<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
The Securities Act of 1934
December 31, 1997
Date of Report (Date of earliest event reported)
LARSCOM INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 1-12491 94-2362692
---------------------- ----------------------------- ---------------------
(State or other (Commission File Number) (I.R.S. Employer
jurisdiction of Identification No.)
incorporation)
1845 McCandless Drive
Milpitas, CA 95035
(Address of principal executive offices)
(408) 941-4000
(Registrant's telephone number, including area code)
Not Applicable
(Former name or address, if change since last report)
<PAGE>
Item 2. ACQUISITION OR DISPOSITION OF ASSETS
Larscom Incorporated, a Delaware corporation ("Larscom"), has previously
announced that it had entered into an Agreement and Plan of Reorganization,
dated December 2, 1997 (the "Reorganization Agreement"), among Larscom,
NetEdge Systems, Inc., a Delaware corporation ("NetEdge"), and LPH
Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of
Larscom ("Sub"). The merger was effected on December 31, 1997, pursuant to a
Certificate of Merger filed with the Secretary of State of Delaware. The
total merger consideration paid by Larscom consisted of approximately $26
million in cash plus approximately $9 million in assumption of liabilities.
The merger is intended to be accounted for as a purchase and will give rise
to a one-time charge in the quarter ending December 31, 1997. Further
details regarding this announcement are contained in Larscom's press release
dated December 31, 1997, attached as an exhibit hereto and incorporated by
reference herein.
Item 7. PRO FORMA FINANCIAL INFORMATION
The following financial statements and exhibits are filed as part of this
report, where indicated.
(a) Financial statements of business acquired, prepared pursuant to Rule
3.05 of Regulation S-X:
It is impracticable for the Registrant to provide audited financial
statements of NetEdge at this time. Such audited financial statements
will be filed as soon as practicable, but not later than March 16,
1998.
(b) Pro forma financial information required pursuant to Article 11 of
Regulation S-X:
It is impracticable for the Registrant to provide pro forma financial
information assuming a business combination between the Registrant and
NetEdge at this time. Such pro forma financial information will be
filed as soon as practicable, but not later than March 16, 1998.
(c) Exhibit in accordance with Item 601 of Regulation S-K: Agreement and
Plan of Reorganization, dated as of December 2, 1997, among Larscom
Incorporated, a Delaware corporation, LPH Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of Larscom, and
NetEdge Systems, Inc., a Delaware corporation.
2
<PAGE>
EXHIBITS
Exhibit
Number Exhibit Title
- ------ -------------
2.1 Agreement and Plan of Reorganization, dated as of December 2, 1997,
among Larscom Incorporated, a Delaware corporation, LPH Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of
Larscom, and NetEdge Systems, Inc., a Delaware corporation.
99.1 Press Release
3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
LARSCOM INCORPORATED
Dated: January 2, 1998 By: /s/ Bruce D. Horn
-----------------------------------
Bruce D. Horn
Vice President, Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
4
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
LARSCOM INCORPORATED,
LPH ACQUISITION CORP.
AND
NETEDGE SYSTEMS, INC.
DATED AS OF DECEMBER 2, 1997
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
Exhibit A Certificate of Merger
Exhibit B Disclosure Schedule
Exhibit C Stockholders Entering into Voting Agreements
Exhibit D Form of Voting Agreement
Exhibit E Form of Affiliate Agreement
Exhibit F Stockholder's Representation Statement
<PAGE>
TABLE OF CONTENTS
PAGE
----
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
ARTICLE II CONSIDERATION FOR MERGER . . . . . . . . . . . . . . . . . . . . 3
2.1 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Adjustments to Total Merger Consideration . . . . . . . . . . . 7
2.3 Effect of Merger on Capital Stock and Company Options . . . . .10
2.4 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . .11
2.5 Exchange of Certificates . . . . . . . . . . . . . . . . . . . .12
2.6 No Further Ownership Rights in Company Stock . . . . . . . . . .13
2.7 Lost, Stolen or Destroyed Certificates . . . . . . . . . . . . .13
2.8 Taking of Necessary Action; Further Action . . . . . . . . . . .13
2.9 Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . .13
2.10 Payment and Allocation of Total Merger Consideration . . . . . .14
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . .14
3.1 Organization of the Company . . . . . . . . . . . . . . . . . .14
3.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .15
3.3 Company Capital Structure . . . . . . . . . . . . . . . . . . .15
3.4 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.5 No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.6 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .17
3.7 Company Financial Statements . . . . . . . . . . . . . . . . . .18
3.8 No Undisclosed Liabilities . . . . . . . . . . . . . . . . . . .18
3.9 No Changes . . . . . . . . . . . . . . . . . . . . . . . . . . .18
3.10 Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . .20
3.11 Restrictions on Business Activities . . . . . . . . . . . . . .23
3.12 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment . . . . . . . . . . . . . . . . . . . .23
3.13 Intellectual Property . . . . . . . . . . . . . . . . . . . . .23
3.14 Agreements, Contracts and Commitments . . . . . . . . . . . . .27
3.15 Interested Party Transactions . . . . . . . . . . . . . . . . .28
3.16 Governmental Matters . . . . . . . . . . . . . . . . . . . . . .29
-i-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
3.17 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . .29
3.18 Balance Sheet Items . . . . . . . . . . . . . . . . . . . . . .29
3.19 Minute Books . . . . . . . . . . . . . . . . . . . . . . . . . .30
3.20 Environmental Matters . . . . . . . . . . . . . . . . . . . . .30
3.21 Brokers; Schedule of Fees and Expenses . . . . . . . . . . . . .31
3.22 Employee Benefit Plans and Compensation . . . . . . . . . . . .31
3.23 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . .35
3.24 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . .36
3.25 Warranties; Indemnities . . . . . . . . . . . . . . . . . . . .36
3.26 Complete Copies of Materials . . . . . . . . . . . . . . . . . .36
3.27 Representations Complete . . . . . . . . . . . . . . . . . . . .36
3.28 InterNex Account Receivable . . . . . . . . . . . . . . . . . .36
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT . . . . . . . . . . . .36
4.1 Organization, Standing and Power . . . . . . . . . . . . . . . .36
4.2 Parent Capital Structure . . . . . . . . . . . . . . . . . . . .37
4.3 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . .37
4.4 No Conflict . . . . . . . . . . . . . . . . . . . . . . . . . .37
4.5 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
4.6 SEC Documents; Parent Financial Statements . . . . . . . . . . .37
4.7 Representations Complete . . . . . . . . . . . . . . . . . . . .38
4.8 Parent Common Stock . . . . . . . . . . . . . . . . . . . . . .38
ARTICLE V CONDUCT PRIOR TO THE EFFECTIVE TIME . . . . . . . . . . . . . .38
5.1 Conduct of Business of the Company . . . . . . . . . . . . . . .38
5.2 No Solicitation . . . . . . . . . . . . . . . . . . . . . . . .40
ARTICLE VI ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . .41
6.1 Registration. . . . . . . . . . . . . . . . . . . . . . . . . .41
6.2 Access to Information . . . . . . . . . . . . . . . . . . . . .42
6.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . .42
6.4 September 30 Audit . . . . . . . . . . . . . . . . . . . . . . .42
6.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
6.6 Public Disclosure . . . . . . . . . . . . . . . . . . . . . . .43
6.7 Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
6.8 FIRPTA Compliance . . . . . . . . . . . . . . . . . . . . . . .43
6.9 Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . .43
-ii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
6.10 Notification of Certain Matters . . . . . . . . . . . . . . . .44
6.11 Additional Documents and Further Assurances . . . . . . . . . .44
6.12 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . .44
6.13 Bank Debt . . . . . . . . . . . . . . . . . . . . . . . . . . .45
6.14 Voting Agreements . . . . . . . . . . . . . . . . . . . . . . .45
6.15 Affiliate Agreements . . . . . . . . . . . . . . . . . . . . . .45
6.16 Termination of Company's Employee Plans Subject to ERISA . . . .45
6.17 Section 338 Related Tax . . . . . . . . . . . . . . . . . . . .46
6.18 Parent and Surviving Corporation Maintenance of Directors' and
Officers' Liability Insurance. . . . . . . . . . . . . . . . .46
6.19 Government Review . . . . . . . . . . . . . . . . . . . . . . .46
6.20 Final Tax Returns, Audits, Etc. . . . . . . . . . . . . . . . .46
6.21 Collection of InterNex Account Receivable . . . . . . . . . . .46
ARTICLE VII CONDITIONS TO THE MERGER . . . . . . . . . . . . . . . . . . . .47
7.1 Conditions to Obligations of Each Party to Effect the Merger . .47
7.2 Additional Conditions to Obligations of the Company . . . . . .47
7.3 Additional Conditions to the Obligations of Parent and Sub . . .48
ARTICLE VIII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROWS . . . . . .49
8.1 Survival of Representations and Warranties . . . . . . . . . . .49
8.2 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50
8.3 Protection of Escrow Fund . . . . . . . . . . . . . . . . . . .52
8.4 Claims Upon Escrow Fund; Threshold for Loss Recovery . . . . . .53
8.5 Objections to Claims . . . . . . . . . . . . . . . . . . . . . .53
8.6 Resolution of Conflicts; Arbitration . . . . . . . . . . . . . .54
8.7 Third-Party Claims . . . . . . . . . . . . . . . . . . . . . . .54
8.8 Escrow Agent's Duties . . . . . . . . . . . . . . . . . . . . .55
8.9 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
8.10 Stockholder Representative . . . . . . . . . . . . . . . . . . .57
8.11 Maximum Payments; Remedy . . . . . . . . . . . . . . . . . . . .58
8.12 Backup Withholding Penalties . . . . . . . . . . . . . . . . . .58
ARTICLE IX TERMINATION; AMENDMENT AND WAIVER . . . . . . . . . . . . . . .58
9.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . .58
9.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . .59
9.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . .59
-iii-
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
PAGE
----
9.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . .59
ARTICLE X GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . .60
10.1 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . .60
10.2 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . .61
10.3 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . .61
10.4 Entire Agreement; Assignment . . . . . . . . . . . . . . . . . .62
10.5 Severability . . . . . . . . . . . . . . . . . . . . . . . . . .62
10.6 Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . .62
10.7 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . .62
10.8 Rules of Construction . . . . . . . . . . . . . . . . . . . . .62
-iv-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of December 2, 1997 by and among Larscom Incorporated, a
Delaware corporation ("PARENT"), LPH Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Parent ("SUB"), NetEdge Systems, Inc., a
Delaware corporation (the "COMPANY") and, with respect to Articles VIII and X,
Jon Fjeld, as Stockholder Representative, and First Trust of California,
National Association, as Escrow Agent.
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 Sub with and
into the Company (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 Preferred Stock of the Company (other than Dissenting
Shares (as defined below)) shall be converted into the right to receive cash and
shares of Parent Common Stock (as defined below).
C. A portion of the consideration payable by Parent in connection with
the Merger shall be placed in escrow by Parent for the purpose of satisfying
Losses, General Losses (including Special Losses) or Price Adjustments (each, as
defined below) in accordance with Article VIII hereof.
D. The Company, on the one hand, and Parent and Sub, on the other hand,
desire to make certain representations, warranties, covenants and other
agreements in connection with the Merger.
E. Concurrent with the execution of this Agreement, as a material
inducement to the Company, Parent and Sub, certain stockholders of the Company
(the "PRINCIPAL STOCKHOLDERS") are entering into voting agreements with Parent
(the "VOTING AGREEMENTS").
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 General Corporation Law of the State of Delaware
("DELAWARE LAW"), Sub shall be merged with and into the Company, the separate
corporate existence of Sub shall cease and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. 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 9.1, the closing of the Merger (the "CLOSING") will take place on
December 31, 1997 following satisfaction or waiver of the conditions set forth
in Article VII, at the offices of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, 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
filing a Certificate of Merger (or like instrument) in the form attached hereto
as EXHIBIT A with the Secretary of State of the State of Delaware (the "MERGER
CERTIFICATE"), in accordance with the applicable provisions of Delaware Law (the
time of acceptance by the Secretary of State of Delaware of such filing 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; PROVIDED,
HOWEVER, that Article One of the Certificate of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation
is NetEdge Systems, Inc."
(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 directors of the Surviving Corporation
immediately after the Effective Time shall be the directors of Sub immediately
prior to the Effective Time, each to hold the office of director of the
Surviving Corporation in accordance with the provisions of the applicable laws
of the State of Delaware and the Certificate of Incorporation and Bylaws of the
Surviving Corporation until their successors are duly qualified and elected.
The officers of the Surviving Corporation immediately after the Effective Time
shall be the officers of Sub immediately prior to the Effective Time, each to
hold office in accordance with the provisions of the Bylaws of the Surviving
Corporation.
ARTICLE II
CONSIDERATION FOR MERGER
2.1 CERTAIN DEFINITIONS. For all purposes of this Agreement, the
following terms shall have the following meanings:
(a) "CLASS A PREFERRED" shall mean shares of Company Class A
Convertible Preferred Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time.
(b) "CLASS B PREFERRED" shall mean the shares of Company Class B
Convertible Preferred Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time.
(c) "CLASS C PREFERRED" shall mean the shares of Company Class C
Convertible Preferred Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time.
(d) "CLASS D PREFERRED" shall mean the shares of Company Class D
Convertible Preferred Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time.
(e) "CLASS E PREFERRED" shall mean the shares of Company Class E
Convertible Preferred Stock, par value $0.01 per share, issued and outstanding
immediately prior to the Effective Time.
(f) "COMPANY COMMON STOCK" shall mean shares of common stock of the
Company, par value $0.01 per share, together with any other shares of capital
stock of the Company other than Company Preferred Stock, issued and outstanding
immediately prior to the Effective Time.
(g) "COMPANY PREFERRED STOCK" shall mean the aggregate of shares of
Company Class A Convertible Preferred, Company Class B Convertible Preferred,
Company Class C Convertible Preferred, Company Class D Convertible Preferred
and Company Class E Convertible Preferred.
(h) "COMPANY OPTIONS" shall mean any options, warrants, rights,
convertible securities, agreements, commitments or other rights of any
character, whether oral or written, to which
-3-
<PAGE>
the Company is a party or by which it is bound, obligating the Company to issue,
deliver or sell, or cause to be issued, delivered or sold, any shares of Company
Stock, or obligating the Company to grant or otherwise enter into any such
option, warrant, rights, convertible security, agreement, commitment or other
right.
(i) "COMPANY STOCK" shall mean shares of Company Common Stock and
Company Preferred Stock.
(j) "CURRENT BALANCE SHEET" shall have the meaning set forth in
Section 3.7.
(k) "DETERMINED PRICE" shall mean the average closing price of the
Parent Common Stock for the ten (10) consecutive trading days ending (and
including) on the third trading day immediately preceding the date of the
Effective Time, as reported by the NASDAQ Market.
(l) "ESCROW AMOUNT" shall mean a number of shares of Parent Common
Stock (having a value based on the Determined Price) plus an amount of cash
which shall together have an aggregate value equal to Six Million Three Hundred
Dollars ($6,300,000). Subject to Parent's rights under Section 2.10, the Escrow
Amount shall consist of cash in the amount of Two Million One Hundred Fifty
Thousand Dollars ($2,150,000), subject to adjustment as required by the next
sentence, and that number of shares of Parent Common Stock (valued at the
Determined Price) having an aggregate value as close as reasonably practicable
to Four Million One Hundred Fifty Thousand Dollars ($4,150,000). The difference
between the Four Million One Hundred Fifty Thousand Dollars ($4,150,000) and the
aggregate value of such number of shares of Parent Common Stock (valued at the
Determined Price) shall be included into the Escrow Amount in cash. The portion
of the Escrow Amount to be contributed on behalf of each Stockholder shall be
its Pro Rata Portion of the Escrow Amount. The Escrow Amount shall include all
interest accrued on all cash components of the Escrow Amount.
(m) EXCHANGE RATIOS
(i) "COMMON EXCHANGE RATIO" shall mean the quotient of (A) the
Common Merger Consideration divided by (B) the sum of (i) the aggregate number
of shares of Company Common Stock, plus (ii) the aggregate number of shares of
Company Common Stock issuable immediately prior to the Effective Time on
conversion of the Class D Preferred and Class E Preferred.
(ii) "CLASS A EXCHANGE RATIO" shall mean the quotient of the
Class A Merger Consideration divided by the number of shares of Class A
Preferred.
(iii)"CLASS B EXCHANGE RATIO" shall mean the quotient of the
Class B Merger Consideration divided by the number of shares of Class B
Preferred.
(iv) "CLASS C EXCHANGE RATIO" shall mean the quotient of the
Class C Merger Consideration divided by the number of shares of Class C
Preferred.
-4-
<PAGE>
(v) "CLASS D EXCHANGE RATIO" shall mean the quotient of the
Class D Merger Consideration divided by the number of shares of Class D
Preferred.
(vi) "CLASS E EXCHANGE RATIO" shall mean the quotient of the
Class E Merger Consideration divided by the number of shares of Class E
Preferred.
(n) "GAAP" shall mean generally accepted accounting principles.
(o) "KNOWLEDGE" shall mean what is actually known or should be known
to management of the Company after reasonable investigation.
(p) "LOSS" or, collectively, "LOSSES", shall include any General Loss
(including any Special Loss), any Price Adjustment and any other amount deemed
to be a "Loss" for the purposes of Article VIII or any section thereof.
(q) MERGER CONSIDERATION
(i) "CLASS A MERGER CONSIDERATION" shall mean a number of shares
of Parent Common Stock (valued at the Determined Price) and an amount of cash
which together shall have an aggregate value equal to the lesser of:
(1) the product of (i) the number of issued and outstanding
shares of Class A Preferred at the Effective Time and (ii) the amount of $31.00
per share (subject to appropriate adjustment for all stock splits, dividends,
combinations, recapitalizations and the like with respect to the Class A
Preferred from the date hereof until the Effective Time)(the amount determined
pursuant to this clause (A) being referred to as the "CHARTER A CONSIDERATION"),
and
(2) the product of (i) the ratio determined by dividing the
Charter A Consideration by the sum of the Charter A Consideration, the Charter B
Consideration and the Charter C Consideration, and (ii) the Class ABC Merger
Consideration.
(ii) "CLASS B MERGER CONSIDERATION " shall mean a number of
shares of Parent Common Stock (valued at the Determined Price) and an amount of
cash which together shall have an aggregate value equal to the lesser of:
(1) the product of (i) the number of issued and outstanding
shares of Class B Preferred at the Effective Time and (ii) the amount of $70.00
per share (subject to appropriate adjustment for all stock splits, dividends,
combinations, recapitalizations and the like with respect to the Class B
Preferred from the date hereof until the Effective Time)(the amount determined
pursuant to this clause (A) being referred to as the "CHARTER B CONSIDERATION"),
and
(2) the product of (i) the ratio determined by dividing the
Charter B Consideration by the sum of the Charter A Consideration, the Charter B
Consideration and the Charter C Consideration and (ii) the Class ABC Merger
Consideration.
