Board of Directors to be $6.75 to $9.00 per share based upon
a number of factors, including growth in the Company's business and the
private sale, in October, 1997, of 222,222 shares of Common Stock to an
independent third party at a price of $9.00 per share. See Note 8. 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 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
Entity. The Company has excluded from the recognized purchase price
calculations approximately 818,500 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 Entity allows for the issuance
of additional stock-based consideration in the event a Controlled Entity's
valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
not presently known, however, for acquisitions recognized through September
30, 1997, management estimates that approximately 257,000 additional shares
are probable of issuance at the completion of the respective valuation
periods. 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 effective 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 September 30, 1997, the purchase accounting effects of transactions
occurring between the designated effective dates and the legal closing dates
were not material.
F-10
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following pro forma financial information reflects the results of
operations for the year ended December 31, 1996 and the nine months ended
September 30, 1997, as if the acquisitions had occurred on January 1, 1996 (or
the date of inception, if later), 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 (or date of inception, if later), and may not be indicative of
future operating results.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................. $ 19,936 $ 25,033
========== ==========
Net loss.................................. $ (63,393) $ (52,819)
========== ==========
Pro forma net loss per share.............. $ (2.13) $ (1.66)
========== ==========
Weighted average common shares
outstanding.............................. 29,828,978 31,826,497
========== ==========
</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 financial statements as of September 30, 1997 and the nine
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.
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.
F-11
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 September 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 nine months ended September 30, 1997, the Company recognized an impairment
provision totaling $4 million, representing the total amount of its cost basis
investment in Utopia, Inc., 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 investee
liquidation, sale or merger. See Note 13--Subsequent Events.
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.
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
F-12
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 nine months ended September 30, 1996 and
1997 totaled $3,223, $1,696 and $2,404, 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-13
<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, 3,103,333 and 2,818,193
shares, respectively, of Common Stock. In addition, warrants to purchase
53,333 shares of Series A and 704,549 shares of Series C Mandatorily
Redeemable Convertible Preferred Stock, will convert into Warrants to purchase
757,882 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 September 30, 1997.
Interim Financial Information
The accompanying interim financial statements for the nine months ended
September 30, 1996 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 the consolidated financial statements for the
nine months ended September 30, 1997 and reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
results of the Company's operations and its cash flows for the nine months
ended September 30, 1996. The financial data and other information disclosed
in these notes to consolidated
F-14
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
financial statements related to this period are unaudited. The results for the
nine months ended September 30, 1997, are not necessarily indicative of the
results to be expected for the year ending December 31, 1997.
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 significant 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>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ ----------- -------
(UNAUDITED)
<S> <C> <C> <C>
Supplemental disclosures:
Cash paid for interest................... $ 58 $ 33 $ 52
Non-cash financing and investing activi-
ties:
Common Stock issued for note receivable.. 2,000 -- 2,000
Notes payable converted into Common
Stock................................... 500 500 --
Equipment acquired through capital lease. 288 238 500
Common Stock issued for acquisitions..... -- -- 29,330
</TABLE>
F-15
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 4--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................ $ 137 $ 6,036
Less: allowance for doubtful accounts.......... -- (811)
------ -------
$ 137 $ 5,225
====== =======
Other current assets:
Note receivable................................ $ -- $ 2,000
Other.......................................... 54 1,104
------ -------
$ 54 $ 3,104
====== =======
Property and equipment, net:
Computers and equipment........................ $1,149 $ 4,881
Furniture and fixtures......................... 124 630
Leasehold improvements......................... 74 279
------ -------
1,347 5,790
Less: accumulated depreciation and amortiza-
tion.......................................... (263) (1,039)
------ -------
$1,084 $ 4,751
====== =======
Intangible assets, net:
Goodwill....................................... $ -- $17,770
Purchased technology........................... -- 2,379
------ -------
-- 20,149
Less: accumulated amortization................. -- (4,321)
------ -------
$ -- 15,828
====== =======
Accrued expenses:
Marketing costs................................ $1,271 1,799
Compensation and benefits...................... 549 1,422
Deferred revenue............................... -- 1,386
Accrued financing costs........................ -- 1,050
Legal costs.................................... -- 553
Other.......................................... 370 2,381
------ -------
$2,190 $ 8,591
====== =======
</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.
F-16
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 6--INCOME TAXES:
No provision for income taxes has been recognized for the year ended
December 31, 1996 or the nine months ended September 30, 1997, as the Company
incurred net operating losses for income tax purposes and has no carryback
potential.
Deferred tax assets of approximately $15,200 at September 30, 1997, 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.
The Company's various acquisitions have been structured as tax free stock
exchanges, therefore, the differences between the historical bases and the
fair value recognized by the Company, including intangible assets, are not
deductible for income tax purposes.
At September 30 1997, the Company had federal net operating loss
carryforwards of approximately $38,000 available to reduce future taxable
income, which expire in 2012. The Company's ability to utilize net operating
loss carryforwards and tax credits may be subject to limitations as set forth
in applicable federal and state tax laws. As specified in the Internal Revenue
Code, an ownership change of more than 50% by a combination of the Company's
significant stockholders during any three-year period would result in certain
limitations on the Company's ability to utilize its net operating loss and
credit carryforwards. See Note 13--Subsequent Events.
NOTE 7--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS:
A total of 12,729,500 shares of Mandatorily Redeemable Convertible Preferred
Stock have been authorized for issuance, of which 6,226,167, 3,103,333 and
3,400,000 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
3,103,333 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. 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,
F-17
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 12,094,359 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 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 September 30, 1997.
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 September 30, 1997.
In July 1996, the Company issued warrants to purchase 18,055 shares of
Common Stock at $0.90 per share to an individual employed as a consultant to
the Company. The fair value of the warrants was not
F-18
<PAGE>
USWEB CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
material on the date of grant. The warrants are exercisable at any time prior
to their expiration in July 2001. No warrants had been exercised at September
30, 1997.
In December 1996, the Company issued warrants to purchase 33,333 shares of
Common Stock at $3.75 per share to an individual employed as a consultant to
the Company. 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
December 2001. No warrants had been exercised at September 30, 1997.
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 nine months ended September 30,
1997, was immaterial.
NOTE 8--COMMON STOCK:
Founder's 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. During August 1997, a
Company Founder terminated his employment. In connection with the termination
the Company accelerated the vesting of 111,205 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 were repurchased by the Company at their
original issuance price of $.0003 per share. As of September 30, 1997, a total
of 2,383,566 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.
Common Stock
On September 30, 1997, the Company sold 222,222 shares of Common Stock in a
private transaction to an independent third party in exchange for a note
receivable in the amount of $2,000. On October 14, 1997, the note receivable
was collected in full.
F-19
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
NOTE 9--STOCK-BASED COMPENSATION:
At September 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. 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. 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 have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
NINE MONTH ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31 ---------------------
1996 1996 1997
----------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C>
Net Loss:
As reported......................... $(13,808) $(9,141) $(39,270)
Pro forma........................... (13,815) (9,148) (39,529)
Loss per share:
As reported......................... $ (.48) $ (.32) $ (1.35)
Pro forma........................... (.48) (.32) (1.36)
</TABLE>
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
F-20
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 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
F-21
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 nine months ended September 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.
A summary of the status of the Company's three fixed stock option plans as
of December 31, 1996 and September 30, 1997, and changes during the year ended
December 31, 1996 and the nine months ended September 30, 1997, is presented
below:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------ -------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
FIXED STOCK OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------------------- -------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 234,833 1.84
Granted.................. 567,500 .83 7,263,918 7.96
Exercised................ (281,000) .10 (36,077) .95
Canceled................. (51,667) .22 (96,702) 4.10
-------- ---------
Outstanding at end of pe-
riod.................... 234,833 1.84 7,365,972 7.85
======== =========
Options exercisable at
end of period........... 234,833 1,343,635
======== =========
Weighted-average minimum
value of options granted
during the period....... $ .07 $ .35
======== =========
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1997:
<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.................... 4,688 8.4 years $ .03 4,688 $ .03
$.30.................... 69,167 8.6 years .30 69,167 .30
$.90.................... 29,167 8.9 years .90 29,167 .90
$3.75................... 13,167 9.0 years 3.75 13,167 3.75
$6.75 to $9.75.......... 7,249,783 9.2 years 7.97 1,227,446 7.54
--------- ---------
7,365,972 1,343,635
========= =========
</TABLE>
F-22
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Acquisition Stock Bonus Plan
During the nine months ended September 30, 1997, the Company agreed to issue
a bonus payable in shares of Common Stock to employees previously employed by
Acquired Entities (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 for
awards through September 30, 1997, totaled $49,529, and will be paid in shares
of Common Stock at the fair market value of the Common Stock at the date of
issuance. Stock bonus awards are recognized as compensation expense over the
thirty-six month vesting periods. See Note 13--Subsequent Events.
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.
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 106,834 shares of Common Stock and AGR Warrants to purchase 17,918
shares of Common Stock and recognized costs estimated using the Black-Scholes
formula totaling $167. During the nine months ended September 30, 1997, the
Company issued Signing Warrants to purchase 4,000 shares of Common Stock and
AGR Warrants to purchase 94,784 shares of Common Stock and recognized costs
estimated using the Black-Scholes formula totaling $125.
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
F-23
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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 January 2002.
Total equipment acquired under capitalized leases was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Computers and equipment........................... $ 702 $1,156
Furniture and fixtures............................ 108 154
----- ------
810 1,310
Less: accumulated depreciation.................... (214) (564)
----- ------
$ 596 $ 746
===== ======
</TABLE>
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 September 30, 1997, approximately $1 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 September 30, 1997 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER OPERATING CAPITAL
31, LEASES LEASES
----------- --------- -------
<S> <C> <C>
1997..................................................... $ 623 $ 126
1998..................................................... 2,415 480
1999..................................................... 2,376 337
2000..................................................... 2,166 35
2001..................................................... 1,952 10
Thereafter............................................... 8,798 1
------- -----
Total minimum payments.................................... $18,330 989
=======
Less: amount representing interest........................ (106)
-----
Present value of capital lease obligations................ 883
Less: current portion..................................... (356)
-----
Lease obligations, long-term.............................. $ 527
=====
</TABLE>
Rent expense under operating leases totaled $278, $209 and $700 for the year
ended December 31, 1996 and for the nine months ended September 30, 1996 and
1997, 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
F-24
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
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
During the period from October 1, 1997 to November 5, 1997, the Company
recognized the acquisition of all of the outstanding shares of Common Stock of
USWeb LA Central and USWeb Houston in exchange for shares of the Company's
Common Stock. The Company also entered non-binding agreements for the
acquisition of all of the stock of Reach Networks, Inc. in exchange for Common
Stock of the Company and for the acquisition of certain assets of an
additional entity in exchange for the assumption by the Company of specified
liabilities totalling $3,000. The Company believes that the non-binding
agreements should be considered as probable acquisitions. The acquired
companies provide Internet professional services. The following table
summarizes the companies acquired, or probable of acquisition, and number of
shares issuable for each acquisition, if applicable.
<TABLE>
<CAPTION>
EFFECTIVE COMMON RECOGNIZED
CONTROLLED ENTITY (FORMER BUSINESS DATE OF SHARES PURCHASE
NAME) CONSOLIDATION ISSUABLE PRICE
---------------------------------- ---------------- --------- ----------
<S> <C> <C> <C>
Stock Purchase
USWeb LA Central (W3-design)........ November 5, 1997 385,937 $ 3,473
USWeb Houston (USWeb-Apex, Inc.).... November 5, 1997 365,029 3,285
Probable Stock Acquisition
Reach Networks, Inc................. pending 511,656 4,605
Probable Asset Purchase
USWeb Boston (Utopia, Inc.)......... pending -- 3,000
--------- -------
1,262,622 $14,363
========= =======
</TABLE>
The acquisitions will be accounted for using the purchase method of
accounting, and accordingly, the purchase price will be allocated to the
tangible and identifiable intangible assets acquired liabilities assumed on
the basis of their fair values.
Approximately $150 of the aggregate recognized purchase price will be
allocated to net tangible assets consisting primarily of cash, accounts
receivable, property and equipment and accounts payable. The historical
carrying amounts of such net assets approximate their fair values.
Approximately $2,746 will be allocated to in-process technology and will be
immediately charged to operations because such in-process technology have not
reached the stage of technological feasibility at the acquisition dates and
have no alternative future use. Approximately $1,231 will be allocated to
existing technology and will be amortized over its estimated useful life of
six months. The purchase price in excess of identified tangible and intangible
assets and liabilities assumed in the amount of $7,236 will be allocated to
goodwill and will be amortized over its estimated useful life of one to two
years.
F-25
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The fair value of the Company's Common Stock of $9.00 per share used as
consideration for the acquisitions was determined by the Board of Directors
based upon a number of considerations including the private sale in October
1997, of 222,222 shares of Common Stock to an independent third party for
$2,000. 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 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
Entity. The purchase price adjustment for each Controlled Entity allows for
the issuance of additional stock-based consideration in the event a Controlled
Entity's valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
not presently known, however, for acquisitions recognized after September 30,
1997, management estimates that approximately 161,000 additional shares are
probable of issuance at the completion of the respective valuation periods.
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.
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 1,262,621 shares of the Company's Common Stock at an
exercise price of $9.75 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 $12,311.
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 based upon the fair market value of the Common Stock at the date of
issuance. 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 awards will be recognized as
compensation expense over the three-year vesting period.
Prior to June 30, 1997 the Company had invested $4,000 for an approximate
20% investment in Utopia, Inc. ("Utopia") an Internet consulting company
located in Boston, Massachusetts. The Company's investment was accounted for
on the cost basis. Through June 30, 1997 Utopia had incurred significant
losses, was experiencing significant cash flow deficits and had a net asset
deficiency. During June 1997, the Company determined that it was unlikely that
the Company would recover any of its investment in Utopia and, accordingly,
recorded an impairment loss equal to the carrying amount of its investment.
On October 9, 1997, the Company entered into a non-binding term sheet to
purchase specified assets of Utopia. Under the preliminary terms of the
arrangement, the Company would acquire selected computer hardware and software
assets and would agree to enter at will employment agreements with most Utopia
employees. In addition, the Company would obtain all rights and
responsibilities relating to specified Utopia customer contracts effective
October 1, 1997. In consideration for the acquired net assets the Company
would
F-26
<PAGE>
USWEB CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
agree to assume a note payable to Utopia's former majority shareholder in the
amount of $3,000. The Company has determined that the acquisition will be
accounted for as an acquisition of a business. The Company will account for
the acquisition using the purchase method of accounting, and, accordingly, the
purchase price will be allocated to the various assets, including intangible
assets acquired and liabilities assumed on the basis of their fair values at
the date of acquisition. Substantially all of the purchase price is expected
to be allocated to goodwill and will be amortized over its estimated useful
life of one year.
The note payable to be assumed by the Company would be payable in cash on
the later of October 1, 1998 or 30 days subsequent to the closing of the
Company's initial public offering and would bear interest at a referenced
prime rate plus 1%. Beginning ninety days subsequent to the closing of the
Company's public offering, the note would be convertible, at the option of the
holder, into restricted shares of the Company's Common Stock based upon the
fair value of such stock at the conversion date.
The purchase price consideration would be subject to adjustment at six and
twelve month intervals subsequent to the closing, based upon the standard
valuation formula used in the Company's acquisition program. The increase in
value, if any, attributable to the period subsequent to the closing would be
payable in shares of and options to purchase shares of the Company's Common
Stock.
Bank Credit Facility
On October 6, 1997, the Company entered into a credit facility with a bank
that allows the Company to borrow up to a maximum of $3,000 to finance various
equipment purchases. Advances accrue interest at the bank's prime lending rate
plus 1% and are repayable over a thirty-six month period.
Bridge Loan
On November 3, 1997, the Company received the terms of a non-binding bridge
loan facility from a bank. The terms of the bridge loan facility would allow
the Company to borrow up to a maximum of $2,000, secured by substantially all
of the Company's assets. The loan would accrue interest at the bank's prime
rate plus 1% and would mature at the earlier of the effective date of the
Company's planned public offering or December 31, 1997.
F-27
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
OVERVIEW
During the period from January 1, 1997 to November 5, 1997, the Company
recognized the effect of the acquisition of eighteen entities (the "Controlled
Entities") in separate transactions whereby the Company acquired all of the
outstanding stock of eighteen Controlled Entities in exchange for Common Stock
of the Company. Additionally, as of November 5, 1997 the Company had
identified two additional acquisition candidates that were deemed probable of
acquisition including a probable transaction whereby the Company would acquire
various assets in exchange for the assumption by the Company of a note payable
to the former majority stockholder of the entity. The Controlled Entities,
including the probable acquisition are as follows:
<TABLE>
<CAPTION>
COMMON RECOGNIZED
CONTROLLED ENTITY (FORMER BUSINESS EFFECTIVE DATE SHARES PURCHASE
NAME) OF CONSOLIDATION ISSUED PRICE
- ---------------------------------- ------------------ --------- ----------
<S> <C> <C> <C>
Stock Purchase
USWeb San Francisco (XCom Corporation). March 16, 1997 383,209 $ 1,609
USWeb Seattle (Cosmix Corporation)..... April 1, 1997 119,774 503
USWeb Milwaukee (Fetch Interactive,
Inc.)................................. April 1, 1997 464,838 1,397
USWeb LA Metro (NewLink Corporation)... April 1, 1997 425,700 1,537
USWeb Atlanta (InterNetOffice, LLC).... May 1, 1997 510,646 1,578
USWeb Silicon Valley (NetWORKERS
Corporation).......................... May 1, 1997 135,415 569
USWeb DC (Infopreneurs Inc.)........... June 1, 1997 1,008,169 3,173
USWeb Phoenix (Netphaz Corporation).... June 1, 1997 235,205 776
USWeb Pittsburgh (Electronic Images,
Inc.)................................. July 1, 1997 1,665,525 6,205
USWeb Chicago Metro (Multimedia
Marketing & Design, Inc.)............. July 24, 1997 332,536 1,397
USWeb Hollywood (KandH, Inc.).......... August 29, 1997 151,624 1,023
USWeb Hollywood (DreamMedia, Inc.)..... August 29, 1997 359,094 2,424
USWeb Marin (Internet Cybernautics,
Inc.)................................. September 29, 1997 447,183 4,025
USWeb Long Island (Synergetix Systems
Integration, Inc.).................... September 30, 1997 151,716 1,365
USWeb Detroit (Online Marketing
Company).............................. September 30, 1997 95,730 861
USWeb San Mateo (Zendatta, Inc.)....... September 30, 1997 176,360 1,587
USWeb LA Central (W3-design)........... November 5, 1997 385,937 3,473
USWeb Houston (USWeb-Apex, Inc.)....... November 5, 1997 365,029 3,285
Probable Stock Purchase
Reach Networks, Inc.................... pending 511,656 4,605
Probable Asset Purchase
USWeb Boston (Utopia, Inc.)............ pending -- 3,000
--------- -------
7,925,346 $44,392
========= =======
</TABLE>
The acquisitions have been or will be 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 $3,270 of the aggregate recognized purchase price was allocated
to identified net tangible assets consisting primarily of cash, accounts
receivable, property and equipment and accounts payable. The historical
carrying amounts of such assets approximated their fair values. Approximately
$9,471 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 $3,610 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 $25,041 was allocated to goodwill and
is being amortized on an entity by entity basis over its estimated useful life
of one to two years.
F-28
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
The fair value of the Company's Common Stock issued as consideration for the
acquisitions was determined by the Board of the Directors based upon a number
of considerations. For acquisitions recognized through July 24, 1997, the fair
value of the Company's Common Stock was estimated to be $4.20 per share,
determined primarily by reference to the $15,811 amount allocated to 2,813,193
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). For acquisitions from August 29, 1997 through November 5, 1997, the
fair value of the Company's Common Stock was estimated by the Company's Board
of Directors to be $6.75 to $9.00 per share based upon a number of factors,
including the private sale, in October 1997, of 222,222 shares of Common Stock
to an independent third party for $2,000. 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 by issued to the pervious
owners of the acquired entities or returned to the Company based upon the
results of the purchase price adjustments, as defined for each Controlled
Entity. The Company has excluded from the recognized purchase price
calculations approximately 818,500 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 Entity allows for the issuance
of additional stock-based consideration in the event a Controlled Entity's
valuation calculated at the six and twelve month dates following the
acquisition increases. The number of additional shares that are potentially
issuable at the completion of the six and twelve month valuation periods is
presently unknown, however, management estimates that approximately 418,000
additional shares are probable of issuance at the completion of the respective
valuation periods. 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.
Prior to June 30, 1997, the Company had invested $4,000 for a less than 20%
investment in Utopia, Inc. ("Utopia") an internet consulting company located
in Boston, Massachusetts. The Company's investment was accounted for on the
cost basis. Through June 30, 1997 Utopia had incurred significant losses, was
experiencing significant cash flow deficits and had a net asset deficiency.
During June 1997, the Company determined that it was unlikely that the Company
would recover any of its investment in Utopia and, accordingly, recorded an
impairment loss equal to its entire investment in Utopia.
On October 9, 1997, the Company entered into a non-binding term sheet to
purchase specified assets of Utopia. Under the preliminary terms of the
arrangement, the Company would acquire selected computer hardware and software
assets and would agree to enter at will employment agreements with most Utopia
employees. In addition, the Company would obtain all rights and
responsibilities relating to specified Utopia customer contracts effective
October 1, 1997. In consideration for the acquired net assets the Company
would agree to assume a note payable to Utopia's former majority shareholder
in the amount of $3,000. The Company has determined that the acquisition of
certain of the assets of Utopia will be accounted for as acquistion of a
business. The Company will account for the acquisition using the purchase
method of accounting, and, accordingly, the purchase price will be allocated
to the various assets, including intangible assets acquired and liabilities
assumed on the basis of their fair values at the date of acquisition.
Substantially all of the purchase price is expected to be allocated to
goodwill and will be amortized over its estimated useful life of one year.
The following unaudited pro forma consolidated statements of operations give
effect to these acquisitions as if they had occurred on January 1, 1996 (or
date of inception, if later) by consolidating the results of operations of the
Controlled Entities with the results of operations of USWeb for the year ended
F-29
<PAGE>
USWEB CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION -- (CONTINUED)
December 31, 1996 and the nine months ended September 30, 1997. Certain of the
Controlled Entities have fiscal year ends other than December 31. In such
cases the Company has converted the Controlled, Entity's results of operations
to a December 31 year end or 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 being representative of future
operating results.
The unaudited pro forma consolidated balance sheet gives effect to the
recognition of the acquisitions of USWeb LA Central and USWeb Houston and the
probable acquisitions of USWeb Boston and Reach Networks, Inc., as if they had
occurred on September 30, 1997, by consolidating the balance sheets of USWeb
LA Central, USWeb Houston, USWeb Boston and Reach Networks, Inc. all as of
September 30, 1997, with the historical consolidated balance sheet of the
Company at September 30, 1997. The Company's consolidated balance sheet at
September 30, 1997 includes the balance sheets of the other sixteen Controlled
Entities listed above as their acquisitions were recognized prior to September
30, 1997. See Notes 1 and 13 to the Consolidated Financial Statements.
The historical financial statements of the Company, USWeb San Francisco,
USWeb Milwaukee, USWeb LA Metro, USWeb Atlanta, USWeb DC, USWeb Pittsburgh,
USWeb Chicago Metro, USWeb Hollywood (formerly KandH, Inc.), USWeb Hollywood
(formerly DreamMedia, Inc.), USWeb Marin, USWeb Long Island, USWeb Detroit,
USWeb San Mateo, USWeb LA Central, USWeb Houston and Reach Networks, Inc. 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.
F-30
<PAGE>
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 NINE MONTHS ENDED SEPTEMBER 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.............. $ -- $18,967 $ -- $ 18,967 $ 7,868 $25,350 $ (7,868) $ (621)(B) $ 24,729
Other................. 1,820 -- (851)(B) 969 808 -- -- (504)(B) 304
-------- ------- -------- -------- -------- ------- -------- -------- --------
Total revenues........ 1,820 18,967 (851) 19,936 8,676 25,350 (7,868) (1,125) 25,033
-------- ------- -------- -------- -------- ------- -------- -------- --------
Cost of revenues:
Services.............. -- 13,389 (119)(B) 13,270 6,196 18,391 (6,196) (322)(B) 18,069
Other................. 208 -- -- 208 1,180 -- -- -- 1.180
Stock compensation (1)
..................... -- -- 4,365 (E) 4,365 966 -- (966) 3,786 (E) 3,786
-------- ------- -------- -------- -------- ------- -------- -------- --------
Total cost of
revenues............. 208 13,389 4,246 17,843 8,342 18,391 (7,162) 3,464 23,035
-------- ------- -------- -------- -------- ------- -------- -------- --------
Gross profit (loss).... 1,612 5,578 (5,097) 2,093 334 6,959 (706) (4,589) 1,998
-------- ------- -------- -------- -------- ------- -------- -------- --------
Operating expenses:
Marketing, sales and
support.............. 12,764 3,903 -- 16,667 14,119 5,999 (1,472) -- 18,646
General and
administrative....... 2,813 3,786 -- 6,599 7,027 6,175 (1,994) -- 11,208
Acquired in-process
technology (1) ...... -- -- 9,472 (C) 9,472 6,726 -- -- (6,726)(C) --
Stock compensation (1)
..................... -- -- 13,394 (E) 13,394 3,500 -- (3,500) 11,826 (E) 11,826
Amortization of
intangible assets (1)
..................... -- -- 19,322 (D) 19,322 4,321 -- (4,321) 9,124 (D) 9,124
-------- ------- -------- -------- -------- ------- -------- -------- --------
Total operating
expenses............. 15,577 7,689 42,188 65,454 35,693 12,174 (11,287) 14,224 50,804
-------- ------- -------- -------- -------- ------- -------- -------- --------
Income (loss) from
operations............ (13,965) (2,111) (47,285) (63,361) (35,359) (5,215) 10,581 (18,813) (48,806)
Interest income........ 215 12 -- 227 165 35 -- -- 200
Interest expense....... (58) (201) -- (259) (76) (166) 29 -- (213)
Impairment of investee
carried at cost....... -- -- -- -- (4,000) -- -- -- (4,000)
-------- ------- -------- -------- -------- ------- -------- -------- --------
Net loss............... $(13,808) $(2,300) $(47,285) $(63,393) $(39,270) $(5,346) $ 10,610 $(18,813) $(52,819)
======== ======= ======== ======== ======== ======= ======== ======== ========
Pro forma:
Net loss per share
(I).................. $ (.48) $ (2.13) $ (1.35) $ (1.66)
======== ======== ======== ========
Weighted average
shares
outstanding (I)...... 28,741 29,829 29,100 31,826
======== ======== ======== ========
</TABLE>
- -------------------
(1) 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.
See accompanying notes to Pro Forma Consolidated Financial Information
F-31
<PAGE>
PRO FORMA CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------------------------------
USWEB
CORPORATION ACQUISITIONS ADJUSTMENTS PRO FORMA
----------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 1,939 $ 252 $ 9,650(H) $ 11,841
Accounts receivable,
net.................. 5,225 824 -- 6,049
Other current assets.. 3,104 69 -- 3,173
-------- ------- ------- --------
Total current as-
sets............... 10,268 1,145 9,650 21,063
Property and equip-
ment................. 4,751 969 5,720
Intangible assets,
net.................. 15,828 -- 11,014(F) 26,842
Other assets.......... 539 42 -- 581
-------- ------- ------- --------
$ 31,386 $ 2,156 $20,664 $ 54,206
======== ======= ======= ========
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Accounts payable...... $ 1,914 $ 1,154 $ -- $ 3,068
Accrued expenses...... 8,591 455 -- 9,046
Current portion of
lease obligations.... 356 111 -- 467
Note payable.......... -- 3,081 -- 3,081
-------- ------- ------- --------
Total Current Lia-
bilities........... 10,861 4,801 -- 15,662
Lease obligations, long-
term portion........... 527 92 -- 619
Long-term debt.......... -- 114 -- 114
-------- ------- ------- --------
11,388 5,007 -- 16,395
-------- ------- ------- --------
Commitments and contin-
gencies
Mandatorily Redeemable
Convertible Preferred
Stock.................. 32,490 -- (32,490)(G) --
-------- ------- ------- --------
Stockholders' equity
(deficit):
Common Stock.......... 9 2 12(G)(H) 23
Additional paid in
capital.............. 40,577 1,077 49,212(F)(G)(H) 90,866
Accumulated deficit... (53,078) (3,930) 3,930(F) (53,078)
-------- ------- ------- --------
Total stockholders'
equity (deficit)... (12,492) (2,851) 53,154 37,811
-------- ------- ------- --------
$ 31,386 $ 2,156 $20,664 $ 54,206
======== ======= ======= ========
</TABLE>
See accompanying notes to Pro Forma Consolidated Financial Information
F-32
<PAGE>
USWEB CORPORATION
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
(IN THOUSANDS)
The following adjustments were applied to the Company's historical
consolidated financial statements and the Controlled Entities to arrive at the
pro forma consolidated financial information.
(A) To eliminate items of income and expense related to the Controlled
Entities which are included in the consolidated results of operations of
the Company from the date of the respective acquisition to September 30,
1997.
(B) To eliminate intercompany revenues and related expenses associated
with the Controlled Entities which had previously been Affiliates of the
Company.
(C) To record acquired in-process technology associated with the
acquisitions and probable acquisition in the amount of $9,471 which has
been recognized at the later of January 1, 1996 or the date of inception of
the respective Controlled Entity.
(D) To record amortization expense related to (i) capitalized technology
in the amount of $3,610, which is amortized over its estimated useful life
of 6 months, and (ii) goodwill in the amount of $28,041, which is amortized
on an entity by entity basis over its estimated useful life of one to two
years.
(E) To record stock compensation expense related to stock bonus awards to
new employees in the amount of $61,840, which is recorded as expense over
the related service period of three years and is allocated between cost of
revenues and operating expenses based upon employee classification.
(F) To record identified intangible assets associated with the
acquisitions of USWeb LA Central and USWeb Houston, and the probable
acquisitions of USWeb Boston and Reach Networks, Inc. and to eliminate the
historical stockholders' equity of USWeb LA Central, USWeb Houston, USWeb
Boston and Reach Networks, Inc. using the purchase method of accounting.
(G) To record the conversion of the Company's Mandatorily Redeemable
Convertible Preferred Stock in to Common Stock concurrently with the
closing of this offering.
(H) To record the net proceeds from the sale of shares of the Company's
Common Stock in the aggregate price of $10,000 to be sold at 80% of the
estimated offering price to Intel Corporation to close contemporaneously
with this offering.
(I) 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.
Differences between the historical weighted average shares outstanding and
pro forma weighted average shares outstanding used to compute Net loss per
share result primarily from the calculation of shares issuable related to
the unearned stock bonus using the treasury stock method in accordance with
Financial Interpretation Number 31 (FIN 31) to APB 15.
F-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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
F-40
<PAGE>
USWEB SAN FRANCISCO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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.
F-49
<PAGE>
USWEB MILWAUKEE
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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.
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.
F-64
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-65
<PAGE>
USWEB ATLANTA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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 1,114,000 1,042,000
---------- ---------- ---------- ----------
Gross profit.............. 1,553,000 1,277,000 708,000 462,000
---------- ---------- ---------- ----------
Operating expenses:
Marketing, sales and sup-
port..................... 212,000 302,000 49,000 75,000
General and administra-
tive..................... 809,000 689,000 159,000 124,000
---------- ---------- ---------- ----------
Total operating ex-
penses................. 1,021,000 991,000 208,000 199,000
---------- ---------- ---------- ----------
Income from operations...... 532,000 286,000 500,000 263,000
Interest expense, net....... (1,000) (14,000) (4,000) (6,000)
Other income................ 5,000 -- -- --
---------- ---------- ---------- ----------
Income before income taxes.. 536,000 272,000 496,000 257,000
Income tax provision........ 218,000 116,000 211,000 104,000
---------- ---------- ---------- ----------
Net income.................. $ 318,000 $ 156,000 $ 285,000 $ 153,000
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<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-78
<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 $ 285,000 $ 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 40,000 284,000 166,000
----------- ----------- --------- ---------
Net cash provided by (used
in) operating activities... 446,000 577,000 233,000 (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 (281,000) (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 (281,000) (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-79
<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-80
<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-81
<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 $176,000 $ 87,000
State.................................. 54,000 26,000 35,000 17,000
-------- -------- -------- --------
218,000 107,000 211,000 104,000
-------- -------- -------- --------
Deferred:
Federal................................ -- 2,000 -- --
State.................................. -- 7,000 -- --
-------- -------- -------- --------
-- 9,000 -- --
-------- -------- -------- --------
Income Tax Provision..................... $218,000 $116,000 $211,000 $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-82
<PAGE>
USWEB PITTSBURGH
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets consists of the following as of January 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- JUNE 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 December 31, 1995 and 1996 and the six month
period ended June 30, 1997 totaled 4,160, 26,889 and 58,408, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $ 93
1998............................................................. 79
1999............................................................. 79
3000............................................................. 14
----
Total minimum lease payments..................................... $265
====
</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 $,500,000 shares of no par value Common Stock. And 5,500,000 Shares
of Preferred Stock during the years ended December 31, and 1996, the Company
issued 1,169.682 and 437,184 shares of Common Stock, Respectively.
NOTE 8--STOCK OPTION PLAN:
In June 1996, the Company adopted the Electronic Images, Inc. Corporate
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-83
<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. 123, 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-84
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Chicago 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 Chicago Metro (formerly
Multimedia Marketing & Design Inc.) 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
October 31, 1997
F-85
<PAGE>
USWEB CHICAGO METRO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 36,000 $110,000
Accounts receivable ............................ 142,000 6,000
Other current assets............................ 5,000 --
-------- --------
Total current assets.......................... 183,000 116,000
Property and equipment, net....................... 70,000 71,000
Other assets...................................... 1,000 --
-------- --------
$254,000 $187,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 24,000 $27,000
Payroll taxes payable........................... 19,000 3,000
Deferred revenue................................ 9,000 22,000
-------- --------
Total current liabilities..................... 52,000 52,000
Loan from shareholder............................. -- 48,000
-------- --------
52,000 100,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,500 shares autho-
rized;
1 share issued and outstanding.................. -- --
Retained earnings............................... 202,000 87,000
-------- --------
Total shareholders' equity.................... 202,000 87,000
-------- --------
$254,000 $187,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------
1996 1996 1997
------------ ------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues......................................... $602,000 $98,000 $327,000
Cost of revenues................................. 256,000 47,000 226,000
-------- ------- --------
Gross profit................................... 346,000 51,000 101,000
-------- ------- --------
Operating expenses:
Marketing, sales and support................... 97,000 7,000 47,000
General and administrative..................... 70,000 18,000 25,000
-------- ------- --------
Total operating expenses..................... 167,000 25,000 72,000
-------- ------- --------
Income from operations........................... 179,000 26,000 29,000
Interest income ................................. -- -- 1,000
-------- ------- --------
Net income....................................... $179,000 $26,000 $ 30,000
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ --------- -------------
<S> <C> <C> <C> <C>
Balance at December 31,
1995................... 1 $-- $ 41,000 $ 41,000
Distribution to share-
holder................. -- -- (18,000) (18,000)
Net income.............. -- -- 179,000 179,000
--- --- --------- ---------
Balance at December 31,
1996................... 1 -- 202,000 202,000
--- --- --------- ---------
Distribution to
shareholder
(Unaudited)............ -- -- (145,000) (145,000)
Net income (Unaudited).. -- -- 30,000 30,000
--- --- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1 $-- $ 87,000 $ 87,000
=== === ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE>
USWEB CHICAGO METRO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTH
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 179,000 $ 26,000 $ 30,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 22,000 9,000 18,000
Changes in assets and liabilities:
Accounts receivable....................... (136,000) (6,000) 136,000
Other current assets...................... (5,000) -- 5,000
Other assets.............................. (2,000) -- 1,000
Accounts payable.......................... 22,000 7,000 3,000
Payroll taxes payable..................... 19,000 (1,000) (16,000)
Deferred revenue.......................... 9,000 13,000 13,000
--------- -------- ---------
Net cash provided by operating
activities.............................. 108,000 48,000 190,000
--------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF
PROPERTY AND EQUIPMENT...................... (62,000) (38,000) (19,000)
--------- -------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on loan from shareholder........... (24,000) (15,000) --
Distribution to shareholder................. (18,000) -- (145,000)
Proceeds from issuance of note payable to
shareholder................................ -- -- 48,000
--------- -------- ---------
Net cash used in financing activities.... (42,000) (15,000) (97,000)
--------- -------- ---------
Net increase (decrease) in cash and cash
equivalents................................. 4,000 (5,000) 74,000
Cash and cash equivalents at beginning of
period...................................... 32,000 32,000 36,000
--------- -------- ---------
Cash and cash equivalents at end of period... $ 36,000 $ 27,000 $ 110,000
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Chicago Metro (the "Company"), formerly Multimedia Marketing & Design
Inc., was incorporated in Illinois on April 7, 1995, and is a professional
services firm providing companies with a single source for Internet and
Internet solutions. See Note 5.
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 development 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 agreement adjustments and losses are recorded in the period such items are
identified. Deferred revenue represents 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 three customers accounted
for 21%, 14% and 14% of revenues. Approximately 53%, 11% and 10% of accounts
receivable at December 31, 1996, was due from three 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.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable and loans from shareholder, have carrying amounts
which approximate fair value due to the relatively short maturity of these
instruments.
F-90
<PAGE>
USWEB CHICAGO METRO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
The Company elected to be taxed as on S Corporation pursuant to the Internal
Revenue Code. This election provides for all profits or losses to be
recognized in the tax returns of the shareholder.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 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 six months ended
June 30, 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, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $90,000 $104,000
Furniture and fixtures............................ 7,000 12,000
------- --------
97,000 116,000
Less: accumulated depreciation.................... 27,000 45,000
------- --------
$70,000 $ 71,000
======= ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1999. Rent expense for the year ended December 31, 1996
and the six month periods ended June 30, 1996 and 1997 totaled $14,000,
$1,000, and $13,000, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $26,000
1998............................................................. 26,000
1999............................................................. 13,000
-------
Total minimum lease payments..................................... $65,000
=======
</TABLE>
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,500 shares of no par value Common Stock.
NOTE 5--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.
F-91
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
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 Hollywood (formerly KandH,
Inc.) at August 29, 1997 and the results of its operations and its cash flows
for the period from March 5, 1997 (Inception) to August 29, 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 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
October 31, 1997
F-92
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 29,
1997
----------
<S> <C>
ASSETS
Current assets:
Cash............................................................ $ 11,000
Accounts receivable............................................. 123,000
--------
$134,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 21,000
Income tax payable.............................................. 2,000
--------
Total current liabilities..................................... 23,000
--------
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Shareholder note receivable..................................... (1,000)
Retained earnings............................................... 111,000
--------
Total shareholders' equity.................................... 111,000
--------
$134,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
Revenues....................................................... $339,000
Cost of revenues............................................... 154,000
--------
Gross profit................................................. 185,000
--------
Operating expenses:
Marketing, sales and support................................. 64,000
General and administrative................................... 8,000
--------
Total operating expenses................................... 72,000
--------
Income from operations before taxes............................ 113,000
Provision for income taxes..................................... 2,000
--------
Net income..................................................... $111,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE TOTAL
------------- FROM RETAINED SHAREHOLDERS'
SHARES AMOUNT SHAREHOLDER EARNINGS EQUITY
------ ------ ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock....... 1,000 $1,000 $(1,000) $ -- $ --
Net income..................... -- -- -- 111,000 111,000
----- ------ ------- -------- --------
Balance at August 29, 1997..... 1,000 $1,000 $(1,000) $111,000 $111,000
===== ====== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
MARCH 5, 1997
(INCEPTION)
THROUGH
AUGUST 29,
1997
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 111,000
Adjustments to reconcile net income to net cash
used in operating activities:
Changes in assets and liabilities:
Accounts receivable......................................... (123,000)
Accounts payable............................................ 21,000
Income tax payable.......................................... 2,000
---------
Net cash used in operating activities..................... (100,000)
---------
Net increase in cash........................................... 11,000
Cash at beginning of period.................................... --
---------
Cash at end of period.......................................... $ 11,000
=========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of Common Stock for shareholder note receivable...... $ 1,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
USWEB HOLLYWOOD
(formerly KandH, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly KandH, Inc., was formed to provide
professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in Florida on March 5, 1997 and
elected an S Corporation tax status.
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.
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.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable and accounts payable, the carrying amounts approximate fair value
due to the relatively short maturity of these instruments.
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 August 29, 1997, one customer
accounted for 91% of the Company's accounts receivable balance and 43% of
total revenues.
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 August 29, 1997 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 period ended August
29, 1997.
NOTE 2--COMMON STOCK:
The Company's Articles of Incorporation authorize the Company to issue 1,000
shares of $1.00 par value Common Stock. During the period from March 5, 1997
(Inception) through August 29, 1997, the Company sold 1,000 shares of Common
Stock to the founders of the Company.
NOTE 3--SUBSEQUENT EVENTS:
On August 29, 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-97
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Hollywood
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 Hollywood (formerly
DreamMedia, Inc.) at December 31, 1996 and the results of its operations and
its cash flows from April 3, 1996 (Inception) to 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
October 29, 1997
F-98
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 21,000 $ 12,000
Accounts receivable................................. 36,000 63,000
Inventory........................................... -- 55,000
Other assets........................................ 12,000 36,000
-------- --------
Total current assets.............................. 69,000 166,000
Property and equipment, net........................... 163,000 158,000
-------- --------
$232,000 $324,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 6,000 $ 61,000
Accrued expenses.................................... 2,000 31,000
Amounts due to related party (Note 3)............... 129,000 91,000
-------- --------
Total current liabilities......................... 137,000 183,000
-------- --------
Commitments (Note 4)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares
authorized,
issued and outstanding ............................ 1,000 1,000
Retained earnings................................... 94,000 140,000
-------- --------
Total shareholders' equity.......................... 95,000 141,000
-------- --------
$232,000 $324,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-99
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3,
1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues.......................................... $204,000 $380,000
Cost of revenues.................................. 72,000 257,000
-------- --------
Gross profit.................................... 132,000 123,000
-------- --------
Operating expenses:
Marketing, sales and support.................... -- 35,000
General and administrative...................... 37,000 41,000
-------- --------
Total operating expenses...................... 37,000 76,000
-------- --------
Income from operations............................ 95,000 47,000
Provision for income taxes........................ 1,000 1,000
-------- --------
Net income........................................ $ 94,000 $ 46,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-100
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
Issuance of Common Stock for cash.......... 1,000 $1,000 $ -- $ 1,000
Net income................................. -- -- 94,000 94,000
----- ------ -------- --------
Balance at December 31, 1996............... 1,000 $1,000 94,000 95,000
Net income (Unaudited)..................... -- -- 46,000 46,000
----- ------ -------- --------
Balance at June 30, 1997 (Unaudited)....... 1,000 $1,000 $140,000 $141,000
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-101
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 3, 1996
(INCEPTION) SIX MONTHS
THROUGH ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 94,000 $ 46,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation....................................... 33,000 34,000
Changes in assets and liabilities:
Accounts receivable............................... (36,000) (27,000)
Inventory......................................... -- (55,000)
Other assets...................................... (11,000) (24,000)
Accounts payable.................................. 6,000 55,000
Accrued expenses.................................. 2,000 29,000
--------- --------
Net cash provided by (used in) operating activi-
ties........................................... 88,000 58,000
--------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
ACQUISITION OF PROPERTY AND EQUIPMENT PURCHASES..... (196,000) (29,000)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock.............. 1,000 --
Due to related party................................ 128,000 (38,000)
--------- --------
Net cash provided by (used in) financing
activities..................................... 129,000 (38,000)
--------- --------
Net increase in cash................................. 21,000 (9,000)
Cash at beginning of period.......................... -- 21,000
--------- --------
Cash at end of period................................ $ 21,000 $ 12,000
========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-102
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Hollywood (the "Company"), formerly DreamMedia, Inc., was formed to
provide professional consulting services relating to Internet and intranet
technologies. The Company was incorporated in California on April 3, 1996 and
elected an S Corporation tax status. See Note 6.
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.
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.
Fair Value of Financial Instruments
For certain of the Company's financial instruments, including accounts
receivable, inventory, other assets, accounts payable, accrued expenses and
due to related party, the carrying amounts approximate fair value due to the
relatively short maturity of these instruments.
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 two major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of December 31, 1996 two
customers accounted for 99% of the Company's accounts receivable balance, and
79% of the Company's total revenues.
Income Taxes
The Company has been 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 tax 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.
F-103
<PAGE>
USWEB HOLLYWOOD
(formerly DreamMedia, Inc.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying financial statements as of June 30, 1997 and for the period
from April 3, 1996 (Inception) through June 30, 1996 and the six months ended
June 30, 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, 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 six months ended June 30, 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, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment................................ $174,000 $203,000
Furniture and fixtures............................ 22,000 22,000
-------- --------
Less: accumulated depreciation.................... (33,000) (67,000)
-------- --------
$163,000 $158,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
Shareholder Note Payable
In July 1996, the Company purchased furniture and equipment valued at
$196,000 from an affiliate in exchange for a note payable. The note accrued
interest at the rate of 6.5% per annum payable upon maturity. The balance plus
accrued interest was repaid in October 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities under month-to-month operating
leases. Rent paid for the year ended December 31, 1996 and for the six months
ended June 30, 1997 totaled $7,333 and $8,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000 shares of $1.00 par value Common Stock. During the period from
April 3, 1996 (Inception) through December 31, 1996, the Company sold 1,000
shares of Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On August 29, 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-104
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Marin
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Marin
(formerly Internet Cybernautics, Inc.) at December 31, 1995 and 1996, and the
results of its operations and its cash flows for the years ended December 31,
1995 and 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 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
October 17, 1997
F-105
<PAGE>
USWEB MARIN
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1995 1996 1997
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents. $ 1,000 $ 170,000 $ 122,000
Accounts receivable, net.. 24,000 405,000 404,000
Costs in excess of bill-
ings..................... -- -- 57,000
Other current assets...... 5,000 14,000 17,000
-------- --------- ---------
Total current assets.... 30,000 589,000 600,000
Property and equipment, net. 7,000 49,000 331,000
Other assets................ -- -- 44,000
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
LIABILITIES AND
SHAREHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......... $ 12,000 $ 40,000 $ 167,000
Accrued expenses.......... 34,000 309,000 595,000
Deferred revenues......... -- 120,000 --
Short-term borrowings..... -- -- 350,000
--- --- ---
-------- --------- ---------
Total current liabili-
ties................... 46,000 469,000 1,112,000
-------- --------- ---------
Commitments (Note 5)
Shareholders' equity:
Series A Preferred Stock:
no par value, 5,500,00
shares
authorized; no shares is-
sued or outstanding...... -- -- --
Common Stock: No par val-
ue, 18,500,000 shares au-
thorized; 1,169,632,
1,601,818 and 1,930,239
shares issued and
outstanding.............. 56,000 395,000 707,000
Additional paid-in capi-
tal...................... -- 471,000 471,000
Note receivable from
shareholder.............. -- (25,000) --
Deferred stock compensa-
tion..................... -- (438,000) (390,000)
Accumulated deficit....... (65,000) (234,000) (925,000)
-------- --------- ---------
Total shareholders' eq-
uity (deficit)......... (9,000) 169,000 (137,000)
-------- --------- ---------
$ 37,000 $ 638,000 $ 975,000
======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-106
<PAGE>
USWEB MARIN
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -------------------
1995 1996 1996 1997
-------- --------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $ 55,000 $ 970,000 $279,000 $1,591,000
Cost of revenues..................... 42,000 418,000 69,000 1,183,000
-------- --------- -------- ----------
Gross profit....................... 13,000 552,000 210,000 408,000
-------- --------- -------- ----------
Operating expenses:
Marketing, sales and support....... 27,000 180,000 92,000 373,000
General and administrative......... 51,000 541,000 61,000 726,000
-------- --------- -------- ----------
Total operating expenses......... 78,000 721,000 153,000 1,099,000
-------- --------- -------- ----------
Net income (loss).................... $(65,000) $(169,000) $ 57,000 $ (691,000)
======== ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-107
<PAGE>
USWEB MARIN
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTE TOTAL
COMMON STOCK ADDITIONAL RECEIVABLE DEFERRED SHAREHOLDERS'
------------------ PAID-IN FROM STOCK ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL SHAREHOLDER COMPENSATION DEFICIT (DEFICIT)
--------- -------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... -- $ -- $ -- $ -- $ -- $ -- $ --
Issuance of Common Stock
for cash............... 1,169,632 56,000 -- -- -- -- 56,000
Net loss................ -- -- -- -- -- (65,000) (65,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1995................... 1,169,632 56,000 -- -- -- (65,000) (9,000)
Issuance of Common Stock
for cash............... 369,326 292,000 -- -- -- -- 292,000
Issuance of Common Stock
for services........... 30,552 22,000 -- -- -- -- 22,000
Issuance of Common Stock
for note receivable
from shareholder....... 32,308 25,000 -- (25,000) -- -- --
Deferred stock
compensation........... -- -- 471,000 -- (471,000) -- --
Amortization of deferred
stock compensation -- -- -- -- 33,000 -- 33,000
Net loss................ -- -- -- -- -- (169,000) (169,000)
--------- -------- -------- -------- --------- --------- ---------
Balance at December 31,
1996................... 1,601,818 395,000 471,000 (25,000) (438,000) (234,000) 169,000
Issuance of Common Stock
for cash (Unaudited)... 328,421 312,000 -- -- -- -- 312,000
Amortization of deferred
stock compensation
(Unaudited)............ -- -- -- -- 48,000 -- 48,000
Payment on note
receivable from
shareholder
(Unaudited)............ -- -- -- 25,000 -- -- 25,000
Net loss (Unaudited).... -- -- -- -- -- (691,000) (691,000)
--------- -------- -------- -------- --------- --------- ---------
Balance as of June 30,
1997 (Unaudited)....... 1,930,239 $707,000 $471,000 $ -- $(390,000) $(925,000) $(137,000)
========= ======== ======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-108
<PAGE>
USWEB MARIN
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- -------------------
1995 1996 1996 1997
----------- ------------ -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS USED IN OPERATING
ACTIVITIES:
Net income................... $ (65,000) $ (169,000) $ 57,000 $(691,000)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Stock Compensation.......... -- 33,000 -- 48,000
Depreciation and
amortization............... -- 6,000 2,000 38,000
Provision for doubtful
accounts................... -- 30,000 -- 15,000
Noncash exchange for
services................... -- 22,000 -- --
Changes in assets and
liabilities:
Accounts receivable........ (24,000) (411,000) (76,000) (14,000)
Costs in excess of
billings.................. -- -- -- (57,000)
Other current assets....... (5,000) (9,000) (5,000) (3,000)
Other assets............... -- -- -- (44,000)
Accounts payable........... 12,000 28,000 20,000 127,000
Accrued expenses........... 34,000 275,000 (8,000) 286,000
Deferred revenues.......... -- 120,000 -- (120,000)
----------- ------------ -------- ---------
Net cash used in operating
activities............... (48,000) (75,000) (10,000) (415,000)
----------- ------------ -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND
EQUIPMENT.................... (7,000) (48,000) (12,000) (320,000)
----------- ------------ -------- ---------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of Common Stock..... 56,000 292,000 64,000 312,000
Proceeds from short-term
borrowing................... -- -- -- 350,000
Collection of note receivable
from shareholder............ -- -- -- 25,000
----------- ------------ -------- ---------
Net cash provided by
financing activities..... 56,000 292,000 64,000 687,000
----------- ------------ -------- ---------
Net increase (decrease) in
cash and cash equivalents.... 1,000 169,000 42,000 (48,000)
Cash and cash equivalents at
beginning of period.......... -- 1,000 1,000 170,000
----------- ------------ -------- ---------
Cash and cash equivalents at
end of period................ $ 1,000 $ 170,000 43,000 122,000
=========== ============ ======== =========
SUPPLEMENTAL NONCASH ACTIVITY:
Issuance of common stock for
shareholder
note receivable............. $ -- $ 25,000 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-109
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Marin (the "Company"), formerly Internet Cybernautics, Inc., was
incorporated in Wyoming on August 17, 1995 and is engaged in full service
digital design and multi-media production specializing in digital media
communications. On July 9, 1997, the Company amended its articles of
incorporation and filed as a Delaware corporation. See Note 8.
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 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 agreement
adjustments and losses are recorded in the period such items are identified.
Deferred revenues represent the amount of revenues received in advance of
services being performed.
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, 1995, sales to four customers accounted
for 23%, 14%, 14% and 13%of revenues. During the year ended December 31, 1996,
sales to two customers accounted for 25% and 10% of revenues. Approximately
48% of accounts receivable at December 31, 1996 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.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, accrued expenses and short term borrowings, have
carrying amounts which approximate fair value due to the relatively short
maturity of these instruments.
F-110
<PAGE>
USWEB MARIN
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 June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 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 six months ended
June 30, 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,
---------------- JUNE 30,
1995 1996 1997
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable, net:
Accounts Receivable.......................... $24,000 $435,000 $449,000
Less: allowance for bad debt................. -- (30,000) (45,000)
------- -------- --------
$24,000 $405,000 $404,000
======= ======== ========
Property and equipment:
Equipment.................................... $ 6,000 $ 51,000 $352,000
Furniture and fixtures....................... 1,000 4,000 17,000
------- -------- --------
7,000 55,000 369,000
Less: accumulated depreciation............... -- (6,000) (38,000)
------- -------- --------
$ 7,000 $ 49,000 $331,000
======= ======== ========
Accrued expenses:
Payroll and related expenses................. $21,000 $142,000 $469,000
Customer Deposits............................ -- 99,000 --
Other........................................ 13,000 68,000 126,000
------- -------- --------
$34,000 $309,000 $595,000
======= ======== ========
</TABLE>
F-111
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--SHORT-TERM BORROWINGS AND CREDIT FACILITY:
The Company maintains a working capital line of credit with a bank that
allows borrowings of up to 80 percent of eligible accounts receivable with a
maximum borrowing of $500,000. Borrowings under the line bear interest at 1.5
percent above the bank's prime rate (8.0 percent at June 30, 1997). At June
30, 1997, there was $350,000 of borrowings outstanding.
NOTE 4--INCOME TAXES:
The Company files separate company tax returns. For the years ended December
31, 1995 and 1996 and the six months ended June 30, 1996 and 1997 there was no
provision for income taxes recorded.
Deferred tax assets consist of the following as of December 31, 1995 and
1996 and June 30, 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1995 1996 1997
-------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Deferred tax assets:
Depreciation and amorti-
zation................. $ -- $ 10,000 $ 15,000
Reserves not currently
deductible............. -- 10,000 10,000
Loss carryforwards...... 26,000 48,000 275,000
-------- -------- ---------
Gross deferred tax as-
sets................... 26,000 68,000 300,000
Valuation allowance..... (26,000) (68,000) (300,000)
-------- -------- ---------
$ -- $ -- $ --
======== ======== =========
</TABLE>
No deferred provision or benefit for income taxes has been recorded as the
Company is in a net deferred tax asset position for which a full valuation has
been provided as management believes that it is more likely than not, based on
available evidence, that the deferred tax assets will not be realized.
At June 30, 1997, the Company has federal net operating loss carryforwards
of approximately $925,000, which expire in 2010. The income tax benefit from
the utilization of net operating loss carryforwards may be limited in certain
circumstances including, but not limited to, cumulative stock ownership
changes of more than 50% over a three year period.
NOTE 5--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 2000. 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 December 31, 1995 and 1996 and the six month
periods ended June 30, 1996 and 1997 totaled $4,000, $27,000, $5,000 and
$46,000, respectively.
F-112
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $ 93,000
1998............................................................. 79,000
1999............................................................. 79,000
2000............................................................. 13,000
--------
Total minimum lease payments..................................... $264,000
========
</TABLE>
NOTE 6--COMMON STOCK AND CONVERTIBLE PREFERRED STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 18,500,000 shares of no par value Common Stock and 5,500,000 shares
of Convertible Preferred Stock.
NOTE 7--STOCK OPTION PLAN:
In August 1995, the Company adopted the Combined Incentive and Nonstatutory
Stock Option 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. Under the plan, options vest at a rate of 20% at the end of the
first year after grant and one forty-eighth ( 1/48th) percent each month
thereafter. Options expire seven years from the date granted.
During the year ended December 31, 1995 and the six month period ended June
30, 1996, respectively, no compensation costs were recognized in connection
with option grants. During the year ended December 31, 1996 the Company
granted options to certain employees with exercise prices below fair value, as
a result, compensation costs of $33,000 and $48,000 were recorded for the year
ended December 31, 1996 and the six month period ended June 30, 1997,
respectively. Had compensation cost for the Company's option plan been
determined based on the fair value at the grant dates, as described in SFAS
123, the Company's net income (loss) would have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
------------------- -----------------
1995 1996 1996 1997
-------- --------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net income (loss):
As reported...................... $(65,000) $(169,000) $57,000 $(691,000)
======== ========= ======= =========
Pro forma........................ $(78,000) $(199,000) $42,000 $(704,000)
======== ========= ======= =========
</TABLE>
Under SFAS 123, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted average assumption used for grants:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------- -------------------
1995 1996 1996 1997
------ ------ ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C>
Expected lives, in years........... 5.0 5.0 5.0 5.0
Risk free interest rates........... 6.0% 6.2% 6.1% 6.4%
Dividend yield..................... 0.0% 0.0% 0.0% 0.0%
Stock price volatility............. 0.0% 0.0% 0.0% 0.0%
</TABLE>
F-113
<PAGE>
USWEB MARIN
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1994............. -- $ --
Granted.................................... 3,000,000 0.15 $0.02
--------- -----
Outstanding at December 31, 1995............. 3,000,000 0.15
Granted.................................... 1,180,173 0.21 0.05
--------- -----
Outstanding at December 31, 1996............. 4,180,173 0.17
Granted (Unaudited)........................ 40,000 0.95 0.26
--------- -----
Outstanding at June 30, 1997 (Unaudited)..... 4,220,173 $0.18
========= =====
</TABLE>
At June 30, 1997, 1,592,792 shares were exercisable and the options
outstanding had a weighted-average remaining contractual life of 5.5 years.
NOTE 8--SUBSEQUENT EVENTS:
In June 1997, the Company entered into a Common Stock Option Repurchase
Agreement with one of its former employees whereby the Company will pay
$150,000 for the purchase of all of the employee's vested options.
On July 9, 1997, the Company amended its articles of incorporation and filed
as Delaware corporation. Subsequent to this reincorporation, all issued and
outstanding shares of the Company's Common Stock were exchanged for an
equivalent number of Series A Preferred Stock in August 1997.
In July, 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. To date the
Company has not declared a matching contribution.
On September 30, 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-114
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Long Island
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 Long Island (formerly
Synergetix Systems Integration, Inc.) 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
October 31, 1997
F-115
<PAGE>
USWEB LONG ISLAND
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................ $ 42,000 $ 57,000
Accounts receivable, net............................ 178,000 190,000
Inventory........................................... 10,000 --
-------- --------
Total current assets.............................. 230,000 247,000
Property and equipment, net .......................... 15,000 12,000
Other assets, net..................................... 28,000 21,000
-------- --------
$273,000 $280,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 46,000 $124,000
Accrued expenses.................................... 61,000 98,000
Unearned revenue.................................... 17,000 9,000
Note payable ....................................... 98,000 --
Note payable--related party ........................ -- 23,000
-------- --------
Total liabilities................................. 222,000 254,000
-------- --------
Commitments (Note 6)
Shareholders' equity:
Common Stock: no par value, 200 shares authorized;
150 and 100 shares issued and outstanding at
December 31, 1996 and June 30, 1997, respectively.. 9,000 9,000
Treasury stock, at cost............................. -- (51,000)
Retained earnings................................... 42,000 68,000
-------- --------
Total shareholders' equity ....................... 51,000 26,000
-------- --------
$273,000 $280,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-116
<PAGE>
USWEB LONG ISLAND
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ------------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $818,000 $472,000 $431,000
Cost of revenues............................... 781,000 432,000 328,000
-------- -------- --------
Gross profit................................. 37,000 40,000 103,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 43,000 21,000 27,000
General and administrative................... 49,000 21,000 39,000
-------- -------- --------
Total operating expenses................... 92,000 42,000 66,000
-------- -------- --------
Income (loss) from operations.................. (55,000) (2,000) 37,000
Interest expense, net.......................... 11,000 4,000 11,000
-------- -------- --------
Net income (loss).............................. $(66,000) $ (6,000) $ 26,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE>
USWEB LONG ISLAND
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
------------- --------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT EARNINGS EQUITY
------ ------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1996................... 150 $9,000 -- $ -- $108,000 $117,000
Net loss................ -- -- -- -- (66,000) (66,000)
--- ------ --- -------- -------- --------
Balance at December 31,
1996................... 150 9,000 -- -- 42,000 51,000
Purchase of treasury
stock (Unaudited)...... (50) -- 50 (51,000) -- (51,000)
Net income (Unaudited).. -- -- -- -- 26,000 26,000
--- ------ --- -------- -------- --------
Balance at June 30, 1997
(Unaudited)............ 100 $9,000 50 $(51,000) $ 68,000 $ 26,000
=== ====== === ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE>
USWEB LONG ISLAND
STATEMENT OF CASH FLOWS
<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 income (loss)........................... $(66,000) $ (6,000) $ 26,000
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating
activities:
Depreciation and amortization.............. 13,000 5,000 11,000
Changes in operating assets and
liabilities:
Accounts receivable....................... 12,000 10,000 (12,000)
Inventory................................. (10,000) -- 10,000
Other assets.............................. (25,000) -- --
Accounts payable.......................... 46,000 27,000 78,000
Accrued expenses.......................... 24,000 22,000 37,000
Unearned revenue.......................... (22,000) (20,000) (8,000)
-------- -------- ---------
Net cash provided by (used in) operating
activities................................. (28,000) 38,000 142,000
-------- -------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE
ACQUISITION OF PROPERTY AND EQUIPMENT....... (13,000) (12,000) (1,000)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable.................. 75,000 25,000 --
Repayment of note payable................... (8,000) (5,000) (98,000)
Repayment of note payable to related party.. -- -- (2,000)
Purchase of treasury stock from former
shareholder................................ -- -- (26,000)
-------- -------- ---------
Net cash provided (used in) by financing
activities................................ 67,000 20,000 (126,000)
-------- -------- ---------
Net increase in cash......................... 26,000 46,000 15,000
Cash at beginning of period.................. 16,000 16,000 42,000
-------- -------- ---------
Cash at end of period........................ $ 42,000 $ 62,000 $ 57,000
======== ======== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
Issuance of note payable to former
shareholder................................ $ -- $ -- $ 25,000
======== ======== =========
CASH PAID DURING THE PERIOD FOR:
Interest.................................... $ 10,000 $ 4,000 $ 10,000
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT POLICIES:
The Company
USWeb Long Island (the "Company"), formerly Synergetix Systems Integration,
Inc., was incorporated in the state of New York on November 3, 1989. The
Company provides professional consulting services relating to software design
and integration and document imaging.
