<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of Report (Date of earliest event reported): August 25, 1999
Commission File Number: 000-25269
VerticalNet, Inc.
(Exact name of registrant as specified in its charter.)
Pennsylvania 23-2815834
----------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
700 Dresher Road
Horsham, PA 19044
-----------------------------------------------------
(Address of principal executive offices,
including zip code)
Registrant's telephone number, including area code: (215) 328-6100
Not Applicable
------------------------------------------
(Former name or former
address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On August 25, 1999, VerticalNet, Inc. ("VerticalNet" or the "Company"), a
Pennsylvania Corporation, purchased all of the capital stock of Isadra, Inc.
("Isadra"), a California corporation, which is a development-stage company
located in Palo Alto, California, engaged principally in the development of
information technology that integrates sources from multiple locations without
regard to hardware and software environments. The Company's core technology is
software that integrates product data from multiple, distributed business
systems in real time; therefore, providing an electronic commerce infrastructure
for emerging Internet trading hubs.
The acquisition was consummated pursuant to an Agreement and Plan of Merger (the
"Agreement") dated May 24, 1999, by and among the Company, Isadra Acquisition
Corp., a California corporation, Isadra, Hugo Daley, an individual, Mustafa
Syed, an individual, and Tira Capital Management, Inc., as shareholders'
representative. The terms of the Agreement were negotiated on an arms-length
basis.
Pursuant to the Agreement, the consideration for the acquisition of Isadra was
$2.4 million in cash, 1,000,000 shares of VerticalNet common stock having a fair
market value of approximately $37.8 million (after taking into consideration
discounts for certain restrictions on the shares issued) and options to
purchase 40,763 shares of VerticalNet common stock valued at approximately $1.5
million. The transaction costs incurred by the Company are approximately
$250,000. The cash portion of the purchase price was financed by proceeds from
the initial public offering of the Company's common stock that was consummated
in February 1999.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Isadra:
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Shareholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(b) Pro Forma Financial Information.
Pro Forma Financial Statements (unaudited):
Basis of Presentation
Pro Forma Condensed Consolidated Balance Sheet
Pro Forma Consolidated Statements of Operations
Notes to Pro Forma Condensed Consolidated Financial
Statements
Exhibits
2.1 Agreement and Plan of Merger by and among VerticalNet,
Inc., Isadra Acquisition Corp., Isadra, Inc., Hugo
Daley, Mustafa Syed and Tira Capital Capital
Management, Inc., as shareholders' representative
23.1 Consent of Arthur Andersen LLP
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Isadra, Inc.:
We have audited the accompanying balance sheets of Isadra, Inc. (a California
corporation in the development stage) as of December 31, 1997 and 1998, and the
related statements of operations, shareholders' equity (deficit) and cash flows
for the years then ended and for the period from inception (November 3, 1993) to
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Isadra, Inc. as of December 31,
1997 and 1998, and the results of its operations and its cash flows for the
years then ended and for the period from inception (November 3, 1993) to
December 31, 1998, in conformity with generally accepted accounting principles.
Philadelphia, Pennsylvania
June 2, 1999
<PAGE>
ISADRA, INC.
------------
(a development-stage company)
BALANCE SHEETS
--------------
<TABLE>
<CAPTION>
December 31, June 30,
------------------------------
1997 1998 1999
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash $ 11,728 $ 106,235 $ 51,967
Accounts receivable 16,491 20,497 3,587
Prepaids and other current assets 6,835 23,066 15,282
----------- ----------- -----------
Total current assets 35,054 149,798 70,836
PROPERTY AND EQUIPMENT, net 163,981 149,511 180,334
OTHER ASSETS 23,630 36,445 38,445
----------- ----------- -----------
$ 222,665 $ 335,754 $ 289,615
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES:
Lines of credit $ 500,000 $ -- $ 390,000
Shareholder advances 80,000 91,300 4,243
Current portion of long-term debt -- 1,302 495,957
Convertible shareholder notes -- 478,000 --
Other convertible notes -- 50,000 --
Accounts payable 158,700 510,724 402,122
Deferred salaries 157,500 221,265 215,432
Other accrued expenses 125,490 89,551 89,383
----------- ----------- -----------
Total current liabilities 1,021,690 1,442,142 1,597,137
----------- ----------- -----------
LONG-TERM DEBT -- 493,609 2,143
----------- ----------- -----------
COMMITMENTS (Note 11)
SHAREHOLDERS' DEFICIT:
Convertible Preferred Stock, Series A, no par
value, 3,000,000 shares authorized, 1,500,000,
2,309,225, and 2,749,225 shares issued and
outstanding (liquidation value of $2,749,225 at
June 30, 1999) 1,475,655 2,284,880 2,724,880
Convertible Preferred Stock, Series B, no par
value, 5,000,000 shares authorized, 893,000
shares issued and outstanding at June 30, 1999
(liquidation value of $893,000 at June 30, 1999) -- -- 893,000
Common Stock, no par value, 20,000,000 shares
authorized, 6,736,000, 7,637,919, and 9,813,652
shares issued and outstanding 68,260 248,644 3,176,472
Additional paid-in capital 640,671 727,027 2,369,625
Deferred compensation -- -- (1,003,577)
Deficit accumulated during the development stage (2,983,611) (4,860,548) (9,470,065)
----------- ----------- -----------
Total shareholders' deficit (799,025) (1,599,997) (1,309,665)
----------- ----------- -----------
$ 222,665 $ 335,754 $ 289,615
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ISADRA, INC.
------------
(a development-stage company)
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
Period
Period from
from Inception Inception
Year Ended (November 3, Six Months Ended (November 3,
December 31, 1993) to June 30, 1993) to
--------------------------- --------------------------
December 31, June 30,
1997 1998 1998 1998 1999 1999
----------- ----------- ----------- --------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 32,869 $ 124,600 $ 157,469 $ 65,625 $ -- $ 157,469
----------- ----------- ----------- --------- ----------- -----------
COSTS AND EXPENSES:
Product development 937,894 854,546 2,050,347 398,397 575,893 2,626,240
Sales and marketing 321,288 361,737 709,525 128,850 257,561 967,086
General and
administrative 641,881 707,168 1,571,705 364,669 3,728,687 5,300,392
----------- ----------- ----------- --------- ----------- -----------
Total costs and
expenses 1,901,063 1,923,451 4,331,577 891,916 4,562,141 8,893,718
----------- ----------- ----------- --------- ----------- -----------
Operating loss (1,868,194) (1,798,851) (4,174,108) (826,291) (4,562,141) (8,736,249)
INTEREST EXPENSE, net
of interest income of
$7,013 in 1997 622,230 78,086 686,440 26,174 47,376 733,816
----------- ----------- ----------- --------- ----------- -----------
NET LOSS $(2,490,424) $(1,876,937) $(4,860,548) $(852,465) $(4,609,517) $(9,470,065)
=========== =========== =========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ISADRA, INC.
------------
(a development-stage company)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------
<TABLE>
<CAPTION>
Series A Convertible Series B Convertible
Preferred Stock Preferred Stock
-------------------------- --------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, INCEPTION (NOVEMBER 3, 1993) AND DECEMBER 31, 1995 -- $ -- -- $ --
Issuance of Common Stock to Founders for services rendered, valued at
$.01 per share -- -- -- --
Issuance of Common Stock to consultants for services rendered, valued
at $.01 per share -- -- -- --
Issuance of Common Stock at $.10 per share -- -- -- --
Issuance of Series A Convertible Preferred Stock at $1.00 per share,
net of offering costs of $24,345 1,260,000 1,235,655 -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 1,260,000 1,235,655 -- --
Issuance of Series A Convertible Preferred Stock at $1.00 per share 240,000 240,000 -- --
Collection of stock subscription receivable -- -- -- --
Cancellation of Common Stock shares previously issued for services
rendered -- -- -- --
Issuance of warrants to purchase Series A Convertible Preferred Stock
in connection with obtaining line of credit -- -- -- --
Issuance of warrant to purchase Series A Convertible Preferred Stock
to an officer in connection with obtaining line of credit -- -- -- --
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 1,500,000 1,475,655 -- --
Issuance of Series A Convertible Preferred Stock at $1.00 per share 625,000 625,000 -- --
Issuance of Series A Convertible Preferred Stock to an officer for
services rendered, valued at $1.00 per share 16,638 16,638 -- --
Issuance of Series A Convertible Preferred Stock to consultants for
services rendered, valued at $1.00 per share 78,600 78,600 -- --
Conversion of shareholder advance into shares of Series A Convertible
Preferred Stock at $1.00 per share 88,987 88,987 -- --
Issuance of Common Stock at $.20 per share -- -- -- --
Issuance of Common Stock to consultants for services rendered, valued
at $.20 per share -- -- -- --
Exercise of warrant to purchase Common Stock at $.20 per share -- -- -- --
Exercise of options to purchase Common Stock at $.20 per share -- -- -- --
Charge for Common Stock to be issued to officers and employees for
services rendered, valued at $.20 per share -- -- -- --
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- -- --
Issuance of warrants to purchase Common Stock in connection with
issuance of note payable to Investor -- -- -- --
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- -- --
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 2,309,225 2,284,880 -- --
Conversion of notes into Series A Convertible Preferred Stock at $1.00
per share 440,000 440,000 -- --
Conversion of shareholder notes into Series B Convertible Preferred
Stock at $1.00 per share -- -- -- --
Conversion of interest on note payable to Investor into shares of
Common Stock at $.20 per share -- -- 893,000 893,000
Conversion of shareholder advance into shares of Common Stock at $.20
per share -- -- -- --
Issuance of Common Stock to officers and employees for services
rendered, valued at $.20-$2.75 per share -- -- -- --
Issuance of Common Stock to consultants for services rendered, valued
at $.20-$2.75 per share -- -- -- --
Exercise of options to purchase Common Stock at $.20 per share -- -- -- --
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- -- --
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- -- --
Deferred compensation related to options issued to officers and
employees -- -- -- --
Amortization of deferred compensation -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 (unaudited) 2,749,225 $ 2,724,880 893,000 $ 893,000
============ ============ ============ ============
<CAPTION>
Common Stock
-------------------------
Additional
Paid-in Deferred
Shares Amount Capital Compensation
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, INCEPTION (NOVEMBER 3, 1993) AND DECEMBER 31, 1995 -- $ -- $ -- $ --
Issuance of Common Stock to Founders for services rendered, valued at
$.01 per share 6,176,000 61,760 -- --
Issuance of Common Stock to consultants for services rendered, valued
at $.01 per share 950,000 9,500 -- --
Issuance of Common Stock at $.10 per share 10,000 1,000 -- --
Issuance of Series A Convertible Preferred Stock at $1.00 per share,
net of offering costs of $24,345 -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 7,136,000 72,260 -- --
Issuance of Series A Convertible Preferred Stock at $1.00 per share -- -- -- --
Collection of stock subscription receivable -- -- -- --
Cancellation of Common Stock shares previously issued for services
rendered (400,000) (4,000) 4,000 --
Issuance of warrants to purchase Series A Convertible Preferred Stock
in connection with obtaining line of credit -- -- 86,980 --
Issuance of warrant to purchase Series A Convertible Preferred Stock
to an officer in connection with obtaining line of credit -- -- 529,691 --
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- 20,000 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 6,736,000 68,260 640,671 --
Issuance of Series A Convertible Preferred Stock at $1.00 per share -- -- -- --
Issuance of Series A Convertible Preferred Stock to an officer for
services rendered, valued at $1.00 per share -- -- -- --
Issuance of Series A Convertible Preferred Stock to consultants for
services rendered, valued at $1.00 per share -- -- -- --
Conversion of shareholder advance into shares of Series A Convertible
Preferred Stock at $1.00 per share -- -- -- --
Issuance of Common Stock at $.20 per share 250,000 50,000 -- --
Issuance of Common Stock to consultants for services rendered, valued
at $.20 per share 234,019 46,804 -- --
Exercise of warrant to purchase Common Stock at $.20 per share 375,000 75,000 -- --
Exercise of options to purchase Common Stock at $.20 per share 42,900 8,580 -- --
Charge for Common Stock to be issued to officers and employees for
services rendered, valued at $.20 per share -- -- 18,000 --
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- 12,000 --
Issuance of warrants to purchase Common Stock in connection with
issuance of note payable to Investor -- -- 30,204 --
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- 19,385 --
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- 6,767 --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 7,637,919 248,644 727,027 --
Conversion of notes into Series A Convertible Preferred Stock at $1.00
per share -- -- -- --
Conversion of shareholder notes into Series B Convertible Preferred
Stock at $1.00 per share -- -- -- --
Conversion of interest on note payable to Investor into shares of
Common Stock at $.20 per share 160,000 32,000 -- --
Conversion of shareholder advance into shares of Common Stock at $.20
per share 660,333 132,067 -- --
Issuance of Common Stock to officers and employees for services
rendered, valued at $.20-$2.75 per share 1,101,750 2,606,749 (18,000) --
Issuance of Common Stock to consultants for services rendered, valued
at $.20-$2.75 per share 218,450 149,972 (32,000) --
Exercise of options to purchase Common Stock at $.20 per share 35,200 7,040 -- --
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- 520,348 --
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- 25,000 --
Deferred compensation related to options issued to officers and
employees -- -- 1,147,250 (1,147,250)
Amortization of deferred compensation -- -- -- 143,673
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1999 (unaudited) 9,813,652 $ 3,176,472 $ 2,369,625 $ (1,003,577)
============ ============ ============ ============
<CAPTION>
Deficit
Accumulated Total
Stock During the Shareholders'
Subscription Development Equity
Receivable Stage (Deficit)
------------ ------------ ------------
<S> <C> <C> <C>
BALANCE, INCEPTION (NOVEMBER 3, 1993) AND DECEMBER 31, 1995 $ -- $ -- $ --
Issuance of Common Stock to Founders for services rendered, valued at
$.01 per share -- -- 61,760
Issuance of Common Stock to consultants for services rendered, valued
at $.01 per share -- -- 9,500
Issuance of Common Stock at $.10 per share -- -- 1,000
Issuance of Series A Convertible Preferred Stock at $1.00 per share,
net of offering costs of $24,345 (110,000) -- 1,125,655
Net loss -- (493,187) (493,187)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1996 (110,000) (493,187) 704,728
Issuance of Series A Convertible Preferred Stock at $1.00 per share -- -- 240,000
Collection of stock subscription receivable 110,000 -- 110,000
Cancellation of Common Stock shares previously issued for services
rendered -- -- --
Issuance of warrants to purchase Series A Convertible Preferred Stock
in connection with obtaining line of credit -- -- 86,980
Issuance of warrant to purchase Series A Convertible Preferred Stock
to an officer in connection with obtaining line of credit -- -- 529,691
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- 20,000
Net loss -- (2,490,424) (2,490,424)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 -- (2,983,611) (799,025)
Issuance of Series A Convertible Preferred Stock at $1.00 per share -- -- 625,000
Issuance of Series A Convertible Preferred Stock to an officer for
services rendered, valued at $1.00 per share -- -- 16,638
Issuance of Series A Convertible Preferred Stock to consultants for
services rendered, valued at $1.00 per share -- -- 78,600
Conversion of shareholder advance into shares of Series A Convertible
Preferred Stock at $1.00 per share -- -- 88,987
Issuance of Common Stock at $.20 per share -- -- 50,000
Issuance of Common Stock to consultants for services rendered, valued
at $.20 per share -- -- 46,804
Exercise of warrant to purchase Common Stock at $.20 per share -- -- 75,000
Exercise of options to purchase Common Stock at $.20 per share -- -- 8,580
Charge for Common Stock to be issued to officers and employees for
services rendered, valued at $.20 per share -- -- 18,000
Charge for Common Stock to be issued to consultants for services
rendered, valued at $.20 per share -- -- 12,000
Issuance of warrants to purchase Common Stock in connection with
issuance of note payable to Investor -- -- 30,204
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- 19,385
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- 6,767
Net loss -- (1,876,937) (1,876,937)
------------ ------------ ------------
BALANCE, DECEMBER 31, 1998 -- (4,860,548) (1,599,997)
Conversion of notes into Series A Convertible Preferred Stock at $1.00
per share -- -- 440,000
Conversion of shareholder notes into Series B Convertible Preferred
Stock at $1.00 per share -- -- 893,000
Conversion of interest on note payable to Investor into shares of
Common Stock at $.20 per share -- -- 32,000
Conversion of shareholder advance into shares of Common Stock at $.20
per share -- -- 132,067
Issuance of Common Stock to officers and employees for services
rendered, valued at $.20-$2.75 per share -- -- 2,588,749
Issuance of Common Stock to consultants for services rendered, valued
at $.20-$2.75 per share -- -- 117,972
Exercise of options to purchase Common Stock at $.20 per share -- -- 7,040
Issuance of options to purchase Common Stock to consultants for
services rendered -- -- 520,348
Deemed capital contribution for forgiveness of interest on note
payable to Investor -- -- 25,000
Deferred compensation related to options issued to officers and
employees -- -- --
Amortization of deferred compensation -- -- 143,673
Net loss -- (4,609,517) (4,609,517)
------------ ------------ ------------
BALANCE, JUNE 30, 1999 (unaudited) $ -- $ (9,470,065) $ (1,309,665)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ISADRA, INC.