-5-
<PAGE>
(iii) "CLASS C MERGER CONSIDERATION" shall mean cash in an
aggregate amount equal to the lesser of:
(1) the product of (i) the number of issued and
outstanding shares of Class C Preferred at the Effective Time and (ii) the
amount of $117.00 per share (subject to appropriate adjustment for all stock
splits, dividends, combinations, recapitalizations and the like with respect to
the Class C Preferred from the date hereof until the Effective Time)(the amount
determined pursuant to this clause (A) being referred to as the "CHARTER C
CONSIDERATION"), and
(2) the product of (i) the ratio determined by
dividing the Charter C Consideration by the sum of the Charter A Consideration,
the Charter B Consideration and the Charter C Consideration and (ii) the Class
ABC Merger Consideration.
(iv) "CLASS D MERGER CONSIDERATION" shall mean a number of
shares of Parent Common Stock (valued at the Determined Price) and an amount of
cash which together shall have an aggregate value equal to the lesser of (i) the
product of (A) the number of issued and outstanding shares of Class D Preferred
at the Effective Time multiplied by (B) $4.00 (subject to appropriate
adjustment for all stock splits, dividends, combinations, recapitalizations and
the like with respect to the Class D Preferred from the date hereof until the
Effective Time), and (ii) the Total Merger Consideration less the Class E Merger
Consideration.
(v) "CLASS E MERGER CONSIDERATION" shall mean a number of
shares of Parent Common Stock (valued at the Determined Price) and an amount of
cash which together shall have an aggregate value equal to the lesser of (i) the
product of (A) the number of issued and outstanding shares of Class E Preferred
at the Effective Time multiplied by (B) $4.00 (subject to appropriate adjustment
for all stock splits, dividends, combinations, recapitalizations and the like
with respect to the Class E Preferred from the date hereof until the Effective
Time), and (ii) the Total Merger Consideration.
(vi) "COMMON MERGER CONSIDERATION" shall equal the Total
Merger Consideration less (i) the Class E Merger Consideration, (ii) the Class D
Merger Consideration, and (iii) the Total Class ABC Merger Consideration (it
being understood that the Common Merger Consideration may be zero) with such
amount consisting exclusively of cash.
(vii) "TOTAL MERGER CONSIDERATION" shall mean a number of
shares of Parent Common Stock (having a value based on the Determined Price)
plus an amount of cash which together have an aggregate value equal to Twenty
Five Million Seven Hundred Ninety Three Thousand One Hundred Dollars
($25,793,100), subject to adjustment as provided in Section 2.2 hereof.
(viii) "TOTAL CLASS ABC MERGER CONSIDERATION" shall equal the
lesser of (i) the total Merger Consideration less the Class D Merger
Consideration and less the Class E Merger Consideration, or (ii) the aggregate
of One Hundred Seventeen Dollars ($117.00) per share (subject to appropriate
adjustment for all stock splits, dividends, combinations, recapitalizations and
the like with respect to such class of Preferred from the date hereof until the
Effective Time), multiplied by the number of issued and outstanding shares of
Class A Preferred at the Effective Time, plus Seventy
-6-
<PAGE>
Dollars ($70.00) per share (subject to appropriate adjustment for all stock
splits, dividends, combinations, recapitalizations and the like with respect to
such class of Preferred from the date hereof until the Effective Time),
multiplied by the number of issued and outstanding shares of Class B Preferred
at the Effective Time, plus Thirty One Dollars ($31.00) per share (subject to
appropriate adjustment for all stock splits, dividends, combinations,
recapitalizations and the like with respect to such class of Preferred from the
date hereof until the Effective Time), multiplied by the number of issued and
outstanding shares of Class C Preferred at the Effective Time.
(r) "PARENT COMMON STOCK" shall mean shares of the common stock, par
value $0.01 per share, of Parent.
(s) "PRO RATA PORTION" shall mean, with respect to each Stockholder,
an amount determined at the Effective Time equal to the quotient obtained by
dividing (x) the aggregate portion of the Total Merger Consideration issuable to
such Stockholder pursuant to this Article II upon exchange of all shares of
Company Stock owned by such Stockholder immediately prior to the Effective Time
(including all amounts withheld pursuant to escrow provisions), by (y) the Total
Merger Consideration issuable pursuant to this Article II to all Stockholders
upon exchange of all shares of Company Stock owned by such Stockholders
immediately prior to the Effective Time (including all amounts withheld pursuant
to escrow provisions).
(t) "STOCKHOLDER" shall mean each holder of any shares of Company
Stock immediately prior to the Effective Time.
2.2 ADJUSTMENTS TO TOTAL MERGER CONSIDERATION. The Total Merger
Consideration shall be subject to adjustment on the Closing Date as provided in
this Section 2.2.
(a) PRELIMINARY CLOSING BALANCE SHEET. On the date being not more
than thirty (30) and not less than ten (10) days prior to the Closing Date, the
Company shall prepare and deliver to Parent a balance sheet, dated as of the end
of the most recent calendar month (November 30, 1997) and prepared in accordance
with GAAP as consistently applied by the Company (the "PRELIMINARY CLOSING
BALANCE SHEET"). The Preliminary Closing Balance Sheet shall be subject to the
review and acceptance by Parent and its auditors.
(b) FINAL CLOSING BALANCE SHEET. As soon as practicable (but in no
event later than sixty (60) days) after the Closing Date, Parent shall cause the
Surviving Corporation to prepare the balance sheet of the Company as of the
Closing Date (the "CLOSING BALANCE SHEET") and shall deliver a copy of such
Closing Balance Sheet to the Stockholder Representative (as defined in Section
8.10). The Closing Balance Sheet shall be prepared in accordance with GAAP
consistent with the basis of accounting and procedures and methods employed by
the Company in the preparation of the September 30 Audited Financials (as
defined below). During the conduct of such review, the Surviving Corporation
shall cooperate in all respects with the independent auditors for the purpose of
completing the Closing Balance Sheet. The Surviving Corporation shall
contemporaneously prepare, and make available to the Parent, draft federal and
state income tax returns for all periods through the Effective Time. The
Surviving Corporation and its independent auditors shall be available for
periodic inquiry by Parent, and
-7-
<PAGE>
the Surviving Corporation and its independent auditors will answer such
questions as Parent may have and provide such additional schedules and materials
as Parent may reasonably request in order to permit a meaningful review of the
Closing Balance Sheet and the draft tax returns.
(c) PURCHASE PRICE ADJUSTMENTS AT EFFECTIVE TIME. The following
adjustments to the Total Merger Consideration shall be made as of the Effective
Time:
(i) ADJUSTMENT FOR BANK INDEBTEDNESS. In the event that the
Company shall have outstanding any indebtedness for money borrowed
from commercial banks and other financial institutions as well as
indebtedness for money borrowed from stockholders of the Company or
from Parent ("BANK DEBT"), in excess of Six Hundred Thousand Dollars
($600,000), the Total Merger Consideration shall be reduced to the
extent of such indebtedness.
(ii) NET WORTH ADJUSTMENT. In the event that the Net Worth of
the Company (as defined below) as set forth on the Preliminary Closing
Balance Sheet (the "PRELIMINARY NET WORTH") is less than the Net Worth
of the Company as set forth on the Current Balance Sheet, then the
Total Merger Consideration shall be reduced by the amount of any such
difference. "NET WORTH" shall mean the sum of all assets of the
Company as reflected on the applicable balance sheet, including cash,
accounts receivable (net of allowances for doubtful accounts), net
value of inventory (adjusted for all applicable write-downs and
write-offs), net fixed assets, net intangible assets, other assets and
prepaid expenses, but exclusive of deferred tax assets, less all
liabilities of any kind as reflected on the applicable balance sheet,
including but not limited to accounts payable, royalties payable,
warranty and other reserves, accrued salary, bonus, vacation and other
elements of employee or contractor compensation, deferred revenue and
all other liabilities, exclusive only of (i) redeemable preferred
stock and (ii) Bank Debt.
(d) POST CLOSING PURCHASE PRICE ADJUSTMENTS. The Total Merger
Consideration shall be subject to adjustment after the Effective Time as
provided in this Section 2.2(d).
(i) ADJUSTMENT FOR BANK INDEBTEDNESS. In the event that upon
completion of the Closing Balance Sheet it shall be determined that
the Company had outstanding as of the Effective Time any Bank Debt
other than (A) Bank Debt for which an adjustment to the Total Merger
Consideration was made at the Effective Time pursuant to
Section 2.2(c)(i) and (B) the Six Hundred Thousand Dollars ($600,000)
referred to in Section 2.2(c)(i), then the Total Merger Consideration
shall be further reduced to the extent of such further Bank Debt.
Such reduction in the Total Merger Consideration shall be effected by
the Escrow Agent delivering to Parent of a portion of the Escrow
Amount established pursuant to Section 8.2, pursuant to the escrow
claim procedures set forth in Section 8.4.
-8-
<PAGE>
(ii) NET WORTH ADJUSTMENT. In the event that the Net Worth of
the Company as set forth on the Closing Balance Sheet (the "CLOSING
NET WORTH") is less than the Preliminary Net Worth of the Company,
then the Total Merger Consideration shall be reduced by the amount of
any such difference. Such reduction in the Total Merger Consideration
shall be effected by the Escrow Agent delivering to Parent a portion
of the Escrow Amount established pursuant to Section 8.2, pursuant to
the escrow claim procedures set forth in Section 8.4.
(e) DISPUTES. At any time within thirty (30) days following the
delivery by the Surviving Corporation of the Closing Balance Sheet to Parent and
the Stockholder Representative (as defined in Section 8.10) (the "REVIEW
PERIOD"), Parent or the Stockholder Representative may dispute any amounts
reflected or not reflected on the Closing Balance Sheet, but only on the basis
that such amounts were not arrived at in accordance with Section 2.2(b) and
provided that any such dispute is made in good faith with a reasonable basis for
making such dispute. Each of Parent and the Stockholder Representative will
notify the other in writing of each such disputed item, and will specify the
amount thereof in dispute, not later than the expiration of the Review Period.
If Parent and the Stockholder Representative are able to resolve all the
disputed items, then the Closing Balance Sheet agreed upon by Parent and the
Stockholder Representative will be final, binding and conclusive on the parties
hereto. If Parent and the Stockholder Representative are unable to resolve any
disputed item and are therefore unable to agree upon the Closing Balance Sheet
and the resultant Closing Net Worth within twenty (20) days following the
expiration of the Review Period, then within ten (10) days thereafter either
Parent or the Stockholder Representative may elect that the items remaining in
dispute be submitted for resolution to a nationally recognized accounting firm
(the member of which who will be primarily responsible for resolving such
disputes will have had substantial auditing experience and substantial
experience in arbitration or other dispute resolution proceedings concerning
accounting issues) selected by mutual agreement of Parent and the Stockholder
Representative (or failing such agreement between Parent and the Stockholder
Representative, as selected by mutual agreement between Parent's independent
accountants and the Company's independent accountants (prior to the Merger), or
failing such agreement between Parent's and the Company's respective independent
accountants, appointed by the American Arbitration Association) (the
"ACCOUNTANTS"). The Accountants will, within thirty (30) days after submission,
determine, based solely on presentations by Parent and the Stockholder
Representative (and their representatives) and not by independent review, and
render a written report to the parties upon, such remaining disputed items and
the resultant calculation of the Closing Balance Sheet and the Closing Net Worth
in accordance with the provisions hereof, and such report and the resultant
Closing Balance Sheet will be final, binding and conclusive on the parties
hereto. In resolving any disputed item, the Accountants may not assign a value
to such item greater than the greatest value for such item claimed by either
party or less than the smallest value for such item claimed by either party.
The fees and disbursements of the Accountants (and of the American Arbitration
Association, if any) (a) will be paid by the Parent, and Parent shall be deemed
to have incurred a Price Adjustment (as defined in Section 8.1(a)(iii) under
Article VIII equal to the amount thereof, if the Closing Net Worth finally
determined pursuant to this Section 2.2(e) is less than Fifty Thousand Dollars
($50,000) greater than the Closing Net Worth reflected on the Closing Balance
Sheet originally submitted pursuant to Section 2.2(b), or (b) will be borne by
Parent with no deemed Price Adjustment under Article VIII
-9-
<PAGE>
hereof, if the Closing Net Worth finally determined pursuant to this
Section 2.2(e) is more than Fifty Thousand Dollars ($50,000) greater than the
Closing Net Worth amount reflected on the Closing Balance Sheet originally
submitted pursuant to Section 2.2(b) hereof. Parent and the Stockholder
Representative hereby agree to cooperate and work in good faith and as
expeditiously as reasonably possible to resolve any and all Closing Balance
Sheet disputes.
2.3 EFFECT OF MERGER ON CAPITAL STOCK AND COMPANY OPTIONS. At the
Effective Time, by virtue of the Merger and without any action on the part of
Sub, the Company, the holders of any shares of Company Stock or the holders of
any Company Options, the following shall take place:
(a) CONSIDERATION FOR COMPANY CLASS A PREFERRED. Each share of
Company Class A Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Section 2.4)
will be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of Company
Class A Preferred in the manner provided in Section 2.5(c) an amount of cash and
a number of whole shares of Parent Common Stock (rounded down to the nearest
number after aggregating all shares held by that stockholder) equal to the
Class A Exchange Ratio, upon the terms and subject to conditions set forth below
and throughout this Agreement, including, without limitation, the escrow
provisions set forth in Article VIII.
(b) CONSIDERATION FOR COMPANY CLASS B PREFERRED. Each share of
Company Class B Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Section 2.4)
will be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of
Company Class B Preferred in the manner provided in Section 2.5(c) an amount of
cash and a number of whole shares of Parent Common Stock (rounded down to the
nearest number after aggregating all shares held by that stockholder) equal to
the Class B Exchange Ratio, upon the terms and subject to conditions set forth
below and throughout this Agreement, including, without limitation, the escrow
provisions set forth in Article VIII.
(c) CONSIDERATION FOR COMPANY CLASS C PREFERRED. Each share of
Company Class C Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Section 2.4)
will be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of
Company Class C Preferred in the manner provided in Section 2.5(c) an amount of
cash equal to the Class C Exchange Ratio, upon the terms and subject to
conditions set forth below and throughout this Agreement, including, without
limitation, the escrow provisions set forth in Article VIII.
(d) CONSIDERATION FOR COMPANY CLASS D PREFERRED. Each share of
Company Class D Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Section 2.4)
will be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of Company
Class D Preferred in the manner provided in Section 2.5(c), (i) an amount of
cash and a number of whole shares of Parent Common Stock (rounded down to the
nearest number after aggregating all shares held by that
-10-
<PAGE>
stockholder) equal to the Class D Exchange Ratio, plus (ii) an amount of cash
equal to the product of (A) the number of shares of Company Stock issuable
immediately prior to the Effective Time on conversion of one share of Class D
Preferred, times (B) the Common Exchange Ratio (which, it is understood, may be
zero), in each case upon the terms and subject to conditions set forth below and
throughout this Agreement, including, without limitation, the escrow provisions
set forth in Article VIII.
(e) CONSIDERATION FOR COMPANY CLASS E PREFERRED. Each share of
Company Class E Preferred issued and outstanding immediately prior to the
Effective Time (other than any Dissenting Shares, as defined in Section 2.4)
will be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of Company
Class E Preferred in the manner provided in Section 2.5(c), (i) an amount of
cash and a number of whole shares of Parent Common Stock (rounded down to the
nearest number after aggregating all shares held by that stockholder) equal to
the Class E Exchange Ratio, plus (ii) an amount of cash equal to the product of
(A) the number of shares of Company Common Stock issuable immediately prior to
the Effective Time on conversion of one share of Class E Preferred, times
(B) the Common Exchange Ratio (which, it is understood, may be zero), in each
case upon the terms and subject to conditions set forth below and throughout
this Agreement, including, without limitation, the escrow provisions set forth
in Article VIII.
(f) COMPANY COMMON STOCK. Each share of Company Common Stock issued
and outstanding immediately prior to the Effective Time will, at the Effective
Time, be canceled and extinguished and be converted automatically into the right
to receive, upon surrender of the certificate representing such share of Company
Common Stock in the manner provided in Section 2.5(c) an amount of cash equal to
the Common Exchange Ratio (which, it is understood, may be zero), upon the terms
and subject to conditions set forth below and throughout this Agreement,
including, without limitation, the escrow provisions set forth in Article VIII.
(g) COMPANY OPTIONS. Any existing Company Options that have not been
exercised prior to the Effective Time shall be canceled and terminated at the
Effective Time, except that vested in-the-money options may be exercised
immediately prior to and contingent upon the Effective Time on a "cash-less"
basis.
(h) CAPITAL STOCK OF SUB. Each share of common stock of Sub issued
and outstanding immediately prior to the Effective Time shall be converted into
and exchanged for one validly issued, fully paid and nonassessable share of
common stock of the Surviving Corporation. Each share of capital stock of Sub
evidencing ownership of any such shares shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
2.4 DISSENTING SHARES.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Stock held by a holder who has exercised and perfected
appraisal rights for such shares in accordance with Delaware Law and who, as of
the Effective Time, has not effectively withdrawn or lost such appraisal rights
("DISSENTING SHARES"), shall not be converted into or represent a right to
receive the
-11-
<PAGE>
consideration for Company Stock pursuant to Section 2.3, but the holder thereof
shall only be entitled to such rights as are granted by Delaware Court of
Chancery under Delaware Law.
(b) Notwithstanding the provisions of subsection (a), if any holder
of Dissenting Shares shall effectively withdraw or lose (through failure to
perfect or otherwise) his or her appraisal rights, then, as of the later of
Effective Time and the occurrence of such event, such holder's shares shall
automatically be converted into and represent only the right to receive the
consideration for Company Stock as provided in Section 2.3, without interest
thereon, upon surrender of the certificates representing such shares.
(c) The Company shall give Parent (i) prompt notice of any written
demand for appraisal received by the Company pursuant to the applicable
provisions of Delaware Law and (ii) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent and the Stockholder
Representative (which consent shall not be unreasonably withheld), voluntarily
make any payment with respect to any such demands or offer to settle or settle
any such demands. To the extent that Parent or the Company makes any payment or
payments in respect of any Dissenting Shares, Parent shall be entitled to
recover under the terms of Section 8.2 and Section 8.4 hereof the aggregate
amount by which such payment or payments exceed the aggregate consideration that
otherwise would have been payable in respect of such shares.
2.5 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. The Bank of New York shall serve as exchange
agent (the "EXCHANGE AGENT") in the Merger.
(b) PARENT TO PROVIDE PARENT COMMON STOCK. Promptly after the
Effective Time, Parent shall make available to the Exchange Agent for exchange
in accordance with this Article II the cash and shares of Parent Common Stock
comprising the Total Merger Consideration less the shares of Parent Common Stock
and cash which are part of the Escrow Amount. In accordance with Section 8.2,
Parent will deposit the Escrow Amount into the Escrow Fund (as defined in
Section 8.2). Each Stockholder shall be deemed to have contributed its Pro Rata
Portion of the Escrow Amount.