During September 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 the 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 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 recognized in the period such items are identified.
Unearned revenues represent the amount of revenues received in advance of
services being performed. Revenue from time and materials agreements are
recognized and billed as the services are rendered.
Inventory
Inventory, which consists principally of purchased computer hardware, is
stated at the lower of cost or market value, cost being determined on the
first-in, first-out method.
Other Assets
Franchise fees paid to USWeb are amortized to cost of revenues over two
years. Accumulated amortization totaled $3,000 and $10,000 as of December 31,
1996 and June 30, 1997, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful lives of three years for
computer equipment and seven years for office equipment.
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and trade receivables.
The Company places its cash with high quality financial institutions and, by
policy, limits the amount of credit exposure to any one institution.
Concentrations of credit risk exist with respect to trade receivables. The
Company performs periodic credit evaluations of its customers' financial
condition and does not require collateral or other security.
F-120
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The portion of total revenue that was derived from major customers was as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Customer A....................................... 17% --
Customer B....................................... 14% --
Customer C....................................... 12% --
Customer D....................................... -- 35%
Customer E....................................... -- 19%
Customer F....................................... -- 12%
</TABLE>
At December 31, 1996, Customer A represented 44% of net accounts receivable.
At June 30, 1997, Customers D and E represented 42% and 19%, respectively, of
net accounts receivable.
Fair Value of Financial Instruments
The Company's financial instruments, including cash, accounts receivable,
notes and accounts payable and accrued expenses, have carrying amounts which
approximate fair value due to the relatively short maturity of these
instruments.
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.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 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 six months ended
June 30, 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, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computers and equipment.......................... $26,000 $27,000
Furniture and fixtures........................... 12,000 12,000
------- -------
38,000 39,000
Less: accumulated depreciation................... (23,000) (27,000)
------- -------
$15,000 $12,000
======= =======
</TABLE>
Depreciation expense was $10,000 for the year ended December 31, 1996 and
$4,000 for the six months ended June 30, 1997, respectively.
F-121
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3--ACCRUED EXPENSES:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Payroll and related taxes........................ $17,000 $23,000
Other............................................ 44,000 75,000
------- -------
Total........................................ $61,000 $98,000
======= =======
</TABLE>
Included in other accrued expenses are credit card liabilities of $29,000
and $61,000 at December 31, 1996 and June 30, 1997, respectively. Interest on
these liabilities accrue at an annual rate ranging from 6% to 18%.
NOTE 4--NOTE PAYABLE:
The Company has a line of credit with its lender for $100,000. Borrowings
under this line bear interest at prime plus 3.75% and are collateralized by
the personal assets of a shareholder. Interest expense for the year ended
December 31, 1996 and for the six months ended June 30, 1997 totaled $3,000
and $4,000, respectively.
In May 1997, the Company repaid and closed its $100,000 line of credit with
its lender.
NOTE 5--NOTE PAYABLE - RELATED PARTY:
In May 1997, the Company repurchased 50 shares of common stock from a
stockholder for $51,000, consisting of $26,000 in cash and a promissory note
of $25,000. The promissory note is payable in twelve equal monthly
installments of approximately $2,000 commencing June 1997. Interest accrues at
an annual rate of 8.5%. This note was repaid in September 1997.
NOTE 6--COMMITMENTS:
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. Royalty expense for the six months ended
June 30, 1997 totaled $24,000 and is included in cost of revenues. There was
no royalty expense for the year ended December 31, 1996.
Operating Leases
The Company leases a car and an office facility under noncancelable
operating leases which expire in January 1998 and November 1999, respectively.
Future minimum lease payments under these leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1997........................................................... $ 42,000
1998........................................................... 39,000
1999........................................................... 36,000
--------
$117,000
========
</TABLE>
F-122
<PAGE>
USWEB LONG ISLAND
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Rent expense for the year ended December 31, 1996 and the for six month
period ended June 30, 1997 totaled $36,000, and $18,000, respectively.
NOTE 7--SUBSEQUENT EVENTS:
On September 30, 1997, the Company and US Web reached an agreement whereby
USWeb agreed to acquire all of outstanding shares of the Company's common
stock, at which time the Company became a wholly owned subsidiary of US Web.
In September 1997, the Company issued two unsecured promissory notes of
$99,000 and $26,000 respectively, in exchange for accounts payable, to
investors who are related to a stockholder of the Company. These notes are
non-interest bearing and are due in December 1997.
F-123
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb Detroit
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity (deficit) and of cash flows present
fairly, in all material respects, the financial position of USWeb Detroit
(formerly Online Marketing Company, Inc.) 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
October 24, 1997
F-124
<PAGE>
USWEB DETROIT
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $16,000 $ --
Accounts receivable, net............................ 38,000 77,000
------- --------
Total current assets.............................. 54,000 77,000
Property and equipment, net........................... 36,000 37,000
Other assets.......................................... 1,000 4,000
------- --------
$91,000 $118,000
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................... $33,000 $ 79,000
Accrued expenses.................................... 9,000 16,000
Note payable--affiliates............................ 10,000 10,000
Current portion of capital lease obligation ........ 7,000 7,000
------- --------
Total current liabilities......................... 59,000 112,000
Capital lease obligation, net of current portion...... 12,000 8,000
------- --------
71,000 120,000
------- --------
Commitments (Note 4)
Shareholders' equity (deficit):
Common Stock: $1.00 par value, 60,000 shares
authorized; 3,000 shares issued and outstanding.... 3,000 3,000
Retained earnings (accumulated deficit)............. 17,000 (5,000)
------- --------
Total shareholders' equity (deficit) ............. 20,000 (2,000)
------- --------
$91,000 $118,000
======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-125
<PAGE>
USWEB DETROIT
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues....................................... $476,000 $218,000 $306,000
Cost of revenues............................... 264,000 100,000 230,000
-------- -------- --------
Gross profit................................. 212,000 118,000 76,000
-------- -------- --------
Operating expenses:
Marketing, sales and support................. 96,000 43,000 40,000
General and administrative................... 113,000 35,000 57,000
-------- -------- --------
Total operating expenses................... 209,000 78,000 97,000
-------- -------- --------
Income (loss) from operations.................. 3,000 40,000 (21,000)
Interest expense, net.......................... (2,000) -- (1,000)
-------- -------- --------
Net income (loss).............................. $ 1,000 $ 40,000 $(22,000)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-126
<PAGE>
USWEB DETROIT
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED TOTAL
COMMON STOCK EARNINGS SHAREHOLDERS'
------------- (ACCUMULATED EQUITY
SHARES AMOUNT DEFICIT) (DEFICIT)
------ ------ ------------ -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1995.......... 3,000 $3,000 $ 16,000 $ 19,000
Net income............................ -- -- 1,000 1,000
----- ------ -------- --------
Balance at December 31, 1996.......... 3,000 3,000 17,000 20,000
Net loss (Unaudited).................. -- -- (22,000) (22,000)
----- ------ -------- --------
Balance as of June 30, 1997 (Unau-
dited)............................... 3,000 $3,000 $ (5,000) $ (2,000)
===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
USWEB DETROIT
STATEMENT OF CASH FLOWS
<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 income.................................... $ 1,000 $ 40,000 $(22,000)
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization................ 8,000 3,000 8,000
Provision for doubtful accounts.............. 8,000 -- --
Changes in assets and liabilities:
Accounts receivable......................... (26,000) (41,000) (39,000)
Other current assets........................ (1,000) -- --
Other assets................................ 1,000 (2,000) (3,000)
Accounts payable............................ 28,000 12,000 46,000
Accrued expenses............................ 9,000 6,000 7,000
-------- -------- --------
Net cash provided by (used in) operating
activities................................ 28,000 18,000 (3,000)
-------- -------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......... (22,000) (15,000) (9,000)
-------- -------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR THE
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATION
.............................................. (4,000) -- (4,000)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 2,000 3,000 (16,000)
Cash and cash equivalents at beginning of
period........................................ 14,000 14,000 16,000
-------- -------- --------
Cash and cash equivalents at end of period..... $ 16,000 $ 17,000 $ --
======== ======== ========
SUPPLEMENTAL NONCASH INVESTING AND FINANCING
ACTIVITY:
Acquisition of property and equipment under
capital lease obligation..................... $ 23,000 $ 23,000 $ --
======== ======== ========
CASH PAID DURING THE PERIOD FOR:
Interest...................................... $ 1,000 $ -- $ 1,000
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb Detroit (the "Company"), formerly Online Marketing Company, Inc., was
incorporated in Michigan on June 9, 1995, and is engaged in full service
internet technology integration specializing in web page and intranet design,
production and maintenance, primarily in the Metro-Detroit area. The Company,
through September 30, 1997, was wholly owned by three shareholders. See Note
6.
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
10% of revenues. Approximately 10% of accounts receivable at December 31,
1996, was due from one customer.
Property and Equipment
Property and equipment are stated at cost. Assets held under capital leases
are recorded at the present value of the minimum lease payments at lease
inception. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the assets, generally three years.
Fair Value of Financial Instruments
The Company's financial instruments, including cash equivalents, accounts
receivable, accounts payable, notes and lease obligations payable and accrued
expenses, have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
F-129
<PAGE>
USWEB DETROIT
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 tax returns of its shareholders. Accordingly, no provision
for income tax is made in these financial statements.
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 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 six months ended
June 30, 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, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Accounts receivable, net:
Accounts receivable............................... $ 46,000 $ 77,000
Less: allowance for doubtful accounts............. (8,000) --
-------- --------
$ 38,000 $ 77,000
======== ========
Property and equipment, net:
Computers and equipment........................... $ 41,000 $ 47,000
Furniture and fixtures............................ 5,000 8,000
-------- --------
46,000 55,000
Less: accumulated depreciation.................... (10,000) (18,000)
-------- --------
$ 36,000 $ 37,000
======== ========
</TABLE>
NOTE 3--RELATED PARTY TRANSACTIONS:
In 1995, the Company borrowed $5,000 under a note payable to a shareholder
of the Company. The note was non-interest bearing, unsecured and payable upon
demand. Subsequent to year-end and concurrent with the US Web transaction in
September 1997, this note was converted to equity.
In 1995, the Company borrowed $5,000 under a note payable to a party related
to a shareholder of the Company. The note is non-interest bearing, unsecured
and payable on December 31, 1997.
NOTE 4--COMMITMENTS:
Operating Leases
The Company leases its office facilities and certain equipment under
noncancelable operating leases which expire in 1998 and 1999, respectively.
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 year ended
December 31, 1996 and the six month periods ended June 30, 1996 and 1997
totaled $32,000, $15,000, and $19,000, respectively.
F-130
<PAGE>
USWEB DETROIT
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED OPERATING
DECEMBER 31, LEASES
------------ ---------
<S> <C>
1997............................................................. $45,000
1998............................................................. 22,000
1999............................................................. 4,000
-------
Total minimum lease payments..................................... $71,000
=======
</TABLE>
Capital leases
In 1996, the Company leased certain computer equipment under a non-
cancelable capital lease with a remaining term in excess of one year. The
lease is personally guaranteed by an officer of the Company. Future minimum
lease commitments under the capital lease are as follows for years ending
December 31:
<TABLE>
<CAPTION>
YEAR ENDED CAPITAL
DECEMBER 31, LEASES
------------ -------
<S> <C>
1997.............................................................. $ 9,000
1998.............................................................. 8,000
1999.............................................................. 4,000
-------
Total minimum lease payments...................................... 21,000
Less: amount representing interest................................ (2,000)
-------
Present value of capital lease obligation......................... 19,000
Less: current portion............................................. (7,000)
-------
Long-term obligation at December 31, 1996......................... $12,000
=======
</TABLE>
The cost and related accumulated depreciation of assets under capital lease
was $23,000 and $5,000, respectively, at December 31, 1996.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 60,000 shares of $1 par value Common Stock.
NOTE 6--SUBSEQUENT EVENTS:
Subsequent events
In August 1997, the Company borrowed $55,000 under a note payable to a
shareholder of the Company. The note was non-interest bearing, unsecured and
payable on demand. Concurrent with the USWeb transaction on September 30,
1997, this note was converted to equity.
On September 30, 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-131
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb San Mateo
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 Mateo (formerly
Zendatta, Inc.) 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
October 15, 1997
F-132
<PAGE>
USWEB SAN MATEO
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $107,000 $ 60,000
Accounts receivable, net............................ 157,000 153,000
Costs in excess of billings......................... 19,000 36,000
-------- --------
Total current assets.............................. 283,000 249,000
Property and equipment, net........................... 74,000 65,000
Other assets.......................................... 6,000 32,000
-------- --------
$363,000 $346,000
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 21,000 $ 94,000
Accrued expenses.................................... 47,000 9,000
-------- --------
Total current liabilities......................... 68,000 103,000
-------- --------
Commitments (Note 3)
Shareholders' equity:
Common Stock: no par value, 1,000,000 shares autho-
rized; 2,000 shares issued and outstanding......... 20,000 20,000
Additional paid-in capital.......................... 14,000 --
Retained earnings................................... 261,000 223,000
-------- --------
Total shareholders' equity........................ 295,000 243,000
-------- --------
$363,000 $346,000
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE>
USWEB SAN MATEO
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1996 1996 1997
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Revenues........................................ $1,010,000 $367,000 $695,000
Cost of revenues................................ 663,000 166,000 513,000
---------- -------- --------
Gross profit.................................. 347,000 201,000 182,000
---------- -------- --------
Operating expenses:
Marketing, sales and support.................. 16,000 15,000 32,000
General and administrative.................... 74,000 23,000 138,000
---------- -------- --------
Total operating expenses.................... 90,000 38,000 170,000
---------- -------- --------
Income from operations.......................... 257,000 163,000 12,000
Income tax provision............................ 6,000 2,000 --
---------- -------- --------
Net income...................................... $ 251,000 $161,000 $ 12,000
========== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-134
<PAGE>
USWEB SAN MATEO
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. 2,000 $20,000 $ 14,000 $ 10,000 $ 44,000
Net income................... -- -- -- 251,000 251,000
----- ------- -------- -------- --------
Balance at December 31, 1996. 2,000 20,000 14,000 261,000 295,000
----- ------- -------- -------- --------
Distribution to shareholders
(Unaudited)................. -- -- (14,000) (50,000) (64,000)
Net income (Unaudited)....... -- -- -- 12,000 12,000
----- ------- -------- -------- --------
Balance as of June 30, 1997
(Unaudited)................. 2,000 $20,000 $ -- $223,000 $243,000
===== ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE>
USWEB SAN MATEO
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1996 1996 1997
------------ --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income.................................. $ 251,000 $ 161,000 $ 12,000
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 16,000 3,000 16,000
Changes in assets and liabilities:
Accounts receivable....................... (157,000) (174,000) 4,000
Costs in excess of billings............... (19,000) -- (17,000)
Other assets.............................. (5,000) -- (26,000)
Accounts payable.......................... 20,000 42,000 73,000
Accrued expenses.......................... 47,000 14,000 (38,000)
--------- --------- --------
Net cash provided by operating
activities.............................. 153,000 46,000 24,000
--------- --------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR
THE ACQUISITION OF PROPERTY AND EQUIPMENT... (74,000) (31,000) (7,000)
--------- --------- --------
CASH FLOWS USED IN FINANCING ACTIVITIES FOR
THE DISTRIBUTION TO SHAREHOLDERS............ -- -- (64,000)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................. 79,000 15,000 (47,000)
Cash and cash equivalents at beginning of
period...................................... 28,000 28,000 107,000
--------- --------- --------
Cash and cash equivalents at end of period... $ 107,000 $ 43,000 $ 60,000
========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-136
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USWeb San Mateo (the "Company"), formerly Zendatta, Inc., was incorporated
in California on October 30, 1995 and is engaged in software development and
consulting, specializing in enterprise applications for internet, intranet and
extranet environments. See Note 5.
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 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 four customers accounted
for 33%, 19%, 18% and 12% of revenues. Approximately 38%, 27% and 24% of
accounts receivable at December 31, 1996 was due from three 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.
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
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 1.5% franchise tax imposed by the State of California.
F-137
<PAGE>
USWEB SAN MATEO
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Interim Financial Information
The accompanying balance sheet as of June 30, 1997 and the statements of
operations and of cash flows for the six-month periods ended June 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 six months ended
June 30, 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, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
Property and equipment:
Computers and equipment........................... $ 90,000 $ 92,000
Furniture and fixtures............................ -- 5,000
-------- --------
90,000 97,000
Less: accumulated depreciation.................... (16,000) (32,000)
-------- --------
$ 74,000 $ 65,000
======== ========
Accrued expenses:
Payroll and related expenses...................... $ 41,000 $ 9,000
Income taxes...................................... 6,000 --
-------- --------
$ 47,000 $ 9,000
======== ========
</TABLE>
NOTE 3--COMMITMENTS:
Operating Leases
The Company leases its office facilities under noncancelable operating
leases which expire in 1997. The leases require payment of property taxes,
insurance, maintenance and utilities. Rent expense for the year ended December
31, 1996 and the six month periods ended June 30, 1996 and 1997 totaled
$33,000, $6,000 and $33,000, respectively.
Future minimum lease payments under noncancelable operating leases are
$64,000 for the year ended December 31, 1997.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 1,000,000 shares of no par value Common Stock.
NOTE 5--SUBSEQUENT EVENTS:
On September 30, 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-138
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
USWeb LA Central
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 Central (formerly W3-
design) at March 31, 1996 and 1997 and the results of its operations and its
cash flows for the period from April 7, 1995 (Inception) to March 31, 1996 and
for the year ended March 31, 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
October 31, 1997
F-139
<PAGE>
USWEB LA CENTRAL
BALANCE SHEET
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash......................................... $ 2,000 $ 9,000 $186,000
Accounts receivable.......................... 173,000 462,000 347,000
-------- -------- --------
Total current assets....................... 175,000 471,000 533,000
Property and equipment, net.................... 45,000 139,000 150,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................. $ 19,000 $ 15,000 $177,000
Accrued expenses............................. 9,000 17,000 3,000
Unearned revenue............................. -- 146,000 --
Loan from officer............................ -- 12,000 --
Income taxes payable......................... 9,000 49,000 83,000
-------- -------- --------
Total current liabilities.................. 37,000 239,000 263,000
Deferred income taxes.......................... 75,000 114,000 114,000
-------- -------- --------
112,000 353,000 377,000
-------- -------- --------
Commitments (Note 4)
Shareholders' equity:
Common stock; 10,000 shares authorized; 1,000
shares issued and outstanding............... 1,000 1,000 1,000
Additional paid-in capital................... 3,000 3,000 3,000
Retained earnings............................ 104,000 253,000 302,000
-------- -------- --------
Total shareholders' equity................. 108,000 257,000 306,000
-------- -------- --------
$220,000 $610,000 $683,000
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
USWEB LA CENTRAL
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH MARCH YEAR ENDED SEPTEMBER 30,
31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $537,000 $1,438,000 $631,000 $1,282,000
Cost of revenues.................. 169,000 566,000 221,000 574,000
-------- ---------- -------- ----------
Gross profit.................... 368,000 872,000 410,000 708,000
Operating expenses:
Marketing, sales and support.... 76,000 311,000 138,000 263,000
General and administrative ex-
penses......................... 104,000 322,000 141,000 364,000
-------- ---------- -------- ----------
Total operating expenses...... 180,000 633,000 279,000 627,000
-------- ---------- -------- ----------
Income from operations............ 188,000 239,000 131,000 81,000
Interest income................... -- 3,000 1,000 1,000
-------- ---------- -------- ----------
Income before income taxes........ 188,000 242,000 132,000 82,000
Provision for income taxes........ 84,000 93,000 53,000 33,000
-------- ---------- -------- ----------
Net income........................ $104,000 $ 149,000 $ 79,000 $ 49,000
======== ========== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
USWEB LA CENTRAL
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNTS CAPITAL EARNINGS EQUITY
------ ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Issuance of Common Stock...... 1,000 $1,000 $3,000 $ -- $ 4,000
Net income.................... -- -- -- 104,000 104,000
----- ------ ------ -------- --------
Balance at March 31, 1996..... 1,000 1,000 3,000 104,000 108,000
Net income.................... -- -- -- 149,000 149,000
----- ------ ------ -------- --------
Balance at March 31, 1997..... 1,000 1,000 3,000 253,000 257,000
Net income (Unaudited)........ -- -- -- 49,000 49,000
----- ------ ------ -------- --------
Balance at September 30, 1997
(Unaudited).................. 1,000 $1,000 $3,000 $302,000 $306,000
===== ====== ====== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
USWEB LA CENTRAL
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 7, 1995
(INCEPTION) SIX MONTHS ENDED
THROUGH YEAR ENDED SEPTEMBER 30,
MARCH 31, MARCH 31, -------------------
1996 1997 1996 1997
------------- ---------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVI-
TIES:
Net income....................... $ 104,000 $ 149,000 $ 79,000 $ 49,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Deferred income taxes.......... 75,000 39,000 -- --
Depreciation................... 8,000 37,000 17,000 25,000
Changes in operating assets and
liabilities:
Accounts receivable.......... (173,000) (289,000) (28,000) 115,000
Accounts payable............. 19,000 (4,000) 47,000 163,000
Accrued expenses............. 9,000 7,000 16,000 (14,000)
Billings in excess of fees
and expenditures............ -- 146,000 -- (146,000)
Income taxes payable......... 9,000 40,000 53,000 34,000
--------- --------- -------- ---------
Net cash provided by operating
activities.................... 51,000 125,000 184,000 226,000
--------- --------- -------- ---------
CASH FLOWS USED IN INVESTING
ACTIVITIES FOR THE ACQUISITION
OF PROPERTY AND EQUIPMENT....... (53,000) (130,000) (37,000) (37,000)
--------- --------- -------- ---------
CASH FLOWS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of common
stock........................... 1,000 -- -- --
Additional paid-in capital....... 3,000 -- -- --
Proceeds from officer loan....... -- 12,000 -- (12,000)
--------- --------- -------- ---------
Net cash provided by financing
activities.................... 4,000 12,000 -- (12,000)
--------- --------- -------- ---------
Net increase (decrease) in cash.. 2,000 7,000 147,000 177,000
Cash at beginning of period...... -- 2,000 2,000 9,000
--------- --------- -------- ---------
Cash at end of period............ $ 2,000 $ 9,000 $149,000 $ 186,000
========= ========= ======== =========
CASH PAID DURING THE PERIOD FOR:
Income taxes................... $ $ -- $ $
========= ========= ======== =========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY AND SIGNIFICANT ACCOUNTING POLICIES:
USWeb LA Central (the "Company"), formerly W3-design, was incorporated in
California on April 7, 1995 as a dedicated group of information architects who
build Web-based communities for major corporations in North America.
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.
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 two customers
totaling 85% and 28% at March 31, 1996 and 1997, respectively. The Company
performs ongoing credit evaluation of its customers and generally does not
require collateral. For the period from April 7, 1995 (Inception) through
March 31, 1996 and for the year ended March 31, 1997, five customers accounted
for 41% and 27% of the Company's total revenues, respectively.
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.
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.
Unearned revenues represents the amount of revenues received in advance of
services being performed.
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 laws; 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-144
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments, including accounts receivable, notes
and accounts payable, accrued expenses and billings in excess of fees and
expenditures have carrying amounts which approximate fair value due to the
relatively short maturity of these instruments.
Interim Financial Information
The accompanying balance sheet as of September 30, 1997 and the statements
of operations and of cash flows for the six-month periods ended September 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 six
months ended September 30, 1997 are not necessarily indicative of the results
to be expected for the year ending March 31, 1998.
NOTE 2--PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Computers and equipment..................... $47,000 $152,000 $177,000
Furniture and fixtures...................... 6,000 32,000 43,000
------- -------- --------
53,000 184,000 220,000
Less: accumulated depreciation.............. (8,000) (45,000) (70,000)
------- -------- --------
$45,000 $139,000 $150,000
======= ======== ========
</TABLE>
NOTE 3--INCOME TAXES:
The Company files separate company tax returns. The provision for income
taxes consists of the following for the years ended March 31, 1996 and 1997
and the six months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED SEPTEMBER
MARCH 31, 30,
--------------- ---------------
1996 1997 1996 1997
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current:
Federal.................................... $ 8,000 $46,000 $45,000 $28,000
State...................................... 1,000 8,000 8,000 5,000
------- ------- ------- -------
9,000 54,000 53,000 33,000
------- ------- ------- -------
Deferred:
Federal.................................... 64,000 35,000 -- --
State...................................... 11,000 4,000 -- --
------- ------- ------- -------
75,000 39,000 -- --
------- ------- ------- -------
Income tax provision......................... $84,000 93,000 $53,000 $33,000
======= ======= ======= =======
</TABLE>
F-145
<PAGE>
USWEB LA CENTRAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of the federal income tax rate to the effective tax rate
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
MARCH 31, SEPTEMBER 30,
------------- ---------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ 34% 34% 34% 34%
State income tax, net of federal benefit.. 7% 4% 6% 6%
Nondeductable expenses and other.......... 3% -- -- --
----- ----- ------ ------
Effective income tax rate................. 44% 38% 40% 40%
===== ===== ====== ======
</TABLE>
As of March 31, 1996 and 1997, the Company had total deferred tax
liabilities of $75,000 and $114,000, respectively, consisting primarily of a
conversion from the cash to accrual method of accounting.
NOTE 4--COMMITMENTS:
The Company maintains an executive office and an operating office in Culver
City, California and New York, New York, respectively, under month-to-month
operating leases. The Company is generally responsible for maintaining public
liability and property damage insurance on the leased property and is also
responsible for certain operating expenses and property taxes.
Rent expense for the period from April 7, 1995 (Inception) through March 31,
1996 and for the year ended March 31, 1997 and the six month period ended
September 30, 1997 totaled $15,000, $37,000, and $42,000, respectively.
NOTE 5--COMMON STOCK:
The Company's Articles of Incorporation, as amended, authorize the Company
to issue 10,000 shares of $1 par value Common Stock. For the period from April
7, 1995 (Inception) through March 31, 1996, the Company sold 1,000 shares of
Common Stock to the founders of the Company.
NOTE 6--SUBSEQUENT EVENTS:
On October 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-146
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholder of
USWeb Houston
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of USWeb
Houston (formerly USWeb-Apex, Inc. and Apex Business Solutions, a sole
proprietorship) at September 30, 1997 and the results of their operations and
their cash flows from December 5, 1996 (Inception) to September 30, 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 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
November 4, 1997
F-147
<PAGE>
USWEB HOUSTON
COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 19,000
Accounts receivable............................................. 175,000
Other current assets............................................ 3,000
--------
Total current assets.......................................... 197,000
Property and equipment, net....................................... 40,000
--------
$237,000
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 36,000
Accrued expenses................................................ 49,000
--------
Total current liabilities..................................... 85,000
--------
Commitments (Note 3)
Shareholders' equity:
Common Stock: $1.00 par value, 1,000 shares authorized,
issued and outstanding......................................... 1,000
Additional paid in capital...................................... 6,000
Retained earnings............................................... 145,000
--------
Total shareholders' equity.................................... 152,000
--------
$237,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-148
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
Revenues....................................................... $820,000
Cost of revenues............................................... 407,000
--------
Gross profit................................................. 413,000
--------
Operating expenses:
Marketing, sales and support................................. 76,000
General and administrative................................... 192,000
--------
Total operating expenses................................... 268,000
--------
Net income..................................................... $145,000
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-149
<PAGE>
USWEB HOUSTON
COMBINED 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>
Issuance of Common Stock to
Founders...................... 1,000 $1,000 $ -- $ -- $ 1,000
Contribution from shareholder.. -- -- 6,000 -- 6,000
Net income..................... -- -- 145,000 145,000
----- ------ ------ -------- --------
Balance at September 30, 1997.. 1,000 $1,000 $6,000 $145,000 $152,000
===== ====== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-150
<PAGE>
USWEB HOUSTON
COMBINED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
DECEMBER 5, 1996
(INCEPTION) TO
SEPTEMBER 30,
1997
----------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................... $ 145,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization................................ 29,000
Changes in assets and liabilities:
Accounts receivable......................................... (175,000)
Other current assets........................................ (3,000)
Accounts payable............................................ 36,000
Accrued expenses............................................ 49,000
---------
Net cash provided by operating activities................. 81,000
---------
CASH FLOWS USED IN INVESTING ACTIVITIES FOR THE
ACQUISITION OF PROPERTY AND EQUIPMENT......................... (69,000)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock........................ 1,000
Proceeds from shareholder contribution........................ 6,000
---------
Net cash used in financing activities..................... 7,000
---------
Net increase in cash and cash equivalents...................... 19,000
Cash and cash equivalents at beginning of period............... --
---------
Cash and cash equivalents at end of period..................... $ 19,000
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-151
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company
USWeb Houston (the "Company") is principally engaged in providing Internet
technology integration services.
Principles of Consolidation
USWeb Houston is comprised of the combined accounts of USWeb-Apex, Inc.
which was incorporated on December 15, 1996 and Apex Business Solutions, a
sole proprietorship. The sole shareholder of USWeb-Apex, Inc. also owns Apex
Business Solutions. (Note 6)
During December, 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, web
development, and computer hardware and software sales.
Consulting service revenues are recognized and billed as services are
provided. Web development revenues are recognized upon contract completion
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. Computer hardware and software sales revenues are recognized upon
delivery of goods. 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.
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 three major
customers. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. As of September 30, 1997, these
customers accounted for 64% of the Company's accounts receivable balance and
14% of the Company's total revenues.
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
USWeb-Apex, Inc. 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. Apex Business
Solutions is a sole proprietorship with all profits or losses recognized in
the owner's personal income tax returns.
F-152
<PAGE>
USWEB HOUSTON
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Property and equipment, net:
Computers and equipment ..................................... $ 51,000
Furniture and fixtures....................................... 18,000
--------
69,000
Less: accumulated depreciation............................... (29,000)
--------
$ 40,000
========
Accrued expenses:
Payroll and related taxes.................................... $ 35,000
Franchise Fees............................................... 7,000
Sales Taxes.................................................. 7,000
--------
$ 49,000
========
</TABLE>
NOTE 3--COMMITMENTS:
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 from Inception to September 30,
1997 totaled $19,000 and are included in cost of revenues.
Operating Leases
The Company leases its office facilities under a noncancelable operating
lease which expires in November, 1997. Rent expense from Inception to
September 30, 1997 totaled $18,000. Future minimum lease payments under this
noncancelable operating lease as of September 30, 1997 total $4,000.
NOTE 4--COMMON STOCK:
The Company's Articles of Incorporation authorized the Company to issue
1,000 shares of $1 par value Common Stock. At Inception the Company sold a
total of 1,000 shares of Common Stock to the Founder of the Company.
NOTE 5--RELATED PARTY TRANSACTIONS:
The Company has performed services on behalf of another USWeb affiliate. The
transaction totaling $25,000 was accounted for at arms length with no special
terms.
NOTE 6--SUBSEQUENT EVENTS:
On October 29, 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-153
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Reach Networks, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of Reach Networks, Inc. and its subsidiaries at April 30,
1997 and 1996, and the results of their operations and their cash flows for
the years then ended, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from
operations and has a net capital deficiency that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result for the outcome of this uncertainty.
Price Waterhouse LLP
New York, New York
November 4, 1997
F-154
<PAGE>
REACH NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
APRIL 30,
---------------------- JULY 31,
1996 1997 1997
---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 40,160 $ 3,331 $ 8,896
Accounts receivable, net of allowance for
doubtful accounts of $92,336, $35,723
and $21,812, respectively............... 852,192 116,267 93,686
Unbilled costs and accrued earnings...... -- 38,000 111,704
Other receivables and prepayments ....... 90,979 21,954 42,204
---------- ----------- -----------
Total current assets.................. 983,331 179,552 256,490
Equipment, net............................ 964,864 425,843 394,973
Investment................................ 25,000 25,000 25,000
Other assets.............................. 16,997 16,559 17,560
---------- ----------- -----------
Total assets.......................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................... 1,593,559 1,703,334 1,823,830
Accrued expenses......................... 63,194 202,301 215,109
Deferred revenue......................... 25,000 51,667 122,723
Loans payable to stockholders............ 192,499 192,890 214,710
---------- ----------- -----------
Total current liabilities............. 1,874,252 2,150,192 2,376,372
Deferred tax liability.................... 1,460 -- --
Commitments (Note 9)
Stockholders' equity:
Preferred stock ($0.01 par value; 1,000
shares authorized, none issued and
outstanding)............................ -- -- --
Common stock ($0.01 par value; 20,000
shares authorized; 1,500 shares issued
and outstanding, respectively).......... 15 15 15
Additional paid-in capital............... 70,567 70,567 70,567
Retained earnings (accumulated deficit).. 43,898 (1,573,820) (1,752,931)
---------- ----------- -----------
Total stockholders' equity (deficit).. 114,480 (1,503,238) (1,682,349)
---------- ----------- -----------
Total liabilities and stockholders'
equity (deficit)..................... $1,990,192 $ 646,954 $ 694,023
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-155
<PAGE>
REACH NETWORKS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
----------------------- ---------------------
1996 1997 1996 1997
---------- ----------- ---------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues....................... $7,440,453 $ 6,465,099 $1,635,943 $ 567,583
Cost of revenues............... 5,024,629 4,683,703 1,178,556 431,910
---------- ----------- ---------- ---------
Gross Profit................. 2,415,824 1,781,396 457,387 135,673
---------- ----------- ---------- ---------
Operating expenses:
General and administrative... 1,662,554 1,779,733 342,481 203,590
Product development.......... 542,001 732,276 99,883 21,511
Selling and marketing........ 451,328 423,328 92,587 84,155
Product line discontinuance.. -- 454,654 -- --
---------- ----------- ---------- ---------
Total operating expenses... 2,655,883 3,389,991 534,951 309,256
---------- ----------- ---------- ---------
Loss from operations....... (240,059) (1,608,595) (77,564) (173,583)
---------- ----------- ---------- ---------
Other income (expense):
Interest income.............. 2,678 3,031 1,212 --
Interest expense............. (1,200) (10,694) (1,330) (5,528)
---------- ----------- ---------- ---------
Total other income (ex-
pense).................... 1,478 (7,663) (118) (5,528)
Loss before income taxes... (238,581) (1,616,258) (77,682) (179,111)
Provision (benefit) for income
taxes......................... (52,344) 1,460 -- --
---------- ----------- ---------- ---------
Net loss................... $ (186,237) $(1,617,718) $ (77,682) $(179,111)
========== =========== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-156
<PAGE>
REACH NETWORKS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING
ON RETAINED TOTAL
COMMON STOCK ADDITIONAL OFFICER STOCK EARNINGS SHAREHOLDERS'
------------- PAID PURCHASE (ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL AGREEMENT DEFICIT) (DEFICIT)
------ ------ ---------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at April 30,
1995................... 1,500 $15 $70,567 $(10,378) $ 230,135 $ 290,339
Forgiveness of amount
outstanding on officer
stock purchase
agreement.............. -- -- -- 10,378 -- 10,378
Net loss................ -- -- -- -- (186,237) (186,237)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1996................... 1,500 15 70,567 -- 43,898 114,480
Net loss................ -- -- -- -- (1,617,718) (1,617,718)
----- --- ------- -------- ----------- -----------
Balance at April 30,
1997................... 1,500 15 70,567 -- (1,573,820) (1,503,238)
Net loss................ -- -- -- -- (179,111) (179,111)
----- --- ------- -------- ----------- -----------
Balance at July 31, 1997
(Unaudited)............ 1,500 $15 $70,567 $ -- $(1,752,931) $(1,682,349)
===== === ======= ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-157
<PAGE>
REACH NETWORKS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED APRIL 30, JULY 31,
---------------------- -------------------
1996 1997 1996 1997
--------- ----------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net cash flows from operating ac-
tivities
Net loss........................ $(186,237) $(1,617,718) $(77,682) $(179,111)
Adjustments to reconcile net
loss to net cash provided by
operating activities
Product line discontinuance... -- 360,154 -- --
Depreciation and amortization. 254,701 288,077 70,187 29,178
Provision for doubtful ac-
counts....................... 81,036 193,773 -- --
Stock grant compensation...... 10,378 -- -- --
Changes in operating assets
and liabilities
Accounts receivable......... (248,731) 542,152 (224,280) 22,581
Unbilled costs and accrued
earnings................... -- (38,000) -- (73,704)
Deferred taxes.............. 68,756 (1,460) (1,460) --
Other receivables and pre-
payments................... (4,075) 69,025 11,678 (20,250)
Accounts payable............ 610,082 109,775 231,233 120,496
Accrued expenses............ (210,000) 139,107 87,122 12,808
Deferred revenue............ (211,576) 26,667 -- 71,056
Income taxes................ (143,062) -- -- --
Other assets................ 861 438 -- (1,001)
--------- ----------- -------- ---------
Net cash provided by (used in)
operating activities........... 22,133 71,990 96,798 (17,947)
--------- ----------- -------- ---------
Cash flows from investing activi-
ties
Capital expenditures............ (406,915) (109,210) (19,174) 1,692
Purchase of investment.......... (25,000) -- -- --
--------- ----------- -------- ---------
Net cash used in investing ac-
tivities....................... (431,915) (109,210) (19,174) 1,692
--------- ----------- -------- ---------
Cash flows from financing activi-
ties
Net increase (decrease) in
borrowings from stockholders... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net cash provided by (used in)
financing activities........... 170,109 391 (42,165) 21,820
--------- ----------- -------- ---------
Net increase (decrease) in cash
and cash equivalents............. (239,673) (36,829) 35,459 5,565
Cash and cash equivalents, begin-
ning of period................... 279,833 40,160 40,160 3,331
--------- ----------- -------- ---------
Cash and cash equivalents, end of
period........................... $ 40,160 $ 3,331 $ 75,619 $ 8,896
========= =========== ======== =========
Cash paid during the period for:
Interest........................ $ -- $ 6,394 $ -- $ --
========= =========== ======== =========
Income taxes.................... $ 33,240 $ 267 $ 267 $ --
========= =========== ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-158
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION, BUSINESS OF THE COMPANY AND BASIS OF PRESENTATION
Reach Networks, Inc. (the "Company") was incorporated in 1993 under the laws
of the State of Delaware and during 1993 merged with its predecessor, Reach
Networks, Inc., a New York Corporation, incorporated in 1988. The Company, a
provider of communications software and services, was primarily engaged in the
development, marketing, licensing and maintenance of private on-line networks
based on Internet standards that were targeted towards business organizations
and associations. The Company developed and maintained private on-line
networks for customers in the United States, Europe and Asia.
During 1997, the Company's management shifted the Company's product focus to
provide solutions to complex information flows through the use of Internet
technologies. During 1997 the Company began to derive significant revenues
from custom application and website development and design, systems
integration and support services including web/server hosting and management.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company has incurred significant
operating losses for the years ended April 30, 1996 and 1997. At April 30,
1997 the Company had an accumulated deficit of $1,573,820 and a working
capital deficit of $1,970,640. Such losses have primarily resulted from the
decreasing demand for private on-line networks and the transition by the
Company to becoming a provider of Internet solutions. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations as they come
due. The Company has a pending merger agreement with USWeb Corporation
("USWeb") and a pending stock purchase agreement with unaffiliated parties and
it believes that when and if such arrangements are consummated will provide
sufficient funding to meet its planned business objectives (Note 11). These
financial statements do not include any adjustments relating to the
recoverability of the carrying amount of recorded assets or the amount of
liabilities that might result from the outcome of these uncertainties.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
The consolidated financial statements include the accounts of Reach
Networks, Inc. and its wholly owned and majority-owned subsidiaries. All
significant intercompany balances and transactions have been eliminated.
Losses of majority-owned subsidiaries are not allocated to minority interests
if such allocation results in the minority interest becoming negative. To
date, the Company's majority-owned subsidiaries have incurred cumulative
operating losses and no allocation of losses has been made in excess of the
original capital contributions of the minority interests.
Revenue recognition
License fees are recognized upon delivery of the Company's online network
products and the completion of all significant vendor obligations. Network
management and website hosting fees are recognized as services are performed.
Fees derived from long-term network or website management contracts are
recognized ratably over the life of the underlying contracts.
Communication fees received by the Company for providing network access as
well as incremental charges, which generally consist of faxing and mailing
services, are recognized upon performance of the service.
F-159
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Development fees from short-term projects to customize the Company's
proprietary software, custom software development on behalf of customers and
website development are recognized using the completed contract method. These
short-term projects were generally less than nine months in duration. The
Company records a current asset for network development projects in process on
the reporting date when the accumulated costs exceed related billings or a
current liability when the excess accumulated billings exceed related costs.
Unbilled costs and accrued earnings consist primarily of services performed
which were not billed at the end of the period.
Product development expenses
Software development costs are accounted for in accordance with Statement of
Financial Accounting Standards No. 86, ("SFAS No. 86"), "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed."
Software development costs incurred after the establishment of technological
feasibility are capitalized and amortized to cost of revenues on a straight-
line basis over the expected useful life of the software. Product development
costs incurred prior to the attainment of technological feasibility are
expensed as incurred. As of April 30, 1996 and 1997, the Company had no
capitalized software development costs.
Advertising costs
Advertising costs are expensed as incurred. Advertising costs included in
selling and marketing expenses were $90,498 for the year ended April 30, 1996.
No significant advertising costs were incurred subsequent to fiscal 1996.
Cash and cash equivalents
Cash equivalents consist of short-term, highly liquid investments, with
original maturities of less than three months when purchased and are stated at
cost. Interest is accrued as earned.
Equipment
Equipment is stated at cost. Depreciation and amortization are provided on
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided on the shorter of
the useful life of the improvement or the remaining lease term.
Income taxes
Income taxes are accounted for under the asset and liability method.
Deferred income taxes are recorded for temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities.
Deferred tax assets and liabilities reflect the tax rates expected to be in
effect for the years in which the differences are expected to reverse. A
valuation allowance is provided if it is more likely than not that some or all
of the deferred tax asset will not be realized.
F-160
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses, and loans payable to stockholders
approximate their fair values due to the relatively short maturity of these
investments.
Accounting 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 the
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 those estimates.
Interim Financial Data
The unaudited financial data at July 31, 1997 and for the three months ended
July 31, 1996 and 1997 have been prepared by management and include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the results of operations and cash flows. The results of
operations for the three months ended July 31, 1997 are not necessarily
indicative of the operating results to be expected for the entire year ending
April 30, 1998.
3. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF RISKS
The Company is dependent on a limited number of customers for a substantial
portion of its revenues. One customer accounted for approximately 39% and 34%
of revenues in 1996 and 1997, respectively and approximately 25% and 20% of
accounts receivable as of April 30, 1996 and 1997, respectively. In connection
with the discontinuation of its private on-line network products the Company
terminated service to such customer in 1998. A second customer, which
accounted for 29% and 14% of revenues in 1996 and 1997, respectively, and 24%
of accounts receivable as of April 30, 1996 did not renew its contract that
expired in March 1997. A third customer accounted for 10% of revenues in 1996
none of which was outstanding as of April 30, 1996. A fourth customer
accounted for 22% of revenues in 1997 and 28% of accounts receivable as of
April 30, 1997.
Financial instruments which potentially subject the Company concentrations
of credit risk are primarily cash, accounts receivable, accounts payable and
loans payable to stockholders. The Company generally does not require
collateral and its trade receivables are unsecured.
4. EQUIPMENT
Equipment is comprised of:
<TABLE>
<CAPTION>
ESTIMATED APRIL 30,
USEFUL LIFE --------------------- JULY 31,
(YEARS) 1996 1997 1997
----------- ---------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Network equipment and computers. 5 $1,144,965 $ 519,620 $ 517,928
Furniture and fixtures.......... 10 145,490 146,037 146,037
Software licenses............... 3 175,245 62,323 62,323
Leasehold improvements.......... 52,127 52,127 52,127
---------- --------- ---------
Total equipment............... 1,517,827 780,107 778,415
Less--accumulated depreciation
and amortization............... (552,963) (354,264) (383,442)
---------- --------- ---------
Net equipment................. $ 964,864 $ 425,843 $ 394,973
========== ========= =========
</TABLE>
F-161
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LOANS PAYABLE TO STOCKHOLDERS
The Company has loans payable to stockholders, who are also employees of the
Company, which represent amounts owed for funds loaned to the Company and
deferred salaries. Loans payable to stockholders are comprised as follows:
<TABLE>
<CAPTION>
APRIL 30,
----------------- JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Borrowings from stockholders...................... $168,298 $167,390 $180,390
Deferred salary................................... 23,001 20,000 28,792
Accrued interest.................................. 1,200 5,500 5,528
-------- -------- --------
$192,499 $192,890 $214,710
======== ======== ========
</TABLE>
During 1996 and 1997, the interest rate on loans from stockholders averaged
9% and 10%, respectively. Interest expense on loans payable to stockholders
amounted to $1,200 and $10,694 in 1996 and 1997, respectively.
6. INCOME TAXES
The (benefit) provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
APRIL 30, JULY 31,
----------------- ------------
1996 1997 1996 1997
--------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current
Federal....................................... $ (75,320) $ -- $ -- $ --
State and local............................... (45,780) -- -- --
--------- ------ ------ ------
(121,100) -- -- --
Deferred
Federal....................................... 68,756 1,460 -- --
State and local............................... -- -- -- --
--------- ------ ------ ------
(Benefit) provision for income taxes........ $ (52,344) $1,460 -- --
========= ====== ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
APRIL 30, JULY 31,
-------------- ----------------
1996 1997 1996 1997
----- ----- ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory rate............................ (34)% (34)% (34)% (34)%
State income taxes, net of federal bene-
fit...................................... (13)% (13)% (13)% (13)%
Nondeductible expense and other........... 2 % 3 % -- --
Valuation Allowance....................... 24 % 50 % 47 % 47 %
----- ----- ------ ------
Effective income tax rate................. 21 % -- -- --
===== ===== ====== ======
</TABLE>
F-162
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes at April 30, 1996 and 1997 and July 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
APRIL 30,
------------------ JULY 31,
1996 1997 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current deferred tax assets
Allowance for doubtful accounts............... $31,544 $ 16,794 $ 10,251
Accrued expenses............................... -- 44,415 44,415
-------- -------- --------
31,544 61,209 54,666
Noncurrent deferred tax assets
Equipment write-off........................... -- 169,272 169,272
Net operating loss............................. 81,118 611,000 705,000
-------- -------- --------
81,118 780,272 874,272
-------- -------- --------
Noncurrent deferred tax liabilities.............. 57,460 125,490 130,396
-------- -------- --------
Net deferred tax asset........................... 55,202 715,991 798,542
Less: valuation allowance........................ 56,662 715,991 798,542
-------- -------- --------
Net deferred tax asset (liability)............. $ (1,460) $ -- $ --
======== ======== ========
</TABLE>
In consideration of the Company's losses during 1996 and 1997 and the
uncertainty of its ability to utilize deferred tax benefits in the future, the
Company has recorded a valuation allowance for deferred tax benefits in excess
of net operating loss amounts that can be carried back to prior years for
federal and state income tax purposes. The Company has net operating loss
carryforwards of approximately $1,300,000 and $1,500,000 at April 30, 1997 and
July 31, 1997, which begin to expire in 2011. These losses are subject to
limitation on future years utilization should certain ownership changes occur
(Note 11).
7. EMPLOYEE STOCK GRANTS AND ISSUANCES
In October 1993, the Company issued 150 shares of common stock to an officer
of the Company in return for a non-recourse promissory note in the principal
amount of $20,756. One-half the principal amount of the note was to be
automatically forgiven on each of the first and second anniversary dates of
the issuance date of the note, provided the officer continued to be an
employee. As of April 30, 1996, the note has been forgiven in its entirety and
the Company has recorded compensation expense of $10,378 in the year ending
April 30, 1996.
8. STOCK OPTION PLAN AND DEFINED CONTRIBUTION PLAN
Stock option plan
During 1995, the Company implemented an employee stock option plan whereby
options to purchase up to 100 shares of common stock may be granted to key
employees, directors and consultants. As of April 30, 1997 there have been no
options granted under the plan.
Defined contribution plan
Company employees may participate in an employee savings plan maintained by
the Company pursuant to Section 401(k) of the Internal Revenue Code ("IRC").
Eligible participants may contribute a percentage of their pretax salaries,
subject to certain IRC limitations. The plan provides for employer matching
contributions to be made at the discretion of the Company. There were no
discretionary amounts contributed to the plan during the years ended April 30,
1996 and 1997 and three months ended July 31, 1997.
F-163
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS
Network access agreement
Pursuant to a non-cancelable agreement expiring in fiscal 1998, the Company
committed to monthly minimum usage levels with its network access provider.
The annual minimum usage commitments amount to $600,000 and $150,000 in 1997
and 1998, respectively. The Company's actual network access usage
significantly exceeded the contractually required minimums for each of the
years ended April 30, 1996 and 1997. In May 1997, the Company and the network
access provider mutually agreed to terminate the agreement.
Leases
The Company leases its facilities and certain office equipment under non-
cancelable operating leases. Future rental payments on a fiscal year basis
under operating leases with initial terms in excess of one year are as
follows:
<TABLE>
<S> <C>
1998............................................................ $133,056
1999............................................................ 132,944
2000............................................................ 131,712
2001............................................................ 89,633
2002............................................................ --
--------
$487,345
========
</TABLE>
Rent expense approximated $157,900 and $189,000, for the years ended April
30, 1996 and 1997, respectively.
Employment contracts
The Company has entered into employment agreements with certain employees
and officers, who are also stockholders of the Company. The agreements provide
for payments, upon termination of the employee, of an amount equal to 50% of
the employee's annual base salary.
10. DISCONTINUED PRODUCT LINES
During 1997 the Company discontinued its private on-line network products
and services and abandoned the related network computer equipment and software
licenses having a net book value of $360,154. Approximately $7,361,000 and
$4,365,000 of the Company's revenues in 1996 and 1997 were generated from
private on-line network products and services.
The Company also terminated one of its employees, who instituted litigation
against the Company claiming breach of contract. In October of 1997 the
Company and the employee, who is a stockholder, entered into a settlement
agreement, which is contingent upon completion of the USWeb share exchange
(Note 11). The Company has accrued the costs associated with the pending
settlement as of April 30, 1997, which are expected to be less than $100,000.
Additionally, the Company discontinued development of a private on-line
network for the architectural industry in which the Company incurred
development and administrative expenses which are included in product
development and general and administration expenses, in the amount of $572,000
during the year ended April 30, 1997.
F-164
<PAGE>
REACH NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SUBSEQUENT EVENTS
In October 1997, the Company issued 265 shares of its common stock to
certain employees and consultants with immediate vesting in consideration of
current services being performed.
In October of 1997 the Company entered into a merger agreement with USWeb
whereby the stockholders of the Company will exchange their shares of common
stock for shares of USWeb and the Company will become a wholly-owned
subsidiary of USWeb. The closing of the share exchange is subject to certain
conditions, which can be waived by USWeb, including the attainment of a
specified working capital level. As of November 3, 1997 the Company has not
met the working capital requirement. The number of shares to be issued by
USWeb is subject to adjustment during the first year subsequent to the
completion of the share exchange based on the Company's performance. The
Company also entered into a stock purchase agreement during October 1997 with
unaffiliated third parties whereby the Company will issue and sell 793.82
shares of its common stock at a price of $1,259.73 per share, providing gross
proceeds of $1,000,000. The issuance and sale will be executed
contemporaneously with the closing of the USWeb share exchange.
During September of 1997, the Company entered into an agreement to sell a
subsidiary to a former employee which had developed a product for the digital
delivery of information over the Internet using a "push" technology. The
subsidiary had ceased operations in February 1997 and had generated minimal
revenue. The Company received a note, secured by the stock of the subsidiary,
in the principal amount of $500,000. The note is payable in four equal
quarterly installments commencing September 30, 1998.
F-165
<PAGE>
USWEB INTERNET STRATEGY
AND SOLUTIONS CENTER
At this center USWeb has assembled core expertise across a wide range of
technical, communications and media disciplines. This team envisions the future
of the Internet and its impact on business, acquires and organizes knowledge
gained from USWeb's practices around the world and creates core systems,
strategies and ideas for USWeb practices and clients. Emerging from this center
are the tools and programs that enable USWeb to scale its operations.
1. SOLUTIONS LIBRARY
Partially pre-built Internet
solutions targeted at specific
vertical markets and
business functions.
2. PROJECT REGISTRY
A comprehensive database of client engagements.
3. SITECAST
Internet live seminar
broadcasts on how businesses can use Internet
technologies to improve business processes.
4. EXECUTIVE BRIEFINGS
Executive seminars,
solutions demonstrations and discussions
regarding innovative Internet
technologies.
5. TECHNOLOGY LIBRARY
Proprietary reusable
software and content
objects.
[LOGO OF USWEB]
<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........................................................... 8
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 17
Capitalization......................................................... 18
Dilution............................................................... 19
Selected Consolidated Financial Data................................... 20
Pro Forma Selected Consolidated Financial Data......................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 24
Business............................................................... 36
Management............................................................. 50
Certain Transactions................................................... 59
Principal Stockholders................................................. 61
Description of Capital Stock........................................... 63
Shares Eligible for Future Sale........................................ 66
Underwriting........................................................... 68
Legal Matters.......................................................... 69
Experts................................................................ 69
Additional Information................................................. 70
Index to Consolidated Financial Statements and Pro Forma Financial
Information........................................................... 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
5,000,000 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.................................. 50,000
Printing and Engraving.............................................. 400,000
Legal Fees and Expenses............................................. 350,000
Accounting Fees and Expenses........................................ 775,000
Blue Sky Fees and Expenses.......................................... 7,500
Transfer Agent Fees................................................. 10,000
Miscellaneous....................................................... 81,508
----------
Total............................................................. $1,700,000
==========
</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 3.5; 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 7 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
Amended and Restated Certificate of Incorporation...................... 3.3
Bylaws of Registrant (Delaware)........................................ 3.5
Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.......................... 10.1*
</TABLE>
- ---------------------
* Previously filed.
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 for an aggregate of
$5,000 pursuant to Restricted Stock Purchase Agreements 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 541,667 shares of
Common Stock (options for 116,188 of which are outstanding) to 57
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 627,027 shares of
Common Stock (options for 587,060 of which are outstanding) to 150
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 6,662,724 shares
of Common Stock (all of which are outstanding) to 284 directors,
employees and consultants pursuant to the Registrant's 1997 Acquisition
Stock Option Plan in reliance on Rule 701 promulgated under the
Securities Act or in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act.
5. During the period from December 6, 1995 through September 30, 1997, the
Registrant granted warrants to purchase an aggregate of 223,536 shares
of Common Stock (warrants for 223,536 of which are outstanding) to 144
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 Crosspoint Venture
Partners (1996), The Cutler Group and SOFTBANK Holdings Inc. 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 SOFTBANK Holdings,
Inc. 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 2,818,193 shares of Series C Preferred Stock and warrants
to purchase 704,549 shares of Series C Preferred Stock in a private
placement to 16 investors for aggregate consideration of $17,500,981 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
II-2
<PAGE>
share to 6 individuals in connection with a real estate lease agreement.
The warrants expire, if not 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 1 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 $3.75 per share
to 1 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 24 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 August 25, 1997, the Registrant issued and sold 510,646 shares of
Common Stock in a private placement to 15 investors in connection with
the acquisition of InterNetOffice, LLC. This issuance of Common Stock
was made in reliance on Section 4(2) of the Securities Act.
18. On September 2, 1997, the Registrant issued and sold 1,665,525 shares
of Common Stock in a private placement to 4 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.
19. 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 & Design Inc. This issuance was
made in reliance on Section 4(2) of the Securities Act.
20. On October 6, 1997, the Registrant sold 95,730 shares of Common Stock
in a private placement to 3 investors in connection with the
acquisition of Online Marketing Company. This issuance was made in
reliance on Section 4(2) of the Securities Act.
21. On October 2, 1997, the Registrant issued and sold 1,008,169 shares of
Common Stock in a private placement to 10 investors in connection with
the acquisition of Infopreneurs, Inc. This issuance was made in
reliance on Section 4(2) of the Securities Act.
II-3
<PAGE>
22. On October 8, 1997, the Registrant issued and sold 235,205 shares of
Common Stock in a private placement to 11 investors in connection with
the acquisition of NETPHAZ, L.L.C. This issuance was made in reliance
on Section 4(2) of the Securities Act.
23. On October 10, 1997, the Registrant issued and sold 447,183 shares of
Common Stock in a private placement to 47 investors in connection with
the acquisition of Internet Cybernautics, Inc. This issuance was made
in reliance on Rule 506 promulgated under the Securities Act.
24. On October 10, 1997, pursuant to an agreement executed on September 30,
1997, the Registrant issued 222,222 shares of Common Stock in a private
placement to one 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.
25. As of September 30, 1997, the Registrant has issued an aggregate of
317,077 shares of Common Stock pursuant to the exercise of options
issued under the 1996 Equity Compensation Plan.
II-4
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement (draft dated November 5, 1997).
2.1+ Agreement and Plan of Reorganization dated as of March 16, 1997 by and
among the Registrant, USWeb Acquisition Corporation 101 and XCom Corpora-
tion.
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.
2.7 Agreement and Plan of Reorganization dated as of July 1, 1997 by and
among the Registrant, USWeb Acquisition Corporation 110 and Multimedia
Marketing & Design Inc.
2.8 Agreement and Plan of Reorganization dated as of August 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 111 and KandH., Inc.
2.9 Agreement and Plan of Reorganization dated as of August 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 111 and DreamMedia,
Inc.
2.10 Agreement and Plan of Reorganization dated as of September 26, 1997 by
and among the Registrant, USWeb Acquisition Corporation 113 and Internet
Cybernautics, Inc.
2.11 Agreement and Plan of Reorganization dated as of July 31, 1997 by and
among the Registrant, USWeb Acquisition Corporation 114 and Synergetic
Systems Integration, Inc.
2.12 Agreement and Plan of Reorganization dated as of September 30, 1997 by
and among the Registrant, USWeb Acquisition Corporation 119 and Online
Marketing Company.
2.13 Agreement and Plan of Reorganization dated as of September 30, 1997 by
and among the Registrant, USWeb Acquisition Corporation 117 and Zendatta,
Inc.
2.14 Agreement and Plan of Reorganization dated as of October 10, 1997 by and
among the Registrant, USWeb Acquisition Corporation 118 and W3-design.
2.15 Agreement and Plan of Reorganization dated as of October 29, 1997 by and
among the Registrant, USWeb Acquisition Corporation 122 and USWeb-Apex,
Inc.
2.16 Agreement and Plan of Reorganization dated as of October 24, 1997 by and
among the Registrant, USWeb Acquisition Corporation 112 and Reach Net-
works, 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.
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
4.7+ Form of Registrant's AGR Warrant.
4.8 Form of Amended and Restated Investor Rights Agreement dated November
7, 1997 among the Registrant and the other parties named therein.
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.
Heffernan.
10.11+ Form of Affiliate Agreement.
10.12 Loan and Security Agreement dated September 29, 1997 between the Regis-
trant and Silicon Valley Bank.
10.13 Amendment, dated November 5, 1997 to Loan and Security Agreement dated
September 29, 1997 between the Registrant and Silicon Valley Bank.
11.1 Statement of computation of pro forma net loss 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-
9).
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be supplied by amendment.
II-6
<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-7
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO 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 7TH DAY OF NOVEMBER, 1997.