------------
(a development-stage company)
STATEMENTS OF CASH FLOWS
------------------------
<TABLE>
<CAPTION>
Period from Period from
Inception Inception
Year Ended (November 3, Six Months Ended (November 3,
December 31, 1993) to June 30, 1993) to
-------------------------- ------------------------
December 31, June 30,
1997 1998 1998 1998 1999 1999
----------- ----------- ----------- ---------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $(2,490,424) $(1,876,937) $(4,860,548) $(852,465) $(4,609,517) $(9,470,065)
Adjustments to reconcile net loss to net
cash used in operating activities-
Depreciation and amortization 42,110 51,267 98,879 23,727 26,709 125,588
Amortization of debt discount and
deferred financing costs 616,671 20,874 637,545 2,056 3,796 641,341
Amortization of deferred compensation -- -- -- -- 143,673 143,673
Issuance of Convertible Preferred
Stock for services rendered -- 95,238 95,238 95,238 -- 95,238
Issuance of Common Stock for
services rendered -- 46,804 118,064 46,804 2,706,721 2,824,785
Charge for Common Stock to be
issued for services rendered 20,000 30,000 50,000 9,000 -- 50,000
Issuance of options to purchase
Common Stock for services rendered -- 19,385 19,385 17,535 520,348 539,733
Deemed capital contribution for
interest forgiven on note payable to
Investor -- 6,767 6,767 -- 25,000 31,767
Change in assets and liabilities-
Accounts receivable (12,108) (4,006) (20,497) 1,994 16,910 (3,587)
Prepaids and other assets 21 (29,046) (59,511) (15,523) 5,784 (53,727)
Accounts payable 123,604 352,024 510,724 72,073 (76,602) 434,122
Deferred salaries 157,500 63,765 221,265 (10,337) (5,833) 215,432
Other accrued expenses 114,796 (35,939) 89,551 25,364 (168) 89,383
----------- ----------- ----------- ---------- ----------- -----------
Net cash used in operating
activities (1,427,830) (1,259,804) (3,093,138) (584,534) (1,243,179) (4,336,317)
----------- ----------- ----------- ---------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property and equipment (89,954) (32,002) (243,595) (25,481) (57,532) (301,127)
----------- ----------- ----------- ---------- ----------- -----------
FINANCING ACTIVITIES:
Net borrowings (repayments) under
line of credit 500,000 (500,000) -- (500,000) 390,000 390,000
Net proceeds from shareholder advances 77,700 100,287 180,287 18,287 45,010 225,297
Proceeds from issuance of
convertible shareholder notes -- 478,000 478,000 -- 415,000 893,000
Proceeds from issuance of other
convertible notes -- 50,000 50,000 -- 390,000 440,000
Proceeds from long-term debt -- 500,000 500,000 500,000 -- 500,000
Payments on long-term debt -- (554) (554) -- (607) (1,161)
Proceeds from issuance of
Convertible Preferred Stock, net of
related offering costs 240,000 625,000 1,990,655 489,000 -- 1,990,655
Collection of stock subscription
receivable 110,000 -- 110,000 -- -- 110,000
Proceeds from issuance of Common Stock -- 50,000 51,000 16,000 -- 51,000
Proceeds from exercise of Common
Stock warrants -- 75,000 75,000 75,000 -- 75,000
Proceeds from exercise of Common
Stock options -- 8,580 8,580 -- 7,040 15,620
----------- ----------- ----------- ---------- ----------- -----------
Net cash provided by financing
activities 927,700 1,386,313 3,442,968 598,287 1,246,443 4,689,411
----------- ----------- ----------- ---------- ----------- -----------
INCREASE (DECREASE) IN CASH (590,084) 94,507 106,235 (11,728) (54,268) 51,967
CASH, BEGINNING OF PERIOD 601,812 11,728 -- 11,728 106,235 --
----------- ----------- ----------- ---------- ----------- -----------
CASH, END OF PERIOD $ 11,728 $ 106,235 $ 106,235 $ -- $ 51,967 $ 51,967
=========== =========== =========== ---------- =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 11,739 $ 11,641 $ 23,380 $ 11,233 $ 548 $ 23,928
=========== =========== =========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
ISADRA, INC.
------------
(a development-stage company)
NOTES TO FINANCIAL STATEMENTS
-----------------------------
(Information as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 is unaudited)
--------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
-------------------------------------------
The Company
- -----------
Isadra, Inc. ("Isadra" or the "Company") is a development-stage company located
in Palo Alto, California, engaged principally in the development of information
technology that integrates sources from multiple locations without regard to
hardware and software environments. The Company's core technology is software
that integrates product data from multiple, distributed business systems in real
time; therefore, providing an electronic commerce infrastructure for emerging
Internet trading hubs or "vortex businesses." The Company was incorporated on
November 3, 1993 but did not commence operations until August 1, 1996. The
Company has not generated any revenues from its primary software products, nor
is there any assurance of any product revenues in the future. Revenues to date
have been generated through miscellaneous consulting services provided by the
Company. The Company operates in a very competitive industry, and there is no
assurance the Company will be able to successfully develop and market its
products. In addition, the Company is highly dependent on its key employees. To
the extent needed, the Company plans to continue to finance its product
development through debt and equity financings, however, there is no assurance
that additional funding will be available to the Company when required. The
Company will continue to be considered in the development stage until such time
as it generates significant revenues from its principal operations. As of June
30, 1999, the Company had a deficit accumulated during the development stage of
$9,470,065.
On May 24, 1999, the Company and its shareholders executed an agreement to sell
the stock of the Company to VerticalNet, Inc. ("VerticalNet"), an owner and
operator of several vertical trade communities.
Interim Financial Statements
- ----------------------------
The financial statements as of June 30, 1999 and for the six months ended June
30, 1998 and 1999 are unaudited and, in the opinion of management, include all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of results for these interim periods. The results of
operations for the six months ended June 30, 1998 and 1999 are not necessarily
indicative of the results to be expected for the entire year.
<PAGE>
Property and Equipment
- ----------------------
Property and equipment are stated at cost, net of accumulated depreciation and
amortization. Property and equipment are depreciated on a straight-line basis
over the estimated useful lives of the assets as follows:
<TABLE>
<S> <C>
Computer equipment and purchased software 3-5 years
Office equipment and furniture 7 years
Leasehold improvements Lesser of lease term or useful life
</TABLE>
Revenue Recognition
- -------------------
Revenue is generally recognized from the license of software upon delivery of
the product if no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. If significant vendor obligations exist
at delivery and/or the product is subject to customer acceptance, revenue is
deferred until no significant obligations remain and/or acceptance has occurred.
To date, no revenue has been recorded from the license of software.
Consulting revenue is recognized as the services are performed. As of December
31, 1997 and 1998 and June 30, 1999, the Company had $27,000, $20,000 and
$20,000, respectively, recorded as deferred revenues related to consulting
services billed but not yet performed. Deferred revenues are included in other
accrued expenses in the accompanying balance sheets.
Concentration of Credit Risk
- ----------------------------
The Company performs ongoing credit evaluations of its customers' financial
conditions and generally does not require collateral on accounts receivable. The
Company maintains allowances for credit losses and such losses have been within
management's expectations. Two and five customers, respectively, individually
accounted for more than 10% of total revenues in the years ended December 31,
1997 and 1998, while three customers individually accounted for more than 10% of
total revenues in the six months ended June 30, 1998.
Product Development Costs
- -------------------------
Costs related to research, design and development of computer software are
charged to product development expense as incurred. The Company capitalizes
software development costs in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 86, "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed." The Company capitalizes software
development costs subsequent to the establishment of technological feasibility
and until the product is available for general release. Based on the stage of
product development, no costs have been capitalized through June 30, 1999.
<PAGE>
Advertising Costs
- -----------------
The Company charges advertising costs to expense as incurred. Advertising
expense was $15,377, $13,533, $9,028 and $1,900 for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 and 1999, respectively.
Income Taxes
- ------------
The Company records income taxes using the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and the tax
effect of net operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in operating results in the period that includes the
enactment date. A valuation allowance is recorded against deferred tax assets if
it is more likely than not that such assets will not be realized.
Accounting for Impairment of Long-Lived Assets
- ----------------------------------------------
The Company records impairment losses on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amount of
such assets.
Stock Options
- -------------
The Company accounts for the grant of employee options to purchase Common Stock
in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS
No. 123 gives companies the option to adopt the fair value method for expense
recognition of employee stock options or to continue to account for stock
options and stock-based awards using the intrinsic value method, as outlined
under Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock
Issued to Employees," and to make pro forma disclosures of net income (loss) as
if the fair value method had been applied. The Company elected to apply APB No.
25 to account for stock options and has disclosed pro forma net loss as if the
fair value method had been applied.
Shareholders' Equity (Deficit)
- ------------------------------
In June 1996, the Company effected a ten-for-one stock split of each outstanding
share of Common Stock. All share, stock option and warrant data have been
retroactively restated to reflect the stock split.
<PAGE>
On June 1, 1999, the Company amended its Articles of Incorporation to increase
the number of authorized shares of Common Stock to 20,000,000 and the number of
authorized shares of Preferred Stock to 8,000,000, with 3,000,000 designated as
Series A Preferred Stock and 5,000,000 designated as Series B Preferred Stock.
Financial Instruments
- ---------------------
The Company's financial instruments principally consist of accounts receivable,
accounts payable, accrued expenses, advances and notes payable that are carried
at cost, which approximates fair value.
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT:
-----------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
June 30,
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Computer equipment and purchased software $ 149,170 $ 179,695 $ 226,450
Office equipment and furniture 40,598 45,393 56,170
Leasehold improvements 20,546 20,546 20,546
---------- ---------- ----------
210,314 245,634 303,166
Less- Accumulated depreciation and
amortization (46,333) (96,123) (122,832)
---------- ---------- ----------
$ 163,981 $ 149,511 $ 180,334
========== ========== ==========
</TABLE>
3. LINES OF CREDIT:
---------------
In September 1997, the Company obtained a line of credit from a venture capital
fund. The line of credit, as amended, provided for maximum borrowings of
$500,000 with interest at prime plus 1.5%, payable monthly. All borrowings under
the line of credit were repaid upon its maturity in March 1998. Maximum
borrowings under the line of credit were $500,000 for the years ended December
31, 1997 and 1998 and the six months ended June 30, 1998, and the weighted
average interest rate was 10.0% during these periods. In conjunction with the
line of credit and its amendments, the Company granted the venture capital fund
warrants to purchase 100,000 shares of Series A Convertible Preferred Stock at
$1.00 per share. The warrants expire between September 2002 and October 2004 and
are outstanding as of June 30, 1999. The Company recorded the fair value of
these warrants ($86,980) as
<PAGE>
deferred financing costs and amortized the costs as additional interest expense
in the year ended December 31, 1997.
In exchange for personally providing collateral to the venture capital fund in
order for the Company to obtain the line of credit, the Company granted a
warrant to purchase 600,000 shares of Series A Convertible Preferred Stock at
$.50 per share to an officer of the Company. The warrant was to expire in
December 2004; however, it was canceled in March 1998 based on a settlement
agreement between the Company and the officer at the time of the officer's
termination of employment with the Company. The Company recorded the fair value
of this warrant ($529,691) as deferred financing costs and amortized the costs
as additional interest expense in the year ended December 31, 1997.
In May 1999, the Company obtained a line of credit from VerticalNet. The line of
credit provides for maximum borrowings of $1,000,000 with interest at 5.0% per
year. All unpaid principal and accrued interest are payable on October 15, 1999.
Maximum borrowings under the line of credit were $390,000 for the six months
ended June 30, 1999, and the weighted average interest rate was 5.0%. As of June
30, 1999, the outstanding balance on the line of credit was $390,000.
In conjunction with the line of credit, the Company granted VerticalNet a
warrant to purchase shares of Common Stock. The number of shares that may be
purchased under the warrant varies based upon the amounts borrowed and the
number of shares of Common Stock issued and outstanding. The warrant has an
exercise price equal to the amounts borrowed, vests only upon the termination of
the agreement to sell the stock of the Company to VerticalNet and expires three
years from the date on which it vests. As the termination of the agreement has
not been deemed probable by the Company as of June 30, 1999, the Company has not
recorded any expense related to the issuance of this warrant. If the agreement
is terminated, the Company will record a charge in its statement of operations
equal to the fair value of the warrant.
Interest expense related to the lines of credit, excluding amortization of the
aforementioned deferred financing costs, was $12,572, $10,556, $10,556 and $810
for the years ended December 31, 1997, 1998 and the six months ended June 30,
1998 and 1999, respectively.
4. SHAREHOLDER ADVANCES:
--------------------
During the years ended December 31, 1997 and 1998 and the six months ended June
30, 1999, the Company received advances from the Investor, as defined in Note 5,
and certain officers/employees that are shareholders of the Company. The
balances outstanding as of December 31, 1997 and 1998 and June 30, 1999 were
$80,000, $91,300 and $4,243, respectively, and have no defined terms and do not
bear interest. During the year ended December 31, 1998, $88,987 in advances were
converted into Series A Convertible Preferred Stock at $1.00 per share. During
the six months ended June 30, 1999, $132,067 in advances were converted into
Common Stock at $.20 per share.
<PAGE>
5. LONG-TERM DEBT:
--------------
In March 1998, the Company issued a promissory note for $500,000 to an investor
(the "Investor"). The note originally bore interest at 10% per year. The note
and all unpaid interest are due on March 23, 2000. In December 1998, the
Investor agreed to waive all interest between November 1, 1998 and August 31,
1999 and convert all interest currently accrued into 160,000 shares of Common
Stock during the six months ended June 30, 1999 (see Note 9). The interest
expense forgiven of $6,767 for the year ended December 31, 1998 and $25,000 for
the six months ended June 30, 1999, has been recorded as a deemed capital
contribution by the Investor.
In conjunction with this note, the Company issued warrants to purchase 100,000
shares of Common Stock to the Investor. The warrants have an exercise price of
$.20 per share and expire in April 2002. The promissory note was recorded net of
the value ($15,180) associated with these warrants. This discount is being
amortized over the term of the debt.
In October 1998, the Company issued additional warrants to purchase 100,000
shares of Common Stock to the Investor as a penalty for failing to repay the
loan on an accelerated basis. The warrants have an exercise price per share of
$.20 and expire in October 2002. The Company recorded the value of these
warrants ($15,024) as additional interest expense in the year ended December 31,
1998.
Interest expense related to the promissory note was $59,641, $15,637 and $28,796
for the year ended December 31, 1998 and the six months ended June 30, 1998 and
1999, respectively. These amounts include amortization of the debt discount of
$20,874 for the year ended December 31, 1998 and $2,056 and $3,796 for the six
months ended June 30, 1998 and 1999, respectively, resulting from the warrants.
6. CONVERTIBLE SHAREHOLDER NOTES:
-----------------------------
In September 1998, the Company issued a $200,000 convertible note to the
Investor. The note was due on March 31, 1999, with interest at 8% per year,
payable monthly. The note was scheduled to convert into Preferred Stock 15 days
after the earlier of an equity financing of $2,000,000 or December 31, 1998,
with the conversion price equal to 70% of the price per share of the equity
financing or $1.00 per share if the financing did not occur. The notes were
converted into Series B Convertible Preferred Stock on June 23, 1999.
In December 1998, the Company issued convertible notes of $200,000 and $78,000
to the Investor. The notes were due on June 30, 1999, with interest at 8% per
year, payable monthly. The notes were scheduled to convert into Preferred Stock
15 days after the earlier of an equity financing of $2,000,000 or March 31,
1999, with the conversion price equal to 70% of the price per share of the
equity financing or $1.00 per share if the financing did not occur. The notes
were converted into Series B Convertible Preferred Stock on June 23, 1999.
<PAGE>
In January 1999 and March 1999, the Company issued convertible notes of $120,000
and $295,000 to the Investor. The notes were due on June 30, 1999, with interest
at 8% per year, payable monthly. The notes were scheduled to convert into
Preferred Stock 15 days after the earlier of an equity financing of $2,000,000
or March 31, 1999, with the conversion price equal to 70% of the price per share
of the equity financing or $1.00 per share if the financing did not occur. The
notes were converted into Series B Convertible Preferred Stock on June 23, 1999.
Interest expense related to convertible shareholder notes was $6,713 and $11,900
during the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively. The Company has not paid any interest on the notes as of June 30,
1999, therefore, the aforementioned amounts are included in other accrued
expenses in the accompanying balance sheets.
7. OTHER CONVERTIBLE NOTES:
-----------------------
In October 1998, the Company issued $50,000 of convertible notes to two
investors, each of whom loaned the Company $25,000. The notes were due March 31,
1999, with interest at 8% per year, payable monthly. The notes were scheduled to
convert to Preferred Stock 15 days after the earlier of an equity financing of
$2,000,000 or March 31, 1999, with the conversion price equal to 70% of the
price per share of the equity financing or $1.00 per share if the financing did
not occur. The notes were converted into Series A Convertible Preferred Stock on
June 23, 1999.
In February 1999, the Company issued a $25,000 convertible note to another
investor. The note was due on June 30, 1999, with interest at 8% per year,
payable monthly. The note was scheduled to convert into Preferred Stock 15 days
after the earlier of an equity financing of $2,000,000 or March 31, 1999, with
the conversion price equal to 70% of the price per share of the equity financing
or $1.00 per share if the financing did not occur. The notes were converted into
Series A Convertible Preferred Stock on June 23, 1999.
In April 1999, the Company issued $365,000 of convertible notes to seven
investors and one existing shareholder of the Company. The notes were due on
September 30, 1999, with interest at 8% per year, payable monthly. The notes
were scheduled to convert into Preferred Stock 15 days after the earlier of an
equity financing of $2,000,000 or September 30, 1999, with the conversion price
equal to 70% of the price per share of the equity financing or $1.00 per share
if the financing did not occur. In May 1999, the Company and the noteholders
agreed to amend the notes for earlier conversion. The notes were converted into
Series A Convertible Preferred Stock on June 23, 1999.
Interest expense related to the other convertible notes was $768 and $5,870
during the year ended December 31, 1998 and the six months ended June 30, 1999,
respectively. The Company has not paid any interest on the notes as of June 30,
1999; therefore, the aforementioned amounts are included in other accrued
expenses in the accompanying balance sheets.
<PAGE>
8. CONVERTIBLE PREFERRED STOCK AND WARRANTS:
----------------------------------------
Series A and B Convertible Preferred Stock
- ------------------------------------------
In July 1996, the Company issued 1,260,000 shares of Series A Convertible
Preferred Stock ("Series A Preferred Stock") at $1.00 per share. In May 1997,
the Company issued 240,000 shares of Series A Preferred Stock at $1.00 per
share.
During the year ended December 31, 1998, the Company issued 625,000 shares of
Series A Preferred Stock at $1.00 per share to the Investor. In addition, the
Company issued 16,638 and 78,600 shares of Series A Preferred Stock to an
officer and the Investor, respectively, for services performed for the Company.