(c) EXCHANGE PROCEDURES. On or following the Closing Date, the
holders of Company Stock will surrender the certificates representing their
shares of Company Stock (the "COMPANY STOCK CERTIFICATES") to the Exchange Agent
for cancellation together with a letter of transmittal in such form and having
such provisions as Parent may reasonably request. Upon surrender of Company
Stock Certificates for cancellation to the Exchange Agent or to such other agent
or agents as may be appointed by Parent with the consent of the Stockholder
Representative, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holder of such
Company Stock Certificates shall be entitled to receive from the Exchange Agent
in exchange therefor, if applicable, cash plus a certificate or certificates
representing the number of full shares of Parent Common Stock into which the
aggregate number of shares of Company Stock previously represented by such
certificate or certificates surrendered shall have been converted pursuant to
Section 2.2 of this
-12-
<PAGE>
Agreement (after giving effect to the withholding of certain such shares as
provided in Article VIII), and the Company Stock Certificates so surrendered
shall forthwith be canceled. The Exchange Agent shall accept such certificates
upon compliance with reasonable terms and conditions as the Exchange Agent may
impose to effect an orderly exchange thereof. Until so surrendered, each
outstanding Company Stock Certificate (except those representing Dissenting
Shares) will be deemed from and after the Effective Time, for all corporate
purposes, to evidence only the right to receive, if applicable, upon such
surrender, Parent Common Stock pursuant to this Article II.
(d) NO LIABILITY. Notwithstanding anything to the contrary in this
Section 2.5, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Company Stock for any amount
properly paid to a public official pursuant to any applicable abandoned
property, escheat or similar law.
2.6 NO FURTHER OWNERSHIP RIGHTS IN COMPANY STOCK. The merger
consideration, if any, issued in respect of the surrender for exchange of shares
of Company 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 Stock; and there shall be no further registration of transfers on the
stock transfer books of the Surviving Corporation of shares of Company Stock
which were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Company Stock Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged, if applicable,
as provided in this Article II.
2.7 LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Company
Stock Certificates shall have been lost, stolen or destroyed, the Exchange Agent
shall issue in exchange for such lost, stolen or destroyed Company Stock
Certificates, upon the making of an affidavit of that fact by the holder
thereof, in form and substance reasonably acceptable to Parent and the Exchange
Agent, such number of shares, if any, as may be required pursuant to
Section 2.2; 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 against any claim that may be made against Parent or the
Exchange Agent with respect to the certificates alleged to have been lost,
stolen or destroyed.
2.8 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, Parent 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.
2.9 TAX CONSEQUENCES. It is intended by the parties hereto that the Merger
will constitute a taxable purchase of the Company Stock for federal and state
income tax purposes. It is also intended that the Merger will constitute a
qualified stock purchase within the meaning of Section 338 of the Internal
Revenue Code of 1986, as amended (the "CODE"). Furthermore, the parties hereto
acknowledge that Parent will make an election with respect to the Company under
Section 338(g) of the Code and
-13-
<PAGE>
under any applicable similar provisions of state law (the "SECTION 338
ELECTION"). Each party has consulted with its own tax advisors with respect to
the tax consequences of the Merger.
2.10 PAYMENT AND ALLOCATION OF TOTAL MERGER CONSIDERATION. Payment of the
Total Merger Consideration by Parent shall consist of fifty percent (50%) cash
and fifty percent (50%) shares of Parent Common Stock (based on the Determined
Price), provided that, if the Determined Price is less than Ten Dollars ($10.00)
per share, then Parent may in its sole discretion elect to tender all or any
part of the total Merger Consideration otherwise payable in shares of Parent
Common Stock in cash, based on equivalent value at the Determined Price. Parent
shall not issue any fractional shares of Parent Common Stock, and in lieu
thereof shall increase the cash portion of the Total Merger Consideration. The
Class C Merger Consideration and the Common Merger Consideration, if any, shall
be payable entirely in cash; subject to such requirement, the number of shares
of Parent Common Stock and the amount of cash comprising the Total Merger
Consideration shall be allocated among the Class A Merger Consideration, Class B
Merger Consideration, Class C Merger Consideration, Class D Merger
Consideration, and Class E Merger Consideration pro rata in the same proportion
of shares to cash. The portion of the Escrow Amount to be contributed on
behalf of each Stockholder shall be its Pro Rata Portion of the Escrow Amount.
The amount of cash and Parent Common Stock to be contributed by each Stockholder
shall be in the proportions necessary to ensure that the Escrow Amount includes
the appropriate proportion of cash to Parent Common Stock as specified in the
definition of the Escrow Amount in Section 2.1(l), subject to the provision that
Stockholders receiving only cash in exchange for Class C Preferred or Company
Common Stock shall contribute only cash to the Escrow Amount with respect to
such stock. With respect to all other Company Stock, each Stockholder will
contribute to the Escrow Amount the same proportion of cash to Parent Company
Stock as each other similarly situated Stockholder.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Sub, (i) on the
date hereof, subject to such exceptions as are specifically disclosed in the
disclosure schedule (referencing the appropriate section and paragraph numbers)
supplied by the Company to Parent and attached hereto as EXHIBIT B (the
"DISCLOSURE SCHEDULE"), and (ii) as of the Effective Time, as though these
representations are made at the Effective Time, as follows:
3.1 ORGANIZATION OF THE COMPANY. The Company and each of NetEdge Systems
UK Limited and NetEdge Systems International BV (collectively, the
"SUBSIDIARIES" and individually a "SUBSIDIARY") is a corporation duly organized,
validly existing and in good standing under the laws of its organization. The
Company and each of its Subsidiaries has the corporate power to own its
properties and to carry on its business as now being conducted. The Company and
each of its Subsidiaries 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 could have a Material Adverse Effect. For all purposes of this
Agreement, the term "MATERIAL ADVERSE EFFECT" means any change, event or effect
in or on the business of the Company and its Subsidiaries that is materially
adverse to the business, financial condition, assets or results of operations
-14-
<PAGE>
of the Company and its Subsidiaries taken as a whole except for any events,
changes or effects resulting from (i) any material and adverse change in the
financial markets as a whole independent of the Company, (ii) any political,
economic or financial conditions affecting the industry or business generally or
(iii) the effect upon customer orders of uncertainty created by the announcement
of the transactions contemplated by this Agreement. The Company has delivered a
true and correct copy of its Certificate of Incorporation and Bylaws, each as
amended to date, to Parent. Section 3.1 of the Disclosure Schedule lists the
directors and officers of the Company. Except as set forth on Section 3.1 of
the Disclosure Schedule, the operations now being conducted by the Company have
not been conducted under any other name.
3.2 SUBSIDIARIES. The Company has delivered a true and correct copy of
each Subsidiary's charter documents and Bylaws, each as amended to date, to
Parent. Section 3.2 of the Disclosure Schedule lists the directors and officers
of each Subsidiary. The operations now being conducted by each Subsidiary have
not been conducted under any other name. Other than the Subsidiaries, the
Company does not have, and has never had, any subsidiaries or affiliated
companies and does not otherwise own, and has not otherwise owned, any shares in
the capital of or any interest in, or control, directly or indirectly, any
corporation, partnership, association, joint venture or other business entity.
Except as set forth in Section 3.2 of the Disclosure Schedule, all of the shares
of capital stock of each Subsidiary are owned of record and beneficially by the
Company free and clear of all pledges, claims, liens, charges, encumbrances and
security interest of any kind or nature whatsoever (collectively "LIENs"). All
the shares of capital stock of each Subsidiary are duly authorized, validly
issued, fully paid and nonassessable and have been issued in compliance with all
applicable laws. There are no options, warrants, rights, convertible
securities, commitments or agreements of any character, written or oral, to
which any Subsidiary is a party or by which it is bound obligating such
Subsidiary to issue or deliver or sell or cause to be issued, delivered or sold
any shares of the capital stock of such Subsidiary or obligating such Subsidiary
to grant, extend, accelerate the vesting of, change the price of, otherwise
amend or enter into any such option, warrant, right, convertible security,
commitment or agreement. There are no rights, puts, commitments, agreements or
other obligations outstanding requiring any Subsidiary or which could require
any Subsidiary (with or without notice or lapse of time or both) to repurchase
or redeem any shares of capital stock of any Subsidiary. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to any Subsidiary.
3.3 COMPANY CAPITAL STRUCTURE.
(a) The authorized capital stock of the Company consists of
22,000,000 shares of authorized Company Common Stock of which 5,338,736 shares
are issued and outstanding as of the date hereof, and 5,018,202 shares of
authorized Preferred Stock. 56,452 shares of the Company's Preferred Stock are
designated Class A Preferred Stock, of which 56,452 shares are issued and
outstanding as of the date hereof. 50,000 shares of the Company's Preferred
Stock are designated Class B Preferred Stock, of which 36,069 shares are issued
and outstanding as of the date hereof. 43,000 shares of the Company's Preferred
Stock are designated as Class C Preferred Stock, of which 11,420 shares are
issued and outstanding as of the date hereof. 2,768,750 shares of the Company's
Preferred Stock are designated Class D Preferred Stock, of which 2,768,750
shares are issued and outstanding as of the date hereof.
-15-
<PAGE>
2,100,000 shares of the Company's Preferred Stock are designated Class E
Preferred Stock, of which 2,100,000 shares are issued and outstanding on the
date hereof. The Company's capital stock is held by the persons, with the
domicile addresses, to the extent available, and in the amounts set forth in
Section 3.3(a) of the Disclosure Schedule. Except as set forth in Section 3.3(a)
of the Disclosure Schedule, all outstanding shares of the Company's 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, Certificates of Designation or Bylaws of the Company or any
agreement to which the Company is a party or by which it is bound, and all such
shares have been issued in compliance with all applicable federal and state
securities laws. There are no declared or accrued unpaid dividends with respect
to any shares of the Company's capital stock. There are no bonds, debentures,
notes or other indebtedness of the Company having the right to vote (or
convertible into, or exchangeable for, securities having the right to vote) on
any matter which stockholders of the Company may vote.
Based on the representations made by each of the stockholders of the
Company at the time of their investment in the Company, to the Knowledge of the
Company each of the Stockholders who shall receive any Parent securities as a
portion of the Total Merger Consideration in connection with the Merger is an
"accredited investor" as defined under Regulation D promulgated pursuant to the
Securities Act of 1933, as amended (the "1933 ACT").
(b) Except for the Company's 1984 Stock Option Plan, 1987 Stock
Option Plan, 1989 Stock Option Plan, 1993 Stock Option Plan and 1994 Stock
Option Plan (collectively the "Option Plans") the Company has never adopted or
maintained any formal stock option plan or other plan providing for equity
compensation of any person. The Company has reserved an aggregate of 5,632,400
shares of Company Common Stock for issuance to employees and consultants
pursuant to the Option Plans, of which as of the date hereof 1,505,216 shares
have been exercised and 3,964,516 shares are subject to outstanding, unexercised
options. Section 3.3(b) of the Disclosure Schedule sets forth for each
outstanding Company Option awarded under one of the Plans the name of the holder
of such option, the domicile address of such holder, the number of shares of
Company Common Stock subject to such option, the exercise price of such option
and the vesting schedule for such option, including the extent vested to date.
Except for such Company Options listed in Section 3.3(b) of the Disclosure
Schedule, there are no options, warrants, rights, convertible securities,
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 or sell, or cause to be issued, delivered or sold, any shares of 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, right, convertible security, commitment or agreement. Section 3.3(b)
of the Disclosure Schedule also sets forth the name of the holder of any shares
of capital stock of the Company subject to vesting (including rights of
repurchase with regard to shares of capital stock of the Company), the number of
shares of capital stock of the Company subject to vesting and the vesting
schedule for such shares of capital stock of the Company, including the extent
vested to date. Except as described in Section 3.3(b) of the Disclosure
Schedule, no vesting provisions applicable to any Company Option or share of
Company Stock will accelerate in connection with the transactions contemplated
by the Merger or this Agreement. There are no rights, puts, commitments,
agreements or other obligations outstanding requiring the Company or which could
require the Company (with or without notice or lapse of time or both) to
repurchase or redeem any shares of capital stock of
-16-
<PAGE>
the Company or any Company Options. There are no outstanding authorized stock
appreciation, phantom stock, profit participation, or other similar rights with
respect to the Company. There are no voting trusts, proxies, or other
agreements or understandings with respect to the voting stock of the Company.
Subject to the rights of any dissenting stockholders, as a result of the Merger,
Parent will be the record and sole beneficial owner of all outstanding capital
stock of the Surviving Corporation and all rights to acquire or receive any
capital stock of the Surviving Corporation, whether or not such capital stock is
outstanding.
3.4 AUTHORITY. The Company has all requisite corporate power and
authority to enter into this Agreement and any Related Agreements (as
hereinafter defined) to which it is a party and to consummate the transactions
contemplated hereby and thereby. The execution and delivery of this Agreement
and any Related Agreements to which it is a party 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 the part of the Company to authorize the Agreement, any Related
Agreements to which it is a party and the transactions contemplated hereby and
thereby, subject only to the approval of this Agreement by the Stockholders of
the Company. This Agreement and the Merger have been unanimously approved by
the Board of Directors of the Company. This Agreement and any Related
Agreements to which the Company is a party have been 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
obligation of the Company, enforceable in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency and the relief of debtors and to rules of law governing specific
performance, injunctive relief or other equitable remedies. The "RELATED
AGREEMENTS" shall mean all ancillary agreements required in this Agreement to be
executed and delivered in connection with the transactions contemplated hereby,
including without limitation the Voting Agreements, Affiliate Agreements,
Employment Agreements and Stockholder's Representation Statements (each as
defined elsewhere herein).
3.5 NO CONFLICT. The execution and delivery of this Agreement and any
Related Agreements by the Company 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 or Bylaws of
the Company or any of the Subsidiaries, (ii) any mortgage, indenture, lease,
contract or other agreement or instrument, permit, concession, franchise or
license to which the Company or any of the Subsidiaries or any of their
respective properties or assets are subject, or (iii) any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
any of the Subsidiaries or their respective properties or assets.
3.6 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, to the Knowledge of the
Company, 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 Subsidiaries (so as not to trigger any Conflict),
is required by or with respect to the Company or any of its Subsidiaries in
connection with the execution and delivery of this Agreement
-17-
<PAGE>
and any Related Agreements to which the Company is a party or the consummation
of the transactions contemplated hereby or thereby, except for (i) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable securities laws,
(ii) the filing of the Merger Certificate with the Secretary of State of
Delaware, (iii) notification requirements of the Hart-Scott-Rodino Anti-Trust
Improvement Act of 1976, as amended, and the rules and regulations thereunder
(the "HSR ACT") and (iv) such other consents and approvals as may be identified
in Section 3.6 of the Disclosure Schedule.
3.7 COMPANY FINANCIAL STATEMENTS. Section 3.7 of the Disclosure Schedule
sets forth the Company's audited financial statements (balance sheet and
statements of income, cash flows and stockholders' equity (the "AUDITED
FINANCIALS")) as of and for the years ended December 31, 1994, 1995, and 1996
and unaudited Financial Statements as of and for the nine month periods ended
September 30, 1996 and 1997 (the "UNAUDITED FINANCIALS"). In addition, the
Company will prepare and cause to be audited financial statements as of and for
the period ended September 30, 1997 (the "SEPTEMBER 30 AUDITED FINANCIALS"),
pursuant to Section 6.4. The Audited Financials and the Unaudited Financials
have been prepared, and the September 30 Audited Financials will be prepared, in
accordance with GAAP applied on a basis consistent throughout the periods
indicated (except that the Unaudited Financials do not contain all the notes
that may be required by GAAP). The Audited Financials and the Unaudited
Financials present fairly, and the September 30 Audited Financials will present
fairly, the consolidated financial condition, consolidated operating results and
consolidated cash flows of the Company and any consolidated subsidiaries as of
the dates and during the periods indicated therein. The Company's unaudited
consolidated balance sheet as of September 30, 1997, included in Section 3.7 of
the Disclosure Schedule, shall be referred to as the "CURRENT BALANCE SHEET."
3.8 NO UNDISCLOSED LIABILITIES. Neither the Company nor any of the
Subsidiaries has any liability, indebtedness, obligation, expense, claim,
deficiency, guaranty or endorsement of any type, whether accrued, absolute,
contingent, matured, unmatured or other (whether or not required to be reflected
in financial statements in accordance with GAAP), (each, a "LIABILITY") other
than any such Liability which (i) is reflected on the Current Balance Sheet,
individually or in the aggregate, or (ii) has arisen in the ordinary course of
business consistent with industry practice which, together with all other
Liabilities not reflected on the Current Balance Sheet, does not exceed Fifty
Thousand Dollars ($50,000) in the aggregate.
3.9 NO CHANGES. Since September 30, 1997, there has not been, occurred or
arisen any:
(a) new customer contract or modification to existing contracts which
would result in a loss or increase to reserves for losses;
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company or any of the Subsidiaries;
(c) capital expenditure or commitment by the Company or any of the
Subsidiaries, exceeding Ten Thousand Dollars ($10,000) individually or Fifty
Thousand Dollars ($50,000) in the aggregate, except as disclosed in Section
3.9(c) of the Disclosure Schedule;
-18-
<PAGE>
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company or any of the Subsidiaries (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 or any of the
Subsidiaries;
(g) revaluation by the Company or any of the Subsidiaries of any of
their assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company capital stock or the capital stock of
any of the Subsidiaries or any direct or indirect redemption, purchase or other
acquisition by the Company of its capital stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company or any of the Subsidiaries 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 or any of the
Subsidiaries, except as disclosed in Section 3.9(i) of the Disclosure Schedule;
(j) any material agreement, contract, covenant, instrument, lease,
license or commitment to which the Company or any of the Subsidiaries is a party
or by which they or any of their assets are bound or any termination, extension,
amendment or modification of the terms of any such agreement, contract,
covenant, instrument, lease, license or commitment to which the Company or any
of the Subsidiaries are a party or by which they or any of their assets is
bound, except as disclosed in Section 3.9(j) of the Disclosure Schedule;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company or any of the Subsidiaries or any creation of any
security interest in such assets or properties, except as disclosed in Section
3.9(k) of the Disclosure Schedule;
(l) hiring of new employees, except as disclosed in Section 3.9(l) of
the Disclosure Schedule;
(m) loan by the Company or any of the Subsidiaries to any person or
entity, except as disclosed in Section 3.9(m) of the Disclosure Schedule, or
incurring by the Company or any of the Subsidiaries of any indebtedness,
guaranteeing by the Company or any of the Subsidiaries of any indebtedness,
issuance or sale of any debt securities of the Company or any of the
Subsidiaries 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 industry practice;
(n) waiver or release of any right or claim of the Company or any of
the Subsidiaries including any write-off or other compromise of any account
receivable of the Company or any of the Subsidiaries, except as disclosed in
Section 3.9(n) of the Disclosure Schedule;
-19-
<PAGE>
(o) the commencement of, or the notice or threat made to the Company
of any action, suit or other adverse legal proceeding of any nature pending
against the Company or any of the Subsidiaries, their respective properties or
any of their officers or directors, nor is the Company aware that any third
party is contemplating any such adverse legal proceeding;
(p) notice of any claim or potential claim made to the Company of
ownership by any person other than the Company or any of the Subsidiaries of the
Company Intellectual Property (as defined in Section 3.13) or of infringement by
the Company or any of the Subsidiaries of any other person's Intellectual
Property, nor is the Company aware that any third party is contemplating any
such claim or potential claim;
(q) issuance or sale, or contract to issue or sell, by the Company or
any of the Subsidiaries of any shares of Company Stock or the capital stock of
any of the Subsidiaries or securities exchangeable, convertible or exercisable
therefor, or any securities, warrants, options or rights to purchase any of the
foregoing, except for any exercise prior to the Effective Time of any of the
Company Options outstanding as of the date hereof and listed on Schedule 3.9(q).