USWEB CORPORATION
/s/ James Heffernan
By: __________________________________
JAMES HEFFERNAN
EXECUTIVE VICE PRESIDENT, CHIEF
FINANCIAL OFFICER, SECRETARY AND
DIRECTOR
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>
* Chairman of the
- ------------------------------------ Board and Chief
JOSEPH FIRMAGE Executive Officer
(Principal
Executive Officer)
/s/ James Heffernan Executive Vice
- ------------------------------------ President, Chief November 7, 1997
JAMES HEFFERNAN Financial Officer,
Secretary and
Director
(Principal
Financial and
Accounting
Officer)
* Director
- ------------------------------------
JEFFREY BALLOWE
* Director
- ------------------------------------
ROBERT HOFF
* Director
- ------------------------------------
GARY RIESCHEL
* Director
- ------------------------------------
BARRY RUBENSTEIN
*/s/ James Heffernan
- ------------------------------------ November 7, 1997
JAMES HEFFERNAN
ATTORNEY-IN-FACT
</TABLE>
II-8
<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 (No. 333-36827) of our reports dated
November 5, 1997 relating to the consolidated financial statements of USWeb
Corporation, September 17, 1997 related to the financial statements of USWeb
San Francisco, September 12, 1997 related to the financial statements of USWeb
Milwaukee, September 17, 1997 related to the financial statements of USWeb LA
Metro, September 18, 1997 related to the financial statements of USWeb
Atlanta, September 18, 1997 related to the financial statements of USWeb DC,
September 18, 1997 related to the financial statements of USWeb Pittsburgh,
October 31, 1997 related to the financial statements of USWeb Chicago Metro,
October 31, 1997 related to the financial statements of USWeb Hollywood
(formerly KandH, Inc.), October 29, 1997 related to the financial statements
of USWeb Hollywood (formerly DreamMedia, Inc.), October 17, 1997 related to
the financial statements of USWeb Marin, October 31, 1997 related to the
financial statements of USWeb Long Island, October 24, 1997 related to the
financial statements of USWeb Detroit, October 15, 1997 related to the
financial statements of USWeb San Mateo, October 31, 1997 related to the
financial statements of USWeb LA Central, November 4, 1997 related to the
financial statements of USWeb Houston, November 5, 1997 related to the
financial statements of Reach Networks, Inc., 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
November 5, 1997
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement (draft dated November 5,
1997).
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.
2.7 Agreement and Plan of Reorganization dated as of July 1,
1997 by and among the Registrant, USWeb Acquisition Cor-
poration 110 and Multimedia Marketing & Design Inc.
2.8 Agreement and Plan of Reorganization dated as of August
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 111 and KandH., Inc.
2.9 Agreement and Plan of Reorganization dated as of August
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 111 and DreamMedia, Inc.
2.10 Agreement and Plan of Reorganization dated as of Septem-
ber 26, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 113 and Internet Cybernautics, Inc.
2.11 Agreement and Plan of Reorganization dated as of July 31,
1997 by and among the Registrant, USWeb Acquisition Cor-
poration 114 and Synergetic Systems Integration, Inc.
2.12 Agreement and Plan of Reorganization dated as of Septem-
ber 30, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 119 and Online Marketing Company.
2.13 Agreement and Plan of Reorganization dated as of Septem-
ber 30, 1997 by and among the Registrant, USWeb Acquisi-
tion Corporation 117 and Zendatta, Inc.
2.14 Agreement and Plan of Reorganization dated as of October
10, 1997 by and among the Registrant, USWeb Acquisition
Corporation 118 and W3-design.
2.15 Agreement and Plan of Reorganization dated as of October
29, 1997 by and among the Registrant, USWeb Acquisition
Corporation 122 and USWeb-Apex, Inc.
2.16 Agreement and Plan of Reorganization dated as of October
24, 1997 by and among the Registrant, USWeb Acquisition
Corporation 112 and Reach Networks, 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.
</TABLE>
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
------- ----------- ----------
<C> <S> <C>
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.
4.8 Form of Amended and Restated Investor Rights Agreement
dated November 7, 1997 among the Registrant and the other
parties named therein.
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.
10.12 Loan and Security Agreement dated September 29, 1997 be-
tween the Registrant and Silicon Valley Bank.
10.13 Amendment, dated November 5, 1997 to Loan and Security
Agreement dated September 29, 1997 between the Registrant
and Silicon Valley Bank.
11.1 Statement of computation of pro forma net loss 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-9).
24.1+ Power of Attorney.
27.1+ Financial Data Schedule.
</TABLE>
- ---------------------
+ Previously filed.
* To be supplied by amendment.
<PAGE>
Exhibit 1.1
USWEB CORPORATION
5,000,000 SHARES/1/
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
_____ __, 1997
HAMBRECHT & QUIST LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON, L.L.C.
FIRST ALBANY CORPORATION
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
USWeb Corporation, a Delaware corporation (herein called the Company),
proposes to issue and sell 5,000,000 shares of its authorized but unissued
Common Stock, $0.001 par value (herein called the Common Stock) (said 5,000,000
shares of Common Stock being herein called the Underwritten Stock). The Company
proposes to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 750,000 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration Statement
and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
3(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-36827), including the related preliminary prospectus, for the
registration under the Securities Act of 1933, as amended (herein called the
Securities Act) of the Stock. Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus (meeting
the requirements of Rule 430A of the rules and regulations of the Commission)
heretofore filed by the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (herein called a Rule
462(b) registration statement), and, in the event of any amendment thereto after
the effective date of such registration statement (herein called the Effective
Date), shall also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b)
___________________________
/1/Plus an option to purchase from the Company up to 750,000 additional shares
to cover over-allotment.
1
<PAGE>
registration statement). The term Prospectus as used in this Agreement shall
mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as
included in the Registration Statement) and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from and
after the filing with the Commission of such supplement or the effectiveness of
such amendment) such prospectus as so supplemented or amended. The term
Preliminary Prospectus as used in this Agreement shall mean each preliminary
prospectus included in such registration statement prior to the time it becomes
effective.
The Registration Statement has been declared effective under the Securities
Act, and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. The Company has caused to be delivered
to you copies of each Preliminary Prospectus and has consented to the use of
such copies for the purposes permitted by the Securities Act.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants as follows:
(a) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect on
the business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole). The outstanding shares of
capital stock of each of its subsidiaries have been duly authorized and validly
issued, are fully paid and non-assessable, and are owned by the Company free and
clear of all liens, encumbrances and equities and claims; and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiary are outstanding.
(b) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any materially
adverse change in the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or not
arising from transactions in the ordinary course of business, other than as set
forth in the Registration Statement and the Prospectus, and since such dates,
except in the ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to in the
Registration Statement and the Prospectus.
(c) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option Stock
is to be purchased, the Prospectus will comply, in all material respects, with
the provisions of the Securities Act and the rules and regulations of the
Commission thereunder; on the Effective Date, the Registration Statement did not
contain any untrue statement of a material fact and did not omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading; and, on the Effective Date the Prospectus did
not and, on the Closing Date and any later date on which Option Stock is to be
purchased, will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that none of the representations and warranties in this
subparagraph (c) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in conformity
with information herein or otherwise furnished in writing to the Company by or
on behalf of the Underwriters for use in the Registration Statement or the
Prospectus.
(d) The Stock, when issued and sold to the Underwriters as provided
herein, will be duly and validly authorized and issued, fully paid and
nonassessable and conforms to the description thereof in the
2
<PAGE>
Prospectus. No further approval or authority of the stockholders or the Board
of Directors of the Company will be required for the issuance and sale of the
Stock as contemplated herein.
(e) Prior to the Closing Date the Stock to be issued and sold by the
Company will be authorized for listing by the Nasdaq National Market upon
official notice of issuance.
(f) The Company has the duly authorized and validly issued
outstanding capitalization set forth under the caption "Capitalization" in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) and will have the adjusted capitalization set forth
therein on the Closing Date and the Option Closing Date, based on the
assumptions set forth therein. The securities of the Company conform to the
descriptions thereof contained in the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus). The outstanding shares of
Common Stock have been duly authorized and validly issued by the Company and are
fully paid and nonassessable. Except as created hereby or referred to in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), there are no outstanding options, warrants, rights or
other arrangements requiring the Company or any subsidiary at any time to issue
any capital stock. No holders of outstanding shares of capital stock of the
Company are entitled as such to any preemptive or other rights to subscribe for
any of the Stock and neither the filing of the Registration Statement nor the
offering or sale of the Stock as contemplated by this Agreement gives rise to
any rights, other than those which have been waived or satisfied, for or
relating to, the registration of any securities of the Company.
(g) The Company has full legal right, power and authority to enter
into this Agreement and to consummate the transactions provided for herein.
This Agreement has been duly authorized, executed and delivered by the Company
and, assuming it is a binding agreement of yours, constitutes a legal, valid and
binding agreement of the Company enforceable against the Company in accordance
with its terms (except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws of general
application relating to or affecting the enforcement of creditors' rights and
the application of equitable principles relating to the availability of remedies
and except as rights to indemnity or contribution may be limited by federal or
state securities laws and the public policy underlying such laws). The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not violate or result in a breach of any of the terms or provisions of, or
constitute a default under, any indenture, mortgage, deed of trust or other
agreement or instrument to which the Company or any of its subsidiaries is a
party, or of the Certificate of Incorporation or Bylaws of the Company
(including all amendments thereto) or any order, rule or regulation applicable
to the Company or any of its subsidiaries of any court or of any regulatory body
or administrative agency or other governmental body having jurisdiction.
(h) The Company and its subsidiaries hold all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of the business of the Company and its subsidiaries, taken as a
whole; each of the Company and its subsidiaries owns, possesses or has the right
to use all inventions, trademarks, trade names, service marks, service names,
copyrights, license rights, know-how (including trade secrets, know-how and
other unpatented and/or unpatentable proprietary or confidential information,
systems or procedures) and other intellectual property rights, and all patent
and patent rights, necessary to carry on its business as presently conducted and
as described in the Registration Statement and the Prospectus; and neither the
Company nor any of its subsidiaries has infringed, or received notice of alleged
infringement of or conflict with, any inventions, trade names, service marks,
service names, copyrights, license rights, know-how or other intellectual
property rights of others, any patents, patent rights or trademarks of others,
which, individually or in the aggregate, if the subject of any unfavorable
decision, ruling or finding, would result in any material adverse effect on the
business, properties, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole. The Company
knows of no material infringement by others of patents, patent rights,
inventions, trade names, trademarks, service marks, service names, copyrights,
license rights, know-how and other intellectual property rights owned by or
licensed to the Company or any of its subsidiaries.
(i) The Company confirms as of the date hereof that each of the
Company and its subsidiaries is in compliance with all provisions of Section 1
of Laws of Florida, Chapter 92-198, An Act Relating to Disclosure of Doing
--------------------------------------
Business with Cuba, and the Company further agrees that if it commences engaging
- ------------------
in business with the government of Cuba or with any person or affiliate located
in Cuba after the date
3
<PAGE>
the Registration Statement becomes or has become effective with the Commission
or with the Florida Department of Banking and Finance (the "Department"),
whichever date is later, or if the information reported in the Prospectus, if
any, concerning the Company's business with Cuba or with any person or affiliate
located in Cuba changes in any material way, the Company will provide the
Department notice of such business or change, as appropriate, in a form
acceptable to the Department.
(j) The Commission has not issued an order preventing or suspending
the use of any Prospectus relating to the proposed offering of the Stock nor
instituted proceedings for that purpose
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
5,000,000 shares of the Underwritten Stock to the several Underwriters and each
of the Underwriters agrees to purchase from the Company the respective aggregate
number of shares of Underwritten Stock set forth opposite its name in Schedule
I. The price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per share. In
making this Agreement, each Underwriter is contracting severally and not
jointly; except as provided in paragraphs (b) and (c) of this Section 3, the
agreement of each Underwriter is to purchase only the respective number of
shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of shares of the Stock agreed to be purchased by such
Underwriter or Underwriters, the Company shall immediately give notice thereof
to you, and the non-defaulting Underwriters shall have the right within 24 hours
after the receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed upon
between you and such purchasing Underwriter or Underwriters and upon the terms
herein set forth, all or any part of the shares of the Stock which such
defaulting Underwriter or Underwriters agreed to purchase. If the non-
defaulting Underwriters fail so to make such arrangements with respect to all
such shares and portion, the number of shares of the Stock which each non-
defaulting Underwriter is otherwise obligated to purchase under this Agreement
shall be automatically increased on a pro rata basis to absorb the remaining
shares and portion which the defaulting Underwriter or Underwriters agreed to
purchase; provided, however, that the non-defaulting Underwriters shall not be
obligated to purchase the shares and portion which the defaulting Underwriter or
Underwriters agreed to purchase if the aggregate number of such shares of the
Stock exceeds 10% of the total number of shares of the Stock which all
Underwriters agreed to purchase hereunder. If the total number of shares of the
Stock which the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the 24-hour period
above referred to, to make arrangements with other underwriters or purchasers
satisfactory to you for purchase of such shares and portion on the terms herein
set forth. In any such case, either you or the Company shall have the right to
postpone the Closing Date determined as provided in Section 5 hereof for not
more than seven business days after the date originally fixed as the Closing
Date pursuant to said Section 5 in order that any necessary changes in the
Registration Statement, the Prospectus or any other documents or arrangements
may be made. If neither the non-defaulting Underwriters nor the Company shall
make arrangements within the 24-hour periods stated above for the purchase of
all the shares of the Stock which the defaulting Underwriter or Underwriters
agreed to purchase hereunder, this Agreement shall be terminated without further
act or deed and without any liability on the part of the Company to any non-
defaulting Underwriter and without any liability on the part of any non-
defaulting Underwriter to the Company. Nothing in this paragraph (b), and no
action taken hereunder, shall relieve any defaulting Underwriter from liability
in respect of any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 750,000 shares in the aggregate of the Option Stock from the
Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth day after the date of
4
<PAGE>
this Agreement upon written or telegraphic notice by you to the Company setting
forth the aggregate number of shares of the Option Stock as to which the several
Underwriters are exercising the option. Delivery of certificates for the shares
of Option Stock, and payment therefor, shall be made as provided in Section 5
hereof. The number of shares of the Option Stock to be purchased by each
Underwriter shall be the same percentage of the total number of shares of the
Option Stock to be purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such manner as you
deem advisable to avoid fractional shares.
4. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of
the Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed by the
Company (insofar as such information relates to the Underwriters) constitutes
the only information furnished by the Underwriters to the Company for inclusion
in the Registration Statement, any Preliminary Prospectus, and the Prospectus,
and you on behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
5. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the option granted by Section 3(c) hereof shall have
been exercised not later than 7:00 A.M., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Wilson Sonsini Goodrich & Rosati, counsel for the Company, or
such other place as the parties shall agree, at 7:00 a.m., San Francisco time,
on the fourth business day after the date of this Agreement, or at such time on
such other day, not later than seven full business days after such fourth
business day, as shall be agreed upon in writing by the Company and you. The
date and hour of such delivery and payment (which may be postponed as provided
in Section 3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding the
Closing Date, delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made at the office of Wilson Sonsini Goodrich &
Rosati, counsel for the Company, or such other place as the parties shall agree,
at 7:00 a.m., San Francisco time, on the third business day after the exercise
of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks in same day funds or other same day funds. Such payment shall be made
upon delivery of certificates for the Stock to you for the respective accounts
of the several Underwriters against receipt therefor signed by you.
Certificates for the Stock to be delivered to you shall be registered in such
name or names and shall be in such denominations as you may request at least one
business day before the Closing Date, in the case of Underwritten Stock, and at
least one business day prior to the purchase thereof, in the case of the Option
Stock. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Lewco Securities
Corporation, 2 Broadway, New York, New York 10004 on the business day prior to
the Closing Date or, in the case of the Option Stock, by 3:00 p.m., New York
time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
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6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees
as follows:
(a) The Company will (i) prepare and timely file with the Commission
under Rule 424(b) a Prospectus containing information previously omitted at the
time of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) not file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of the
Commission.
(b) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of the
Registration Statement, (iii) the institution or notice of intended institution
of any action or proceeding for that purpose, (iv) the receipt by the Company of
any notification with respect to the suspension of the qualification of the
Stock for sale in any jurisdiction, or (v) the receipt by it of notice of the
initiation or threatening of any proceeding for such purpose. The Company will
make every reasonable effort to prevent the issuance of such a stop order and,
if such an order shall at any time be issued, to obtain the withdrawal thereof
at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to
you a signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each post-
effective amendment, if any, to the Registration Statement (together with, in
each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus as
you may reasonably request, and (iii) thereafter from time to time during the
period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event relating
to or affecting the Company, or of which the Company shall be advised in writing
by you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the light
of the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the Prospectus as
so supplemented or amended will not contain any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances existing at the time such
Prospectus is delivered to such purchaser, not misleading. If, after the initial
public offering of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by reason of
changes in general market conditions or otherwise, you will advise the Company
in writing of the proposed variation, and, if in the opinion either of counsel
for the Company or of counsel for the Underwriters such proposed variation
requires that the Prospectus be supplemented or amended, the Company will
forthwith prepare and file with the Commission a supplement to the Prospectus or
an amended prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by the several
Underwriters to use the Prospectus, as from time to time amended or
supplemented, in connection with the sale of the Stock in accordance with the
applicable provisions of the Securities Act and the applicable rules and
regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
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(f) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(g) During a period of five years commencing with the date hereof,
the Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders of
the Company and of all information, documents and reports filed with the
Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement in accordance with Section 11(a) of the Securities Act and Rule 158
thereunder.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including all costs and
expenses incident to (i) the preparation, printing and filing with the
Commission and the National Association of Securities Dealers, Inc. of the
Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the
furnishing to the Underwriters of copies of any Preliminary Prospectus and of
the several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents delivered
to the Underwriters, (iv) the preparation, printing and filing of all
supplements and amendments to the Prospectus referred to in paragraph (d) of
this Section 6, (v) the furnishing to you and the Underwriters of the reports
and information referred to in paragraph (g) of this Section 6 and (vi) the
printing and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements (including
counsel fees and disbursements and cost of printing memoranda for the
Underwriters) paid by or for the account of the Underwriters or their counsel in
qualifying the Stock under state securities or blue sky laws and in the review
of the offering by the NASD.
(k) The Company hereby agrees that, without the prior written consent
of Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not,
for a period of 180 days following the commencement of the public offering of
the Stock by the Underwriters, directly or indirectly, (i) sell, offer, contract
to sell, make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for or any rights to
purchase or acquire Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences or
ownership of Common Stock, whether any such transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply to (A)
the Stock to be sold to the Underwriters pursuant to this Agreement, (B) shares
of Common Stock issued by the Company upon the exercise of options granted under
the stock option plans of the Company (the "Option Plans") or upon the exercise
of warrants outstanding as of the date hereof, all as described in footnote 3 to
the table under the caption "Capitalization" in the Prospectus, (C) options to
purchase Common Stock granted under the Option Plans, (D) shares of Common Stock
issuable pursuant to its obligations under its various acquisition agreements as
described in the Prospectus, (E) shares of Common Stock sold to Intel
Corporation pursuant to that certain Common Stock Purchase Agreement dated
November __, 1997 by and between the Company and Intel Corporation and (F)
shares of Common Stock issued in connection with transactions contemplated by
Rule 145 promulgated under the Securities Act.
(l) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether
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such rumor, publication or event necessitates a supplement to or amendment of
the Prospectus), the Company will, after written notice from you advising the
Company to the effect set forth above, forthwith prepare, consult with you
concerning the substance of, and disseminate a press release or other public
statement, reasonably satisfactory to you, responding to or commenting on such
rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of 1940,
as amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
7. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Securities Exchange Act of 1934, as amended
(herein called the Exchange Act), or the common law or otherwise, and the
Company agrees to reimburse each such Underwriter and controlling person for any
legal or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or (ii) any untrue
statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus or the Prospectus (as amended or as supplemented if the
Company shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph (a)
shall not apply to any such losses, claims, damages, liabilities or expenses if
such statement or omission was made in reliance upon and in conformity with
information furnished as herein stated or otherwise furnished in writing to the
Company by or on behalf of any Underwriter for use in any Preliminary Prospectus
or the Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto and (2) the indemnity agreement contained in this paragraph
(a) with respect to any Preliminary Prospectus shall not inure to the benefit of
any Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of Section
15 of the Securities Act, from and against any and all losses, claims, damages
or liabilities, joint or several, to which such indemnified parties or any of
them may become subject under the Securities Act, the Exchange Act, or the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with
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defending against any such losses, claims, damages or liabilities or in
connection with any investigation or inquiry of, or other proceeding which may
be brought against, the respective indemnified parties, in each case arising out
of or based upon (i) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (including the Prospectus
as part thereof and any Rule 462(b) registration statement) or any post-
effective amendment thereto (including any Rule 462(b) registration statement)
or the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading or
(ii) any untrue statement or alleged untrue statement of a material fact
contained in the Prospectus (as amended or as supplemented if the Company shall
have filed with the Commission any amendment thereof or supplement thereto) or
the omission or alleged omission to state therein a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, if such statement or omission was made in
reliance upon and in conformity with information furnished as herein stated or
otherwise furnished in writing to the Company by or on behalf of such
indemnifying Underwriter for use in the Registration Statement or the Prospectus
or any such amendment thereof or supplement thereto. The indemnity agreement of
each Underwriter contained in this paragraph (b) shall remain operative and in
full force and effect regardless of any investigation made by or on behalf of
any indemnified party and shall survive the delivery of and payment for the
Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 7 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall not
relieve such indemnifying party or parties from any liability which it or they
may have to the indemnified party for contribution or otherwise than on account
of such indemnity agreement. Any indemnifying party shall be entitled at its
own expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any indemnifying
party shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (herein called the Notice of Defense) to
the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or parties
shall be entitled to conduct the defense to the extent reasonably determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties and (ii) in any event, the indemnified party or parties shall be
entitled to have counsel chosen by such indemnified party or parties participate
in, but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to the
indemnified party or parties, the indemnifying party or parties will not be
liable under paragraphs (a) through (c) of this Section 7 for any legal or other
expenses subsequently incurred by the indemnified party or parties in connection
with the defense of the action, suit, investigation, inquiry or proceeding,
except that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized to
be incurred by the indemnified party or parties. If, within a reasonable time
after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
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(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of
indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received by
the Company and the total underwriting discount received by the Underwriters, as
set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by each indemnifying party and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in this paragraph (d) to contribute are several in proportion to
their respective underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in any
pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such indemnified party and each such
controlling person from all liability arising out of such claim, action, suit or
proceeding.
8. TERMINATION. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material
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adverse decline in value of securities generally on the New York Stock Exchange,
the American Stock Exchange, The Nasdaq Stock Market, or limitations on prices
(other than limitations on hours or numbers of days of trading) for securities
on either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the securities
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; provided, however, that in
the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing, and the
form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Morrison & Foerster LLP, counsel for the Underwriters.
(c) You shall have received from Wilson Sonsini Goodrich & Rosati,
Professional Corporation, counsel for the Company, an opinion, addressed to the
Underwriters and dated the Closing Date, covering the matters set forth in Annex
A hereto, and if Option Stock is purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the Underwriters and
dated such later date, confirming that the statements expressed as of the
Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading, (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such a
supplement or amendment, (iii) since the respective dates as of which
information is given in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the business, properties, financial
condition or results of operations of the Company and its subsidiaries, taken as
a whole, whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of business,
neither the Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in which
it originally became effective and the Prospectus contained therein, (iv)
neither the Company nor any of its subsidiaries has any material contingent
obligations which are not disclosed in the Registration Statement and the
Prospectus, (v) there are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus, (vi)
there are not any
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franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as required,
(vii) the representations and warranties of the Company herein are true and
correct in all material respects as of the Closing Date or any later date on
which Option Stock is to be purchased, as the case may be, and (viii) there has
not been any material change in the market for securities in general or in
political, financial or economic conditions from those reasonably foreseeable as
to render it impracticable in your reasonable judgment to make a public offering
of the Stock, or a material adverse change in market levels for securities in
general (or those of companies in particular) or financial or economic
conditions which render it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or such
later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (vii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from Price Waterhouse LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Stock is purchased, confirming that they are independent
public accountants with respect to the Company within the meaning of the
Securities Act and the applicable published rules and regulations thereunder and
based upon the procedures described in their letter delivered to you
concurrently with the execution of this Agreement (herein called the Original
Letter), but carried out to a date not more than three business days prior to
the Closing Date or such later date on which Option Stock is purchased (i)
confirming, to the extent true, that the statements and conclusions set forth in
the Original Letter are accurate as of the Closing Date or such later date, as
the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter which are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. The letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the public
offering of the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from Price Waterhouse LLP a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's financial statements as at September 30, 1997, did
not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several jurisdictions,
or other evidence satisfactory to you, of the qualification referred to in
paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from
stockholders, optionholders and warrantholders holding an aggregate of _____
shares of Common Stock and the right to purchase _________ shares of Common
Stock agreements, in form reasonably satisfactory to Hambrecht & Quist LLC,
stating that without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, such person or entity will not, for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell, make
any short sale, pledge, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any shares of Common Stock or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement that
transfers, in whole or in part, any of the economic consequences or ownership of
Common Stock, whether any such transaction described in clause (i) or (ii) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise.
12
<PAGE>
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Morrison & Foerster LLP, counsel for the Underwriters,
shall be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all out-
of-pocket expenses (including reasonable fees and disbursements of counsel) that
shall have been incurred by them in connection with the transactions
contemplated hereby.
10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
11. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 11 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
12. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
13. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by fax and, if to the Underwriters, shall be
mailed, faxed or delivered to Hambrecht & Quist LLC, One Bush Street, San
Francisco, California 94104; and if to the Company, shall be mailed, faxed or
delivered to it at its office, 2880 Lakeside Drive, Suite 350, Santa Clara,
California 95054, Attention: Chief Financial Officer. All notices given by fax
shall be promptly confirmed by letter.
14. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force
13
<PAGE>
and effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or their respective directors or
officers, and (c) delivery and payment for the Stock under this Agreement;
provided, however, that if this Agreement is terminated prior to the Closing
Date, the provisions of paragraph (k) of Section 6 hereof shall be of no further
force or effect.
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.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
14
<PAGE>
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
USWEB CORPORATION
By___________________________________________
Joseph Firmage
Chairman and Chief Executive Officer
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
HAMBRECHT & QUIST LLC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
WESSELS, ARNOLD & HENDERSON, L.L.C.
FIRST ALBANY CORPORATION
BY: HAMBRECHT & QUIST LLC
By __________________________
Managing Director
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
15
<PAGE>
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
- ------------ ---------
<S> <C>
Hambrecht & Quist LLC...........................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
Wessels, Arnold & Henderson, L.L.C..............................
First Albany Corporation........................................
</TABLE>
16
<PAGE>
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
WILSON SONSINI GOODRICH & ROSATI, PROFESSIONAL CORPORATION
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which its
ownership or leasing of property requires such qualification (except where the
failure to be so qualified would not have a material adverse effect on the
business, properties, financial condition or results of operations of the
Company and its subsidiaries, taken as a whole), and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement; all the issued and outstanding capital
stock of each of the subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned by the Company
free and clear of all liens, encumbrances and security interests, and to the
best of such counsel's knowledge, no options, warrants or other rights to
purchase, agreements or other obligations to issue or other rights to convert
any obligations into shares of capital stock or ownership interests in such
subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of [ ] shares
of Preferred Stock, $[ ] par value, of which no shares are outstanding, and [ ]
shares of Common Stock, $[ ] par value, of which there are outstanding [ ]
shares (including the Underwritten Stock plus the number of shares of Option
Stock issued on the date hereof); proper corporate proceedings have been taken
validly to authorize such authorized capital stock; all of the outstanding
shares of such capital stock (including the Underwritten Stock and the shares of
Option Stock issued, if any) have been duly and validly issued and are fully
paid and nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, will have been duly and validly issued and be fully paid
and nonassessable; and no preemptive rights of, or rights of refusal in favor
of, stockholders exist with respect to the Stock, or the issue and sale thereof,
pursuant to the Certificate of Incorporation or Bylaws of the Company and, to
the knowledge of such counsel, there are no contractual preemptive rights that
have not been waived, rights of first refusal or rights of co-sale which exist
with respect to the issue and sale of the Stock;
(iii) the Registration Statement has become effective under the Securities
Act and, to the best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other statistical data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such counsel
need not express any opinion or belief) as of its date or at the Closing Date
(or any later date on which Option Stock is purchased), contained or contains
any untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and
17
<PAGE>
the description of the Company's stock option plans and the options granted and
which may be granted thereunder and the Company's warrants set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to said plans, options and warrants to the extent required by the
Securities Act and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms;
(ix) the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of, the Certificate of Incorporation or Bylaws of the Company
or any of its subsidiaries or any agreement or instrument known to such counsel
to which the Company or any of its subsidiaries is a party or any applicable law
or regulation, or so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality;
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except such as have been obtained
under the Securities Act and such as may be required under state securities or
blue sky laws in connection with the purchase and distribution of the Stock by
the Underwriters; and
(xii) the Stock issued and sold by the Company has been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance.
____________________________________
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or of the States of Delaware or
California, upon opinions of local counsel satisfactory in form and scope to
counsel for the Underwriters. Copies of any opinions so relied upon shall be
delivered to the Representatives and to counsel for the Underwriters and the
foregoing opinion shall also state that counsel knows of no reason the
Underwriters are not entitled to rely upon the opinions of such local counsel.
18
<PAGE>
EXHIBIT 2.7
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 110
AND
MULTIMEDIA MARKETING & DESIGN INC.
(D/B/A "VIRTUAL MARKETING")
DATED AS OF JULY 1, 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................................. 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
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............................................................. 10
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.................................. 17
2.15 Interested Party Transactions.......................................... 19
2.16 Governmental Authorization............................................. 19
2.17 Litigation............................................................. 19
2.18 Accounts Receivable.................................................... 20
2.19 Minute Books........................................................... 20
2.20 Environmental Matters.................................................. 20
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses.................... 21
2.22 Employee Benefit Plans and Compensation............................. 21
2.23 Insurance........................................................... 24
2.24 Compliance with Laws................................................ 24
2.25 Third Party Consents................................................ 24
2.26 Warranties; Indemnities............................................. 24
2.27 Complete Copies of Materials........................................ 24
2.28 Representations Complete............................................ 24
2.29 Business Plan....................................................... 24
2.30 Backlog Report...................................................... 25
2.31 Securities Law Compliance........................................... 25
2.32 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................................................... 27
3.4 Brokers' and Finders' Fees.......................................... 27
3.5 Similar Transactions................................................ 27
3.6 No Changes.......................................................... 28
3.7 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..................................................... 30
ARTICLE V - ADDITIONAL AGREEMENTS.............................................. 31
5.1 Parent's Right of First Refusal..................................... 31
5.2 Market Standoff Agreement........................................... 32
5.3 Restriction on Competition.......................................... 32
5.4 Confidentiality..................................................... 33
5.5 Expenses............................................................ 34
5.6 Public Disclosure................................................... 34
5.7 Post-Closing Employment of Company Employees........................ 34
5.8 Treatment of Affiliate Warrants..................................... 36
5.9 Access to Information............................................... 36
5.10 Public Disclosure................................................... 36
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.11 Consents............................................................. 36
5.12 FIRPTA Compliance.................................................... 37
5.13 Best Efforts......................................................... 37
5.14 Notification of Certain Matters...................................... 37
5.15 Tax Returns.......................................................... 37
5.16 Additional Documents and Further Assurances.......................... 37
5.17 Section 368 Compliance............................................... 38
5.18 Parent Policies...................................................... 38
ARTICLE VI - CONDITIONS TO THE MERGER........................................... 38
6.1 Conditions to Obligations of Each Party to Effect the Merger......... 38
6.2 Additional Conditions to Obligations of Company...................... 38
6.3 Additional Conditions to the Obligations of Parent and Sub........... 39
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW................ 40
7.1 Survival of Representations and Warranties........................... 40
7.2 Escrow Arrangements; Setoff.......................................... 40
7.3 Indemnity ........................................................... 47
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER................................ 48
8.1 Termination.......................................................... 48
8.2 Effect of Termination................................................ 49
8.3 Amendment............................................................ 49
8.4 Extension; Waiver.................................................... 49
ARTICLE IX - GENERAL PROVISIONS................................................. 50
9.1 Notices.............................................................. 50
9.2 Interpretation....................................................... 50
9.3 Counterparts......................................................... 51
9.4 Entire Agreement; Assignment......................................... 51
9.5 Severability......................................................... 51
9.6 Other Remedies....................................................... 51
9.7 Governing Law........................................................ 51
9.8 Rules of Construction................................................ 51
</TABLE>
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of July 1, 1997 (the "Effective Date"), among USWeb Corporation,
--------------
a Utah corporation ("Parent"), USWeb Acquisition Corporation 110, a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), Multimedia
---
Marketing & Design Inc., an Illinois 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:
<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 Illinois (the "Illinois 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 Illinois (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 Illinois 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
Illinois 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
<PAGE>
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 $2,992,828 (the "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(e) below) as of the Effective 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. The Company has no stock 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 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
<PAGE>
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.
(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
-4-
<PAGE>
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 was 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 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
-5-
<PAGE>
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 Model attached as Exhibit B
---------
(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 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:
-6-
<PAGE>
FSP = (-FAPP / FVPSED)
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective 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. 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 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 / FVPSED)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective Date."
------------------
-7-
<PAGE>
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 Common Shareholders listed in Exhibit A attached hereto
---------
(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:
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
Illinois. 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.
-8-
<PAGE>
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of 1,500
shares of authorized Common Stock of which one share is 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.
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
-9-
<PAGE>
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 Illinois.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of January 31, 1997, 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 June 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, the
-------------------------- ---------
Company has no 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;
-10-
<PAGE>
(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 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;
-11-
<PAGE>
(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;
(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
-------
-12-
<PAGE>
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.
(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,
-13-
<PAGE>
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.
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"). 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.
2.13 Intellectual Property.
---------------------
-14-
<PAGE>
(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.
(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
-15-
<PAGE>
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.
(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 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
-16-
<PAGE>
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 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,
-17-
<PAGE>
(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,
(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.
-18-
<PAGE>
(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.
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.
-19-
<PAGE>
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of June 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 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
- -------
-20-
<PAGE>
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 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
-21-
<PAGE>
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. (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; (iv) 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); (v) 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 (vi) 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.
-22-
<PAGE>
(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) 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
-23-
<PAGE>
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
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.
---------
-24-
<PAGE>
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.
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.
-25-
<PAGE>
(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.
(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.
-26-
<PAGE>
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $.001 par value, of which 21,068,321 shares were issued and
outstanding as of May 31, 1997, and 37,764,153 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 10,200,000 shares are designated
Series C Preferred Stock, 8,529,141 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 the 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 issued or outstanding warrants to purchase issuable pursuant to the
Company's Affiliate Warrant Program, and (v) 10,000,000 shares of Common Stock
for issuance under the Company'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.
(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 Company Shareholders upon such recalculation shall be issued promptly to
the Company Shareholders.
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<PAGE>
3.6 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the Confidential Offering Memorandum dated February
1997, relating to Parent's $18,000,000 Series C Preferred Stock Offering (i) was
true and correct as of their respective dates, (ii) accurately described
Parent's business, operating results, financial condition, and, to the Parent's
knowledge, prospects as of their respective dates, (iii) contained no untrue
statement of a material fact as of their respective dates, or (iv) omitted no
material fact necessary to make the statements contained therein, in light of
the circumstances under which made in such documents, not misleading as of their
respective dates. None of the representations made by Parent as of the date of
this Agreement, or any certificate or Exhibit furnished by Parent pursuant to
this Agreement, contains any untrue statement of a material fact, or omits to
state any material fact necessary in order to make the statements contained
therein, in light of the circumstances under which made, not misleading.
3.7 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 counsel.
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;
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(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;
(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;
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<PAGE>
(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);
(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
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<PAGE>
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 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 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.
(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
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<PAGE>
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
under the Securities Act of 1933, as amended.
5.2 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 of the 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 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.
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) except as set forth in Exhibit C, 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
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<PAGE>
(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 any time upon the occurrence of any of the following
events:
1. acts of dishonesty by the Principal Shareholder;
2. gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
3. the Principal Shareholder's conviction of a crime relating
to his character or employment by Parent;
4. 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
5. death of the Principal Shareholder.
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
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<PAGE>
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.
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
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<PAGE>
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, 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 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 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 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 bonus, that Parent
may withhold any applicable taxes from New Employee's regular pay or, if
insufficient, that New Employee will make
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<PAGE>
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.
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.
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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.
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. 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.
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<PAGE>
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. 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
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<PAGE>
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:
(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.
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<PAGE>
(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.
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
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<PAGE>
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.
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 $__________, 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 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
-41-
<PAGE>
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 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).
-42-
<PAGE>
(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 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.
-43-
<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 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 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, Tushar Patel 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>
(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
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<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.
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<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 (an
"Indemnification 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 Indemnification Notice shall be given within
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<PAGE>
25 days of the filing or other written assertion of any such claim against
Parent, but the failure of Parent to give the Indemnification 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 November 1, 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
-48-
<PAGE>
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.
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.
-49-
<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
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:
Tushar Patel
325 West Eugenie
Chicago, IL 60614
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.
-50-
<PAGE>
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 unenforce able, 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.
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.
-51-
<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.
COMPANY USWEB CORPORATION
By: /s/ Joseph Firmage By:______________________________
--------------------------------
President
Title:___________________________
ESCROW AGENT USWEB ACQUISITION CORPORATION 110
By:___________________________ By:______________________________
Title:________________________ Title:___________________________
PRINCIPAL SHAREHOLDERS
/s/ Tushar Patel
---------------------------------
Tushar Patel
-52-
<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
-i-
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares/*/
Tushar Patel 997,609
____________________
/*/On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
<PAGE>
Exhibit 2.8
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 111
AND
KANDH, INC.
DATED AS OF AUGUST 29, 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....................................................3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.....3
1.7 Surrender of Certificates.................................................5
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.......................................................9
1.12 Tax Consequences..........................................................9
1.13 Taking of Necessary Action; Further Action................................9
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS..........................................10
2.1 Organization of the Company..............................................10
2.2 Company Capital Structure................................................10
2.3 Subsidiaries.............................................................10
2.4 Authority................................................................11
2.5 No Conflict..............................................................11
2.6 Consents.................................................................11
2.7 Company Financial Statements.............................................11
2.8 No Undisclosed Liabilities...............................................12
2.9 No Changes...............................................................12
2.10 Tax Matters..............................................................14
2.11 Restrictions on Business Activities......................................15
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment...................................................15
2.13 Intellectual Property....................................................16
2.14 Agreements, Contracts and Commitments....................................19
2.15 Interested Party Transactions............................................21
2.16 Governmental Authorization...............................................21
2.17 Litigation...............................................................21
2.18 Accounts Receivable......................................................21
2.19 Minute Books.............................................................21
2.20 Environmental Matters....................................................22
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses.........................22
2.22 Employee Benefit Plans and Compensation..................................23
2.23 Insurance................................................................25
2.24 Compliance with Laws.....................................................26
2.25 Third Party Consents.....................................................26
2.26 Warranties; Indemnities..................................................26
2.27 Complete Copies of Materials.............................................26
2.28 Representations Complete.................................................26
2.29 Business Plan............................................................26
2.30 Backlog Report...........................................................26
2.31 Principal Shareholder Investment Representations and Warranties..........26
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.......................28
3.1 Organization, Standing and Power.........................................28
3.2 Authority; Consents......................................................28
3.3 Capital Structure........................................................28
3.4 Brokers' and Finders' Fees...............................................29
3.5 No Changes...............................................................29
3.6 Complete Copies of Materials.............................................29
3.7 Parent Financial Statements..............................................29
3.8 Litigation...............................................................30
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME.....................................30
4.1 Conduct of Business of the Company.......................................30
4.2 No Solicitation..........................................................32
ARTICLE V - ADDITIONAL AGREEMENTS....................................................33
5.1 Parent's Right of First Refusal..........................................33
5.2 Market Standoff Agreement................................................34
5.3 Restriction on Competition...............................................34
5.4 Confidentiality..........................................................36
5.5 Expenses.................................................................36
5.6 Public Disclosure........................................................36
5.7 Post-Closing Employment of Company Employees.............................36
5.8 Treatment of Affiliate Warrants..........................................38
5.9 Access to Information....................................................38
5.10 Public Disclosure........................................................39
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.11 Consents.................................................................39
5.12 FIRPTA Compliance........................................................39
5.13 Best Efforts.............................................................39
5.14 Notification of Certain Matters..........................................39
5.15 Tax Returns..............................................................40
5.16 Additional Documents and Further Assurances..............................40
5.17 Section 368 Compliance...................................................40
5.18 Parent Policies..........................................................40
5.19 Similar Transactions.....................................................40
ARTICLE VI - CONDITIONS TO THE MERGER................................................41
6.1 Conditions to Obligations of Each Party to Effect the Merger.............41
6.2 Additional Conditions to Obligations of Company..........................41
6.3 Additional Conditions to the Obligations of Parent and Sub...............42
6.4 Satisfaction or Waiver of Conditions.....................................43
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.....................................51
8.1 Termination..............................................................51
8.2 Effect of Termination....................................................52
8.3 Amendment................................................................52
8.4 Extension; Waiver........................................................52
ARTICLE IX - GENERAL PROVISIONS......................................................53
9.1 Notices..................................................................53
9.2 Interpretation...........................................................54
9.3 Counterparts.............................................................54
9.4 Entire Agreement; Assignment.............................................54
9.5 Severability.............................................................54
9.6 Other Remedies...........................................................54
9.7 Governing Law............................................................55
9.8 Rules of Construction....................................................55
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of August 29, 1997 (the "Effective Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 111, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), KandH,
---
Inc., a Florida 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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
<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 Florida (the "Florida 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 September 30, 1997, 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 Florida (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 Florida being
referred to herein as the "Effective Time"). Notwithstanding anything in the
--------------
Agreement to the contrary, the parties hereto acknowledge and agree that the
Agreement shall be executed and delivered as of, and the Merger Articles shall
be filed on, one and the same date.
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 Florida
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.
The initial directors of the Surviving Corporation immediately
following the Effective Time shall be James J. Heffernan, Craig Bramscher and
Joseph Firmage. The initial officers of the Surviving Corporation immediately
following the Effective Time shall be as follows:
Chief Executive Officer, President, James J. Heffernan
Chief Financial Officer, Secretary and
Treasurer
Vice President and General Manager Craig Bramscher
Vice President Dan Kempka
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 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 $1,478,333 (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. The Company has no stock option, warrant or
-------------
similar 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 or Company Common Stock occurring after the date
hereof.
-3-
<PAGE>
(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. The Fair Value Per Share on
the Closing Date shall be the dollar amount set forth in the Valuation Model (as
defined below) delivered on the Closing Date. Parent agrees that the Fair Value
Per Share at any time after the Closing Date shall be consistent with the fair
market value per share of Parent's Common Stock as determined by the Board of
Directors in connection with contemporaneous grants by parent of incentive stock
options to purchase shares of the Parent's Common Stock.
(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.
-4-
<PAGE>
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 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 (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 was 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 and voting, 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,
-5-
<PAGE>
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
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 Parent
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
- ---------------
-6-
<PAGE>
valuation of the Sub according to the operation of the Parent's Valuation Model
attached as Exhibit B (the "Valuation Model"). Parent shall then calculate the
--------- ---------------
"First Adjustment to Purchase Price" as follows:
- -----------------------------------
FAPP = FADV - COPP
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
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Agreement and Plan of Reorganization dated the
Effective Date among Parent, Sub and DreamMedia, Inc. (the "Other
-----
Agreement").
---------
(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 x (OPP/COPP)
where FSP is the "First Shares Payment;"
FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date;
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 / FVPSED) x (OPP/COPP)
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective Date;"
------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
-7-
<PAGE>
(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. 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;
FADV is the First Adjustment Date Value;
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 x (OPP/COPP)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
FVPSSAD is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Second Adjustment Date;"
--------------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 / FVPSED) x (OPP/COPP)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective Date;"
------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
-8-
<PAGE>
(iii) If SAPP equals zero, no adjustment to the Original Purchase
Price shall be made for the Second Adjustment Date.
(c) Notwithstanding anything in Section 1.10 or Article VII to the
contrary, the parties to the Agreement hereby acknowledge and agree that, absent
fraud on the part of any of the Company Shareholders, in no event shall the
aggregate number of shares of Parent Common Stock deliverable under Sections
1.10(a)(ii) and 1.10(b)(ii) on account of one or more negative adjustments to
the Original Purchase Price in accordance with Section 1.10 exceed the Escrow
Fund. The parties to the Agreement hereby further agree that, notwithstanding
anything in the Agreement to the contrary, absent fraud on the part of the
Company Shareholders, recourse to the Escrow Fund in accordance with Section 7.2
of the Agreement shall be the sole and exclusive remedy of Parent, Sub and the
Surviving Corporation with respect to any adjustments to the Original Purchase
Price in accordance with Section 1.10. The foregoing is not intended to limit
Parent or Sub's remedies for breaches of representations and warranties under
this Agreement.
(d) Any dispute with the respect to Purchase Price Adjustments in
accordance with Section 1.10 of the Agreement shall be resolved through the
arbitration procedure set forth in Section 7.2(i).
1.1 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will not be 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.
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.
-9-
<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 as of the Closing Date, subject to such
exceptions as are specifically disclosed in Exhibit C attached hereto
---------
(referencing the appropriate section and paragraph numbers), as follows:
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
Florida. 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.
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
-10-
<PAGE>
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 all
other agreements required by this Agreement to be entered into by the Company or
such Principal Shareholder (the "Ancillary Agreements") 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 Ancillary Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Ancillary
Agreements have 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, constitute the valid and
binding obligations of the Company and the Principal Shareholders, enforceable
in accordance with their 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 Delaware and the
Secretary of State of the State of Florida.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
unaudited balance sheet of July 31, 1997, and the related unaudited statements
of income and cash flow from the date of inception of the Company (collectively
the "Financials"). The Financials are correct in all material respects and have
----------
been prepared in accordance with United States generally accepted
-11-
<PAGE>
accounting principles ("USGAAP") applied on a basis consistent throughout the
------
periods indicated and consistent with each other. The 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 to normal year-end adjustments, which will not be material in amount or
significance. The Company's unaudited Balance Sheet as of July 31, 1997 shall be
referred to as the "Balance Sheet."
-------------
2.8 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, 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
July 31, 1997.
2.9 No Changes. Except as set forth in Exhibit C, since July 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,
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
-12-
<PAGE>
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 (each 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, 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 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 may have a
Material Adverse Effect on the Company; or
-13-
<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.
(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.
-14-
<PAGE>
(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 mortgage, pledge, security interest or lien
or other encumbrance (each a "Lien") 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.
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
-15-
<PAGE>
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"). 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.
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,
-16-
<PAGE>
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 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 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.
-17-
<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; 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), 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 use 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.
-18-
<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,
-19-
<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.
-20-
<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, 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 per cent (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 proper ties 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.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of August 29, 1997 ("Accounts Receivable") along
-------------------
with the number of days elapsed since such 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
-21-
<PAGE>
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.
-22-
<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
-23-
<PAGE>
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. (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; (iv) 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); (v) 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 (vi) 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
-24-
<PAGE>
welfare benefits upon their retirement or termination of employment, except to
the extent required by statute.
(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.
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
-25-
<PAGE>
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 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.
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. No
---------
representation is made as to whether business prospects, financial projections
or future events described or alluded to in the business plan will actually
occur or be realized. However, the Company and each of its Principal
Shareholders reasonably believe that the current projections and prospects
described in the Company-prepared business plan are reasonable under the
circumstances.
-26-
<PAGE>
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.
2.31 Principal Shareholder Investment Representations and Warranties. 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.
-27-
<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 and the Principal
Shareholders as of the Closing Date 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 100,000,000 shares of
Common Stock, $.001 par value, of which 28,850,214 shares were issued and
outstanding as of August 28,
-28-
<PAGE>
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, 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 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 the 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, (iii) 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 Warrant Program, (iv)
24,000,000 shares of Common Stock for issuance under the Company's 1997
Acquisition Stock Option Plan, (v) 2,113,647 shares of Series C Preferred Stock
for issuance upon exercise of warrants to purchase Series C Preferred Stock, and
(vi) a sufficient number of shares for issuance upon conversion of the Preferred
Stock currently outstanding. 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 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the disclosure package delivered to the Company on
August ____, 1997, including the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of the respective dates of the documents contained therein, (ii)
accurately described Parent's business, operating results, financial condition,
and, to the Parent's knowledge, prospects as of the respective dates of the
documents contained therein, (iii) contained no untrue statement of a material
fact as of the respective dates of the documents contained therein, or (iv)
omitted no material fact necessary to make the statements contained therein, in
light of the circumstances under which made in such document, not misleading as
of the respective dates of the documents contained therein. None of the
representations made by Parent as of the Closing Date, or any certificate or
Exhibit furnished by Parent pursuant to this Agreement, contains any untrue
statement of a material fact, or omits to state any material fact
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<PAGE>
necessary in order to make the statements contained therein, in light of the
circumstances under which made, not misleading.
3.6 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 other than documents (or summaries thereof) that the Parent has
represented to be confidential.
3.7 Parent Financial Statements. Attachment 1 to the Schedule of
---------------------------
Exceptions is Parent's unaudited consolidated balance sheet of July 31, 1997,
and the related unaudited statements of income and cash flow for the seven (7)
months then ended ("Parent Unaudited Financials"). The Parent Unaudited
Financials are correct in all material respects and have been prepared in
accordance with USGAAP applied on a basis consistent throughout the periods
indicated and consistent with each other. The Parent Unaudited Financials
present fairly in all material respects the financial condition, operating
results and cash flows of Parent and its subsidiaries as of the dates and during
the periods indicated therein, subject to normal year-end adjustments, which
will not be material in amount or significance.
3.8 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to Parent's knowledge threatened, against Parent or any of its
subsidiaries, or any of its or their properties, the negative outcome of which
could reasonably be expected to result in a material adverse affect on Parent.
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:
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<PAGE>
(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 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;
-31-
<PAGE>
(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);
(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
-32-
<PAGE>
(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 the Principal
Shareholders, 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 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.
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<PAGE>
(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 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.
(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
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 Parent or any representative of the underwriters in
connection with any registration of the offering of any Shares of the 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 the Parent during the
180-day period following the
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<PAGE>
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.
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.
--------------------
(i) This Section shall apply in the Standard Metropolitan
Statistical Area 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
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<PAGE>
from Parent equal to six (6) months salary and employee benefits; provided, that
--------
neither the term of such restrictions on such Principal Shareholder/New Employee
nor the Parent's obligations to pay such severance benefits shall extend beyond
the third anniversary date of the Closing Date. 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:
1. acts of dishonesty by the Principal Shareholder;
2. gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
3. the Principal Shareholder's conviction of a crime relating to his
character or employment by Parent;
4. 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
5. death of the Principal Shareholder.
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 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 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.
---------
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<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 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 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 and the New Employee exercises or has previously exercised options granted
to such New Employee in accordance with Section 5.7(b), then on such date as
such New Employee may request with respect to the bonus payment for such
exercised options 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.
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<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).
5.12 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 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
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<PAGE>
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 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. Such reimbursement shall not include taxes of the Company
Shareholders payable with respect to income of the Company.
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. 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.
5.19 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
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Second Adjustment Date, Parent acquires another entity similar to the Company
based on a valuation model 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 more
favorable valuation model 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.
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.
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(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.
(e) Side Agreement. The Side Agreement shall have been executed and
--------------
delivered by all of the parties thereto.
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.
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(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.
6.4 Satisfaction or Waiver of Conditions. Execution and delivery of this
------------------------------------
Agreement on the Closing Date by each party to the Agreement shall be deemed for
all purposes under the Agreement to be a written acknowledgment on the part of
such party that all conditions to the obligations of such party to effect the
Closing have been satisfied or irrevocably waived by such party.
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.
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<PAGE>
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.
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 2% of the Original
Purchase Price, 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 after the Effective Time by Parent or Sub.
(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.
-------------------------
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<PAGE>
(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,
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
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<PAGE>
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.
(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
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<PAGE>
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.
(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 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, Daniel Kempka shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
--------------------------
each Company Shareholder, for and on behalf of the Company Shareholders, 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
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<PAGE>
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 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
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<PAGE>
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 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,
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<PAGE>
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 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 incurred by the Company,
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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 (an
"Indemnification 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 Indemnification 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 Indemnification 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.
-51-
<PAGE>
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 November 1, 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 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.
-52-
<PAGE>
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.
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, Professional Corporation
650 Page Mill Road
-53-
<PAGE>
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (650) 493-6811
(b) if to Company or to a Principal Shareholder to:
Attention:
Telecopy No.:
with a copy to:
Foley, Hoag & Eliot
One Post Office Square
Boston, MA 02109
Attention: Bruce Kinn
Telecopy No.: (617) 832-7000
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 unenforce able, the remainder of this
Agreement will continue in full force and effect and the application of
-54-
<PAGE>
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. Parent shall be compensated for ordinary
decreases in the calculated value of the Company pursuant to the provisions of
Section 1.10 and may not duplicate its compensation by means of a claimed breach
of a representation, warranty or covenant.
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.
-55-
<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.
KANDH, INC. USWEB CORPORATION
By: /s/ Daniel Kempka By: /s/ Joseph Firmage
----------------------------- -----------------------------------
Daniel Kempka, President Joseph Firmage, Chief Executive
Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 111
By: /s/ Tobey Corey By: /s/ Joseph Firmage
----------------------------- -----------------------------------
Tobey Corey, President Joseph Firmage, President
PRINCIPAL SHAREHOLDERS
/s/ Daniel Kempka
--------------------------------------
Daniel Kempka
/s/ Richard N. Hornstrom
--------------------------------------
Richard N. Hornstrom
-56-
<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
<PAGE>
EXHIBIT A
---------
Principal Shareholders
<TABLE>
<CAPTION>
Name Number of Shares/*/
- ----------------------- ----------------------
<S> <C>
Daniel Kempka 500
Richard N. Hornstrom 500
</TABLE>
_____________________
/*/ On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
<PAGE>
EXHIBIT 2.9
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 111
AND
DREAMMEDIA, INC.
DATED AS OF AUGUST 29, 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................................................................................. 3
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations.................................. 3
1.7 Surrender of Certificates.............................................................................. 5
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.................................................................................... 9
1.12 Tax Consequences....................................................................................... 9
1.13 Taking of Necessary Action; Further Action............................................................. 9
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE PRINCIPAL SHAREHOLDERS................................................................ 10
2.1 Organization of the Company............................................................................ 10
2.2 Company Capital Structure.............................................................................. 10
2.3 Subsidiaries........................................................................................... 10
2.4 Authority.............................................................................................. 11
2.5 No Conflict............................................................................................ 11
2.6 Consents............................................................................................... 11
2.7 Company Financial Statements........................................................................... 11
2.8 No Undisclosed Liabilities............................................................................. 12
2.9 No Changes............................................................................................. 12
2.10 Tax Matters............................................................................................ 14
2.11 Restrictions on Business Activities.................................................................... 15
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment................................................................................. 15
2.13 Intellectual Property.................................................................................. 16
2.14 Agreements, Contracts and Commitments.................................................................. 19
2.15 Interested Party Transactions.......................................................................... 21
2.16 Governmental Authorization............................................................................. 21
2.17 Litigation............................................................................................. 21
2.18 Accounts Receivable.................................................................................... 21
2.19 Minute Books........................................................................................... 21
2.20 Environmental Matters.................................................................................. 22
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
[CAPTION]
<TABLE>
PAGE
----
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses....................................................... 22
2.22 Employee Benefit Plans and Compensation................................................................ 23
2.23 Insurance.............................................................................................. 25
2.24 Compliance with Laws................................................................................... 26
2.25 Third Party Consents................................................................................... 26
2.26 Warranties; Indemnities................................................................................ 26
2.27 Complete Copies of Materials........................................................................... 26
2.28 Representations Complete............................................................................... 26
2.29 Business Plan.......................................................................................... 26
2.30 Backlog Report......................................................................................... 26
2.31 Principal Shareholder Investment Representations and Warranties........................................ 26
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB..................................................... 28
3.1 Organization, Standing and Power....................................................................... 28
3.2 Authority; Consents.................................................................................... 28
3.3 Capital Structure...................................................................................... 28
3.4 Brokers' and Finders' Fees............................................................................. 29
3.5 No Changes............................................................................................. 29
3.6 Complete Copies of Materials........................................................................... 29
3.7 Parent Financial Statements............................................................................ 30
3.8 Litigation............................................................................................. 30
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME................................................................... 30
4.1 Conduct of Business of the Company..................................................................... 30
4.2 No Solicitation........................................................................................ 32
ARTICLE V - ADDITIONAL AGREEMENTS.................................................................................. 33
5.1 Parent's Right of First Refusal........................................................................ 33
5.2 Market Standoff Agreement.............................................................................. 34
5.3 Restriction on Competition............................................................................. 35
5.4 Confidentiality........................................................................................ 36
5.5 Expenses............................................................................................... 36
5.6 Public Disclosure...................................................................................... 36
5.7 Post-Closing Employment of Company Employees........................................................... 36
5.8 Treatment of Affiliate Warrants........................................................................ 38
5.9 Access to Information.................................................................................. 39
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.10 Public Disclosure...................................................................................... 39
5.11 Consents............................................................................................... 39
5.12 FIRPTA Compliance...................................................................................... 39
5.13 Best Efforts........................................................................................... 39
5.14 Notification of Certain Matters........................................................................ 39
5.15 Tax Returns............................................................................................ 40
5.16 Additional Documents and Further Assurances............................................................ 40
5.17 Section 368 Compliance................................................................................. 40
5.18 Parent Policies........................................................................................ 40
5.19 Similar Transactions................................................................................... 40
ARTICLE VI - CONDITIONS TO THE MERGER.............................................................................. 41
6.1 Conditions to Obligations of Each Party to Effect the Merger........................................... 41
6.2 Additional Conditions to Obligations of Company........................................................ 41
6.3 Additional Conditions to the Obligations of Parent and Sub............................................. 42
6.4 Satisfaction or Waiver of Conditions................................................................... 43
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................................................................... 51
8.1 Termination............................................................................................ 51
8.2 Effect of Termination.................................................................................. 52
8.3 Amendment.............................................................................................. 52
8.4 Extension; Waiver...................................................................................... 52
ARTICLE IX - GENERAL PROVISIONS.................................................................................... 53
9.1 Notices................................................................................................ 53
9.2 Interpretation......................................................................................... 54
9.3 Counterparts........................................................................................... 54
9.4 Entire Agreement; Assignment........................................................................... 54
9.5 Severability........................................................................................... 54
9.6 Other Remedies......................................................................................... 54
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
9.7 Governing Law.......................................................................................... 55
9.8 Rules of Construction.................................................................................. 55
</TABLE>
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of August 29, 1997 (the "Effective Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 111, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"),
---
DreamMedia, Inc., 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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
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
<PAGE>
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 September 30, 1997, 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"). Notwithstanding anything in the
--------------
Agreement to the contrary, the parties hereto acknowledge and agree that the
Agreement shall be executed and delivered as of, and the Merger Articles shall
be filed on, one and the same date.
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.
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>
The initial directors of the Surviving Corporation immediately following
the Effective Time shall be James J. Heffernan, Craig Bramscher and Joseph
Firmage. The initial officers of the Surviving Corporation immediately
following the Effective Time shall be as follows:
Chief Executive Officer, President, James J. Heffernan
Chief Financial Officer, Secretary and
Treasurer
Vice President and General Manager Craig Bramscher
Vice President Dan Kempka
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, $_____
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 $____________
-------------------
(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. The Company has no stock option, warrant or
-------------
similar 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 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.
-3-
<PAGE>
(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. The Fair Value Per Share on
the Closing Date shall be the dollar amount set forth in the Valuation Model (as
defined below) delivered on the Closing Date. Parent agrees that the Fair Value
Per Share at any time after the Closing Date shall be consistent with the fair
market value per share of Parent's Common Stock as determined by the Board of
Directors in connection with contemporaneous grants by parent of incentive stock
options to purchase shares of the Parent's Common Stock.
(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
-4-
<PAGE>
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 (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 was 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 and voting, 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
-5-
<PAGE>
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
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 Parent
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 Valuation Model attached as Exhibit B (the
---------
"Valuation Model"). Parent shall then calculate the "First Adjustment to
- ---------------- -------------------
Purchase Price" as follows:
- --------------
FAPP = FADV - COPP
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
-6-
<PAGE>
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Agreement and Plan of Reorganization dated the
Effective Date among Parent, Sub and KandH, Inc. (the "Other
-----
Agreement").
---------
(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 x (OPP/COPP)
where FSP is the "First Shares Payment;"
FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSFAD is the Fair Value Per Share of the Parent's Common Stock on
the First Adjustment Date;
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 / FVPSED) x (OPP/COPP)
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective Date;"
------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
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. 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;
-7-
<PAGE>
FADV is the First Adjustment Date Value;
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 x (OPP/COPP)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
FVPSSAD is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Second Adjustment Date;"
--------------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(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 / FVPSED) x (OPP/COPP)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
FVPSED is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Effective Date;"
------------------
OPP is the Original Purchase Price; and
COPP is the Original Purchase Price plus the Original Purchase Price
as defined in the Other Agreement.
(ii) If SAPP equals zero, no adjustment to the Original
Purchase Price shall be made for the Second Adjustment Date.
(c) Notwithstanding anything in Section 1.10 or Article VII to the
contrary, the parties to the Agreement hereby acknowledge and agree that, absent
fraud on the part of any of the Company Shareholders, in no event shall the
aggregate number of shares of Parent Common Stock deliverable under Sections
1.10(a)(ii) and 1.10(b)(ii) on account of one or more negative adjustments to
the Original Purchase Price in accordance with Section 1.10 exceed the Escrow
Fund. The parties to the Agreement hereby further agree that, notwithstanding
anything in the Agreement to the contrary, absent fraud on the part of the
Company Shareholders, recourse to the Escrow Fund in accordance with Section 7.2
of the Agreement shall be the sole and exclusive remedy of Parent, Sub and the
Surviving Corporation with respect to any adjustments to the Original Purchase
Price in
-8-
<PAGE>
accordance with Section 1.10. The foregoing is not intended to limit
Parent or Sub's remedies for breaches of representations and warranties under
this Agreement.