The Company recorded a charge to expense in the accompanying statement of
operations for the fair market value of the stock issued. Also during 1998, the
Company issued 88,987 shares of Series A Preferred Stock to the same officer as
payment on an advance made to the Company (see Note 4).
During the six months ended June 30, 1999, the Company converted $440,000 of
convertible notes into 440,000 shares of Series A Preferred Stock at $1.00 per
share (see Note 6).
During the six months ended June 30, 1999, the Company converted $893,000 of
convertible shareholder notes into 893,000 shares of Series B Convertible
Preferred Stock ("Series B Preferred Stock").
The holders of the Series A and B Preferred Stock are entitled to receive non-
cumulative dividends at the rate of $.10 per share each year, if and when
declared by the Board of Directors.
The holders of the Series A and B Preferred Stock have the right, at their
option, to convert such shares into shares of Common Stock. The conversion rate
is one share of Common Stock for each share of Series A and B Preferred Stock,
subject to adjustment. The shares shall automatically convert upon an initial
public offering.
In the event of any liquidation or winding up of the Company, the holders of the
Series A and B Preferred Stock will be entitled to receive $1.00 per share, plus
all declared and unpaid dividends, before any payment is made to the holders of
the Common Stock. In the event the assets are insufficient to permit payment of
the liquidation preferences to the holders of the Series A and B Preferred
Stock, then the assets shall be distributed on a pro-rata basis. After payment
of the liquidation preference to the holders of the Series A and B Preferred
Stock, the holders of the Common Stock will be entitled to receive $.10 per
share, plus all declared and unpaid dividends, prior to any further
distributions to the holders of the Series A and B Preferred Stock. Any
remaining assets will be distributed on a pro-rata basis between the holders of
the Common Stock and the holders of the Series A and B Preferred Stock as if
their shares were converted into Common Stock.
The shares of Series A and B Preferred Stock have the same voting rights as the
shares of Common Stock.
<PAGE>
As long as 20% of the authorized shares of Series A or B Preferred Stock remain
outstanding, the Company is subject to certain limitations and restrictions
which, among others, include redemption of Preferred and Common Stock, issuance
of stock senior to the Preferred Stock as to dividend rights, redemption rights
and liquidation preferences, selling or merging the Company, increasing or
decreasing the number of authorized shares of Preferred Stock and amending the
Company's Articles of Incorporation or By-laws.
Warrants
- --------
In conjunction with a line of credit (see Note 3), the Company issued warrants
to purchase 100,000 shares of Series A Preferred Stock at $1.00 per share. The
warrants expire between September 2002 and October 2004. The warrants are still
outstanding as of June 30, 1999.
In October 1997, the Company granted a warrant to purchase 600,000 shares of
Series A Preferred Stock at $.50 per share to an officer of the Company in
exchange for the officer personally providing collateral for a line of credit
(see Note 3). In March 1998, the warrant was cancelled under a settlement
agreement upon the officer's termination of employment with the Company.
9. COMMON STOCK, WARRANTS AND OPTIONS:
-----------------------------------
Common Stock
- ------------
The Company is authorized to issue 20,000,000 shares of no par voting Common
Stock.
In January 1996, the Company issued 6,176,000 shares of Common Stock to the
founders of the Company for services performed. In addition, during 1996 the
Company issued 950,000 shares of Common Stock to consultants who performed
services. The Company recorded a charge to expense for the fair market value of
the Common Stock issued during the period.
During 1996, the Company also sold 10,000 shares of Common Stock at a price of
$.10 per share.
During 1997, the Company agreed to issue 100,000 shares of Common Stock to a
consultant for services performed. The Company recorded a charge to expense in
the accompanying statement of operations for the fair market value of the stock
to be issued.
During 1997, 400,000 shares of Common Stock previously issued to a consultant
were cancelled under a settlement agreement with the former consultant.
During 1998, the Company issued 234,019 shares of Common Stock to consultants
and agreed to issue 90,000 and 60,000 shares of Common Stock to employees and
consultants, respectively, for services performed. The Company recorded a charge
to expense in the accompanying statement of operations for the fair market value
of the stock issued or to be issued. During the six months June 30, 1999,
Company issued all shares it had previously agreed to issue.
<PAGE>
During 1998, the Company also sold 250,000 shares of Common Stock at a price of
$.20 per share.
During the six months ended June 30, 1999, the Company issued 941,750 and
158,450 shares of Common Stock to employees and consultants, respectively, for
services performed. The Company recorded a charge to expense in the accompanying
statement of operations for the fair market value of the Common Stock issued.
During the six months ended June 30, 1999, the Company converted all interest
due as of December 1998 on a $500,000 note payable into 160,000 shares of Common
Stock (see Note 5) and issued 660,333 shares of Common Stock to a shareholder as
payment on advances made to the Company (see Note 4).
Warrants
- --------
In April 1998, in connection with the sale of Series A Preferred Stock, the
Company issued a warrant to the Investor to purchase 375,000 shares of Common
Stock at an exercise price of $.20. The warrant was required to be exercised on
the same day as issuance and was exercised immediately. Based upon the terms of
the warrant, management determined the value of the warrant at the time of
issuance was immaterial.
In connection with the issuance of a $500,000 note payable (see Note 5), the
Company issued warrants to purchase 200,000 shares of Common Stock. The warrants
have an exercise price of $.20 per share and expire in 2002. The warrants are
still outstanding as of June 30, 1999.
In conjunction with the line of credit provided by VerticalNet (see Note 3), the
Company issued a warrant to purchase Common Stock. The number of shares that may
be purchased varies based upon the amounts borrowed and the number of shares of
Common Stock issued and outstanding. The warrant has an exercise price equal to
the amounts borrowed, vests only upon the termination of the agreement to sell
the stock of the Company to VerticalNet and expires three years from the date on
which it vests. The warrant is still outstanding as of June 30, 1999.
Stock Options
- -------------
Effective September 1, 1997, the Company established the Isadra, Inc. 1997 Stock
Option Plan (the "Plan") for employees, directors and consultants of the
Company. Under the Plan, options to purchase 1,000,000 shares of Common Stock
were authorized to be granted. In December 1998 and April 1999, the Company's
Board of Directors approved resolutions to increase the number of options
available in the Plan to 1,500,000 and 2,000,000, respectively, subject to
shareholder approval. The Plan is administered by the Company's Board of
Directors who determine the price and other terms upon which grants are made. As
of June 30, 1999, there were 1,908,208 options outstanding and 13,692 options
available for grant under the Plan.
<PAGE>
Information relative to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Exercise Exercise
Price Price Aggregate
Options Per Share Per Share Proceeds
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance as of September 1, 1997 -- $ -- $ -- $ --
Granted 221,000 .20 .20 44,200
Exercised -- -- -- --
Terminated (3,000) .20 .20 (600)
----------- ----------- ----------- -----------
Balance as of December 31, 1997 218,000 .20 .20 43,600
Granted 1,062,953 .20 - .22 .20 213,953
Exercised (42,900) .20 .20 (8,580)
Terminated (156,520) .20 .20 (31,304)
----------- ----------- ----------- -----------
Balance as of December 31, 1998 1,081,533 .20 - .22 .20 217,669
Granted 915,000 .20 - .22 .21 190,000
Exercised (35,200) .20 .20 (7,040)
Terminated (53,125) .20 .20 (10,625)
----------- ----------- ----------- -----------
Balance as of June 30, 1999 1,908,208 $.20 - $.22 $ .20 $ 390,004
=========== =========== =========== ===========
</TABLE>
The following table summarizes information relating to the Plan at June 30, 1999
based upon each exercise price:
<TABLE>
<CAPTION>
Weighted
Average
Options Remaining Options
Exercise Outstanding Contractual Exercisable
Price at June 30, Life at June 30,
Per Share 1999 (Years) 1999
--------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
$ .20 1,490,108 8.3 399,358
.22 418,100 8.7 111,849
--------- ------- -------
1,908,208 8.4 511,207
========= ======= =======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting for
stock options granted under the Plan. During the six months ended June 30, 1999,
deferred compensation of $1,147,250 was recorded for options granted to
employees with exercise prices below fair value at the date of grant, of which
$143,673 was charged to compensation expense. Had compensation cost been
recognized pursuant to SFAS No. 123, the Company's net loss would have increased
by approximately $2,000 to $2,492,000 for the year ended December 31, 1997 and
$26,000 to $1,903,000 for the year ended December 31, 1998. The weighted average
fair value of options granted during the year ended December 31, 1997 and 1998,
was estimated to be $.08 per share.
<PAGE>
The fair value of each option grant is estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
For the Year Ended
December 31,
------------------------------------
1997 1998
---------------- ----------------
<S> <C> <C>
Risk-free interest rate 6.1% 5.4%
Volatility 0.0% 0.0%
Expected dividend yield 0.0% 0.0%
Expected life 9.0 years 9.0 years
</TABLE>
During the year ended December 31, 1998 and the six months ended June 30, 1999,
the Company issued or agreed to issue options to purchase 25,000 and 365,000
shares of Common Stock, respectively, to consultants for services performed. The
options have an exercise price of $.20 per share, vest over a period not
exceeding three months and expire nine years from the date of grant through
January 2008. In accordance with SFAS No. 123, the Company recorded a charge for
the value of these options in the accompanying statements of operations.
10. INCOME TAXES:
------------
As of December 31, 1998, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $3,699,000, which begin to expire
in 2011, and approximately $3,699,000 for state income tax purposes, which begin
to expire in 2004. Significant components of deferred income taxes consist of
the following:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1998
----------- -----------
<S> <C> <C>
Gross deferred tax assets:
Net operating loss carryforwards $ 1,012,000 $ 1,714,000
Accruals not currently deductible 5,000 103,000
----------- -----------
1,017,000 1,817,000
Gross deferred tax liabilities:
Depreciation and amortization (7,000) (13,000)
Less- Valuation allowance (1,010,000) (1,804,000)
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
The net deferred tax asset increased $794,000 during the year ended December 31,
1998 due principally to net operating loss carryforwards, which will be
deductible in future years. Based on changes in ownership of the Company,
utilization of the net operating loss
<PAGE>
carryforwards may be subject to annual limitations. The Company has recorded a
valuation allowance for the net deferred tax asset as management concluded that
the net deferred tax asset did not meet the recognition criteria under SFAS No.
109.
11. COMMITMENTS:
-----------
Leases
- ------
The Company leases both real estate and equipment used in its operations and
classifies those leases as either operating or capital leases following the
provisions of SFAS No. 13, "Accounting for Leases." The remaining lives of the
leases range from one to three years through 2004.
In 1998, the Company entered into a capital lease for $4,795 of equipment. The
lease is with an entity owned by the Investor (see Notes 5 and 12).
The following is a summary of future minimum payments under operating and
capital leases that have initial or remaining noncancelable lease terms in
excess of one year as of June 30, 1999:
<TABLE>
<CAPTION>
Operating Capital
---------- ----------
<S> <C> <C>
1999 $ 27,372 $ 1,155
2000 9,808 2,309
2001 4,841 1,347
2002 3,972 --
2003 3,972 --
Thereafter 1,324 --
---------- ----------
Total minimum lease payments $ 51,289 4,811
==========
Less- Amount representing interest (1,177)
----------
Present value of minimum capital lease payments $ 3,634
==========
</TABLE>
Rent expense for operating leases and other month-to-month leases entered into
by the Company was $131,478, $141,256, $68,470 and $81,919 for the years ended
December 31, 1997 and 1998 and the six months ended June 30, 1998 and 1999,
respectively.
Interest expense on the capital lease was $408 for the year ended December 31,
1998 and $548 for the six months ended June 30, 1999.
Employment Agreements
- ---------------------
The Company has employment agreements with certain officers and employees that
provide for, among other things, salary, bonuses and stock grants. The
agreements are generally cancelable at any time.
<PAGE>
12. RELATED-PARTY TRANSACTIONS:
--------------------------
The Company leased certain equipment from the Investor during the year ended
December 31, 1998 and the six months ended June 30, 1999, resulting in payments
of $962 and $1,155, respectively.
During the years ended December 31, 1997 and 1998, and the six months ended June
30, 1998, the Company paid $17,164, $4,970 and $2,470, respectively, to an
entity owned by an officer of the Company. No payments were made during the six
months ended June 30, 1999.
During the year ended December 31, 1998, the Company recorded revenue of $11,500
for consulting services performed for an entity owned by a certain officer of
the Company.
<PAGE>
VERTICALNET, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
(unaudited)
The accompanying unaudited pro forma condensed consolidated balance sheet as of
June 30, 1999, and the related unaudited pro forma consolidated statements of
operations for the year ended December 31, 1998 and for the six months ended
June 30, 1999, give effect to the acquisition of all the capital stock of
Isadra, as described in Note 2 of the Notes to Pro Forma Condensed Consolidated
Financial Statements, as if the transaction had occurred as of June 30, 1999, in
the case of the unaudited pro forma condensed consolidated balance sheet, and as
of January 1, 1998, in the case of the unaudited pro forma consolidated
statements of operations.
The unaudited pro forma consolidated statements of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999, also give effect
to the acquisitions of CertiSource, Inc. ("CertiSource"), LabX Technologies Inc.
("LabX") and Techspex, Inc. ("Techspex"), completed on August 10, 1999, July 29,
1999 and June 14, 1999, respectively, as described in Notes 3, 4 and 5 of the
Notes to the Pro Forma Condensed Consolidated Financial Statements,
respectively, as if the transactions had occurred as of January 1, 1998.
In addition, the unaudited pro forma consolidated statement of operations for
the year ended December 31, 1998 also gives effect to the acquisitions of
Boulder Interactive Technology Services Company ("BITC") and Informatrix
Worldwide, Inc. ("Informatrix"), completed in 1998, as described in Note 6 of
the Notes to the Pro Forma Condensed Consolidated Financial Statements, as if
the transactions had occurred as of January 1, 1998.
The unaudited pro forma condensed consolidated financial statements have been
prepared by the management of the Company and should be read in conjunction with
the Company's historical consolidated financial statements, which have been
previously filed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998, and Quarterly Report on Form 10-Q for the quarter ended June
30, 1999, the historical financial statements of Isadra, which are included
elsewhere in this Form 8-K, the historical financial statements of CertiSource,
LabX and Techspex, filed on Forms 8-K dated August 10, 1999, July 29, 1999 and
June 14, 1999, respectively, and the historical financial statements of BITC and
Informatrix filed in the Company's Registration Statement filed on Form S-1
effective February 11, 1999. Since the unaudited pro forma financial statements
which follow are based upon the financial condition and operating results of
Isadra, CertiSource, LabX, Techspex, BITC and Informatrix during periods when
they were not under the control or management of VerticalNet, the information
presented may not be indicative of the results which would have actually been
obtained had the acquisitions been completed on January 1, 1998 nor are they
indicative of future financial or operating results.