(r) (i) selling or entering into any license agreement with respect
to the Company's intellectual property with any third party (other than
nonexclusive OEM, VAR or other distribution agreements terminable within 30 days
of providing notice and other than end user agreements, with each of the same
being entered into in the ordinary course of business consistent with industry
practice) or (ii) buying or entering into any license agreement with respect to
the intellectual property of any third party other than licenses of
shrink-wrapped software and other generally available commercial software;
(s) any other event or condition of any character not contemplated by
the foregoing paragraphs of this Section 3.9 that may have a Material Adverse
Effect on the Company, other than events or conditions affecting the Company's
industry generally;
(t) any other transaction by the Company not contemplated by the
foregoing paragraphs of this Section 3.9 which is not in the ordinary course of
business consistent with industry practice;
(u) agreement by the Company or any officer or employees thereof to
do any of the things described in the preceding clauses (a) through (t).
3.10 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
-20-
<PAGE>
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) As of the Effective Time the Company and each
Subsidiary will have prepared and timely filed all required federal, state,
local and foreign returns, estimates, information statements and reports
including any extensions (the "RETURNS") relating to any and all Taxes
concerning or attributable to the Company, each Subsidiary, or their
operations and such Returns are true and correct and have been completed in
accordance with applicable law.
(ii) As of the Effective Time the Company and each
Subsidiary (A) will have timely paid all Taxes it is required to pay and will
have timely withheld with respect to their employees all federal and state
income taxes, FICA, and other Taxes required to be withheld, and (B) will
have accrued on the Current Balance Sheet all Taxes attributable to the
periods covered by the Current Balance Sheet and will not have incurred any
liability for Taxes for the period prior to the Effective Time other than in
the ordinary course of business.
(iii) There is no Tax deficiency outstanding, assessed or, to
the Knowledge of the Company, proposed against the Company or any of the
Subsidiaries, nor has the Company or any of the Subsidiaries 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 or any of the Subsidiaries is presently in progress, nor has the
Company or any of the Subsidiaries been formally or informally notified of
any request for such an audit or other examination.
(v) Neither the Company nor any of the Subsidiaries has any
liabilities for unpaid federal, state, local and foreign Taxes which have not
been accrued or reserved against in accordance with GAAP on the Current
Balance Sheet, whether asserted or unasserted, contingent or otherwise, and
the Company and the Subsidiaries have no knowledge of any reasonable basis
for the assertion of any such liability attributable to the Company, the
Subsidiaries, their assets or operations. No Tax liabilities have been
incurred since the date of the Current Balance Sheet other than in the
ordinary course of business.
(vi) The Company and the Subsidiaries have made available to
Parent or its legal counsel, copies of all foreign, federal and state income
and all state sales and use Returns for the Company and the Subsidiaries
filed for all periods requested.
(vii) There are no Liens on the assets of the Company or any
of the Subsidiaries relating to or attributable to Taxes other than Liens for
Taxes not yet due and payable.
-21-
<PAGE>
(viii) Neither the Company nor any of the Subsidiaries has any
knowledge of any basis on which it is reasonable to anticipate the assertion
of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company or any of
the Subsidiaries.
(ix) None of the Company's or the Subsidiaries' assets are
treated as "tax-exempt use property" within the meaning of Section 168(h) of
the Code.
(x) Neither the Company nor any Subsidiary has a permanent
establishment in any country other than the United States, except for certain
Subsidiaries which have a permanent establishment in the United Kingdom and
the Netherlands.
(xi) Neither the Company nor any of the Subsidiaries has
filed any consent agreement under Section 341(f) of the Code or agreed to
have Section 341(f)(4) of the Code apply to any disposition of a subsection
(f) asset (as defined in Section 341(f)(4) of the Code) owned by the Company
or any of the Subsidiaries.
(xii) Neither the Company nor any of the Subsidiaries is a
party to any tax sharing, indemnification or allocation agreement, except as
disclosed in Section 3.10(b)(xii) of the Disclosure Schedule, nor does the
Company owe any amount under any such agreement. Neither the Company nor any
of the Subsidiaries has been, or been required to be, included in a
consolidated, combined or unitary Return that included an entity other than
the Company and the Subsidiaries.
(xiii) The Company's and each Subsidiary's 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.
(xiv) Neither the Company nor any of the Subsidiaries is, and
neither has been at any time, a "United States Real Property Holding
Corporation" within the meaning of Section 897(c)(2) of the Code.
(xv) No net operating losses of the Company have been or
should have been carried back to a prior year.
(xvi) The Company has all documentation required to support its
research and development and general business tax credits.
(c) EXECUTIVE COMPENSATION TAX. There is no contract, agreement,
plan or arrangement to which the Company or any of the Subsidiaries is a party
as of the date of this Agreement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company or any
of the Subsidiaries that, individually or collectively, could give rise to the
payment of any amount that would not be deductible pursuant to Sections 280G,
404 or 162(m) of the Code.
-22-
<PAGE>
3.11 RESTRICTIONS ON BUSINESS ACTIVITIES. There is no agreement
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company or any of the Subsidiaries is a party or otherwise binding
upon the Company or any of the Subsidiaries which has or is reasonably likely to
have the effect of prohibiting or impairing any business practice of the Company
or any of the Subsidiaries, any acquisition of property (tangible or intangible)
by the Company or any of the Subsidiaries or the conduct of business by the
Company or any of the Subsidiaries. Without limiting the foregoing, neither the
Company nor any of the Subsidiaries has entered into any agreement under which
the Company or any of the Subsidiaries is restricted from selling, licensing or
otherwise distributing any of its technology or products to or 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,
except as disclosed in Section 3.11 of the Disclosure Schedule.
3.12 TITLE OF PROPERTIES; ABSENCE OF LIENS AND ENCUMBRANCES; CONDITION OF
EQUIPMENT.
(a) Neither the Company nor any of the Subsidiaries owns any real
property, or ever owned any real property. Section 3.12(a) of the Disclosure
Schedule sets forth a list of all real property currently leased by the Company
or any of the Subsidiaries, 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 and each Subsidiary 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
Current Balance Sheet and except for Liens for Taxes not yet due and payable,
mechanics liens and other similar statutory liens, zoning and use restrictions
of general application 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) The items of equipment (the "EQUIPMENT") owned or leased by the
Company or any of the Subsidiaries and used in their respective businesses are,
(i) adequate for the conduct of the business of the Company or any of the
Subsidiaries as currently conducted and (ii) in good operating condition,
regularly and properly maintained, subject to normal wear and tear.
(d) The Company and each Subsidiary has possession of all material
files relating to current and former customers of the Company and the
Subsidiaries (the "CUSTOMER INFORMATION").
3.13 INTELLECTUAL PROPERTY.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
-23-
<PAGE>
"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 or
technology, know how, 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; (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 and all goodwill associated therewith throughout the
world; (vii) all databases and data collections and all rights therein
throughout the world; (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, all Web addresses and domain names; (ix)
any similar, corresponding or equivalent rights to any of the foregoing and (x)
all documentation related to any of the foregoing.
"COMPANY INTELLECTUAL PROPERTY" shall mean any Intellectual
Property that is (i) owned by or (ii) exclusively licensed to the Company or any
of the Subsidiaries.
"REGISTERED INTELLECTUAL PROPERTY" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or applications
related to trademarks; (iii) registered copyrights and applications for
copyright registration; (iv) any mask work registrations and applications to
register mask works; and (v) any other Company Intellectual Property that is the
subject of an application, certificate, filing, registration or other document
issued by, filed with, or recorded by, any state, government or other public
legal authority.
(b) Section 3.13(a) of the Disclosure Schedule lists all Registered
Intellectual Property owned by, or filed in the name of, the Company or any of
the Subsidiaries (the "COMPANY REGISTERED INTELLECTUAL PROPERTY") and lists any
proceedings or actions before any court, tribunal (including the United States
Patent and Trademark Office (the "PTO") or equivalent authority anywhere in the
world) related to any of the Company Registered Intellectual Property Rights.
(c) Each item of Company Intellectual Property, including all Company
Registered Intellectual Property listed in Section 3.13(a) of the Disclosure
Schedule, is free and clear of any Liens. The Company (i) is the exclusive owner
of all registered trademarks and trade names used in connection with the
operation or conduct of the business of the Company or any of the Subsidiaries
and has adequate rights to use all other trademarks and trade names used in that
regard, including the sale of any products or technology or the provision of any
services by the Company or any of the Subsidiaries and (ii) owns exclusively,
and has good title to, all copyrighted works that are the Company's or any of
the Subsidiaries' products or other works of authorship that the Company or any
of the Subsidiaries otherwise purport to own.
-24-
<PAGE>
(d) To the extent that any Intellectual Property has been developed
or created by any person other than the Company or any of the Subsidiaries for
which the Company or any of the Subsidiaries has, directly or indirectly, paid,
the Company has a written agreement with such person with respect thereto and
the Company thereby has obtained ownership of, and is the exclusive owner of,
all such Intellectual Property by operation of law or by valid assignment.
(e) Other than customer license agreements which are non-exclusive
and involve the nontransferable license of object code only, neither the Company
nor any of the Subsidiaries has transferred ownership of or granted any license
of or right to use or authorized the retention of any rights to use any
Intellectual Property that is or was Company Intellectual Property, to any other
person.
(f) The Company Intellectual Property constitutes all the
Intellectual Property used in and/or necessary to the conduct of the Company's
or any of the Subsidiaries' business as it currently is conducted, including,
without limitation, the design, development, manufacture, use (excepting (i)
customer specific data or customer logos, and (ii) other Intellectual Property
generally available from third party vendors on commercially reasonable terms,
such as testing software), import and sale of the products, technology and
services of the Company or any of the Subsidiaries (including products,
technology or services currently under development).
(g) Other than "shrink-wrap" and similar widely available commercial
end-user licenses, the contracts, licenses and agreements listed in
Section 3.13(g) of the Disclosure Schedule include all contracts, licenses and
agreements, to which the Company or any of the Subsidiaries is a party with
respect to any Intellectual Property of a third party. No person other than the
Company has ownership rights to improvements made by the Company in Intellectual
Property of a third party which has been licensed to the Company.
(h) Section 3.13(h) of the Disclosure Schedule lists all contracts,
licenses and agreements between the Company or any of the Subsidiaries and any
other person wherein or whereby the Company has agreed to, or assumed, any
obligation or duty to warrant, indemnify, reimburse, hold harmless, guaranty or
otherwise assume or incur any obligation or liability or provide a right of
rescission with respect to the infringement or misappropriation by the Company
or any of the Subsidiaries or such other person of the Intellectual Property of
any person other than the Company or any of the Subsidiaries.
(i) The operation of the business of the Company and the Subsidiaries
as each currently is conducted or is reasonably contemplated to be conducted,
including but not limited to the Company's and the Subsidiaries' design,
development, use, import, manufacture and sale of the products, technology or
services (including products, technology or services currently under
development) of the Company or any of the Subsidiaries does not infringe or
misappropriate the Intellectual Property of any
-25-
<PAGE>
person, violate the privacy or publicity rights of any person, or constitute
unfair competition or trade practices under the laws of any jurisdiction, and
neither the Company nor any of the Subsidiaries has received notice from any
person claiming that such operation or any act, product, technology or service
(including products, technology or services currently under development) of the
Company or any of the Subsidiaries infringes or misappropriates the Intellectual
Property of any person or constitutes unfair competition or trade practices
under the laws of any jurisdiction (nor is the Company aware of any basis
therefor).
(j) All necessary registration, maintenance and renewal fees have
been paid in connection with each item of the Company Registered Intellectual
Property and all necessary documents and certificates in connection with such
Company 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. In each case in which the Company has
purchased any Intellectual Property rights from any person, the Company has
obtained a valid and enforceable assignment sufficient to irrevocably transfer
all rights in such Intellectual Property (including the right to seek past and
future damages with respect to such Intellectual Property) to the Company and,
to the maximum extent provided for by, and in accordance with, applicable laws
and regulations, the Company has recorded each such assignment with the relevant
governmental authorities, including the PTO, the U.S. Copyright Office, or their
respective equivalents in any relevant foreign jurisdiction, as the case may be.
(k) There are no contracts, licenses or agreements between the
Company or any of the Subsidiaries and any other person with respect to Company
Intellectual Property under which there is any dispute known to the Company or
any of the Subsidiaries regarding the scope of such agreement, or performance
under such agreement including with respect to any material payments to be made
or received by the Company thereunder.
(l) Except as disclosed in Section 3.13(l) of the Disclosure
Schedule, to the Knowledge of the Company, no person is infringing or
misappropriating any material portion of the Company's Intellectual Property.
(m) The Company and each Subsidiary has taken commercially reasonable
steps that are required to protect the Company's and the Subsidiaries' rights in
confidential information and trade secrets of the Company and the Subsidiaries
or provided by any other person to the Company. Without limiting the foregoing,
the Company has, and enforces, a policy requiring each employee, consultant and
contractor who performs work on the development of Company Intellectual Property
or has access to material confidential information of the Company to execute
proprietary information, confidentiality and assignment agreements substantially
in the Company's standard forms, and all such current and former employees,
consultants and contractors of the Company and the Subsidiaries have executed
such an agreement.
(n) No Intellectual Property of the Company is subject to any
proceeding or outstanding decree, order, judgment, settlement agreement or
stipulation that restricts in any manner the use, transfer or licensing thereof
by the Company or may affect the validity, use or enforceability of such Company
Intellectual Property, except as disclosed in Section 3.13(n) of the Disclosure
Schedule.
(o) No (i) publication of the Company or any of the Subsidiaries,
(ii) material published or distributed by the Company or any of the Subsidiaries
or (iii) conduct or statement of the
-26-
<PAGE>
Company or any of the Subsidiaries constitutes obscene material, a defamatory
statement or material, false advertising.
3.14 AGREEMENTS, CONTRACTS AND COMMITMENTS.
(a) Neither the Company nor any of the Subsidiaries is a party to nor
is either bound by:
(i) 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, except as disclosed in Section 3.14(a)(i) of the Disclosure
Schedule,
(ii) 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, except as disclosed in Section 3.14(a)(ii) of the Disclosure
Schedule,
(iii) any fidelity or surety bond or completion bond,
(iv) any lease of personal property having a value
individually in excess of Ten Thousand Dollars ($10,000) or Fifty Thousand
Dollars ($50,000) in the aggregate, except as disclosed in Section 3.14(a)(iv)
of the Disclosure Schedule,
(v) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company or any of the Subsidiaries to
engage in any line of business or to compete with any person, except as
disclosed in Section 3.14(a)(v) of the Disclosure Schedule,
(vi) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of Ten Thousand Dollars
($10,000) individually or Fifty Thousand Dollars ($50,000) in the aggregate,
except as disclosed in Section 3.14(a)(vi) of the Disclosure Schedule,
(vii) 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 consistent with industry
practice,
(viii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit,
-27-
<PAGE>
(ix) any purchase order or contract for the purchase of
materials involving in excess of Ten Thousand Dollars ($10,000) individually or
Fifty Thousand Dollars ($50,000) in the aggregate, except as disclosed in
Section 3.14(a)(ix) of the Disclosure Schedule,
(x) any construction contracts, except as disclosed in
Section 3.14(a)(x) of the Disclosure Schedule,
(xi) any distribution, joint marketing or development
agreement, except as disclosed in Section 3.14(a)(xi) of the Disclosure
Schedule, or
(xii) any other agreement, contract or commitment that involves
Ten Thousand Dollars ($10,000) or more.
(b) The Company and each Subsidiary is in compliance with and 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, covenant, instrument, lease, license or commitment to which the
Company or any of the Subsidiaries is a party or by which it is bound referenced
in Section 3.14(a) (including the Disclosure Schedule sections referenced to
therein) (collectively 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, except
as otherwise disclosed in Section 3.14(b) of the Disclosure Schedule, to the
Knowledge of the Company is not subject to any default thereunder by any party
obligated to the Company or any of the Subsidiaries 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 or for such Contracts to remain in
effect without modification after the Closing. Following the Effective Time,
the Company or the Subsidiaries, as applicable, will be permitted to exercise
all of the Company's or the Subsidiaries', as applicable, rights under the
Contracts without the payment of any additional amounts or consideration other
than ongoing fees, royalties or payments which the Company or the Subsidiaries,
as applicable, would otherwise be required to pay had the transactions
contemplated by this Agreement not occurred.
3.15 INTERESTED PARTY TRANSACTIONS. To the Knowledge of the Company, no
officer, director or Stockholder of the Company or any of the Subsidiaries (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, material services, products or
technology that the Company or any of the Subsidiaries 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 or any of the Subsidiaries any
material goods or services or (iii) a beneficial interest in any material
Contract; provided, that ownership of no more than ten percent (10%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed an
"interest in any entity" for purposes of this Section 3.15.
-28-
<PAGE>
3.16 GOVERNMENTAL MATTERS.
(a) AUTHORIZATIONS AND PERMITS. Section 3.16(a) of the Disclosure
Schedule accurately lists each material consent, license, permit, grant or other
authorization issued to the Company or any of the Subsidiaries by a Governmental
Entity (i) pursuant to which the Company or any of the Subsidiaries currently
operate or hold any interest in any of their properties or (ii) which is
required for the operation of their business or the holding of any such interest
(herein collectively called "COMPANY AUTHORIZATIONS"). The Company
Authorizations are in full force and effect.
(b) GSA COMPLIANCE. Neither the Company nor any of the Subsidiaries
has any liability or exposure, whether known or unknown, accrued, absolute,
contingent, reserved or otherwise, related to compliance with the rules and
regulations established by the General Services Administration.
3.17 LITIGATION. Except as described in Section 3.17 of the Disclosure
Schedule, to the Company's Knowledge, there is no action, suit or other adverse
legal proceeding of any nature pending against the Company or any of the
Subsidiaries, their respective properties or any of their officers or directors,
nor, to the Knowledge of the Company or any of the Subsidiaries, is any such
action, suit or other adverse legal proceeding threatened nor to the Knowledge
of the Company is there any reasonable basis therefor. There is no
investigation pending against the Company or any of the Subsidiaries, their
respective properties or any of their officers or directors nor is there any
such investigation threatened or any reasonable basis therefor by or before any
Governmental Entity. No Governmental Entity has at any time challenged in
writing the legal right of the Company or any of the Subsidiaries to conduct its
operations as presently or previously conducted.
3.18 BALANCE SHEET ITEMS.
(a) ACCOUNTS RECEIVABLE. The Company has made available to Parent
a list of all accounts receivable of the Company and the Subsidiaries ("ACCOUNTS
RECEIVABLE") as of September 30, 1997 along with a range of days elapsed since
invoice. All Accounts Receivable of the Company arose in the ordinary course of
business, are carried at values determined in accordance with GAAP consistently
applied and are collectible except to the extent of reserves therefor set forth
in the Current 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.