(d) Any dispute with the respect to Purchase Price Adjustments in
accordance with Section 1.10 of the Agreement shall be resolved through the
arbitration procedure set forth in Section 7.2(i).
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will not be 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.
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 as of the Closing Date, subject to such
exceptions as are specifically disclosed in Exhibit C attached hereto
---------
(referencing the appropriate section and paragraph numbers), as follows:
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.
-9-
<PAGE>
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.
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.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by this Agreement to be entered into by the Company or
such Principal Shareholder (the "Ancillary Agreements") 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 Ancillary Agreements and the
transactions contemplated hereby and thereby. This Agreement and the Ancillary
Agreements have 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, constitute the valid and
binding obligations of the Company and the Principal Shareholders, enforceable
in accordance with their 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.
-10-
<PAGE>
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 Delaware and the
Secretary of State of the State of California.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
unaudited balance sheet as of December 31, 1996, and the related unaudited
statements of income and cash flow for year then ended and the Company's
unaudited balance sheet of July 31, 1997, and the related unaudited statements
of income and cash flow for the seven (7) months then ended (collectively the
"Financials"). The 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 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 to
normal year-end adjustments, which will not be material in amount or
significance. The Company's unaudited Balance Sheet as of July 31, 1997 shall
be referred to as the "Balance Sheet."
-------------
2.8 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, 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
July 31, 1997.
2.9 No Changes. Except as set forth in Exhibit C, since July 31, 1997,
---------- ---------
there has not been, occurred or arisen any:
-11-
<PAGE>
(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 (each 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;
-12-
<PAGE>
(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 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 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.
-13-
<PAGE>
(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.
(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 mortgage, pledge, security interest or lien or
other encumbrance (each a "Lien") 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.
-14-
<PAGE>
(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.
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"). Other than
--------------------
normal rights of Company's customers to their
-15-
<PAGE>
own 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; 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
-16-
<PAGE>
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 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.
(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 use 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
-17-
<PAGE>
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 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,
-18-
<PAGE>
(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,
(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
-19-
<PAGE>
(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.
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, 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 per cent (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 proper ties 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.
-20-
<PAGE>
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of August 29, 1997 ("Accounts Receivable") along
-------------------
with the number of days elapsed since such 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 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
- -------
-21-
<PAGE>
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 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
-22-
<PAGE>
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. (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; (iv) 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); (v) 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 (vi) 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.
-23-
<PAGE>
(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) 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
-24-
<PAGE>
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 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 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.
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. No
---------
representation is made as to whether business prospects, financial projections
or future events
-25-
<PAGE>
described or alluded to in the business plan will actually occur or be realized.
However, the Company and each of its Principal Shareholders reasonably believe
that the current projections and prospects described in the Company-prepared
business plan are reasonable under the circumstances.
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.
2.31 Principal Shareholder Investment Representations and Warranties.
---------------------------------------------------------------
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.
-26-
<PAGE>
(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.
(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 and the Principal
Shareholders as of the Closing Date 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.
-27-
<PAGE>
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $.001 par value, of which 28,850,214 shares were issued and
outstanding as of August 28, 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, 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 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 the 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, (iii) 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 Warrant Program, (iv)
24,000,000 shares of Common Stock for issuance under the Company's 1997
Acquisition Stock Option Plan, (v) 2,113,647 shares of Series C Preferred Stock
for issuance upon exercise of warrants to purchase Series C Preferred Stock, and
(vi) a sufficient number of shares for issuance upon conversion of the Preferred
Stock currently outstanding. 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 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the disclosure package delivered to the Company on
August ____, 1997, including the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of the respective dates of the documents contained therein, (ii)
accurately described Parent's business, operating results, financial condition,
and, to the Parent's knowledge, prospects as of the respective dates of the
documents contained therein, (iii) contained no untrue statement of a material
fact as of the respective dates of the documents contained therein, or (iv)
omitted no material fact necessary to make the statements contained therein, in
light of the circumstances under which made in such document, not misleading as
of the respective dates of the documents contained therein. None of the
representations made by Parent as of the Closing Date, or any certificate or
Exhibit furnished by Parent pursuant to this Agreement, contains any untrue
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statement of a material fact, or omits to state any material fact necessary in
order to make the statements contained therein, in light of the circumstances
under which made, not misleading.
3.6 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 other than documents (or summaries thereof) that the Parent has
represented to be confidential.
3.7 Parent Financial Statements. Attachment 1 to the Schedule of
---------------------------
Exceptions is Parent's unaudited consolidated balance sheet of July 31, 1997,
and the related unaudited statements of income and cash flow for the seven (7)
months then ended ("Parent Unaudited Financials"). The Parent Unaudited
Financials are correct in all material respects and have been prepared in
accordance with USGAAP applied on a basis consistent throughout the periods
indicated and consistent with each other. The Parent Unaudited Financials
present fairly in all material respects the financial condition, operating
results and cash flows of Parent and its subsidiaries as of the dates and during
the periods indicated therein, subject to normal year-end adjustments, which
will not be material in amount or significance.
3.8 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to Parent's knowledge threatened, against Parent or any of its
subsidiaries, or any of its or their properties, the negative outcome of which
could reasonably be expected to result in a material adverse affect on Parent.
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;
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(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 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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(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);
(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
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this Agreement any offer or proposal relating to any of the above, the Company
or the Principal Shareholders, 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 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 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.
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<PAGE>
(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
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 Parent or any representative of the underwriters in
connection with any registration of the offering of any Shares of the 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 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.
5.3 Restriction on Competition.
--------------------------
(a) Restricted Activities. For a period of three (3) years
---------------------
beginning on the Closing Date, no Principal Shareholder shall:
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<PAGE>
(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 Standard Metropolitan
Statistical Area 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; provided, that
--------
neither the term of such restrictions on such Principal Shareholder/New Employee
nor the Parent's obligations to pay such severance benefits shall extend beyond
the third anniversary date of the Closing Date. 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:
1. acts of dishonesty by the Principal Shareholder;
2. gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
3. the Principal Shareholder's conviction of a crime relating to
his character or employment by Parent;
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<PAGE>
4. 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
5. death of the Principal Shareholder.
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.
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
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<PAGE>
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 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 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 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 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 and the New Employee exercises or has previously exercised options granted
to such
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<PAGE>
New Employee in accordance with Section 5.7(b), then on such date as such New
Employee may request with respect to the bonus payment for such exercised
options 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.
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
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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.
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. 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
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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. Such reimbursement shall not include
taxes of the Company Shareholders payable with respect to income of the Company.
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. 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.
5.19 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 based on a valuation model
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 more favorable valuation
model 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.
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:
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<PAGE>
(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.
(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.
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<PAGE>
(e) Side Agreement. The Side Agreement shall have been executed and
--------------
delivered by all of the parties thereto.
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.
(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.
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<PAGE>
6.4 Satisfaction or Waiver of Conditions. Execution and delivery of this
------------------------------------
Agreement on the Closing Date by each party to the Agreement shall be deemed for
all purposes under the Agreement to be a written acknowledgment on the part of
such party that all conditions to the obligations of such party to effect the
Closing have been satisfied or irrevocably waived by such party.
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.
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 2% of the Original
Purchase Price, have been delivered to the Shareholder Representative (as
defined below) and the Escrow Agent as provided in paragraph (d) below. The
Company
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<PAGE>
Shareholders shall not have any right of contribution from the Company with
respect to any Loss claimed after the Effective Time by Parent or Sub.
(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).
(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
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<PAGE>
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.
(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
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<PAGE>
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.
(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
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<PAGE>
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, Craig A. Bramscher shall
be appointed as agent and attorney-in-fact (the "Shareholder Representative")
for each Company Shareholder, for and on behalf of the Company Shareholders, 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.
(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
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<PAGE>
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 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
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<PAGE>
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 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.
-48-
<PAGE>
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 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 (an
"Indemnification 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 Indemnification 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 Indemnification 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.
-49-
<PAGE>
(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 November 1, 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 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
-50-
<PAGE>
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.
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):
-51-
<PAGE>
(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, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (650) 493-6811
(b) if to Company or to a Principal Shareholder to:
Attention:
Telecopy No.:
with a copy to:
Foley, Hoag & Eliot
One Post Office Square
Boston, MA 02109
Attention: Bruce Kinn
Telecopy No.: (617) 832-7000
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.
-52-
<PAGE>
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 unenforce able, 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. Parent shall be compensated for ordinary
decreases in the calculated value of the Company pursuant to the provisions of
Section 1.10 and may not duplicate its compensation by means of a claimed breach
of a representation, warranty or covenant.
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.
-53-
<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.
DREAMMEDIA, INC. USWEB CORPORATION
By: /s/ Craig A. Bramscher By: /s/ Joseph Firmage
-------------------------------- -----------------------------------
Craig A. Bramscher, President Joseph Firmage, Chief Executive
Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 111
By: /s/ Tobey Corey By: /s/ Joseph Firmage
-------------------------------- -----------------------------------
Tobey Corey, President Joseph Firmage, President
PRINCIPAL SHAREHOLDERS
/s/ Craig A. Bramscher
--------------------------------------
Craig A. Bramscher
-54-
<PAGE>
INDEX IF EXHIBITS
<TABLE>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
Exhibit A Principal Shareholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Option Agreement
Exhibit E Form of Shareholder Certificate
</TABLE>
<PAGE>
EXHIBIT A
---------
Principal Shareholders
<TABLE>
<CAPTION>
Name Number of Shares*
- ---------------------------------- --------------------
<S> <C>
Craig A. Bramscher 1,000
</TABLE>
- ----------------------------
*On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
<PAGE>
EXHIBIT 2.10
AMENDED AND RESTATED
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 113
AND
INTERNET CYBERNAUTICS, INC.
DATED AS OF AUGUST 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 Capital 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..........................................................9
1.13 Taking of Necessary Action; Further Action................................9
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY...........................9
2.1 Organization of the Company...............................................9
2.2 Company Capital Structure................................................10
2.3 Subsidiaries.............................................................10
2.4 Authority................................................................10
2.5 No Conflict..............................................................10
2.6 Consents.................................................................11
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......................................15
2.12 Title to Properties; Absence of Liens and Encumbrances;
Condition of Equipment...................................................15
2.13 Intellectual Property....................................................16
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......................................................21
2.19 Minute Books.............................................................21
2.20 Environmental Matters....................................................21
2.21 Brokers' and Finders' Fees; Third Party Expenses.........................22
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
2.22 Employee Benefit Plans and Compensation..................................22
2.23 Insurance................................................................25
2.24 Compliance with Laws.....................................................25
2.25 Warranties; Indemnities..................................................25
2.26 Complete Copies of Materials.............................................25
2.27 Representations Complete.................................................25
2.28 Business Plan............................................................25
2.29 Backlog Report...........................................................25
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB......................26
3.1 Organization, Standing and Power.........................................26
3.2 Authority................................................................26
3.3 No Conflict..............................................................26
3.4 Consents.................................................................26
3.5 Capital Structure........................................................27
3.6 Brokers' and Finders' Fees...............................................27
3.7 No Changes...............................................................27
3.8 Complete Copies of Materials.............................................28
3.9 Parent Financial Statements..............................................28
3.10 Litigation...............................................................28
3.11 Compliance with Laws.....................................................28
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME....................................29
4.1 Conduct of Business of the Company.......................................29
4.2 No Solicitation..........................................................31
ARTICLE V - ADDITIONAL AGREEMENTS...................................................32
5.1 Confidentiality..........................................................32
5.2 Expenses.................................................................32
5.3 Post-Closing Employment of Company Employees.............................32
5.4 Access to Information....................................................34
5.5 Public Disclosure........................................................34
5.6 Consents.................................................................35
5.7 FIRPTA Compliance........................................................35
5.8 Best Efforts.............................................................35
5.9 Notification of Certain Matters..........................................35
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
PAGE
----
<S> <C>
5.10 Additional Documents and Further Assurances..............................35
5.11 Section 368 Compliance...................................................35
5.12 Parent Policies..........................................................35
5.13 Tax Returns..............................................................36
ARTICLE VI - CONDITIONS TO THE MERGER...............................................36
6.1 Conditions to Obligations of Each Party to Effect the Merger.............36
6.2 Additional Conditions to Obligations of Company..........................36
6.3 Additional Conditions to the Obligations of Parent and Sub...............37
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; ESCROW....................................................39
7.1 Survival of Representations and Warranties...............................39
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER....................................39
8.1 Termination..............................................................39
8.2 Effect of Termination....................................................40
8.3 Amendment................................................................40
8.4 Extension; Waiver........................................................40
ARTICLE IX - GENERAL PROVISIONS.....................................................40
9.1 Notices..................................................................40
9.2 Interpretation...........................................................41
9.3 Counterparts.............................................................41
9.4 Entire Agreement; Assignment.............................................42
9.5 Severability.............................................................42
9.6 Other Remedies...........................................................42
9.7 Governing Law............................................................42
9.8 Rules of Construction....................................................42
</TABLE>
-iii-
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION
This AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION (the
"Agreement") is made and entered into on September 26, 1997 to be effective as
- ----------
of August 31, 1997 (the "Agreement Date"), among USWeb Corporation, a Utah
--------------
corporation ("Parent"), USWeb Acquisition Corporation 113, a Delaware
------
corporation and a wholly owned subsidiary of Parent ("Sub"), and Internet
---
Cybernautics, Inc., a Delaware corporation (the "Company").
-------
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 stockholders
that Parent acquire the Company through the statutory merger of the Company with
and into Sub (the "Merger" or "Acquisition") 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 issued in
connection with the Merger at the Effective Time 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 Parent.
D. The Company, 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 Sub or Parent
following the Merger. Each party understands and agrees that any such employee
or Sub or Parent 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:
<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 Delaware General Corporation Law ("Delaware Law"),
------------
the Company shall be merged with and into 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 (the "Merger
------
Articles"), in accordance with the relevant provisions of Delaware Law (the time
of filing with the Secretary of State of Delaware 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. 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. Parent shall cause Keith
2
<PAGE>
Schaefer to be elected immediately after the Effective Time as "Vice President
and General Manager" of the Surviving Corporation 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, $0.001
par value (the "Company Common Stock") and each share of the Company's Preferred
--------------------
Stock, $0.001 par value (the "Company Preferred Stock"), that is issued and
-----------------------
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of Sub, the Company, or the Company's
stockholders (the "Company Stockholders"), be canceled and extinguished and each
--------------------
Company Stockholder shall have the right to receive, subject to Article II of
the Indemnification and Escrow Agreement in substantially the form attached as
Exhibit E (the "Indemnification Agreement"), (i) (A) with respect to each share
- --------- -------------------------
of Company Preferred Stock owned by such Company Stockholder immediately prior
to the Effective Time, a fractional share of Parent Common Stock, par value
$0.001 per share ("Parent Common Stock"), equal to the result of dividing (1)
-------------------
$0.95 by (2) the Fair Value Per Share of Parent Common Stock as of the Closing
Date, or (B) with respect to each share of Company Common Stock owned by such
Company Stockholder immediately prior to the Effective Time, a fractional share
of Parent Common Stock equal to the result of dividing (1) 1,341,550 minus the
number of shares of Parent Common Stock to be issued in connection with the
Merger at the Effective Time pursuant to the preceding sub-clause (A), by (2)
the number of shares of Company Common Stock outstanding immediately prior to
the Effective Time, plus (ii) such Company Stockholder's pro rata portion of
that number of additional shares of Parent Common Stock as and to the extent
provided in Section 1.10 of this Agreement (the "Purchase Price Adjustment").
-------------------------
For purposes of Clause (ii) of the immediately preceding sentence: (A) the pro
rata portion of the Purchase Price Adjustment in the case of a holder of Series
A Preferred of the Company shall be determined by multiplying (1) the percentage
of shares of Parent Common Stock issued at the Effective Time with respect to
Company Preferred Stock (excluding shares issued to holders of Company Series B
Preferred Stock) by (2) a fraction, the numerator of which is the number of
shares of Series A Preferred Stock of the Company beneficially owned by such
Company Stockholder immediately prior to the Effective Time and the denominator
of which shall be the total number of shares of Series A Preferred Stock of the
Company outstanding immediately prior to the Effective Time; and (B) the pro
rata portion of the Purchase Price Adjustment in the case of a holder of Company
Common Stock shall be determined by multiplying (1) the percentage of shares of
Parent Common Stock issued at the Effective Time with respect to Company Common
Stock (excluding shares issued to holders of Company Series B Preferred Stock)
by a fraction, the numerator of which is the number of shares of Company Common
Stock beneficially owned by such Company Stockholder immediately prior to the
Effective Time and the denominator of which shall be the total number of shares
of Company Common Stock outstanding immediately prior to the Effective Time.
Notwithstanding the foregoing, subject to Purchase Price Adjustments pursuant to
Section 1.10, the maximum number of shares of Parent Common Stock to be issued
by Parent in connection with the Merger at the Effective Time shall be 1,341,550
and the Company shall adjust the exchange ratios set forth in Section 1.6(a)(i)
if necessary to avoid the issuance of more than such maximum number of shares of
Parent Common Stock. The
3
<PAGE>
Original Purchase Price and the Purchase Price Adjustments, if any, are
hereinafter collectively referred to as the "Merger Consideration."
--------------------
(b) Stock Options. At or prior to the Effective Time, all warrants,
-------------
rights convertible into capital stock, options or similar rights to purchase
Company capital stock shall be canceled and of no further force and effect.
(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, Company
Common Stock or Company Preferred Stock), reorganization, recapitalization or
other like change with respect to Parent Common Stock, Company Common Stock or
Company Preferred Stock occurring after the date hereof.
(d) Fractional Shares. No fractional share of Parent Common Stock
-----------------
shall be issued in the Merger, including a Purchase Price Adjustment pursuant to
Section 1.10 below. 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) Fair Value Per Share. The Fair Value Per Share of Parent
--------------------
Common Stock, as of any particular date, shall mean, if 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 Parent's
Board of Directors acting in good faith.
(ii) Escrow Amount; Escrow Agent. The "Escrow Amount" shall be
--------------------------- -------------
equal to (i) Fifty Percent (50%) of the number of shares of Parent Common Stock
issued in connection with the Merger at the Effective Time and shall be
delivered into escrow pursuant to the Indemnification Agreement by the Company
Stockholders (except holders of the outstanding shares of Series B Preferred
Stock of the Company) pro rata based on such Company Stockholders' relative
interest in the Purchase Price Adjustment calculated as provided in Section
1.6(a). The Escrow Agent shall be the secretary of Parent, or his designee, so
long as Parent is a privately held company. Thereafter, any transfer agent for
Parent's Common Stock may be appointed Escrow Agent.
(iii) Original Purchase Price. For purposes of this Agreement,
-----------------------
the "Original Purchase Price" is $4,024,650.
(f) Broadview Shares. Parent acknowledges that the Company shall
----------------
issue immediately prior to the Effective Time to Broadview Associates
("Broadview") shares of Company Series B Preferred Stock (the "Broadview
--------- ---------
Shares") in satisfaction of the Company's obligations
- ------
4
<PAGE>
under the letter agreement between the Company and Broadview Associates dated
July 22, 1997, as amended (the "Broadview Letter Agreement").
--------------------------
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 shares of Parent Common Stock issuable
pursuant to Section 1.6(a) in exchange for outstanding shares of Company Common
Stock and Company Preferred Stock; provided, that on behalf of the Company
Stockholders, 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 Stockholder (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 or Company Preferred 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
Stockholder shall be entitled to receive in exchange therefor a certificate
representing the number of shares issuable to such Company Stockholder 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 the Indemnification Agreement)
on such holder's behalf pursuant to the Indemnification Agreement) 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 Indemnification Agreement, Parent shall cause to be distributed to the Escrow
Agent (as defined in the Indemnification Agreement) 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 was deposited in the Escrow Fund and
shall be available to compensate Parent as provided in the Indemnification
Agreement. Until surrendered to the Exchange Agent, each outstanding
Certificate that, prior to the Effective Time, represented shares of Company
Common Stock or Company Preferred 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
5
<PAGE>
respect to the shares of Parent Common Stock issuable upon conversion of the
shares of Company Common Stock or Company Preferred 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, Company
Common Stock or Company Preferred 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 Capital Stock. All shares of
----------------------------------------------------
Parent Common Stock issued upon the surrender for exchange of shares of Company
capital 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.
6
<PAGE>
1.10 Purchase Price Adjustments. The Original Purchase Price shall be
--------------------------
subject to adjustment as follows:
(a) Six-Month Adjustment. As promptly as commercially practicable
--------------------
after the close of business on January 31, 1998 (the "First Adjustment Date"),
---------------------
Parent shall conduct a valuation of Sub according to the operation of Parent's
Valuation Model attached as Exhibit A (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 Parent pursuant to
Section 1.10(c) shall pay to the Company Stockholders (except the holders of the
shares of Series B Preferred Stock of the Company outstanding immediately prior
to the Effective Time) 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 Parent's Common Stock on
the First Adjustment Date.
(ii) If FAPP is less than zero, then the Escrow Agent
pursuant to Section 1.10(c) shall pay to Parent from the Escrow Amount promptly
after the First Adjustment Date a number of shares calculated as follows:
FSP = (-FAPP / FVPSAD)
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated
above; and
FVPSAD is $3.00.
If FAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the First Adjustment Date.
(b) Twelve-Month Adjustment. As promptly as commercially practicable
-----------------------
after the close of business on July 31, 1998 (the "Second Adjustment Date"),
----------------------
Parent shall conduct a valuation of Sub according to the Valuation Model.
Parent shall then calculate the "Second Adjustment to Purchase Price" as
follows:
7
<PAGE>
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 Parent pursuant to
Section 1.10(c) shall pay to the Company Stockholders (except the holders of
Series B Preferred Stock of the Company outstanding immediately prior to the
Effective Time) 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 Parent's Common Stock on
------------------------------------------------
the Second Adjustment Date."
--------------------------
(ii) If SAPP is less than zero, then the Escrow Agent
pursuant to Section 1.10(c) shall pay to Parent from the Escrow Amount promptly
after the Second Adjustment Date a number of shares calculated as follows:
SSP = (-SAPP / FVPSAD)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated
above; and
FVPSAD is $3.00.
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
(c) As promptly as commercially practicable after the First
Adjustment Date and the Second Adjustment Date, Parent shall deliver to the
Representative (as defined in the Indemnification Agreement) a reasonably
detailed report indicating the basis for its respective calculations of FAPP and
SAPP. The Representative shall have two weeks from the date of delivery of each
such report to determine whether to dispute the calculation. Parent shall make
available to the Representative, if reasonably requested by Representative in
connection with its review, at a reasonable time and for a reasonable period of
time a representative of Parent or Sub involved in making such calculations or
analyzing the supporting data. Promptly upon the later of (i) the expiration of
the two-week period following each date of delivery Parent's report of FAPP and
SAPP or (ii) the resolution of a dispute with respect to Parent's calculations
of FAPP and SAPP, Parent or the Escrow Agent, as applicable, shall deliver the
number of shares, if any, required under Sections 1.10(a) or 1.10(b),
respectively. Any payment by Parent of additional shares of Parent
8
<PAGE>
Common Stock pursuant to Sections 1.10(a)(i) or 1.10(b)(i) and any delivery by
the Escrow Agent to Parent pursuant to Sections 1.10(a)(ii) or 1.10(b)(ii) shall
be made to the Company Stockholders or from the Escrow Amount, as applicable,
pro rata (based on such Company Stockholders' respective interests in the
Purchase Price Adjustment calculated as provided in Section 1.6(a). Any dispute
regarding an adjustment in the Original Purchase Price pursuant to this Section
1.10 shall be resolved in accordance with the mechanism described in Article II
of the Indemnification Agreement.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will not be 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.
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"), and it shall be treated
----
as such for the Valuation Model. Each party has consulted its own tax advisors
with respect to the tax consequences of the Merger. The Company Stockholders
shall not be liable to the Company, Surviving Corporation or Parent for any
taxes incurred by the Company, Surviving Corporation or Parent for taxes
incurred by them, and except for a breach of Section 5.11 below, nor shall the
Company, Surviving Corporation or Parent be liable to the Company Stockholders
for taxes incurred by them, if the Merger does not constitute a reorganization
within the meaning of Section 368 of the Code.
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
For purposes of this Article II, references to the Company shall encompass
any predecessor of the Company, except with respect to such references that
appear in Sections 2.1 through 2.5, 2.25, and 2.27 through 2.29. The Company
hereby represents and warrants 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:
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
Delaware. 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
9
<PAGE>
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the business, assets (including intangible assets), financial
condition or results of operations of the Company (hereinafter referred to as a
"Company Material Adverse Effect") or could reasonably be expected to have a
-------------------------------
material adverse effect on the business, assets (including intangible assets),
financial condition or results of operations of the Surviving Corporation based
on the current management's plans as of the Agreement Date (hereinafter referred
to as a "Surviving Corporation Material Adverse Effect"). The Company has
---------------------------------------------
delivered a true and correct copy of its Certificate 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. As of the Agreement Date:
-------------------------
(a) The authorized capital stock of the Company consists of
18,500,000 shares of Common Stock, none of which is issued and outstanding, and
5,500,000 shares of Preferred Stock. Of such authorized Preferred Stock,
3,500,000 shares are designated "Series A Preferred Stock" and 2,839,274 are
------------------------
issued and outstanding. There are no other classes or series of capital stock of
the Company of any kind outstanding. The Company capital stock is held by the
persons, with the domicile addresses and in the amounts set forth on
Exhibit C. All outstanding shares of Company capital stock are duly authorized,
- ---------
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Certificate 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. The Company does not have any subsidiaries 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 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.
2.4 Authority. The Company has all requisite corporate power and
---------
authority to enter into this Agreement and all agreements required by the terms
hereof to be entered into by the Company (the "Company Ancillary Agreements")
----------------------------
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Company Ancillary Agreements
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 no further action is required on its part to authorize the
Agreement and the Company Ancillary Agreements and the transactions
10
<PAGE>
contemplated hereby and thereby (other than the approval of the Company
Stockholders). This Agreement has been and the Company Ancillary Agreements will
be at or prior to the Closing duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by the other parties
hereto and thereto, constitute the valid and binding obligations of the Company,
enforceable in accordance with their respective 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 to rules of law governing specific performance, injunctive relief or
other equitable remedies.
2.5 No Conflict. The execution and delivery of this Agreement and the
-----------
Company Ancillary Agreements do 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 Certificate 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, which such conflict, violation, default or (if exercised)
right would have a Company Material Adverse Effect or could reasonably be
expected to have a Surviving Corporation Material Adverse Effect.
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 or by which the
Company is bound (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 have previously been obtained or 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.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
unaudited balance sheet as of December 31, 1996, and the related unaudited
statements of income and cash flow for year then ended (the "1996 Financials")
---------------
and the Company's unaudited balance sheet of June 30, 1997, and the related
unaudited statements of income and cash flow for the six (6) months then ended
(the "1997 Financials" and, collectively, the "Company Financials"). The 1996
--------------- ------------------
Financials and the 1997 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, operating results and cash
flows 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. The
Company's Balance Sheet as of December 31, 1996 shall be referred to as the
"Balance Sheet."
-------------
11
<PAGE>
2.8 No Undisclosed Liabilities. Except as set forth in Exhibit C, the
-------------------------- ---------
Company has no material 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 (i) has not been
reflected in the Balance Sheet or in the Company Financials, 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 June 30, 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 Certificate 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) to the knowledge of the Company, labor trouble or claim of
wrongful discharge or other unlawful labor practice or action;
(f) material 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 material 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 the terms of any Company
- ------------------
Agreement which (i) involves the payment of greater than $25,000 per annum or
which extends (and cannot be terminated without penalty) for more than one year,
(ii) involves any payment or obligation to any
12
<PAGE>
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 material
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 material 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,
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 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 of which the Company is aware and which is not generally
applicable to similar companies in the Company's industry that has or would have
a Company Material Adverse Effect or could reasonably be expected to have a
Surviving Corporation Material Adverse Effect; 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).
13
<PAGE>
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.
(iv) To the knowledge of the Company, 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.
14
<PAGE>
(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 Stockholders 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, with the exception 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), contract, commitment, judgment, injunction, order or
decree to which the Company is a party or otherwise binding upon the Company
which has or may have the effect of prohibiting any business practice of the
Company, any acquisition of property (tangible or intangible) by the Company or
the conduct of business by the Company or which has or may limit the freedom of
the Company to engage in any line of business or to compete with any person,
other than this Agreement and the Company Ancillary Agreements. The Company has
not entered into any agreement under which the Company is prohibited 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 and the Company has delivered to Parent copies
of all applicable leases. 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)
on the part of the Company or, to the knowledge of the Company, on the part of
any other party.
(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 material
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
15
<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 is entitled to possess and use all customer files
and other customer information relating to Company's customers in the possession
or control of the Company (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; 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 by the current
management of the Company as of the Agreement Date 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.
16
<PAGE>
(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
documents and certificates necessary to maintain 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
relating in any material respect to any Intellectual Property with a stated
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
---------
relating to the Intellectual Property of Company are in full force and effect.
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, all other parties to the contracts, licenses and agreements listed
in Exhibit C are, in material compliance with, and have not breached any term
---------
of, such contracts, licenses and agreements. Following the Closing Date,
Surviving Corporation 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,
assuming the Surviving Corporation's compliance with the terms thereof.
(f) To the knowledge of the Company, the Company has not granted to
any Person, or authorized any Person to retain, any rights in the Intellectual
Property of Company.
(g) 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 the Company owns, or has the right, pursuant to a valid
Contract to use or operate under, all other Intellectual Property of Company.
(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, 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.
17
<PAGE>
(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 by the current management of the Company as of the
Agreement Date 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 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) There are no contracts, licenses and agreements between the
Company and any other person with respect to Intellectual Property of Company
under which there is any dispute known to the Company 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 which could have a
Company Material Adverse Effect or a Surviving Corporation Material Adverse
Effect.
(m) To the knowledge of the Company, no person is infringing or
misappropriating any of the Intellectual Property of Company.
(n) To the knowledge of the Company, there are no Intellectual
Property claims of infringement or misappropriation of Intellectual Property
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 specifically applicable to and naming the Company 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
18
<PAGE>
material, a defamatory statement or material, or violates any rights, including
rights of publicity or privacy, of any person, nor is the Company aware of any
such claim asserted against the Company.
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) The Company is not a party to, nor is it bound by (other than
this Agreement and the Company Ancillary Agreements):
(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,
(ix) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $25,000,
(x) any agreement, contract or commitment relating to the
disposition or acquisition of material assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
(xi) 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,
19
<PAGE>
(xii) any purchase order or contract for the purchase of
materials involving $25,000 or more,
(xiii) any construction contracts,
(xiv) any distribution, joint marketing or development
agreement, or
(xv) 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 or by which it is bound (any such agreement, contract, license or
commitment, a "Contract"), nor is the Company 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 to the knowledge
of the Company, is not subject to any default thereunder by any party obligated
to the Company pursuant thereto. The Company has obtained 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. No officer, director or stockholder
-----------------------------
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 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 knowledge threatened, against the Company, its
properties or any of its officers or directors, nor, to the knowledge of the
Company, is there any reasonable basis therefor which if adversely determined
could reasonably be expected to have a Company Material Adverse Effect or a
Surviving Corporation Material Adverse Effect. There is no investigation
pending or, to the
20
<PAGE>
Company's knowledge threatened, against the Company, its properties or any of
its officers or directors (nor, to the best knowledge of the Company, is there
any reasonable basis therefor) by or before any governmental entity. To the
knowledge of the Company, 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 July 31, 1997 ("Accounts Receivable") along with
-------------------
the number of days elapsed since such 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 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 stockholders 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 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
21
<PAGE>
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
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company which could
reasonably be expected to have a Company Material Adverse Effect or a Surviving
Corporation Material Adverse Effect. The Company is not aware of any fact or
circumstance which could involve the Company in any environmental litigation or
impose upon the Company any environmental liability which could reasonably be
expected to have a Company Material Adverse Effect or a Surviving Corporation
Material Adverse Effect.
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 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;
22
<PAGE>
(b) Schedule. Exhibit C contains an accurate and complete list of
-------- ---------
each Company Employee Plan and each Employee Agreement. 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 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) copies of all written
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 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, in all material respects; (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 threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iv) 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); (v) there are no inquiries or proceedings pending or, to
the knowledge of the Company threatened by the IRS or DOL with respect to any
Company Employee Plan; and (vi) 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.
23
<PAGE>
(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. 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) 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, threatened. The Company is not
involved in or to the knowledge of the Company 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 material liability to the Company, Parent or Sub. The
24
<PAGE>
The Company is not presently, nor has it 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) in all
material respects. The Company has 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, 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, except where such
failure to comply or such violation could not reasonably be expected to have a
Company Material Adverse Effect.
2.25 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.
2.26 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.
2.27 Representations Complete. None of the representations or guarantees
------------------------
made by the Company or the Principal Stockholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
---------
Company or the Company Stockholders pursuant to this Agreement, or furnished in
or in connection with documents mailed or delivered to the Company Stockholders
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.
2.28 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. The
---------
Company makes no representation with respect to the Company's or the Surviving
Corporation's ability to execute such business plan except that it reasonably
believes that the assumptions underlying the business plan and the projections
in the business plan are reasonable under the circumstances.
25
<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.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly represent and warrant to the Company and the Company
Stockholders 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 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 or results of operation of Parent or Sub taken together as a
whole (a "Parent Material Adverse Effect").
------------------------------
3.2 Authority. Parent and Sub have all requisite corporate power and
---------
authority to enter into this Agreement and all agreements required by the terms
hereof to be entered into by Parent or Sub (the "Parent Ancillary Agreements")
---------------------------
and to consummate the transactions contemplated hereby and thereby. The
execution and delivery of this Agreement and the Parent Ancillary Agreements and
the consummation of the transactions contemplated hereby and thereby have been
duly authorized by all necessary corporate action on the part of Parent and Sub,
and no further action is required on the part of either Parent or Sub to
authorize the Agreement and the Parent Ancillary Agreements and the transactions
contemplated hereby and thereby. This Agreement has been and the Parent
Ancillary Agreements will be at or prior to the Closing duly executed and
delivered by Parent and Sub and constitute the valid and binding obligations of
Parent and Sub, enforceable in accordance with their 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.
3.3 No Conflict. The execution and delivery of this Agreement and the
-----------
Parent Ancillary Agreements by Parent and Sub do not, and 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 either Parent or
Sub or any of their respective parties is subject, or (iii) any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to either of
Parent or Sub.
3.4 Consents. No consent, waiver, approval, order or authorization, or
--------
registration, declaration or filing with, any Governmental Entity or any third
party is required by or with respect to
26
<PAGE>
either of Parent or Sub in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
3.5 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $0.001 par value, of which 30,372,368 shares of Common Stock are
issued and outstanding as of August 29, 1997, and 38,188,501 shares of Preferred
Stock, $0.001 par value, of which (x) 18,678,500 shares are designated Series A
Preferred Stock, 18,518,500 of which are issued and outstanding as of the
Agreement Date, and (y) 9,310,001 shares are designated Series B Preferred
Stock, all of which are issued and outstanding as of August 29, 1997 and (z)
10,200,000 shares are designated Series C Preferred Stock, 8,454,580 of which
are issued and outstanding as of August 29, 1997. There are no other classes or
series of capital stock of Parent of any kind outstanding or issuable. 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.
(b) 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 the 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 issued or
outstanding warrants to purchase issuable pursuant to the Company's Affiliate
Warrant Program, and (v) 24,000,000 shares of Common Stock for issuance under
the Company's 1997 Acquisition Stock Option Plan. There are no other options,
warrants, calls, rights, commitments or agreements of any character, written or
oral, 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.
(c) The shares of Parent Common Stock to be issued pursuant to the
Merger (including any shares issued pursuant to the exercise of any options to
be granted pursuant to Article V) will be duly authorized, validly issued, fully
paid and non-assessable.
(d) All shares of the capital stock of Sub have been validly issued,
are fully paid and nonassessable, are free of any liens or encumbrances, are not
subject to any right of first refusal and are owned by Parent.
3.6 Brokers' and Finders' Fees. 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.
27
<PAGE>
3.7 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of its date, (ii) accurately described Parent's business, operating
results, financial condition, and, to Parent's knowledge, prospects as of its
date, (iii) contained no untrue statement of a material fact as of its date,
and (iv) omitted no material fact necessary to make the statements contained
therein, in light of the circumstances under which made in such document, not
misleading as of its date. None of the representations made by Parent as of the
Agreement Date, or any certificate or Exhibit furnished by Parent pursuant to
this Agreement, contains any untrue statement of a material fact, or omits to
state any material fact necessary in order to make the statements contained
therein, in light of the circumstances under which made, not misleading.
3.8 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 or its counsel, including without limitation the
Articles or Certificate of Incorporation and Bylaws of Parent and Sub, in each
case as amended to date.
3.9 Parent Financial Statements. Parent has provided to the Company the
---------------------------
Parent's audited balance sheets as of December 31, 1995 and 1996 and the related
audited statements of income and cash flow for the years then ended, and the
Parent's unaudited balance sheet as of June 30, 1997, and the related unaudited
statements of income and cash flow for the six months then ended (the "Parent
------
Financials"). The Parent Financials are correct in all material respects and
- ----------
have been prepared in accordance with USGAAP applied on a basis consistent
throughout the periods indicated and consistent with each other. The Parent
Financials present fairly in all material respects the financial condition,
operation results and cash flows of the Parent on a consolidated basis as of the
dates and during the periods indicated therein, subject in the case of the
unaudited financial statements to normal year-end adjustments.
3.10 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to Parent's knowledge threatened, against Parent, its properties or
any of its officers or directors, nor to the knowledge of Parent, is there any
reasonable basis therefor which if adversely determined could reasonably be
expected to have a Parent Material Adverse Effect. There is no investigation
pending or, to Parent's knowledge threatened, against Parent, its properties or
any of its officers or directors (nor, to the best knowledge of Parent, is there
any reasonable basis therefor) by or before any governmental entity. To the
knowledge of Parent, no governmental entity has at any time challenged or
questioned the legal right of Parent to manufacture, offer or sell any of its
products or services in the present manner or style thereof.
3.11 Compliance with Laws. Parent 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, except where such failure to
comply or such violation could not reasonably be expected to have a Parent
Material Adverse Effect.
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) Except for recourse loans by the Company, to Company employees or
directors that will allow them to exercise their options to purchase Company
Common Stock in connection with the Agreement, which loans shall be secured by
the Company Common Stock issued upon the exercise of such options (and proceeds
thereof), 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 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), except in
each case shares issued upon the exercise of options to purchase Company Common
Stock outstanding on the date hereof;
29
<PAGE>
(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, except in each case shares issued upon the exercise of
options to purchase Company Common Stock outstanding on the date hereof;
(h) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws other than amendment to its Certificate of Incorporation
to increase the number of authorized shares of Company capital stock, to create
a Series B Preferred Stock, and possibly change the conversion ratio of the
Preferred Stock in a manner that does not adversely affect Parent or Sub;
(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 in excess of $10,000 of 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 (i) except for
recourse loans by the Company to Company employees or directors that will allow
them to exercise their options to purchase Company Common Stock in connection
with the Agreement, which loans shall be secured by the Company Common Stock
issued upon the exercise of such options (and proceeds thereof), or (ii) 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) 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
30
<PAGE>
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);
(q) 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;
(r) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
(s) 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, the Company will not (and will not 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 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 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
receives prior to the Effective Time or the termination of this Agreement any
offer or proposal relating to any of the above, the Company 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 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 (including without limitation any information obtained by Parent or
Sub pursuant to Section 5.4); 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.
5.2 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.
5.3 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 5.3(a) above, Parent shall grant to the New
- ---------
Employees incentive stock options and will grant to certain consultants
nonqualified stock options to purchase Parent Common Stock in an aggregate
number equal to the number of shares paid as the Original Purchase Price. Such
32
<PAGE>
incentive stock options shall be issued to the New Employees and such
nonqualified stock options shall be issued to such consultants, 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 agreement 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 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 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 B.
---------
(c) Also in connection with hiring the New Employees and the
consultants (as described in Section 5.3(b)), 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 5.3(b) above. Such bonus shall be, as
to each such person, 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 such person described in the foregoing paragraph. The bonus
payment described in this paragraph shall be made to such person on the earlier
of: (i) in the event that the New Employee's employment by or the consultant's
consulting relationship with 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 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. The Company acknowledges that there
may be
33
<PAGE>
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.
(e) Parent shall use commercially reasonable efforts to permit all
New Employees to transfer their respective accounts under the Company's 401(k)
Plan into Parent's 401(k) Plan.
5.4 Access to Information. Each of the Company and Parent shall afford
---------------------
the other and their respective accountants, counsel and other representatives,
reasonable access during normal business hours during the period prior to the
Effective Time to (a) all of its 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 such party as
the requesting party may reasonably request. Each of the Company and Parent
agrees to provide the other and their respective 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 5.4 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.
5.5 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.
5.6 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
34
<PAGE>
consents, waivers and approvals are set forth in Exhibit C) so as to preserve
---------
all rights of, and benefits to, the Company thereunder.
5.7 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).
5.8 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.
5.9 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 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 5.9 shall not limit or otherwise
affect any remedies available to the party receiving such notice.
5.10 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.
5.11 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.
5.12 Parent Policies. Parent has provided to the Company a true and
---------------
correct copy of Parent's policies regarding the operation of subsidiary entities
such as the Company will be following the Merger. The Company acknowledges and
agrees 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 hereby indicates its intention to act in
substantial
35
<PAGE>
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.
5.13 Tax Returns. The Company 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, including without limitation the income Tax
Returns for the 1996 Tax year for which the Company has filed an extension.
Such Returns shall be prepared in accordance with applicable law and past
practices consistently applied. The Company shall permit Parent to review and
comment on each such Tax Return prior to filing.
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 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.
36
<PAGE>
(b) Certificate of Parent. Company shall have been provided with a
---------------------
certificate executed on behalf of Parent by its President to the effect that, as
of the Effective Time:
(i) all representations and warranties made by 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 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 may have a Parent
Material Adverse Effect.
(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 Parent, taken as a whole since
July 31, 1997.
(e) Offer Letters. Parent shall have been delivered to each of the
-------------
Company Executives employment offer letters in substantially the form of the
drafts of such letters delivered to the Company Executives on the date this
Agreement is executed and delivered.
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 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. Parent shall have been provided with
--------------------------
a certificate 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
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.
37
<PAGE>
(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 Company
Material Adverse Effect or Surviving Corporation Material Adverse Effect.
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Company Stockholders Agreement; Company Executives Agreement.
------------------------------------------------------------
Parent and each of the Company Stockholders shall have executed and delivered
the Company Stockholders Agreement in substantially the form attached hereto as
Exhibit D1 and the Representative shall have been appointed as the
- ----------
representative of the Company Stockholders and Parent and each of the Company
Executives shall have executed and delivered the Company Executives Agreement in
substantially the form attached hereto as Exhibit D2.
----------
(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 July 31, 1997.
(g) Company Stockholder Approval. Each of the Company Stockholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Stockholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
(h) Indemnification and Escrow Agreement. The Company Stockholders
------------------------------------
shall have executed and delivered to Parent the Indemnification and Escrow
Agreement in substantially the form of Exhibit E.
---------
(i) Broadview Letter Agreement. The Company shall have received from
--------------------------
Broadview a binding agreement or receipt acknowledging payment in full
satisfaction of any and all obligations owed by the Company to Broadview under
the Broadview Letter Agreement.
(j) Termination of Indemnification Agreements. The Company shall have
-----------------------------------------
entered into binding agreements with each person it is contractually required to
indemnify amending such indemnification agreements to provide that neither the
Company nor its successors or assigns, including without limitation, the
Surviving Corporation, is obligated to indemnify such person against Losses with
respect to which such person, as a Company Stockholder, is obligated to
indemnify the Company or its successors or assigns, including without
limitation, the Surviving Corporation.
(k) Assumption of Silicon Valley Bank Credit Facilities. Surviving
---------------------------------------------------
Corporation shall be entitled to assume, effective as of the Effective Date, the
Company's credit facilities with Silicon Valley Bank on terms satisfactory to
Surviving Corporation and Parent.
38
<PAGE>
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant hereto shall terminate on the second 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 Parent's
and Sub's representations and warranties contained herein or in any instrument
delivered pursuant to this Agreement shall terminate on the second anniversary
of the Effective Time.
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 November 1, 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 or (ii) compel Parent or the Company to dispose of or hold separate all
or a portion of the business or assets of 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 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 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
Parent or Sub and such breach has not been
39
<PAGE>
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 or Company if an event having a Company Material
Adverse Effect 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 stockholders, provided that each
party shall remain liable for any breaches of this Agreement prior to its
termination; provided further that, the provisions of Sections 5.1 and 5.2 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 Stockholders 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.
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):
40
<PAGE>
(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
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham, Esq.
Telecopy No.: (650) 493-6811
(b) if to Company to:
Internet Cybernautics, Inc.
85 Liberty Ship Way
Sausalito, California 94965
Attention: Chief Executive Officer
Telecopy No.: (415) 289-5032
with a copy to:
Morrison & Foerster, LLP
425 Market Street
San Francisco, California 94105
Attention: Gavin Grover, Esq.
Telecopy No.: (415) 268-7522
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.
41
<PAGE>
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.
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.
42
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company and the Company Stockholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
INTERNET CYBERNAUTICS, INC. USWEB CORPORATION
By: /s/ Keith Schaefer By: /s/ Joseph P. Firmage
--------------------------------- ------------------------------
Keith Schaefer, President Joseph P. Firmage,Chief
Executive Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 113
By: /s/ James J. Heffernan By: /s/ James J. Heffernan
--------------------------------- -------------------------------
James J. Heffernan, Secretary of James J. Heffernan, President
USWeb Corporation
[SIGNATURE PAGE TO AMENDED AND RESTATED AGREEMENT AND PLAN OF REORGANIZATION]
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A Form of Valuation Model
Exhibit B Form of Option Agreement
Exhibit C Schedule of Exceptions
Exhibit D1 Form of Company Stockholders Agreement
Exhibit D2 Form of Company Executives Agreement
Exhibit E Form of Indemnification and Escrow Agreement
-iv-
<PAGE>
EXHIBIT A
---------
Valuation Model
<PAGE>
EXHIBIT B
---------
Form of Option Agreement
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D1
----------
Form of Company Stockholders Agreement
<PAGE>
EXHIBIT D2
----------
Form of Company Executives Agreement
<PAGE>
EXHIBIT E
---------
Form of Indemnification and Escrow Agreement
<PAGE>
EXHIBIT 2.11
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 114
AND
SYNERGETIX SYSTEMS INTEGRATION, INC.
DATED AS OF JULY 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..................... 6
1.10 Purchase Price Adjustments................................. 6
1.11 Parent Common Stock........................................ 7
1.12 Tax Consequences........................................... 8
1.13 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.................................... 8
2.3 Subsidiaries................................................. 9
2.4 Authority.................................................... 9
2.5 No Conflict.................................................. 9
2.6 Consents..................................................... 10
2.7 Company Financial Statements................................. 10
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....................................... 14
2.13 Intellectual Property........................................ 14
2.14 Agreements, Contracts and Commitments........................ 17
2.15 Interested Party Transactions................................ 19
2.16 Governmental Authorization................................... 19
2.17 Litigation................................................... 19
2.18 Accounts Receivable.......................................... 19
2.19 Minute Books................................................. 19
2.20 Environmental Matters........................................ 20
2.21 Brokers' and Finders' Fees; Third Party Expenses............. 20
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
----
<S> <C>
2.22 Employee Benefit Plans and Compensation...................... 21
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................................. 24
2.28 Representations Complete..................................... 24
2.29 Business Plan................................................ 24
2.30 Backlog Report............................................... 24
2.31 Securities Law Compliance.................................... 24
2.32 Principal Shareholder Investment Representations and
Warranties.................................................. 24
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF
PARENT AND SUB.............................................. 25
3.1 Organization, Standing and Power............................. 25
3.2 Authority; Consents.......................................... 26
3.3 Capital Structure............................................ 26
3.4 Brokers' and Finders' Fees................................... 27
3.5 No Changes................................................... 27
3.6 Complete Copies of Materials................................. 27
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... 27
4.1 Conduct of Business of the Company........................... 27
4.2 No Solicitation.............................................. 29
ARTICLE V - ADDITIONAL AGREEMENTS......................................... 30
5.1 Parent's Right of First Refusal.............................. 30
5.2 Market Standoff Agreement.................................... 31
5.3 Restriction on Competition................................... 31
5.4 Confidentiality.............................................. 33
5.5 Expenses..................................................... 33
5.6 Public Disclosure............................................ 33
5.7 PostClosing Employment of Company Employees.................. 33
5.8 Treatment of Affiliate Warrants.............................. 35
5.9 Access to Information........................................ 35
5.10 Public Disclosure............................................ 36
5.11 Consents..................................................... 36
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
PAGE
----
<S> <C>
5.12 FIRPTA Compliance............................................ 36
5.13 Best Efforts................................................. 36
5.14 Notification of Certain Matters.............................. 36
5.15 Tax Returns.................................................. 36
5.16 Additional Documents and Further Assurances.................. 37
5.17 Section 368 Compliance....................................... 37
5.18 Parent Policies.............................................. 37
ARTICLE VI - CONDITIONS TO THE MERGER..................................... 37
6.1 Conditions to Obligations of Each Party to Effect the Merger. 37
6.2 Additional Conditions to Obligations of Company.............. 38
6.3 Additional Conditions to the Obligations of Parent and Sub... 38
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND
WARRANTIES; ESCROW.......................................... 39
7.1 Survival of Representations and Warranties................... 39
7.2 Escrow Arrangements; Setoff.................................. 40
7.3 Indemnity.................................................... 46
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER.......................... 47
8.1 Termination.................................................. 47
8.2 Effect of Termination........................................ 48
8.3 Amendment.................................................... 48
8.4 Extension; Waiver............................................ 49
ARTICLE IX - GENERAL PROVISIONS........................................... 49
9.1 Notices...................................................... 49
9.2 Interpretation............................................... 50
9.3 Counterparts................................................. 50
9.4 Entire Agreement; Assignment................................. 50
9.5 Severability................................................. 50
9.6 Other Remedies............................................... 50
9.7 Governing Law................................................ 50
9.8 Rules of Construction........................................ 51
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of July 31, 1997 (the "Effective Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 114, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), Synergetix
---
Systems Integration, Inc., a New York 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:
<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 New York (the "New York 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 New York (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 New York 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 New York
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
-2-
<PAGE>
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 $1,365,447 (the "Original
------------------- --------
Purchase Price") divided by $3.00, 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. The Company has no stock 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 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
-3-
<PAGE>
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 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 (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
-4-
<PAGE>
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 was 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 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
-5-
<PAGE>
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 Effective 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 attached as Exhibit B
---------
(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 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 / FVPSED)
-6-
<PAGE>
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSED is $3.00.
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 Effective Date (the "Second
------
Adjustment Date"), the Parent shall conduct a valuation of the Sub 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 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 / FVPSED)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSED is $3.00.
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
-7-
<PAGE>
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 Common Shareholders listed in Exhibit A attached hereto
---------
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:
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
New York. 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 200
shares of authorized Common Stock of which 100 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
-8-
<PAGE>
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. 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.
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.
-9-
<PAGE>
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 New York.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
unaudited balance sheet as of December 31, 1996, and the related unaudited
statements of income and cash flow for year then ended and the Company's
unaudited balance sheet of June 30, 1997, and the related unaudited statements
of income and cash flow for the six (6) months then ended (collectively the
"Financials"). The 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 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 to
normal year-end adjustments, which will not be material in amount or
significance. The Company's unaudited Balance Sheet as of December 31, 1996
shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. The Company has no 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. 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);
-10
<PAGE>
(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 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 securi ties 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;
-11-
<PAGE>
(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 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).
2.1 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.
----------------------
(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
-12-
<PAGE>
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.
(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
-13-
<PAGE>
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.
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"). 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.
2.1 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
-14-
<PAGE>
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.
(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
- -
-15-
<PAGE>
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) No person has any rights to use any of the Intellectual Property
of the Company; and the Company has not granted to any Person, or authorized any
Person to retain, any rights in the Intellectual Property of Company.
(g) 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 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), 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) 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
-16-
<PAGE>
under such agreement including with respect to any payments to be made or
received by the Company thereunder.
(m) To the knowledge of the Company and the Principal Shareholders,
no person is infringing or misappropriating any of the Intellectual Property of
Company.
(n) 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) 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,
-17-
<PAGE>
(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,
(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 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.
-18-
<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 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.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all accounts
receivable of the Company as of July 31, 1997 ("Accounts Receivable") along with
-------------------
the number of days elapsed since such 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 shareholders or actions by written consent since the time of
incorporation of the Company.
-19-
<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.
2.21 Brokers' and Finders' Fees; Third Party Expenses. 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.
-20-
<PAGE>
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 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.
-21-
<PAGE>
(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; (iv) 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); (v) 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 (vi) 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. 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) 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,
-22-
<PAGE>
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.
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. 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
-23-
<PAGE>
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, 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.
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 and Warranties.
---------------------------------------------------------------
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
-24-
<PAGE>
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.
(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.
-25-
<PAGE>
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 100,000,000 shares of
Common Stock, $.001 par value, of which 32,524,985 shares were issued and
outstanding as of September 25, 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, and 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 the 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) 6,013,647 shares of Common Stock for
-------------
issuance upon conversion of the Warrant Stock, (iv) 1,154,167 shares of Common
Stock for issuance upon the exercise of warrants issued or outstanding warrants
to purchase issuable pursuant to the Company's Affiliate Warrant Program or
otherwise issued, and (v) 24,000,000 shares of Common Stock for issuance under
the Company'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.
-26-
<PAGE>
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued as contemplated hereby, 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 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of their respective dates, (ii) accurately described Parent's
business, operating results, financial condition, and, to the Parent's
knowledge, prospects as of its date, (iii) contained no untrue statement of a
material fact as of its date, or (iv) omitted no material fact necessary to make
the statements contained therein, in light of the circumstances under which made
in such document, not misleading as of its date. None of the representations
made by Parent as of the Effective Date, or any certificate or Exhibit furnished
by Parent pursuant to this Agreement, contains any untrue statement of a
material fact, or omits to state any material fact necessary in order to make
the statements contained therein, in light of the circumstances under which
made, not misleading.
3.6 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
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:
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(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 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;
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<PAGE>
(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);
(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,
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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 the Principal Shareholders, 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 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, or in the event of transfer by gift or operation of law, 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 wire
transfer, by cancellation of all or a portion of
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<PAGE>
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 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 Parent or its ultimate parent or any representative
of the underwriters in connection with any registration of the offering of any
Shares of the Parent or its ultimate 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 the Parent or its ultimate parent during the 180-day period
following the date of the final Prospectus contained in a registration statement
of the Parent or its ultimate parent filed under the Securities Act; provided,
however, that such restriction shall only apply to the first registration
statement of the Parent or its ultimate 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 or its ultimate 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.
--------------------------
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<PAGE>
(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 from the date of
termination and that terminated Principal Shareholder/New Employee shall receive
severance benefits from Parent equal to six (6) months salary and all other
employee benefits as calculated from the date of termination; provided, that
--------
neither the term of such restrictions on such Principal Shareholder/New Employee
nor the Parent's obligations to pay such severance benefits shall extend beyond
the third anniversary date of the Closing Date. 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:
1. acts of dishonesty by the Principal Shareholder;
2. gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
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<PAGE>
3. the Principal Shareholder's conviction of a crime relating to
his character or employment by Parent;
4. 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
5. death of the Principal Shareholder.
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.
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
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<PAGE>
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 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 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 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
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<PAGE>
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 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.
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
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<PAGE>
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.
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. 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
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<PAGE>
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.
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
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<PAGE>
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
Closing Date 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 Closing Date 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 Closing Date.
(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 Closing Date:
(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
February, 1997.
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 Closing Date 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 Closing Date
as though such representations and warranties were made on and as of the Closing
Date 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 Closing Date.
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<PAGE>
(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 Closing Date:
(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.
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.
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<PAGE>
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.
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 two percent (2%) of the
Original Purchase Price, 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 after the Effective Time by Parent or Sub.
(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
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<PAGE>
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,
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
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<PAGE>
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.
(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
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<PAGE>
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.
(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 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, Joseph L. Labbe shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
--------------------------
each Company Shareholder, for and on behalf of the Company Shareholders, 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.
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<PAGE>
(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 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.
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<PAGE>
(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 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
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<PAGE>
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 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, (ii) by reason of the failure of the
Company and the Principal Shareholders to perform their obligations hereunder,
and (iii) as a result of the matters discussed in Section 2.2 of the Schedule of
Exceptions.
(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 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
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<PAGE>
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 (an
"Indemnification 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 Indemnification 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 Indemnification 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:
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<PAGE>
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by November 1, 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 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.
-48-
<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, Professional Corporation
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:
Synergetix Systems Integration, Inc.
Suite 202, 1065 Old Country Road
Westbury, NY 11590
Attention: Joseph L. Labbe
Telecopy No.: (516) 997-0202
with a copy to:
-49-
<PAGE>
Shearer, Lanctot & Noelke
44 Montgomery Street, Suite 3585
San Francisco, CA 94104
Attention: Carl B. 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 unenforce able, 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.
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
-50-
<PAGE>
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.
-51-
<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 Effective Date.
SYNERGETIX SYSTEMS INTEGRATION, INC. USWEB CORPORATION
By: /s/ George P. Weihs By: /s/ James J. Heffernan
------------------------------------ ----------------------------------
President George P. Weihs James J. Heffernan,Chief Financial
Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 114
USWEB CORPORATION
By: /s/ James J. Heffernan By: /s/ James J. Heffernan
------------------------------------ ---------------------------------
James J. Heffernan, Secretary James J. Heffernan, President
PRINCIPAL SHAREHOLDERS
/s/ George P. Weihs
--------------------------------------
George P. Weihs
/s/ Joseph L. Labbe
--------------------------------------
Joseph L. Labbe
-52-
<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
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares/*/
George P. Weihs 50
Joseph L. Labbe 50
_________________
/*/ On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
<PAGE>
EXHIBIT E
---------
Form of Shareholder Certificate
<PAGE>
EXHIBIT 2.12
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 119
AND
ONLINE MARKETING COMPANY
DATED AS OF SEPTEMBER 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER.................................................. 1
1.1 The Merger..................................................... 1
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...................................... 3
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
2.1 Organization of the Company................................... 8
2.2 Company Capital Structure..................................... 8
2.3 Subsidiaries.................................................. 9
2.4 Authority..................................................... 9
2.5 No Conflict................................................... 9
2.6 Consents...................................................... 9
2.7 Company Financial Statements.................................. 10
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........................................ 14
2.13 Intellectual Property......................................... 14
2.14 Agreements, Contracts and Commitments......................... 17
2.15 Interested Party Transactions................................. 18
2.16 Governmental Authorization.................................... 19
2.17 Litigation.................................................... 19
2.18 Accounts Receivable........................................... 19
2.19 Minute Books.................................................. 19
2.20 Environmental Matters......................................... 19
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses.............. 20
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 Representations Complete...................................... 23
2.29 Business Plan................................................. 24
2.30 Backlog Report................................................ 24
2.31 Principal Shareholder Investment Representations.............. 24
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............................................. 25
3.4 Brokers' and Finders' Fees.................................... 25
3.5 Complete Copies of Materials.................................. 26
3.6 Parent Financial Statements................................... 26
3.7 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..................................... 29
5.3 Restriction on Competition.................................... 29
5.4 Confidentiality............................................... 31
5.5 Expenses...................................................... 31
5.6 Public Disclosure............................................. 31
5.7 Post-Closing Employment of Company Employees.................. 31
5.8 Treatment of Affiliate Warrants............................... 33
5.9 Access to Information......................................... 33
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
5.10 Consents...................................................... 34
5.11 FIRPTA Compliance............................................. 34
5.12 Best Efforts.................................................. 34
5.13 Notification of Certain Matters............................... 34
5.14 Tax Returns................................................... 34
5.15 Section 368 Compliance........................................ 34
5.16 Parent Policies............................................... 35
ARTICLE VI - CONDITIONS TO THE MERGER................................... 35
6.1 Conditions to Obligations of Each Party to Effect the
Merger........................................................ 35
6.2 Additional Conditions to Obligations of Company............... 35
6.3 Additional Conditions to the Obligations of Parent and Sub.... 36
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW........ 37
7.1 Survival of Representations and Warranties.................... 37
7.2 Escrow Arrangements; Setoff................................... 37
7.3 Indemnity..................................................... 44
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER........................ 46
8.1 Termination................................................... 46
8.2 Effect of Termination......................................... 46
8.3 Amendment..................................................... 47
8.4 Extension; Waiver............................................. 47
ARTICLE IX - GENERAL PROVISIONS......................................... 47
9.1 Notices....................................................... 47
9.2 Interpretation................................................ 48
9.3 Counterparts.................................................. 48
9.4 Entire Agreement; Assignment.................................. 48
9.5 Severability.................................................. 49
9.6 Other Remedies................................................ 49
9.7 Governing Law................................................. 49
9.8 Rules of Construction......................................... 49
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of September 30, 1997 (the "Agreement Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 119, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), Online
---
Marketing Company, a Michigan 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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
<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 Michigan ("Michigan 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 Michigan, 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 Michigan 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
Michigan 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
-2-
<PAGE>
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 $933,363 (the "Original Purchase
------------------- -----------------
Price") divided by the Fair Value Per Share (as defined in Section 1.6(d) below)
- -----
as of the Closing Date, subject to Section 7.2 hereof, plus the contingent right
to receive (or obligation to return) 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, warrant or similar
-------------
plans or securities.