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Historical (Note 1)
---------------------------------------
VertitcalNet LabX CertiSource
------------ --------- -----------
<S> <C> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ 20,235,068 $ 49,714 $ 129,373
Short-term investments 12,480,457 - -
Accounts receivable, net of allowance for doubtful accounts 4,446,631 33,844 963,904
Prepaid expenses and other assets 2,945,708 2,923 5,925
------------ --------- -----------
Total current assets 40,107,864 86,481 1,099,202
Property and equipment, net 1,816,460 17,872 48,758
Goodwill and other intangibles, net of accumulated amortization 8,159,583 - -
Long-term investments 14,376,407 - -
Deferred charges and other assets 1,809,617 - -
------------ --------- -----------
Total assets $ 66,269,931 $ 104,353 $ 1,147,960
============ ========= ===========
Liabilities and Shareholders' Equity (Deficit)
- ----------------------------------------------
Current liabilities:
Line of credit $ - $ - $ -
Current portion of long-term debt 823,480 - -
Accounts payable 1,896,362 943 489,149
Accrued expenses 2,372,080 8,510 18,530
Amounts due to training providers - - 757,324
Deferred revenues 5,820,222 61,819 38,240
Deferred salaries - - -
Shareholder advances - 3,233 -
------------ --------- -----------
Total current liabilities 10,912,144 74,505 1,303,243
Long-term debt, net of current portion 517,293 - -
Shareholders' equity (deficit) 54,840,494 29,848 (155,283)
------------ --------- -----------
Total liabilities and shareholders' equity (deficit) $ 66,269,931 $ 104,353 $ 1,147,960
============ ========= ===========
<CAPTION>
Historical (Note 1)
-------------------
Pro Forma
Adjustments Total Isadra
------------ ------------ ------------------
<S> <C> <C> <C>
Assets
- ------
Current assets: $ (600,724) (g)
Cash and cash equivalents (1,800,000) (l) $ 18,013,431 $ 51,967
Short-term investments - 12,480,457
Accounts receivable, net of allowance for doubtful accounts - 5,444,379 3,587
Prepaid expenses and other assets - 2,954,556 15,282
------------ ------------ ------------------
Total current assets (2,400,724) 38,892,823 70,836
Property and equipment, net - 1,883,090 180,334
3,393,438 (h)
Goodwill and other intangibles, net of accumulated amortization 4,582,729 (m) 16,135,750 -
Long-term investments - 14,376,407
Deferred charges and other assets - 1,809,617 38,445
------------ ------------ ------------------
Total assets $ 5,575,443 $ 73,097,687 $ 289,615
============ ============ ==================
Liabilities and Shareholders' Equity (Deficit)
- ----------------------------------------------
Current liabilities:
Lines of credit $ - $ - $ 390,000
Current portion of long-term debt - 823,480 495,957
Accounts payable - 2,386,454 402,122
Accrued expenses - 2,399,120 89,383
Amounts due to training providers - 757,324 -
(13,100) (i)
Deferred revenues (21,178) (n) 5,886,003 -
Deferred salaries - - 215,432
Shareholder advances - 3,233 4,243
------------ ------------ ------------------
Total current liabilities (34,278) 12,255,614 1,597,137
Long-term debt, net of current portion - 517,293 2,143
2,650,531 (g)
2,833,755 (l)
155,283 (j)
Shareholders' equity (deficit) (29,848) (o) 60,324,780 (1,309,665)
------------ ------------ ------------------
Total liabilities and shareholders' equity (deficit) $ 5,575,443 $ 73,097,687 $ 289,615
============ ============ ==================
<CAPTION>
Pro Forma
Adjustments Pro Forma
------------- -------------
<S> <C> <C>
Assets
- ------
Current assets:
Cash and cash equivalents $ (2,694,843) (a) $ 15,370,555
Short-term investments - 12,480,457
Accounts receivable, net of allowance for doubtful accounts - 5,447,966
Prepaid expenses and other assets (390,000) (c) 2,579,838
------------- -------------
Total current assets (3,084,843) 35,878,816
Property and equipment, net - 2,063,424
Goodwill and other intangibles, net of accumulated amortization 29,671,323 (b) 45,807,073
Long-term investments - 14,376,407
Deferred charges and other assets - 1,848,062
------------- -------------
Total assets $ 26,586,480 $ 99,973,782
============= =============
Liabilities and Shareholders' Equity (Deficit)
- ----------------------------------------------
Current liabilities:
Lines of credit $ (390,000) (c) $ -
Current portion of long-term debt - 1,319,437
Accounts payable - 2,788,576
Accrued expenses - 2,488,503
Amounts due to training providers - 757,324
Deferred revenues - 5,886,003
Deferred salaries - 215,432
Shareholder advances - 7,476
------------- -------------
Total current liabilities (390,000) 13,462,751
Long-term debt, net of current portion - 519,436
(13,600,000) (b)
1,516,338 (a)
37,750,477 (a)
Shareholders' equity (deficit) 1,309,665 (d) 85,991,595
------------- -------------
Total liabilities and shareholders' equity (deficit) $ 26,586,480 $ 99,973,782
============= =============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Historical (Note 1)
---------------------------------------------------------------------
VerticalNet BITC Informatrix Techspex LabX CertiSource
------------- --------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 3,134,769 $ 437,628 $ 32,442 $ 307,554 $ 91,217 $ 943,940
------------- --------- ----------- ---------- ------- ----------
Costs and Expenses:
Editorial and operational 3,237,971 121,726 253,503 72,937 20,359 469,341
Product development 1,404,557 - 75,766 22,142 8,497 189,461
Sales and marketing 7,894,662 123,542 426,058 218,264 18,088 351,256
General and administrative 3,823,593 327,879 93,131 183,518 20,829 235,661
Amortization of goodwill and other intangibles 282,990 - - - - -
------------- --------- ----------- ---------- ------- ----------
Operating income (loss) (13,509,004) (135,519) (816,016) (189,307) 23,444 (301,779)
------------- --------- ----------- ---------- ------- ----------
Interest and dividend income 212,130 143 - - - -
Interest expense (297,401) - (37,978) (43,144) - -
------------- --------- ----------- ---------- ------- ----------
Interest, net (85,271) 143 (37,978) (43,144) - -
Income taxes - - - - 3,892 -
------------- --------- ----------- ---------- ------- ----------
Net income (loss) $ (13,594,275) $(135,376) $ (853,994) $ (232,451) $19,552 $ (301,779)
============= ========= =========== ========== ======= ==========
Basic and diluted net loss per share $ (2.64)
=============
Weighted average shares outstanding
used in basic and diluted per-share calculation (Note 7) 5,141,100
=============
<CAPTION>
Historical (Note 1)
-------------------
Pro Forma Pro Forma
Adjustments Total Isadra Adjustments
----------- ------------ ------------------- --------------
<S> <C> <C> <C> <C>
Revenues $ - $ 4,947,550 $ 124,600 $ -
----------- ------------ ------------------- --------------
Costs and Expenses:
Editorial and operational (180,000) (t) 3,995,837 - -
Product development - 1,700,423 854,546 -
Sales and marketing - 9,031,870 361,737 -
General and administrative - 4,684,611 707,168 -
1,131,146 (k)
1,585,910 (p)
1,101,681 (r)
Amortization of goodwill and other intangibles 922,401 (v) 5,024,128 - 10,323,774 (e)
----------- ------------ ------------------- --------------
Operating income (loss) (4,561,138) (19,489,319) (1,798,851) (10,323,774)
----------- ------------ ------------------- --------------
Interest and dividend income - 212,273 - -
43,144 (s)
Interest expense 35,025 (u) (300,354) (78,086) -
----------- ------------ ------------------- --------------
Interest, net 78,169 (88,081) (78,086) -
Income taxes (3,892) (q) - - -
----------- ------------ ------------------- --------------
Net income (loss) $(4,479,077) $(19,577,400) $ (1,876,937)$ (10,323,774)
=========== ============ =================== ==============
Basic and diluted net loss per share
Weighted average shares outstanding
used in basic and diluted per-share calculation (Note 7)
<CAPTION>
Pro Forma
-------------
<S> <C>
Revenues $ 5,072,150
-------------
Costs and Expenses:
Editorial and operational 3,995,837
Product development 2,554,969
Sales and marketing 9,393,607
General and administrative 5,391,779
Amortization of goodwill and other intangibles 15,347,902
-------------
Operating income (loss) (31,611,944)
-------------
Interest and dividend income 212,273
Interest expense (378,440)
-------------
Interest, net (166,167)
Income taxes -
-------------
Net income (loss) $ (31,778,111)
=============
Basic and diluted net loss per share $ (4.92)
=============
Weighted average shares outstanding
used in basic and diluted per-share calculation (Note 7) 6,457,040
=============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VERTICALNET, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Historical (Note 1)
-----------------------------------------------
VerticalNet Techspex LabX CertiSource
--------------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Revenues $ 5,484,959 $ 151,258 $ 93,571 $ 612,028
--------------- ------------- -------- ------------
Costs and Expenses:
Editorial and operational 2,884,756 32,801 19,328 171,779
Product development 2,694,704 10,344 15,174 77,652
Sales and marketing 9,176,807 95,659 21,855 236,382
General and administrative 3,350,071 54,552 11,983 490,078
Amortization of goodwill and other intangibles 610,469 - - -
--------------- ------------- -------- ------------
Operating income (loss) (13,231,848) (42,098) 25,231 (363,863)
--------------- ------------- -------- ------------
Interest and dividend income 1,037,936 - - -
Interest expense (175,557) (12,501) - -
--------------- ------------- -------- ------------
Interest, net 862,379 (12,501) - -
Other Income - - - 327,065
Income taxes - - 5,632 -
--------------- ------------- -------- ------------
Net income (loss) $(12,369,469) $ (54,599) $ 19,599 $ (36,798)
=============== ============= ======== ============
Basic and diluted net loss per share $ (0.46)
Weighted average shares outstanding ===============
used in basic and diluted per-share calculation (Note 7) 27,041,866
===============
<CAPTION>
Historical (Note 1)
---------------------
Pro Forma
Adjustments Total Isadra
-------------- ------------ ---------------------
<S> <C> <C> <C>
Revenues $ - $ 6,341,816 $ -
-------------- ------------ ---------------------
Costs and Expenses:
Editorial and operational - 3,108,664 -
Product development - 2,797,874 575,893
Sales and marketing - 9,530,703 257,561
General and administrative - 3,906,684 3,728,687
565,573 (k)
792,955 (p)
Amortization of goodwill and other intangibles 504,937 (r) 2,473,934 -
-------------- ------------ ---------------------
Operating income (loss) (1,863,465) (15,476,043) (4,562,141)
-------------- ------------ ---------------------
Interest and dividend income
- 1,037,936 -
Interest expense 12,501 (s) (175,557) (47,376)
-------------- ------------ ---------------------
Interest, net 12,501 862,379 (47,376)
Other Income - 327,065 -
Income taxes (5,632) (q) - -
-------------- ------------ ---------------------
Net income (loss) $ (1,845,332) $(14,286,599) $ (4,609,517)
============== ============ =====================
Basic and diluted net loss per share
Weighted average shares outstanding
used in basic and diluted per-share calculation (Note 7)
<CAPTION>
Pro Forma
Adjustments Pro Forma
--------------- --------------
<S> <C> <C>
Revenues $ - $ 6,341,816
--------------- --------------
Costs and Expenses:
Editorial and operational - 3,108,664
Product development - 3,373,767
Sales and marketing - 9,788,264
General and administrative - 7,635,371
Amortization of goodwill and other intangibles 5,161,887 (e) 7,635,821
-------------- --------------
Operating income (loss) (5,161,887) (25,200,071)
-------------- --------------
Interest and dividend income - 1,037,936
Interest expense 810 (f) (222,123)
-------------- --------------
Interest, net 810 815,813
Other Income - 327,065
Income taxes - -
-------------- --------------
Net income (loss) $ (5,161,077) $(24,057,193)
=============== ==============
Basic and diluted net loss per share $ (0.85)
==============
Weighted average shares outstanding
used in basic and diluted per-share calculation (Note 7) 28,278,936
==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
VERTICALNET, INC.
NOTES TO PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: HISTORICAL FINANCIAL STATEMENTS:
The historical balances of VerticalNet, Inc. ("VerticalNet" or the "Company")
reflect the consolidated balance sheet as of June 30, 1999, and the
consolidated results of operations for the year ended December 31, 1998 and for
the six months ended June 30, 1999, as reported in the consolidated financial
statements which have been previously filed in the Company's Annual Report on
Form 10-K for the year ended December 31, 1998 and Quarterly Report on Form 10-Q
for the three and six months ended June 30, 1999. The historical balances of
Boulder Interactive Technology Services ("BITC") and Informatrix Worldwide, Inc.
("Informatrix") for the year ended December 31, 1998, represent the results of
operations for BITC and Informatrix prior to their acquisition by the Company
during the year ended December 31, 1998, and were derived from their historical
financial statements included in the Company's Registration Statement filed on
Form S-1 effective February 11, 1999. The historical balances of CertiSource,
Inc. ("CertiSource") for the year ended December 31, 1998 and for the six months
ended June 30, 1999 represent the results of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999, which were derived
from the historical financial statements filed in the Form 8-K dated August 10,
1999. The historical balances of LabX Technologies Inc. ("LabX") for the year
ended December 31, 1998 and for the six months ended June 30, 1999, which were
derived from the historical financial statements for the year ended September
30, 1998 and the period ended June 30, 1999 filed in the Form 8-K dated
July 29, 1999. The historical balances of Techspex, Inc. ("Techspex") for the
year ended December 31, 1998 and six months ended June 30, 1999, represent the
results of operations for the year ended December 31, 1998 and for the six
months ended June 30, 1999, which were derived from the historical financial
statements filed in the Form 8-K dated June 14, 1999 and reflect the results of
its operations prior to its acquisition by the Company. The historical balances
of Isadra, Inc. ("Isadra") for the year ended December 31, 1998 and the six
months ended June 30, 1999, were derived from the historical financial
statements included in this Form 8-K.
Note 2: ACQUISITION OF ISADRA, INC:
On August 25, 1999, VerticalNet purchased all of the capital stock of Isadra
pursuant to an Agreement and Plan of Merger (the "Agreement") dated May 24,
1999, as amended, by and among VerticalNet, Isadra Acquisition Corp., Isadra ,
Hugo Daley, Mustafa Syed and Tira Capital Management, Inc., as shareholders'
representative, for approximately $42.0 million, including transaction costs.
The acquisition will be accounted for under the purchase method of accounting.
Under this method, the purchase price is allocated to the assets acquired and
liabilities assumed based on the fair values at the acquisition date. Such
allocation has been based on estimates that may be revised at a later date.
Therefore, actual amounts may differ from those in the unaudited pro forma
condensed consolidated financial statements. The purchase price plus the net
liabilities assumed was approximately $43.3 million, which has been allocated to
in-process research and development, existing technology, assembled work force
and goodwill in the amounts of approximately $13.6 million, $2.1 million,
$500,000 and $27.1 million, respectively. The $13.6 million will be charged to
expense as a non-recurring charge upon consummation of the acquisition since the
in-process research and development has not yet reached feasibility and has no
alternative future uses. The existing technology and assembled work force will
be amortized on a straight line basis over 24 months, while goodwill will be
amortized on a straight line basis over 36 months.
<PAGE>
The following pro forma adjustments for the Isadra acquisition are reflected in
the unaudited pro forma condensed consolidated balance sheet as of June 30,
1999, and the unaudited pro forma statements of operations for the year ended
December 31, 1998 and the six months ended June 30, 1999:
Unaudited Pro Forma Adjustments to Condensed Consolidated Balance Sheet
- -----------------------------------------------------------------------
(a) Reflects the consideration issued by the Company to consummate the
acquisition as follows:
<TABLE>
<S> <C>
Cash $ 2,444,843
Transaction costs 250,000
Options 1,516,338
VerticalNet common stock 37,750,477
-----------
$41,961,658
===========
</TABLE>
(b) Reflects the recording of the purchase transaction. The book value of the
assets acquired and liabilities assumed are estimated to approximate fair
value.
<TABLE>
<S> <C>
Total purchase price $41,961,658
Fair value of net liabilities assumed 1,309,665
-----------
$43,271,323
===========
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<S> <C>
In-process research and development $13,600,000
Existing technology (estimated useful life of 24 months) 2,100,000
Assembled work force (estimated useful life of 24 months) 500,000
Goodwill (estimated useful life of 36 months) 27,071,323
-----------
$43,271,323
===========
</TABLE>
The amount allocated to in-process research and development, based on an
independent valuation report, represents valuation of projects that had not yet
reached technological feasibility and for which the technology had no
alternative future use. The $13,600,000 has been reflected as a reduction to
shareholders' equity and has not been included in the pro forma consolidated
statement of operations due to its non-recurring nature.
(c) Reflects the intercompany elimination of Isadra's line of credit from
VerticalNet.
(d) Reflects the elimination of the equity accounts of Isadra.
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
- ------------------------------------------------------------------------
(e) Represents additional amortization expense for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, relating to
existing technology and the assembled work force acquired in the
transaction based upon estimated useful lives of 24 months and goodwill
based upon the estimated useful life of 36 months.
<PAGE>
(f) Represents the elimination of interest expense incurred on Isadra's line of
credit from VerticalNet.
Note 3: ACQUISITION OF CERTISOURCE, INC:
On August 10, 1999, VerticalNet acquired all of the capital stock of CertiSource
for approximately $3.3 million, including transaction costs. The consideration
for the acquisition was $600,724 in cash (including estimated transaction costs
of $125,000) and 83,712 shares of Company common stock with a fair market value
of approximately $2.7 million. The acquisition has been accounted for under the
purchase method of accounting. The purchase price plus the net liabilities
assumed was approximately $3.4 million, which has been allocated to a covenant
not-to-compete and goodwill of approximately $500,000 and $2.9 million,
respectively. The covenant not-to-compete and goodwill and will be amortized on
a straight-line basis over 36 months. Refer to the Company's Form 8-K, filed on
August 20, 1999, for additional information.
The following pro forma adjustments for the CertiSource acquisition are
reflected in the unaudited pro forma condensed consolidated balance sheet as of
June 30, 1999, and the unaudited pro forma consolidated statements of operations
for the year ended December 31, 1998 and the six months ended June 30, 1999:
Unaudited Pro Forma Adjustments to Condensed Consolidated Balance Sheet
- -----------------------------------------------------------------------
(g) Reflects the consideration issued by the Company to consummate the
acquisition as follows:
<TABLE>
<S> <C>
Cash $ 475,724
Transaction costs 125,000
VerticalNet common stock 2,650,531
----------
$3,251,255
==========
</TABLE>
(h) Reflects the recording of the purchase transaction. The book value of the
assets acquired and liabilities assumed are estimated to approximate fair
value.
<TABLE>
<CAPTION>
<S> <C>
Total purchase price $3,251,255
Fair value of net liabilities assumed (also refer to (i)) 142,183
----------
$3,393,438
==========
</TABLE>
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Covenant not-to-compete (estimated useful life of 36 months) $ 500,000
Goodwill (estimated useful life of 36 months) 2,893,438
----------
$3,393,438
==========
</TABLE>
(i) Represents the adjustment to the fair value of deferred revenue assumed at
time of acquisition, based on VerticalNet's cost structure plus a
reasonable profit margin.
(j) Reflects the elimination of the historical equity accounts of CertiSource.
<PAGE>
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
- ------------------------------------------------------------------------
(k) Represents additional amortization expense for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, relating to the
covenant not-to-compete and goodwill based upon the estimated useful life
for both of 36 months.
Note 4: ACQUISITION OF LABX TECHNOLOGIES, INC:
On July 29, 1999, the Company acquired all of the capital stock of LabX for
approximately $4.6 million, including transaction costs. The consideration for
the acquisition was $1.8 million in cash (including transaction costs of
$200,000) and 69,794 shares of Company common stock with a fair market value of
approximately $2.8 million. The acquisition has been accounted for under the
purchase method of accounting. The purchase price less the net assets acquired
was approximately $4.6 million, which has been allocated to a covenant not-to-
compete, existing technology and goodwill of approximately $350,000, $500,000
and $3.75 million, respectively. The covenant not-to-compete will be amortized
on a straight-line basis over 24 months, while the existing technology and
goodwill will be amortized on a straight-line basis over 36 months. Refer to the
Company's Form 8-K, filed on August 12, 1999 for additional information.
The following pro forma adjustments for the LabX acquisition are reflected in
the unaudited pro forma condensed consolidated balance sheet as of June 30,
1999, and the unaudited pro forma consolidated statements of operations for the
year ended December 31, 1998 and the six months ended June 30, 1999:
Unaudited Pro Forma Adjustments to Condensed Consolidated Balance Sheet
- -----------------------------------------------------------------------
(l) Reflects the consideration issued by the Company to consummate the
acquisition as follows:
<TABLE>
<S> <C>
Cash $1,600,000
Transaction costs 200,000
VerticalNet common stock 2,833,755
----------
$4,633,755
==========
</TABLE>
(m) Reflects the recording of the purchase transaction. The book value of the
assets acquired and liabilities assumed are estimated to approximate fair
value.