(b) INVENTORIES. The Company has made available to Parent a list of
all parts on hand at September 30, 1997, valued at standard cost. The value of
all such parts, valued at standard cost, in the aggregate (net of any reserves
for inventory valuation), is not less than actual cost when purchased by a
variance greater than 2%, computed on a first in first out (FIFO) basis. It is
understood that any such adverse variance in excess of 2% shall, on a dollar for
dollar basis, constitute a General Loss for the purposes of Section 8.2. The
Closing Balance Sheet shall reflect sufficient reserves for any parts on hand or
on order which are in excess of the Company's requirements through September 30,
1998. The Company's reserves for inventory reflected on the September 30
Audited Financials are, and the Company's reserves for inventory reflected on
the Closing Balance Sheet will be, adequate in accordance with GAAP.
-29-
<PAGE>
(c) WARRANTY RESERVE. The Company has made available to Parent a
calculation of the warranty reserve included on the Current Balance Sheet. Such
reserve is adequate to cover expenses to be incurred after September 30, 1997
related to warranties (whether written or verbal) given to customers for
products sold prior to September 30, 1997. The Company is not aware of any
specific fault in products in warranty as of September 30, 1997 which would
require any separate and specific reserve in accordance with GAAP. Additionally
nothing has occurred between September 30, 1997 and the date hereof, nor shall
anything occur between the date hereof and the Closing Date, which would require
additional warranty reserves to be included in the Closing Balance Sheet.
(d) SALES RETURNS RESERVE. The Company has made available to Parent
a calculation of the sales returns reserve included in the Current Balance
Sheet. Such reserve is adequate to cover returns for proper sales, other than
returns made as part of sales of new equipment made by the Surviving Corporation
after the Effective Time. It is understood that any sales returns related to
revenue recognized prior to the Effective Time which are in excess of the sales
returns reserve included in the Closing Balance Sheet shall constitute a General
Loss on a dollar for dollar basis, pursuant to Section 8.2.
(e) FIXED ASSETS. The Company has made available to Parent a listing
of the fixed assets of the Company included in the Current Balance Sheet
together with the related accumulated depreciation for each asset. All such
assets as of such date were owned by the Company free from any encumbrances and
have not been subsequently sold.
3.19 MINUTE BOOKS. The minutes of the Company and the Subsidiaries made
available to counsel for Parent reasonably document all meetings of the Board of
Directors (or committees thereof) of the Company and the Subsidiaries and their
Stockholders or actions by written consent since the time of incorporation of
the Company.
3.20 ENVIRONMENTAL MATTERS.
(a) HAZARDOUS MATERIAL. Neither the Company nor any of the
Subsidiaries has: (i) operated any underground storage tanks at any property
that the Company or any of the Subsidiaries 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, PCBs,
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, whether or not as a
result of any action by the Company, 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.
-30-
<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
Effective Time, nor has the Company or any of the Subsidiaries 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 and each Subsidiary currently hold all
environmental approvals, permits, licenses, clearances and consents (the
"ENVIRONMENTAL PERMITS") necessary for the conduct of the Company's and the
Subsidiaries' Hazardous Material Activities, respectively, and other businesses
of the Company and the Subsidiaries 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 or any of the
Subsidiaries or concerning any land or improvement that the Company has at any
time owned, operated, occupied or leased. There is no fact or circumstance
which could involve the Company or any of the Subsidiaries in any environmental
litigation or impose upon the Company or any of the Subsidiaries any
environmental liability.
3.21 BROKERS; SCHEDULE OF FEES AND EXPENSES. Except as described in
Section 3.21 of the Disclosure Schedule, neither the Company nor any of the
Subsidiaries has incurred, nor will it incur directly or indirectly any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with the Agreement or any transaction contemplated hereby.
3.22 EMPLOYEE BENEFIT PLANS AND COMPENSATION.
(a) For purposes of this Section 3.22, the following terms shall have
the meanings set forth below:
(i) "AFFILIATE" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder.
(ii) "EMPLOYEE PLAN" shall refer to any plan, program, policy,
practice, contract, agreement or other arrangement providing for compensation,
bonuses, severance, termination pay, deferred compensation, pensions, profit
sharing, performance awards, stock or stock-related awards, fringe benefits or
employee benefits, whether formal or informal, written or otherwise, 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 or any Affiliate for the
-31-
<PAGE>
benefit of any "Employee" (as defined below), and pursuant to which the Company
or any Affiliate has or may have any material liability, contingent or
otherwise; and
(iii) "EMPLOYEE" shall mean any current, former, or retired
employee, consultant, officer, or director of the Company or any Affiliate.
(iv) "EMPLOYEE AGREEMENT" shall refer to each employment,
severance, consulting or similar agreement or contract between the Company or
any Affiliate and any Employee;
(b) Section 3.22(b) of the Disclosure Schedule contains an accurate
and complete list of each Employee Plan and each Employee Agreement. All
liabilities related to such plans have been properly reserved on the Current
Balance Sheet to the extent required by GAAP, except liabilities incurred since
the date of such balance sheet in the ordinary course of business. Except as
set forth in Section 3.22(b) of the Disclosure Schedule, the Company does not
have any plan or commitment, whether legally binding or not, to establish any
new Employee Plan or Employee Agreement, to modify any Employee Plan or Employee
Agreement (except to the extent required by law or to conform any such 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 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 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
Employee Plan; (v) the two most recent IRS determination letters and rulings
relating to Employee Plans and copies of all applications and correspondence to
or from the IRS or the Department of Labor ("DOL") delivered or received within
the five (5) year period preceding the Closing Date with respect to any Employee
Plan; (vi) if the Employee Plan is funded, the most recent annual and periodic
accounting of Employee Plan assets; (vii) all material agreements and contracts
relating to each Employee Plan, including but not limited to, administrative
service agreements, group annuity contracts and group insurance contracts; and
(viii) all communications material to any Employee or Employees, which have been
communicated or proposed within the three (3) year period preceding the Closing
Date, 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 or any of its
Affiliates.
(d) EMPLOYEE PLAN COMPLIANCE. (i) The Company and each Affiliate 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,
-32-
<PAGE>
statutes, orders, rules and regulations, including ERISA and the Code; (ii) each
Employee Plan intended to qualify under Section 401(a) of the Code and each
trust intended to qualify under Section 501(a) of the Code has either received a
favorable determination letter with respect to each such Plan from the IRS or
has remaining a period of time under applicable Treasury regulations or IRS
pronouncements in which to apply for such a determination letter and make any
amendments necessary to obtain a favorable determination; (iii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 or
407 of ERISA, has occurred with respect to any Employee Plan; (iv) 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; (v) each Employee Plan can be
amended, terminated or otherwise discontinued after the Effective Time in
accordance with its terms, without liability to the Company, Parent, Sub or any
Affiliate (other than liabilities specified therein and ordinary administration
expenses typically incurred in a termination event); (vi) there are no inquiries
or proceedings pending or, to the Knowledge of the Company, threatened by the
IRS or DOL with respect to any Employee Plan; and (vii) neither the Company nor
any Affiliate is subject to any penalty or tax with respect to any Employee Plan
under Section 502(i) or Section 502(l) of ERISA or Section 4975 through 4980 of
the Code.
(e) PENSION PLANS. Neither the Company nor any of its Affiliates
now, nor has it ever, maintained, established, sponsored, participated in, or
contributed to, any pension plan, within the meaning of Section 3(2) of ERISA,
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 or any of its
Affiliates contributed to or been requested to contribute to any multiemployer
plan within the meaning of Section 3(37) of ERISA.
(g) NO POST-EMPLOYMENT OBLIGATIONS. 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 neither the Company nor any of
its Affiliates has 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 COBRA OR HIPAA VIOLATION. Neither the Company nor any
Affiliate has, prior to the Effective Time and in any material respect, violated
any of (i) the health care continuation requirements of the Consolidated Omnibus
Budget Reconciliation Act of 1985, as amended, or any similar provisions of
state law applicable to its employees or (ii) the requirements of Health
Insurance Portability and Accountability Act of 1996.
(i) EFFECT OF TRANSACTION; OTHER SEVERANCE OR CONTINUATION
OBLIGATIONS. 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
-33-
<PAGE>
of severance pay or otherwise), acceleration, forgiveness of indebtedness,
vesting, distribution, increase in benefits or obligation to fund benefits with
respect to any Employee. Neither the Company nor any of its Affiliates has or
will have as of the Effective Time any other liability, whether known or
unknown, accrued, absolute, contingent, matured or other, to make any salary
continuation payment, severance payment or other similar obligation to any
Employee except as shall be provided on the Closing Balance Sheet.
(j) EMPLOYMENT MATTERS. The Company and each Affiliate (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 and (ii) is not liable for
any arrears of wages or any taxes or any penalty for failure to comply with any
of the foregoing.
(k) LABOR. No work stoppage or labor strike against the Company or
any of its Subsidiaries is pending, or to the Knowledge of the Company
threatened. The Company is not involved in or threatened with any labor
dispute, grievance, or litigation relating to labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if adversely determined,
would, individually or in the aggregate, result in liability to the Company,
Parent or Sub. Neither the Company nor any of its Affiliates has engaged in any
unfair labor practices which could, individually or in the aggregate, directly
or indirectly result in a liability to the Company, the Subsidiaries, Parent,
Sub or any Affiliate. Neither the Company nor any of its Affiliates, is
presently, nor have any of them 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 or any
of its Affiliates.
(l) NO INTERFERENCE OR CONFLICT. To the Knowledge of the Company, no
Stockholder, officer, employee or consultant of the Company is obligated under
any contract or agreement, or subject to any judgment, decree or order of any
court or administrative agency, that would interfere with such person's efforts
to promote the interests of the Company or any of the Subsidiaries or that would
interfere with the Company's or any of the Subsidiaries' business. Neither the
execution nor delivery of this Agreement, nor the carrying on of the Company's
or the Subsidiaries' business as presently conducted or proposed to be conducted
nor any activity of such officers, directors, employees or consultants in
connection with the carrying on of the Company's or any of the Subsidiaries'
business as presently conducted or proposed to be conducted, will, to the
Company's Knowledge, conflict with or result in a breach of the terms,
conditions or provisions of, or constitute a default under, any contract or
agreement under which any of such officers, directors, employees or consultants
is now bound.
(m) CONTRIBUTIONS. All contributions required to be made to each
Employee Plan have been timely and completely made. All such contributions are
fully deductible by the Company and its Affiliates for income tax purposes, such
deductions have not been challenged or disallowed by any government entity (nor
does the Company have any reason to believe that such deductions are not
allowable), and all amounts properly accrued as unpaid liabilities of the
Company and its Affiliates with respect to each Employee Plan for the current
plan year have been recorded on the Company's or the Affiliates' books and will
be reflected on the Closing Balance Sheet.
-34-
<PAGE>
(n) PAYMENTS. All benefits and other payments required to be
made under or by any Employee Plan or Employee Agreement have been completely
and timely paid.
(o) CODE SECTION 280G. Neither the Company nor any Subsidiaries
has any obligations to pay severance benefits that will arise solely as a result
of the transactions contemplated by this Agreement, except as described in
Section 3.22(o) of the Disclosure Schedule, and no benefit obligations have
given or will give rise to an "excess parachute payment," as such term is
defined in Section 280G of the Code.
(p) EMPLOYEE WELFARE BENEFIT PLANS; LIABILITIES FOR MEDICAL
CLAIMS. With respect to each Employee Plan which is a self-insured "employee
welfare benefit plan" (within the meaning of Section 3(1) or ERISA), no claims
have been made pursuant to any such Plan that have not yet been paid or
otherwise accrued on the Company's or the Affiliates' books and, to the
Company's Knowledge, no injury, sickness or other medical condition has been
incurred with respect to which claims may be made pursuant to any such Plan and
the Company and its Affiliates do not have and will not have as of the Effective
Time any liability, whether known or unknown, accrued, absolute, contingent,
matured or other, for any medical claims, other than any such claims to the
extent for which a reserve has been provided in the Current Balance Sheet.
(q) COMPLIANCE WITH WARN ACT. The Company and its Affiliates
have complied with all federal and state laws, rules and regulations related to
each termination of a former employee, including but not limited to, the Worker
Adjustment and Retraining Notification Act of 1988.
(r) FORMS 5500. The Company and its Affiliates have filed all
Forms 5500 in a timely manner, and such Forms were correctly prepared in all
material respects and are not subject to any late filing fees.
Solely for purposes of this Section 3.22, the term Company includes any
controlled group (within the meaning of Section 414(b) of the Code) of which the
Company is a member, all trades or businesses under common control (within the
meaning of Section 414(c) of the Code) of which the Company is a member, and all
affiliated service groups (within the meaning of Section 414(m) of the Code) of
which the Company is a member. The Company is not a member of any controlled
group, any trade or business under common control, or any affiliated service
group.
3.23 INSURANCE. Section 3.23 of the Disclosure Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company or any
Affiliate, as well as all premiums for such policies and loss runs for three
years. There is no claim by the Company or any Affiliate 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 and
its Affiliates are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). The Company has no Knowledge of any threatened termination of, or
premium increase with respect to, any of such policies.
-35-
<PAGE>
3.24 COMPLIANCE WITH LAWS. The Company and each Subsidiary 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.
3.25 WARRANTIES; INDEMNITIES. Neither the Company nor any of the
Subsidiaries has given any warranties or indemnities relating to products or
technology sold or services rendered by the Company, other than warranties or
indemnities given in the ordinary course of business consistent with industry
practice, in each case for a warranty period not exceeding fifteen (15) months
from date of end user purchase, except as disclosed in Section 3.25 of the
Disclosure Schedule.
3.26 COMPLETE COPIES OF MATERIALS. The Company has delivered or made
available true and complete copies of each document (or summaries of same)
within its possession or control that has been requested by Parent or its
counsel.
3.27 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by the Company (as modified by the Disclosure Schedule), nor any statement
made in any Schedule or certificate furnished by the Company pursuant to this
Agreement or (as such statement relates to the Company) furnished in or in
connection with documents mailed or delivered to the Stockholders for use in
soliciting their consent to this Agreement and the Merger contains or will
contain at the Effective Time, any untrue statement of a material fact, or omits
or will omit at the Effective Time 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.
3.28 INTERNEX ACCOUNT RECEIVABLE. The Company warrants that prior to
March 1, 1998 the Surviving Corporation shall have received payment in full of
the accounts receivable due from InterNex Information Services, Inc. as
reflected on the Closing Balance Sheet (the "InterNex Receivable"). Any
shortfall in the amount received by the Surviving Corporation shall constitute a
General Loss for the purposes of Section 8.2.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company that on the date hereof and
as of the Effective Time as though made at the Effective Time as follows:
4.1 ORGANIZATION, STANDING AND POWER. Each of Parent and Sub is a
corporation duly organized, validly existing and in good standing under the laws
of the State 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.
-36-
<PAGE>
4.2 PARENT CAPITAL STRUCTURE. As of the date hereof, Parent's
capitalization has not changed materially from the capitalization set forth in
the SEC documents (as defined below).
4.3 AUTHORITY. Each of Parent and Sub has all requisite corporate power
and authority to enter into this Agreement and the Related Agreements and to
consummate the transactions contemplated hereby and thereby. The execution and
delivery of this Agreement, any Related 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. This Agreement and
any Related Agreements to which Parent or Sub is a party have been duly executed
and delivered by Parent or Sub, as the case may be, and assuming the due
authorization, execution and delivery by the other parties hereto and thereto,
constitute the valid and binding obligation of Parent and Sub, as the case may
be, enforceable in accordance with their respective terms, subject to the laws
of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
4.4 NO CONFLICT. The execution and delivery of this Agreement and any
Related Agreements by the Parent and Sub do not, and, the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in Conflict with (i) any provision of the Articles of Incorporation or Bylaws of
Parent or Sub, (ii) any mortgage, indenture, lease, contract or other agreement
or instrument, permit, concession, franchise or license to which Parent or Sub
or their respective properties or assets are subject, or (iii) any judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Parent,
Sub or their respective properties or assets.
4.5 CONSENTS. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with any Governmental Entity or any third
party, including a party to any agreement with Parent or Sub (so as not to
create any Conflict), is required by or with respect to Parent or Sub in
connection with the execution and delivery of this Agreement and any Related
Agreements to which Parent or Sub is a party or the consummation of the
transactions contemplated hereby or thereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable securities laws, and
(ii) notification requirements of the HSR Act.
4.6 SEC DOCUMENTS; PARENT FINANCIAL STATEMENTS. Parent has furnished
the Company with a true and complete copy of its filings with the SEC of the
following: (i) its report on Form 10-K for the year ended December 31, 1996,
(ii) its reports on Form 10-Q for the quarters ended March 31, 1997 and June 30,
1997, (iii) its Annual Report to its stockholders covering the fiscal year ended
December 31, 1996, and (iv) its Proxy Statement to its stockholders for its 1997
annual meeting and will furnish the Company with a true and complete copy of all
filings with the SEC made prior to the Effective Time (collectively, the "SEC
DOCUMENTS"). As of their respective filing dates, the SEC Documents complied,
or as of any respective future filing date will comply, in all material respects
with the requirements of the 1933 Act and the Securities Exchange Act of 1934,
as amended, as applicable and none of the SEC Documents contained, or as of any
respective future filing date will contain, 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 made therein, in light of the circumstances in
which they were made, not misleading, except to the extent corrected by a
subsequently filed document with the SEC. The financial statements of
-37-
<PAGE>
Parent, including the notes thereto, included in the SEC Documents comply as to
form in all material respects with applicable accounting requirements and with
the published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles
consistently applied (except as may be indicated in the notes thereto) and
present fairly the financial position of Parent at the respective dates thereof
and of its operations and cash flows for the respective periods then ended
(subject, in the case of unaudited statements, to normal audit adjustments).
4.7 REPRESENTATIONS COMPLETE. None of the representations or warranties
made by Parent nor any statement made in any Schedule or certificate furnished
by Parent pursuant to this Agreement contains or will contain at the Effective
Time, any untrue statement of a material fact, or omits or will omit at the
Effective Time 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.
4.8 PARENT COMMON STOCK. The shares of Parent Common Stock to be issued
pursuant to this Agreement, when issued in accordance with this Agreement, will,
assuming the accuracy of the representations contained in Article III hereof, be
validly issued, fully paid and non-assessable.
ARTICLE V
CONDUCT PRIOR TO THE EFFECTIVE TIME
5.1 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 the Company's and the
Subsidiaries' business in the ordinary course consistent with reasonable
practice, to pay the debts and Taxes of the Company and the Subsidiaries when
due, to pay or perform other obligations when due, and, to the extent consistent
with such business, to use their reasonable commercial efforts consistent with
past practice and policies to preserve intact the Company's and the
Subsidiaries' present business organizations, keep available the services of the
Company's and the Subsidiaries' present officers and key employees and preserve
the Company's and the Subsidiaries' relationships with customers, suppliers,
distributors, licensors, licensees, and others having business dealings with the
Company, all with the goal of preserving unimpaired the Company's goodwill and
ongoing businesses at the Effective Time. The Company shall notify Parent at
reasonable times of any event or occurrence or emergency not in the ordinary
course of business of the Company or any of the Subsidiaries and at reasonable
times any material event involving the Company or any of the Subsidiaries.