(c) 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.
(d) Certain Definitions.
-------------------
(i) 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.
(ii) 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
-3-
<PAGE>
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 the Escrow Fund (as defined in Section 7.2(a) below).
(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
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 was 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 and voting, 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
-4-
<PAGE>
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
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 Parent 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
- ---------------
-5-
<PAGE>
valuation of the Sub according to the operation of the Parent's 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 from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSAD)
where FSP is the "First Shares Payment";
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and FVPSAD is the Fair Value Per Share of the Parent's Common Stock
on the Agreement 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. Parent shall then calculate the "Second Adjustment to
--------------------
Purchase Price" as follows:
- --------------
SAPP = SADV - FADV
where SAPP is the Second Adjustment to Purchase Price;
-6-
<PAGE>
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 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 / FVPSAD)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and FVPSAD is the Fair Value Per Share of the Parent's Common Stock
on the Agreement 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 not be 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.
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
-7-
<PAGE>
will take, all such lawful and necessary action. On and after the Closing Date,
subject to the rights of any party pursuant to Article VIII hereof, each party
to this Agreement will make a good faith effort to obtain all necessary
approvals for completion of the transactions contemplated hereby.
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. 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.
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
Michigan. 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 60,000
shares of authorized Common Stock of which 3,000 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
-8-
<PAGE>
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. 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.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by the terms hereof to be entered into by the Company
or such Principal Shareholder (the "Ancillary Agreements") and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Ancillary Agreements 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
Ancillary Agreements and the transactions contemplated hereby and thereby. Any
Principal Shareholder that is a natural person or business entity other than a
corporation has all requisite legal authority and power, without approval from
any other person or entity, to execute and deliver this Agreement and the
Ancillary Agreements and consummate the transactions contemplated hereby and
thereby without any further action by such Principal Shareholder. This Agreement
and the Ancillary Agreements have been duly executed and delivered by the
Company and the Principal Shareholders and, assuming the due authorization,
execution and delivery by Parent and Sub, constitute the valid and binding
obligations of the Company and the Principal Shareholders, enforceable in
accordance with their 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
-9-
<PAGE>
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 Delaware and the Secretary of State of
Michigan.
2.7 Company Financial Statements. Exhibit D sets forth certain financial
---------------------------- ---------
statements of the Company (the "Financials"). The 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
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 financial
statements to normal year-end adjustments, which will not be material in amount
or significance. The Company's most recent audited balance sheet included in
the Financials shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. The Company has no 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 the date of the Balance Sheet.
2.9 No Changes. Since the date of the Balance Sheet, 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;
-10-
<PAGE>
(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 (each 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, 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 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;
-11-
<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.
----------------------
(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.
-12-
<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 is no mortgage, pledge, security interest or lien
or other encumbrance (each a "Lien") 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 cash 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.
-13-
<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 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"). 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.
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;
-14-
<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 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 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, such 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.
-15-
<PAGE>
(f) No person has any rights to use any of the Intellectual Property
of the Company. The Company has not granted to any Person, or authorized any
Person to retain, any rights in the Intellectual Property of Company.
(g) 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 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), 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 identifies specifically 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) 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) To the knowledge of the Company and the Principal Shareholders,
no person is infringing or misappropriating any of the Intellectual Property of
Company.
(n) There are no claims asserted against the Company or against any
customer of the Company, related to any product or service of the Company.
-16-
<PAGE>
(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) 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 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,
---------
-17-
<PAGE>
(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 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. 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.
----------------------
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<PAGE>
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 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) 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 August 31, 1997 ("Accounts Receivable"), along
-------------------
with the number of days that has elapsed since each 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 an 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
-19-
<PAGE>
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 (each an "Environmental Permit")
--------------------
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. 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,
-20-
<PAGE>
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 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 estab lished 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
-21-
<PAGE>
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. 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. 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. 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).
(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
-22-
<PAGE>
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.
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. 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. 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 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.
-23-
<PAGE>
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 set forth as Exhibit E 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.
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 G 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.
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
-24-
<PAGE>
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 100,000,000 shares of
Common Stock, $.001 par value, of which 32,524,985 shares were issued and
outstanding as of September 25, 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, and 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 the 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) 6,013,647 shares of Common Stock for
-------------
issuance upon conversion of the Warrant Stock, (iv) 1,154,167 shares of Common
Stock for issuance upon the exercise of warrants issued or outstanding warrants
to purchase issuable pursuant to the Company's Affiliate Warrant Program or
otherwise issued, and (v) 24,000,000 shares of Common Stock for issuance under
the Company'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.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued as contemplated hereby, 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 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.
3.6 Parent Financial Statements. Parent has provided to the Company
---------------------------
certain financial statements of Parent as of the date of the last audited period
and any subsequent quarter for which unaudited financial statements are
available (the "Parent Financials"). The Parent Financials are correct in all
-----------------
material respects and have been prepared in accordance with USGAAP applied on a
-25-
<PAGE>
basis consistent throughout the periods indicated and consistent with each
other. The Parent Financials present fairly in all material respects the
financial condition, operation results and cash flows of the Parent on a
consolidated basis as of the dates and during the periods indicated therein,
subject in the case of the unaudited financial statements to normal year-end
adjustments, which will not be material in amount or significance.
3.7 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Parent's knowledge threatened, against the Parent, its
properties or any of its officers or directors arising out of the operations of
the business of Parent or its subsidiaries, nor, to the knowledge of Parent, is
there any reasonable basis therefor. There is no investigation pending or, to
the Parent's knowledge threatened, against the Parent, its properties or any of
its officers or directors arising out of the operations of the business of
Parent or its subsidiaries (nor, to the knowledge of the Parent, is there any
reasonable basis therefor) by or before any government entity. No Governmental
Entity has at any time challenged or questioned the legal right of the Parent 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 unim paired 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;
-26-
<PAGE>
(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;
(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;
-27-
<PAGE>
(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);
(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;
(t) Hire any new employee, terminate the employment of any existing
employee, add any new consultant or contractor (or group of such consultants or
contractors) with annual compensation in excess of $5,000, terminate the
relationship with any existing consultant or contractor, or fail to take any of
the aforementioned actions if requested by Parent; or
(u) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (t) 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 making any such offer or proposal and the specific
terms of such
-28-
<PAGE>
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. Each Principal Shareholder agrees to
-------------------------------
abide by the terms of the Parent's right of first refusal set forth in Section 4
of the Shareholder Certificate attached hereto as Exhibit G as if such right of
---------
first refusal were set forth in full herein.
5.2 Market Standoff Agreement. Each Principal Shareholder agrees to abide
-------------------------
by the covenants set forth in the market standoff agreement in Section 2 of the
Shareholder Certificate attached hereto as Exhibit G as if such covenants were
---------
set forth in full herein.
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.
--------------------
(i) This Section shall apply in the Metropolitan Statistical
Area (as defined by the U.S. Census Bureau) 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
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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 any time upon the occurrence of any of the following
events:
(A) acts of dishonesty by the Principal Shareholder;
(B) gross negligence or willful malfeasance by the Principal
Shareholder in the performance of his duties;
(C) willful disregard of, or failure to follow written
instructions from, Parent's officers or board of directors to do any legal act
related to the Company's business;
(D) the Principal Shareholder's conviction of a crime
relating to his employment, or of any felony;
(E) 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
(F) death of the Principal Shareholder.
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) has
been approved for use or disclosure by the other party (in writing), (c) 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, (d) is later
lawfully acquired by such party from other sources, (e) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (f) 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 Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory,
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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 (or are intended to be listed), 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 the Company or the Principal Shareholders unless
approved by Parent prior to release, provided that such approval shall not be
unreasonably withheld.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate the employment of each employee of Company
on and as of the Effective Time. Parent will hire at the Effective Time, on an
"at will" basis and subject to Parent's terms, conditions and policies of
employment each person who is employed by Company and whose employment is
terminated by Company at the Effective Time 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
Effective Time, 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 the extent permissible under tax law) 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 Effective Time. The exercise price of each option shall be the
fair market value of the Common Stock subject to such option at the Effective
Time 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 Agreement 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
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<PAGE>
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 terms of the form of option agreement attached
hereto as Exhibit F.
---------
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock (the "Stock Bonus")
-----------
equal to the aggregate exercise price of the options described in Section 5.7(b)
above. 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 the option granted to the New
Employee described in the foregoing paragraph. The Stock Bonus shall be granted
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 on or
before the date five years subsequent to the Agreement Date, 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 Agreement Date 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 Agreement Date, (iii) in the event that on the
date three years subsequent to the Agreement Date 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 Agreement Date 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, and (iv) the
date five years subsequent to the Agreement Date. 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 stock option (the "Original Option") and Stock
---------------
Bonus 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).
Such Additional Options shall be issued to such employees of Parent or Sub as
are reasonably acceptable to the board of directors of Parent and are requested
in writing promptly after any Adjustment Date by the board of directors of Sub.
For each recipient, the number of shares
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<PAGE>
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.
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 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.
5.11 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).
5.12 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 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
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<PAGE>
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.
5.13 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.
5.14 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. 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.
5.15 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.
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:
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<PAGE>
(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.
(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
the date of the most recent balance sheet in the Parent Financials.
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<PAGE>
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.
(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 G.
---------
(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 the date of the Balance Sheet.
(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.
(h) Termination of Buy/Sell Agreement. Parent and Sub shall have been
---------------------------------
provided with evidence satisfactory to Parent and Sub that that certain Buy/Sell
Agreement dated August 4,
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<PAGE>
1996 and subsequently amended on April 2, 1997 and entered into by Company and
the Principal Shareholders has been terminated.
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 date eighteen
(18) months subsequent to 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 eighteen (18) months
subsequent to 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(d)(ii) 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 Company Shareholders, but only after first proceeding against
the Escrow Fund so long as it exists and is not subject to other claims. 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 exceeds $25,000 after the resolution
of any conflicts under Section 7.2(i) below, have been delivered to the
Shareholder Representative (as defined below) and the Escrow Agent as provided
in subsection (d) below. The Company Shareholders shall not have any right of
contribution from the Company with respect to any Loss claimed after the
Effective Time by Parent or Sub.
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<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).
(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
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<PAGE>
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 Company Shareholders, the
Company 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, provided the Officer's Certificate or Officer's Certificates
identifying Losses, the aggregate of which exceeds $25,000 after the resolution
of any conflicts under Section 7.2(i) below, have been delivered to the Company
Shareholders, unless the Company or the Company 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.
------------------------------------
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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 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
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<PAGE>
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, Scott Segal 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 Company
Shareholders 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.
(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.
---------------------
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<PAGE>
(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 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
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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 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.
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<PAGE>
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;
provided, however, the Principal Shareholders shall have no obligation to
indemnify unless Notices and Officer's Certificates identifying Losses, the
aggregate of which exceeds $25,000 after the resolution of any conflicts as set
forth herein, have been delivered to the Principal Shareholders.
(b) Parent hereby agrees to indemnify and hold the Principal
Shareholders and 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 third
anniversary of the Agreement 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 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
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<PAGE>
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 competi tive 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 December 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 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);
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<PAGE>
(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; and provided further that, (i) 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 and (ii) the Company shall promptly
repay any funds lent or otherwise extended to it by Parent or Sub in
anticipation of the Merger.
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.
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
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<PAGE>
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
Telecopy No.: (650) 493-6811
(b) if to Company or to a Principal Shareholder to:
26400 Lasher Road
Suite 315
Southfield, Michigan 48034
Attention: Scott Segal
Telecopy No.: (248) 353-5108
with a copy to:
Frank, Stefani & Haron
5435 Corporate Drive
Troy, MI 48098
Attention: Paul J. Smothers
Telecopy No.: (248) 952-0890
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
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<PAGE>
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 or in any transaction having the effect
of changing the Parent's jurisdiction of incorporation.
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 unenforce able, 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.
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.
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<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.
COMPANY USWEB CORPORATION
Online Marketing Company
Signature:______________________ Signature:______________________
Name:___________________________ Name:___________________________
Title:__________________________ Title:__________________________
ESCROW AGENT USWEB ACQUISITION CORPORATION 119
Secretary, USWeb Corporation
Signature: /s / Tobey Corey Signature:______________________
----------------------
Name: Tobey Corey Name:___________________________
---------------------------
Title:__________________________ Title:__________________________
PRINCIPAL SHAREHOLDERS
/s/ Scott Segal
--------------------------------
Scott Segal
/s/ Jeff Dwoskin
--------------------------------
Jeff Dwoskin
/s/ Johnathan Dwoskin
--------------------------------
Jonathan Dwoskin
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Principal Shareholders
Exhibit B Form of Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Financial Statements
Exhibit E Company Business Plan
Exhibit F Form of Option Agreement
Exhibit G Form of Shareholder Certificate
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares/*/
Scott Segal 1,000
Jeff Dwoskin 1,000
Jonathan Dwoskin 1,000
_______________
/*/ On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Company Financial Statements
1. Audited balance sheet as of December 31, 1996 and related statements of
income and cash flows for the 12-month period then ended.
2. Unaudited balance sheet as of June 30, 1997 and related statements of
income and cash flows for the six-month period then ended.
<PAGE>
EXHIBIT E
---------
Company Business Plan
<PAGE>
EXHIBIT F
---------
Form of Option Agreement
<PAGE>
EXHIBIT G
---------
Form of Shareholder Certificate
<PAGE>
SHAREHOLDER CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of September 30, 1997 (the "Agreement") entered into by
---------
and among USWeb Corporation, a Utah corporation ("Parent"), Online Marketing
------
Company, a Michigan corporation (the "Company"), USWeb Acquisition Corporation
-------
119, 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:
1. 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 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.
<PAGE>
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:
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.
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. 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.
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 that 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 Common Stock held by such Company Shareholder to agree in writing
to take and hold such Parent Common Stock subject to the 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
-2-
<PAGE>
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 market standoff agreement or 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 subsection (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, Sub, the Company or any of their agents. The undersigned understands
that 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.
2. 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, which Parent may elect to seek directly from the Escrow Fund, or
(ii) Parent may seek Purchase Price Adjustments from the Escrow Fund, in either
of which events the Escrow Amount otherwise payable to the undersigned would be
reduced without any act of the undersigned.
c. Each Company Shareholder hereby agrees that in connection with
any registration of the offering of any Shares of the Parent under the 1933 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 Securities Act; provided, however, that such restriction shall
only apply to the first
-3-
<PAGE>
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.
3. Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of Scott Segal 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 to 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.
4. Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to the 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. If the Shares are being transferred by gift (other than
pursuant to subsection (g) below), the Parent Purchase Price shall be the
product of the Fair Value Per Share multiplied by the number of Shares proposed
to be gifted.
-4-
<PAGE>
(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.
(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
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-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this 30th
day of September, 1997.
____________________________________
Signature
____________________________________
Print Name
-6-
<PAGE>
EXHIBIT 2.13
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 117
AND
ZENDATTA, INC.
DATED AS OF SEPTEMBER 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER...................................................... 1
1.1 The Merger............................................................ 1
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.......................................... 10
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
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses..................... 20
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 Representations Complete............................................. 23
2.29 Business Plan........................................................ 24
2.30 Backlog Report....................................................... 24
2.31 Principal Shareholder Investment Representations..................... 24
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.................................................... 25
3.4 Brokers' and Finders' Fees........................................... 25
3.5 Complete Copies of Materials......................................... 25
3.6 Parent Financial Statements.......................................... 26
3.7 Litigation........................................................... 26
3.8 Representations Complete............................................. 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............................................ 29
5.3 Restriction on Competition........................................... 29
5.4 Confidentiality...................................................... 31
5.5 Expenses............................................................. 31
5.6 Public Disclosure.................................................... 31
5.7 Post-Closing Employment of Company Employees......................... 31
5.8 Access to Information................................................ 33
5.9 Consents............................................................. 33
5.10 FIRPTA Compliance.................................................... 33
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<S> <C>
5.11 Best Efforts......................................................... 34
5.12 Notification of Certain Matters...................................... 34
5.13 Tax Returns.......................................................... 34
5.14 Section 368 Compliance............................................... 34
5.15 Parent Policies...................................................... 34
ARTICLE VI - CONDITIONS TO THE MERGER...................................... 35
6.1 Conditions to Obligations of Each Party to Effect the
Merger............................................................... 35
6.2 Additional Conditions to Obligations of Company...................... 35
6.3 Additional Conditions to the Obligations of Parent and Sub........... 36
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW........... 37
7.1 Survival of Representations and Warranties........................... 37
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............................................ 47
9.1 Notices.............................................................. 47
9.2 Interpretation....................................................... 48
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>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of September 30, 1997 (the "Agreement Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 117, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), Zendatta,
---
Inc., 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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
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
<PAGE>
laws of the states of Delaware ("Delaware Law") and California ("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, 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.
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, 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 $1,719,512 (the "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(d) below) as of the Closing Date, subject to Section 7.2 hereof, plus the
contingent right to receive (or obligation to return) 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, warrant or similar
-------------
plans or securities.
(c) 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.
(d) Certain Definitions.
-------------------
(i) 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.
(ii) 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.
-3-
<PAGE>
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 the Escrow Fund (as defined in Section 7.2(a) below).
(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
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 was 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 and voting, 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
-4-
<PAGE>
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, and there shall be no further registration of transfers on the
records of the Surviving Corporation of shares of Company Common 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 Parent 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 Valuation Model (the "Valuation Model" attached as
---------------
Exhibit B). Parent shall then calculate the "First Adjustment to Purchase
- --------- ----------------------------
Price" as follows:
- -----
-5-
<PAGE>
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 from the Escrow Amount promptly after the First Adjustment Date a
number of shares calculated as follows:
FSP = (-FAPP / FVPSAD)
where FSP is the "First Shares Payment";
--------------------
FAPP is the First Adjustment to Purchase Price as calculated
above; and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock
on the Agreement 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. 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.
-6-
<PAGE>
(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 / FVPSAD)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated
above; and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock
on the Agreement 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 not be 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.
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 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. On and after the
Closing Date, subject to the rights of any party pursuant to Article VIII
hereof, each party to this Agreement will make a good faith effort to obtain all
necessary approvals for completion of the transactions contemplated hereby.
-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. 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.
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 or,
results of operations 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 1,000,000
shares of authorized Common Stock of which 2,000 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.
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
-8-
<PAGE>
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.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by the terms hereof to be entered into by the Company
or such Principal Shareholder (the "Ancillary Agreements") and to consummate the
--------- ----------
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Ancillary Agreements and the consummation of the trans
actions 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 Ancillary Agreements and the transactions contemplated hereby
and thereby. Any Principal Shareholder that is a natural person or business
entity other than a corporation has all requisite legal authority and power,
without approval from any other person or entity, to execute and deliver this
Agreement and the Ancillary Agreements and consummate the transactions
contemplated hereby and thereby without any further action by such Principal
Shareholder. This Agreement and the Ancillary Agreements have been duly
executed and delivered by the Company and the Principal Shareholders and,
assuming the due authorization, execution and delivery by Parent and Sub,
constitute the valid and binding obligations of the Company and the Principal
Shareholders, enforceable in accordance with their 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 and the
-----------
Ancillary Agreements do 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, (ii) the filing of the
Agreement of Merger with the Secretary of State of Delaware and the Secretary of
State of California and (iii) such consents as shall have been obtained prior to
the Closing.
-9-
<PAGE>
2.7 Company Financial Statements. Exhibit D sets forth certain financial
---------------------------- ---------
statements of the Company (the "Financials"). The 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
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 financial
statements to normal year-end adjustments, which will not be material in amount
or significance. The Company's most recent audited balance sheet included in
the Financials shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. The Company has no 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 the date of the Balance Sheet.
2.9 No Changes. Since the date of the Balance Sheet, 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;
-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 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 (each 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 in writing 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 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 could
reasonably be expected to 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.
----------------------
(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.
(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.
-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 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 could reasonably be expected to 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.
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 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).
-13-
<PAGE>
(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"). 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.
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 the
Company as it currently is operated or is reasonably anticipated to be operated
in the future,
-14-
<PAGE>
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 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 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, such contracts, licenses
and agreements. Nothing contained in such contracts, licenses and agreements
will prohibit Sub from exercising following the Closing Date, 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) No person has any rights to use any of the Intellectual Property
of the Company. The Company has not granted to any Person, or authorized any
Person to retain, any rights in the Intellectual Property of Company.
(g) 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 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, 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 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 identifies specifically 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) 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) To the knowledge of the Company and the Principal Shareholders,
no person is infringing or misappropriating any of the Intellectual Property of
Company.
(n) 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.
-16-
<PAGE>
(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) 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 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,
-17-
<PAGE>
(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 is not to the knowledge of the
Principal Shareholders 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. 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.
-18-
<PAGE>
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 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) 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 ("Accounts Receivable"), along with the number
-------------------
of days that has elapsed since each 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 an 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.
-19-
<PAGE>
(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 (each an "Environmental
-------------
Permit") 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 against the Company 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 reasonably be expected to involve the Company in any
environmental litigation or impose upon the Company any environmental liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. 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 could reasonably be
expected to any material liability, contingent or otherwise; and
(ii) "Employee" shall mean any current, former, or retired
--------
employee, officer, or director of the Company.
-20-
<PAGE>
(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. (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.
-21-
<PAGE>
(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. 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. 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. 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).
(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 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.
-22-
<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, 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.
2.25 Third Party Consents. 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 other than such consents which shall have been obtained prior to
the Closing.
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. 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 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.
2.29 Business Plan. The Company has provided to Parent a business plan for
-------------
the Company's planned operations during the twelve months following the Closing
Date which includes, without limitation, a current forecast of the Company's
capital requirements, staffing needs, and a pro forma income statement. The
Company used reasonable care in preparing such business plan, and the
assumptions and projections contained in such business plan are reasonable. The
business plan is set forth as Exhibit E hereto.
---------
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<PAGE>
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.
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 G 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.
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 32,524,985 shares were issued
and outstanding as of September 25, 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, and 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 the
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) 6,013,647 shares of
-------------
Common Stock for issuance upon conversion of the Warrant Stock, (iv) 1,154,167
shares of Common Stock for issuance upon the exercise of warrants issued or
outstanding warrants to purchase issuable pursuant to the Company's Affiliate
Warrant Program or otherwise issued, and (v) 24,000,000 shares of Common Stock
for issuance under the Company'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.
(b) The shares of Parent Common Stock to be issued pursuant
to the Merger, when issued as contemplated hereby, will be duly authorized,
validly issued, fully paid and non-assessable.
(c) The authorized stock of Sub consists of 1,000 shares of
Common Stock, $.001 par value, all of which are issued and outstanding. The
shares of Sub Common Stock are 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 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.
3.6 Parent Financial Statements. Parent has provided to the Company
---------------------------
certain financial statements of Parent as of the date of the last audited period
and any subsequent quarter for which unaudited financial statements are
available (the "Parent Financials"). The Parent Financials are correct in all
-----------------
material respects and have been prepared in accordance with USGAAP applied on a
basis consistent throughout the periods indicated and consistent with each
other. The Parent
-25-
<PAGE>
Financials present fairly in all material respects the financial condition,
operation results and cash flows of the Parent on a consolidated basis as of the
dates and during the periods indicated therein, subject in the case of the
unaudited financial statements to normal year-end adjustments, which will not be
material in amount or significance.
3.7 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Parent's knowledge threatened, against the Parent, its
properties or any of its officers or directors arising out of the operations of
the business of Parent or its subsidiaries, nor, to the knowledge of Parent, is
there any reasonable basis therefor. There is no investigation pending or, to
the Parent's knowledge threatened, against the Parent, its properties or any of
its officers or directors arising out of the operations of the business of
Parent or its subsidiaries (nor, to the knowledge of the Parent, is there any
reasonable basis therefor) by or before any government entity. No Governmental
Entity has at any time challenged or questioned the legal right of the Parent to
manufacture, offer or sell any of its products or services in the present manner
or style thereof.
3.8 Representations Complete. None of the representations or warranties
------------------------
made by Parent or Sub, nor any statement made in any certificate furnished by
Parent or Sub pursuant to this Agreement 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.
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 unim paired 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;
-26-
<PAGE>
(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 the issuance, grant,
delivery or sale of, or purchase 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;
-27-
<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
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;
(t) Hire any new employee, terminate the employment of any existing
employee, add any new consultant or contractor (or group of such consultants or
contractors) with annual compensation in excess of $5,000, terminate the
relationship with any existing consultant or contractor, or fail to take any of
the aforementioned actions if requested by Parent; or
(u) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (t) 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,
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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 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. Each Principal Shareholder agrees to
-------------------------------
abide by the terms of the Parent's right of first refusal set forth in Section 4
of the Shareholder Certificate attached hereto as Exhibit G as if such right of
---------
first refusal were set forth in full herein.
5.2 Market Standoff Agreement. Each Principal Shareholder agrees to abide
-------------------------
by the covenants set forth in the market standoff agreement in Section 2 of the
Shareholder Certificate attached hereto as Exhibit G as if such covenants were
---------
set forth in full herein.
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.
--------------------
(i) This Section shall apply in the Metropolitan Statistical
Area (as defined by the United States Census Bureau) where the Company is
located.
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(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 (x) the term of the
restrictions imposed by this Section 5.3 shall be reduced to six (6) months and
(y) 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 any time upon the occurrence of any of the following
events:
(A) acts of dishonesty by the Principal Shareholder related
to employment with Company, Sub or Parent;
(B) gross negligence or willful misconduct by the Principal
Shareholder in the performance of his duties;
(C) willful disregard of, or failure to follow written
instructions from, Parent's officers or board of directors to do any legal act
related to the Company's business;
(D) the Principal Shareholder's conviction of a crime
relating to his employment, or of any felony;
(E) 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
(F) death of the Principal Shareholder.
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) has
been approved for use or disclosure by the other party (in writing), (c) 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, (d) is later
lawfully acquired by such party from other sources, (e) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general
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<PAGE>
disclosure or (f) 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 Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger 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 (or are intended to be listed), 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 the any party hereto unless approved by each
party hereto prior to release, provided that such approval shall not be
unreasonably withheld.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate the employment of each employee of Company
on and as of the Effective Time. Sub will hire at the Effective Time, on an "at
will" basis and subject to Parent's terms, conditions and policies of employment
each person who is employed by Company and whose employment is terminated by
Company at the Effective Time 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 Effective
Time, 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 the extent permissible under tax law) 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 Effective Time. The exercise price of each option shall be the
fair market value of the Common Stock subject to such option at the Effective
Time 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 Agreement 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
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(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 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 terms of the form of option agreement attached
hereto as Exhibit F.
---------
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each of them a bonus payable in Parent Common Stock (the "Stock Bonus")
-----------
equal to the aggregate exercise price of the options described in Section 5.7(b)
above. 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 the option granted to the New
Employee described in the foregoing paragraph. The Stock Bonus shall be granted
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 on or
before the date five years subsequent to the Agreement Date, 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 Agreement Date 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 Agreement Date, (iii) in the event that on the
date three years subsequent to the Agreement Date 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 Agreement Date 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, and (iv) the
date five years subsequent to the Agreement Date. 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 stock option (the "Original Option") and Stock
---------------
Bonus 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
- -----
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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). Such Additional Options shall be issued to such employees of Parent or Sub
as are reasonably acceptable to the board of directors of Parent and are
requested in writing promptly after any Adjustment Date by the board of
directors of Sub. 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 Access to Information. Subject to Section 5.4, 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 5.8 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.
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<PAGE>
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 5.13 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.13 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.
5.14 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.
5.15 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, a copy of which
policies has been provided to the Principal Shareholder. 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
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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.
(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
the date of the most recent balance sheet in the Parent Financials.
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
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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 G.
---------
(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 the date of the Balance Sheet.
(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.
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ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. Notwithstanding anything
------------------------------------------
to the contrary in Section 7.3(c)(e) below, 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 eighteen
(18) months subsequent to 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 eighteen (18) months
subsequent to 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(d)(ii) 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 Company Shareholders, but only after first proceeding against
the Escrow Fund so long as it exists and is not subject to other claims. 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 exceeds 2% of the Original Purchase
Price, have been delivered to the Shareholder Representative (as defined below)
and the Escrow Agent as provided in subsection (d) below. The Company
Shareholders shall not have any right of contribution from the Company with
respect to any Loss claimed after the Effective Time by Parent or Sub.
(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
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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).
(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.
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(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 Company Shareholders, the
Company Shareholders shall promptly, and in no event later than 30 days after
delivery of the Officer's Certificate, pay to Parent the amount of such Loss,
unless the Company or the Company Shareholders, as the case may be, contest such
claim by following the procedures set forth in Section 7.2(i). Such payment may
be made, at the option of the Company Shareholders, by (i) wire transfer to
Parent of the amount of such Loss or (ii) the transfer to Parent of the number
of shares of Parent Common Stock obtained by dividing the amount of such Loss by
the fair market value of a share of Parent Common Stock determined as of the
Agreement Date.
(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 as of the Agreement Date.
(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
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<PAGE>
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.
(j) Third-Party Claims. In the event Parent becomes aware of a third-
------------------
party claim which Parent reasonably 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 Section 7.2 to the amount of any
claim by Parent against the Escrow Fund with respect to such settlement.
(k) Shareholder Representative.
--------------------------
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<PAGE>
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, John Lucena 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 Company
Shareholders 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 gross
negligence or willful misconduct 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
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<PAGE>
of such good faith provided that the Escrow Agent has exercised reasonable care
in the selection of such counsel.
(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 absent gross negligence or willful
misconduct.
(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 absent gross negligence or willful
misconduct.
(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 provided that the Escrow Agent has
exercised reasonable care in the selection of such 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.
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<PAGE>
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 hereto 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) Parent agrees 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 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.
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<PAGE>
7.3 Indemnity.
---------
(a) By Principal Shareholders. The Principal Shareholders hereby
-------------------------
agree to indemnify and hold Parent and its subsidiaries, directors, officers and
agents (collectively the "Parent Indemnified Parties") 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, (ii) by reason of the failure of the
Company and the Principal Shareholders to perform their obligations hereunder
and (iii) as a result of the matters described in Section 2.14(xvi) of the
Schedule of Exceptions.
(b) By Parent and Sub. Parent and Sub hereby agree to jointly and
-----------------
severally 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 third
anniversary of the Agreement 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 indemnification obligations with respect to a
breach of 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, and provided that the
indemnification obligations with respect to a breach of the other
representations shall survive only until the date 18 months subsequent to the
Effective Time, 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 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
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<PAGE>
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 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, 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 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.
(f) Limit on Liability. Notwithstanding anything herein to the
------------------
contrary, (i) the aggregate amount payable by all Principal Shareholders on
account of Losses shall be limited to an amount equal to 200% of the Original
Purchase Price and (ii) the aggregate amount payable by Parent and Sub to the
Company and the Principal Shareholders on account of Losses shall be limited to
an amount equal to 200% of the Original Purchase Price.
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 December 15, 1997, unless such failure has been caused by the breach
of the Agreement by the party seeking such termination; (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 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;
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<PAGE>
(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; and provided further that, (i) the provisions of Sections 5.4 and
5.5 of this Agreement shall remain in full force and effect and survive any
termination of this Agreement and (ii) the Company shall promptly repay any
funds lent or otherwise extended to it by Parent or Sub in anticipation of the
Merger.
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 only 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.
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<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
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
Telecopy No.: (650) 493-6811
(b) if to Company or to a Principal Shareholder to:
Zendatta, Inc.
1710 South Amphlett Blvd., Suite 100
San Mateo, California 94402
Attention: John Lucena
Telecopy No.: (650) 655-2456
with a copy to:
Wise & Shepard
3030 Hansen Way, Suite 100
Palo Alto, CA 94304
Attention: Anthony J. Conroy
Telecopy No.: (650) 856-1344
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
- ----------
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<PAGE>
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 or in any transaction having the effect
of changing the Parent's jurisdiction of incorporation.
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 unenforce able, 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.
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.
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<PAGE>
* * *
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<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.
COMPANY USWEB CORPORATION
Zendatta, Inc.
Signature: Signature:
________________________ ___________________________
Name: Name:
_____________________________ ________________________________
Title: Title:
____________________________ _______________________________
ESCROW AGENT USWEB ACQUISITION CORPORATION 117
Secretary, USWeb Corporation
Signature: Signature:
________________________ ___________________________
Name: Name:
_____________________________ ________________________________
Title: Title:
____________________________ _______________________________
PRINCIPAL SHAREHOLDERS
/s/ John Lucena
-------------------------------------
John Lucena
/s/ Brent Wood
-------------------------------------
Brent Wood
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Principal Shareholders
Exhibit B Form of Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Financial Statements
Exhibit E Company Business Plan
Exhibit F Form of Option Agreement
Exhibit G Form of Shareholder Certificate
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares/*/
John Lucena 1,000
Brent Wood 1,000
__________________
/*/ On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Company Financial Statements
See attached.
<PAGE>
EXHIBIT E
---------
Company Business Plan
<PAGE>
EXHIBIT F
---------
Form of Option Agreement
<PAGE>
EXHIBIT G
---------
Form of Shareholder Certificate
<PAGE>
SHAREHOLDER CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of ______________, 1997 (the "Agreement") entered into
---------
by and among USWeb Corporation, a Utah corporation ("Parent"), Zendatta, Inc., a
------
California corporation (the "Company"), USWeb Acquisition Corporation 117, 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:
1. 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 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.
<PAGE>
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:
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.
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. 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.
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 that 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 Common Stock held by such Company Shareholder to agree in writing
to take and hold such Parent Common Stock subject to the 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
-2-
<PAGE>
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 market standoff agreement or 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 subsection (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, Sub, the Company or any of their agents. The undersigned understands
that 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.
2. 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, which Parent may elect to seek directly from the Escrow Fund, or
(ii) Parent may seek Purchase Price Adjustments from the Escrow Fund, in either
of which events the Escrow Amount otherwise payable to the undersigned would be
reduced without any act of the undersigned.
c. Each Company Shareholder hereby agrees that in connection with
any registration of the offering of any Shares of the Parent under the 1933 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 Securities Act; provided, however, that such restriction shall
only apply to the first
-3-
<PAGE>
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.
3. Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of John Lucena 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 to 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.
4. Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to the 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. If the Shares are being transferred by gift (other than
pursuant to subsection (g) below), the Parent Purchase Price shall be the
product of the Fair Value Per Share multiplied by the number of Shares proposed
to be gifted.
-4-
<PAGE>
(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.
(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
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-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of _________________, 1997.
_______________________________________
Signature
_______________________________________
Print Name
-6-
<PAGE>
EXHIBIT 2.14
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 118
AND
W3-DESIGN
DATED AS OF OCTOBER 10, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE I
THE MERGER......................................................... -1-
1.1 The Merger.................................................. -1-
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................................................ -9-
2.4 Authority................................................... -9-
2.5 No Conflict................................................. -9-
2.6 Consents.................................................... -9-
2.7 Company Financial Statements................................ -10-
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...................................... -14-
2.13 Intellectual Property....................................... -14-
2.14 Agreements, Contracts and Commitments....................... -17-
2.15 Interested Party Transactions............................... -18-
2.16 Governmental Authorization.................................. -19-
2.17 Litigation.................................................. -19-
</TABLE>
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(CONTINUED)
<TABLE>
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<S> <C>
2.18 Accounts Receivable.......................................... -19-
2.19 Minute Books................................................. -19-
2.20 Environmental Matters........................................ -20-
2.21 Brokers' and Finders' Fees; Third Party Expenses............. -20-
2.22 Employee Benefit Plans and Compensation...................... -21-
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................................. -24-
2.28 Representations Complete..................................... -24-
2.29 Business Plan................................................ -24-
2.30 Backlog Report............................................... -24-
2.31 Principal Shareholder Investment Representations............. -24-
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB.................... -24-
3.1 Organization, Standing and Power............................. -24-
3.2 Authority; Consents.......................................... -25-
3.3 Capital Structure............................................ -25-
3.4 Brokers' and Finders' Fees................................... -26-
3.5 Complete Copies of Materials................................. -26-
3.6 Parent Financial Statements.................................. -26-
3.7 Litigation................................................... -26-
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME................................. -26-
4.1 Conduct of Business of the Company........................... -26-
4.2 No Solicitation.............................................. -29-
ARTICLE V
ADDITIONAL AGREEMENTS............................................... -29-
5.1 Parent's Right of First Refusal.............................. -29-
5.2 Market Standoff Agreement.................................... -29-
5.3 Restriction on Competition................................... -29-
5.4 Confidentiality.............................................. -31-
</TABLE>
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(CONTINUED)
<TABLE>
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<S> <C>
5.5 Expenses..................................................... -31-
5.6 Public Disclosure............................................ -31-
5.7 Post-Closing Employment of Company Employees................. -31-
5.8 Access to Information........................................ -33-
5.9 Consents..................................................... -34-
5.10 FIRPTA Compliance............................................ -34-
5.11 Best Efforts................................................. -34-
5.12 Notification of Certain Matters.............................. -34-
5.13 Tax Returns.................................................. -34-
5.14 Section 368 Compliance....................................... -34-
5.15 Parent Policies.............................................. -35-
5.16 Fairness Hearing; Company Share Approval..................... -35-
ARTICLE VI
CONDITIONS TO THE MERGER............................................ -35-
6.1 Conditions to Obligations of Each Party to Effect
the Merger................................................... -35-
6.2 Additional Conditions to Obligations of Company.............. -36-
6.3 Additional Conditions to the Obligations of Parent
and Sub...................................................... -36-
ARTICLE VII.............................................................. -38-
7.1 Survival of Representations and Warranties................... -38-
7.2 Escrow Arrangements; Setoff.................................. -38-
7.3 Indemnity.................................................... -43-
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER................................... -47-
8.1 Termination.................................................. -47-
8.2 Effect of Termination........................................ -48-
8.3 Amendment.................................................... -48-
8.4 Extension; Waiver............................................ -48-
ARTICLE IX
GENERAL PROVISIONS.................................................. -48-
9.1 Notices...................................................... -48-
9.2 Interpretation............................................... -49-
9.3 Counterparts................................................. -49-
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(CONTINUED)
<TABLE>
<CAPTION>
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<S> <C>
9.4 Entire Agreement; Assignment...................................... -49-
9.5 Severability...................................................... -50-
9.6 Other Remedies.................................................... -50-
9.7 Governing Law..................................................... -50-
9.8 Rules of Construction............................................. -50-
</TABLE>
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of October 10, 1997 (the "Agreement Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 118, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), W3-design,
---
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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
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 ("California Law"), the Company
------------- --------------
<PAGE>
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, 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.
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.
The initial directors of the Surviving Corporation immediately following
the Effective Time shall be James J. Heffernan, Nicholas Rothenberg and Joseph
Firmage. The initial officers of the Surviving Corporation immediately
following the Effective Time shall be as follows:
-2-
<PAGE>
Chief Executive Officer, President, Chief James Heffernan
Financial Officer, Secretary and Treasurer
Managing Director and Vice President, Nicholas Rothenberg
Strategic Development
Vice President, Information Architecture Michael Mascha
Vice President, Technology Frank San Filippo
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 $ 4,000,166 (the "Original
------------------- --------
Purchase Price") divided by the Fair Value Per Share (as defined in Section
- --------------
1.6(d) below) as of the Closing Date, subject to Section 7.2 hereof, plus the
contingent right to receive (or obligation to return) 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. Prior to the Effective Time, all options, warrants
-------------
convertible into capital stock, or similar rights to purchase Company Common
Stock then outstanding shall be canceled and of no further force and affect.
(c) 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.
(d) Certain Definitions.
-------------------
(i) 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>
(ii) 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.
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 the Escrow Fund (as defined in Section 7.2(a) below).
(c) Exchange Procedures. On or prior to the Agreement Date, the
-------------------
Company Shareholders delivered to the Shareholder Representative all of the
certificates (the "Certificates") which immediately prior to the Effective Time
------------
represented outstanding shares of Company Common Stock whose shares will be
converted into the right to receive the Merger Consideration pursuant to Section
1.6. Promptly after the Effective Time, the Surviving Corporation shall cause
to be delivered to the Shareholder Representative instructions for 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, in accordance with the
instructions thereto, each 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 represent ing 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 was 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
and voting, 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
-4-
<PAGE>
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. As an
additional condition to the issuance of such Certificate, the person in whose
name such Certificate is issued shall execute such binding agreements and other
documents as Parent shall deem necessary or advisable, including without
limitation, the documents executed by the Company Shareholders in connection
with this Agreement.
(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 Parent
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.
-5-
<PAGE>
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 Valuation Method (the "Valuation Method" 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 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 / FVPSAD)
where FSP is the "First Shares Payment";
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock on
the Agreement 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 Method. Parent shall then calculate the "Second Adjustment to
--------------------
Purchase Price" as follows:
- --------------
-6-
<PAGE>
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.
(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 / FVPSAD)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock on the
Agreement 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 not be 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.
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
-7-
<PAGE>
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. On and after the Closing Date, subject to
the rights of any party pursuant to Article VIII hereof, each party to this
Agreement will make a good faith effort to obtain all necessary approvals for
completion of the transactions contemplated hereby.
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.
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 3,000,000
shares of authorized Common Stock of which 1,000,000 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
-8-
<PAGE>
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. 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.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by the terms hereof to be entered into by the Company
or such Principal Shareholder (the "Ancillary Agreements") and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Ancillary Agreements and the consummation of the trans
actions contemplated hereby and thereby have been duly authorized by all
necessary corporate action on the part of the Company and the Company
Shareholders, and no further action is required on their part to authorize the
Agreement and the Ancillary Agreements and the transactions contemplated hereby
and thereby. Any Principal Shareholder that is a natural person or business
entity other than a corporation has all requisite legal authority and power,
without approval from any other person or entity, to execute and deliver this
Agreement and the Ancillary Agreements and consummate the transactions
contemplated hereby and thereby without any further action by such Principal
Shareholder. This Agreement and the Ancillary Agreements have been duly
executed and delivered by the Company and/or the Company Shareholders, as
applicable, and, assuming the due authorization, execution and delivery by
Parent and Sub, constitute the valid and binding obligations of the Company and
the Principal Shareholders, enforceable in accordance with their 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 or any of the
Principal Shareholders (so as not to trigger any Conflict), is required by or
with respect to
-9-
<PAGE>
the Company or any of the Principal Shareholders 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 Delaware and the Secretary of State of
California.
2.7 Company Financial Statements. Exhibit D sets forth certain financial
---------------------------- ---------
statements of the Company (the "Financials"). The 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
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 financial
statements to normal year-end adjustments, which will not be material in amount
or significance. The Company's September 30, 1997 un audited balance sheet
included in the Financials shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. The Company has no 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 the date of the Balance Sheet.
2.9 No Changes. Since the date of the Balance Sheet, 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 of the
Company, or the loss of any material customers or material amounts of business
(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;
-10-
<PAGE>
(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 (each 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,
except to the extent properly reserved on the Balance Sheet;
(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 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;
-11-
<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.
----------------------
(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.
-12-
<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 is no mortgage, pledge, security interest or lien or
other encumbrance (each a "Lien") 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 Principal 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.
-13-
<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 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 by the Company (nor an event which with notice or
lapse of time, or both, would constitute a default by the Company), nor to the
knowledge of the Company and the Principal Shareholders, is there, under any of
such leases, any existing default or event of default by the other party to each
of such leases (nor to the knowledge of the Company and the Principal
Shareholders is there an event which with notice or lapse of time, or both,
would constitute a default by the other party to each of such leases).
(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"). 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.
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
-14-
<PAGE>
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.
(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 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 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, such contracts, licenses
and
-15-
<PAGE>
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) No person has any rights to use any of the Intellectual Property
of the Company. The Company has not granted to any Person, or authorized any
Person to retain, any rights in the Intellectual Property of Company.
(g) 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 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), 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 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 by the Company.
(k) Exhibit C identifies specifically 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) 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.
-16-
<PAGE>
(m) To the knowledge of the Company and the Principal Shareholders, no
person is infringing or misappropriating any of the Intellectual Property of
Company.
(n) To the knowledge of the Company, there have been 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) 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,
-17-
<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 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. 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,
-18-
<PAGE>
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 per cent (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 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) 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 September 30, 1997 ("Accounts Receivable"),
-------------------
along with the number of days that has elapsed since each 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 an 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.
-19-
<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, other than office and janitorial
supplies properly and safely maintained.
(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 (each an "Environmental Permit")
--------------------
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. 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
-20-
<PAGE>
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.
2.2 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 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
-21-
<PAGE>
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 has 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. 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. 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. The Company (i) is in compliance with all
------------------
applicable laws, rules and regulations respecting employment, employment
practices, terms and conditions of
-22-
<PAGE>
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 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.
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 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.
2.26 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. Exhibit C also indicates all warranty and indemnity claims
---------
in excess of $25,000 made against the Company.
-23-
<PAGE>
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 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.
2.29 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
Company used reasonable care in preparing such business plan, and the
assumptions and projections therein are reasonable. The business plan is set
forth as Exhibit E hereto.
---------
2.30 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 G 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.
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
-24-
<PAGE>
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 100,000,000 shares of
Common Stock, $.001 par value, of which 70,807,970 shares were issued and
outstanding as of October 10 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, and 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 the 1996 Equity
Compensation Plan, (ii) 160,000 shares of Series A Preferred Stock, 2,113,647
shares of Series C Preferred Stock and 154,167 shares of Common Stock for
issuance upon the exercise of outstanding warrants to purchase Series A
Preferred Stock, Series C Preferred Stock, and Common Stock, respectively (the
"Warrant Stock"), (iii) 2,327,814 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 issued or outstanding warrants to
purchase issuable pursuant to the Company's Affiliate Warrant Program or
otherwise issued, and (v) 24,000,000 shares of Common Stock for issuance under
the Company's 1997 Acquisition Stock Option Plan. Except for stock bonuses in
connection with completed acquisitions and options, stock and stock bonuses to
be issued in connection with several potential acquisitions, 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, when issued as contemplated hereby, will be duly authorized, validly
issued, fully paid and non-assessable.
-25-
<PAGE>
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 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.
3.6 Parent Financial Statements. Parent has provided to the Company
---------------------------
certain financial statements of Parent as of the date of the last audited period
and any subsequent quarter for which unaudited financial statements are
available (the "Parent Financials"). The Parent Financials are correct in all
-----------------
material respects and have been prepared in accordance with USGAAP applied on a
basis consistent throughout the periods indicated and consistent with each
other. The Parent Financials present fairly in all material respects the
financial condition, operation results and cash flows of the Parent on a
consolidated basis as of the dates and during the periods indicated therein,
subject in the case of the unaudited financial statements to normal year-end
adjustments, which will not be material in amount or significance.
3.7 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Parent's knowledge threatened, against the Parent, its
properties or any of its officers or directors arising out of the operations of
the business of Parent or its subsidiaries, nor, to the knowledge of Parent, is
there any reasonable basis therefor. There is no investigation pending or, to
the Parent's knowledge threatened, against the Parent, its properties or any of
its officers or directors arising out of the operations of the business of
Parent or its subsidiaries (nor, to the knowledge of the Parent, is there any
reasonable basis therefor) by or before any government entity. No Governmental
Entity has at any time challenged or questioned the legal right of the Parent 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
-26-
<PAGE>
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, other than as reasonably necessary in the ordinary
course of business and consistent with past practices in rendering services to
customers;
(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;
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(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);
(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;
(t) Hire any new employee, terminate the employment of any existing
employee, add any new consultant or contractor (or group of such consultants or
contractors) with annual compensation in excess of $5,000, terminate the
relationship with any existing consultant or contractor, or fail to take any of
the aforementioned actions if requested by Parent; or
(u) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (t) 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
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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 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. From and after the Closing Date,
-------------------------------
each Principal Shareholder agrees to abide by the terms of the Parent's right of
first refusal set forth in Section 4 of the Shareholder Certificate attached
hereto as Exhibit G as if such right of first refusal were set forth in full
---------
herein.
5.2 Market Standoff Agreement. From and after the Closing Date, each
-------------------------
Principal Shareholder agrees to abide by the covenants set forth in the market
standoff agreement in Section 2 of the Shareholder Certificate attached hereto
as Exhibit G as if such covenants were set forth in full herein.
---------
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
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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 Standard Metropolitan
Statistical Area 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 any time upon the occurrence of any of the following
events:
(A) acts of dishonesty by the Principal Shareholder
related to the Company, the Surviving Corporation or the Parent;
(B) gross negligence or willful malfeasance by the
Principal Shareholder in the performance of his duties;
(C) willful disregard of, or failure to follow written
instructions from, Parent's officers or board of directors to do any legal act
related to the Company's business;
(D) the Principal Shareholder's conviction of a crime
relating to his employment, or of any felony;
(E) 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
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(F) death of the Principal Shareholder.
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) has
been approved for use or disclosure by the other party (in writing), (c) 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, (d) is later
lawfully acquired by such party from other sources, (e) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (f) 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 Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger 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 (or are intended to be listed), 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 the Company or the Principal Shareholders unless
approved by Parent prior to release, provided that such approval shall not be
unreasonably withheld.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate the employment of each employee of
Company on and as of the Effective Time. Parent will hire at the Effective Time,
on an "at will" basis and subject to Parent's terms, conditions and policies of
employment each person who is employed by Company and whose employment is
terminated by Company at the Effective Time 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
Effective Time, 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 such New
- ---------
Employees incentive stock options
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(to the extent permissible under tax law) 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 Effective Time. The
exercise price of each option shall be the fair market value of the Common Stock
subject to such option at the Effective Time 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 Agreement
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. Each new Employee receiving such
a stock option will be required to acknowledge that (a) 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 Employee will make
any required withholding payment to the Parent, (b) that there may be state or
local tax due upon exercise of the option, and (c) 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 terms of the form of option
agreement attached hereto as Exhibit F.
---------
(c) Also in connection with hiring the New Employees, Parent agrees to
issue to each such New Employee who receives an option described in Section
5.7(b) above a bonus payable in Parent Common Stock (the "Stock Bonus") equal to
-----------
the aggregate exercise price of the options. 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 the
option granted to the New Employee described in the foregoing paragraph. The
Stock Bonus shall be granted 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 on or before the date five years subsequent to
the Agreement Date, on the date of such termination, (ii) if on the date three
years subsequent to the Agreement Date 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
Agreement Date, (iii) in the event that on the date three years subsequent to
the Agreement Date 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 Agreement Date 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, and (iv) the date five years subsequent to the
Agreement Date. Each New Employee receiving
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<PAGE>
such a stock bonus will be required to acknowledge that (a) there may be
federal, state or local tax due upon receipt of the Stock Bonus, (b) 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 (c) 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 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. 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). Such
Additional Options shall be issued to such employees of Parent or Sub as are
reasonably acceptable to the board of directors of Parent and are requested in
writing promptly after any Adjustment Date by the board of directors of Sub. 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 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 5.8 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
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<PAGE>
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 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.
5.14 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.
5.15 Fairness Hearing; Unwind; Company Share Approval. As promptly as
------------------------------------------------
practicable after the execution of this Agreement, Parent shall seek to obtain a
permit from the Commissioner of the Department of Corporations of the State of
California (after a hearing before such Department) pursuant to Section 25113 of
the California Corporations Code with respect to the issuance of the Merger
Consideration, so that the issuance of Parent Common Stock in the Merger shall
be exempt from registration under Section 3(a)(10) of the Securities Act.
As promptly as practicable after the execution of this Agreement and at
such time as Parent may request so as not to interfere with the permit
application process described above or the Section 3(a)(10) exemption, the
Company shall submit this Agreement and the transactions contemplated hereby to
its shareholders for approval and adoption as provided by California Law and
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its Articles of Incorporation and Bylaws. The Company shall use its best efforts
to solicit and obtain the consent of the Company sufficient to approve the
Merger and this Agreement and to enable the Closing to occur as promptly as
practicable. The materials submitted to the Company's shareholders shall be
subject to review and approval by Parent (which approval shall not be
unreasonably withheld) and include information regarding the Company, the terms
of the Merger and this Agreement and the recommendation of the Board of
Directors of the Company in favor of the Merger and this Agreement.
5.1 Guaranties. The parties shall use commercially reasonable efforts to
----------
cause to be terminated the guaranties executed by Principal Shareholders
pursuant to which any Principal Shareholder guarantees obligations or
indebtedness of the Company.
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.
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(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
the date of the most recent balance sheet in the Parent Financials.
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.
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(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 G.
---------
(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 the date of the Balance Sheet.
(g) Securities Law Compliance. Parent shall have received a permit
-------------------------
from the California Commissioner of Corporations as described in Section 5.1
hereof, or, if after having made application for such permit, such permit is
denied, Parent shall otherwise be able to issue the Parent Common Stock that
comprises part of the Merger Consideration in compliance with the Securities Act
and the rules and regulations thereunder.
(h) 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.
(i) Convergence Partners. The Company shall have received from
--------------------
Convergence Partners a binding agreement or receipt acknowledging payment in
full satisfaction of any and all obligations owed by the Company to Convergence
Partners under the agreement dated February 13, 1996 between the Company and
Convergence Partners, as amended.
(j) Termination of Stockholders Agreement. The Company and its
-------------------------------------
shareholders shall have terminated the Stock Purchase and Stockholders Agreement
dated as of June 30, 1995 among them, and the Company shall have received
waivers of preemptive rights with respect to all issuances of Company securities
on or prior to the Closing Date.
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 date eighteen
(18) months subsequent to 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
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such Tax or environmental laws or matters. All of the Parents' and Sub=s
representations and warranties contained herein or in any instrument delivered
pursuant to this Agreement shall terminate on the date eighteen (18) months
subsequent to 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(d)(ii) 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.
(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"), at which time all shares and amounts therein shall be released
-------------
and delivered to the Company Shareholders; provided, however, that if at such
time there are any claims that have been identified in Officer's Certificates
(as defined below) and which remain unresolved, in which case an amount equal to
the aggregate dollar amount of such claims (as shown in said Officer's
Certificates) shall be retained by the Escrow Agent in the Escrow Fund pending
the resolution of such claims, and the balance, if any, delivered to the Company
Shareholders. As soon as all such unresolved 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, with appropriate adjustments to account for the exemptions from certain
indemnity claims provided for by Section 7.3(i).
(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.
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(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.
-----------------------
(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) Disposition of Escrow Fund After Objection. If the Shareholder
------------------------------------------
Representative objects to the claim made in an Officer's Certificate, Escrow
Agent shall distribute that portion of the Escrow Fund covered by the claim to
which the Shareholder Representative has objected only in accordance with (i)
joint written instructions of Parent and the Shareholder Representative or (ii)
a final non-appealable court order or arbitrators' judgment.
(g) Shareholder Representative.
--------------------------
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(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, Nicholas Rothenberg 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 Company
Shareholders 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.
(h) 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.
(i) 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
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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 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
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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) Subject to Section 7.2(j) below, 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.
(j) 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 (i) to pay to Parent the
amount of any Purchase Price Adjustment in excess of the amount then remaining
in the Escrow Fund; and (ii) to
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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 (x) 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,
(y) by reason of the failure of the Company and the Principal Shareholders to
perform their obligations hereunder and (z) by reason of the failure of any
Principal Shareholder to satisfy such Principal Shareholder's obligations under
the leases identified in Section 2.14(a)(iii) of the Schedule of Exceptions. The
Company Shareholders shall not have any right of contribution from the Company
with respect to any Loss claimed after the Effective Time by Parent or Sub.
(b) Parent hereby agrees to indemnify and hold the Principal
Shareholders and the Company, 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, and Parent hereby agrees to indemnify each
Principal Shareholder for any Loss incurred by such Principal Shareholder under
the guaranties executed by Principal Shareholders pursuant to which such
Principal Shareholder guarantees obligations or indebtedness of the Company if
such Loss is due to the failure of the Surviving Corporation to satisfy such
obligations or indebtedness guaranteed by such Principal Shareholder.
(c) Expiration of Indemnification. The indemnification obligations
-----------------------------
under this Section 7.3 shall terminate at 5:00 p.m., Pacific Time, eighteen (18)
months after the Agreement 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 in accordance with Section 7.3(d) below; 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 (i) that the party delivering the Notice 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 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.
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(e) Actions Against Principal Shareholders. In the event that the
--------------------------------------
Principal Shareholders shall become obligated to indemnify Parent for any amount
pursuant to this Section 7.3, the Principal Shareholders may satisfy such
obligation by either (i) making payment to Parent in cash by wire transfer of
the amount owed, or (ii) delivering shares of Parent Common Stock, duly endorsed
or with stock powers attached which have been endorsed in blank.
(f) 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 or otherwise as indemnity pursuant to Section 7.3 hereof, the shares
of Parent Common Stock shall be valued as of the Agreement Date.
(g) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In the event of any dispute over a claim pursuant to this
Section 7.3, or any dispute over the amount of any Purchase Price Adjustment,
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 or Notice, as the case may be), 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 or Notice 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.
The arbitrators shall not be empowered to award punitive damages.
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(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.
(h) Third-Party Claims.
------------------
(i) Promptly after receipt by an indemnified party of notice
of the commencement of any action, arbitration, audit, hearing, investigation,
litigation or suit (whether civil, criminal, administrative, investigative or
informal) commenced, brought, conducted or heard before or otherwise involving
any court, governmental agency or entity or arbitrator (a "Proceeding") against
it, such indemnified party will, if a claim is to be made against an
indemnifying party under such Section, give notice to the indemnifying party of
the commencement of such claim, but the failure to notify the indemnifying party
will not relieve the indemnifying party of any liability that it may have to any
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying party's
failure to give such notice.
(ii) If any Proceeding referred to in Section 7.3(h)(i) is
brought against an indemnified party and it gives notice to the indemnifying
party of the commencement of such Proceeding, the indemnifying party will be
entitled to participate in such Proceeding and, to the extent that it wishes
(unless the indemnifying party is also a party to such Proceeding and the
indemnified party determines in good faith that joint representation would be
inappropriate), to assume the defense of such Proceeding with counsel
satisfactory to the indemnified party and, after notice from the indemnifying
party to the indemnified party of its election to assume the defense of such
Proceeding, the indemnifying party will not, as long as it diligently conducts
such defense, be liable to the indemnified party under this Section 10 for any
fees of other counsel or any other expenses with respect to the defense of such
Proceeding, in each case subsequently incurred by the indemnified party in
connection with the defense of such Proceeding, other than reasonable costs of
investigation. If the indemnifying party assumes the defense of a Proceeding,
(i) no compromise or settlement of such claims may be effected by the
indemnifying party without the indemnified party's consent unless (A) there is
no finding or admission of any violation of any law, statute, ordinance,
regulation or ruling or any violation of the rights of any person and no effect
on any other claims that may be made against the indemnified party, and (B) the
sole relief provided is monetary damages that are paid in full by the
indemnifying party; and (ii) the indemnified party will have no liability with
respect to any compromise or settlement of such claims effected without its
consent. If notice is given to an indemnifying party of the commencement of any
Proceeding and the indemnifying party does not, within ten days after the
indemnified party's notice is given, give notice to the indemnified party of its
election to assume the defense of such Proceeding, the indemnifying party will
be bound by any determination made in such Proceeding or any compromise or
settlement effected by the indemnified party.
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(iii) Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party will not be bound by any determination of a Proceeding so
defended or any compromise or settlement effected without its consent (which may
not be unreasonably withheld).
(i) Excluded Shares. Notwithstanding any provision of this Agreement
---------------
to the contrary, the shares of Parent Common Stock received by Robin Bernstein
and Convergence Partners in the Merger, whether or not deposited into the Escrow
Fund, shall only be subject to reduction for Purchase Price Adjustments effected
through the Escrow Fund, and not for claims pursuant to clauses (i) and (ii) of
Section 7.3(a). Responsibility for Robin Bernstein's and Convergence Partners'
shares for such claims will be borne by the Principal Shareholders on a joint
and several basis.
(j) Certain Limitations. Sellers will have no liability (for
-------------------
indemnification or otherwise) with respect to the matters described in clause
(ii) of Section 7.3(a), (i) until the total of all Losses with respect to such
matters exceeds 2% of the Original Purchase Price, and then only for the amount
by which such Losses exceed 2% of the Original Purchase Price, and (ii) for
Losses in excess of 200% of the Original Purchase Price. However, this Section
7.3(j) will not apply (i) to claims for Purchase Price Adjustments not satisfied
out of the Escrow Fund, and (ii) to any breach of any representations and
warranties of the Company or the Principal Shareholders of which any of the
Company or Principal Shareholders had knowledge at any time prior to the date on
which such representation and warranty is made or any intentional breach by
either Seller of any covenant or obligation, and any of the Company or Principal
Shareholders will be jointly and severally liable for all Losses with respect to
such breaches.
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 December 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 any Governmental Entity, which would: (i) prohibit
Parent's or Sub's ownership or operation of any
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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
thirty (30) 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 thirty (30) 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 or Parent 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; and provided further that, (i) 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 and (ii) the Company shall promptly
repay any funds lent or otherwise extended to it by Parent or Sub in
anticipation of the Merger.
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.
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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, Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Mark Bonham
Telecopy No.: (650) 493-6811
(b) if to a Principal Shareholder, to the address set forth in
Exhibit C and if to Company to:
8522 National Blvd.
Culver City, California 90232
Attention: Nicholas Rothenberg
Telecopy No.: (310) 815-1133
with a copy to:
Brown Raysman Millstein Felder & Steiner LLP
1880 Century Park East, Suite 711
Los Angeles, CA 90067
Attention: John G. Petrovich
Telecopy No.: (310) 712-8383
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
- ----------
-48-
<PAGE>
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 or in any transaction having the effect
of changing the Parent's jurisdiction of incorporation; provided, however, that
the assigning party shall not be released from any of its obligations hereunder
without the written consent of the Company, which shall not be withheld
unreasonably.