<TABLE>
<S> <C>
Total purchase price $4,633,755
Fair value of net assets acquired (also refer to (n)) (51,026)
----------
$4,582,729
==========
</TABLE>
<PAGE>
The purchase price was allocated as follows:
<TABLE>
<S> <C>
Covenant not-to-compete (estimated useful life of 24 months) $ 350,000
Existing technology (estimated useful life of 36 months) $ 500,000
Goodwill (estimated useful life of 36 months) 3,732,729
----------
$4,582,729
==========
</TABLE>
(n) Represents the adjustment to the fair value of deferred revenue assumed at
time of acquisition, based VerticalNet's cost structure plus a reasonable
profit margin.
(o) Reflects the elimination of the historical equity accounts of LabX.
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
- ------------------------------------------------------------------------
(p) Represents additional amortization expense for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, relating to the
covenant not-to-compete, existing technology acquired and goodwill based
upon the estimated useful life of 24 months for the covenant not-to-
compete and 36 months for both the existing technology and goodwill.
(q) Represents the elimination of tax expense incurred on the net income of
LabX.
Note 5: TECHSPEX INC. ACQUISTION INFORMATION:
On June 14, 1999, the Company acquired all of the capital stock of Techspex for
approximately $3.3 million, including transaction costs. The consideration for
the acquisition was $311,000 in cash (including transaction costs of $100,000)
and 89,994 shares of Company common stock with a fair market value of
approximately $3.0 million. The acquisition has been accounted for under the
purchase method of accounting. The purchase price plus the net liabilities
assumed was approximately $3.3 million, which has been recorded as goodwill and
will be amortized on a straight-line basis over 36 months. Refer to the
Company's Form 8-K, filed on June 29, 1999, for additional information.
The Techspex acquisition is reflected in the June 30, 1999 VerticalNet
historical balance sheet, therefore pro forma adjustments to the Condensed
Consolidated Balance Sheet are not required.
The following pro forma adjustments for the Techspex acquisition are reflected
in the pro forma consolidated statements of operations for the year ended
December 31, 1998 and the six months ended June 30, 1999:
Unaudited Pro Forma Adjustments to Consolidated Statements of Operations
- ------------------------------------------------------------------------
(r) Represents additional amortization expense for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively, relating to
goodwill based upon the estimated useful life of 36 months.
(s) Represents the elimination of interest expense incurred on the notes
payable of Techspex.
<PAGE>
Note 6: BOULDER INTERACTIVE TECHNOLOGY SERVICES AND INFORMATRIX WORLDWIDE INC.
ACQUISTION INFORMATION:
On September 1, 1998, the Company acquired all of the outstanding stock capital
stock of BITC for $1.8 million in cash. On September 30, 1998, the Company
acquired all the outstanding capital stock of Informatrix for 92,308 shares of
the Company's common stock valued at $153,000. Contingent on achieving future
sales targets during 1998, Informatrix shareholders later received 7,476
additional shares of the Company's common stock valued at approximately $32,000.
Both acquisitions were accounted for using the purchase method of accounting.
The purchase price plus net liabilities assumed, which was recorded as goodwill
and is being amortized on a straight line basis over 36 months, was
approximately $1.9 million and $903,000 for BITC and Informatrix, respectively.
Refer to the Company's previously filed Annual Report on Form 10-K and
Registration Statement on Form S-1 effective February 11, 1999 for additional
information.
The following pro forma adjustments for the BITC and Informatrix acquisition are
reflected in the pro forma condensed consolidated statement of operations for
the year ended December 31, 1998:
Unaudited Pro Forma Adjustments to Condensed Statements of Operations
- ---------------------------------------------------------------------
(t) Reflects the elimination of editorial and operational costs charged by
VerticalNet to Informatrix to maintain Informatrix's vertical trade
community.
(u) Reflects the elimination of interest expense incurred by Informatrix on
indebtedness to VerticalNet.
(v) Represents additional amortization expense for the year ended December 31,
1998 relating to goodwill based upon the estimated useful life of 36
months.
Note 7: PRO FORMA BASIC AND DILUTED NET LOSS PER SHARE:
The weighted average shares outstanding used in the pro forma basic and diluted
net loss per share calculation for the year ended December 31, 1998, includes
1,000,000, 83,712, 69,794 and 89,994 shares of Company common stock issued in
the acquisition of Isadra, Certisource, LabX and Techspex, respectively, and
72,440 incremental shares that would have been outstanding from the acquisition
of Informatrix, as if all of the acquisitions had occurred on Janurary 1, 1998.
For the six months ended June 30, 1999, the weighted average shares outstanding
used in the pro forma basic and diluted net loss per share calculation includes
1,000,000, 83,712 and 69,794 shares of Company common stock issued in the
acquisition of Isadra, CertiSource and LabX, respectively, and 83,564
incremental shares that would have been outstanding from the acquisition of
Techspex and the additional consideration given to Informatrix shareholders, as
if these acquisitions had occurred on Janurary 1, 1999.
Note 8: STOCK SPLIT:
On August 20, 1999, the Company effected a two-for-one stock split of each
outstanding share of Company common stock. All share and per share data have
been restated to reflect the stock split.
<PAGE>
SIGNATURE
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 thereunto duly authorized.
Dated: September 8, 1999 VERTICALNET, INC.
By: /s/ Gene S. Godick
------------------
Name: Gene S. Godick
Title: Chief Financial Officer
<PAGE>
EXHIBIT INDEX
Exhibit No. Description of Exhibit
- ----------- ----------------------
2.1 Agreement and Plan of Merger by and among VerticalNet, Inc.,
Isadra Acquisition Corp., Isadra, Inc., Hugo Daley, Mustafa Syed
and Tira Capital Capital Management, Inc., as shareholders'
representative
23.1 Consent of Arthur Andersen LLP
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF MERGER
by and among
VERTICALNET, INC.
(a Pennsylvania corporation),
ISADRA ACQUISITION CORP.
(a California corporation),
ISADRA, INC.
(a California corporation),
HUGO DALEY,
(an individual),
MUSTAFA SYED
(an individual),
and
TIRA CAPITAL MANAGEMENT, INC.
as Shareholders' Representative
(a California corporation)
dated as of May 24, 1999
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Page
<S> <C>
1. THE MERGER; CLOSING...................................................................................... 2
1.1 The Merger...................................................................................... 2
----------
1.2 Effective Time.................................................................................. 2
--------------
1.3 Effects of the Merger........................................................................... 2
---------------------
1.4 Articles of Incorporation and Bylaws............................................................ 2
------------------------------------
1.5 Directors and Officers.......................................................................... 2
----------------------
1.6 Location, Date.................................................................................. 2
--------------
1.7 Deliveries...................................................................................... 3
----------
2. MERGER CONSIDERATION; ADJUSTMENTS........................................................................ 3
2.1 Conversion of Capital Stock; Merger Consideration............................................... 3
-------------------------------------------------
2.2 No Fractional Shares............................................................................ 5
--------------------
2.3 Estimated Closing Date Liabilities.............................................................. 5
----------------------------------
2.4 Closing Balance Sheet........................................................................... 5
---------------------
2.5 Pre-Closing Merger Consideration Adjustment..................................................... 5
-------------------------------------------
2.6 Post-Closing Reduction of Merger Consideration.................................................. 5
----------------------------------------------
2.7 Post-Closing Increase of Merger Consideration................................................... 6
---------------------------------------------
2.8 Shareholders' Representative.................................................................... 7
----------------------------
2.9 Resolution of Dispute........................................................................... 8
---------------------
2.10 Dissenting Shares............................................................................... 9
-----------------
2.11 Exchange Procedures............................................................................. 9
-------------------
2.12 No Further Ownership Rights in Company Stock................................................... 11
--------------------------------------------
2.13 Lost, Stolen or Destroyed Certificates......................................................... 11
--------------------------------------
2.14 Taking of Necessary Action; Further Action..................................................... 11
------------------------------------------
3. INDEMNITY ESCROW........................................................................................ 12
3.1 Creation of Indemnity Escrow................................................................... 12
----------------------------
3.2 Terms of Indemnity Escrow..................................................................... 12
--------------------------
3.3 Voting and Investment regarding Escrow Shares.................................................. 12
---------------------------------------------
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PRINCIPAL SHAREHOLDERS................................ 12
4.1 Enforceable Obligations........................................................................ 13
-----------------------
4.2 Authority; Ownership........................................................................... 13
--------------------
4.3 Validity of Contemplated Transactions.......................................................... 13
-------------------------------------
4.4 Consents and Approvals......................................................................... 13
----------------------
4.5 Authorizations................................................................................. 13
--------------
4.6 Accounts and Notes Receivable, etc............................................................. 13
----------------------------------
4.7 Litigation..................................................................................... 14
----------
4.8 Brokers........................................................................................ 14
-------
5. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY ............................................... 14
5.1 Corporate Existence............................................................................ 14
-------------------
5.2 Corporate Power; Authorization; Enforceable Obligations........................................ 14
-------------------------------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
5.3 Authority; Ownership........................................................................... 15
--------------------
5.4 Validity of Contemplated Transactions.......................................................... 15
-------------------------------------
5.5 Capitalization of the Company.................................................................. 15
-----------------------------
5.6 Transactions in Capital Stock.................................................................. 16
-----------------------------
5.7 No Subsidiaries, etc........................................................................... 16
--------------------
5.8 Predecessor Status; etc........................................................................ 16
------------------------
5.9 Consents and Approvals......................................................................... 16
----------------------
5.10 Third-Party Options, Warrants, etc............................................................. 16
----------------------------------
5.11 Financial Statements........................................................................... 17
--------------------
5.12 Liabilities and Obligations.................................................................... 18
---------------------------
5.13 Accounts and Notes Receivable.................................................................. 19
-----------------------------
5.14 Permits........................................................................................ 19
-------
5.15 Real and Personal Property..................................................................... 19
--------------------------
5.16 Contracts and Commitments...................................................................... 20
-------------------------
5.17 Government Contracts........................................................................... 22
--------------------
5.18 Title to Real Property......................................................................... 22
----------------------
5.19 Insurance...................................................................................... 22
---------
5.20 Employees...................................................................................... 22
---------
5.21 Employee Benefit Plans and Arrangements........................................................ 23
---------------------------------------
5.22 Compliance with Law; Authorizations............................................................ 26
-----------------------------------
5.23 Transactions With Affiliates................................................................... 27
----------------------------
5.24 Litigation..................................................................................... 27
----------
5.25 Restrictions................................................................................... 27
------------
5.26 Taxes.......................................................................................... 27
-----
5.27 Intellectual Property Matters.................................................................. 29
-----------------------------
5.28 Completeness; No Violations.................................................................... 30
---------------------------
5.29 Absence of Changes............................................................................. 30
------------------
5.30 Deposit Accounts; Powers of Attorney........................................................... 32
------------------------------------
5.31 Books of Account............................................................................... 32
----------------
5.32 Environmental Matters.......................................................................... 32
---------------------
5.33 No Illegal Payments............................................................................ 34
-------------------
5.34 Disclosure..................................................................................... 34
----------
5.35 Inventory and Equipment........................................................................ 34
-----------------------
5.36 Corporate Records.............................................................................. 34
-----------------
5.37 Customers...................................................................................... 35
---------
5.38 Product Warranties............................................................................. 35
------------------
5.39 No Defective Products.......................................................................... 35
---------------------
5.40 Brokers........................................................................................ 35
-------
6. REPRESENTATIONS OF THE PARENT AND NEWCO................................................................. 35
6.1 Corporate Existence............................................................................ 36
-------------------
6.2 Corporate Power and Authorization.............................................................. 36
---------------------------------
6.3 Consents and Approvals......................................................................... 36
----------------------
6.4 Parent Common Stock............................................................................ 36
-------------------
6.5 SEC Documents; Parent Financial Statements..................................................... 36
------------------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
6.6 No Conflicts................................................................................... 37
------------
6.7 Absence of Changes............................................................................. 37
------------------
6.8 Ownership of Newco; No Prior Activities........................................................ 37
---------------------------------------
6.9 Brokers........................................................................................ 38
-------
7. COVENANTS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS................................................. 38
7.1 Conduct of Business............................................................................ 38
-------------------
7.2 Compliance with Laws, etc...................................................................... 42
--------------------------
7.3 Exclusivity.................................................................................... 42
-----------
7.4 Third-Party Approvals.......................................................................... 42
---------------------
7.5 Amendment to Articles of Incorporation......................................................... 42
--------------------------------------
7.6 Non-Competition Agreements..................................................................... 43
--------------------------
7.7 Lock-Up Agreements............................................................................. 43
------------------
7.8 Employment Agreements.......................................................................... 43
---------------------
7.9 Amendment to Convertible Securities............................................................ 43
-----------------------------------
8. ADDITIONAL AGREEMENTS................................................................................... 43
8.1 Fairness Hearing; Registration of Shares....................................................... 43
----------------------------------------
8.2 Approval of the Shareholders................................................................... 44
----------------------------
8.3 Access to Information.......................................................................... 45
---------------------
8.4 Expenses....................................................................................... 45
--------
8.5 Public Disclosure.............................................................................. 46
-----------------
8.6 Approvals...................................................................................... 46
---------
8.7 FIRPTA Compliance.............................................................................. 46
-----------------
8.8 Additional Documents and Further Assurances.................................................... 46
-------------------------------------------
8.9 NNM Listing of Additional Shares Application................................................... 46
--------------------------------------------
8.10 Takeover Statutes.............................................................................. 47
-----------------
8.11 Notification of Certain Matters................................................................ 47
-------------------------------
8.12 Company Options, Warrants, etc................................................................. 47
------------------------------
8.13 Tax Matters.................................................................................... 47
-----------
9. CONDITIONS TO THE MERGER................................................................................ 48
9.1 Conditions to Obligations of Each Party to Effect the Merger................................... 48
------------------------------------------------------------
9.2 Additional Conditions to Obligations of the Company............................................ 49
---------------------------------------------------
9.3 Additional Conditions to the Obligations of Parent and Newco................................... 50
------------------------------------------------------------
10. INDEMNIFICATION; SURVIVAL............................................................................... 51
10.1 General Indemnification by the Company and the Shareholders.................................... 51
-----------------------------------------------------------
10.2 Indemnification by the Parent and Newco........................................................ 52
---------------------------------------
10.3 Third-Party Claims............................................................................. 53
------------------
10.4 Limitations on Indemnification................................................................. 54
------------------------------
10.5 Survival of Representations and Warranties..................................................... 55
------------------------------------------
11. TERMINATION, AMENDMENT AND WAIVER....................................................................... 55
11.1 Termination.................................................................................... 55
-----------
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
11.2 Effect of Termination.......................................................................... 56
---------------------
11.3 Amendment...................................................................................... 56
---------
11.4 Extension; Waiver.............................................................................. 56
-----------------
11.5 Procedure for Termination, Amendment, Extension or Waiver...................................... 56
---------------------------------------------------------
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION............................................................... 57
12.1 The Parent..................................................................................... 57
12.2 Damages........................................................................................ 57
13. GENERAL................................................................................................. 57
13.1 Cooperation.................................................................................... 57
-----------
13.2 Successors and Assigns......................................................................... 57
----------------------
13.3 Entire Agreement............................................................................... 58
----------------
13.4 Counterparts................................................................................... 58
------------
13.5 Brokers and Agents............................................................................. 58
------------------
13.6 Notices........................................................................................ 58
-------
13.7 Governing Law.................................................................................. 59
-------------
13.8 Exercise of Rights and Remedies................................................................ 60
-------------------------------
13.9 Time........................................................................................... 60
----
13.10 Severability................................................................................... 60
------------
13.11 Remedies Cumulative............................................................................ 60
-------------------
13.12 Captions....................................................................................... 60
--------
14. DEFINITIONS............................................................................................. 60
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is made as of May 24,
1999, by and among VERTICALNET, INC., a Pennsylvania corporation ("Parent"),
ISADRA ACQUISITION CORP., a California corporation and a wholly-owned subsidiary
of Parent ("Newco"), ISADRA, INC., a California corporation (the "Company"),
HUGO DALEY, an individual, MUSTAFA SYED, an individual (collectively, the
"Principal Shareholders"), and TIRA CAPITAL MANAGEMENT, INC., a California
corporation, as Shareholders' Representative. Certain other terms are used
herein as defined below in Article 14 or elsewhere in this Agreement.
RECITALS
--------
A. This Agreement sets forth the terms and conditions under which Newco
will merge with and into the Company (the "Merger") in accordance with this
Agreement. The parties intend that (a) upon completion of the Merger, the
Company will be a wholly-owned subsidiary of Parent and (b) for federal income
tax purposes, the Merger will constitute a reorganization under Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"). For purposes of
this Agreement, Parent, Newco and the Company are sometimes referred to herein
as the "Constituent Corporations."
B. The Board of Directors of each of the Constituent Corporations believes
it is in the best interests of such Constituent Corporation and their respective
shareholders that the Parent complete a business combination through the merger
of Newco with and into the Company and, in furtherance thereof, have approved
the Merger.
C. The Boards of Directors of each of the Constituent Corporations have
approved the Merger, this Agreement and the transactions contemplated hereby.
D. Pursuant to the Merger, among other things, and subject to the terms
and conditions of this Agreement, all of the issued and outstanding shares of
capital stock of the Company shall be converted into the right to receive the
Merger Consideration, subject to the terms and conditions hereinafter provided.
E. Concurrently herewith, the Company and the Parent have entered into a
Loan Agreement in the form attached hereto as Exhibit A.
---------
F. The Company, the Principal Shareholders, Parent and Newco desire to
make certain representations, warranties, covenants and agreements in connection
with the Merger.
G. A portion of the Merger Consideration issued to the Shareholders of the
Company in connection with the Merger shall be placed in escrow by Parent in
accordance with the terms and conditions set forth herein.
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises,
representations and warranties set forth herein, and for other good and valuable
consideration, intending to be legally bound hereby the parties agree as
follows:
AGREEMENT
---------
1. THE MERGER; CLOSING
1.1 The Merger. At the Effective Time and upon the terms and subject to
----------
the conditions hereof, and in accordance with the relevant provisions of the
California Code, Newco shall be merged with and into the Company. Following the
Merger, the Company shall continue as the surviving corporation (the "Surviving
Corporation") and a wholly-owned subsidiary of the Parent, and the separate
corporate existence of Newco shall cease.