Except as expressly contemplated by this Agreement, the Company shall not, and
shall not permit any of the Subsidiaries to, without the prior written consent
of Parent:
(a) Enter into any license agreement with respect to the
Intellectual Property of any person or entity except for licenses on standard
terms for commonly available software;
(b) License, sell or transfer to any person or entity any rights
in or to the Company Intellectual Property except for nonexclusive, or
terminable (within thirty (30) days of providing notice)
-38-
<PAGE>
OEM, VAR or other distribution arrangements or end user agreements entered into
in the ordinary course of business consistent with industry practice;
(c) Enter into or effect any material amendment to any Contract
pursuant to which any other party is granted marketing, distribution or similar
rights of any type or scope with respect to any products or technology of the
Company or any of the Subsidiaries;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate in any material way the terms of, any of
the Contracts set forth or described in the Disclosure Schedule;
(e) Commence or settle any litigation (in which case Parent's
consent will not be unreasonably withheld);
(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;
(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 or purchase any such shares
or other convertible securities; provided, however, that this Section 5.1(g)
shall not apply to securities issued upon exercise of any Company Options
outstanding on the date hereof or the Effective Time or conversion of Company
Preferred Stock outstanding on the date hereof;
(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 the
Company's and its Subsidiaries' business taken as a whole;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets;
(k) Incur any indebtedness for borrowed money other than
borrowings not exceeding Fifty Thousand Dollars ($50,000) in the aggregate or
guarantee any indebtedness for borrowed money 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;
-39-
<PAGE>
(m) Grant any severance or termination pay (i) to any director
or officer or (ii) to any other employee except in each case payments made
pursuant to written agreements outstanding on the date hereof and disclosed in
the Disclosure Schedule;
(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, except as part of the normal review process for persons below
the director and officer levels, or accelerate the vesting of any outstanding
Company Option or any Company Stock subject to vesting other than as currently
provided for in existing agreement;
(o) Revalue any of its assets, including without limitation
writing up the value of inventory or accounts receivable or writing off notes
other than in the ordinary course of business consistent with industry practice;
(p) Pay, discharge or satisfy, in an amount in excess of Ten
Thousand Dollars ($10,000) (in any one case) or Fifty Thousand Dollars ($50,000)
(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 consistent with
industry practice of liabilities reflected or reserved against in the Current
Balance Sheet;
(q) Make or change any material election or Return filing 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;
(s) Enter into any commitment or transaction not in the ordinary
course of business consistent with industry practice;
(t) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 5.1(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.
5.2 NO SOLICITATION. Until the earlier of the Effective Time or the
date of termination of this Agreement pursuant to the provisions of Section 9.1
hereof, the Company will not take (and the Company will use its best efforts to
ensure that none of the Company's officers, directors, agents, representatives
or affiliates take) directly or indirectly, any of the following actions (except
as contemplated by this Agreement in connection with the proposed Merger) with
any party other than Parent and its designees: (a) solicit, encourage,
initiate, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company or any of the Subsidiaries
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any portion of its capital stock (whether or not currently
outstanding) or assets, or assist or cooperate
-40-
<PAGE>
with any person to make any proposal with respect to any of the foregoing;
(b) disclose or provide any information with respect to the Company, its
business or properties, or afford access to its properties, books or records, to
any person, other than Parent, relating to the possible acquisition of the
Company or any of the Subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock (whether or not currently outstanding) or assets; (c) enter into an
agreement with any person, other than Parent, providing for the acquisition of
the Company or any of the Subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any portion of its capital
stock (whether or not currently outstanding) 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 portion of its or their capital stock or
assets (including any Subsidiary) by any person, other than by Parent. In
addition to the foregoing, if the Company receives prior to the earlier of the
Effective Time or the termination of this Agreement any offer, proposal, or
request 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.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 REGISTRATION.
(a) Within sixty (60) days following the Effective Time, but not
prior to December 21, 1997, the Parent shall prepare and file with the SEC a
Registration Statement on Form S-3 (the "S-3") to register under the 1933 Act,
all shares of Parent Common Stock issued in connection with the Merger. The
Company shall provide to Parent and its counsel for inclusion in the S-3, in
form and substance reasonably satisfactory to Parent and its counsel, such
information concerning the Company and its stockholders as Parent or its counsel
may reasonably request. Parent shall use its reasonable commercial efforts to
respond to any comments of the SEC, with the reasonable assistance and consent
of the Company, to have the S-3 declared effective under 1933 Act as promptly as
practicable after such filing, and to cause the prospectus incorporated therein
to be mailed to the Company's Stockholders who receive Parent Common Stock on
the Merger at the earliest practicable time after the S-3 has been declared
effective by the SEC. Whenever any event occurs which should be set forth in an
amendment or supplement to the S-3 filing, Parent or the Company, as the case
may be, shall promptly inform the other company of such occurrence and cooperate
in filing with the SEC such amendment or supplement. Except as provided by
Section 6.1(b), Parent shall use reasonable commercial efforts to maintain the
effectiveness of such S-3 until twelve (12) months following the Effective Time.
(b) Parent shall have the right, upon giving notice of the
exercise of such right (the "DELAY NOTICE") to each Stockholder of the Company
who receives Parent Common Stock, to require the Stockholders of the Company not
to sell any Parent Common Stock pursuant to the S-3 filed pursuant to Section
6.1 for a reasonable period (as determined in good faith by the Board of
Directors
-41-
<PAGE>
of Parent (the "BOARD")) from the date on which such notice is given, if (i)(A)
Parent is engaged in or proposes to engage in discussions or negotiations with
respect to, or has proposed or taken a substantial step to commence, or there
otherwise is pending, any merger, acquisition, other form of business
combination, divestiture, tender offer, financing or other transaction, or there
is an event or state of facts relating to Parent, in each case which is material
to Parent (as determined in good faith by the Board) (any such negotiation,
step, event or state of facts being herein called a "MATERIAL ACTIVITY"), (B) in
the reasonable judgment of the Board, after consultation with counsel,
disclosure of such Material Activity would be necessary or advisable so as to
permit the Parent Common Stock to be sold in compliance with applicable laws and
(C) such disclosure would, in the reasonable judgment of the Board, be adverse
to the interests of Parent, or (ii) the Board, in its reasonable judgment, deems
it necessary to file a post-effective amendment to the S-3 or to prepare a
supplement to, or otherwise amend, the form of prospectus contained therein; and
during any such period each Stockholder agrees not to sell any Parent Common
Stock under the S-3 for such period of time as the Board, upon the advice of
counsel, may in good faith deem advisable.
6.2 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 and the Subsidiaries' properties, books, contracts, commitments and
records; (b) all other information concerning the business, properties and
personnel (subject to restrictions imposed by applicable law) of the Company and
the Subsidiaries as Parent may reasonably request and (c) all key employees of
the Company and the Subsidiaries as may be identified by Parent. The Company
agrees to provide to Parent and its accountants, counsel and other
representatives copies of internal financial statements (including supporting
documentation) promptly upon request. Parent shall provide to the Company
copies of such publicly available information about Parent as the Company may
request and shall provide to the Company reasonable access to appropriate
members of its management in this regard. No information or knowledge obtained
in any investigation pursuant to this Section 6.2 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.
6.3 CONFIDENTIALITY. Each of the parties hereto hereby agrees that the
information obtained in any investigation pursuant to Section 6.2, or pursuant
to the negotiation and execution of this Agreement or the effectuation of the
transaction contemplated hereby shall be governed by the terms of the
Confidentiality Agreement effective as of October 26, 1997 between the Company
and Parent.
6.4 SEPTEMBER 30 AUDIT. As soon as practicable after September 30,
1997, the Company shall prepare and shall cause to be audited by Ernst & Young,
the financial statements (balance sheet, income statement, statement of cash
flows, statement of stockholders' equity) as of and for the period ended
September 30, 1997 (the "SEPTEMBER 30 AUDITED FINANCIALS") and shall deliver a
copy of such September 30 Audited Financials to Parent no later than December 3,
1997. The September 30 Audited Financials shall be prepared in accordance with
GAAP and shall (to the extent consistent with GAAP) be prepared consistent with
the basis of accounting and procedures and methods employed by the Company. The
Company and the independent auditors shall be available for periodic inquiry by
Parent and Price Waterhouse LLP (independent auditors to Parent), will answer
such questions as Parent or its independent auditors may have, make all work
papers available to Parent and its independent auditors,
-42-
<PAGE>
and provide such additional schedules and materials as Parent may reasonably
request in order to permit a meaningful review of the September 30 Audited
Financials. From and after the date hereof, and until the first post-closing
audited consolidated financial statements of Parent and the Surviving
Corporation are disclosed, the Company and its auditors will cooperate in all
reasonable respects with Parent and its auditors in the preparation of any
financial analysis or valuation regarding the Company and its assets and
properties deemed necessary or advisable by Parent in connection with the
Merger, provided that the Parent shall bear all reasonable costs of the
Company's auditors associated with preparation of any such financial analysis or
valuation.
6.5 EXPENSES. Whether or not the Merger is consummated, all 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 ("THIRD PARTY EXPENSES") 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, or, in the case of the
Company if the Merger is consummated, the Surviving Corporation; provided that,
in the event the Merger is consummated and Third Party Expenses of the Company
exceed an aggregate of One Million Eight Hundred Twenty Five Thousand Dollars
($1,825,000.00), such excess of Third Party Expenses shall be General Losses for
the purposes of Section 8.2.
6.6 PUBLIC DISCLOSURE. 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, subject, in the case of Parent, to Parent's obligation to comply with
applicable securities laws and the rules and regulations of the National
Association of Securities Dealers, Inc. or, in the Company's case, as necessary
to comply with stockholder approval and dissenters' rights requirements, and to
obtain third party consents (subject to appropriate confidentiality
restrictions).
6.7 CONSENTS. Company, Parent and Sub shall use commercially reasonable
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 the Disclosure Schedule) so as to preserve all
rights of, and benefits to, the Company or Parent (as the case may be)
thereunder.
6.8 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).
6.9 REASONABLE EFFORTS. Subject to the terms and conditions provided in
this Agreement, Company, Parent and Sub shall use commercially reasonable
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;
it being understood that in
-43-
<PAGE>
no event shall Parent 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, or significant assets or property of Parent or its
subsidiaries or affiliates or of the Company, 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.
As soon as may be reasonably practicable, Parent and the Company each shall file
with the United States Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice ("DOJ") Notification and
Report Forms relating to the transactions contemplated herein as required by the
HSR Act, as well as comparable pre-merger notification forms required by the
merger notification or control laws and regulations of any applicable
jurisdiction, as agreed to by the parties and each party shall have requested
early termination of the statutory waiting period. Parent and the Company each
shall promptly (a) supply the other with any information which may be required
in order to effectuate such submissions and filings and (b) supply any
additional information which reasonably may be required by the FTC, the DOJ or
other relevant government authority, to such government authority.
6.10 NOTIFICATION OF CERTAIN MATTERS. Each of the parties hereto, as the
case may be, shall give prompt notice to the other party 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 parties hereto, contained
in this Agreement to be untrue or inaccurate at or prior to the Effective Time
in any material respect and (ii) any failure of the parties hereto, as the case
may be, to comply with or satisfy in any material respect 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 6.10
shall not limit or otherwise affect any remedies available to the party
receiving such notice. No disclosure by the parties hereto pursuant to this
Section 6.10, however, shall be deemed to amend or supplement the Disclosure
Schedule or prevent or cure any misrepresentations, breach of warranty or breach
of covenant by the parties hereto.
6.11 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 reasonably be
necessary or desirable for effecting completely the consummation of this
Agreement and the transactions contemplated hereby.
6.12 EMPLOYEE BENEFITS. From and after the Effective Time (or from and
after January 1, 1998, for Employee Plans which shall have an effective date of
termination of December 31, 1997, pursuant to Section 6.16(a)), the employees of
the Surviving Corporation and their eligible dependents shall be entitled to
participate in all benefit plans of the Parent to the extent eligible under the
terms and conditions of such plans, excluding the Axel Johnson, Inc. Retirement
Plan, without application of any pre-existing condition provisions, proof of
insurability requirements, waiting periods, activity-at-work requirements or any
similar conditions or requirements that would delay commencement of
participation in, or limit the level of coverage under such benefit plans, and
shall be credited under Parent's welfare benefit plans with the amount of any
deductible or coinsurance and maximum out-of-pocket requirements satisfied in
whole or in part by each such employee of the Surviving Corporation and his or
her eligible dependents under the Company's welfare benefit plans as of the
Effective Time with respect to the plan year in which the Effective Time occurs.
Employees of the Surviving Corporation shall be credited under the Company's
401(k) Plan for time of service to the Company prior to the
-44-
<PAGE>
Effective Time (but from no earlier than December 20, 1993), to the extent
permitted by the safe harbor under Section 401(a)(4) of the Code; shall be
credited for time of service to the Company prior to the Effective Time (but
from no earlier than December 20, 1993) for the purposes of Parent's
vacation/paid-time-off policies; and shall be credited for eligibility under the
Axel Johnson, Inc. Thrift Plan and vesting thereunder (for contributions
purposes)for each month that they have contributed to the Company's 401(k) Plan,
but only up to a maximum of twelve (12) months. Employees of the Surviving
Corporation shall not be entitled to service credit for service to the Company
prior to the Effective Time, for any other plan or purpose.
6.13 BANK DEBT. The Company shall not incur any indebtedness to any bank,
any other financial institution, any other entity or any person without the
prior written consent of Parent.
6.14 VOTING AGREEMENTS. Contemporaneous with the execution of this
Agreement, the Principal Stockholders, as set forth on EXHIBIT C, are entering
into Voting Agreements, in substantially the form of EXHIBIT D.
6.15 AFFILIATE AGREEMENTS. Section 6.15 of the Disclosure Schedule sets
forth those persons who, in the Company's reasonable judgment, are or may be
"affiliates" of the Company within the meaning of Rule 145 (each such person an
"AFFILIATE") promulgated under the 1933 Act ("RULE 145"). The Company shall
provide Parent such information and documents as Parent shall reasonably request
for purposes of reviewing such list. The Company shall deliver or cause to be
delivered to Parent, concurrently with the execution of this Agreement (and in
any case prior to the Effective Time) from each of the Affiliates of the
Company, an executed Affiliate Agreement in the form attached hereto as
EXHIBIT E. Parent and Sub shall be entitled to place appropriate legends on the
certificates evidencing any Parent Common Stock to be received by such
Affiliates pursuant to the terms of this Agreement, and to issue appropriate
stop transfer instructions to the transfer agent for Parent Common Stock,
consistent with the terms of such Affiliate Agreements.
6.16 TERMINATION OF COMPANY'S EMPLOYEE PLANS SUBJECT TO ERISA.
(a) The Board of Directors of the Company shall terminate the
Company's 401(k) Plan (the "401(k) Plan") one or more days prior to the Closing.
The Board of Directors of the Company shall also terminate all such other
Employee Plans as Parent may specify prior to the Closing such that the
effective date of termination for all such other Employee Plans shall be
December 31, 1997. From and after appointment of appropriate new fiduciaries
under the 401(k) Plan and such other Employee Plans (collectively, the
"TERMINATED PLANS"), and at Parent's expense, Parent shall cause all reporting,
disclosure and other administrative and fiduciary duties to be fulfilled in
connection with the Terminated Plans including, without limitation, filing all
required final Forms 5500, providing summary annual and final reports to
Terminated Plan participants and beneficiaries, and responding to any Internal
Revenue Service (the "IRS") or other governmental agency inquiries. The
Stockholder Representative agrees that at least ten days prior to delivering any
written communications to any Terminated Plans participant with respect to such
Terminated Plans, he shall provide prior notice and a copy of such proposed
communication to Parent.
-45-
<PAGE>
(b) Within ninety (90) days following the Closing, Parent shall
(at the expense, including attorneys' fees, of the Company payable as a General
Loss under Section 8.2) prepare and file a request for a favorable determination
letter on the termination of the 401(k) Plan to be completed and filed with the
IRS. Parent shall also have the option to file under any IRS program to correct
any defect(s) in the 401(k) Plan, or any IRS or DOL program to correct the
filings of Forms 5500 which were required to be filed prior to the Effective
Time; PROVIDED, HOWEVER, that any and all filing fees, costs (including
attorneys' fees), penalties and interest relating to participation in such
programs shall be a General Loss under Section 8.2. Promptly upon receipt of an
IRS determination letter on the termination of the 401(k) Plan, Parent shall
deliver a copy of same to the Stockholder Representative.
6.17 SECTION 338 RELATED TAX. The amount of any and all Taxes actually
incurred by the Company as a result of the Section 338 Election shall be Special
Losses for the purposes of Section 8.2 except to the extent reserved on the
Current Balance Sheet.
6.18 PARENT AND SURVIVING CORPORATION MAINTENANCE OF DIRECTORS' AND
OFFICERS' LIABILITY INSURANCE. Prior to Closing, the Company shall obtain, and
pay all premiums for, Directors' and Officers' liability insurance coverage
(i.e., run-off coverage) for a term of six (6) years with coverage up to Two
Million Dollars ($2,000,000) on all officers and directors of the Company.
Parent shall bear the cost of such coverage up to an aggregate of Ten Thousand
Dollars ($10,000). The excess of the premiums over such amount shall be deemed
to be a General Loss for the purposes of Section 8.2 except to the extent
reserved on the Current Balance Sheet.
6.19 GOVERNMENT REVIEW. Without limiting the provisions of Section 3.10,
the parties agree that all costs related to any audit of the transaction
contemplated by this Agreement by the IRS, or any other review by any taxing
authority, together with any Taxes deemed payable as a result thereof shall be
deemed to be Special Losses for the purposes of Section 8.2 except to the extent
reserved on the Current Balance Sheet.
6.20 FINAL TAX RETURNS, AUDITS, ETC.. Subject to Parent's approval, the
Company shall cause Ernst & Young to prepare the final Tax Returns (but not the
IRS Form 8023-A which shall be the sole responsibility of Parent to prepare and
file) for the Company's taxable year ending as a result of the Section 338
Election. The internal and external costs of preparing such return as well as
any internal or external costs incurred by Parent (or, post-closing, by the
Surviving Corporation) in connection with any audit or examination of any Return
of the Company or any of the Subsidiaries (including in each case legal,
accounting and other costs of investigation and conduct of any defense) shall be
Special Losses for the purposes of Section 8.2 except to the extent reserved on
the Closing Balance Sheet.
6.21 COLLECTION OF INTERNEX ACCOUNT RECEIVABLE. Parent or Surviving
Corporation will use reasonable commercial efforts to collect the InterNex
Receivable prior to March 1, 1998.
-46-
<PAGE>
ARTICLE VII
CONDITIONS TO THE MERGER
7.1 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) CORPORATE APPROVALS. This Agreement and the Merger shall
have been approved and adopted by the requisite vote of the stockholders of the
Company.