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 unenforce able, 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.
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
-49-
<PAGE>
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.
* * *
-50-
<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.
W3-DESIGN USWEB CORPORATION
Signature:___________________ Signature:_____________________________
Name:________________________ Name:__________________________________
Title:_______________________ Title:_________________________________
ESCROW AGENT USWEB ACQUISITION CORPORATION 118
Secretary, USWeb Corporation
Signature: /s/ Tobey Corey Signature:_____________________________
--------------------
Name: Tobey Corey Name:__________________________________
-------------------------
Title:________________________ Title:_________________________________
PRINCIPAL SHAREHOLDERS
/s/ Nicholas Rothenberg
---------------------------------------
Nicholas Rothenberg
/s/ Michael Mascha
---------------------------------------
Michael Mascha
/s/ Frank San Filippo
---------------------------------------
Frank San Filippo
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Principal Shareholders
Exhibit B Valuation Method
Exhibit C Schedule of Exceptions
Exhibit D Financial Statements
Exhibit E Business Plan
Exhibit F Option Agreement
Exhibit G Form of Shareholder Certificate
<PAGE>
EXHIBIT A
---------
Principal Shareholders
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES*
- ---- ----------------
<S> <C>
Nicholas Rothenberg 380,000
Address: See Section 2.2 of Exhibit C
Michael Mascha 380,000
Address: See Section 2.2 of Exhibit C
Frank San Filippo 190,000
Address: See Section 2.2 of Exhibit C
</TABLE>
- ------------------------
* On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Method
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Company Financial Statements
1. Audited balance sheet as of March 31, 1997 and related statements of income
and cash flows for the 12-month period then ended.
2. Unaudited balance sheet as of September 30, 1997 and related statements of
income and cash flows for the five-month period then ended.
<PAGE>
EXHIBIT E
---------
Company Business Plan
<PAGE>
EXHIBIT F
---------
Form of Option Agreement
<PAGE>
EXHIBIT G
---------
Form of Shareholder Certificate
<PAGE>
SHAREHOLDER CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of ______________, 1997 (the "Agreement") entered into
---------
by and among USWeb Corporation, a Utah corporation ("Parent"), W3-design, a
------
California corporation (the "Company"), USWeb Acquisition Corporation ___, 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:
1. 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 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.
<PAGE>
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:
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.
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. 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.
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 that 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 Common Stock held by such Company Shareholder to agree in writing
to take and hold such Parent Common Stock subject to the 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
-2-
<PAGE>
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 market standoff agreement or 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 subsection (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, Sub, the Company or any of their agents. The undersigned understands
that 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.
2. 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, which Parent may elect to seek directly from the Escrow Fund, or
(ii) Parent may seek Purchase Price Adjustments from the Escrow Fund, in either
of which events the Escrow Amount otherwise payable to the undersigned would be
reduced without any act of the undersigned.
c. Each Company Shareholder hereby agrees that in connection with
any registration of the offering of any Shares of the Parent under the 1933 Act,
such Company Shareholder shall not, except as provided in Section 4(g) below,
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 Securities Act;
provided, however, that such
-3-
<PAGE>
restriction shall only apply to the first registration statement of the Parent
to become effec tive 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.
3. Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of Nicholas Rothenberg 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 to 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.
4. Parent's Right of First Refusal.
-------------------------------
a. Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to the 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. If the Shares are being transferred by gift (other than
pursuant to subsection (g)
-4-
<PAGE>
below), the Parent Purchase Price shall be the product of the Fair Value 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.
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 Transfers. Anything to the contrary
-------------------------------
contained in this Section notwithstanding, the following transfers may be made
without having to comply with the other provisions of this Section 4: (i) 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; (ii) any pledge of not more
than 40,000 of the Shares in the aggregate by Nicholas Rothenberg, Michael
Mascha and Frank San Filippo, as security for one or more loans not exceeding
$50,000 in the aggregate for all such loans; (iii) a sale of not more than
20,000 of the Shares owned by Robin Bernstein to one or more of Nicholas
Rothenberg, Michael Mascha and Frank San Filippo; (iv) a grant of an option by
such of Nicholas Rothenberg, Michael Mascha and Frank San Filippo who
participate in the purchase described in the immediately preceding clause (iii)
to Robin Bernstein to repurchase the shares sold by her; (v) the transfer of
Shares upon the exercise of the option described in the immediately preceding
clause (iv); and (vi) the transfer of the undersigned's pro rata share of not
more than 16,001 Shares in the aggregate to Gregory Biggers, Larry Dunn, Ki
Ingersol and Alvin Rodolfo, affiliates of Convergence Partners, by Nicholas
Rothenberg, Michael Mascha and Frank San Filippo (all Share amounts, in the case
of clauses (ii) through (vi) above to be adjusted to account for stock splits,
reverse stock splits and similar adjustments to the capitalization of Parent).
"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 Certificate, and there shall be no further transfer of such Shares except
in accordance with the terms of this Certificate.
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
-5-
<PAGE>
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.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of _________________, 1997.
____________________________________________
Signature
____________________________________________
Print Name
-7-
<PAGE>
EXHIBIT 2.15
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 122
AND
USWEB - APEX, INC.
DATED AS OF OCTOBER 29, 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........................................................ 9
2.4 Authority........................................................... 9
2.5 No Conflict......................................................... 9
2.6 Consents............................................................ 9
2.7 Company Financial Statements........................................ 10
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 Encumbrance; Condition
of Equipment........................................................ 14
2.13 Intellectual Property............................................... 14
2.14 Agreements, Contracts and Commitments............................... 17
2.15 Interested Party Transactions....................................... 18
2.16 Governmental Authorization.......................................... 19
2.17 Litigation.......................................................... 19
2.18 Accounts Receivable................................................. 19
2.19 Minute Books........................................................ 19
2.20 Environmental Matters............................................... 19
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.21 Brokers' and Finders' Fees; Third Party Expenses.................... 20
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 Representations Complete............................................ 23
2.29 Business Plan....................................................... 24
2.30 Backlog Report...................................................... 24
2.31 Principal Shareholder Investment Representations.................... 24
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................................................... 25
3.4 Brokers' and Finders' Fees.......................................... 25
3.5 Complete Copies of Materials........................................ 25
3.6 Parent Financial Statements......................................... 26
3.7 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........................................... 29
5.3 Restriction on Competition.......................................... 29
5.4 Confidentiality..................................................... 30
5.5 Expenses............................................................ 31
5.6 Public Disclosure................................................... 31
5.7 PostClosing Employment of Company Employees......................... 31
5.8 Treatment of Affiliate Warrants..................................... 33
5.9 Access to Information............................................... 33
5.10 Consents............................................................ 33
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.11 FIRPTA Compliance................................................... 33
5.12 Best Efforts........................................................ 33
5.13 Notification of Certain Matters..................................... 34
5.14 Tax Returns......................................................... 34
5.15 Section 368 Compliance.............................................. 34
5.16 Parent Policies..................................................... 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............................................................. 37
7.1 Survival of Representations and Warranties.......................... 37
7.2 Escrow Arrangements; Setoff......................................... 37
7.3 Indemnity........................................................... 43
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........................................................ 47
9.4 Entire Agreement; Assignment........................................ 47
9.5 Severability........................................................ 48
9.6 Other Remedies...................................................... 48
9.7 Governing Law....................................................... 48
9.8 Rules of Construction............................................... 48
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of October 29, 1997 (the "Agreement Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 122, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), USWeb -
---
Apex, Inc., a Texas 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 Parent or Sub
following the Merger. Each party understands and agrees that any such employee
or the Parent or 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:
<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 Texas ("Texas 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 Texas, 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 Texas 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 Texas 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
-2-
<PAGE>
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, $1.00
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 $ 3,559,027 (the
-------------------
"Original Purchase Price") divided by the Fair Value Per Share (as defined in
-----------------------
Section 1.6(d) below) as of the Closing Date, subject to Section 7.2 hereof,
plus the contingent right to receive (or obligation to return) 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, warrant or similar
-------------
plans or securities.
(c) 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.
(d) Certain Definitions.
-------------------
(i) 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.
(ii) 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
-3-
<PAGE>
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 the Escrow Fund (as defined in Section 7.2(a) below).
(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
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 was 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 and voting, 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
-4-
<PAGE>
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
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 Parent 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
- ---------------
-5-
<PAGE>
valuation of the Sub according to the operation of the Parent's Valuation Method
(the "Valuation Method" 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 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 / FVPSAD)
where FSP is the "First Shares Payment";
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock on
the Agreement 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 Method. Parent shall then calculate the "Second Adjustment to
--------------------
Purchase Price" as follows:
- --------------
SAPP = SADV - FADV
-6-
<PAGE>
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.
(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 / FVPSAD)
where SSP is the "Second Shares Payment";
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSAD is the Fair Value Per Share of the Parent's Common Stock on the
Agreement 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 not be 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.
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
-7-
<PAGE>
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. On and
after the Closing Date, subject to the rights of any party pursuant to Article
VIII hereof, each party to this Agreement will make a good faith effort to
obtain all necessary approvals for completion of the transactions contemplated
hereby.
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. 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.
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
Texas. 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 1,000
shares of authorized Common Stock of which 1,000 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
-8-
<PAGE>
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. 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.
2.4 Authority. Each of the Company and the Principal Shareholders has all
---------
requisite corporate power and authority to enter into this Agreement and all
other agreements required by the terms hereof to be entered into by the Company
or such Principal Shareholder (the "Ancillary Agreements") and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Ancillary Agreements and the consummation of the trans
actions 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 Ancillary Agreements and the transactions contemplated hereby
and thereby. Any Principal Shareholder that is a natural person or business
entity other than a corporation has all requisite legal authority and power,
without approval from any other person or entity, to execute and deliver this
Agreement and the Ancillary Agreements and consummate the transactions
contemplated hereby and thereby without any further action by such Principal
Shareholder. This Agreement and the Ancillary Agreements have been duly
executed and delivered by the Company and the Principal Shareholders and,
assuming the due authorization, execution and delivery by Parent and Sub,
constitute the valid and binding obligations of the Company and the Principal
Shareholders, enforceable in accordance with their 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 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. 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
-9-
<PAGE>
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 Delaware and the Secretary of State of
Texas.
2.7 Company Financial Statements. Exhibit D sets forth certain financial
---------------------------- ---------
statements of the Company (the "Financials"). The 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
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 financial
statements to normal year-end adjustments, which will not be material in amount
or significance. The Company's most recent audited balance sheet included in
the Financials shall be referred to as the "Balance Sheet."
-------------
2.8 No Undisclosed Liabilities. The Company has no 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 the date of the Balance Sheet.
2.9 No Changes. Since the date of the Balance Sheet, 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;
-10-
<PAGE>
(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 (each 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 securi ties 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 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;
-11-
<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).
2.1 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.
----------------------
(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.
-12-
<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 is no mortgage, pledge, security interest or lien or
other encumbrance (each a "Lien") 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.
2.1 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.
-13-
<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 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 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.
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;
-14-
<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 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 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, such 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.
-15-
<PAGE>
(f) No person has any rights to use any of the Intellectual Property
of the Company. The Company has not granted to any Person, or authorized any
Person to retain, any rights in the Intellectual Property of Company.
(g) 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 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), 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 identifies specifically 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) 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) To the knowledge of the Company and the Principal Shareholders,
no person is infringing or misappropriating any of the Intellectual Property of
Company.
(n) There are no claims asserted against the Company or against any
customer of the Company, related to any product or service of the Company.
-16-
<PAGE>
(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.
2.1 Agreements, Contracts and Commitments.
-------------------------------------
(a) 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 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,
---------
-17-
<PAGE>
(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 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. 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.
----------------------
- -18-
<PAGE>
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 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) 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 September 30, 1997 ("Accounts Receivable"),
-------------------
along with the number of days that has elapsed since each 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 an 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
-19-
<PAGE>
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 (each an "Environmental Permit")
--------------------
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. 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,
-20-
<PAGE>
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 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
-21-
<PAGE>
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. 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. 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. 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).
(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
-22-
<PAGE>
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.
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. 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. 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 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.
-23-
<PAGE>
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 set forth as Exhibit E 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.
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 G 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.
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
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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 capital stock of Applicant consists of 100,000,000
shares of Common Stock, $0.001 par value, and 38,188,501 shares of Preferred
Stock, $0.001 par value, of which 18,678,500 shares are designated Series A
Preferred Stock, 9,310,001 shares are designated Series B Preferred Stock and
10,200,000 shares are designated Series C Preferred Stock. As of October 10,
1997, 39,421,722 shares of its Common Stock were issued and outstanding,
18,518,500 shares of its Series A Preferred Stock were issued and outstanding,
9,310,001 shares of its Series B Preferred Stock were issued and outstanding and
8,454,580 shares of its Series C Preferred Stock were issued and outstanding.
The Applicant has also reserved (i) 3,900,000 shares of Common Stock for
issuance to employees and consultants pursuant to Applicant's 1996 Stock Option
Plan and the 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 issued or
outstanding warrants to purchase issuable pursuant to the Applicant's Affiliate
Warrant Program, and (v) 24,000,000 shares of Common Stock for issuance under
the Applicant's 1997 Acquisition Stock Option Plan. Except for stock and
options issuable in connection with potential acquisitions by Applicant, there
are no other options, warrants, calls, rights, commitments or agreements of any
character, written or oral, to which Applicant is a party or by which it is
bound obligating Applicant to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of Applicant or obligating Applicant to grant, extend, or enter
into any such option, warrant, call, right, commitment or agreement. The Merger
will not change the rights of the existing stockholders of Applicant; however,
the Merger will diminish USWeb stockholders' equity interest in USWeb because of
the increase in the number of shares of Common Stock of Applicant outstanding.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued as contemplated hereby, 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 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.
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<PAGE>
3.6 Parent Financial Statements. Parent has provided to the Company
---------------------------
certain financial statements of Parent as of the date of the last audited period
and any subsequent quarter for which unaudited financial statements are
available (the "Parent Financials"). The Parent Financials are correct in all
-----------------
material respects and have been prepared in accordance with USGAAP applied on a
basis consistent throughout the periods indicated and consistent with each
other. The Parent Financials present fairly in all material respects the
financial condition, operation results and cash flows of the Parent on a
consolidated basis as of the dates and during the periods indicated therein,
subject in the case of the unaudited financial statements to normal year-end
adjustments, which will not be material in amount or significance.
3.7 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Parent's knowledge threatened, against the Parent, its
properties or any of its officers or directors arising out of the operations of
the business of Parent or its subsidiaries, nor, to the knowledge of Parent, is
there any reasonable basis therefor. There is no investigation pending or, to
the Parent's knowledge threatened, against the Parent, its properties or any of
its officers or directors arising out of the operations of the business of
Parent or its subsidiaries (nor, to the knowledge of the Parent, is there any
reasonable basis therefor) by or before any government entity. No Governmental
Entity has at any time challenged or questioned the legal right of the Parent 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
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;
(t) Hire any new employee, terminate the employment of any existing
employee, add any new consultant or contractor (or group of such consultants or
contractors) with annual compensation in excess of $5,000, terminate the
relationship with any existing consultant or contractor, or fail to take any of
the aforementioned actions if requested by Parent; or
(u) Take, or agree in writing or otherwise to take, any of the actions
described in Sections 4.1(a) through (t) 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,
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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 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. Each Principal Shareholder agrees to
-------------------------------
abide by the terms of the Parent's right of first refusal set forth in Section 4
of the Shareholder Certificate attached hereto as Exhibit G as if such right of
---------
first refusal were set forth in full herein.
5.2 Market Standoff Agreement. Each Principal Shareholder agrees to abide
-------------------------
by the covenants set forth in the market standoff agreement in Section 2 of the
Shareholder Certificate attached hereto as Exhibit G as if such covenants were
---------
set forth in full herein.
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.
--------------------
(i) This Section shall apply in the Standard Metropolitan
Statistical Area where the Company is located.
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<PAGE>
(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 any time upon the occurrence of any of the following
events:
(A) acts of dishonesty by the Principal Shareholder;
(B) gross negligence or willful malfeasance by the
Principal Shareholder in the performance of his duties;
(C) willful disregard of, or failure to follow written
instructions from, Parent's officers or board of directors to do any legal act
related to the Company's business;
(D) the Principal Shareholder's conviction of a crime
relating to his employment, or of any felony;
(E) 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
(F) death of the Principal Shareholder.
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) has
been approved for use or disclosure by the other party (in writing), (c) 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, (d) is later
lawfully acquired by such party from other sources, (e) is required to be
disclosed by order of court or government agency after seeking any reasonably
available protection against general disclosure or (f) which is disclosed in the
course of any litigation between any of the parties hereto; it
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<PAGE>
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 Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger 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 (or are intended to be listed), 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 the Company or the Principal Shareholders unless
approved by Parent prior to release, provided that such approval shall not be
unreasonably withheld.
5.7 Post-Closing Employment of Company Employees.
--------------------------------------------
(a) Company shall terminate the employment of each employee of
Company on and as of the Effective Time. Parent will hire at the Effective Time,
on an "at will" basis and subject to Parent's terms, conditions and policies of
employment each person who is employed by Company and whose employment is
terminated by Company at the Effective Time 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
Effective Time, 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 the extent permissible under tax law) 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 Effective Time. The exercise price of each option shall be the
fair market value of the Common Stock subject to such option at the Effective
Time 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 Agreement 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
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<PAGE>
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 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 terms of the
form of option agreement attached hereto as Exhibit F.
---------
(c) Also in connection with hiring the New Employees, Parent agrees
to issue to each of them a bonus payable in Parent Common Stock (the "Stock
-----
Bonus") equal to the aggregate exercise price of the options described in
- -----
Section 5.7(b) above. 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 the option granted to the
New Employee described in the foregoing paragraph. The Stock Bonus shall be
granted 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 on or before the date five years subsequent to the Agreement Date, 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 Agreement
Date 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 Agreement Date, (iii) in the event that
on the date three years subsequent to the Agreement Date 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 Agreement Date 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, and (iv) the
date five years subsequent to the Agreement Date. 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 stock option (the "Original Option") and Stock
---------------
Bonus 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
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<PAGE>
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).
Such Additional Options shall be issued to such employees of Parent or Sub as
are reasonably acceptable to the board of directors of Parent and are requested
in writing promptly after any Adjustment Date by the board of directors of Sub.
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.
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 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.
5.11 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).
5.12 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
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<PAGE>
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.
5.13 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.
5.14 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. Such reimbursement shall not include taxes of the Company
Shareholders payable with respect to income of the Company.
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.
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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.
(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
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<PAGE>
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
the date of the most recent balance sheet in the Parent Financials.
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.
(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 G.
---------
(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 the date of the Balance Sheet.
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<PAGE>
(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 date eighteen
(18) months subsequent to 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 eighteen (18) months
subsequent to 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(d)(ii) 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.
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 exceeds $25,000, have been
delivered to the Shareholder Representative (as defined below) and the Escrow
Agent as provided in subsection (d) below. The Company Shareholders shall not
have any
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<PAGE>
right of contribution from the Company with respect to any Loss claimed after
the Effective Time by Parent or Sub.
(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).
(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
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<PAGE>
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 as of the Agreement Date.
(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
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<PAGE>
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.
(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 Section 7.2 to the amount of any
claim by Parent against the Escrow Fund with respect to such settlement.
<PAGE>
(k) Shareholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any shareholder, Gary Suttle 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 Company
Shareholders 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.
(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
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<PAGE>
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 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
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<PAGE>
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 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,
----
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<PAGE>
"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 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 Agreement 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 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
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<PAGE>
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 December 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 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
-45-
<PAGE>
(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; and provided further that, (i) 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 and (ii) the Company shall promptly
repay any funds lent or otherwise extended to it by Parent or Sub in
anticipation of the Merger.
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.
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
-46-
<PAGE>
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
Telecopy No.: (650) 493-6811
(b) if to Company or to a Principal Shareholder to:
USWeb Houston
2650 Fountainview, Suite 430
Houston, TX 77056
Attention: Gary Suttle
Telecopy No.: 713-783-6223
with a copy to:
The Law Offices of
Arthur G.Vega
115 Villata Street
San Antonio, TX 78205
Attention: John Benton, Esq.
Telecopy No.: 210-225-7751
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
-47-
<PAGE>
delegate their respective obligations hereunder to their respective affiliates
or in any transaction having the effect of changing the Parent's jurisdiction of
incorporation.
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 unenforce able, 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.
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.
-48-
<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.
COMPANY USWEB CORPORATION
Signature: /s/ Gary Suttle Signature: /s/ James J. Heffernan
------------------------ -------------------------
Gary Suttle James J. Heffernan
President, Treasurer, and Secretary Executive Vice President
and Chief Financial Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 122
USWeb Corporation
Signature: /s/ James J. Heffernan Signature: /s/ James J. Heffernan
----------------------- -------------------------
James J. Heffernan James J. Heffernan
Secretary President, Treasurer, and Secretary
PRINCIPAL SHAREHOLDERS
Signature: /s/ Gary Suttle
-------------------------
Gary Suttle
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF REORGANIZATION BY AND AMONG USWEB
CORPORATION, USWEB ACQUISITION CORPORATION 122, AND USWEB - APEX, INC.]
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Principal Shareholders
Exhibit B Valuation Method
Exhibit C Schedule of Exceptions
Exhibit D Financial Statements
Exhibit E Business Plan
Exhibit F Option Agreement
Exhibit G Form of Shareholder Certificate
<PAGE>
EXHIBIT A
---------
Principal Shareholders
Name Number of Shares/*/
Gary Suttle 1,000
________________________
/*/ On an as fully converted to Common Stock, fully diluted basis.
<PAGE>
EXHIBIT B
---------
Valuation Method
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Company Financial Statements
1. Unaudited balance sheet as of September 30, 1997 and related unaudited
balance sheets and statements of income and cash flows for the six-month period
then ended.
<PAGE>
EXHIBIT E
---------
Company Business Plan
<PAGE>
EXHIBIT F
---------
Form of Option Agreement
<PAGE>
EXHIBIT G
---------
Form of Shareholder Certificate
<PAGE>
SHAREHOLDER CERTIFICATE
The undersigned is aware that pursuant to an Agreement and Plan of
Reorganization, dated as of ______________, 1997 (the "Agreement") entered into
---------
by and among USWeb Corporation, a Utah corporation ("Parent"),
------
____________________, a ___________ corporation (the "Company"), USWeb
-------
Acquisition Corporation ___, 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:
1. 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 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.
<PAGE>
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:
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.
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. 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.
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 that 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 Common Stock held by such Company Shareholder to agree in writing
to take and hold such Parent Common Stock subject to the 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
-2-
<PAGE>
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 market standoff agreement or 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 subsection (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, Sub, the Company or any of their agents. The undersigned understands
that 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.
2. 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, which Parent may elect to seek directly from the Escrow Fund, or
(ii) Parent may seek Purchase Price Adjustments from the Escrow Fund, in either
of which events the Escrow Amount otherwise payable to the undersigned would be
reduced without any act of the undersigned.
c. Each Company Shareholder hereby agrees that in connection with
any registration of the offering of any Shares of the Parent under the 1933 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 Securities Act; provided, however, that such restriction shall
only apply to the first
-3-
<PAGE>
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.
3. Election of Shareholder Representative. The undersigned hereby
--------------------------------------
consents to the election and appointment of ________________ 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 to 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.
4. Parent's Right of First Refusal.
-------------------------------
(a) Parent's Right of First Refusal. Before any shares issued
-------------------------------
pursuant to the 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. If the Shares are being transferred by gift (other than
pursuant to subsection (g) below), the Parent Purchase Price shall be the
product of the Fair Value Per Share multiplied by the number of Shares proposed
to be gifted.
-4-
<PAGE>
(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.
(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
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-
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
_____ day of _________________, 1997.
________________________________
Signature
________________________________
Print Name
-6-
<PAGE>
EXHIBIT 2.16
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
USWEB CORPORATION
USWEB ACQUISITION CORPORATION 112,
REACH NETWORKS, INC.
AND THE OTHER PARTIES SET FORTH HEREIN
DATED AS OF OCTOBER 24, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I - THE MERGER........................................................... 1
1.1 The Merger........................................................... 1
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............. 2
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..................................................... 8
1.13 Taking of Necessary Action; Further Action........................... 8
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL STOCKHOLDERS....................................... 8
2.1 Organization of the Company.......................................... 8
2.2 Company Capital Structure............................................ 8
2.3 Subsidiaries......................................................... 9
2.4 Authority............................................................ 9
2.5 No Conflict.......................................................... 9
2.6 Consents............................................................. 10
2.7 Company Financial Statements......................................... 10
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......................................................... 14
2.13 Intellectual Property................................................ 14
2.14 Agreements, Contracts and Commitments................................ 17
2.15 Interested Party Transactions........................................ 19
2.16 Governmental Authorization........................................... 19
2.17 Litigation........................................................... 19
2.18 Accounts Receivable.................................................. 19
2.19 Minute Books......................................................... 20
2.20 Environmental Matters................................................ 20
2.21 Brokers' and Finders' Fees; Third Party Expenses..................... 20
2.22 Employee Benefit Plans and Compensation.............................. 21
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
2.23 Insurance....................................................... 23
2.24 Compliance with Laws............................................ 24
2.25 Third Party Consents............................................ 24
2.26 Warranties; Indemnities......................................... 24
2.27 Complete Copies of Materials.................................... 24
2.28 Representations Complete........................................ 24
2.29 Business Plan................................................... 24
2.30 Backlog Report.................................................. 24
2.31 Stockholder Investment Representations and Warranties........... 24
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB............ 25
3.1 Organization, Standing and Power................................ 25
3.2 Authority; Consents............................................. 26
3.3 Capital Structure............................................... 26
3.4 Brokers' and Finders' Fees...................................... 27
3.5 No Changes...................................................... 27
3.6 Complete Copies of Materials.................................... 27
ARTICLE IV - CONDUCT PRIOR TO THE EFFECTIVE TIME.......................... 27
4.1 Conduct of Business of the Company.............................. 27
4.2 No Solicitation................................................. 29
ARTICLE V - ADDITIONAL AGREEMENTS......................................... 30
5.1 Parent's Right of First Refusal................................. 30
5.2 Market Standoff Agreement....................................... 31
5.3 Restriction on Competition...................................... 32
5.4 Confidentiality................................................. 33
5.5 Expenses........................................................ 33
5.6 Public Disclosure............................................... 33
5.7 PostClosing Employment of Company Employees..................... 34
5.8 Access to Information........................................... 35
5.9 Public Disclosure............................................... 36
5.10 Consents........................................................ 36
5.11 FIRPTA Compliance............................................... 36
5.12 Best Efforts.................................................... 36
5.13 Notification of Certain Matters................................. 36
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
5.14 Tax Returns..................................................... 37
5.15 Additional Documents and Further Assurances..................... 37
5.16 Section 368 Compliance.......................................... 37
5.17 Parent Policies................................................. 37
5.18 Fairness Hearing; Unwind; Company Share Approval................ 37
ARTICLE VI - CONDITIONS TO THE MERGER..................................... 38
6.1 Conditions to Obligations of Each Party to Effect the Merger.... 38
6.2 Additional Conditions to Obligations of Company................. 38
6.3 Additional Conditions to the Obligations of Parent and Sub...... 39
ARTICLE VII - SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW.......... 41
7.1 Survival of Representations and Warranties...................... 41
7.2 Escrow Arrangements; Setoff..................................... 41
7.3 Indemnity....................................................... 48
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER.......................... 49
8.1 Termination..................................................... 49
8.2 Effect of Termination........................................... 50
8.3 Amendment....................................................... 50
8.4 Extension; Waiver............................................... 50
ARTICLE IX - GENERAL PROVISIONS........................................... 50
9.1 Notices......................................................... 50
9.2 Interpretation.................................................. 51
9.3 Counterparts.................................................... 52
9.4 Entire Agreement; Assignment.................................... 52
9.5 Severability.................................................... 52
9.6 Other Remedies.................................................. 52
9.7 Governing Law................................................... 52
9.8 Rules of Construction........................................... 52
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of October 24, 1997 (the "Agreement Date"), among USWeb
--------------
Corporation, a Utah corporation ("Parent"), USWeb Acquisition Corporation 112, a
------
Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), Reach
---
Networks, Inc., a Delaware corporation (the "Company"), and the individuals and
-------
entities listed on Exhibit A attached hereto (such individuals being hereinafter
---------
referred to collectively as the "Stockholders" and individually as a
------------
"Stockholder").
- ------------
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 stockholders
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, certain Stockholders, 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
immediately prior to the Merger shall be offered an opportunity of employment by
the Sub immediately 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:
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 Delaware General Corporation Law ("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
<PAGE>
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 (the "Merger
------
Articles"), in accordance with the relevant provisions of Delaware Law (the time
- --------
of filing with the Secretary of State of Delaware 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. 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.
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, $0.01
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 stockholders (the "Company
-------
Stockholders"), be
- ------------
-2-
<PAGE>
canceled and extinguished and each Company Stockholder shall have (i) the right
to receive such Company Stockholder's pro rata portion (based on such Company
Stockholders' 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 $4,988,643.43 (the "Original
------------------- --------
Purchase Price") divided by $3.25, 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. The Company has no stock option plans. At or
-------------
prior to the Effective Time, all options, warrants, rights convertible into
capital stock, or similar rights to acquire Company capital stock, if any, shall
be canceled and of no further force and effect.
(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) 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.
(ii) 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
shall be appointed Escrow Agent.
-3-
<PAGE>
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 Stockholders, 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 Stockholder (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 Stockholder shall be
entitled to receive in exchange therefor a certificate representing the number
of shares issuable to such Company Stockholder 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 was 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
-4-
<PAGE>
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
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 Model attached as Exhibit B
---------
(the "Valuation Model"). Parent shall then calculate the "First Adjustment to
--------------- -------------------
Purchase Price" as follows:
- --------------
-5-
<PAGE>
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 Stockholders (pro rata based upon their equity ownership in the
Company immediately prior to the Effective Time as represented to Parent by the
Company) 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 / FVPSAD)
where FSP is the "First Shares Payment;"
--------------------
FAPP is the First Adjustment to Purchase Price as calculated above;
and
FVPSAD is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Agreement 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. 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.
-6-
<PAGE>
(i) If SAPP is greater than zero, then the Parent shall pay to
the Company Stockholders (pro rata based upon their equity ownership in the
Company immediately prior to the Effective Time as represented to Parent by the
Company) 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 / FVPSAD)
where SSP is the "Second Shares Payment;"
---------------------
SAPP is the Second Adjustment to Purchase Price as calculated above;
and
FVPSAD is the "Fair Value Per Share of the Parent's Common Stock on
----------------------------------------------------
the Agreement Date."
------------------
If SAPP equals zero, no adjustment to the Original Purchase Price shall be made
for the Second Adjustment Date.
(c) Adjustment Methodology. Parent shall cause a copy of its
----------------------
valuation of the Company as of the First Adjustment Date and the Second
Adjustment Date to be delivered to each of the Stockholders and the Escrow Agent
promptly following the preparation thereof. For a period of ten (10) days after
such delivery, the Escrow Agent shall make no delivery to Parent of any Escrow
Amounts as a result of a Purchase Price Adjustment unless the Escrow Agent shall
have received written authorization from the Stockholder Representative to make
such delivery. After the expiration of such ten (10) day period, the Escrow
Agent shall make delivery to Purchaser of the Purchase Price Adjustment from the
Escrow Fund (as defined below), provided that no such payment or delivery shall
be made if the Stockholder Representative shall object in a written statement to
the Purchase Price Adjustment and such objection shall have been delivered to
the Parent and the Escrow Agent prior to the expiration of such ten (10) day
period. In the event such an objection by the Stockholder Representative is
received the provisions of Section 7.2(i) of this Agreement shall apply to the
resolution of the dispute regarding the claimed Purchase Price Adjustment.
1.11 Parent Common Stock. The shares of Parent Common Stock issued in
-------------------
connection with the Merger will be exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act"). Such shares may not be
--------------
transferred or resold thereafter, except in compliance with
-7-
<PAGE>
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 STOCKHOLDERS
The Company and each of Albert Collins, Michael Collins, Douglas Kester and
William Kane (collectively, the "Principal Stockholders") hereby, jointly and
----------------------
severally, represent and warrant to Parent and Sub, subject to such exceptions
as are specifically disclosed in Exhibit C attached hereto, as follows:
---------
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
Delaware. 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 Certificate 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 50,000
shares of authorized Common Stock of which 1,765 shares are issued and
outstanding as of the date hereof, and 2,558.82 shares will be issued and
outstanding on the Closing Date, and 1,000 shares of authorized Preferred Stock,
of which no 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
-8-
<PAGE>
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 Certificate 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. As of the Closing Date, the Company will not have any
------------
subsidiaries or affiliated companies and will 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 except as set forth on Exhibit C.
---------
2.4 Authority. Each of the Company and the Principal Stockholders 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
Stockholders, 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
Stockholders 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 Stockholders, 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 Certificate 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.
-9-
<PAGE>
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 Delaware.
2.7 Company Financial Statements. Exhibit C sets forth the Company's
---------------------------- ---------
audited balance sheet as of April 30, 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 September 30, 1997, and the related
unaudited statements of income and cash flow for the five 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 April 30, 1996 shall be referred to as the "Balance Sheet."
-------------
2.8 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, 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
April 30, 1996.
2.9 No Changes. Except as set forth in Exhibit C, since April 30, 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);
-10-
<PAGE>
(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 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, or investigation of, the Company or its affairs;
-11-
<PAGE>
(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 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
-12-
<PAGE>
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.
(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 Principal Stockholders 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 Stockholder is a party or otherwise binding
upon the Company which has or may have the
-13-
<PAGE>
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.
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"). 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.
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
-14-
<PAGE>
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.
(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
- -
-15-
<PAGE>
Company and the Principal Stockholders, 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 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), 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 Stockholders regarding the scope
-16-
<PAGE>
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 Stockholders, 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 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
-17-
<PAGE>
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,
(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 Stockholder 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
-18-
<PAGE>
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. No officer, director or Principal
-----------------------------
Stockholder 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 per cent
(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 Stockholders' knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Principal Stockholders, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's or Principals Stockholders' knowledge threatened, against the Company,
its properties or any of its officers or directors (nor, to the best knowledge
of the Principal Stockholders, 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 September 30, 1997 ("Accounts Receivable") along
-------------------
with the number of days elapsed since such 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.
-19-
<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 stockholders 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
Stockholders' 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 Stockholders' knowledge, threatened concerning any Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of the Company.
The Principal Stockholders 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
-20-
<PAGE>
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 ERISA with respect to each
Company Employee Plan; (v) all IRS determination
-21-
<PAGE>
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
Stockholders threatened or anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (iv) 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); (v) there are no inquiries or proceedings pending or, to
the knowledge of the Company or any Principal Stockholders threatened by the IRS
or DOL with respect to any Company Employee Plan; and (vi) 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) 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
-22-
<PAGE>
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 Stockholders,
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.
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 Stockholders have no knowledge of any threatened
termination of, or premium increase with respect to, any of such policies.
-23-
<PAGE>
2.24 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.
2.25 Third Party Consents. Except as set forth in Exhibit C, no consent or
-------------------- ---------
approval is needed from any third party in order for the Company 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 warranties
------------------------
made by the Company or the Principal Stockholders (as modified by the Exhibit
-------
C), nor any statement made in Exhibit C or any certificate furnished by the
- - ---------
Company or the Principal Stockholders pursuant to this Agreement, or furnished
in or in connection with documents mailed or delivered to the Company
Stockholders 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.
2.31 Stockholder Investment Representations and Warranties. Each of the
-----------------------------------------------------
Stockholders represents and warrants to the Parent, severally and not jointly
and solely with respect to himself, herself or itself, as follows:
(a) Experience. The Stockholder is able to assess the technology,
----------
markets, management and strategy of the Parent and to fend for himself, herself
or itself in transactions such as the one contemplated by this Agreement, has
such knowledge and experience in financial and business matters that the
Stockholder 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.
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<PAGE>
(b) Investment. The Stockholder accepts the shares of the Parent
----------
Common Stock as investment for the Stockholder's own account and not with the
view to, or for resale in connection with, any distribution thereof. The
Stockholder 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 Stockholder
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 Stockholder
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 Stockholder 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
Stockholder 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 Stockholder
covenants that, in the absence of an effective registration statement covering
the stock in question, the Stockholder will sell, transfer, or otherwise dispose
of the Parent Common Stock only in a manner consistent with the Stockholder's
representations and covenants set forth herein. In connection therewith, the
Stockholder 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 Stockholder 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.
(e) Access to Data. The Stockholder 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 Stockholder 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 and the Stockholders 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
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<PAGE>
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 100,000,000 shares of
Common Stock, $.001 par value, of which 39,421,722 shares were issued and
outstanding as of October 10, 1997 and 36,283,081 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,
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 the 1996 Equity
Compensation Plan, (ii) 160,000 shares of Series A Preferred Stock, 2,113,647
shares of Series C Preferred Stock and 154,167 shares of Common Stock for
issuance upon the exercise of outstanding warrants to purchase Series A
Preferred Stock, Series C Preferred Stock, and Common Stock, respectively (the
"Warrant Stock"), (iii) 2,327,814 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 issued or outstanding warrants to
purchase issuable pursuant to the Company's Affiliate Warrant Program or
otherwise issued, and (v) 24,000,000 shares of Common Stock for issuance under
the Company's 1997 Acquisition Stock Option Plan. Except for stock bonuses in
connection with completed acquisitions and options, stock and stock bonuses to
be issued in connection with several potential
-26-
<PAGE>
acquisitions, 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, when issued as contemplated hereby, 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 No Changes. Except as otherwise disclosed in this Agreement, the
----------
information contained in the Confidential Offering Memorandum dated February
1997, relating to Parent's Series C Preferred Stock offering (i) was true and
correct as of its date, (ii) accurately described Parent's business, operating
results, financial condition, and, to the Parent's knowledge, prospects as of
its date, (iii) contained no untrue statement of a material fact as of its date,
or (iv) omitted no material fact necessary to make the statements contained
therein, in light of the circumstances under which made in such document, not
misleading as of its date. None of the representations made by Parent in this
Agreement, or any certificate or Exhibit furnished by Parent pursuant to this
Agreement, contains any untrue statement of a material fact, or omits to state
any material fact necessary in order to make the statements contained in this
Agreement, or any certificate or Exhibit furnished by Parent pursuant to this
Agreement, in light of the circumstances under which made, not misleading.
3.6 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 Stockholders, or their respective
counsel.
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
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<PAGE>
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) Except as otherwise expressly set forth in Exhibit C, 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 Certificate 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 except as set forth on Exhibit C;
---------
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<PAGE>
(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) Except as otherwise expressly set forth in Exhibit C, 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 Stockholders 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
-29-
<PAGE>
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 Principal Stockholder 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
Stockholders, 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 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 fifteen
----------------------------------
(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
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<PAGE>
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 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.
(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 Transfers. Anything to the contrary
-------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares either (i) during the Holder's lifetime or on the Holder's death by will
or intestacy to the Holder's immediate family, or (ii) by Golub Associates
Investors to one or more of its affiliates, or a trust for the benefit of the
Holder's immediate family shall be exempt from the provisions of this Section
5.1. "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 Parent 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 Stockholder hereby agrees
-------------------------
that if so requested by the Parent or its ultimate parent or any representative
of the underwriters in connection with any registration of the offering of any
Shares of the Parent or its ultimate parent under the Securities Act, such
Principal Stockholder 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 or its ultimate parent during the 180-day period
following the date of the final Prospectus contained in a registration statement
of the Parent or its ultimate parent filed under the
-31-
<PAGE>
Securities Act; provided, however, that such restriction shall only apply to the
first registration statement of the Parent or its ultimate parent to become
effective under the Securities Act which includes securities to be sold on
behalf of the Parent or its ultimate parent to the general public in an
underwritten public offering under the Securities Act. The Parent or its
ultimate 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, no Principal Stockholder who is also a New Employee 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 Metropolitan Statistical
Area (as defined by the U.S. Census Bureau) 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 Stockholder, 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 from the date of
termination and that terminated Principal Stockholder/New Employee shall receive
severance benefits from Parent payable in a lump sum at the date of termination
equal to six
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<PAGE>
(6) months salary and employee benefits. For the purposes solely of this
Agreement, "cause" for a Principal Stockholder's termination shall exist at any
-----
time upon the occurrence of any of the following events:
1. acts of dishonesty by the Principal Stockholder;
2. gross negligence or willful malfeasance by the Principal
Stockholder in the performance of his duties;
3. the Principal Stockholder's conviction of a crime relating to his
character or employment by Parent;
4. physical or mental disability of the Principal Stockholder 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
5. death of the Principal Stockholder.
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 Stockholders 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 Stockholders' 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. Sub 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 Sub or 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 Sub, Parent and Company, and are not intended to
benefit any persons not party to this Agreement, including such employees. Sub,
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 and consultants designated by the Company as of the Closing Date stock
options 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 issued to the New Employees and such consultants, and in the amounts,
requested by the Company in writing at or prior to 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 aggregate original number of shares subject to such option each month after
the Agreement 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 of the Parent (an
"Employee Termination"); 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 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.
---------
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<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 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 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. Each New Employee shall be required
to acknowledge that there may be federal, state or local tax due upon receipt of
the bonus, that Parent may withhold any applicable taxes from each 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 or
designated consultant to the Company 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.
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
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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 5.8 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 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.
5.10 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.
5.11 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).
5.12 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 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.
5.13 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 Stockholders 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.
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<PAGE>
5.14 Tax Returns. The Company 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 Company shall permit Parent to review and
comment on each such Tax Return prior to filing.
5.15 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.
5.16 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 Code.
5.17 Parent Policies. The Company and Company Stockholders acknowledge
---------------
that Parent has implemented policies regarding the operation of subsidiary
entities such as the Company will be following the Merger. The Company and
Company Stockholders 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
Company Stockholders 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 Company Stockholders.
5.18 Fairness Hearing; Unwind; Company Share Approval. As promptly as
------------------------------------------------
practicable after the execution of this Agreement, Parent shall seek to obtain a
permit from the Commissioner of the Department of Corporations of the State of
California (after a hearing before such Department) pursuant to Section 25113 of
the California Corporations Code with respect to the issuance of the Merger
Consideration, so that the issuance of Parent Common Stock in the Merger shall
be exempt from registration under Section 3(a)(10) of the Securities Act.
As promptly as practicable after the execution of this Agreement and at
such time as Parent may request so as not to interfere with the permit
application process described above or the Section 3(a)(10) exemption, the
Company shall submit this Agreement and the transactions contemplated hereby to
its stockholders for approval and adoption as provided by Delaware Law and its
Certificate of Incorporation and Bylaws. The Company shall use its best efforts
to solicit and obtain the consent of the Company Stockholders sufficient to
approve the Merger and this Agreement and to enable the Closing to occur as
promptly as practicable. The materials submitted to the Company Stockholders
shall be subject to review and approval by Parent (which approval shall not be
unreasonably withheld) and include information regarding the Company, the terms
of the Merger and this Agreement and the recommendation of the Board of
Directors of the Company in favor of the Merger and this Agreement.
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<PAGE>
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.
(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
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<PAGE>
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 Stockholders 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 Stockholders. Parent
-----------------------------------------------------
shall have been provided with a certificate executed by the Principal
Stockholders 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 Stockholders in this Agreement are true and correct in all
material respects;
(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;
(iii) the Company's unaudited balance sheet as of the Closing
Date (the "Closing Balance Sheet") is correct in all material respects and has
been prepared in accordance with USGAAP applied on a consistent basis;
(iv) with respect to the Company's "Web" business, the aggregate
amount of the Company's accounts receivable (as reflected on the Closing Balance
Sheet) is equal to or exceeds the aggregate amount of the Company's aggregate
accounts payable reflected thereon; and
(v) the Company's working capital line item (C.19) as of the
Closing Date based on the Closing Balance Sheet as set forth in the Valuation
Model is equal to or exceeds zero.
(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.
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<PAGE>
(d) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in Exhibit C shall have been obtained.
---------
(e) Company Stockholder Agreement. Each of the Company Stockholders
-----------------------------
shall have executed and delivered to Parent a Company Stockholder Agreement 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 April 30, 1996.
(g) Company Stockholder Approval. Each of the Company Stockholders
----------------------------
shall have approved this Agreement and the Merger and the transactions
contemplated thereby, and no Company Stockholder shall have exercised, or have
any continuing right to exercise, appraisal, dissenters' or similar rights by
virtue of the Merger.
(h) Additional Investment. Leg Partners SBIC, L.P., Bernard Spitzer,
---------------------
Curtis Schenker, Metropolitan Capital Advisors, L.P., Clement B. Wood, Sally
Wood, Gregory W. Cashman, Charles H. Ledley, and James A. Mai (collectively, the
"Golub Associates Investors") shall have invested $1 million in the Company, on
--------------------------
substantially the terms set forth in the Stock Purchase Agreement and the Escrow
Agreement, each dated as of October 23, 1997 among the Company and the Golub
Associates Investors.
(i) Settlement. The Company shall have entered into a binding
----------
agreement with Christian Stumm providing for the settlement of all disputes and
release of all claims alleged by Mr. Stumm on substantially the terms set forth
in the Agreement of Settlement and Mutual General Releases dated as of October
23, 1997 between the Company and Stumm.
(j) Termination of 401(k) Plan. The Company's board of directors
--------------------------
shall have approved the termination of the Company's 401(k) Plan, and the
Company shall have notified the participants in the Company's 401(k) Plan that
such plan will be terminated.
(k) Audit. Parent's independent auditors shall have completed an
-----
audit of the Company's financial records as of April 30, 1997 and delivered to
Parent an unqualified opinion with respect thereto.
(l) Securities Law Compliance. Parent shall have received a permit
-------------------------
from the California Commissioner of Corporations as described in Section 5.16
hereof, or, if after having made application for such permit, such permit is
denied, Parent shall otherwise be able to issue the Parent Common Stock that
comprises part of the Merger Consideration in compliance with the Securities Act
and the rules and regulations thereunder.
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<PAGE>
(m) McFarland, Dewey & Co., Inc. The Company shall have received from
---------------------------
McFarland, Dewey & Co., Inc. a binding agreement or receipt acknowledging
payment in full satisfaction of any and all obligations owed by the Company to
McFarland, Dewey & Co., Inc.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's and
------------------------------------------
the Principal Stockholders' 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
on the eighteen month 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
Stockholders (other than Golub Associates Investors) 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 such Company Stockholder. 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 such Company Stockholder shall be the pro
rata amount calculated pursuant to Section 1.6(a) of this Agreement but
excluding for this purpose all shares issued to Golub Associates Investors. 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
Stockholders, but only after first proceeding against the Escrow Fund so long as
it exists and is not subject to other claims. 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 two percent (2%) of the Original Purchase Price
have been delivered to the Stockholder Representative (as defined below) and the
Escrow Agent as provided in paragraph (d) below. The Company Stockholders shall
not have any right of
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<PAGE>
contribution from the Company with respect to any Loss claimed after the
Effective Time by Parent or Sub.
(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 Stockholder 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
Stockholders (other than Golub Associates Investors) or their designees the
remaining portion of the Escrow Fund not required to satisfy such claims.
Deliveries of Escrow Amounts to the Company Stockholders (other than Golub
Associates Investors) or their designees 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 Stockholder (other than Golub Associates
Investors) shall have voting rights with respect to the shares of Parent Common
Stock contributed to the Escrow Fund by such Company Stockholder (and on any
voting securities added to the Escrow Fund in respect of such shares of Parent
Common Stock).
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<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 Stockholder 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 Stockholder 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 Stockholder 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 out of the
Escrow Fund pursuant to this Section 7.2, Parent shall deliver to the
Stockholder 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 Stockholders. In the event that Parent
--------------------------------------
has elected to pursue indemnity directly from the Principal Stockholders in
accordance with the provisions of Section 7.2(a), the Principal Stockholders
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 Principal Stockholders 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 Parent's Common Stock is not so
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<PAGE>
publicly traded, the fair market value per share as determined by the Parents'
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 Stockholder 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 Stockholder
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
Stockholder 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 Stockholder 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 Stockholder 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, provided that the
Golub Associates Investors shall not be liable for any such expenses or fees.
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<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
Stockholder Representative of such claim, and the Stockholder Representative
shall be entitled, at the expense of the Company Stockholders (other than the
Golub Associates Investors), 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 Stockholder 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
Stockholder Representative has consented to any such settlement, the Company
Stockholders 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) Stockholder Representative.
--------------------------
(i) In the event that the Merger is approved, effective upon
such vote, and without further act of any stockholder, William P. Kane shall be
appointed as agent and attorney-in-fact (the "Stockholder Representative") for
each Company Stockholder, for and on behalf of such Company Stockholders 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 Stockholder Representative for
the accomplishment of the foregoing. Such agency may be changed by the
stockholders of the Company from time to time upon not less than thirty (30)
days prior written notice to Parent; provided that the Stockholder
Representative may not be removed unless a majority-in-interest of the Company
Stockholders agree to such removal and to the identity of the substituted agent.
No bond shall be required of the Stockholder Representative, and the Stockholder
Representative shall not receive compensation for services as such. Notices or
communications to or from the Stockholder Representative shall constitute notice
to or from each of the Company Stockholders or their permitted transferees.
(ii) The Stockholder Representative shall not be liable for any
act done or omitted hereunder as Stockholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Stockholders
(other than Golub Associates Investor(s)) shall severally indemnify the
Stockholder Representative and hold him or her harmless against any loss,
liability or expense incurred without negligence or bad faith on the part of the
Stockholder Representative and arising out of or in connection with the
acceptance or administration of the Stockholders Representative's duties
hereunder, including the reasonable fees and expenses of any legal counsel
retained by the Stockholder Representative.
(l) Actions of the Stockholder Representative. A decision, act,
-----------------------------------------
consent or instruction of the Stockholder Representative shall constitute a
decision of all the Company Stockholders and shall be final, binding and
conclusive upon each of such Company Stockholder, and the Escrow Agent and
Parent may rely upon any such decision, act, consent or instruction of the
Stockholder Representative as being the decision, act, consent or instruction of
each and every such
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<PAGE>
Company Stockholder. 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 Stockholder 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 Stockholder 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 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
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<PAGE>
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
(other than Golub Associates Investors) 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
Stockholder 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 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
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<PAGE>
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 Company Stockholders 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 breach of a representation or warranty of the Company or the
Principal Stockholders contained in this Agreement or any failure by the Company
or any Principal Stockholder to perform or comply with any covenant contained in
this Agreement, (ii) by reason of the failure of the Company and the Principal
Stockholders to perform their obligations hereunder and (iii) the matters
involving Christian P. Stumm described in Section 2.17 of the Disclosure
Schedule, provided, however, that the liability of the Principal Stockholders
pursuant to such indemnity shall not exceed $9,977,286, the liability of the
other Company Stockholders pursuant to such indemnity shall is limited to the
extent shares of Parent Common Stock are placed in the Escrow Fund on their
behalf, and Golub Associates Investors shall have no indemnification obligations
under this Section 7.3(a).
(b) Parent hereby agrees to indemnify and hold the Stockholders
harmless against and in respect of any Loss incurred by the Stockholders, (i) as
a result of any breach of a representation or warranty of Parent or Sub
contained in this Agreement or any failure by Parent or Sub to perform or comply
with any covenant contained in this Agreement and (ii) by reason of the failure
of Parent or Sub to perform its obligations hereunder, provided, however, that
the liability of the Parent and Sub pursuant to such indemnity shall not exceed
$9,977,286.
(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 Agreement 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 Parent or Sub,
-----------------------------
on the one hand, or the Stockholders on the other hand, 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 (an "Indemnification Notice") to the
----------------------
Parent or the Stockholder Representative, as the case may be, briefly stating
the
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<PAGE>
nature and basis of such claim. In the case of Losses arising by reason of any
third-party claim, the Indemnification 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 Indemnification Notice within such time period
shall not relieve the Principal Stockholders of any liability that the Principal
Stockholders may have to Parent except to the extent that the Principal
Stockholders 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 Principal Stockholders and the Parent 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 Principal Stockholders. 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 Stockholders.
Parent shall choose one such arbitrator, the Principal Stockholders 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 Principal Stockholders. 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 December 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 any
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<PAGE>
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 Stockholders 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 Stockholders 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 Stockholders 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 the Stockholders, Parent, Sub
or the Company, or their respective officers, directors or stockholders,
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 Stockholders 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.
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<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
Attn: Chief Financial Officer
Telecopy No.: (408) 987-3240
with a copy to:
Wilson Sonsini Goodrich & Rosati, Professional Corporation
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 Stockholder to:
Reach Networks, Inc.
588 Broadway
New York, New York 10012
Attention: Mr. William P. Kane
Telecopy No.: (212) 274-0695
with a copy to:
Patterson, Belknap, Webb & Tyler LLP
1133 Avenue of the Americas
New York, New York 10036-6710
Attention: Jeffrey E. LaGueux, Esq.
Telecopy No.: (212) 336-2222
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<PAGE>
(c) if to any of the Golub Associates Investors:
LEG Partners SBIC, L.P.
c/o Golub Associates Incorporated
230 Park Avenue, 19th Floor
New York, NY 10169
Attention: Lawrence E. Golub
Telecopy No.: (212) 207-1579
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.
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 unenforce able, 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.
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
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<PAGE>
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.
-53-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company and the Principal Stockholders
have caused this Agreement to be signed by their duly authorized respective
officers, all as of the date first written above.
REACH NETWORKS, INC. USWEB CORPORATION
By:________________________________ By: /s/ James J. Heffernan
President ---------------------------------
James J. Heffernan,
Chief Financial Officer
ESCROW AGENT USWEB ACQUISITION CORPORATION 112
USWEB CORPORATION
By: /s/ James J. Heffernan By: /s/ James J. Heffernan
--------------------------------- ---------------------------------
James J. Heffernan, Secretary James J. Heffernan, President
STOCKHOLDERS
/s/ Albert Collins
---------------------------------------
Albert Collins
/s/ Michael Collins
---------------------------------------
Michael Collins
/s/ Douglas Kester
---------------------------------------
Douglas Kester
/s/ William Kane
---------------------------------------
William Kane
_______________________________________
LEG Partners SBIC, L.P.
/s/ Bernard Spitzer
---------------------------------------
Bernard Spitzer
<PAGE>
/s/ Curtis Schenker
----------------------------------
Curtis Schenker
__________________________________
Metropolitan Capital Advisors, L.P.
/s/ Clement B. Wood
----------------------------------
Clement B. Wood
/s/ Sally Wood
----------------------------------
Sally Wood
/s/ Gregory W. Cashman
----------------------------------
Gregory W. Cashman
/s/ Charles H. Ledley
----------------------------------
Charles H. Ledley
/s/ James A Mai
----------------------------------
James A. Mai
/s/ Arnold Hyman
----------------------------------
Arnold Hyman
/s/ Christian Stumm
----------------------------------
Christian Stumm
/s/ Anthony Schmitz
----------------------------------
Anthony Schmitz
/s/ Sheena Ryan
----------------------------------
Sheena Ryan
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<PAGE>
/s/ Roman Shenkerman
----------------------------------
Roman Shenkerman
/s/ Raju Patel
----------------------------------
Raju Patel
/s/ Manuel Gil
----------------------------------
Manuel Gil
/s/ Emmanuel Szabados
----------------------------------
Emmanuel Szabados
/s/ Eric Saul
----------------------------------
Eric Saul
/s/ Andrew Sulak
----------------------------------
Andrew Sulak
/s/ Nishit Maskey
----------------------------------
Nishit Maskey
/s/ William Carlin
----------------------------------
William Carlin
__________________________________
McFarland, Dewey & Co., Inc.
-56-
<PAGE>
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
Exhibit A Stockholders
Exhibit B Valuation Model
Exhibit C Schedule of Exceptions
Exhibit D Form of Option Agreement
Exhibit E Form of Stockholders Certificates
</TABLE>
<PAGE>
EXHIBIT A
---------
Principal Stockholders
Name Number of Shares of Common Stock
Albert Collins 105.0
Michael Collins 62.3
Douglas Kester 495.0
William Kane 225.0
<PAGE>
EXHIBIT B
---------
Valuation Model
<PAGE>
EXHIBIT C
---------
Schedule of Exceptions
<PAGE>
EXHIBIT D
---------
Form of Option Agreement
<PAGE>
EXHIBIT E
---------
Form of Stockholder Certificate
<PAGE>
EXHIBIT 3.2
RESTATED
--------
CERTIFICATE OF INCORPORATION
----------------------------
OF USWEB CORPORATION
--------------------
USWeb Corporation, a corporation organized and existing under the laws of
the State of Delaware, (the "Corporation") hereby certifies as follows:
A. The name of the Corporation is USWeb Corporation. The corporation was
originally incorporated under the same name and the original Certificate
of Incorporation of the Corporation was filed with the Secretary of State
of Delaware on November 15, 1996.
B. This Certificate of Incorporation has been duly adopted in accordance
with the provisions of the General Corporation Law of the State of
Delaware by the Board of Directors and the Stockholders of the
corporation.
C. Pursuant to Sections 242 and 245 of the General Corporation Law of the
State of Delaware, this Certificate of Incorporation restates and
integrates and further amends the provisions of the Certificate of
Incorporation of this corporation.
D. The text of the Certificate of Incorporation is hereby amended and
restated in its entirety to read as follows:
ARTICLE I
The name of the corporation is USWeb Corporation (the "Corporation").
ARTICLE II
<PAGE>
The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
ARTICLE IV
1. Authorized Capital. The aggregate number of shares that the
------------------
corporation shall have authority to issue is 112,852,260, divided into
100,000,000 shares of Common Stock, each with $0.001 par value, and 12,852,260
shares of Preferred Stock, each with $0.001 par value. The Preferred Stock
shall be issued in three series, which shall be designated "Series A Preferred
Stock," consisting of 6,226,166 shares, "Series B Preferred Stock," consisting
of 3,103,333 shares, and "Series C Preferred Stock," consisting of 3,522,759
shares.
2. Reverse Stock Split. Upon the filing of this Certificate of
-------------------
Incorporation with the Secretary of State of the State of Delaware, each
currently outstanding share of Common Stock of the Corporation shall be
consolidated and combined into one-third (1/3) of a share of Common Stock. No
fractional shares of Common Stock shall be issued upon such reverse stock split;
any fractional shares that would otherwise result as to any holder shall be
rounded up to the nearest whole share. The rights, preferences, privileges and
restrictions of the Preferred have been amended hereinbelow as necessary to
reflect the occurrence of the reverse stock split contemplated by this
paragraph.
3. Authorized Capital Following Automatic Conversion Event. Upon the
-------------------------------------------------------
automatic conversion of all outstanding shares of Preferred in accordance with
the provisions of Article V, Section 4(b) of this Certificate of Incorporation
(the "Automatic Conversion Event"), the Corporation shall immediately thereafter
be authorized to issue two classes of stock to be designated, respectively,
Common Stock and Preferred Stock. The total number of shares of Common Stock
which the Corporation shall have the authority to issue shall be 100,000,000,
$0.001 par value, and the total number of shares of Preferred Stock the
Corporation shall have the authority to issue shall be 1,000,000, $0.001 par
value. Immediately following any Automatic Conversion Event, the Preferred
Stock may be issued from time to time in one or more series pursuant to a
resolution or resolutions providing for such issue duly adopted by the Board of
Directors (authority to do so being hereby expressly vested in the Board). The
Board of Directors is further authorized to determine or alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock and to fix the number of shares of any series
of Preferred Stock and the designation of any such series of Preferred Stock.
The Board of Directors, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series, may increase or
-2-
<PAGE>
decrease (but not below the number of shares in any such series then
outstanding), the number of shares of any series subsequent to the issue of
shares of that series.
4. Restatement of Certificate of Incorporation. Immediately following
-------------------------------------------
any Automatic Conversion Event, the Board of Directors of the Corporation is
authorized, without the further consent or approval of the stockholders of the
Corporation to amend and restate this Certificate of Incorporation to show the
authorized classes of capital stock as set forth in the preceding paragraph and
to eliminate all references in this Certificate of Incorporation to the rights,
preferences, privileges and restrictions of the series of Preferred Stock
including those set forth in Article IV, section 1 above and Article V below
(and, in connection with any such amendment and restatement, to renumber the
remaining Articles).
Article V
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) "Corporation" shall mean USWeb Corporation.
-----------
(b) "Common Stock" shall mean the Common Stock, $0.001 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.
(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 April
30, 1997 for the Series C Preferred Stock.
(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 $0.001 par value.
-3-
<PAGE>
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 Corporation; 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 Corporation 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 Corporation) or the purchase of
shares of the Corporation (other than in connection with the repurchase of
shares of Common Stock issued to or held by employees, consultants, officers and
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 Corporation in connection with the termination of employment by
or services to the Corporation and relating to the repurchase of shares of
capital stock issued to or held by such individuals pursuant to agreements with
the Corporation for such repurchases.
-4-
<PAGE>
3. Liquidation Rights.
------------------
(a) Liquidation Preference. In the event of any liquidation,
----------------------
dissolution or winding up of the Corporation, either voluntary or involuntary,
but excluding any sale, merger or acquisition of the Corporation, the holders of
the Preferred Stock shall be entitled to receive, out of the assets of the
Corporation, 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 Corporation, 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
Corporation 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 Corporation shall be distributed ratably to the holders of the Corporation'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 Corporation 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. 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.
-5-
<PAGE>
(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 Corporation 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 Corporation 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 Corporation representing fifty percent (50%) or more of the total voting
power represented by the Corporation's then outstanding voting securities; or
(ii) A merger or consolidation of the Corporation with any
other corporation or business entity, other than a merger or consolidation which
would result in the voting securities of the Corporation 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 Corporation or such surviving entity outstanding immediately after such
merger or consolidation; or
(iii) The sale, lease, exchange, disposition or other transfer
by the Corporation of all or substantially all of the Corporation'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 Corporation 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 Corporation.