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 11, as soon as practicable, but in any event within five
Business Days after the satisfaction or waiver of all conditions to the Merger,
the Company and Newco shall file with the Secretary of State of the State of
California, an agreement of merger and such other appropriate documents executed
in accordance with the California Code. The Merger shall become effective upon
such filing or at such later time as may be specified in such filing (the
"Effective Time").
1.3 Effects of the Merger. The Merger shall have the effects set forth
---------------------
in the California Code.
1.4 Articles of Incorporation and Bylaws. The Articles of Incorporation
------------------------------------
of Newco shall be the Articles of Incorporation of the Surviving Corporation
from and after the Effective Time until thereafter amended in accordance with
the provisions therein and as provided in the California Code. The bylaws of
Newco shall be the bylaws of the Surviving Corporation from and after the
Effective Time, continuing until thereafter amended in accordance with their
terms and the Articles of Incorporation of the Surviving Corporation and as
provided by the California Code.
1.5 Directors and Officers. The initial directors and officers of the
----------------------
Surviving Corporation shall be the directors and officers of Newco immediately
prior to the Effective Time, until their successors are duly elected and
qualified. Such persons shall hold such positions as directors and officers
until their successors are elected or appointed in accordance with the Articles
of Incorporation and the bylaws of the Surviving Corporation.
1.6 Location, Date. The closing (the "Closing") for the Merger and
--------------
transactions contemplated thereby (the "Transactions") shall be held at the
offices of Morgan, Lewis & Bockius LLP in Los Angeles, California, at 10:00 a.m.
(local time) as promptly as practicable (and in any event within five Business
Days) after satisfaction or waiver of the conditions to the consummation of the
Transactions set forth in Section 9 hereof, unless the parties hereto agree in
writing to another date or place. The date on which the Closing occurs is
referred to herein as the "Closing Date."
2
<PAGE>
1.7 Deliveries. At the Closing, subject to the terms and conditions
----------
contained herein:
(a) Newco and the Company shall deliver to the Secretary of State of
the State of California all such documents as required under the California Code
and the parties shall take all such other and further actions as may be required
by the California Code and any other applicable Law to make the Merger effective
upon the terms and subject to the conditions hereof;
(b) the Parent shall deliver the Merger Consideration in accordance
with the terms of Section 2.11; and
(c) the parties shall also deliver to each other the respective
agreements, legal opinions and other documents and instruments specified with
respect to them in Section 9.
2. MERGER CONSIDERATION; ADJUSTMENTS
2.1 Conversion of Capital Stock; Merger Consideration.
-------------------------------------------------
(a) Subject to adjustment pursuant to Sections 2.5, 2.6 and 2.7 hereof
and subject to the terms of Article 10 hereof, at the Effective Time, each
issued and outstanding share of capital stock of the Company (other than shares
to be canceled in accordance with Section 2.1(c) below) (collectively, "Company
Stock") shall, by virtue of the Merger and without any action on the part of the
holder thereof but subject to the effectiveness of the Merger, automatically be
converted into the right to receive, without interest:
(i) cash in an amount equal to the quotient of Three Million
Dollars ($3,000,000) (the "Aggregate Cash Consideration"), divided by the total
number of shares of Company Stock outstanding immediately prior to the Effective
Time on a fully-diluted basis (assuming for such purpose the exercise of all
then outstanding vested options, warrants, conversion rights, commitments or
other rights to acquire shares of the Company's capital stock plus all then
outstanding unvested Convertible Securities listed on Schedule 5.10 other than
-------------
(1) the options for 664,750 shares listed on Schedule 5.10 to the extent not
-------------
vested, and (2) options issued in accordance with Section 7.1(i)) (the "Total
Fully-Diluted Shares Outstanding"); and
(ii) such number of shares of Parent Common Stock equal to the
quotient of 500,000 shares of Parent Common Stock (the "Aggregate Stock
Consideration," and collectively with the Aggregate Cash Consideration, the
"Merger Consideration"), divided by the Total Fully-Diluted Shares Outstanding.
(b) At the Effective Time, each share of capital stock of Newco issued
and outstanding immediately prior to the effectiveness of the Merger shall, by
virtue of the Merger and without any action on the part of the holder thereof,
automatically be converted into one fully paid and non-assessable share of
common stock of the Surviving Corporation, all of which converted common stock
shall constitute all of the outstanding shares of capital stock of the Surviving
Corporation immediately after the effectiveness of the Merger.
3
<PAGE>
(b) At the Effective Time, each share of capital stock of Newco issued
and outstanding immediately prior to the effectiveness of the Merger shall, by
virtue of the Merger and without any action on the part of the holder thereof,
automatically be converted into one fully paid and non-assessable share of
common stock of the Surviving Corporation, all of which converted common stock
shall constitute all of the outstanding shares of capital stock of the Surviving
Corporation immediately after the effectiveness of the Merger.
(c) Each share of Company capital stock owned by the Company
immediately prior to the Effective Time shall be automatically canceled and
extinguished without any conversion thereof and without any further action on
the part of the Parent, Newco or the Company.
(d) Treatment of Options, Warrants, etc. At the Effective Time, any
-----------------------------------
option, warrant, commitment or other right to acquire shares of the Company's
capital stock (collectively, the "Options") then exercisable or any exercisable
portion thereof, which is unexercised immediately prior to the Effective Time
shall be automatically canceled and extinguished without any conversion thereof
and without further action on the part of Parent, Newco or the Company. At the
Effective Time, each Option (or part thereof) which is not then exercisable
which is outstanding immediately prior to the Effective Time shall be assumed by
Parent and converted into an option to purchase shares of Parent Common Stock in
such amount and at such exercise price as provided below and otherwise having
the same terms and conditions as are in effect immediately prior to the
Effective Time (except to the extent that such terms, conditions and
restrictions may be altered in accordance with their terms as a result of the
transactions contemplated hereby):
(i) The number of shares of Parent Common Stock to be subject
to the new option shall be equal to the product of (x) the number of shares of
capital stock of the Company issuable upon the exercise of the non-vested
portion of the Option immediately prior to the Effective Time (assuming all
conditions to the vesting of the non-vested portion of such Option had then been
met) and (y) the fraction, the numerator of which is 531,914.89 and the
denominator of which is the Total Fully-Diluted Shares Outstanding (such
fraction, the "Conversion Number"); provided, however, that, in the case of any
Options to which Section 421 of the Code applies by reason of its qualification
under any of Sections 422-424 of the Code ("Qualified Company Options"), the
option price, the number of shares purchasable pursuant to such Qualified
Company Option and the terms and conditions of such option shall be determined
in order to comply with Section 425(a) of the Code.
(ii) The exercise price per share of Parent Common Stock under
the new option shall be equal to (x) the exercise price per share of the capital
stock of the Company applicable to the nonvested portion of the Option
immediately prior to the Effective Time, divided by (y) the Conversion Number;
and
(iii) Upon each exercise of options by the holder thereof, the
aggregate number of shares of Parent Common Stock deliverable upon such exercise
shall be
4
<PAGE>
2.3 Estimated Closing Date Liabilities. No later than five Business
----------------------------------
Days preceding the Closing Date, the Parent shall prepare an estimate, prepared
in good faith, of the Actual Closing Date Liabilities (the "Estimated Closing
Date Liabilities"), and shall deliver a copy of the same to the Company and the
Shareholders' Representative (as defined in Section 2.8 below). The Company and
the Principal Shareholders shall provide the Parent, its agents and
representatives with full and complete access to the books of account and
records of the Company then in its or their possession and its and their full
cooperation to facilitate the compilation of information necessary to calculate
the Estimated Closing Date Liabilities and to prepare the Closing Balance Sheet
(as defined in Section 2.4 below).
2.4 Closing Balance Sheet. Within ninety (90) days following the
---------------------
Closing Date, the Parent shall cause its independent public accountants to
prepare an audited balance sheet for the Company as of the Closing Date,
prepared on a basis consistent with GAAP (the "Closing Balance Sheet"), setting
forth, among other things, the Actual Closing Date Liabilities. The Parent shall
provide the Shareholders' Representative with a copy of the Closing Balance
Sheet, together with copies of all work papers underlying such computations
within ninety (90) days of the Closing Date.
2.5 Pre-Closing Merger Consideration Adjustment.
-------------------------------------------
(a) Adjustment to Aggregate Cash Consideration. Prior to the
------------------------------------------
Closing Date, the Aggregate Cash Consideration shall be reduced by the amount of
Estimated Closing Date Liabilities.
(b) Adjustment to Aggregate Stock Consideration. In the event that
-------------------------------------------
the Estimated Closing Date Liabilities exceed $3,000,000, the Aggregate Stock
Consideration shall be reduced by 0.01063829787 shares of Parent Common Stock
for every $1.00 or part thereof by which the Estimated Closing Date Liabilities
exceed $3,000,000.
2.6 Post-Closing Reduction of Merger Consideration. Subject to the
----------------------------------------------
provisions of Section 2.9 hereof, the value of the aggregate Merger
Consideration shall be reduced by the amount, if any, by which the Actual
Closing Date Liabilities exceed the Estimated Closing Date Liabilities.
Reductions to the Merger Consideration pursuant to this Section, if any, shall
be paid by each of the Shareholders to the Parent as follows (i) first, from
the Escrow Cash in the same proportion as the portion of the Aggregate Cash
Consideration to be received by each such Shareholder bears to the Aggregate
Cash Consideration rounded up to the nearest whole cent, and (ii) second, from
the Escrow Stock , an aggregate of 0.01063829787 shares of Parent Common Stock
for each $1.00 by which Actual Closing Date Liabilities exceed the Estimated
Closing Date Liabilities less any amounts paid under subclause (i) above, in the
same proportion as the portion of the Aggregate Stock Consideration to be
received by each such Shareholder bears to the Aggregate Stock Consideration,
rounded up to the nearest whole share; and (iii) third, in event that the Actual
Closing Date Liabilities exceed the aggregate value of the Escrow Cash and the
Escrow Stock, each Shareholder shall pay to the Parent, by certified check
within 7 days of written notice from the Parent, the amount set forth in such
notice as owing by such Shareholder pursuant to this subclause (iii) calculated
on
5
<PAGE>
a pro rata basis (based upon such Shareholder's proportionate share of the total
Merger Consideration to be received by all Shareholders).
2.7 Post-Closing Increase of Merger Consideration. Subject to the
---------------------------------------------
provisions of Section 2.9 hereof, the value of the aggregate Merger
Consideration to be received by the Shareholders shall be increased by the
amount, if any, by which the Estimated Closing Date Liabilities exceed the
Actual Closing Date Liabilities. Increases to the Merger Consideration pursuant
to this Section, if any, shall be due and payable from the Parent to the
Exchange Agent within ten (10) Business Days following the Shareholders'
Representative's acceptance of the Closing Balance Sheet, or if the
Shareholders' Representative disputes the information contained in the Closing
Balance Sheet, ten (10) Business Days following the final resolution of the
dispute as provided in Section 2.9 below, as follows:
(a) Adjustment to Aggregate Cash Consideration. The Aggregate Cash
------------------------------------------
Consideration shall be increased by the amount by which Estimated Closing Date
Liabilities exceed the Actual Closing Date Liabilities, which amount shall be
delivered by Parent to the Exchange Agent for delivery to the Shareholders. The
Exchange Agent shall distribute the additional cash consideration to each of the
Shareholders in the same proportion as the portion of the Aggregate Cash
Consideration to be received by each such Shareholder bears to the Aggregate
Cash Consideration rounded up to the nearest whole cent, provided, however, that
in no event shall the adjustments to the Aggregate Cash Consideration pursuant
to this Section 2.7(a) cause the Aggregate Cash Consideration to exceed
$3,000,000;
(b) Adjustment to Aggregate Stock Consideration. In the event that
-------------------------------------------
the Aggregate Cash Consideration, as adjusted pursuant to subclause (a) above,
equals $3,000,000, any additional increases to the Merger Consideration required
pursuant to this Section 2.7 shall be made by increasing the Aggregate Stock
Consideration as follows: for every $1.00 or part thereof that increases to the
Merger Consideration required pursuant to this Section 2.7 would otherwise cause
the Aggregate Cash Consideration to exceed $3,000,000, the Parent shall deliver
to the Exchange Agent an aggregate of 0.01063829787 shares of Parent Common
Stock for delivery to the Shareholders. The Exchange Agent shall distribute the
additional shares of Parent Common Stock to each of the Shareholders in the same
proportion as the portion of the Aggregate Stock Consideration that is to be
received by each such Shareholder bears to the Aggregate Stock Consideration.
Fractional shares of Parent Common Stock will not be issued. Each Shareholder
who would otherwise be entitled to receive a fractional interest in a share of
Parent Common Stock shall receive a cash distribution in lieu of such fractional
share in the amount obtained by multiplying such fraction by $94.
2.8 Shareholders' Representative. (a) By approval of this Agreement
----------------------------
and the transactions contemplated hereby by the requisite percentage of the
Shareholders under the California Code, the Shareholders designate Tira Capital
Management, Inc., who hereby accepts such appointment (or, in the event that
Tira Capital Management, Inc. is unable to serve or resigns, Nadir Ali) to be
such Shareholder's representative for purposes of this Agreement (the
"Shareholders' Representative"). The Shareholders shall be bound by any and all
actions taken by the Shareholders' Representative on their behalf.
6
<PAGE>
(a) The Parent and Newco shall be entitled to rely upon any
communication or writing given or executed by the Shareholders' Representative.
All communications or writings to be sent to Shareholders pursuant to this
Agreement may be addressed to the Shareholders' Representative and any
communication or writing so sent shall be deemed notice to all of the
Shareholders hereunder. By approval of this Agreement and the transactions
contemplated hereby by the requisite percentage of the Shareholders under the
California Code, the Shareholders consent and agree that the Shareholders'
Representative is authorized to accept deliveries, including any notice, on
behalf of the Shareholders pursuant hereto.
(b) By approval of this Agreement and the transactions contemplated
hereby by the requisite percentage of the Shareholders under the California
Code, the Shareholders' Representative shall be appointed and constituted the
true and lawful attorney-in-fact of each Shareholder, with full power in his or
her name and on his or her behalf to act according to the terms of this
Agreement in the absolute discretion of the Shareholders' Representative, and in
general to do all things and to perform all acts including, without limitation,
executing and delivering all agreements, certificates, receipts, instructions
and other instruments contemplated by or deemed advisable in connection with
Sections 2 and 10 of this Agreement. This power of attorney and all authority
hereby and thereby conferred shall be granted subject to and coupled with the
interest of the Shareholders and in consideration of the mutual covenants and
agreements made herein, and shall be irrevocable and shall not be terminated by
any act of any Shareholder, by operation of law, whether by such Shareholder's
death or any other event.
(c) Notwithstanding the foregoing, the Shareholders' Representative
shall inform each Shareholder of all notices received, and of all actions,
decisions, notices and exercises of any rights, power or authority proposed to
be done, given or taken by such Shareholders' Representative, and shall act as
directed by the Shareholders holding a majority interest in the Escrow Property.
(d) The Shareholders' Representative shall not suffer any liability
or loss for any act performed or omitted to be performed by him in his capacity
as Shareholders' Representative under this Agreement in the absence of gross
negligence or willful misconduct. The Shareholders' Representative may consult
with legal counsel in connection with his duties hereunder and shall be fully
protected by any act taken, suffered, permitted, or omitted in good faith in
accordance with the advice of legal counsel.
(e) The Shareholders' Representative shall be entitled to employ such
legal counsel and other experts as he may deem necessary to advise him properly
with respect to his rights and obligations hereunder and to evaluate claims and
to pursue challenges to claims or to defend third party claims. The reasonable
expenses and fees of such legal counsel and, experts, and any reasonable,
documented out-of-pocket expenses which the Shareholders' Representative incurs
under this Section 2.8 in relation to evaluating, challenging or contesting
claims, shall be reimbursed solely by the Shareholders.
(f) The Shareholders shall indemnify, defend and hold the
Shareholders' Representative harmless from and against any and all loss, damage,
tax, liability and expense that
7
<PAGE>
may be incurred by him arising out of or in connection with the acceptance or
administration of the Shareholder Representative's duties, except as caused by
his gross negligence or willful misconduct, including the legal costs and
expenses of defending himself against any claim or liability in connection with
his performance as Shareholders' Representative.
2.9 Resolution of Dispute. In the event that the Shareholders'
---------------------
Representative shall dispute the information set forth by the Parent in the
Closing Balance Sheet, then within ten (10) Business Days following the date of
the delivery to the Shareholders' Representative by the Parent of the Closing
Balance Sheet, the Shareholders' Representative shall provide written notice to
the Parent specifying generally the amount disputed and the basis for the
dispute together with supporting documentation reflecting the analysis of and
justification for any recomputation made. The Shareholders' Representative and
the Parent shall make good faith efforts to resolve the dispute through
negotiation for a period of ten (10) Business Days following the written notice
from the Shareholders' Representative to the Parent identifying and describing
generally the nature of the dispute. In the event the parties are unable to
finally resolve the dispute within such ten (10) Business Day period, the
parties to the dispute may elect by mutual agreement to extend the period of
negotiation (and may elect by mutual agreement to engage a mediator to assist in
such negotiation). If, after such ten (10) Business Day period the parties
elect not to extend the period of negotiation or the parties shall have failed
to reach a written agreement with respect to such dispute, the matter shall be
referred to the American Arbitration Association for the appointment of a single
arbitrator ("Arbitrator"), which shall act as appointing authority and shall
issue its binding decision as to the dispute. Such arbitration shall take place
in San Francisco, California. This arbitration provision is intended by the
parties to be self-executing and arbitration is intended by the parties to be
the exclusive means of resolving such disputes failing mutual resolution as
aforesaid. The Arbitrator shall have sole jurisdiction to determine whether (i)
a claim is subject to arbitration, (ii) the arbitration may proceed even if one
of the parties to the dispute refuses to attend or participate, and (iii) an
award against that party may be ordered pursuant to default or otherwise by the
Arbitrator. The parties agree that they will arbitrate all such disputes,
controversies and claims in accordance with this Section regardless of the
existence of any related dispute, action, or special proceeding between any or
all of the parties hereto and/or any third party. The Arbitrator shall conduct
the arbitration with all reasonable dispatch. The decision of the Arbitrator
shall be final and binding upon the parties hereto, and judgment upon the award
rendered by the Arbitrator may be entered in any court having jurisdiction
thereof. The prevailing party shall be entitled to recover its reasonable
attorneys' fees and its share of the costs.