(b) HART-SCOTT-RODINO. The applicable waiting period under the
HSR Act, including any extension of the initial such period as a result of any
governmental requests for further information or other governmental action,
shall have expired or been terminated early.
(c) 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 seeking any of the foregoing be pending or brought by an
administrative agency or commission or other governmental authority or
instrumentality, domestic or foreign; 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.
(d) LITIGATION. There shall be no action, suit, claim or
proceeding of any nature pending, or threatened in writing, against the Parent
or Sub, the Company or any Subsidiary that would preclude the consummation of
the Merger.
7.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF THE 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. There shall not
have been any material breach in the representations and warranties of Parent
and Sub in this Agreement or any failure on the part of Parent or Sub to have
performed and complied with all covenants and obligations of this Agreement in
all material respects required to be performed and complied with by it as of the
Effective Time, other than any such breach or breaches or failure or failures
which (individually or in the aggregate) are not reasonably likely to cause a
material adverse effect in the financial condition, business or prospects of
Parent.
(b) LEGAL OPINION. The Company shall have received a legal
opinion from Wilson Sonsini Goodrich & Rosati, legal counsel to Parent and Sub,
in form and substance reasonably acceptable to the Company and its counsel.
-47-
<PAGE>
(c) CERTIFICATE OF PARENT. The 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:
(1) all of the representations and warranties made by Parent and
Sub in this Agreement are true and correct in all material respects at the
Effective Time as though such representations and warranties were made at the
Effective Time; and
(2) all covenants and obligations of this Agreement to be
performed by the Parent on or prior to the Effective Time have been performed in
all material respects.
7.3 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. There shall not
have been any material breach or breaches of the representations and warranties
of the Company in this Agreement, or any failure of the Company or the Principal
Stockholders to have performed and complied with all covenants and obligations
of this Agreement in all material respects required to be performed and complied
with by it or them as of the Effective Time, other than any such breach or
breaches or failure or failures which (individually or in the aggregate) are
not reasonably likely to cause a Material Adverse Effect.
(b) CLAIMS. There shall not have occurred any claims against
the Company or any of its Subsidiaries (whether or not asserted in litigation)
which may materially and adversely affect the consummation of the transactions
contemplated hereby, or would have a Material Adverse Effect.
(c) NO MATERIAL ADVERSE EFFECT. There shall not have occurred
any Material Adverse Effect.
(d) THIRD PARTY CONSENTS. All government consents, waivers, and
approvals listed pursuant to Section 3.6 of the Disclosure Schedule, shall have
been obtained, and all other consents, waivers and approvals listed on
Section 3.6 of the Disclosure Schedule shall have been obtained where any such
failure to obtain consents, waivers and approvals would result in a Material
Adverse Effect.
(e) EMPLOYMENT AGREEMENTS. Employment agreements reasonably
acceptable to Parent and the following individuals shall have been duly executed
and delivered by Jon Fjeld and William Tao and shall be in full force and
effect.
(f) LEGAL OPINION. Parent shall have received a legal opinion
from Piper & Marbury LLC, legal counsel to the Company and the Subsidiaries, in
form and substance reasonably acceptable to Parent and its counsel.
-48-
<PAGE>
(g) 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 at the
Effective Time as though made at the Effective Time; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or prior to the Effective Time shall have been so
performed in all material respects.
(iii) the conditions set forth in Section 7.3 shall have been
met.
(h) AFFILIATE AGREEMENTS. Parent shall have received from each
of the Affiliates of the Company an executed Affiliate Agreement in the form of
EXHIBIT E hereto and such agreements shall remain valid and in effect.
(i) STOCKHOLDER'S REPRESENTATION STATEMENT. Each stockholder of
the Company entitled to receive Parent Common Stock in connection with the
Merger shall have delivered to Parent an executed Stockholder's Representation
Statement in the form attached hereto as EXHIBIT F.
(j) TERMINATION OF COMPANY'S EMPLOYEE PLANS SUBJECT TO ERISA.
The Company shall have properly terminated its 401(k) Plan and such other
Employee Plans as specified by Parent pursuant to Section 6.16.
(k) AUDITED FINANCIALS. The Company shall have delivered the
September 30, 1997 Audited Financials to Parent no later than December 3, 1997.
(l) REGULATION D. The issuance of Parent Common Stock in
connection with the Merger shall be exempt from the registration requirements of
the 1933 Act pursuant to Rule 506 of Regulation D promulgated under the 1933
Act.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROWS
8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) COMPANY.
(i) Except as provided in Section 8.1(a)(ii), the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall terminate on the first anniversary of the
Closing Date. The date of such termination shall hereinafter be referred to as
the "GENERAL TERMINATION DATE."
-49-
<PAGE>
(ii) The Company's representations, warranties and covenants in
Section 3.10 (Tax Matters), Section 3.22(o) (Code Section 280G), Section 6.17
(Section 338 Related Tax), Section 6.19 (Government Review) and Section 6.20
(Final Tax Returns, Audits, Etc.), shall terminate on the third anniversary of
the Closing Date. The date of such termination shall hereinafter be referred to
as the "SPECIAL TERMINATION DATE."
(b) PARENT AND SUB. 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 first anniversary of the
Closing Date.
8.2 ESCROW.
(a) ESCROW FUND. As security for the indemnity provided for in
this Section 8.2 hereof and by virtue of this Agreement, (i) the Stockholders of
the Company will be deemed to have received and deposited with the Escrow Agent
(as defined below) the Escrow Amount (of which the stock certificate
representing shares comprising part of the Escrow Amount shall be deposited in
the name of the Escrow Agent defined below). At or promptly following the
Effective Time, the Escrow Amount, without any act of any stockholder of the
Company, will be deposited with First Trust of California, National Association
(or other institution acceptable to Parent and the Company) as Escrow Agent (the
"ESCROW AGENT"), such deposits to constitute an escrow fund (the "ESCROW FUND")
to be governed by the terms set forth herein. 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 to be contributed on
behalf of each Stockholder shall be its Pro Rata Portion of the Escrow Amount.
The Company shall provide the Escrow Agent and Parent with a schedule which
lists, by stockholder, the portion of the Escrow Amount deemed to be contributed
by each stockholder consistent with the preceding sentence. Each Stockholder
shall be entitled to all voting rights with respect to the Parent Common Stock
held in escrow on its behalf. The Company and the Stockholders agree that the
Escrow Fund will be available to jointly and severally indemnify and hold Parent
and its officers, directors and affiliates harmless against all claims, losses,
liabilities, damages, deficiencies, shortfalls, costs and expenses, including
reasonable internal and third party attorneys', accountants' and other fees and
expenses of investigation and defense (hereinafter individually a "GENERAL LOSS"
and collectively "GENERAL LOSSES") incurred by Parent, its officers, directors,
or affiliates (including the Surviving Corporation) directly or indirectly as a
result of (i) any inaccuracy or breach of a representation or warranty of the
Company contained in this Agreement, (ii) any failure by the Company or any
Principal Stockholder to perform or comply with any covenant contained in this
Agreement, (iii) any and all Taxes (including, without limitation, additional
Taxes resulting from disallowed deductions under Section 404 of the Code),
losses, liabilities, claims, damages, obligations, payments, costs and expenses
including, without limitation, reasonable attorneys' fees, arising out of or
relating in any manner to the establishment, administration or termination of
any Benefit Plan on or prior to the Closing Date, including, without limitation,
loss of any deduction due to the disqualification of any such Benefit Plan, (iv)
any audit of or other legal proceeding
-50-
<PAGE>
relating to a Benefit Plan performed by any governmental unit, including but not
limited to the IRS and the U.S. Department of Labor, relating to periods prior
to the Closing Date, or in the case of an audit of or other legal proceeding
relating to the Company's 401(k) Plan, relating to any period or (v) any claim
or suit by any stockholder of the Company. Any General Losses incurred by
Parent, its officers, directors, or affiliates (including the Surviving
Corporation) directly or indirectly as a result of any inaccuracy or breach of a
representation, warranty or covenant of the Company contained in Section 3.10
(Tax Matters), Section 3.22(o) (Code Section 280G), Section 6.17 (Section 338
Related Tax), Section 6.19 (Government Review) or Section 6.20 (Final Tax
Returns, Audits, Etc.) of this Agreement shall be referred to for the purposes
of this Article VIII as a "Special Loss." The Escrow Fund shall be available to
compensate Parent and its affiliates for any General Loss (including any Special
Loss). The Company and the Stockholders agree that the Escrow Fund will also be
available to compensate Parent and its affiliates for any purchase price
adjustment arising out of or relating in any manner to Section 2.2 of this
Agreement (hereinafter individually a "PRICE ADJUSTMENT" and collectively "PRICE
ADJUSTMENTS"). The Stockholders shall not have any right of contribution from
the Company with respect to any Loss claimed by Parent. Parent may not receive
any amounts from the Escrow Fund unless and until Officer's Certificates (as
defined in Section 8.4 below) identifying a Loss have been delivered to the
Escrow Agent as provided in Section 8.4. At such time Parent shall be able to
recover from the Escrow Fund all of the Losses identified in Officer's
Certificates.
(b) ESCROW PERIOD; DISTRIBUTION UPON TERMINATION OF ESCROW
PERIOD. Subject to the following requirements, the Escrow Fund shall be in
existence immediately following the Effective Time and shall terminate at 11:59
p.m., California time, on the Special Termination Date (the "ESCROW PERIOD");
PROVIDED, HOWEVER, that the Escrow Period shall not terminate with respect to
any amount which, in the reasonable judgment of Parent, subject to the objection
of the Stockholder Representative (as defined in Section 8.10) and the
subsequent arbitration of the matter in the manner provided in Section 8.6, 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 notify Parent of its intent to deliver to the Stockholders the
remaining portion of the Escrow Fund not required to satisfy such claims.
Deliveries of amounts out of the Escrow Fund to the Stockholders pursuant to
this Section 8.2(b) shall be made in proportion to the respective original
contributions to the Escrow Fund (in dollar value and in the proportion of cash
versus shares).
(c) DISTRIBUTIONS PRIOR TO TERMINATION OF ESCROW PERIOD.
(i) The Escrow Agent shall be authorized to make the
following two distributions from the Escrow Fund prior to the termination of
the Escrow Period:
(A) Following the expiration of thirty (30) days
after the receipt by Parent and the Stockholder Representative of the Closing
Balance Sheet (the last day of such thirty (30) day period being referred to
as the "FINAL PRICE ADJUSTMENT DATE"), the Escrow Agent is authorized to
release from the Escrow Fund an amount out of the Escrow Fund equal to One
Million Dollars ($1,000,000) less the aggregate amount of all claims (whether
disputed or undisputed) made by Parent through the Final Price Adjustment
Date (the "INITIAL CLAIMS AMOUNT"), provided that the difference between One
Million Dollars ($1,000,000) and the Initial Claims Amount is greater than
zero. Parent
-51-
<PAGE>
shall provide to the Escrow Agent a certificate signed by an officer of Parent
specifying the Final Price Adjustment date prior to such date.
(B) Following the expiration of thirty (30) days after
the Parent files the federal tax return for the Surviving Corporation for its
1997 tax year, the Escrow Agent is authorized to release from the Escrow Fund an
amount out of the Escrow Fund equal to Three Hundred Thousand Dollars ($300,000)
less the aggregate amount by which the aggregate amount of all Taxes due by the
Surviving Corporation, as shown on such federal tax return and the Surviving
Corporation's state tax returns for the 1997 tax year, exceeds Six Hundred
Thousand Dollars ($600,000), provided that the difference between Three Hundred
Thousand Dollars ($300,000) and such excess is greater than zero. A copy of
such federal tax return and all state tax returns for the 1997 tax year shall be
provided to the Escrow Agent along with a certificate signed by an officer of
Parent specifying (I) such aggregate amount of Taxes and (II) the date that such
federal tax return for the 1997 tax year was filed with the IRS.
(C) Following the General Termination Date, the Escrow
Agent is authorized to release from the Escrow Fund an amount out of the Escrow
Fund equal to Two Million Dollars ($2,000,000) less the sum of (I) the amount by
which the Initial Claim Amount exceeded One Million Dollars ($1,000,000), if
any, and (II) the aggregate amount of all claims (whether disputed or
undisputed) made by Parent at any time from the Final Price Adjustment Date
through the General Termination Date, provided that the difference between Two
Million Dollars ($2,000,000) and the sum of (I) and (II) is greater than zero.
(ii) To the extent reasonably possible, all distributions
from the Escrow Fund pursuant to Section 8.2(c)(i) shall proportionately consist
of an amount of cash and an amount of Parent Common Stock (valued at the
Determined Price) in the same proportion as the amount of cash originally placed
in the Escrow Fund to the amount Parent Common Stock (valued at the Determined
Price) originally placed in the Escrow Fund on behalf of each Stockholder.
8.3 PROTECTION OF ESCROW FUND.
(a) DUTY TO SAFEGUARD. The Escrow Agent shall hold and
safeguard the Escrow Fund during the Escrow Period, in accordance with the terms
of this Agreement and shall hold and dispose of the Escrow Fund only in
accordance with the terms hereof. The Escrow Agent shall maintain the Escrow
Fund as a separate escrow account.
(b) SHARES IN ESCROW; DIVIDENDS. Parent Common Stock held in
the Escrow Fund shall be treated as outstanding on the books and records of the
Parent. 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
-52-
<PAGE>
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the Stockholders thereof.
8.4 CLAIMS UPON ESCROW FUND; THRESHOLD FOR LOSS RECOVERY. 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"):
(i) stating that Parent has incurred or paid or reasonably anticipates that it
may incur Losses (as applicable), and (ii) specifying in reasonable detail the
individual items of Losses (as applicable) included in the amount so stated, the
date each such item was incurred or paid, or the basis for any 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 8.2(b) (as applicable) and subject to Section 8.5,
promptly deliver to Parent out of the Escrow Fund, such amount of cash and
number of shares held in the Escrow Fund that shall have value equal to such
Losses (as applicable) and shall provide notice to the Principal Stockholders
of such claims; provided, however, that the Escrow Agent shall not make any such
payment out of the Escrow Fund, nor shall Parent be entitled to any recovery for
Losses unless and until Parent shall have claimed, under one or more Officers'
Certificates, Losses in excess of Two Hundred Thousand Dollars ($200,000) in the
aggregate, at which time Parent shall be entitled to recover only to the extent
Parent shall have incurred Losses which in the aggregate exceed Two Hundred
Thousand Dollars ($200,000) (as determined following completion of any dispute
resolution procedures provided herein). In addition, the following two
limitations shall apply to claims by Parent: (i) payments for claims based on
General Losses other than Special Losses shall be limited to an aggregate of Two
Million Dollars ($2,000,000) and (ii) after the General Termination Date, Parent
shall not be permitted to make any further claims against the Escrow Fund based
on Price Adjustments or General Losses other than Special Losses. Payments out
of the Escrow Fund shall be allocated between cash and shares based on the
proportion of cash and shares originally placed in the Escrow Fund. For the
purposes of determining the number of shares of Parent Common Stock placed into
or held in the Escrow Fund or to be delivered to Parent out of the Escrow Fund
as indemnity pursuant to this Section 8.4, the shares of Parent Common Stock
shall be valued at the Determined Price. At the Closing, Parent shall provide
the Escrow Agent with a certificate specifying the Determined Price and such
certificate may be relied upon by the Escrow Agent. Shares of Parent Common
Stock delivered to Parent out of the Escrow Fund shall be automatically canceled
without any further action by Parent.
8.5 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 from
the Escrow Fund pursuant to Section 8.4 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 shares of Parent Common Stock and cash from the
Escrow Fund in accordance with Section 8.6; PROVIDED, HOWEVER, 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.
-53-
<PAGE>
8.6 RESOLUTION OF CONFLICTS; ARBITRATION.
(a) GOOD FAITH AGREEMENT. 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 and shall be furnished to the Escrow Agent. The Escrow Agent shall be
entitled to rely on any such memorandum and distribute portions of the Escrow
Amount from the Escrow Fund in accordance with the terms thereof.
(b) ARBITRATION.
(i) If no such agreement can be reached after good faith
negotiation, either Parent or the Stockholder Representative may demand
arbitration of the matter and in either such event the matter shall be settled
by arbitration conducted by one arbitrator mutually agreeable to Parent and the
Stockholder Representative. In the event that within fifteen (15) days after
submission of any dispute to arbitration, Parent and the Stockholder
Representative cannot mutually agree on one arbitrator, Parent and the
Stockholder Representative shall each select one arbitrator, and the two
arbitrators so selected shall select a third arbitrator. The arbitrator or
arbitrators, as the case may be, 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 judgement of the arbitrator or
majority of the three arbitrators, as the case may be, to discover relevant
information from the opposing parties about the subject matter of the dispute.
The arbitrator or a majority of the three arbitrators, as the case may be, 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
competent court of law or equity, should the arbitrators or a majority of the
three arbitrators, as the case may be, determine that discovery was sought
without substantial justification or that discovery was refused or objected to
without substantial justification. The decision of the arbitrator or a majority
of the three arbitrators, as the case may be, 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. 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 arbitrator(s).
(ii) Judgment upon any award rendered by the arbitrator(s)
may be entered in any court having jurisdiction. Any such arbitration shall be
held under the commercial arbitration rules then in effect of the American
Arbitration Association in Santa Clara County, California. The arbitrator(s)
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.
8.7 THIRD-PARTY CLAIMS. In the event Parent becomes aware of a
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify the Stockholder Representative of such claim,
and the Stockholder Representative shall be entitled on behalf of the
-54-
<PAGE>
Stockholders, at their expense, to participate in, but not to determine or
conduct, the defense of such claim. Parent shall have the right to conduct the
defense of and settle any such claim. The Stockholder Representative hereby
provides its prior written consent to any such settlement and the Stockholders
shall have no power or authority to object under any provision of this
Article VIII to the amount of any corresponding claim by Parent against the
Escrow Fund with respect to such settlement.
8.8 ESCROW AGENT'S DUTIES.
(a) ESCROW INSTRUCTIONS. 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.
(b) COURT ORDERS. 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.
(c) ESCROW AGENT NOT LIABLE.
(i) 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.
(ii) 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.
(iii) In performing any duties under the Agreement, the
Escrow Agent shall not be liable to any party for damages, losses, or
expenses, except for 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
of 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,
-55-
<PAGE>
the Escrow Agent may consult with legal counsel in connection with Escrow
Agent's duties under this Agreement and shall be fully protected in any act
taken, suffered, or permitted by him/her 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.
(d) CONTROVERSY. 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 cash balances 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 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 cash balances held in escrow,
except all costs, 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.
(e) INDEMNIFICATION OF ESCROW AGENT. 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 Escrow Agent or incurred by Escrow Agent in connection with the
performance of his/her 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 negligence or willful misconduct.