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 Corporation or of any transfer agent for the Preferred Stock, and shall
give written notice to the Corporation 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 Corporation or its transfer agent; provided further, however,
that the Corporation 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
Corporation or its transfer agent as provided above, or the holder notifies the
Corporation or its
-6-
<PAGE>
transfer agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Corporation to indemnify the
Corporation from any loss incurred by it in connection with such certificates.
The Corporation 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 Corporation after
the Original Issue Date of a particular series of Preferred Stock, other than
shares of Common Stock issued or issuable :
(ii) upon conversion of shares of Preferred Stock;
(iii) to the Corporation's employees, officers, directors and
consultants as may be determined by the Corporation's Board of Directors from
time to time;
(iv) 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
(v) pursuant to commercial borrowing, secured lending or lease
financing transactions approved by the Board of Directors.
(vi) 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
Corporation is less than the Conversion Price in effect on the date of, and
immediately prior to, such issue for such share of Preferred Stock.
-7-
<PAGE>
(vii) Deemed Issue of Additional Shares of Common.
-------------------------------------------
(viii) Options and Convertible Securities. In the event the
----------------------------------
Corporation 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 Corporation, 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;
(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:
-8-
<PAGE>
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 Corporation
for the issue of such exercised Options plus the consideration actually
received by the Corporation 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 Corporation 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 Corporation for the Additional Shares of Common deemed to have
been then issued was the consideration actually received by the Corporation
for the issue of such exercised Options, plus the consideration deemed to have
been received by the Corporation (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.
(ix) Stock Dividends. In the event the Corporation 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.
(x) Adjustment of Conversion Price Upon Issuance of Additional Shares
-----------------------------------------------------------------
of Common. In the event the Corporation 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 Corporation 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
-9-
<PAGE>
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, conver sion 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.
(xi) Determination of Consideration. For purposes of this
------------------------------
subsection 4(d), the consideration received by the Corporation for the issue of
any Additional Shares of Common shall be computed as follows:
(xi) Cash and Property. Such consideration shall:
-----------------
(a) insofar as it consists of cash, be computed at the
aggregate amount of cash received by the Corporation 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 Corporation
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.
(xiii) Options and Convertible Securities. The consideration per
----------------------------------
share received by the Corporation 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
Corporation 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 regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Corporation 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.
(xiv) 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.
-10-
<PAGE>
(xv) 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.
(xvi) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation 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 Corporation 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
Corporation 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.
(xvii) 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 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.
(xviii) 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 Corporation'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%.
-11-
<PAGE>
(e) Certificate as to Adjustments. Upon the occurrence of each
-----------------------------
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
the Corporation 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 Corporation 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 Corporation 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 Corporation 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 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 Corporation.
(g) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
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
-12-
<PAGE>
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
Corporation 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 Corporation 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 Corporation (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 Corporation 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
Corporation or given by such holder to the Corporation 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 Corporation receives a Qualifying Request,
the Corporation shall redeem on each Redemption Date the applicable Redeemable
Portion. No redemption obligation shall arise, however, if and to the extent
that the Corporation at such Redemption Date shall be prohibited by applicable
law from effecting such redemption. If the funds of the Corporation 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 Corporation
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.
(a) Notice. Upon receipt of a Qualifying Request, the Corporation
------
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 Corporation 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 Corporation, at the place designated
in the Redemption Notice, and shall thereupon be entitled to receive payment of
the
-13-
<PAGE>
appropriate Redemption Price. The Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation forthwith upon such conversion. The balance of
any monies deposited by the Corporation 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 Corporation, provided that the stockholder
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
Corporation, to receive such monies but without interest from the applicable
Redemption Date.
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 stockholders' meeting in accordance
with the Bylaws of the Corporation. 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 Corporation 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:
-14-
<PAGE>
(i) amend or repeal any provision of, or add any provision to, the
Corporation's Amended and Restated Certificate 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 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 Corporation's capital stock (except for repurchases of shares of capital
stock from employees of the Corporation at the same price per share as the
Corporation 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 Corporation 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 Corporation.
Article VI
The Corporation is to have perpetual existence.
Article VII
Elections of directors need not be by written ballot unless a stockholder
demands election by written ballot at the meeting and before voting begins or
unless the Bylaws of the Corporation shall so provide.
Article VIII
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation.
Article IX
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the Corporation.
-15-
<PAGE>
Article X
1a To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, a director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
2a The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director, officer or employee of
the Corporation or any predecessor of the Corporation, or serves or served at
any other enterprise as a director, officer or employee at the request of the
Corporation or any predecessor to the Corporation.
3a Neither any amendment nor repeal of this Article X, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article X, shall eliminate or reduce the effect of this Article X, in
respect of any matter occurring, or any action or proceeding accruing or arising
or that, but for this Article X, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
Article XI
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
Article XII
Vacancies created by the resignation of one or more members of the Board of
Directors and newly created directorships, created in accordance with the Bylaws
of this Corporation, may be filled by the vote of a majority, although less than
a quorum, of the directors then in office, or by a sole remaining director.
Article XIII
Advance notice of new business and stockholder nominations for the election
of directors shall be given in the manner and to the extent provided in the
Bylaws of the Corporation.
Article XIV
Stockholders shall be entitled to cumulative voting rights in the election
of directors as set forth in this Article XIV and the Bylaws of the Corporation,
but only until cumulative voting rights are not required under Section 2115 of
the California Corporations Code. Subject to such limitation, at all elections
of directors of the Corporation, each holder of stock or of any class or classes
or of a series or series thereof shall be entitled to as many votes as shall
equal the number of votes which (except for this provision as to cumulative
voting) such stockholder would be entitled to cast for the election of directors
with respect to such stockholder's shares of stock multiplied by the number of
directors to be elected, and such stockholder may cast all of such votes for a
single director or may distribute them among the number of directors to be voted
for, or for any two or more of them as such stockholder may see fit. At such
time as cumulative voting rights are not required under Section 2115 of the
California Corporations Code, this Article XIV shall no longer be effective and
may be deleted herefrom upon any restatement of this Certificate of
Incorporation.
Article XV
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
-16-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Incorporation to be signed by Joseph Firmage, its Chief Executive Officer,
effective as of October __, 1997.
USWEB CORPORATION
By: _____________________________
Joseph Firmage
Chief Executive Officer
-17-
<PAGE>
EXHIBIT 3.3
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
USWEB CORPORATION
PURSUANT TO SECTION 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF
DELAWARE
Tobin Corey and James Heffernan each hereby certifies that:
(1) They are the President and Secretary, respectively, of USWeb
Corporation, a Delaware corporation.
(2) The Certificate of Incorporation of this Corporation, originally filed
with the Secretary of State of the State of Delaware on November 15, 1996, is
hereby amended and restated in its entirety to read as follows:
"FIRST. The name of the corporation is USWeb Corporation (the
"Corporation").
SECOND. The address of the Corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, Delaware 19901. The name of its registered
agent at such address is the Corporation Trust Company.
THIRD. The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH. The Corporation is authorized to issue two classes of capital stock
to be designated respectively "Common Stock" and "Preferred Stock." The total
number of shares of all classes of stock which the Corporation shall have the
authority to issue is One Hundred Million (101,000,000) shares. The total number
of shares of Common Stock that the Corporation shall have authority to issue is
One Hundred Million (100,000,000) shares, $0.001 par value per share. The total
number of shares of Preferred Stock that the Corporation shall have authority to
issue is One Million (1,000,000) shares, $0.001 par value per share .
The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, subject to limitations prescribed
by law, to fix by resolution or resolutions the designations, powers,
preferences and rights, and the qualifications, limitations or restrictions
thereof, of any wholly unissued series of Preferred Stock, including without
limitation authority to fix by resolution or resolutions the dividend rights,
dividend rate, conversion rights,
<PAGE>
voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and liquidation preferences of any such
series, and the number of shares constituting any such series and the
designation thereof, or any of the foregoing.
The Board of Directors is further authorized to increase (but not above the
total number of authorized shares of the class) or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any series, the number of which was fixed by it, subsequent to the issuance of
shares of such series then outstanding, subject to the powers, preferences and
rights, and the qualifications, limitations and restrictions thereof stated in
the Certificate of Incorporation or the resolution of the Board of Directors
originally fixing the number of shares of such series. If the number of shares
of any series is so decreased, then the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
FIFTH. The Corporation is to have perpetual existence.
SIXTH. Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
SEVENTH. The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of the
Corporation.
EIGHTH. In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors of the Corporation is expressly authorized to
make, alter, amend or repeal the Bylaws of the Corporation.
NINTH. To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article,
shall eliminate or reduce the effect of this Article in respect of any matter
occurring, or any cause of action, suit or claim that, but for this Article,
would accrue or arise, prior to such amendment, repeal or adoption of an
inconsistent provision.
TENTH. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
<PAGE>
ELEVENTH. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of the stockholders called in accordance
with the Bylaws and no action shall be taken by the stockholders by written
consent.
TWELFTH. At the election of directors of the Corporation, each holder of
stock of any class or series shall be entitled to one vote for each share held.
No stockholder will be permitted to cumulate votes at any election of directors.
THIRTEENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation."
(3) The foregoing Amended and Restated Certificate of Incorporation has
been duly adopted by the Board of Directors of this Corporation in accordance
with Section 245 of the General Corporation Law of the State of Delaware.
(4) The foregoing Amended and Restated Certificate of Incorporation only
restates and integrates and does not further amend the provisions of this
Corporation's Certificate of Incorporation as heretofore amended or
supplemented, and there is no discrepancy between the provisions of this
Corporation's Certificate of Amendment as heretofore amended or supplemented and
the provisions of the foregoing Amended and Restated Certificate of
Incorporation.
<PAGE>
IN WITNESS WHEREOF, USWeb Corporation, has caused this Amended and Restated
Certificate of Incorporation to be signed by Tobin Corey, its President, and
attested by James Heffernan, its Secretary, this ____ day of __________, 1997.
USWEB CORPORATION
By:______________________________
Tobin Corey
President
Attest:
By:____________________________
James Heffernan
Secretary
<PAGE>
EXHIBIT 3.4
BYLAWS
OF
USWEB CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES..................................... 1
1.1 REGISTERED OFFICE........................................... 1
1.2 OTHER OFFICES............................................... 1
ARTICLE II - MEETINGS OF SHAREHOLDERS............................. 1
2.1 PLACE OF MEETINGS........................................... 1
2.2 ANNUAL MEETING.............................................. 1
2.3 SPECIAL MEETING............................................. 2
2.4 NOTICE OF SHAREHOLDERS' MEETINGS............................ 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE................ 2
2.6 QUORUM...................................................... 2
2.7 ADJOURNED MEETING; NOTICE................................... 3
2.8 VOTING...................................................... 3
2.9 WAIVER OF NOTICE............................................ 3
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING..................................................... 3
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING
CONSENTS.................................................... 4
2.12 PROXIES..................................................... 5
2.13 LIST OF SHAREHOLDERS ENTITLED TO VOTE....................... 5
ARTICLE III - DIRECTORS........................................... 5
3.1 POWERS...................................................... 5
3.2 NUMBER OF DIRECTORS......................................... 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS..... 6
3.4 RESIGNATION AND VACANCIES................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE.................... 7
3.6 FIRST MEETINGS.............................................. 7
3.7 REGULAR MEETINGS............................................ 7
3.8 SPECIAL MEETINGS; NOTICE.................................... 8
3.9 QUORUM...................................................... 8
3.10 WAIVER OF NOTICE............................................ 8
3.11 ADJOURNED MEETING; NOTICE................................... 8
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING........... 8
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.13 FEES AND COMPENSATION OF DIRECTORS.......................... 9
3.14 APPROVAL OF LOANS TO OFFICERS............................... 9
3.15 REMOVAL OF DIRECTORS........................................ 9
ARTICLE IV - COMMITTEES........................................... 9
4.1 COMMITTEES OF DIRECTORS..................................... 9
4.2 COMMITTEE MINUTES........................................... 10
4.3 MEETINGS AND ACTION OF COMMITTEES........................... 10
ARTICLE V - OFFICERS.............................................. 11
5.1 OFFICERS................................................... 11
5.2 ELECTION OF OFFICERS....................................... 11
5.3 SUBORDINATE OFFICERS....................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................ 11
5.5 VACANCIES IN OFFICES....................................... 11
5.6 CHAIRMAN OF THE BOARD...................................... 12
5.7 PRESIDENT.................................................. 12
5.8 VICE PRESIDENT............................................. 12
5.9 SECRETARY.................................................. 12
5.10 TREASURER.................................................. 13
5.11 ASSISTANT SECRETARY........................................ 13
5.12 ASSISTANT TREASURER........................................ 13
5.13 AUTHORITY AND DUTIES OF OFFICERS........................... 13
ARTICLE VI - INDEMNITY; LIMITATION OF LIABILITY................... 14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS.................. 14
6.2 INDEMNIFICATION OF OTHERS.................................. 14
6.3 INSURANCE.................................................. 14
6.4 ELIMINATION OF LIABILITY FOR MONETARY DAMAGES.............. 15
ARTICLE VII - RECORDS AND REPORTS................................. 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS...................... 15
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
7.2 INSPECTION BY SHAREHOLDERS AND DIRECTORS................... 15
7.3 ANNUAL STATEMENT TO SHAREHOLDERS........................... 15
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS............. 16
ARTICLE VIII - GENERAL MATTERS.................................... 16
8.1 CHECKS..................................................... 16
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS........... 16
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES..................... 16
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................ 17
8.5 LOST CERTIFICATES.......................................... 17
8.6 CONSTRUCTION; DEFINITIONS.................................. 17
8.7 DIVIDENDS.................................................. 18
8.8 FISCAL YEAR................................................ 18
8.9 SEAL....................................................... 18
8.10 TRANSFER OF STOCK.......................................... 18
8.11 STOCK TRANSFER AGREEMENTS.................................. 18
8.12 REGISTERED SHAREHOLDERS.................................... 18
ARTICLE IX - AMENDMENTS........................................... 19
ARTICLE X - DISSOLUTION........................................... 19
ARTICLE XI - CUSTODIAN............................................ 20
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES................ 20
11.2 DUTIES OF CUSTODIAN........................................ 20
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
USWEB CORPORATION
ARTICLE I
CORPORATE OFFICES
-----------------
1.1 REGISTERED OFFICE
-----------------
The registered office of the corporation shall be in the City of Salt Lake
City, County of Salt Lake, State of Utah. The name of the registered agent of
the corporation at such location is CT Corporation System..
1.2 OTHER OFFICES
-------------
The board of directors may at any time establish other offices at any
place or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
2.1 PLACE OF MEETINGS
-----------------
Meetings of shareholders shall be held at any place, within or outside the
State of Utah, designated by the board of directors. In the absence of any such
designation, shareholders' meetings shall be held at the registered office of
the corporation.
2.2 ANNUAL MEETING
--------------
The annual meeting of shareholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the third
Wednesday of September in each year at 10:00 a.m. However, if such day falls on
a legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
---------------
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 NOTICE OF SHAREHOLDERS' MEETINGS
--------------------------------
All notices of meetings with shareholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each shareholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
--------------------------------------------
Written notice of any meeting of shareholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
shareholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
------
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the shareholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of
-2-
<PAGE>
the shareholders, then the shareholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum is present or represented. At such adjourned meeting at which a quorum is
present or represented, any business may be transacted that might have been
transacted at the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
-------------------------
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each shareholder of record entitled to vote at the meeting.
2.8 VOTING
------
The shareholders entitled to vote at any meeting of shareholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of the Utah Revised Business Corporation Act.
Except as otherwise provided in the certificate of incorporation, each
shareholder shall be entitled to one vote for each share of capital stock held
by such shareholder.
2.9 WAIVER OF NOTICE
----------------
Whenever notice is required or permitted to be given under any provision
of the Utah Revised Business Corporation Act or of the certificate of
incorporation or these bylaws, a written waiver thereof, signed by the person
entitled to notice, whether before or after the time stated therein, shall be
deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the shareholders need be specified in any written
waiver of notice unless so required by the certificate of incorporation or these
bylaws.
2.10 SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------------
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
shareholders of a corporation, or any action that may be taken at any annual or
special meeting of such shareholders, may be taken without a
-3-
<PAGE>
meeting, without prior notice, and without a vote if a consent in writing,
setting forth the action so taken, is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted.
Unless the written consents of all shareholders entitled to vote have been
obtained, notice of any shareholder approval without a meeting shall be given at
least ten (10) days before the consummation of the transaction, action, or event
authorized by the shareholder action to (i) those shareholders entitled to vote
who have not consented in writing; and (ii) those shareholders not entitled to
vote and to whom it is required that notice of the proposed action be given.
The notice must contain or be accompanied by the same material that would have
been required to be sent in a notice of meeting at which the proposed action
would have been submitted to the shareholders for action given as provided in
Section 704 of the Utah Revised Business Corporation Act.
2.11 RECORD DATE FOR SHAREHOLDER NOTICE; VOTING; GIVING CONSENTS
-----------------------------------------------------------
In order that the corporation may determine the shareholders entitled to
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining shareholders entitled to notice of or
to vote at a meeting of shareholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held.
(ii) The record date for determining shareholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
(iii) The record date for determining shareholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of shareholders of record entitled to notice of or to vote
at a meeting of shareholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
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2.12 PROXIES
-------
Each shareholder entitled to vote at a meeting of shareholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the shareholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after eleven (11) months from its date,
unless the proxy provides for a longer period. A proxy shall be deemed signed
if the shareholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the shareholder or the
shareholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section 722
of the Utah Revised Business Corporation Act.
2.13 LIST OF SHAREHOLDERS ENTITLED TO VOTE
-------------------------------------
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of shareholders, a
complete list of the shareholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each shareholder and the number
of shares registered in the name of each shareholder. Such list shall be open
to the examination of any shareholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any shareholder who is present.
ARTICLE III
DIRECTORS
---------
3.1 POWERS
------
Subject to the provisions of the Utah Revised Business Corporation Act and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
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3.2 NUMBER OF DIRECTORS
-------------------
The authorized number of directors shall be five (5). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw.
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
-------------------------------------------------------
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of shareholders to hold office until the next
annual meeting. Directors need not be shareholders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
-------------------------
Any director may resign at any time upon written notice to the
corporation. When one or more directors so resigns and the resignation is
effective at a future date, a majority of the directors then in office shall
have power to fill such vacancy or vacancies, the vote thereon to take effect
when such resignation or resignations shall become effective, and each director
so chosen shall hold office as provided in this section in the filling of other
vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any increase
in the authorized number of directors elected by all of the shareholders having
the right to vote as a single class may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors elected
by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
shareholder or an executor, administrator, trustee or
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guardian of a shareholder, or other fiduciary entrusted with like responsibility
for the person or estate of a shareholder, may call a special meeting of
shareholders in accordance with the provisions of the certificate of
incorporation or these bylaws, or may apply to the district court of the county
in Utah where a corporation's principal office or registered office is located
("District Court") for a decree summarily ordering an election as provided in
Section 703 of the Utah Revised Business Corporation Act.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the District Court
may, upon application of any shareholder or shareholders holding at least ten
(10) percent of the total number of the shares at the time outstanding having
the right to vote for such directors, summarily order an election to be held to
fill any such vacancies or newly created directorships, or to replace the
directors chosen by the directors then in office as aforesaid, which election
shall be governed by the provisions of Section 703 of the Utah Revised Business
Corporation Act as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
----------------------------------------
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Utah.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
--------------
The first meeting of each newly elected board of directors shall be held
at such time and place as shall be fixed by the vote of the shareholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the shareholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
shareholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
3.7 REGULAR MEETINGS
----------------
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
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3.8 SPECIAL MEETINGS; NOTICE
------------------------
Special meetings of the board may be called by the president on two (2)
days' notice to each director, either personally or by mail, telegram, telex,
facsimile or telephone; special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of two (2)
directors unless the board consists of only one (1) director, in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
3.9 QUORUM
------
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
----------------
Whenever notice is required to be given under any provision of the Utah
Revised Business Corporation Act or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
-------------------------
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
-------------------------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may
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be, consent thereto in writing and the writing or writings are filed with the
minutes of proceedings of the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
----------------------------------
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
-----------------------------
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
--------------------
Unless otherwise restricted by statute, by the certificate of
incorporation or by these bylaws, any director or the entire board of directors
may be removed, with or without cause, by the holders of a majority of the
shares then entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of such director's term of
office.
ARTICLE IV
COMMITTEES
----------
4.1 COMMITTEES OF DIRECTORS
-----------------------
The board of directors may, by resolution passed by a majority of the
whole board, designate one or more committees, with each committee to consist of
two or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not they
constitute a quorum, may unanimously appoint
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another member of the board of directors to act at the meeting in the place of
any such absent or disqualified member. Any such committee, to the extent
provided in the resolution of the board of directors or in the bylaws of the
corporation, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers that may require it; but no such committee shall have the power or
authority to (i) amend the certificate of incorporation (except that a committee
may, to the extent authorized in the resolution or resolutions providing for the
issuance of shares of stock adopted by the board of directors as provided in
Section 602 of the Utah Revised Business Corporation Act, fix any of the
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
corporation), (ii) recommend to the shareholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets or (iii)
recommend to the shareholders a dissolution of the corporation or a revocation
of a dissolution; and, unless the board resolution establishing the committee,
the bylaws or the certificate of incorporation expressly so provide, no such
committee shall have the power or authority to declare a dividend, to authorize
the issuance of stock, or to adopt a certificate of ownership and merger
pursuant to Section 1104 of the Utah Business Corporation Act.
4.2 COMMITTEE MINUTES
-----------------
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
---------------------------------
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings and meetings by telephone), Section 3.7 (regular
meetings), Section 3.8 (special meetings and notice), Section 3.9 (quorum),
Section 3.10 (waiver of notice), Section 3.11 (adjournment and notice of
adjournment), and Section 3.12 (action without a meeting), with such changes in
the context of those bylaws as are necessary to substitute the committee and its
members for the board of directors and its members; provided, however, that the
time of regular meetings of committees may also be called by resolution of the
board of directors and that notice of special meetings of committees shall also
be given to all alternate members, who shall have the right to attend all
meetings of the committee. The board of directors may adopt rules for the
government of any committee not inconsistent with the provisions of these
bylaws.
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ARTICLE V
OFFICERS
--------
5.1 OFFICERS
--------
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer or chief financial officer. The
corporation may also have, at the discretion of the board of directors, a
chairman of the board, one or more assistant vice presidents, assistant
secretaries, assistant treasurers, and any such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
--------------------
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
--------------------
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
-----------------------------------
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 VACANCIES IN OFFICES
--------------------
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Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
---------------------
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
---------
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
--------------
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the board of directors, these bylaws,
the president or the chairman of the board.
5.9 SECRETARY
---------
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and shareholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings thereof.
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The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all shareholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the shareholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 TREASURER
---------
The treasurer or chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.11 ASSISTANT SECRETARY
-------------------
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the shareholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the shareholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
-------------------
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the shareholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such
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other duties and have such other powers as the board of directors or the
shareholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
--------------------------------
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the shareholders.
ARTICLE VI
INDEMNITY; LIMITATION OF LIABILITY
----------------------------------
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
The corporation shall, to the maximum extent and in the manner permitted
by the Utah Revised Business Corporation Act, indemnify each of its directors
and officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
-------------------------
The corporation shall have the power, to the extent and in the manner
permitted by the Utah Revised Business Corporation Act, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.3 INSURANCE
---------
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The corporation may purchase and maintain insurance on behalf of any
person who is or was a director, officer, employee or agent of the corporation,
or is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the Utah Revised Business Corporation Act.
6.4 ELIMINATION OF LIABILITY FOR MONETARY DAMAGES
---------------------------------------------
The corporation may eliminate or limit the liability of a director to the
corporation or to its shareholders for monetary damages for any action taken or
any failure to take any action as a director under the provisions of Section
841(1) of the Utah Revised Business Corporation Act.
ARTICLE VII
RECORDS AND REPORTS
-------------------
7.1 MAINTENANCE AND INSPECTION OF RECORDS
-------------------------------------
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, maintain a record of
the names and addresses of its shareholders, in a form that permits preparation
of a list of shareholders listing their names and addresses and the number and
class of shares held by each shareholder, a copy of these bylaws as amended to
date, accounting books and other records under the provisions of Section 1601 of
the Utah Revised Business Corporation Code.
7.2 INSPECTION BY SHAREHOLDERS AND DIRECTORS
-----------------------------------------
A shareholder or director of the corporation is entitled to inspect and
copy, during regular business hours at the corporation's principal office, any
of the records of the corporation described in Section 1601(5) of the Utah
Revised Business Corporation Act if he gives the corporation written notice of
the demand at least five (5) business days before the date on which he wishes to
inspect and copy.
A shareholder or director of the corporation is entitled to inspect and
copy, during regular business hours at a reasonable location specified by the
corporation any of the records of the corporation if permitted under the
provisions of Section 1602 of the Utah Revised Business Corporation Act.
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7.3 ANNUAL STATEMENT TO SHAREHOLDERS
--------------------------------
The board of directors shall present at each annual meeting, and at any
special meeting of the shareholders when called for by vote of the shareholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
----------------------------------------------
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
---------------
8.1 CHECKS
------
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
------------------------------------------------
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
--------------------------------------
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The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the other signatures on the certificate may be by facsimile if
originally countersigned by a transfer agent or registrar. In case any officer,
transfer agent or regis trar who has signed or whose facsimile signature has
been placed upon a certificate has ceased to be such officer, transfer agent or
registrar before such certificate is issued, it may be issued by the corporation
with the same effect as if he were such officer, transfer agent or registrar at
the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
-----------------------------------
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the designations, preferences,
limitations and relative rights of each class of stock or series thereof shall
be set forth in full or summarized on the face or back of the certificate that
the corporation shall issue to represent such class or series of stock;
provided, however, that, in lieu of the foregoing requirements there may be set
forth on the face or back of the certificate that the corporation shall issue to
represent such class or series of stock a statement that the corporation will
furnish such information without charge to each shareholder who so requests it.
8.5 LOST CERTIFICATES
-----------------
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made
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<PAGE>
against it on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
-------------------------
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Utah Revised Business Corporation Act shall
govern the construction of these bylaws. Without limiting the generality of
this provision, the singular number includes the plural, the plural number
includes the singular, and the term "person" includes both a corporation and a
natural person.
8.7 DIVIDENDS
---------
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the Utah Revised Business Corporation Act.
Dividends may be paid in cash, in property or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation and meeting contingencies.
8.8 FISCAL YEAR
-----------
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
8.9 SEAL
----
The corporation may adopt a corporate seal to be used at the discretion of
the officers.
8.10 TRANSFER OF STOCK
-----------------
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
-------------------------
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<PAGE>
The corporation shall have power to enter into and perform any agreement
with any number of shareholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such shareholders in any manner not prohibited
by the Utah Revised Business Corporation Act.
8.12 REGISTERED SHAREHOLDERS
-----------------------
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Utah.
ARTICLE IX
AMENDMENTS
----------
The original or other bylaws of the corporation may be adopted, amended or
repealed by the shareholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the shareholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
ARTICLE X
DISSOLUTION
-----------
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
shareholder entitled to vote thereon of the adoption of the resolution and of a
meeting of shareholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 1403 of the Utah Revised Business Corporation Act and setting forth the
names and
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<PAGE>
residences of the directors and officers shall be executed, acknowledged, and
filed and shall become effective in accordance with Section 120 of the Utah
Revised Business Corporation Act. Upon such certificate's becoming effective in
accordance with Section 120 of the Utah Revised Business Corporation Act, the
corporation shall be dissolved.
Whenever all the shareholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or shareholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 120 of the Utah
Revised Business Corporation Act. Upon such consent's becoming effective in
accordance with Section 120 of the Utah Revised Business Corporation Act, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the State of Utah's Department
of Commerce shall have attached to it the affidavit of the secretary or some
other officer of the corporation stating that the consent has been signed by or
on behalf of all the shareholders entitled to vote on a dissolution; in
addition, there shall be attached to the consent a certification by the
secretary or some other officer of the corporation setting forth the names and
residences of the directors and officers of the corporation.
ARTICLE XI
CUSTODIAN
---------
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
-------------------------------------------
The District Court, upon application of any shareholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the shareholders
are so divided that they have failed to elect successors to directors whose
terms have expired or would have expired upon qualification of their successors;
or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the shareholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
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<PAGE>
11.1 DUTIES OF CUSTODIAN
-------------------
The custodian shall have all the powers and title of a receiver appointed
under Section 1432 of the Utah Revised Business Corporation Act, but the
authority of the custodian shall be to continue the business of the corporation
and not to liquidate its affairs and distribute its assets, except when the
District Court otherwise orders and except in cases arising under Sections
1430(2)(d) or 1402(5).
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<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
USWEB CORPORATION
Adoption by Incorporator
------------------------
The undersigned person appointed in the Certificate of Incorporation to
act as the Incorporator of USWeb Corporation hereby adopts the foregoing bylaws,
comprising twenty (20) pages, as the Bylaws of the corporation.
Executed this day of 19 .
----- ------------- --
------------------------------------------
Mark Bonham, Incorporator
Certificate by Secretary of Adoption by Incorporator
----------------------------------------------------
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of USWeb Corporation and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
on 19 , by the person appointed in the Certificate of
-------------- --
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this day
----
of 19 .
--------------------- --
----------------------------------------
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<PAGE>
, Secretary
------------------------
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<PAGE>
EXHIBIT 3.5
BYLAWS
OF
USWEB CORPORATION
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I - CORPORATE OFFICES........................................... 1
1.1 REGISTERED OFFICE............................................. 1
1.2 OTHER OFFICES................................................. 1
ARTICLE II - MEETINGS OF STOCKHOLDERS................................... 1
2.1 PLACE OF MEETINGS............................................. 1
2.2 ANNUAL MEETING................................................ 1
2.3 SPECIAL MEETING............................................... 2
2.4 NOTICE OF STOCKHOLDERS' MEETINGS.............................. 2
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE.................. 2
2.6 QUORUM........................................................ 2
2.7 ADJOURNED MEETING; NOTICE..................................... 3
2.8 VOTING........................................................ 3
2.9 WAIVER OF NOTICE.............................................. 3
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A
MEETING....................................................... 4
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING
CONSENTS...................................................... 4
2.12 PROXIES....................................................... 5
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE......................... 5
ARTICLE III - DIRECTORS................................................. 6
3.1 POWERS........................................................ 6
3.2 NUMBER OF DIRECTORS........................................... 6
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS....... 6
3.4 RESIGNATION AND VACANCIES..................................... 6
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE...................... 7
3.6 FIRST MEETINGS................................................ 8
3.7 REGULAR MEETINGS.............................................. 8
3.8 SPECIAL MEETINGS; NOTICE...................................... 8
3.9 QUORUM........................................................ 8
3.10 WAIVER OF NOTICE.............................................. 8
3.11 ADJOURNED MEETING; NOTICE..................................... 9
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING............. 9
3.13 FEES AND COMPENSATION OF DIRECTORS............................ 9
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.14 APPROVAL OF LOANS TO OFFICERS................................ 9
3.15 REMOVAL OF DIRECTORS......................................... 9
ARTICLE IV - COMMITTEES................................................. 10
4.1 COMMITTEES OF DIRECTORS....................................... 10
4.2 COMMITTEE MINUTES............................................. 10
4.3 MEETINGS AND ACTION OF COMMITTEES............................. 11
ARTICLE V - OFFICERS.................................................... 11
5.1 OFFICERS...................................................... 11
5.2 ELECTION OF OFFICERS.......................................... 11
5.3 SUBORDINATE OFFICERS.......................................... 11
5.4 REMOVAL AND RESIGNATION OF OFFICERS........................... 12
5.5 VACANCIES IN OFFICES.......................................... 12
5.6 CHAIRMAN OF THE BOARD......................................... 12
5.7 PRESIDENT..................................................... 12
5.8 VICE PRESIDENT................................................ 12
5.9 SECRETARY..................................................... 13
5.10 TREASURER..................................................... 13
5.11 ASSISTANT SECRETARY........................................... 14
5.12 ASSISTANT TREASURER........................................... 14
5.13 AUTHORITY AND DUTIES OF OFFICERS.............................. 14
ARTICLE VI - INDEMNITY.................................................. 14
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS..................... 14
6.2 INDEMNIFICATION OF OTHERS..................................... 15
6.3 INSURANCE..................................................... 15
ARTICLE VII - RECORDS AND REPORTS....................................... 15
7.1 MAINTENANCE AND INSPECTION OF RECORDS......................... 15
7.2 INSPECTION BY DIRECTORS....................................... 16
7.3 ANNUAL STATEMENT TO STOCKHOLDERS.............................. 16
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS................ 16
</TABLE>
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<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE VIII - GENERAL MATTERS.......................................... 17
8.1 CHECKS........................................................ 17
8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS.............. 17
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES........................ 17
8.4 SPECIAL DESIGNATION ON CERTIFICATES........................... 18
8.5 LOST CERTIFICATES............................................. 18
8.6 CONSTRUCTION; DEFINITIONS..................................... 18
8.7 DIVIDENDS..................................................... 19
8.8 FISCAL YEAR................................................... 19
8.9 SEAL.......................................................... 19
8.10 TRANSFER OF STOCK............................................. 19
8.11 STOCK TRANSFER AGREEMENTS..................................... 19
8.12 REGISTERED STOCKHOLDERS....................................... 19
ARTICLE IX - AMENDMENTS................................................. 20
ARTICLE X - DISSOLUTION................................................. 20
ARTICLE XI - CUSTODIAN.................................................. 21
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES.................. 21
11.2 DUTIES OF CUSTODIAN.......................................... 21
</TABLE>
-iii-
<PAGE>
BYLAWS
OF
USWEB CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 REGISTERED OFFICE
The registered office of the corporation shall be in the City of
Wilmington, County of Newcastle, State of Delaware. The name of the registered
agent of the corporation at such location is The Corporation Trust Company.
1.2 OTHER OFFICES
The board of directors may at any time establish other offices at any place
or places where the corporation is qualified to do business.
ARTICLE II
MEETINGS OF STOCKHOLDERS
2.1 PLACE OF MEETINGS
Meetings of stockholders shall be held at any place, within or outside the
State of Delaware, designated by the board of directors. In the absence of any
such designation, stockholders' meetings shall be held at the registered office
of the corporation.
2.2 ANNUAL MEETING
The annual meeting of stockholders shall be held each year on a date and at
a time designated by the board of directors. In the absence of such
designation, the annual meeting of stockholders shall be held on the third
Wednesday of September in each year at 10:00 a.m. However, if such day falls on
a legal holiday, then the meeting shall be held at the same time and place on
the next succeeding full business day. At the meeting, directors shall be
elected and any other proper business may be transacted.
<PAGE>
2.3 SPECIAL MEETING
A special meeting of the stockholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more stockholders holding shares in the aggregate entitled to cast not
less than ten percent (10%) of the votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the stockholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of stockholders called by action of the board of directors may be held.
2.4 NOTICE OF STOCKHOLDERS' MEETINGS
All notices of meetings with stockholders shall be in writing and shall be
sent or otherwise given in accordance with Section 2.5 of these bylaws not less
than ten (10) nor more than sixty (60) days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notice shall specify the
place, date, and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called.
2.5 MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE
Written notice of any meeting of stockholders, if mailed, is given when
deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation. An
affidavit of the secretary or an assistant secretary or of the transfer agent of
the corporation that the notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein.
2.6 QUORUM
The holders of a majority of the stock issued and outstanding and entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business
except as otherwise provided by statute or by the certificate of incorporation.
If, however, such quorum is not present or represented at any meeting of the
stockholders, then the stockholders entitled to vote thereat, present in person
or represented by
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<PAGE>
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum is present or
represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted that might have been transacted at
the meeting as originally noticed.
2.7 ADJOURNED MEETING; NOTICE
When a meeting is adjourned to another time or place, unless these bylaws
otherwise require, notice need not be given of the adjourned meeting if the time
and place thereof are announced at the meeting at which the adjournment is
taken. At the adjourned meeting the corporation may transact any business that
might have been transacted at the original meeting. If the adjournment is for
more than thirty (30) days, or if after the adjournment a new record date is
fixed for the adjourned meeting, a notice of the adjourned meeting shall be
given to each stockholder of record entitled to vote at the meeting.
2.8 VOTING
The stockholders entitled to vote at any meeting of stockholders shall be
determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 217 and 218 of the General Corporation Law
of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners
of stock and to voting trusts and other voting agreements).
Except as provided in the last paragraph of this Section 2.8, or as may be
otherwise provided in the certificate of incorporation, each stockholder shall
be entitled to one vote for each share of capital stock held by such
stockholder.
At a stockholders' meeting at which directors are to be elected, or at
elections held under special circumstances, a stockholder shall be entitled to
cumulate votes (i.e., cast for any candidate a number of votes greater than the
number of votes which such stockholder normally is entitled to cast). Each
holder of stock, or of any class or classes or of a series or series thereof,
who elects to cumulate votes shall be entitled to as many votes as equals the
number of votes which (absent this provision as to cumulative voting) he would
be entitled to cast for the election of directors with respect to his shares of
stock multiplied by the number of directors to be elected by him, and he may
cast all of such votes for a single director or may distribute them among the
number to be voted for, or for any two or more of them, as he may see fit.
2.9 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the
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<PAGE>
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
2.10 STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING
Unless otherwise provided in the certificate of incorporation, any action
required by this chapter to be taken at any annual or special meeting of
stockholders of a corporation, or any action that may be taken at any annual or
special meeting of such stockholders, may be taken without a meeting, without
prior notice, and without a vote if a consent in writing, setting forth the
action so taken, is signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Prompt notice of the taking of the corporate action without a meeting by
less than unanimous written consent shall be given to those stockholders who
have not consented in writing. If the action which is consented to is such as
would have required the filing of a certificate under any section of the General
Corporation Law of Delaware if such action had been voted on by stockholders at
a meeting thereof, then the certificate filed under such section shall state, in
lieu of any statement required by such section concerning any vote of
stockholders, that written notice and written consent have been given as
provided in Section 228 of the General Corporation Law of Delaware.
2.11 RECORD DATE FOR STOCKHOLDER NOTICE; VOTING; GIVING CONSENTS
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or entitled to express consent to corporate action in writing without a meeting,
or entitled to receive payment of any dividend or other distribution or
allotment of any rights, or entitled to exercise any rights in respect of any
change, conversion or exchange of stock or for the purpose of any other lawful
action, the board of directors may fix, in advance, a record date, which shall
not be more than sixty (60) nor less than ten (10) days before the date of such
meeting, nor more than sixty (60) days prior to any other action.
If the board of directors does not so fix a record date:
(i) The record date for determining stockholders entitled to
notice of or to vote at a meeting of stockholders shall be at the close of
business on the day next preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day next preceding the day on
which the meeting is held.
(ii) The record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting, when no prior action
by the board of directors is necessary, shall be the day on which the first
written consent is expressed.
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<PAGE>
(iii) The record date for determining stockholders for any other
purpose shall be at the close of business on the day on which the board of
directors adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjourned meeting.
2.12 PROXIES
Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by a written proxy, signed by
the stockholder and filed with the secretary of the corporation, but no such
proxy shall be voted or acted upon after three (3) years from its date, unless
the proxy provides for a longer period. A proxy shall be deemed signed if the
stockholder's name is placed on the proxy (whether by manual signature,
typewriting, telegraphic transmission or otherwise) by the stockholder or the
stockholder's attorney-in-fact. The revocability of a proxy that states on its
face that it is irrevocable shall be governed by the provisions of Section
212(c) of the General Corporation Law of Delaware.
2.13 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
ARTICLE III
DIRECTORS
3.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be
-5-
<PAGE>
managed and all corporate powers shall be exercised by or under the direction of
the board of directors.
3.2 NUMBER OF DIRECTORS
The authorized number of directors shall be six (6). This number may be
changed by a duly adopted amendment to the certificate of incorporation or by an
amendment to this bylaw adopted by the vote or written consent of the holders of
a majority of the stock issued and outstanding and entitled to vote or by
resolution of a majority of the board of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director before that director's term of office expires.
3.3 ELECTION, QUALIFICATION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 3.4 of these bylaws, directors shall be
elected at each annual meeting of stockholders to hold office until the next
annual meeting. Directors need not be stock holders unless so required by the
certificate of incorporation or these bylaws, wherein other qualifications for
directors may be prescribed. Each director, including a director elected to
fill a vacancy, shall hold office until his successor is elected and qualified
or until his earlier resignation or removal.
Elections of directors need not be by written ballot.
3.4 RESIGNATION AND VACANCIES
Any director may resign at any time upon written notice to the corporation.
When one or more directors so resigns and the resignation is effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided in this
section in the filling of other vacancies.
Unless otherwise provided in the certificate of incorporation or these
bylaws:
(i) Vacancies and newly created directorships resulting from any
increase in the authorized number of directors elected by all of the
stockholders having the right to vote as a single class may be filled by a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director.
(ii) Whenever the holders of any class or classes of stock or series
thereof are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of such
class or classes or series may be filled by a majority of the directors
-6-
<PAGE>
elected by such class or classes or series thereof then in office, or by a sole
remaining director so elected.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware.
If, at the time of filling any vacancy or any newly created directorship,
the directors then in office constitute less than a majority of the whole board
(as constituted immediately prior to any such increase), then the Court of
Chancery may, upon application of any stockholder or stockholders holding at
least ten (10) percent of the total number of the shares at the time outstanding
having the right to vote for such directors, summarily order an election to be
held to fill any such vacancies or newly created directorships, or to replace
the directors chosen by the directors then in office as aforesaid, which
election shall be governed by the provisions of Section 211 of the General
Corporation Law of Delaware as far as applicable.
3.5 PLACE OF MEETINGS; MEETINGS BY TELEPHONE
The board of directors of the corporation may hold meetings, both regular
and special, either within or outside the State of Delaware.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, members of the board of directors, or any committee designated by the
board of directors, may participate in a meeting of the board of directors, or
any committee, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting shall constitute presence in
person at the meeting.
3.6 FIRST MEETINGS
The first meeting of each newly elected board of directors shall be held at
such time and place as shall be fixed by the vote of the stockholders at the
annual meeting and no notice of such meeting shall be necessary to the newly
elected directors in order legally to constitute the meeting, provided a quorum
shall be present. In the event of the failure of the stockholders to fix the
time or place of such first meeting of the newly elected board of directors, or
in the event such meeting is not held at the time and place so fixed by the
stockholders, the meeting may be held at such time and place as shall be
specified in a notice given as hereinafter provided for special meetings of the
board of directors, or as shall be specified in a written waiver signed by all
of the directors.
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<PAGE>
3.7 REGULAR MEETINGS
Regular meetings of the board of directors may be held without notice at
such time and at such place as shall from time to time be determined by the
board.
3.8 SPECIAL MEETINGS; NOTICE
Special meetings of the board may be called by the president on three (3)
days' notice to each director, either personally or by mail, telegram, telex,
facsimile or telephone; special meetings shall be called by the president or
secretary in like manner and on like notice on the written request of two (2)
directors unless the board consists of only one (1) director, in which case
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of the sole director.
3.9 QUORUM
At all meetings of the board of directors, a majority of the authorized
number of directors shall constitute a quorum for the transaction of business
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board of directors, except as may be
otherwise specifically provided by statute or by the certificate of
incorporation. If a quorum is not present at any meeting of the board of
directors, then the directors present thereat may adjourn the meeting from time
to time, without notice other than announcement at the meeting, until a quorum
is present.
3.10 WAIVER OF NOTICE
Whenever notice is required to be given under any provision of the General
Corporation Law of Delaware or of the certificate of incorporation or these
bylaws, a written waiver thereof, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of, any regular or special meeting
of the directors, or members of a committee of directors, need be specified in
any written waiver of notice unless so required by the certificate of
incorporation or these bylaws.
3.11 ADJOURNED MEETING; NOTICE
If a quorum is not present at any meeting of the board of directors, then
the directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum is present.
3.12 BOARD ACTION BY WRITTEN CONSENT WITHOUT A MEETING
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Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors, or of any committee thereof, may be taken without a meeting if all
members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
3.13 FEES AND COMPENSATION OF DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, the board of directors shall have the authority to fix the compensation
of directors.
3.14 APPROVAL OF LOANS TO OFFICERS
The corporation may lend money to, or guarantee any obligation of, or
otherwise assist any officer or other employee of the corporation or of its
subsidiary, including any officer or employee who is a director of the
corporation or its subsidiary, whenever, in the judgment of the directors, such
loan, guaranty or assistance may reasonably be expected to benefit the
corporation. The loan, guaranty or other assistance may be with or without
interest and may be unsecured, or secured in such manner as the board of
directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing in this section contained shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
3.15 REMOVAL OF DIRECTORS
Unless otherwise restricted by statute, by the certificate of incorporation
or by these bylaws, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of directors.
No reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of such director's term of office.
ARTICLE IV
COMMITTEES
4.1 COMMITTEES OF DIRECTORS
The board of directors may, by resolution passed by a majority of the whole
board, designate one or more committees, with each committee to consist of one
or more of the directors of the corporation. The board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
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disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors or in the bylaws of the corporation, shall have and may
exercise all the powers and authority of the board of directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority to (i) amend the certificate of
incorporation (except that a committee may, to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors as provided in Section 151(a) of the General
Corporation Law of Delaware, fix any of the preferences or rights of such shares
relating to dividends, redemption, dissolution, any distribution of assets of
the corporation or the conversion into, or the exchange of such shares for,
shares of any other class or classes or any other series of the same or any
other class or classes of stock of the corporation), (ii) adopt an agreement of
merger or consolidation under Sections 251 or 252 of the General Corporation Law
of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of
all or substantially all of the corporation's property and assets, (iv)
recommend to the stockholders a dissolution of the corporation or a revocation
of a dissolution, or (v) amend the bylaws of the corporation; and, unless the
board resolution establishing the committee, the bylaws or the certificate of
incorporation expressly so provide, no such committee shall have the power or
authority to declare a dividend, to authorize the issuance of stock, or to adopt
a certificate of ownership and merger pursuant to Section 253 of the General
Corporation Law of Delaware.
4.2 COMMITTEE MINUTES
Each committee shall keep regular minutes of its meetings and report the
same to the board of directors when required.
4.3 MEETINGS AND ACTION OF COMMITTEES
Meetings and actions of committees shall be governed by, and held and taken
in accordance with, the provisions of Article III of these bylaws, Section 3.5
(place of meetings and meetings by telephone), Section 3.7 (regular meetings),
Section 3.8 (special meetings and notice), Section 3.9 (quorum), Section 3.10
(waiver of notice), Section 3.11 (adjournment and notice of adjournment), and
Section 3.12 (action without a meeting), with such changes in the context of
those bylaws as are necessary to substitute the committee and its members for
the board of directors and its members; provided, however, that the time of
regular meetings of committees may also be called by resolution of the board of
directors and that notice of special meetings of committees shall also be given
to all alternate members, who shall have the right to attend all meetings of the
committee. The board of directors may adopt rules for the government of any
committee not inconsistent with the provisions of these bylaws.
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ARTICLE V
OFFICERS
5.1 OFFICERS
The officers of the corporation shall be a president, one or more vice
presidents, a secretary, and a treasurer or chief financial officer. The
corporation may also have, at the discretion of the board of directors, a
chairman of the board, one or more assistant vice presidents, assistant
secretaries, assistant treasurers, and any such other officers as may be
appointed in accordance with the provisions of Section 5.3 of these bylaws. Any
number of offices may be held by the same person.
5.2 ELECTION OF OFFICERS
The officers of the corporation, except such officers as may be appointed
in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall
be chosen by the board of directors, subject to the rights, if any, of an
officer under any contract of employment.
5.3 SUBORDINATE OFFICERS
The board of directors may appoint, or empower the president to appoint,
such other officers and agents as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 REMOVAL AND RESIGNATION OF OFFICERS
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by an
affirmative vote of the majority of the board of directors at any regular or
special meeting of the board or, except in the case of an officer chosen by the
board of directors, by any officer upon whom such power of removal may be
conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
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5.5 VACANCIES IN OFFICES
Any vacancy occurring in any office of the corporation shall be filled by
the board of directors.
5.6 CHAIRMAN OF THE BOARD
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 PRESIDENT
Subject to such supervisory powers, if any, as may be given by the board of
directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the stockholders and, in the absence or
nonexistence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 VICE PRESIDENT
In the absence or disability of the president, the vice presidents, if any,
in order of their rank as fixed by the board of directors or, if not ranked, a
vice president designated by the board of directors, shall perform all the
duties of the president and when so acting shall have all the powers of, and be
subject to all the restrictions upon, the president. The vice presidents shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the board of directors, these bylaws, the
president or the chairman of the board.
5.9 SECRETARY
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors, and stockholders. The minutes shall show the time and place of
each meeting, whether regular or special (and, if special, how authorized and
the notice given), the names of those present at directors' meetings or
committee meetings, the number of shares present or represented at stockholders'
meetings, and the proceedings thereof.
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The secretary shall keep, or cause to be kept, at the principal executive
office of the corporation or at the office of the corporation's transfer agent
or registrar, as determined by resolution of the board of directors, a share
register, or a duplicate share register, showing the names of all stockholders
and their addresses, the number and classes of shares held by each, the number
and date of certificates evidencing such shares, and the number and date of
cancellation of every certificate surrendered for cancellation.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and of the board of directors required to be given by law or by
these bylaws. He shall keep the seal of the corporation, if one be adopted, in
safe custody and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or by these bylaws.
5.10 TREASURER
The treasurer or chief financial officer shall keep and maintain, or cause
to be kept and maintained, adequate and correct books and records of accounts of
the properties and business transactions of the corporation, including accounts
of its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The treasurer shall deposit all money and other valuables in the name and
to the credit of the corporation with such depositaries as may be designated by
the board of directors. He shall disburse the funds of the corporation as may
be ordered by the board of directors, shall render to the president and
directors, whenever they request it, an account of all of his transactions as
treasurer and of the financial condition of the corporation, and shall have such
other powers and perform such other duties as may be prescribed by the board of
directors or these bylaws.
5.11 ASSISTANT SECRETARY
The assistant secretary, or, if there is more than one, the assistant
secretaries in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the secretary
and shall perform such other duties and have such other powers as the board of
directors or the stockholders may from time to time prescribe.
5.12 ASSISTANT TREASURER
The assistant treasurer, or, if there is more than one, the assistant
treasurers, in the order determined by the stockholders or board of directors
(or if there be no such determination, then in the order of their election),
shall, in the absence of the treasurer or in the event of his or her inability
or refusal to act, perform the duties and exercise the powers of the treasurer
and shall perform such
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other duties and have such other powers as the board of directors or the
stockholders may from time to time prescribe.
5.13 AUTHORITY AND DUTIES OF OFFICERS
In addition to the foregoing authority and duties, all officers of the
corporation shall respectively have such authority and perform such duties in
the management of the business of the corporation as may be designated from time
to time by the board of directors or the stockholders.
ARTICLE VI
INDEMNITY
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall, to the maximum extent and in the manner permitted by
the General Corporation Law of Delaware, indemnify each of its directors and
officers against expenses (including attorneys' fees), judgments, fines,
settlements, and other amounts actually and reasonably incurred in connection
with any proceeding, arising by reason of the fact that such person is or was an
agent of the corporation. For purposes of this Section 6.1, a "director" or
"officer" of the corporation includes any person (i) who is or was a director or
officer of the corporation, (ii) who is or was serving at the request of the
corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was a director or officer of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power, to the extent and in the manner
permitted by the General Corporation Law of Delaware, to indemnify each of its
employees and agents (other than directors and officers) against expenses
(including attorneys' fees), judgments, fines, settlements, and other amounts
actually and reasonably incurred in connection with any proceeding, arising by
reason of the fact that such person is or was an agent of the corporation. For
purposes of this Section 6.2, an "employee" or "agent" of the corporation (other
than a director or officer) includes any person (i) who is or was an employee or
agent of the corporation, (ii) who is or was serving at the request of the
corporation as an employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or (iii) who was an employee or agent of a
corporation which was a predecessor corporation of the corporation or of another
enterprise at the request of such predecessor corporation.
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6.3 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
ARTICLE VII
RECORDS AND REPORTS
7.1 MAINTENANCE AND INSPECTION OF RECORDS
The corporation shall, either at its principal executive office or at such
place or places as designated by the board of directors, keep a record of its
stockholders listing their names and addresses and the number and class of
shares held by each stockholder, a copy of these bylaws as amended to date,
accounting books, and other records.
Any stockholder of record, in person or by attorney or other agent, shall,
upon written demand under oath stating the purpose thereof, have the right
during the usual hours for business to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders, and its other books and
records and to make copies or extracts therefrom. A proper purpose shall mean a
purpose reasonably related to such person's interest as a stockholder. In every
instance where an attorney or other agent is the person who seeks the right to
inspection, the demand under oath shall be accompanied by a power of attorney or
such other writing that authorizes the attorney or other agent to so act on
behalf of the stockholder. The demand under oath shall be directed to the
corporation at its registered office in Delaware or at its principal place of
business.
The officer who has charge of the stock ledger of a corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open
to the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten (10) days prior to
the meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at
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the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
7.2 INSPECTION BY DIRECTORS
Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders, and its other books and records for a
purpose reasonably related to his position as a director. The Court of Chancery
is hereby vested with the exclusive jurisdiction to determine whether a director
is entitled to the inspection sought. The Court may summarily order the
corporation to permit the director to inspect any and all books and records, the
stock ledger, and the stock list and to make copies or extracts therefrom. The
Court may, in its discretion, prescribe any limitations or conditions with
reference to the inspection, or award such other and further relief as the Court
may deem just and proper.
7.3 ANNUAL STATEMENT TO STOCKHOLDERS
The board of directors shall present at each annual meeting, and at any
special meeting of the stockholders when called for by vote of the stockholders,
a full and clear statement of the business and condition of the corporation.
7.4 REPRESENTATION OF SHARES OF OTHER CORPORATIONS
The chairman of the board, the president, any vice president, the
treasurer, the secretary or assistant secretary of this corporation, or any
other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority granted
herein may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VII
GENERAL MATTERS
8.1 CHECKS
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
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8.2 EXECUTION OF CORPORATE CONTRACTS AND INSTRUMENTS
The board of directors, except as otherwise provided in these bylaws, may
authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.3 STOCK CERTIFICATES; PARTLY PAID SHARES
The shares of a corporation shall be represented by certificates, provided
that the board of directors of the corporation may provide by resolution or
resolutions that some or all of any or all classes or series of its stock shall
be uncertificated shares. Any such resolution shall not apply to shares
represented by a certificate until such certificate is surrendered to the
corporation. Notwithstanding the adoption of such a resolution by the board of
directors, every holder of stock represented by certificates and upon request
every holder of uncertificated shares shall be entitled to have a certificate
signed by, or in the name of the corporation by the chairman or vice-chairman of
the board of directors, or the president or vice-president, and by the treasurer
or an assistant treasurer, or the secretary or an assistant secretary of such
corporation representing the number of shares registered in certificate form.
Any or all of the signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate has ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
The corporation may issue the whole or any part of its shares as partly
paid and subject to call for the remainder of the consideration to be paid
therefor. Upon the face or back of each stock certificate issued to represent
any such partly paid shares, upon the books and records of the corporation in
the case of uncertificated partly paid shares, the total amount of the
consideration to be paid therefor and the amount paid thereon shall be stated.
Upon the declaration of any dividend on fully paid shares, the corporation shall
declare a dividend upon partly paid shares of the same class, but only upon the
basis of the percentage of the consideration actually paid thereon.
8.4 SPECIAL DESIGNATION ON CERTIFICATES
If the corporation is authorized to issue more than one class of stock or
more than one series of any class, then the powers, the designations, the
preferences, and the relative, participating, optional or other special rights
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock; provided, however, that,
except as otherwise provided in Section 202 of the General
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Corporation Law of Delaware, in lieu of the foregoing requirements there may be
set forth on the face or back of the certificate that the corporation shall
issue to represent such class or series of stock a statement that the
corporation will furnish without charge to each stockholder who so requests the
powers, the designations, the preferences, and the relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
8.5 LOST CERTIFICATES
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and cancelled at the same time. The corporation
may issue a new certificate of stock or uncertificated shares in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate or uncertificated shares.
8.6 CONSTRUCTION; DEFINITIONS
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Delaware General Corporation Law shall
govern the construction of these bylaws. Without limiting the generality of this
provision, the singular number includes the plural, the plural number includes
the singular, and the term "person" includes both a corporation and a natural
person.
8.7 DIVIDENDS
The directors of the corporation, subject to any restrictions contained in
the certificate of incorporation, may declare and pay dividends upon the shares
of its capital stock pursuant to the General Corporation Law of Delaware.
Dividends may be paid in cash, in property, or in shares of the corporation's
capital stock.
The directors of the corporation may set apart out of any of the funds of
the corporation available for dividends a reserve or reserves for any proper
purpose and may abolish any such reserve. Such purposes shall include but not be
limited to equalizing dividends, repairing or maintaining any property of the
corporation, and meeting contingencies.
8.8 FISCAL YEAR
The fiscal year of the corporation shall be fixed by resolution of the
board of directors and may be changed by the board of directors.
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8.9 SEAL
The corporation may adopt a corporate seal to be used at the discretion of
the officers.
8.10 TRANSFER OF STOCK
Upon surrender to the corporation or the transfer agent of the corporation
of a certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignation or authority to transfer, it shall be the duty of the
corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate, and record the transaction in its books.
8.11 STOCK TRANSFER AGREEMENTS
The corporation shall have power to enter into and perform any agreement
with any number of stockholders of any one or more classes of stock of the
corporation to restrict the transfer of shares of stock of the corporation of
any one or more classes owned by such stockholders in any manner not prohibited
by the General Corporation Law of Delaware.
8.12 REGISTERED STOCKHOLDERS
The corporation shall be entitled to recognize the exclusive right of a
person registered on its books as the owner of shares to receive dividends and
to vote as such owner, shall be entitled to hold liable for calls and
assessments the person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of another person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
ARTICLE IX
AMENDMENTS
The original or other bylaws of the corporation may be adopted, amended or
repealed by the stockholders entitled to vote; provided, however, that the
corporation may, in its certificate of incorporation, confer the power to adopt,
amend or repeal bylaws upon the directors. The fact that such power has been so
conferred upon the directors shall not divest the stockholders of the power, nor
limit their power to adopt, amend or repeal bylaws.
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ARTICLE X
DISSOLUTION
If it should be deemed advisable in the judgment of the board of directors
of the corporation that the corporation should be dissolved, the board, after
the adoption of a resolution to that effect by a majority of the whole board at
any meeting called for that purpose, shall cause notice to be mailed to each
stockholder entitled to vote thereon of the adoption of the resolution and of a
meeting of stockholders to take action upon the resolution.
At the meeting a vote shall be taken for and against the proposed
dissolution. If a majority of the outstanding stock of the corporation entitled
to vote thereon votes for the proposed dissolution, then a certificate stating
that the dissolution has been authorized in accordance with the provisions of
Section 275 of the General Corporation Law of Delaware and setting forth the
names and residences of the directors and officers shall be executed,
acknowledged, and filed and shall become effective in accordance with Section
103 of the General Corporation Law of Delaware. Upon such certificate's
becoming effective in accordance with Section 103 of the General Corporation Law
of Delaware, the corporation shall be dissolved.
Whenever all the stockholders entitled to vote on a dissolution consent in
writing, either in person or by duly authorized attorney, to a dissolution, no
meeting of directors or stockholders shall be necessary. The consent shall be
filed and shall become effective in accordance with Section 103 of the General
Corporation Law of Delaware. Upon such consent's becoming effective in
accordance with Section 103 of the General Corporation Law of Delaware, the
corporation shall be dissolved. If the consent is signed by an attorney, then
the original power of attorney or a photocopy thereof shall be attached to and
filed with the consent. The consent filed with the Secretary of State shall have
attached to it the affidavit of the secretary or some other officer of the
corporation stating that the consent has been signed by or on behalf of all the
stockholders entitled to vote on a dissolution; in addition, there shall be
attached to the consent a certification by the secretary or some other officer
of the corporation setting forth the names and residences of the directors and
officers of the corporation.
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ARTICLE XI
CUSTODIAN
11.1 APPOINTMENT OF A CUSTODIAN IN CERTAIN CASES
The Court of Chancery, upon application of any stockholder, may appoint one
or more persons to be custodians and, if the corporation is insolvent, to be
receivers, of and for the corporation when:
(i) at any meeting held for the election of directors the
stockholders are so divided that they have failed to elect successors to
directors whose terms have expired or would have expired upon qualification of
their successors; or
(ii) the business of the corporation is suffering or is threatened
with irreparable injury because the directors are so divided respecting the
management of the affairs of the corporation that the required vote for action
by the board of directors cannot be obtained and the stockholders are unable to
terminate this division; or
(iii) the corporation has abandoned its business and has failed within
a reasonable time to take steps to dissolve, liquidate or distribute its assets.
11.2 DUTIES OF CUSTODIAN
The custodian shall have all the powers and title of a receiver appointed
under Section 291 of the General Corporation Law of Delaware, but the authority
of the custodian shall be to continue the business of the corporation and not to
liquidate its affairs and distribute its assets, except when the Court of
Chancery otherwise orders and except in cases arising under Sections 226(a)(3)
or 352(a)(2) of the General Corporation Law of Delaware.