Notwithstanding anything to the contrary contained in this Section, a party
shall have the right to institute judicial proceedings against another party or
anyone acting by, through or under such other party in order to enforce the
instituting party's rights hereunder through specific performance, injunction or
similar equitable relief. Each party, accordingly, submits to the exclusive
jurisdiction of the courts of the State of California and the U.S. federal
courts for the Northern District of California for purposes thereof, and waives
any objection to venue in San Francisco, California.
2.10 Dissenting Shares.
-----------------
8
<PAGE>
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Stock held by a holder who has demanded and perfected
dissenters' rights for such shares in accordance with the California Code and
who, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares") shall not be converted into or
represent a right to receive the Parent Common Stock or the cash consideration
pursuant to Section 2.1, but the holder thereof shall only be entitled to such
rights as are granted by the California Code.
(b) If any holder of shares of Company capital stock who demands
dissenters' rights for such shares under the California Code shall effectively
withdraw or lose (through failure to perfect or otherwise) the right to
dissenters' rights, then, as of the later of (i) the Effective Time or (ii) the
occurrence of such event, such holder's shares shall automatically be converted
into and represent only the right to receive the Parent Common Stock or the cash
consideration as provided in Section 2.1, without interest thereon, upon
surrender of the certificate representing such shares.
(c) The Company shall give the Parent (i) prompt notice of its
receipt of any written demands for dissenters' rights for any shares of Company
capital stock, withdrawals of such demands, and any other instruments relating
to the Merger served pursuant to the California Code and received by the Company
and (ii) the opportunity to participate in all negotiations and proceedings with
respect to demands for dissenters' rights under the California Code. The Company
shall not, except with the prior written consent of the Parent or as may be
required under applicable law, voluntarily make any payment with respect to any
demands for dissenters' rights for Company capital stock or offer to settle or
settle any such demands.
2.11 Exchange Procedures.
-------------------
(a) The Parent Common Stock and Aggregate Cash Consideration. On the
--------------------------------------------------------
Closing Date, the Parent shall deposit with the Exchange Agent for exchange in
accordance with this Article 2, the aggregate number of shares of the Parent
Common Stock and Aggregate Cash Consideration issuable in exchange for shares of
Company Stock, less the aggregate number of shares of Parent Common Stock and
cash consideration otherwise issuable in exchange for shares of Company Stock
but for the demand for and perfection by the stockholders thereof of their
dissenters' rights under the California Code; provided, however, that, on behalf
of the holders of Company Stock, the Parent shall deposit into an escrow
account such number of shares of the Parent Common Stock and cash as set forth
in Section 3.1.
(b) Exchange Procedures. As soon as practicable after the Effective
-------------------
Time (but in no event more than five (5) Business Days thereafter), the
Surviving Corporation shall cause to be mailed to each holder of record of a
certificate or certificates (the "Certificates") which immediately prior to the
Effective Time represented issued and outstanding shares of Company Stock and
which shares were converted into shares of the Parent Common Stock pursuant to
Section 2.1, (i) a letter of transmittal in customary form (which shall specify
that delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent and
shall be in such form and have such other provisions as the Parent may
reasonably specify) and (ii) instructions for use in effecting the surrender of
the Certificates in exchange for certificates representing shares of the Parent
Common Stock. Upon surrender of a
9
<PAGE>
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by the Parent, together with such letter of
transmittal, duly completed and validly executed in accordance with the
instructions thereto, the holder of such Certificate shall be entitled to
receive in exchange therefor (i) such amount of cash and (ii) a certificate
representing the number of whole shares of the Parent Common Stock, (less the
amount of cash and the number of shares of the Parent Common Stock to be
deposited into escrow with the Indemnity Escrow Agent on such holder's behalf
pursuant to Article 3 hereof), to which such holder is entitled pursuant to
Section 2.1, and the Certificate so surrendered shall be canceled. As soon as
practicable after the Effective Time, and subject to and in accordance with the
provisions of Article 3 hereof, the Parent shall cause to be distributed to the
Indemnity Escrow Agent (x) a certificate or certificates (in such denominations
as may be requested by the Indemnity Escrow Agent) representing that number of
shares of the Parent Common Stock equal to the Escrow Shares, which certificate
shall be registered in the name of the Indemnity Escrow Agent and (y) the Escrow
Cash. Such shares shall be beneficially owned by the holders on whose behalf
such shares were deposited in the escrow fund and shall be available to
compensate Parent in accordance with Article 3. Until surrendered, each
outstanding Certificate that, prior to the Effective Time, represented shares of
Company Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the right to payment of dividends declared by the
Parent with a record date on or after the Effective Time (which is covered in
clause (c), below), to evidence the ownership of the portion of the Merger
Consideration into which such shares of the Company Stock shall have been so
converted.
(c) Distributions With Respect to Unexchanged Shares of Company
Stock. No dividends or other distributions with respect to the Parent Common
Stock declared or made after the Effective Time and with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Common Stock represented thereby until the
holder of record of such Certificate shall surrender such Certificate. Subject
to applicable law, promptly following surrender of any such Certificate, there
shall be paid to the record holder of the certificates representing whole shares
of the Parent Common Stock issued in exchange therefor, without interest, at the
time of such surrender, the amount of dividends or other distributions with a
record date after the Effective Time theretofore payable with respect to such
whole shares of the Parent Common Stock.
(d) Transfers of Ownership. If any certificate for shares of the
----------------------
Parent Common Stock is to be issued pursuant to the Merger in a name other than
that in which the Certificate surrendered in exchange therefor is registered, it
will be a condition of the issuance thereof that the Certificate so surrendered
will be properly endorsed and otherwise in proper form for transfer and that the
person requesting such exchange will have paid to the Parent or any agent
designated by it any transfer or other taxes required by reason of the issuance
of a certificate for shares of the Parent Common Stock in any name other than
that of the registered holder of the Certificate surrendered, or established to
the satisfaction of the Parent or any agent designated by it that such tax has
been paid or is not payable.
2.12 No Further Ownership Rights in Company Stock. All cash and shares
--------------------------------------------
of Parent Common Stock issued upon the surrender for exchange of shares of
Company Stock in accordance with the terms hereof (including any cash paid in
respect thereof) shall be deemed to have been
10
<PAGE>
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 records of
the Company of shares of Company Stock which were outstanding immediately prior
to the Effective Time. If, after the Effective Time, Certificates are presented
to the Surviving Corporation for any reason, they shall be canceled and
exchanged as provided in this Article 2.
2.13 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificates evidencing shares of Company Stock shall have been lost, stolen or
destroyed, the Exchange Agent shall issue certificates representing such shares
of Parent Common Stock in exchange for such lost, stolen or destroyed
Certificates, upon the making of an affidavit of that fact by the holder
thereof; provided, however, that Parent or the Exchange Agent may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed Certificates to provide an indemnity or
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against the Parent or the Exchange Agent with respect to
the Certificates alleged to have been lost, stolen or destroyed.
2.14 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, the officers and directors of the Surviving
Corporation are fully authorized to take, and will take, all such lawful and
necessary action.
30 INDEMNITY ESCROW
3.1 Creation of Indemnity Escrow.
----------------------------
(a) At the Closing, as collateral security for the payment of any
obligations of the Shareholders under Section 2.7 and any indemnification
obligations of the Company and the Shareholders pursuant to Section 10.1 hereof,
the following shall be delivered to an escrow agent designated by the Parent
and reasonably acceptable to the Company (the "Indemnity Escrow Agent"):
(i) 37,500 shares of Parent Common Stock, which shall be
contributed by the Shareholders, from each Shareholder in the same proportion as
the portion of the Aggregate Stock Consideration to be received by each such
Shareholder bears to the Aggregate Stock Consideration rounded up to the nearest
whole share (the "Escrow Shares"); and
(ii) $225,000, which shall be contributed by the Shareholders,
from each Shareholder in the same proportion as the portion of the Aggregate
Cash Consideration to be received by each such Shareholder bears to the
Aggregate Cash Consideration rounded up to the nearest whole cent (the "Escrow
Cash").
(b) The Escrow Shares and the Escrow Cash are collectively referred
to hereinafter as the "Escrow Property." In addition, the Escrow Property shall
include all dividends and other property at any time received or otherwise
distributed in respect of or in exchange for any
11
<PAGE>
or all of the Escrow Property, all securities hereafter issued in substitution
for any of the foregoing, all certificates and instruments representing or
evidencing such securities, all cash and non-cash proceeds of all of the
foregoing property except as provided in Section 3.3 and all rights, titles,
interests, privileges and preferences appertaining or incident to the foregoing
property.
3.2 Terms of Indemnity Escrow. The Escrow Property shall be held and
--------------------------
disbursed by the Indemnity Escrow Agent in accordance with the terms of an
Indemnity Escrow Agreement substantially in the form attached hereto as Exhibit
-------
B.
- -
3.3 Voting and Investment regarding Escrow Shares. The Shareholders
---------------------------------------------
shall be entitled to exercise all voting powers incident to the Escrow Shares
held by the Indemnity Escrow Agent as their nominee, but shall not be entitled
to exercise any investment or dispositive powers over such Escrow Shares. The
Escrow Cash shall be invested from time to time by the Indemnity Escrow Agent as
provided in the Indemnity Escrow Agreement.
40 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE PRINCIPAL SHAREHOLDERS
As of the date hereof and as of the Effective Time, each of the Principal
Shareholders severally but not jointly represents, warrants and covenants to the
Parent and Newco, as follows:
4.1 Enforceable Obligations. This Agreement has been, and the other
-----------------------
agreements, documents and instruments entered into by each of the Principal
Shareholders in connection with this Agreement (the "Principal Shareholder
Documents") will be duly executed and delivered by the applicable Principal
Shareholder, and this Agreement constitutes, and the Principal Shareholder
Documents when executed and delivered will constitute, the legal, valid and
binding obligations of the applicable Principal Shareholder, enforceable against
him in accordance with their respective terms.
4.2 Authority; Ownership. Each Principal Shareholder has the full legal
--------------------
right, power and capacity or authority to enter into this Agreement. Upon the
date of this Agreement and immediately prior to the Closing Date, each Principal
Shareholder owns and will own beneficially and of record all of the shares of
capital stock of the Company identified on Annex I as being owned by such
Principal Shareholder.
4.3 Validity of Contemplated Transactions. Subject to obtaining the
-------------------------------------
Company Required Consents as specified in Section 5.9, the execution, delivery
and performance of this Agreement by each Principal Shareholder does not and
will not violate, conflict with or result in the breach of any term, condition
or provision of, or require the consent of any other person under (a) any
existing law, ordinance, or governmental rule or regulation to which the
Principal Shareholder is subject, (b) any judgment, order, writ, injunction,
decree or award of any Governmental Entity which is applicable to the Principal
Shareholder, or (c) any mortgage, indenture, agreement, contract, commitment,
lease, plan, Authorization, or other instrument, document or understanding, oral
or written, to which such Principal Shareholder is a party, by which the
Principal Shareholder may have rights or by which any of the properties or
assets of the Principal
12
<PAGE>
Shareholder may be bound or affected, or give any party with rights thereunder
the right to terminate, modify, accelerate or otherwise change the existing
rights or obligations thereunder.
4.4 Consents and Approvals. Except for spousal consents, neither the
----------------------
execution and delivery by the Principal Shareholders of the Agreement or the
Principal Shareholder Documents, nor the performance of the transactions
contemplated hereby and thereby, require the consent or approval of any Person
nor constitute a default or cause any payment obligation to arise under (a) any
law or court order to which the Principal Shareholders are subject, (b) any
Contract or other document to which the Principal Shareholders are a party or by
which the properties or other assets of the Principal Shareholders may be
subject.
4.5 Authorizations. Neither of the Principal Shareholders owns or has
--------------
any proprietary, financial or other interest (direct or indirect except solely
as a Shareholder) in any Authorization which the Company owns, possesses or uses
in the operation of its business as now or previously conducted.
4.6 Accounts and Notes Receivable, etc. Except as set forth on
----------------------------------
Schedule 4.6, there are no outstanding Company receivables from or advances to
- ------------
the Principal Shareholders. There is no contest, claim, counterclaim, defense
or right of set-off with respect to any amounts owing from the Principal
Shareholders to the Company.
4.7 Litigation. (a) No litigation, including any arbitration,
----------
investigation or other proceeding of or before any court, arbitrator or
governmental or regulatory official, body or authority is pending or, to the
knowledge of the Principal Shareholders, threatened against the Company which
relates to the transactions contemplated by this Agreement.
(b) Except as set forth on Schedule 5.24, no litigation, including
-------------
any arbitration, investigation or other proceeding of or before any court,
arbitrator or governmental or regulatory official, body or authority is pending
or, to the knowledge of the Principal Shareholders, threatened against the
Company or which relates to the Company.
(c) Neither of the Principal Shareholders knows of any reasonably
likely basis for any litigation, arbitration, investigation or proceeding
referred to in Sections 4.7(a) or (b).
4.8 Brokers. Except as set forth on Schedule 4.8, neither of the
------- ------------
Principal Shareholders have, on their individual behalf or on behalf of the
Company, employed any broker, financial advisor or finder or incurred any
liability for any brokerage fees, commissions, or finder's fees in connection
with the transactions contemplated by this Agreement.
50 REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY
As of the date hereof and as of the Effective Time, the Company represents,
warrants and covenants to the Parent and Newco, as follows (for purposes of this
Agreement, any references to the knowledge of the Company, the Company's
knowledge or words to that effect shall refer to the knowledge of Hugo Daley,
Mustafa Syed and Nadir Ali after due inquiry):
13
<PAGE>
5.1 Corporate Existence. The Company is a corporation duly organized,
-------------------
validly existing and in good standing under the laws of the State of California.
Except as set forth on Schedule 5.1, the Company is duly qualified to do
------------
business and is in good standing as a foreign corporation in each jurisdiction
where the conduct of its business requires it to be so qualified. All of the
jurisdictions in which the Company is duly qualified to do business are listed
on Schedule 5.1.
------------
5.2 Corporate Power; Authorization; Enforceable Obligations. The
-------------------------------------------------------
Company has the corporate power, authority and legal right to execute and
deliver this Agreement and the Loan Documents and to perform transactions
contemplated hereby and thereby. The execution, delivery and performance of
this Agreement and the Loan Documents by the Company have been duly authorized
by the Board of Directors and, other than the approval of this Agreement by the
Shareholders, no further corporate action on the part of the Company is
necessary to authorize this Agreement and the Loan Documents and the performance
of the transactions contemplated hereby and thereby. This Agreement and the Loan
Documents have been, and the other agreements, documents and instruments
required to be delivered by the Company in accordance with the provisions hereof
and thereof (the "Company Documents") will be duly executed and delivered on
behalf of the Company by duly authorized officers of the Company, and this
Agreement and the Loan Documents constitute, and the Company Documents when
executed and delivered will constitute, the legal, valid and binding obligations
of the Company, enforceable against it in accordance with their respective
terms.
5.3 Authority; Ownership. Attached hereto as Annex I is a true,
--------------------
accurate and correct shareholders' list setting forth the number and class of
Company Stock owned beneficially and of record by each Shareholder as of the
date of this Agreement. The Company covenants that, at least five (5) Business
Days prior to the Closing Date, the Company shall deliver to the Parent a
revised Annex I which shall be true, accurate and correct as of the date of such
delivery and as of the Closing Date, including the addresses of all such
Shareholders.
5.4 Validity of Contemplated Transactions. The execution, delivery and
-------------------------------------
performance of the Loan Documents and, subject to obtaining the Company Required
Consents as specified in Section 5.9, the execution, delivery and performance of
this Agreement, by the Company does not and will not violate, conflict with or
result in the breach of any term, condition or provision of, or require the
consent of any other person under (a) any existing law, ordinance, or
governmental rule or regulation to which the Company is subject, (b) any
judgment, order, writ, injunction, decree or award of any Governmental Entity
which is applicable to the Company, (c) the Charter Documents of the Company or
any securities issued by the Company, or (d) any mortgage, indenture, agreement,
contract, commitment, lease, plan, Authorization, or other instrument, document
or understanding, oral or written, to which the Company is a party, by which the
Company may have rights or by which any of the properties or assets of the
Company may be bound or affected, or give any party with rights thereunder the
right to terminate, modify, accelerate or otherwise change the existing rights
or obligations of the Company thereunder.
5.5 Capitalization of the Company.
-----------------------------
14
<PAGE>
(a) As of the date of the execution of this Agreement, the authorized
capital stock of the Company consists of: (1) 15,000,000 shares of Common Stock,
of which 9,813,652 shares are currently issued and outstanding, and (2)
3,000,000 shares of Preferred Stock, all of which are designated Series A
Preferred Stock, of which 2,309,225 are currently issued and outstanding. As
of the Closing Date, the authorized capital stock of the Company shall consist
of: (x) 20,000,000 shares of Common Stock, (y) 8,000,000 shares of Preferred
Stock, of which 3,000,000 shares shall be designated Series A Preferred Stock
and 5,000,000 shares shall be designated Series B Preferred Stock. Annex I (as
amended pursuant to Section 5.3 hereof) hereto sets forth a true, accurate and
complete list of the issued and outstanding shares of the Company Stock owned by
each of the Shareholders (as amended pursuant to Section 5.3 hereof). Except as
disclosed on Schedule 5.5(a) hereto, to the best of the Company's knowledge, all
---------------
of the issued and outstanding shares of the Company Stock are free and clear of
all liens, security interests, pledges, charges, voting trusts, restrictions,
encumbrances and claims of every kind, except for restrictions imposed by
applicable securities laws.