(f) RESIGNATION; REPLACEMENT. The Escrow Agent may resign at
any time upon giving at least thirty (30) days written notice to the parties;
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 mutually agree on a successor escrow
agent within thirty (30) days after receiving such notice. If the parties 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. Upon
appointment of a successor escrow agent, the Escrow Agent shall be discharged
from any further duties and liability under this Agreement and thereafter the
successor escrow agent shall be deemed to be the Escrow Agent. Notwithstanding
anything else herein, any company into which the Escrow Agent may be merged or
with which it may be consolidated, or any company to whom Escrow Agent may
transfer a substantial amount of its escrow business, shall be the successor to
the Escrow Agent without the execution or filing of any paper or any further act
on the part of any of the parties to this Agreement anything herein to the
contrary notwithstanding.
-56-
<PAGE>
8.9 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
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 by Parent 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.
8.10 STOCKHOLDER REPRESENTATIVE.
(a) APPOINTMENT OF STOCKHOLDER REPRESENTATIVE. In the event
that the Merger is approved, effective upon such vote, and without further act
of any Stockholder, Jon Fjeld shall be appointed as agent and attorney-in-fact
(the "STOCKHOLDER REPRESENTATIVE") for each Stockholder, for and on behalf of
all Stockholders, to give and receive notices and communications, to authorize
payment to Parent of the appropriate portions of the Escrow Amount from the
Escrow Fund in satisfaction of claims by Parent, to object to such payments, 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 from time to time
upon not less than thirty (30) days prior written notice to Parent; PROVIDED,
HOWEVER, that the Stockholder Representative may not be removed unless holders
of a majority interest of the Escrow Fund agree to such removal and to the
identity of the substituted agent. Any vacancy in the position of Stockholder
Representative may be filled by approval of the holders of a majority in
interest of the Escrow Fund. No bond shall be required of the Stockholder
Representative, and the Stockholder Representative shall not receive
compensation for his or her services. Notices or communications to the
Stockholder Representative shall constitute notice to each of the Stockholders.
(b) STOCKHOLDER REPRESENTATIVE LIABILITY. 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 Stockholders on whose behalf the Escrow Amount was
contributed to the Escrow Fund shall severally indemnify the Stockholder
Representative and hold the Stockholder Representative 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 Stockholder Representative's duties
hereunder, including the reasonable fees and expenses of any legal counsel
retained by the Stockholder Representative.
(c) AUTHORITY OF STOCKHOLDER REPRESENTATIVE. A decision, act,
consent or instruction of the Stockholder Representative shall constitute a
decision of all Stockholders for whom a portion of the Escrow Amount otherwise
issuable to them are deposited in the Escrow Fund and shall be final, binding
and conclusive upon each of such Stockholders, and the Escrow Agent and Parent
may rely upon any such decision, act, consent or instruction of the Stockholder
Representative as being the decision,
-57-
<PAGE>
act, consent or instruction of each and every such 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.
8.11 MAXIMUM PAYMENTS; REMEDY. Except with respect to actual fraud or
intentional malfeasance, in the event that the transaction contemplated by this
Agreement shall be completed, the maximum amount Parent may recover from any
Stockholder pursuant to the indemnity set forth in Section 8.2 for Losses,
General Losses, Special Losses, Price Adjustments or otherwise as a result of
this Agreement or the transactions contemplated hereby shall be limited to
recovery by Parent of the aggregate amount such Stockholder has placed in the
Escrow Fund. In the event of actual fraud or intentional malfeasance by the
Company, the maximum amount Parent may recover in respect of Losses, General
Losses, Special Losses or Purchase Price Adjustments shall not be so limited.
No Stockholder shall have any right to contribution from the Company for any
claim by Parent. Except with respect to actual fraud or intentional
malfeasance, in the event that the transaction contemplated by this Agreement
shall be completed, the maximum amount that the Stockholders of the Company may
recover from Parent due to any claim arising out of this Agreement shall be
limited to One Million Dollars ($1,000,000).
8.12 BACKUP WITHHOLDING PENALTIES. The Company, Parent, Sub and
Stockholders acknowledge that payment of any principal or interest earned on the
Escrow Fund will be subject to backup withholding penalties unless a properly
completed IRS form W-8 or W-9 certification, as applicable, is submitted to the
Escrow Agent by each Stockholder, or other beneficiary of the Escrow Fund.
ARTICLE IX
TERMINATION; AMENDMENT AND WAIVER
9.1 TERMINATION. Except as provided in Section 9.2, 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 March 31, 1998, PROVIDED, HOWEVER, that the right to terminate this
Agreement under this Section 9.1(b)(i) shall not be available to any party whose
action or failure to act has been a principal cause of or resulted in the
failure of the Merger to occur on or before such date and such action or failure
to act constitutes a breach of this Agreement; (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;
-58-
<PAGE>
(c) by Parent 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 any of the Subsidiaries or (ii) compel Parent or the Company to
dispose of or hold separate all or a significant portion of the business or
assets of the Company 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 or breaches of the
representations, warranties, covenants or agreements contained in this Agreement
on the part of the Company or any Principal Stockholder which would be a failure
of conditions set forth in Section 7.3(a) and such breach or breaches have not
been cured within thirty (30) calendar days after written notice to the Company;
PROVIDED, HOWEVER, 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 their
respective obligations under this Agreement and there has been a material breach
or breaches of the representations, warranties, covenants or agreements
contained in this Agreement on the part of Parent or Sub which would be a
failure of the conditions set forth in Section 7.2(a) and such breach or
breaches have not been cured within fifteen (15) calendar days after written
notice to Parent; PROVIDED, HOWEVER, that no cure period shall be required for a
breach which by its nature cannot be cured;
(f) by Parent or Sub if 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 9.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
9.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement as provided in Section 9.1, 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 willful and knowing breaches of this
Agreement by such party prior to its termination; provided further that, in such
event the provisions of Sections 6.3, 6.5 and 6.6, Article X and this
Section 9.2 shall remain in full force and effect and survive any termination of
this Agreement.
9.3 AMENDMENT. This Agreement may be amended by the parties hereto at
any time by execution of an instrument in writing signed on behalf of Parent and
the Company provided that the written agreement of the Escrow Agent and the
Stockholder Representative shall be required to amend any portion of
Article VIII or Article X hereof or this Section 9.3.
9.4 EXTENSION; WAIVER. At any time prior to the Effective Time, Parent
and Sub, on the one hand, and the Company, on the other hand, 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
-59-
<PAGE>
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Except as set forth
in Section 8.10 hereof, 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 X
GENERAL PROVISIONS
10.1 NOTICES. Every notice, consent or other communication required or
permitted to be given by any provision of the Agreement shall be in writing.
Each such notice, shall be deemed to have been duly and properly given, served
or made for all purposes on the date such notice is (a) delivered personally,
(b) sent by registered or certified mail, return receipt requested, postage and
charges prepaid, or (c) transmitted by facsimile for which written confirmation
of successful transmission is received by the sending party, and addressed as
Follows:
(a) if to Parent or Sub, to:
Larscom Incorporated
1845 McCandless Drive
Milpitas, CA 95035
Attention: Paul A. Strudwick,
Vice President-Business Development
Telephone Number: (408) 941-4000
Facsimile Number: (408) 956-0998
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Jeffrey D. Saper, Esq.
Howard S. Zeprun, Esq.
Telephone Number: (415) 493-9300
Facsimile Number: (415) 493-6811
-60-
<PAGE>
(b) if to the Company to:
NetEdge Systems, Inc.
P.O. Box 14993
Research Triangle Park
North Carolina 27709-4993
Attention: President
Telephone Number: (919) 991-9000
Facsimile Number: (919) 991-9060
with a copy to:
Piper & Marbury LLP
1200 Nineteenth Street, N.W.
Washington, DC 20036
Attention: Jay Finkelstein, Esq.
Telephone Number: (202) 861-6315
Facsimile Number: (202) 223-2085
(c) If to the Stockholder Representative, to:
Jon Fjeld
c/o NetEdge Systems, Inc.
P.O. Box 14993
Research Triangle Park
North Carolina 27709-4993
(d) If to the Escrow Agent, to:
First Trust of California,
National Association
One California Street, 4th Floor
San Francisco, CA 94111
Telephone Number: (415) 273-4530
Facsimile Number: (415) 273-4593
Attention: Barbara L. Wise
10.2 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.
10.3 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
-61-
<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.
10.4 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, the Exhibits hereto,
the Nondisclosure Agreement, 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, including without
limitation the Summary Term Sheet between Parent and Company; (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 that Parent
and Sub may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates and successors.
10.5 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.
10.6 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.
10.7 GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the General Corporation Law of the State of
Delaware, with respect to matters of corporate law, and with respect to matters
other than corporate law will be governed by the laws of the State of California
as they apply to contracts entered into and wholly to be performed in California
by residents of such state.
10.8 RULES OF CONSTRUCTION. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefor, 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.
-62-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company, and, with respect to
Article VIII and Article X hereof only, the Escrow Agent and the Stockholder
Representative have caused this Agreement to be signed, all as of the date first
written above.
LARSCOM INCORPORATED
By: /s/ Deborah M. Soon
-------------------------------
(signature)
Name: Deborah M. Soon
-----------------------------
(print)
Title: President & CEO
----------------------------
LPH ACQUISITION CORP.
By: /s/ Deborah M. Soon
-------------------------------
(signature)
Name: Deborah M. Soon
-----------------------------
(print)
Title: President
----------------------------
NETEDGE SYSTEMS, INC.
By: /s/ Jon Fjeld
-------------------------------
(signature)
Name: Jon Fjeld
-----------------------------
(print)
Title: President & CEO
----------------------------
<PAGE>
STOCKHOLDER REPRESENTATIVE
By: /s/ Jon Fjeld
-------------------------------
(signature)
Name: Jon Fjeld
-----------------------------
(print)
Title: President & CEO, NetEdge
----------------------------
ESCROW AGENT:
FIRST TRUST OF CALIFORNIA,
NATIONAL ASSOCIATION
By: /s/ Barbara Wise
-------------------------------
(signature)
Name: Barbara Wise
-----------------------------
(print)
Title: Vice President
----------------------------
<PAGE>
AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN
OF REORGANIZATION DATED DECEMBER 2, 1997
THIS AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF REORGANIZATION DATED
DECEMBER 31, 1997 (the "Amendment No. 1") is made this 31st day of December,
1997 by and among Larscom Incorporated ("Larscom"), LPH Acquisition Corp. (the
"Sub") and NetEdge Systems, Inc. (the "Company") to that certain Agreement and
Plan of Reorganization executed December 2, 1997 by and among the parties hereto
(the "Agreement").
The parties whose signatures appear below hereby agree as follows:
SECTION 2.1 CERTAIN DEFINITIONS
1. Section 2.1(l) is hereby amended by deleting the second to last
sentence of such subsection in its entirety and inserting the following in lieu
thereof:
"The holders of Common Stock shall not be required to make any
contribution to the Escrow Amount (with respect only to the Common
Stock held by such holders) and the holders of the Class E Preferred
Stock, in aggregate, shall only be required to contribute 5% of the
aggregate consideration they are entitled to receive as Class E Merger
Consideration (with respect only to the Class E Preferred Stock held
by such holders). The remainder of the Escrow Amount shall be
contributed by the holders of Class A Preferred Stock, Class B
Preferred Stock, Class C Preferred Stock and Class D Preferred Stock
on a pro rata basis based on the number of shares of Company Common
Stock into which such shares of Class A Preferred Stock, Class B
Preferred Stock, Class C Preferred Stock, Class D Preferred Stock are
convertible immediately prior to the Effective Time."
2. Section 2.1(l) is hereby amended also by replacing the phrase "Six
Million Three Hundred Dollars ($6,300,000)" with the phrase "Six Million Three
Hundred Thousand Dollars ($6,300,000)."
SECTION 2.2 ADJUSTMENTS TO TOTAL MERGER CONSIDERATION
1. Section 2.2(c) is hereby amended by adding the following subsection:
"(iii) NET EXERCISE OF VESTED IN-THE-MONEY OPTIONS. In the event
that vested in-the-money options are exercised immediately prior to,
and contingent upon, the Effective Time on a cashless basis and the
Company makes payments to the holders of such vested in-the-money
options prior to or at the Effective Time for the in-the-money amount
of such options, the Total Merger Consideration shall be reduced by
the aggregate amount of such payments; PROVIDED, HOWEVER, that the
Closing Net Worth (which shall otherwise be decreased by the amount of
such payments) shall be adjusted upward by such amount for the
purposes of the "Net Worth Adjustment" pursuant to Section 2.2(c)(ii)
or Section 2.2(d)(ii), to prevent such payments by the Company from
being subtracted from the Total Merger Consideration more than once."
<PAGE>
2. Section 2.2(c)(i), ADJUSTMENT FOR BANK INDEBTEDNESS shall be replaced
in its entirety by the following:
"(i) ADJUSTMENT FOR BANK INDEBTEDNESS. In the event that the
Company shall have outstanding any indebtedness for money borrowed
from commercial banks and other financial institutions as well as
indebtedness for money borrowed from stockholders of the Company or
from Parent (any such indebtedness being referred to as "BANK DEBT"
and the aggregate amount of such indebtedness being referred to as
"TOTAL BANK DEBT"), in excess of Six Hundred Thousand Dollars
($600,000) (such excess being referred to as "EXCESS BANK DEBT") then
Parent shall be entitled to recover, as a Price Adjustment recoverable
from the Escrow Fund pursuant to the provisions of Article VIII, an
amount equal to the amount of such Excess Bank Debt."
3. Section 2.2(d)(i), ADJUSTMENT FOR BANK INDEBTEDNESS, shall be replaced
in its entirety by the following:
"(i) ADJUSTMENT FOR BANK INDEBTEDNESS. In the event that upon
completion of the Closing Balance Sheet it shall be determined that
the Company had outstanding as of the Effective Time Total Bank Debt
in excess of the Total Bank Debt determined at the Effective Time for
the purposes of Section 2.2(c)(i) (such excess being referred to as
the "ADDITIONAL EXCESS BANK DEBT"), then Parent shall be entitled to
recover, as a Loss recoverable from the Escrow Fund pursuant to the
provisions of Article VIII, an amount equal the Additional Excess Bank
Debt."
SECTION 8.2 ESCROW
1. Section 8.2(a) "Escrow Fund." is hereby amended by deleting the fourth
sentence in its entirety and inserting the following in lieu thereof:
"The holders of Common Stock shall not be required to make any
contribution to the Escrow Amount (with respect only to the Common
Stock held by such holders) and the holders of the Class E Preferred
Stock, in aggregate, shall only be required to contribute 5% of the
aggregate consideration they are entitled to receive as Class E Merger
Consideration (with respect only to the Class E Preferred Stock held
by such holders). The remainder of the Escrow Amount shall be
contributed by the holders of Class A Preferred Stock, Class B
Preferred Stock, Class C Preferred Stock and Class D Preferred Stock
on a pro rata basis based on the number of shares of Company Common
Stock into which such shares of Class A Preferred Stock, Class B
Preferred Stock, Class C Preferred Stock, Class D Preferred Stock are
convertible immediately prior to the Effective Time."
2. Section 8.2(b) "Escrow Period; Distribution upon Termination of Escrow
Period." is hereby amended by adding the following clause to the last sentence
in the paragraph:
";PROVIDED, HOWEVER, that the Class E Preferred Stockholders shall not
be entitled to receive any distributions therefrom unless and until
the holders of the Class A Preferred Stock, the holders of the Class B
Preferred Stock, the holders of the Class
<PAGE>
C Preferred Stock and the holders of the Class D Preferred Stock have
received 100% of their respective Pro Rata Portion contributed to the
Escrow Fund, in respect of their shares of Class A Preferred Stock,
Class B Preferred Stock, Class C Preferred Stock and Class D Preferred
Stock . The holders of the Common Stock shall not be entitled to
receive any distributions out of the Escrow Fund."
OTHER
1. This Amendment No. 1 is effective on the date first set forth above.
2. Except as amended hereby the Agreement remains in full force and
effect.
3. This Amendment may be executed in two or more counterparts, each of
which will be an original and all of which, when taken together, shall
constitute one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
to Agreement as of the day and year set forth above.
/s/ Deborah M. Soon /s/ Jon Fjeld
- ----------------------------------- -----------------------------------
LARSCOM INCORPORATED NETEDGE SYSTEMS, INC.
By: Deborah M. Soon, President By: Jon Fjeld, Chief Executive Officer
/s/ Ann Gadsby /s/ Jon Fjeld
- ----------------------------------- -----------------------------------
FIRST TRUST OF CALIFORNIA, N.A. STOCKHOLDER REPRESENTATIVE
By: Ann Gadsby, Vice President By: Jon Fjeld, Stockholder
Representative
<PAGE>
APPROVED BY: Bruce Horn
Chief Financial Officer
(408) 941-4000
CONTACT: Morgen-Walke Associates
Chris Danne, Alex Williamson, Douglas Sherk
(415) 296-7383
Vince Daniels, Josh Passman
FOR IMMEDIATE RELEASE (212) 850-5600 / (212) 850-5698
LARSCOM COMPLETES ACQUISITION OF NETEDGE SYSTEMS
MILPITAS, CALIFORNIA (December 31, 1997) - Larscom Incorporated (Nasdaq:
LARS) today announced the completion of its acquisition of NetEdge Systems,
Inc., a privately-held designer and manufacturer of ATM edge access
equipment, headquartered in Research Triangle Park, North Carolina.
The acquisition follows the announcement of a definitive purchase
agreement on December 3, 1997. Under the terms of the agreement, Larscom
elected to pay the purchase price for the transaction in cash rather than
through the issuance of Larscom stock. The purchase price will be paid with
approximately $26 million in cash and the assumption of liabilities in the
aggregate amount of approximately $9 million. The acquisition will be
accounted for as a purchase and will result in a substantial one-time charge
principally related to in-process research and development in the fourth
quarter.
NetEdge Systems offers an advanced ATM-based technology platform for
service providers to offer transparent or native LAN service, virtual private
networks, high-speed Internet access, and intranet/extranet services. A
single EDGE multiservice system installed in an office building, office park
or other carrier point of presence can aggregate and concentrate Ethernet,
Fast Ethernet, FDDI and Token Ring LAN traffic from multiple customers to a
high-speed ATM link. Each customer appears to have its own secure, private
virtual network, operating at the same native speed as its LAN. With
NetEdge's products, service providers can maximize service revenue from an
ATM link and end users can subscribe to a number of tailored, flexible
services. NetEdge's customers include domestic and international Network
Service Providers.
Larscom Incorporated is a leading provider of high-speed wide area
network (WAN) access equipment. Its customers include carriers, Internet
service providers, corporate users, and government agencies worldwide. The
Company's headquarters are located at 1845 McCandless Drive, Milpitas,
California 95035. For additional information, please visit the Company's web
site at www.larscom.com or phone (408) 941-4000.
-more-
<PAGE>
LARSCOM, 12/xx/97 Page 2
Any forward looking statements in this news release are based on current
expectations and beliefs and are subject to risks and uncertainties that
could cause the actual results to differ materially. Factors that could
cause actual results to differ materially include the following: acquisitions
involve significantly inherent risks and uncertainties, including the
difficulties associated with integrating the management, products and
technologies, sales force and other operations of the two companies. The
business of Larscom is subject to additional risks and uncertainties,
including without limitation those discussed in the Risk Factor sections of
Larscom's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and
other public filings.
####