-21-
<PAGE>
CERTIFICATE OF ADOPTION OF BYLAWS
OF
USWEB CORPORATION
ADOPTION BY INCORPORATOR
The undersigned person appointed in the Certificate of Incorporation to act
as the Incorporator of USWeb Corporation hereby adopts the foregoing bylaws,
comprising twenty-one (21) pages, as the Bylaws of the corporation.
Executed this ____ day of November, 1997.
_______________________________
Mark Bonham, Incorporator
CERTIFICATE BY SECRETARY OF ADOPTION BY INCORPORATOR
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of USWeb Corporation and that the foregoing Bylaws,
comprising twenty-one (21) pages, were adopted as the Bylaws of the corporation
on ___ November, 1997, by the person appointed in the Certificate of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed
the corporate seal this ____ day of November, 1997.
_______________________________
James Heffernan, Secretary
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<PAGE>
EXHIBIT 4.8
USWEB CORPORATION
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
___________________, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 - Termination of Prior Agreements...................... 1
SECTION 2 - Registration Rights; Restrictions on Transferability. 2
2.1 Certain Definitions............................... 2
2.2 Restrictions...................................... 3
2.3 Restrictive Legend................................ 3
2.4 Notice of Proposed Transfers...................... 4
2.5 Requested Registration............................ 5
2.6 Company Registration.............................. 7
2.7 Registration on Form S-3.......................... 8
2.8 Limitations on Subsequent Registration Rights..... 8
2.9 Expenses of Registration.......................... 9
2.10 Registration Procedures........................... 9
2.11 Indemnification................................... 9
2.12 Information by Holder............................. 11
2.13 Rule 144 Reporting................................ 11
2.14 Transfer of Registration Rights................... 12
2.15 Market Standoff Agreement......................... 12
2.16 Termination of Rights............................. 12
SECTION 3 - Miscellaneous........................................ 13
3.1 Assignment........................................ 13
3.2 Third Parties..................................... 13
3.3 Governing Law..................................... 13
3.4 Counterparts...................................... 13
3.5 Notices........................................... 13
3.6 Severability...................................... 13
3.7 Amendment and Waiver.............................. 13
3.8 Rights of Holders................................. 14
3.9 Delays or Omissions............................... 14
3.10 Entire Agreement.................................. 14
3.11 Effective Time.................................... 14
</TABLE>
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<PAGE>
AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT
----------------------------------------------
THIS AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT (the "Agreement") is
entered into as of ____________, 1997 by and between, USWeb Corporation, a
Delaware corporation (the "Company"), and the investors listed on Exhibit A
---------
hereto (the "Investors").
RECITALS
A. Pursuant to that certain Common Stock Purchase Agreement dated
_________, 1997 (the "Stock Purchase Agreement") by and among the Company, USWeb
Corporation, a Utah corporation ("USWeb Utah") and Intel Corporation, a Delaware
corporation ("Intel"), USWeb Utah has agreed to sell and Intel has agreed to
buy, in a closing simultaneous with the Company's initial public offering, that
number of shares of USWeb Utah's Common Stock, which stock will become the
Company's Common Stock upon completion of USWeb Utah's reincorporation into
Delaware, equal to ten million dollars ($10,000,000) divided by a price equal to
eighty percent (80%) of the price at which the Company's Common Stock is sold to
the public (the "Stock"), as set forth on the cover page of the Prospectus (as
defined in the Stock Purchase Agreement), in the firm commitment underwriting
(the "Initial Public Offering") pursuant to a registration statement originally
filed on September 30, 1997 (No. 333-36827) with the Securities and Exchange
Commission (the "SEC"). The number of shares of Stock shall be rounded down to
the nearest whole share as necessary.
B. The sale of the Stock to Intel (the "Sale") is contingent upon the
completion of the Company's initial public offering as contemplated by the
Registration Statement.
C. The parties to this Agreement desire this Agreement to be effective
simultaneous with the closing of the Sale and the Initial Public Offering.
NOW, THEREFORE, in consideration of the mutual promises and covenants
hereinafter set forth, the parties agree as follows:
SECTION 1
Termination of Prior Agreements
-------------------------------
As of the date of this agreement, the Amended and Restated Investor Rights
Agreement dated May 2, 1997 between the Company, Joseph P. Firmage, Tobin J.
Corey, James J. Heffernan, Sheldon Laube, Kenneth Campbell, and the investors
listed in Exhibit A of said document is hereby terminated and of no further
force.
<PAGE>
SECTION 2
Registration Rights;
-------------------
Restrictions on Transferability
-------------------------------
2.1 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 2.14 hereof.
"Initial Public Offering" shall mean the Company's first firmly
-----------------------
underwritten public offering on Registration Statement Form S-1.
"Initiating Holders" shall mean the Investors or transferees of the
------------------
Investors under Section 2.14 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.
"Preferred Shares" shall mean the Company's Series A Preferred Stock,
----------------
Series B Preferred Stock, Series C Preferred Stock and shares of such securities
issued pursuant to the exercise of Series A and Series C Warrants.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Sections 2.5, 2.6 and 2.7 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 Stock, (b) the Conversion
----------------------
Shares, (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 the Stock or other securities issued or issuable with
respect to the Preferred Shares or Conversion Shares or the Stock upon any stock
split,
-2-
<PAGE>
stock dividend, recapitalization, or similar event, or any Common Stock
otherwise issued or issuable with respect to the Preferred Shares or Conversion
Shares or the Stock; provided, however, that shares of Common Stock or other
-----------------
securities shall only be treated as Registrable Securities if and so long as
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 2.3 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 2.9).
"Series A Preferred Stock" shall mean the Company's $0.01 par value
------------------------
per share Series A Preferred Stock.
"Series B Preferred Stock" shall mean the Company's $0.01 par value
------------------------
per share Series B Preferred Stock.
"Series C Preferred Stock" shall mean the Company's $0.01 par value
------------------------
per share Series C Preferred Stock.
"Series A Warrant" shall mean the Company's warrants exercisable for
-----------------
160,000 shares of its Series A Preferred Stock.
"Series C Warrant" shall mean the Company's warrants exercisable for
----------------
2,113,647 shares of its Series C Preferred Stock.
2.2 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
2.3 Restrictive Legend. Each certificate representing (a) the Preferred
------------------
Shares, (b) the Conversion Shares and (c) any other securities issued in respect
of the securities referenced in
-3-
<PAGE>
clauses (a), (b) or (c) 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."
"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 2.
2.4 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 2. 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
-4-
<PAGE>
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 2. 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 2, 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.
2.5 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 2.5:
(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;
-5-
<PAGE>
(B) Prior to January 1, 2001;
(C) After the Company has effected two (2) such
registrations pursuant to this subparagraph 2.5(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 2.5 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 2.5(a)(i). The right of any Holder to registration pursuant to Section
2.5 shall be conditioned upon such Holder's participation in the underwriting
arrangements required by this Section 2.5 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 2.5, 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.
-6-
<PAGE>
2.6 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 2.6(a)(i). In such event, the right of any Holder to
registration pursuant to Section 2.6 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 2.6, if the managing
underwriter deter mines 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 2.5 hereof be excluded from such offering except in accordance with the
terms of Section 2.5(b) hereof. 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 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
-7-
<PAGE>
(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 2.6
prior to the effectiveness of such registration, whether or not any Holder has
elected to include securities in such registration.
2.7 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
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 2.5(b) shall be applicable to each
registration initiated under this Section 2.7.
(b) Notwithstanding the foregoing, the Company shall not be obligated
to take any action pursuant to this Section 2.7: (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.
2.8 Limitations on Subsequent 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
-8-
<PAGE>
of the Holders hereunder or (b) such new registration rights, including market
standoff obligations, are subordinate to the registration rights granted Holders
in Sections 2.5, 2.6 and 2.7 hereof.
2.9 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with the first registration pursuant to Section 2.5 and any
registration pursuant to Sections 2.6 and 2.7 shall be borne by the Company. If
a registration proceeding is begun upon the request of Initiating Holders
pursuant to Section 2.5, 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 2.5(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 2.5(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
2.5(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.
2.10 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this Section 2,
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.
2.11 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 2, 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,
-9-
<PAGE>
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 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 2.11(b) exceed the gross proceeds from the offering
received by such Holder.
(c) Each party entitled to indemnification under this Section 2.11
(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
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<PAGE>
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 2 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.
2.12 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 Company may
reasonably request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 2.
2.13 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
-12-
<PAGE>
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.
2.14 Transfer of Registration Rights. The rights to cause the Company
-------------------------------
to register securities granted Investors under Sections 2.5, 2.6 and 2.7 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.
2.15 Market Standoff Agreement. Each Holder, except Intel Corporation
-------------------------
(whose market standoff obligations are contained in the Stock Purchase
Agreement), 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 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.
2.16 Termination of Rights. The rights of any particular Holder to
---------------------
cause the Company to register Registrable Securities under Sections 2.5, 2.6 and
2.7 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 five (5) years after the
effective date of the Company's Initial Public Offering.
-12-
<PAGE>
SECTION 3
Miscellaneous
-------------
3.1 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.
3.2 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.
3.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements entered into
and performed in the State of Delaware solely by residents thereof.
3.4 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.
3.5 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.
3.6 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.
3.7 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 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
-13-
<PAGE>
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.
3.8 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.
3.9 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.
3.10 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.
3.11 Effective Time. this Agreement shall be effective simultaneous with
--------------
the closing of the Sale and the Initial Public Offering.
-14-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Investor Rights
Agreement as of this _________ day of November, 1997.
USWEB CORPORATION
Signature:
------------------------------
Name:
-----------------------------------
Title:
----------------------------------
"INVESTOR"
- ----------------------------------------
Name:
-----------------------------------
(Please print or type)
Signature:
------------------------------
Its:
------------------------------------
[SIGNATURE PAGE TO AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT]
<PAGE>
EXHIBIT A
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
<S> <C>
Investor Legal Counsel
- -------- -------------
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, Olshan Grundman Frome & Rosenzweig LLP
L.P. 550 Park Avenue
767 5th Avenue, 45th Floor New York, NY 10022
New York, NY 10153-4590 Attn: Steven Wolosky
Attn: Matthew Smith
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>
<S> <C>
Investor Legal Counsel
- -------- -------------
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 Investment 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: Stephen 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>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Investor Legal Counsel
- -------- -------------
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
Intel Corporation Joshua Pickus
2200 Mission College Boulevard Venture Law Group
Mail Stop SC4-210 2800 Sand Hill Road
Santa Clara, CA 95052-8119 Menlo Park, CA 94025
Attn: Treasurer
with copies to the General Counsel
at 2200 Mission College Boulevard
Mail Stop SC4-203
Santa Clara, California 95052-8199
</TABLE>
<PAGE>
EXHIBIT 10.3
USWEB CORPORATION
1996 EQUITY COMPENSATION PLAN
1. Purposes of the Plan. The purposes of this Stock 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 California 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) "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
<PAGE>
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.
(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 thereof 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) "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.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "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.
(r) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
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<PAGE>
(s) "Optioned Stock" means the Common Stock subject to an Option or a
--------------
Stock Purchase Right.
(t) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(u) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1996 Stock Plan.
----
(w) "Restricted Stock" means shares of Common Stock acquired pursuant
----------------
to a grant of a Stock Purchase Right under Section 12 below.
(x) "Section 16(b)" means Section 16(b) of the Securities Exchange Act
-------------
of 1934, as amended.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 below.
(aa) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 12 below.
(bb) "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 2,100,000 Shares. 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 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.
-3-
<PAGE>
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 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 10(e) instead of Common Stock;
-4-
<PAGE>
(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) 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 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) 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.
-5-
<PAGE>
(c) 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 450,000 Shares.
(ii) In connection with his or her initial service, a Service
Provider may be granted Options to purchase up to an additional 900,000 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 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 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 or such shorter term as may be provided in the
Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) 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:
(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.
-6-
<PAGE>
(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 other than as required above pursuant to a merger or
other corporate transaction.
(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). 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 Shareholder. 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.
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 shareholder 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.
-7-
<PAGE>
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 such disability is not a "disability" as such term is defined
in Section 22(e)(3) of the Code, in the case of an Incentive Stock Option such
Incentive Stock Option shall automatically cease to be treated as an Incentive
Stock Option and shall be treated for tax purposes as a Nonstatutory Stock
Option on the day three months and one day following such 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 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.
-8-
<PAGE>
(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.
(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.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a shareholder
and shall be a shareholder 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
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or
-9-
<PAGE>
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 until fifteen (15) days prior to
such transaction 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 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
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
-10-
<PAGE>
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) Shareholder Approval. The Board shall obtain shareholder 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.
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
-11-
<PAGE>
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. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the degree and manner
required under Applicable Laws.
-12-
<PAGE>
EXHIBIT 10.12
- --------------------------------------------------------------------------------
LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 ACCOUNTING AND OTHER TERMS........................................... 4
--------------------------
2 LOAN AND TERMS OF PAYMENT............................................ 4
-------------------------
2.1 Credit Extensions............................................. 4
2.2 Interest Rate, Payments....................................... 4
2.3 Fees.......................................................... 5
3 CONDITIONS OF LOANS.................................................. 5
-------------------
3.1 Conditions Precedent to Initial Credit Extension.............. 5
3.2 Conditions Precedent to all Credit Extensions................. 5
4 CREATION OF SECURITY INTEREST........................................ 5
-----------------------------
4.1 Grant of Security Interest.................................... 5
5 REPRESENTATIONS AND WARRANTIES....................................... 5
------------------------------
5.1 Due Organization and Authorization............................ 6
5.2 Collateral.................................................... 6
5.3 Litigation.................................................... 6
5.4 No Material Adverse Change in Financial Statements............ 6
5.5 Solvency...................................................... 6
5.6 Regulatory Compliance......................................... 6
5.7 Subsidiaries.................................................. 7
5.8 Full Disclosure............................................... 7
6 AFFIRMATIVE COVENANTS................................................ 7
---------------------
6.1 Government Compliance......................................... 7
6.2 Financial Statements, Reports, Certificates................... 7
6.3 Taxes......................................................... 7
6.4 Insurance..................................................... 7
6.5 Primary Accounts.............................................. 8
6.6 Financial Covenants........................................... 8
6.7 Further Assurances............................................ 8
7 NEGATIVE COVENANTS................................................... 8
------------------
7.1 Dispositions.................................................. 8
7.2 Changes in Business, Ownership, Management or Business
Locations..................................................... 8
7.3 Mergers or Acquisitions....................................... 8
7.4 Indebtedness.................................................. 9
7.5 Encumbrance................................................... 9
7.6 Distributions; Investments.................................... 9
7.7 Transactions with Affiliates.................................. 9
7.8 Subordinated Debt............................................. 9
7.9 Compliance.................................................... 9
8 EVENTS OF DEFAULT.................................................... 9
-----------------
8.1 Payment Default............................................... 9
8.2 Covenant Default.............................................. 10
8.3 Material Adverse Change....................................... 10
8.4 Attachment.................................................... 10
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
8.5 Insolvency.................................................... 10
8.6 Other Agreements.............................................. 10
8.7 Judgments..................................................... 10
8.8 Misrepresentations............................................ 10
9 BANK'S RIGHTS AND REMEDIES........................................... 11
--------------------------
9.1 Rights and Remedies........................................... 11
9.2 Power of Attorney............................................. 11
9.3 Accounts Collection........................................... 11
9.4 Bank Expenses................................................. 12
9.5 Bank's Liability for Collateral............................... 12
9.6 Remedies Cumulative........................................... 12
9.7 Demand Waiver................................................. 12
10 NOTICES............................................................. 12
-------
11 CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER.......................... 12
-------------------------------------------
12 GENERAL PROVISIONS.................................................. 13
------------------
12.1 Successors and Assigns....................................... 13
12.2 Indemnification.............................................. 13
12.3 Time of Essence.............................................. 13
12.4 Severability of Provision.................................... 13
12.5 Amendments in Writing, Integration........................... 13
12.6 Counterparts................................................. 13
12.7 Survival..................................................... 13
12.8 Confidentiality.............................................. 13
13 DEFINITIONS......................................................... 14
-----------
13.1 Definitions.................................................. 14
</TABLE>
3
<PAGE>
THIS LOAN AND SECURITY AGREEMENT is dated September 29, 1997, between
SILICON VALLEY BANK ("Bank"), whose address is 3003 Tasman Drive, Santa Clara,
CA 95054 and USWEB CORPORATION ("Borrower"), whose address is 3000 Lakeside
Drive, Santa Clara, California 95054 provides the terms on which Bank will lend
to Borrower and Borrower will repay Bank. The parties agree as follows:
1 ACCOUNTING AND OTHER TERMS
--------------------------
(a) Accounting terms not defined in this Agreement will be construed
following GAAP Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation," in this or any Loan Document. This Agreement shall be construed to
impart upon Bank a duty to act reasonably at all times.
2 LOAN AND TERMS OF PAYMENT
-------------------------
2.1 CREDIT EXTENSIONS.
Borrower will pay Bank the unpaid principal amount of all Credit
Extensions and interest on the unpaid principal amount of the Credit Extensions.
2.1.1 EQUIPMENT ADVANCES.
(a) Through September 29, 1998 (the "Equipment Availability End Date"),
Bank will make advances ("Equipment Advance" and, collectively, "Equipment
Advances") not exceeding the Committed Equipment Line. The Equipment Advances
may only be used to finance Equipment, furniture and tenant improvements
purchased on or after 90 days before the date of this Agreement and may not
exceed one hundred percent (100%) of the equipment invoice excluding taxes,
shipping, warranty charges, freight discounts and installation expense. Software
or used equipment costs may constitute up to 25% of the aggregate Equipment
Advances. Each Equipment Advance must be for a minimum of $50,000.
(b) Interest accrues from the date of each Equipment Advance at the rate
in Section 22() and is payable monthly until the Equipment Availability End Date
occurs. Equipment Advances outstanding on March 29, 1998, are payable in 36
equal monthly installments of principal, plus accrued interest, beginning on
April 29, 1998 and all subsequent payments of principal plus interest are due on
the same day of each month after that. Additionally, Equipment Advances
outstanding on the Equipment Availability End Date are payable in 36 equal
monthly installments of principal plus accrued interest, beginning on the
twenty-ninth (29th) day of the month following the Equipment Availability End
Date. The final payment for all Equipment Advances will be due on September 29,
2001 (the "Equipment Loan Maturity Date"). Equipment Advances when repaid may
not be reborrowed.
(c) To obtain an Equipment Advance, Borrower must notify Bank (the
notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1
Business Day before the day on which the Equipment Advance is to be made. The
notice in the form of Exhibit B (Payment/Advance Form) must be signed by a
Responsible Officer or designee and include a copy of the invoice for the
Equipment being financed.
2.2 INTEREST RATE, PAYMENTS.
(a) Interest Rate. Equipment Advances accrue interest on the outstanding
principal balance at a per annum rate of 1 percentage point above the Prime
Rate. After an Event of Default, Obligations accrue interest at 5 percent above
the rate effective immediately before the Event of Default. The interest rate
increases or decreases when the Prime Rate changes. Interest is computed on a
360 day year for the actual number of days elapsed.
4
<PAGE>
(b) Payments. Interest due on the Equipment Advances is payable on the
twenty-ninth (29th) day of each month. Bank may debit any of Borrower's deposit
accounts including Account Number _____________________________ for principal
and interest payments or any amounts Borrower owes Bank. Bank will notify
Borrower when it debits Borrower's accounts. These debits are not a set-off.
Payments received after 12:00 noon Pacific time are considered received at the
opening of business on the next Business Day. When a payment is due on a day
that is not a Business Day, the payment is due the next Business Day and
additional fees or interest accrue.
2.3 FEES.
Borrower will pay:
(a) Facility Fee. A fully earned, non-refundable Facility Fee of one
quarter of one percent (0.25%) of the Committed Equipment Line due as follows:
(i) $1,875 due as of the Closing Date, (ii) $1,875 due at such time as the
aggregate amount available under the Committed Equipment Line is $1,500,000, and
(iii) $3750 due at such time as the aggregate amount available under the
Committed Equipment Line is $3,000,000; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses ) incurred through and after the date of this Agreement, are
payable when due.
3 CONDITIONS OF LOANS
-------------------
3.1 CONDITIONS PRECEDENT TO INITIAL CREDIT EXTENSION.
Bank's obligation to make the initial Credit Extension is subject to
the condition precedent that it receive the agreements, documents and fees it
requires.
3.2 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
Bank's obligations to make each Credit Extension, including the initial
Credit Extension, is subject to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
of Section 5 remain true.
4 CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST.
Borrower grants Bank a continuing security interest in all presently
existing and later acquired Collateral to secure all Obligations and performance
of each of Borrower's duties under the Loan Documents. Except for Permitted
Liens, any security interest will be a first priority security interest in the
Collateral. Bank may place a "hold" on any deposit account pledged as
Collateral.
5 REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5
<PAGE>
5.1 DUE ORGANIZATION AND AUTHORIZATION.
Borrower and each Subsidiary is duly existing and in good standing in
its state of formation and qualified and licensed to do business in, and in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formation documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 COLLATERAL.
Borrower has good title to the Collateral, free of Liens except Permitted
Liens. The Eligible Accounts are bona fide, existing obligations, and the
service or property has been performed or delivered to the account debtor or its
agent for immediate shipment to and unconditional acceptance by the account
debtor. Borrower has no notice of any actual or imminent Insolvency Proceeding
of any account debtor whose accounts are an Eligible Account in any Borrowing
Base Certificate. All Inventory is in all material respects of good and
marketable quality, free from material defects.
5.3 LITIGATION.
Except as shown in the Schedule, there are no actions or proceedings
pending or, to Borrower's knowledge, threatened by or against Borrower or any
Subsidiary in which an adverse decision could cause a Material Adverse Change.
5.4 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS.
All consolidated financial statements for Borrower, and any Subsidiary,
delivered to Bank fairly present in all material respects Borrower's
consolidated financial condition and Borrower's consolidated results of
operations. There has not been any material deterioration in Borrower's
consolidated financial condition since the date of the most recent financial
statements submitted to Bank.
5.5 SOLVENCY.
The fair salable value of Borrower's assets (including goodwill minus
disposition costs) exceeds the fair value of its liabilities; the Borrower is
not left with unreasonably small capital after the transactions in this
Agreement; and Borrower is able to pay its debts (including trade debts) as they
mature.
5.6 REGULATORY COMPLIANCE.
Borrower is not an "investment company" or a company "controlled" by an
"investment company" under the Investment Company Act. Borrower is not engaged
as one of its important activities in extending credit for margin stock (under
Regulations G, T and U of the Federal Reserve Board of Governors). Borrower has
complied with the Federal Fair Labor Standards Act. Borrower has not violated
any laws, ordinances or rules, the violation of which could cause a Material
Adverse Change. None of Borrower's or any Subsidiary's properties or assets has
been used by Borrower or any Subsidiary or, to the best of Borrower's knowledge,
by previous Persons, in disposing, producing, storing, treating, or transporting
any hazardous substance other than legally. Borrower and each Subsidiary has
timely filed all required tax returns and paid, or made adequate provision to
pay, all taxes, except those being contested in good faith with adequate
reserves under GAAP. Borrower and each Subsidiary has obtained all consents,
approvals and authorizations of, made all declarations or filings with, and
given all notices to, all government authorities that are necessary to continue
its business as currently conducted.
6
<PAGE>
5.7 SUBSIDIARIES.
Borrower does not own any stock, partnership interest or other equity
securities except for Permitted Investments.
5.8 FULL DISCLOSURE.
No representation, warranty or other statement of Borrower in any
certificate or written statement given to Bank contains any untrue statement of
a material fact or omits to state a material fact necessary to make the
statements contained in the certificates or statements misleading.
6 AFFIRMATIVE COVENANTS
---------------------
Borrower will do all of the following:
6.1 GOVERNMENT COMPLIANCE.
Borrower will maintain its and all Subsidiaries' legal existence and good
standing in its jurisdiction of formation and maintain qualification in each
jurisdiction in which the failure to so qualify could have a material adverse
effect on Borrower's business or operations. Borrower will comply, and have
each Subsidiary comply, with all laws, ordinances and regulations to which it is
subject, noncompliance with which could have a material adverse effect on
Borrower's business or operations or cause a Material Adverse Change.
6.2 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form and certified by a Responsible Officer
acceptable to Bank; (ii) as soon as available, but no later than 90 days after
the last day of Borrower's fiscal year, audited consolidated financial
statements prepared under GAAP, consistently applied, together with an
unqualified opinion on the financial statements from an independent certified
public accounting firm acceptable to Bank; (iii) within 5 days of filing, copies
of all statements, reports and notices made available to Borrower's security
holders or to any holders of Subordinated Debt and all reports on Form 10-K, 10-
Q and 8-K filed with the Securities and Exchange Commission; (iv) a prompt
report of any legal actions pending or threatened against Borrower or any
Subsidiary that could result in damages or costs to Borrower or any Subsidiary
of $100,000 or more; and (v) budgets, sales projections, operating plans or
other financial information Bank requests.
(b) Within 30 days after the last day of each month, Borrower will
deliver to Bank with the monthly financial statements a Compliance Certificate
signed by a Responsible Officer in the form of Exhibit C.
6.3 TAXES.
Borrower will make, and cause each Subsidiary to make, timely payment of
all material federal, state, and local taxes or assessments. Borrower will
deliver to Bank, on demand, appropriate certificates attesting to such payment,
effective when the outstanding balance under the Committed Equipment Line is in
excess of $750,000.
6.4 INSURANCE.
Borrower will keep its business and the Collateral insured for risks and
in amounts, as Bank requests. Insurance policies will be in a form, with
companies, and in amounts that are satisfactory to Bank. All property policies
will have a lender's loss payable endorsement showing Bank as an additional
7
<PAGE>
loss payee and all liability policies will show the Bank as an additional
insured and provide that the insurer must give Bank at least 20 days notice
before canceling its policy. At Bank's request, Borrower will deliver certified
copies of policies and evidence of all premium payments. Proceeds payable under
any policy will, at Bank's option, be payable to Bank on account of the
Obligations.
6.5 PRIMARY ACCOUNTS.
Borrower will maintain, on a best efforts basis, its primary depository
and operating accounts with Bank.
6.6 FINANCIAL COVENANTS.
Borrower will maintain as of the last day of each month:
(i) MINIMUM CASH/DEBT SERVICE COVERAGE. Minimum cash equal to or
greater than two (2) times the outstanding Committed Equipment Line. When
Borrower achieves two (2) consecutive quarters of a ratio of earning plus
depreciation, amortization and interest expense, less unfunded capital
expenditures, divided by interest expense and scheduled principal payments, all
calculated on a rolling three (3) month basis (the "Debt Service Coverage") of
at least 1.50 to 1.00, then the minimum cash covenant shall be replace by a
monthly Debt Service Coverage of 1.50 to 1.00.
(ii) PROFITABILITY. Borrower will be profitable on an operating
basis each quarter, beginning December 31, 1998. Non-cash stock compensation and
intangible asset amortization expenses to be excluded from profit calculation.
6.7 FURTHER ASSURANCES.
Borrower will execute any further instruments and take further action as
Bank requests to perfect or continue Bank's security interest in the Collateral
or to effect the purposes of this Agreement.
7 NEGATIVE COVENANTS
------------------
Borrower will not do any of the following without the prior written
consent of Bank:
7.1 DISPOSITIONS.
Convey, sell, lease, transfer or otherwise dispose of (collectively
"Transfer"), or permit any of its Subsidiaries to Transfer, all or any part of
its business or property, other than Transfers (i) of Inventory in the ordinary
course of business, (ii) of non-exclusive licenses and similar arrangements for
the use of the property of Borrower or its Subsidiaries in the ordinary course
of business, or (iii) of worn-out or obsolete Equipment.
7.2 CHANGES IN BUSINESS, OWNERSHIP, MANAGEMENT OR BUSINESS LOCATIONS.
Engage in or permit any of its Subsidiaries to engage in any business
other than the businesses currently engaged in by Borrower or reasonably related
thereto or have a material change in its ownership of greater than 50%, with the
exception of an initial public offering. Borrower will not, without at least 30
days prior written notice, relocate its chief executive office. Borrower will
also notify Bank whenever Borrower adds new offices or business locations.
7.3 MERGERS OR ACQUISITIONS.
(i) Merge or consolidate, or permit any of its Subsidiaries to merge
or consolidate, with any other Person, or acquire, or permit any of its
Subsidiaries to acquire, all or substantially all of the capital stock or
8
<PAGE>
property of another Person or (ii) merge or consolidate a Subsidiary into
another Subsidiary or into Borrower. Notwithstanding the foregoing, Borrower
shall be allowed to acquire affiliated franchises or companies currently engaged
in similar business activities, provided such acquisitions do not create an
Event of Default.
7.4 INDEBTEDNESS.
Create, incur, assume, or be liable for any Indebtedness, or permit any
Subsidiary to do so, other than Permitted Indebtedness. Notwithstanding the
foregoing, Borrower's acquired companies or affiliated franchises shall be
allowed Indebtedness up to $100,000 each with an aggregate Indebtedness not
greater than $500,000.
7.5 ENCUMBRANCE.
Create, incur, or allow any Lien on any of its property, or assign or
convey any right to receive income, including the sale of any Accounts, or
permit any of its Subsidiaries to do so, except for Permitted Liens, or permit
any Collateral not to be subject to the first priority security interest granted
here.
7.6 DISTRIBUTIONS; INVESTMENTS.
Directly or indirectly acquire or own any Person, or make any Investment
in any Person, other than Permitted Investments, or permit any of its
Subsidiaries to do so. Pay any dividends or make any distribution or payment or
redeem, retire or purchase any capital stock.
7.7 TRANSACTIONS WITH AFFILIATES.
Directly or indirectly enter or permit any material transaction with any
Affiliate except transactions that are in the ordinary course of Borrower's
business, on terms less favorable to Borrower than would be obtained in an arm's
length transaction with a non-affiliated Person.
7.8 SUBORDINATED DEBT.
Make or permit any payment on any Subordinated Debt, except under the
terms of the Subordinated Debt, or amend any provision in any document relating
to the Subordinated Debt without Bank's prior written consent.
7.9 COMPLIANCE.
Become an "investment company" or a company controlled by an "investment
company," under the Investment Company Act of 1940 or undertake as one of its
important activities extending credit to purchase or carry margin stock, or use
the proceeds of any Advance for that purpose; fail to meet the minimum funding
requirements of ERISA, permit a Reportable Event or Prohibited Transaction, as
defined in ERISA, to occur; fail to comply with the Federal Fair Labor Standards
Act or violate any other law or regulation, if the violation could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change, or permit any of its Subsidiaries to do so.
8 EVENTS OF DEFAULT
-----------------
Any one of the following is an Event of Default:
8.1 PAYMENT DEFAULT.
If Borrower fails to pay any of the Obligations;
9
<PAGE>
8.2 COVENANT DEFAULT.
If Borrower does not perform any obligation in Section 6 or violates any
covenant in Section 7 or does not perform or observe any other material term,
condition or covenant in this Agreement, any Loan Documents, or in any agreement
between Borrower and Bank and as to any default under a term, condition or
covenant that can be cured, has not cured the default within 10 days after it
occurs, or if the default cannot be cured within 10 days or cannot be cured
after Borrower's attempts within 10 day period, and the default may be cured
within a reasonable time, then Borrower has an additional period (of not more
than 30 days) to attempt to cure the default. During the additional time, the
failure to cure the default is not an Event of Default (but no Credit Extensions
will be made during the cure period);
8.3 MATERIAL ADVERSE CHANGE.
(i) If there occurs a material impairment in the perfection or
priority of the Bank's security interest in the Collateral or in the value of
such Collateral which is not covered by adequate insurance or (ii) if the Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period.
8.4 ATTACHMENT.
If any material portion of Borrower's assets is attached, seized, levied
on, or comes into possession of a trustee or receiver and the attachment,
seizure or levy is not removed in 10 days, or if Borrower is enjoined,
restrained, or prevented by court order from conducting a material part of its
business or if a judgment or other claim becomes a Lien on a material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed against
any of Borrower's assets by any government agency and not paid within 10 days
after Borrower receives notice. These are not Events of Default if stayed or if
a bond is posted pending contest by Borrower (but no Credit Extensions will be
made during the cure period);
8.5 INSOLVENCY.
If Borrower becomes insolvent or if Borrower begins an Insolvency
Proceeding or an Insolvency Proceeding is begun against Borrower and not
dismissed or stayed within 30 days (but no Credit Extensions will be made before
any Insolvency Proceeding is dismissed);
8.6 OTHER AGREEMENTS.
If there is a default in any agreement between Borrower and a third party
that gives the third party the right to accelerate any Indebtedness exceeding
$100,000 or that could cause a Material Adverse Change;
8.7 JUDGMENTS.
If a money judgment(s) in the aggregate of at least $100,000 is rendered
against Borrower and is unsatisfied and unstayed for 30 days (but no Advances
will be made before the judgment is stayed or satisfied); or
8.8 MISREPRESENTATIONS.
If Borrower or any Person acting for Borrower makes any material
misrepresentation or material misstatement now or later in any warranty or
representation in this Agreement or in any writing delivered to Bank or to
induce Bank to enter this Agreement or any Loan Document.
10
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9 BANK'S RIGHTS AND REMEDIES
--------------------------
9.1 RIGHTS AND REMEDIES.
When an Event of Default occurs and continues Bank may, without notice or
demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an Event
of Default described in Section 85 occurs all Obligations are immediately due
and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requires and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sale, and sell the Collateral; and
(g) Dispose of the Collateral according to the Code.
9.2 POWER OF ATTORNEY.
Effective only when an Event of Default occurs and continues, Borrower
irrevocably appoints Bank as its lawful attorney to: (i) endorse Borrower's
name on any checks or other forms of payment or security; (ii) sign Borrower's
name on any invoice or bill of lading for any Account or drafts against account
debtors, (iii) make, settle, and adjust all claims under Borrower's insurance
policies; (iv) settle and adjust disputes and claims about the Accounts directly
with account debtors, for amounts and on terms Bank determines reasonable; and
(v) transfer the Collateral into the name of Bank or a third party as the Code
permits. Bank may exercise the power of attorney to sign Borrower's name on any
documents necessary to perfect or continue the perfection of any security
interest regardless of whether an Event of Default has occurred. Bank's
appointment as Borrower's attorney in fact, and all of Bank's rights and powers,
coupled with an interest, are irrevocable until all Obligations have been fully
repaid and performed and Bank's obligation to provide Credit Extensions
terminates.
9.3 ACCOUNTS COLLECTION.
When an Event of Default occurs and continues, Bank may notify any Person
owing Borrower money of Bank's security interest in the funds and verify the
amount of the Account. Borrower must collect all payments in trust for Bank
and, if requested by Bank, immediately deliver the payments to Bank in the form
received from the account debtor, with proper endorsements for deposit.
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<PAGE>
9.4 BANK EXPENSES.
If Borrower fails to pay any amount or furnish any required proof of
payment to third persons Bank may make all or part of the payment or obtain
insurance policies required in Section 64, and take any action under the
policies Bank deems prudent. Any amounts paid by Bank are Bank Expenses and
immediately due and payable, bearing interest at the then applicable rate and
secured by the Collateral. No payments by Bank are deemed an agreement to make
similar payments in the future or Bank's waiver of any Event of Default.
9.5 BANK'S LIABILITY FOR COLLATERAL.
If Bank complies with reasonable banking practices it is not liable for:
(a) the safekeeping of the Collateral; (b) any loss or damage to the Collateral;
(c) any diminution in the value of the Collateral; or (d) any act or default of
any carrier, warehouseman, bailee, or other person. Borrower bears all risk of
loss, damage or destruction of the Collateral.
9.6 REMEDIES CUMULATIVE.
Bank's rights and remedies under this Agreement, the Loan Documents, and
all other agreements are cumulative. Bank has all rights and remedies provided
under the Code, by law, or in equity. Bank's exercise of one right or remedy is
not an election, and Bank's waiver of any Event of Default is not a continuing
waiver. Bank's delay is not a waiver, election, or acquiescence. No waiver is
effective unless signed by Bank and then is only effective for the specific
instance and purpose for which it was given.
9.7 DEMAND WAIVER.
Borrower waives demand, notice of default or dishonor, notice of payment
and nonpayment, notice of any default, nonpayment at maturity, release,
compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guarantees held by Bank on which Borrower is
liable.
10 NOTICES
-------
All notices or demands by any party about this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile to the addresses set forth at the beginning of
this Agreement. A Party may change its notice address by giving the other Party
written notice.
11 CHOICE OF LAW , VENUE AND JURY TRIAL WAIVER
-------------------------------------------
California law governs the Loan Documents without regard to principles of
conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY CONTEMPLATED
TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER CLAIMS. THIS
WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS AGREEMENT.
EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12
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12 GENERAL PROVISIONS
------------------
12.1 SUCCESSORS AND ASSIGNS.
This Agreement binds and is for the benefit of the successors and
permitted assigns of each party. Borrower may not assign this Agreement or any
rights under it without Bank's prior written consent which may be granted or
withheld in Bank's discretion. Bank has the right, without the consent of or
notice to Borrower, to sell, transfer, negotiate, or grant participation in all
or any part of, or any interest in, Bank's obligations, rights and benefits
under this Agreement.
12.2 INDEMNIFICATION.
Borrower will indemnify, defend and hold harmless Bank and its officers,
employees, and agents against: (a) all obligations, demands, claims, and
liabilities asserted by any other party in connection with the transactions
contemplated by the Loan Documents; and (b) all losses or Bank Expenses
incurred, or paid by Bank from, following, or consequential to transactions
between Bank and Borrower (including reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 TIME OF ESSENCE.
Time is of the essence for the performance of all obligations in this
Agreement.
12.4 SEVERABILITY OF PROVISION.
Each provision of this Agreement is severable from every other provision
in determining the enforceability of any provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION.
All amendments to this Agreement must be in writing. This Agreement
represents the entire agreement about this subject matter, and supersedes prior
negotiations or agreements. All prior agreements, understandings,
representations, warranties, and negotiations between the parties about the
subject matter of this Agreement merge into this Agreement and the Loan
Documents.
12.6 COUNTERPARTS.
This Agreement may be executed in any number of counterparts and by
different parties on separate counterparts, each of which, when executed and
delivered, are an original, and all taken together, constitute one Agreement.
12.7 SURVIVAL.
All covenants, representations and warranties made in this Agreement
continue in full force while any Obligations remain outstanding. The obligations
of Borrower in Section 122 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 CONFIDENTIALITY.
In handling any confidential information, Bank will exercise the same
degree of care that it exercises for its own proprietary information, but
disclosure of information may be made (i) to Bank's subsidiaries or affiliates
in connection with their business with Borrower, (ii) to prospective transferees
or purchasers of any interest in the Loans, (iii) as required by law,
regulation, subpoena, or other order, (iv) as required in connection with Bank's
examination or audit and (v) as Bank considers appropriate
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exercising remedies under this Agreement. Confidential information does not
include information that either: (a) is in the public domain or in Bank's
possession when disclosed to Bank, or becomes part of the public domain after
disclosure to Bank; or (b) is disclosed to Bank by a third party, if Bank does
not know that the third party is prohibited from disclosing the information.
13 DEFINITIONS
-----------
13.1 DEFINITIONS.
In this Agreement:
"ACCOUNTS" are all existing and later arising accounts, contract rights,
and other obligations owed Borrower in connection with its sale or lease of
goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"AFFILIATE" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"BANK EXPENSES" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"BORROWER'S BOOKS" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"BUSINESS DAY" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"CAPITALIZED PRODUCT DEVELOPMENT COSTS" are all costs associated with the
development of Borrower's product, including, but not limited to software, that
are not recorded as an expense and have been classified as an asset account.
"CLOSING DATE" is the date of this Agreement.
"CODE" is the California Uniform Commercial Code.
"COLLATERAL" is the property described on Exhibit A.
---------
"COMMITTED EQUIPMENT LINE" is a credit extension of up to $3,000,000,
available to Borrower as follows:
(a) $750,000 shall be available at the Closing Date;
(b) An aggregate amount of $1,500,000 shall be available at such
time as Borrower is in receipt of additional equity in an
amount not less than $7,000,000; and
(c) An aggregate amount of $3,000,000 shall be available at such
time as Borrower is in receipt of additional equity
(inclusive of the additional $7,000,000 in item (b) above)
in an amount not less than $25,000,000.
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"CONTINGENT OBLIGATION" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"CREDIT EXTENSION" is each Advance, Bridge Loan Advance, Equipment
Advance, Letter of Credit, Term Loan, Exchange Contract or any other extension
of credit by Bank for Borrower's benefit.
"DEBT SERVICE COVERAGE" is earnings after tax less Capitalized Product
Development Costs plus interest and non cash plus or minus, as appropriate, any
decrease or increase in Capitalized Product Development Costs for the specified
period divided by Current Maturities Long Term Debt and capitalized leases, plus
interest.
"EQUIPMENT" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"EQUIPMENT ADVANCE" is defined in Section 211.
"EQUIPMENT AVAILABILITY END DATE" is defined in Section 211.
"EQUIPMENT MATURITY DATE" is defined in Section 2.1.1.
"ERISA" is the Employment Retirement Income Security Act of 1974, and its
regulations.
"GAAP" is generally accepted accounting principles.
"INDEBTEDNESS" is (a) indebtedness for borrowed money or the deferred
price of property or services (other than trade debt incurred in the ordinary
course of business), such as reimbursement and other obligations for surety
bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"INSOLVENCY PROCEEDING" are proceedings by or against any Person under
the United States Bankruptcy Code, or any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, compositions, extensions
generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"INVENTORY" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"INVESTMENT" is any beneficial ownership of (including stock, partnership
interest or other securities) any Person, or any loan, advance or capital
contribution to any Person.
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"LIEN" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"LOAN DOCUMENTS" are, collectively, this Agreement, any note, or notes or
guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"MATERIAL ADVERSE CHANGE" is defined in Section 8.3.
"OBLIGATIONS" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and
Exchange Contracts and including interest accruing after Insolvency Proceedings
begin and debts, liabilities, or obligations of Borrower assigned to Bank.
"PERMITTED INDEBTEDNESS" is:
(a) Borrower's indebtedness to Bank under this Agreement or any other Loan
Document;
(b) Indebtedness existing on the Closing Date and shown on the Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors and with respect to surety bonds and
similar obligations incurred in the ordinary course of business; and
(e) Indebtedness secured by Permitted Liens.
"PERMITTED INVESTMENTS" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally guaranteed
by the United States or its agency or any State maturing within 1 year from its
acquisition, (ii) commercial paper maturing no more than 1 year after its
creation and having the highest rating from either Standard & Poor's Corporation
or Moody's Investors Service, Inc., (iii) Bank's certificates of deposit issued
maturing no more than 1 year after issue and (iv) investments per Borrower's
Investment Policy.
"PERMITTED LIENS" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
--
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower or
its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
--
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business and any interest or title of a lessor,
licensor or under any lease or license, if the leases, subleases, licenses and
--
sublicenses permit granting Bank a security interest;
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(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
---
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase.
"PERSON" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company association, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or government agency.
"PRIME RATE" is Bank's most recently announced "prime rate," even if it is
not Bank's lowest rate.
"RESPONSIBLE OFFICER" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"SCHEDULE" is any attached schedule of exceptions.
"SUBORDINATED DEBT" is debt incurred by Borrower subordinated to Borrower's
debt to Bank (and identified as subordinated by Borrower and Bank).
"SUBSIDIARY" is for any Person, or any other business entity of which more
than 50% of the voting stock or other equity interests is owned or controlled,
directly or indirectly, by the Person or one or more Affiliates of the Person.
BORROWER:
USWeb Corporation
By:____________________________
Title:_________________________
BANK:
SILICON VALLEY BANK
By:____________________________
Title:_________________________
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EXHIBIT A
---------
The Collateral consists of all of Borrower's right, title and interest in
and to the following:
All goods and equipment now owned or hereafter acquired, including, without
limitation, all machinery, fixtures, vehicles (including motor vehicles and
trailers), and any interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions, and
improvements to any of the foregoing, wherever located;
All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above;
All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, leases, license agreements,
franchise agreements, blueprints, drawings, purchase orders, customer lists,
route lists, claims, literature, reports, catalogs, income tax refunds, payments
of insurance and rights to payment of any kind;
All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods, the licensing of technology or the
rendering of services by Borrower, whether or not earned by performance, and any
and all credit insurance, guaranties, and other security therefor, as well as
all merchandise returned to or reclaimed by Borrower;
All documents, cash, deposit accounts, securities, securities entitlements,
securities accounts, investment property, letters of credit, certificates of
deposit, instruments and chattel paper now owned or hereafter acquired and
Borrower's Books relating to the foregoing;
All copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; all trade secret
rights, including all rights to unpatented inventions, know-how, operating
manuals, license rights and agreements and confidential information, now owned
or hereafter acquired; all mask work or similar rights available for the
protection of semiconductor chips, now owned or hereafter acquired; all claims
for damages by way of any past, present and future infringement of any of the
foregoing; and
All Borrower's Books relating to the foregoing and any and all claims, rights
and interests in any of the above and all substitutions for, additions and
accessions to and proceeds thereof.
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:_______________________
FAX#: (408) 496-2426 TIME:_______________________
- --------------------------------------------------------------------------------
FROM: USWeb Corporation
-------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:___________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:___________________________________________________________
PHONE NUMBER:___________________________________________________________________
FROM ACCOUNT # ______________ TO ACCOUNT #______________________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $_____________________________________
PRINCIPAL PAYMENT (ONLY) $_____________________________________
INTEREST PAYMENT (ONLY) $_____________________________________
PRINCIPAL AND INTEREST (PAYMENT) $_____________________________________
OTHER INSTRUCTIONS:_____________________________________________________________
________________________________________________________________________________
All Borrower's representations and warranties in the Loan and Security Agreement
are true, correct and complete in all material respects on the date of the
telephone request for and Advance confirmed by this Borrowing Certificate; but
those representations and warranties expressly referring to another date shall
be true, correct and complete in all material respects as of that date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
___________________________ ____________________________________
Authorized Requester Phone #
___________________________ ____________________________________
Received By (Bank) Phone #
______________________________________
Authorized Signature (Bank)
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
3003 Tasman Drive
Santa Clara, CA 95054
FROM: USWEB CORPORATION
The undersigned authorized officer of USWeb Corporation certifies that
under the terms and conditions of the Loan and Security Agreement between
Borrower and Bank (the "Agreement"), (i) Borrower is in complete compliance for
the period ending _______________ with all required covenants except as noted
below and (ii) all representations and warranties in the Agreement are true and
correct in all material respects on this date. Attached are the required
documents supporting the certification. The Officer certifies that these are
prepared in accordance with Generally Accepted Accounting Principles (GAAP)
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes. The Officer acknowledges that no borrowings
may be requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER
"COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (Audited) FYE within 90 days Yes No
10-Q, 10-K and 8-K Within 5 days after filing with SEC Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Cash 2 X Outstanding
Loan Balance* _____:1.00 Yes No
Profitability: Quarterly $_________ Yes No
</TABLE>
* When Borrower achieves two (2) consecutive quarters of a ratio of
earning plus depreciation, amortization and interest expense, less unfunded
capital expenditures, divided by interest expense and scheduled principal
payments, all calculated on a rolling three (3) month basis (the "Debt Service
Coverage") of at least 1.50 to 1.00, then the minimum cash covenant shall be
replace by a monthly Debt Service Coverage of 1.50 to 1.00.
<PAGE>
-------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached. BANK USE ONLY
Received by:___________________
AUTHORIZED SIGNER
Sincerely,
Date:___________________________
USWeb Corporation
Verified:_______________________
AUTHORIZED SIGNER
_____________________________
SIGNATURE
DATE:___________________________
_____________________________ Compliance Status: Yes
TITLE --------------------------------
_____________________________
DATE
<PAGE>
CORPORATE BORROWING RESOLUTION
BORROWER: USWEB CORPORATION BANK: SILICON VALLEY BANK
3000 LAKESIDE DRIVE 3003 TASMAN DRIVE
SANTA CLARA, CA 95054 SANTA CLARA, CA 95054-1191
I, THE UNDERSIGNED SECRETARY OR ASSISTANT SECRETARY OF USWEB CORPORATION
("BORROWER"), HEREBY CERTIFY that Borrower is a corporation duly organized and
existing under and by virtue of the laws of the State of Utah.
I FURTHER CERTIFY that at a meeting of the Directors of Borrower (or by other
duly authorized corporate action in lieu of a meeting), duly called and held, at
which a quorum was present and voting, the following resolutions were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers, employees, or
agents of Borrower, whose actual signatures are shown below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
- ----------------------------------- ------------------------------------- --------------------------------------
- ----------------------------------- ------------------------------------- --------------------------------------
- ----------------------------------- ------------------------------------- --------------------------------------
- ----------------------------------- ------------------------------------- --------------------------------------
</TABLE>
acting for and on behalf of Borrower and as its act and deed be, and they hereby
are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers of
Borrower and Bank, such sum or sums of money as in their judgment should be
borrowed.
EXECUTE LOAN DOCUMENTS. To execute and deliver to Bank the loan documents
of Borrower, on Bank's forms, at such rates of interest and on such terms
as may be agreed upon, evidencing the sums of money so borrowed or any
indebtedness of Borrower to Bank, and also to execute and deliver to Bank
one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the loan documents, or
any portion of the loan documents.
GRANT SECURITY. To grant a security interest to Bank in any of Borrower's
assets, which security interest shall secure all of Borrower's obligations
to Bank
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to Borrower or in which Borrower may have an
interest, and either to receive cash for the same or to cause such proceeds
to be credited to the account of Borrower with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
LETTERS OF CREDIT. To execute letter of credit applications and other
related documents pertaining to Bank's issuance of letters of credit.
<PAGE>
FOREIGN EXCHANGE CONTRACTS. To execute and deliver foreign exchange
contracts, either spot or forward, from time to time, in such amount as, in
the judgment of the officer or officers herein authorized.
ISSUE WARRANTS. To issue warrants to purchase Borrower's capital stock,
for such class, series and number, and on such terms, as an officer of
Borrower shall deem appropriate.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements, including agreements waiving the right to a trial by jury, as
they may in their discretion deem reasonably necessary or proper in order
to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to these
Resolutions and performed prior to the passage of these resolutions are hereby
ratified and approved, that these Resolutions shall remain in full force and
effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of Borrower's agreements or commitments in effect at the
time notice is given.
I FURTHER CERTIFY that the persons named above are principal officers of the
Corporation and occupy the positions set opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that they are in full force and effect and have not been modified or revoked
in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on September 29, 1997 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X ______________________________________________
*Secretary or Assistant Secretary
X ______________________________________________
*NOTE: In case the Secretary or other certifying officer is designated by the
foregoing resolutions as one of the signing officers, this resolution should
also be signed by a second Officer or Director of Borrower.
2
<PAGE>
Exhibit 10.13
AMENDMENT
TO
LOAN AND SECURITY AGREEMENT
---------------------------
This Amendment to Loan and Security Agreement is entered into as of
November 5, 1997 by and between SILICON VALLEY BANK ("Bank") and USWEB
CORPORATION ("Borrower").
RECITALS
--------
Borrower and Bank are parties to that certain Loan and Security Agreement
dated as of September 29, 1997, as amended (the "Agreement"). The parties
desire to amend the Agreement in accordance with the terms of this Amendment.
NOW, THEREFORE, the parties agree as follows:
1. The following definitions are added to Section 13.1, as follows:
"Advance" means a cash advance under the Bridge Loan Facility.
"Bridge Loan Facility" means the facility under Section 2.1.1 pursuant
to which Borrower may request Advances in an amount not to exceed Two Million
Dollars ($2,000,000).
"Bridge Maturity Date" means the earlier of the date Borrower receives
the proceeds from the sale of its equity securities in an initial public
offering or December 31, 1997.
2. A new Section 2.1.2 is added to the Agreement, as follow:
2.1.2 Bridge Facility
---------------
(a) Upon the terms and subject to the conditions of this
Agreement, Borrower may request Advances from Bank in an amount not to
exceed Two Million Dollars ($2,000,000). Subject to the terms and
conditions of this Agreement, amounts borrowed pursuant to this
Section 2.1 may be repaid and reborrowed at any time during the term
of this Agreement. Interest shall accrue on each Advance from the
date of such Advance at a floating rate equal to the Prime Rate plus
One Percent (1.00%) per annum, and shall be payable on November 30,
1997 and the Bridge Maturity Date. After an Event of Default, the
outstanding Advances will bear interest at 5 percent above the rate
effective immediately before the Event of Default. The entire
principal balance and all accrued but unpaid interest shall be due and
payable on the Bridge Maturity Date. Bank may debit any of Borrower's
deposit accounts including Account Number 3300072236 for principal and
interest payments or any amounts Borrower owes Bank.
(b) Whenever Borrower desires an Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m.
Pacific time, on the Business Day that the Advance is to be made.
Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of Exhibit B hereto.
---------
Bank is authorized to make Advances under this Agreement, based upon
the instructions received from a Responsible Officer or a designee of
a Responsible Officer. Bank shall be entitled to rely on any
telephonic notice given by a person who Bank reasonably believes to be
a Responsible Officer or a designee therof, and Borrower shall
indemnify and hold Bank harmless from any damages or loss suffered by
Bank as
1
<PAGE>
a result of such reliance. Bank will credit the amount of Advances
made under this Section 2.1.2 to Borrower's deposit account.
3. The definition of "Permitted Investments" in Section 13.1 is amended
to include the following:
(c) Investments constituting acquisitions permitted under Section 7.3.
(d) Investments in Subsidiaries that are in the nature of operating
advances for expenses incurred in the ordinary course of business
of such Subsidiaries; and
(e) Investments in Utopia, Inc.
4. Section 7.2 of the Agreement is amended by replacing the words "with
the exception of" in the third line thereof with the words "prior to".
5. Section 7.3 of the Agreement is amended by replacing the last sentence
thereof with the following:
Notwithstanding the foregoing, Borrower may, without Bank's consent,
merge with other Persons and acquire all or substantially all of the
stock or assets of another Person or make cash advances to such other
Person where either (i) the cash consideration paid by Borrower prior
to Borrower's initial public offering does not exceed $50,000 in any
one transaction or $250,000 in the aggregate, and the cash
consideration paid by Borrower after Borrower's initial public
offering does not exceed $100,000 in any one transaction or $500,000
in the aggregate or (ii) the acquired Person becomes a co-borrower
under the Agreement and grants Bank a first priority security in its
assets; provided further that any such transactions shall be
permitted hereunder only so long as an Event of Default does not exist
immediately prior to the date of such merger or acquisition or
immediately after giving effect to such transaction.
6. Section 7.4 is amended by deleting the second sentence thereof and
adding the following sentences:
Notwithstanding the foregoing, each of Borrower's Subsidiaries may
incur Indebtedness in an amount up to $100,000, provided that the
aggregate of such Indebtedness for all of Borrower's Subsidiaries may
not exceed $500,000. Borrower may incur Indebtedness not to exceed
$3,000,000 in connection with Borrower's acquisition of Utopia, Inc.
Borrower's subsidiaries may incur Indebtedness to Borrower that
constitutes permitted Investments.
7. Section 7.6 is amended by adding the following sentence:
Notwithstanding the foregoing, for so long as an Event of Default has
not occurred and is continuing, Borrower may repurchase stock from
former employees of Borrower in accordance with the terms of
repurchase or similar agreements between Borrower and such employees.
8. Section 7.7 is amended to read as follows:
Directly or indirectly enter into or permit to exist any material
transaction with any Affiliate of Borrower except for transactions
that are in the ordinary course of Borrower's business, upon fair and
reasonable terms that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-affiliated Person
and except for transactions with a Subsidiary that are upon fair and
reasonable terms and transactions constituting Permitted Investments.
9. Unless otherwise defined, all capitalized terms in this Amendment
shall be as defined in the Agreement. Except as amended, the Agreement remains
in full force and effect.
2
<PAGE>
10. Borrower represents and warrants that the Representations and
Warranties contained in the Agreement are true and correct as of the date of
this Amendment, and that no Event of Default has occurred and is continuing.
11. This Amendment may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one instrument.
12. As a condition to the effectiveness of this Amendment, Borrower shall
deliver a warrant to Bank in substantially the form attached hereto, and shall
pay Bank an amount equal to all Bank Expenses incurred in connection with the
preparation of this Amendment.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
first date above written.
USWEB CORPORATION
By:___________________________
Title:________________________
SILICON VALLEY BANK
By:___________________________
Title:________________________
3
<PAGE>
USWEB CORPORATION
CALCULATION OF PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED NINE MONTHS NINE MONTHS ----------------------------------------------------------------------
DEC. 31, ENDED ENDED MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1996 SEPT. 30, 1996 SEPT. 30, 1997 1996 1996 1996 1996 1997 1997 1997
---------- -------------- -------------- -------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA NET
LOSS (INCLUDING
ACQUISITIONS).... $(63,393) $(45,760) $(52,819) $(17,246) $(13,361) $(15,153) $(17,633) $(14,600) $(20,560) $(17,659)
PRO FORMA NET
LOSS (HISTORI-
CAL)............. $(13,808) $ (9,141) $(39,270) $ (2,525) $ (2,670) $ (3,946) $ (4,667) $ (5,843) $(15,400) $(18,027)
Weighted average
common shares
outstanding...... 5,611 5,541 5,823 5,323 5,565 5,736 5,823 5,823 5,823 5,823
Shares included
pursuant to
Securities and
Exchange
Commission Staff
Accounting
Bulletin:........
Common shares
issued subse-
quent to Septem-
ber 30, 1996.... 800 800 800 800 800 800 800 800 800 800
Founders shares
repurchased upon
termination of
employment...... (356) (356) (356) (356) (356) (356) (356) (356) (356) (356)
Common shares
issuable upon
exercise of
stock options... 107 107 107 107 107 107 107 107 107 107
Common shares
issuable upon
conversion of
common stock
warrants........ 21 21 21 21 21 21 21 21 21 21
Common shares
issuable upon
conversion of
Mandatorily
Redeemable
Convertible
Preferred
Stock(1)......... 12,094 12,094 12,094 12,094 12,094 12,094 12,094 12,094 12,094 12,094
Common shares
issuable upon
conversion of
Mandatorily
Redeemable
Convertible
Preferred Stock
warrants......... 176 176 176 176 176 176 176 176 176 176
Common shares
issuable upon
acquisition of
companies prior
to
September 30,
1997............. 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663
Less: Common
shares not
probable of
issuance at the
end of
contingency
period........... (886) (886) (886) (886) (886) (886) (886) (886) (886) (886)
Add: Common
shares probable
of issuance at
the end of
contingency
periods based
upon earn-out
criteria......... 325 325 325 325 325 325 325 325 325 325
Common shares
issuable upon
acquisition of
companies
subsequent to
September 30,
1997(4).......... 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263
Add: Common
shares probable
of issuance at
the end of
contingency
periods based
upon earn-out
criteria......... 161 161 161 161 161 161 161 161 161 161
Common stock
options issued to
employees of
companies
acquired through
September 30,
1997............. 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663 6,663
Treasury shares
acquired with
proceeds from
exercise of stock
options.......... (5,286) (5,286) (5,286) (5,286) (5,286) (5,286) (5,286) (5,286) (5,286) (5,286)
Common stock
options issued to
employees of
companies
acquired
subsequent to
September 30,
1997............. 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263 1,263
Treasury shares
acquired with
proceeds from
exercise of stock
options.......... (1,231) (1,231) (1,231) (1,231) (1,231) (1,231) (1,231) (1,231) (1,231) (1,231)
Shares issuable
under Affiliate
Warrant Program.. 103 103 103 103 103 103 103 103 103 103
Shares deemed
outstanding under
stock bonus
arrangement for
employees of
acquired
companies
(including
acquisitions).... 1,088 839 2,873 380 823 1,313 1,833 2,353 2,873 3,394
Common shares to
be issued to
Intel Corp.
concurrent with
the closing of
the Offering..... 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250 1,250
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total pro forma
(including
acquisitions)
common shares
outstanding...... 29,829 29,510 31,826 28,833 29,518 30,179 30,786 31,306 31,826 32,347
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
PRO FORMA NET
LOSS PER SHARE
(INCLUDING
ACQUISITIONS)(3). $ (2.13) $ (1.55) $ (1.66) $ (.60) $ (.45) $ (.50) $ (.57) $ (.47) $ (.65) $ (.55)
Less: Shares
deemed
outstanding under
stock bonus
arrangement for
employees of
acquired
companies
(including
acquisitions).... (1,088) (839) (2,873) (380) (823) (1,313) (1,833) (2,353) (2,873) (3,394)
Add: Shares
deemed
outstanding under
stock bonus
arrangement for
employees of
acquired
companies
(historical pro
forma)........... 148 2 128 313
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total historical
pro forma common
shares
outstanding...... 28,741 28,671 29,101 28,453 28,695 28,866 28,953 28,955 29,081 29,266
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
PRO FORMA NET
LOSS PER SHARE
(HISTORICAL)(2).. $ (.48) $ (.32) $ (1.35) $ (.09) $ (.09) $ (.14) $ (.16) $ (.20) $ (.53) $ (.62)
</TABLE>
- -----------
(1) Common shares outstanding has been computed on a pro forma basis giving
effect to the conversion upon the closing of this offering of the
Company's Series A, Series B and Series C Preferred Stock, as if converted
for all periods presented.
(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.
(4) Includes shares issuable for pending or probable acquisitions, including
USWeb LA Central, USWeb Houston, USWeb Boston and Reach Networks, Inc.