(b) All of the issued and outstanding shares of Company Stock
currently outstanding and to be outstanding on the Effective Time are and will
have been duly authorized and validly issued, fully paid and nonassessable, are
and will be owned of record and beneficially by the Shareholders and in the
amounts set forth in Annex I (as amended pursuant to Section 5.3 hereof), and
are and will have been offered, issued, sold and delivered by the Company in
compliance with all applicable state and federal laws concerning the offering,
sale or issuance of securities. None of such shares are or will have been, and
none of the shares from which they will have derived were issued in violation of
the preemptive rights of any past or present shareholder, whether contractual or
statutory.
5.6 Transactions in Capital Stock. The Company has not acquired any
-----------------------------
treasury stock since December 31, 1998. The Company has no obligation
(contingent or otherwise) to purchase, redeem or otherwise acquire any of its
equity securities or any interests therein or to pay any dividend or make any
distribution in respect thereof.
5.7 No Subsidiaries, etc. The Company has no subsidiaries and, except
--------------------
as set forth on Schedule 5.7, does not own, of record or beneficially, or
------------
control, directly or indirectly, any capital stock, any securities convertible
into capital stock or any other equity interest in any corporation, association
or other business entity, nor is, directly or indirectly, a participant in any
joint venture, partnership or other noncorporate entity.
5.8 Predecessor Status; etc. Schedule 5.8 lists all names of all
------------------------ ------------
predecessor companies of the Company, including the names of all entities from
whom the Company previously acquired substantially all of the assets of that
entity. Except as set forth on Schedule 5.8, the Company has not been a
------------
subsidiary or division of another corporation or been a part of an acquisition
which was later rescinded.
5.9 Consents and Approvals. Except for filings that may be required to
----------------------
effect the Merger under the laws of California, requisite Shareholder approval
of the transactions contemplated hereby as set forth in Section 8.2 hereof, the
fairness approval or registration statement contemplated under Section 8.1
hereof, and any consents specified in Schedule 5.9 (collectively, the "Company
-------------
15
<PAGE>
Required Consents"), neither the execution and delivery by the Company of the
Agreement, nor the performance of the transactions contemplated hereby, require
any filing with or consent or approval of any Governmental Entity or any other
third party nor constitute a default or cause any payment obligation to arise
under (a) any law or court order to which the Company is subject, (b) the
Charter Documents of the Company or (c) any Contract, Governmental Permit or
other document to which the Company is a party or by which the properties or
other assets the Company may be subject.
5.10 Third-Party Options, Warrants, etc.
----------------------------------
(a) Except as set forth on Schedule 5.10(a), there are no existing
----------------
agreements, options, warrants, conversion rights, convertible notes, commitments
or any other rights of any kind with, of or to any Person which obligates the
Company to issue any of its respective capital stock or which confers upon
Person any right to acquire any of the properties, assets or rights of the
Company or any interest therein (the "Convertible Securities"). All of the
options granted by the Company which are intended to be incentive stock options
meet all of the requirements for incentive stock options set forth under Section
422 of the Code.
(b) Schedule 5.10(b) sets forth those options which are vested as of
----------------
the date hereof, those options which shall have vested prior to the Effective
Time and those options which shall remain unvested immediately prior to the
Effective Time. Immediately prior to the Effective Time, there shall be no
outstanding vested Convertible Securities of the Company and, except as set
forth on Schedule 5.10(b), there shall be no outstanding unvested Convertible
----------------
Securities of the Company.
5.11 Financial Statements. Attached hereto as Schedule 5.11 are true,
-------------------- -------------
accurate and correct copies of the consolidated balance sheets of the Company at
December 31, 1996 (the "Audited Balance Sheet Date"), and the related statements
of income, cash flows and changes in stockholders' equity for the fiscal year
then ended, certified by the Company's independent public accountants, together
with the report of such independent public accountants thereon (the "1996
Audited Financial Statements"). The Company covenants that, no later than 10
Business Days prior to the Closing Date, it shall, and the Principal
Shareholders shall cause the Company to, deliver to the Parent true, accurate
and complete copies of the audited financial statements of the Company as of
December 31, 1997 and December 31, 1998, and the related statements of income,
cash flows and changes in stockholders' equity for the fiscal years then ended,
each certified by the Company's independent public accountants, together with
the reports of such independent public accountants thereon (collectively with
the 1996 Audited Financial Statements, the "Audited Financial Statements").
The Company further covenants that, no later than 10 Business Days prior to
the Closing Date, it shall, and the Principal Shareholders shall cause the
Company to, deliver to the Parent true, accurate and correct copies of the
unaudited, consolidated balance sheets of the Company at March 31, 1999 (the
"Interim Balance Sheet Date"), and March 31, 1998, and the related statements of
income and cash flows for the interim periods then ended (the "Unaudited
Financial Statements," and together with the Audited Financial Statements, the
"Financial Statements"), together with an officer's certificate from the
Company, dated as of the date of delivery, certifying that such
16
<PAGE>
Unaudited Financial Statements fairly and accurately present the financial
position of the Company at the dates indicated, and such statements of income,
cash flows and changes in stockholders' equity fairly present the results of
operations, cash flows and changes in stockholders' equity for the periods
indicated, except for normal recurring year-end adjustments which are not
expected to be material in amount and except for the addition of required
footnotes thereto.
All of the Financial Statements have been or shall have been prepared in
accordance with GAAP consistently applied throughout the periods involved. The
Audited Financial Statements, including the related notes, fairly present the
financial position, assets and liabilities (whether accrued, absolute,
contingent or otherwise) of the Company at the dates indicated and such
statements of income, cash flows and changes in stockholders' equity fairly
present the results of operations, cash flows and changes in stockholders'
equity of the Company for the periods indicated. The Unaudited Financial
Statements shall, as of the delivery date and as of the Closing Date, fairly and
accurately present the financial position of the Company at the dates indicated,
and such statements of income, cash flows and changes in stockholders' equity
fairly present the results of operations, cash flows and changes in
stockholders' equity for the periods indicated, except for normal recurring
year-end adjustments which are not expected to be material in amount and except
for the addition of required footnotes thereto.
5.12 Liabilities and Obligations.
---------------------------
(a) No later than 10 Business Days prior to the Closing Date, the
Company shall deliver to the Parent Schedule 5.12 which shall be an accurate
-------------
list, as of March 31, 1999, of: (i) all liabilities of the Company which are
reflected on the unaudited consolidated balance sheet as of the Interim Balance
Sheet Date included in the Unaudited Financial Statements; (ii) all liabilities
incurred thereafter other than in the ordinary course of business; (iii) all
material liabilities incurred thereafter in the ordinary course of business; and
(iv) all liabilities (A) incurred as of the Interim Balance Sheet Date that are
not reflected on the unaudited consolidated balance sheet as of the Interim
Balance Sheet Date and (B) all liabilities incurred thereafter that would not
have been so reflected had such liabilities been incurred as of the Interim
Balance Sheet Date. Each of the foregoing liabilities that has not theretofore
been paid or discharged shall be noted on Schedule 5.12. For purposes of this
-------------
Agreement, "liabilities" means liabilities of any kind, character or
description, whether accrued, absolute, secured or unsecured, contingent or
otherwise.
(b) For each such liability for which the amount is not fixed or
is contested, Schedule 5.12 shall include a summary description of the
-------------
liability, together with copies of all relevant non-privileged documentation
relating thereto, detail of all amounts claimed and any other action or relief
sought, the names of the claimant and all other parties to the claim, suit or
proceeding, the name of each court or agency before which such claim, suit or
proceeding is pending, the date such claim, suit or proceeding was instituted,
and a best estimate of the maximum amount, if any, which is likely to become
payable with respect to each such liability. If no estimate is provided, the
best estimate shall for purposes of this Agreement be deemed to be zero. On the
Closing Date, the Company shall deliver, and shall cause its accountants,
outside counsel and other representatives or agents to deliver, copies of all
privileged documents related to liabilities as listed on Schedule 5.12.
-------------
17
<PAGE>
(c) All of the liabilities reflected on the unaudited consolidated
balance sheet included in the Interim Financial Statements arose only out of or
were incurred only in connection with the conduct of the business of the
Company. Except as set forth on Schedule 5.12 and except for liabilities not
-------------
required to be set forth thereon pursuant to Section 5.12(a), the Company has no
liabilities or obligations with respect to its business, whether direct or
indirect, matured or unmatured, absolute contingent or otherwise, and there is
no condition, situation or set of circumstances which would reasonably be
expected to result in any such liability.
5.13 Accounts and Notes Receivable. No later than 10 Business Days
-----------------------------
prior to the Closing Date, the Company shall deliver to the Parent Schedule 5.13
-------------
which shall be a complete and accurate list, as of March 31, 1999, of the
accounts and notes receivable of the Company (including, without limitation,
receivables from and advances to employees and Shareholders
("Shareholder/Employee Notes Receivable")) (collectively, the "Accounts
Receivable"). Schedule 5.13 shall include an aging of all Accounts Receivable
-------------
showing amounts due in 30-day aging categories. On the Closing Date, the
Company will deliver to the Parent a complete and accurate list, as of a date
not more than two days prior to the Closing Date, of the Accounts Receivable.
All Accounts Receivable represent valid obligations arising from bona fide
business transactions in the ordinary course of business consistent with past
practice. The Accounts Receivable are, and as of the Closing Date and the
Effective Time will be, collectible net of any respective reserves shown on the
Company's books and records (which reserves are adequate and calculated
consistent with past practice). Subject in the case of Accounts Receivable
reflected on the Company's balance sheet to such reserves reflected on such
balance sheet, each of the Accounts Receivable will be collected in full within
ninety (90) days after the day on which it first became due and payable. There
is no contest, claim, counterclaim, defense or right of set-off, other than
rebates and returns in the ordinary course of business, under any contract with
any obligor of any Account Receivable relating to the amount or validity of such
Account Receivable. The allowance for collection losses on the Interim Balance
Sheet has been determined in accordance with GAAP consistent with past practice.
5.14 Permits. Each material Permit, together with the name of the
-------
Governmental Entity issuing such Permit is set forth on Schedule 5.14. Such
-------------
Permits are valid and in full force and effect and none of such Permits will be
terminated or impaired or become terminable as a result of the transactions
contemplated by this Agreement. Upon consummation of such transactions, the
Surviving Corporation will have all of the Company's right, title and interest
in the Permits.
5.15 Real and Personal Property. Attached hereto as Schedule 5.15 is an
-------------------------- -------------
accurate list, including substantially complete descriptions as of the Interim
Balance Sheet Date, of all the real and personal property (which in the case of
personal property had an original cost in excess of $15,000 owned or leased by
the Company where the Company is a lessee or sublessee, including true and
correct copies of leases for equipment and properties on which are situated
buildings, warehouses and other structures used in the operation of the business
of the Company and including an indication as to which assets were formerly
owned by any Shareholder or affiliate (which term, as used herein, shall have
the meaning ascribed thereto in Rule 144(a)(1) promulgated under the Securities
Act of 1933, as amended (the "Securities Act")) of the Company. Except as set
forth on Schedule 5.15, all of the buildings, leasehold improvements,
-------------
structures, facilities, equipment and other material items of tangible property
and assets owned or leased by the Company are in good operating condition and
18
<PAGE>
repair, subject to normal wear and maintenance, are usable in the regular and
ordinary course of business and conform to all applicable laws, ordinances,
codes, rules and regulations, and Authorizations relating to their construction,
use and operation. All leases set forth on Schedule 5.15 have been duly
-------------
authorized, executed and delivered and constitute the legal, valid and binding
obligations of the Company and, to the knowledge of the Company, no other party
to any such lease is in default thereunder and such leases constitute the legal,
valid and binding obligations of such other parties. All fixed assets used by
the Company in the operation of its business are either owned by the Company or
leased under an agreement set forth on Schedule 5.15. The Company has
-------------
heretofore delivered to the Parent copies of all title reports and title
insurance policies received or held by the Company. The Company has indicated
on Schedule 5.15 a summary description of all plans or projects involving the
-------------
opening of new operations, expansion of any existing operations or the
acquisition of any real property or existing business to which management of the
Company has devoted any significant effort or expenditure in the one-year period
prior to the date of this Agreement which, if pursued by the Company would
require additional expenditures of significant efforts or capital.
5.16 Contracts and Commitments. Schedule 5.16 sets forth an accurate,
------------------------- -------------
correct and complete list of all agreements, contracts, commitments,
arrangements and understandings, written or oral, including all amendments and
supplements thereto, of the Company (the "Contracts"), to which the Company is a
party or is bound, or by which any of its assets are bound, and which involve
any:
(a) agreement, contract, commitment, arrangement or understanding
with any present or former director, officer, employee or consultant with
respect to the employment, engagement, severance or termination of any such
person;
(b) agreement, contract, commitment, arrangement or understanding for
the future purchase of, or payment for, supplies or products, or for the
performance of services by a third party involving in any one case $15,000 or
more;
(c) agreement, contract, commitment, arrangement or understanding to
sell or supply products or to perform services involving in any one case $15,000
or more;
(d) agreement, contract, commitment, arrangement or understanding
containing minimum requirements or "take or pay" provisions;
(e) agreement, contract, commitment, arrangement or understanding not
otherwise listed on Schedule 5.16 and continuing over a period of more than six
-------------
months from the date hereof or exceeding $15,000 in value;
(f) distribution, dealer, representative or sales agency agreement,
contract, commitment, arrangement or understanding;
(g) lease financing arrangements and financing contracts;
19
<PAGE>
(h) agreement, contract, commitment, arrangement or understanding
containing a provision to indemnify any person or entity or assume any tax,
environmental or other liability;
(i) agreement, contract, commitment, arrangement or understanding
with federal, state, local, regulatory or other governmental entities;
(j) note, debenture, bond, equipment trust agreement, letter of
credit agreement, loan agreement or other contract or commitment for the
borrowing or lending of money or agreement or arrangement for a line of credit
or guarantee, pledge or undertaking of the indebtedness of any other person;
(k) agreement, contract, commitment, arrangement or understanding for
any charitable or political contribution;
(l) agreement, contract, commitment, arrangement or understanding for
any capital expenditure or leasehold improvement in excess of $15,000;
(m) agreement, contract, commitment, arrangement or understanding
limiting or restraining the Company, or any successor thereto, or to the
knowledge of the Company, any employee of the Company, or any successor thereto,
from engaging or competing in any manner or in any business;
(n) license, franchise, distributorship or other agreement which
relates in whole or in part to any software, patent, trademark, trade name,
service mark or copyright or to any ideas, technical assistance or other know-
how of or used by the Company;
(o) agreement, contract, commitment, arrangement or understanding to
which the Company, on the one hand, and any affiliate, officer, director or
shareholder of the Company, on the other hand, are parties; or
(p) material agreement, contract, commitment, arrangement or
understanding not made in the ordinary course of business.
Each of the Contracts listed on Schedule 5.16, or not required to be listed
-------------
therein because of the amount thereof, is valid and enforceable in accordance
with its terms; the Company is, and to the knowledge of the Company, all other
parties thereto are, in compliance with the provisions thereof. The Company is
not, and to the knowledge of the Company, no other party thereto is, in default
in the performance, observance or fulfillment of any material obligation,
covenant or condition contained therein; and no event has occurred which with or
without the giving of notice or lapse of time, or both, would constitute a
default thereunder. None of the rights of the Company under any Contract will
be impaired by the consummation of the transactions contemplated hereby, and all
such rights will be enforceable by the applicable Surviving Corporation after
the Effective Time without the consent or agreement of any other party. The
Company has delivered accurate and complete copies of each Contract to the
Parent. Except as set forth on Schedule 5.9, no Contract obligates any party to
------------
obtain any consent in connection with the transactions contemplated hereby.
20
<PAGE>
5.17 Government Contracts. The Company is not now nor ever has been a
--------------------
party to any contract with any Governmental Entity subject to price
redetermination or renegotiation.
5.18 Title to Real Property. The Company does not own nor has ever
----------------------
owned any interest in real property.
5.19 Insurance. The assets, properties and operations of the Company are
---------
insured under various policies of general liability and other forms of
insurance, all of which are described on Schedule 5.19, which discloses for each
-------------
policy, the insurer, the type of insurance, the policy number, the risks insured
against, coverage limits, deductible amounts, the expiration date, all
outstanding claims thereunder, and whether the terms of such policy provide for
retrospective premium adjustments. All such policies are in full force and
effect in accordance with their terms, no notice of cancellation has been
received, and there is no existing default or event which, with the giving of
notice or lapse of time or both, would constitute a default thereunder. Such
policies are in amounts which are adequate in relation to the business and
assets of the respective company and all premiums to date have been paid in
full. To the knowledge of the Company, there is no default with respect to any
such policy or binder, nor has there been any failure to give any notice or
present any claim under any such policy or binder in a timely fashion or in the
manner or detail required by the policy or binder. There is no notice of
nonrenewal or cancellation with respect to, or disallowance of any claim under,
any such policy or binder that has been received by the Company. The Company has
never been refused any insurance, nor has the Company's coverage been limited,
by any insurance carrier to which it has applied for insurance or with which it
has carried insurance during the past five years. Schedule 5.19 also contains a
-------------
true and complete description of all outstanding bonds and other surety
arrangements issued or entered into in connection with the business, assets and
liabilities of the Company.
5.20 Employees. Schedule 5.20 contains the following with respect to
--------- -------------
the Company:
(a) a list of all employees of the Company (including name, title and
position);
(b) each such employee's date of hire and length of service; and
(c) the compensation (including terms of payment, bonuses,
commissions and deferred compensation, as well as any material benefits) of each
such employee.
Except as disclosed on Schedule 5.20: (i) there have not been in the past five
-------------
years and, to the knowledge of the Company, there are not pending, any labor
disputes, work stoppages, pickets or work slow-downs due to labor disagreements;
(ii) there are and have been no unresolved material violations of any Laws of
any Governmental Entity respecting the employment of any employees; (iii) there
is no unfair labor practice, charge or complaint pending, unresolved or, to the
knowledge of the Company, threatened before the National Labor Relations Board
or similar body in any foreign country; (iv) there is no employment handbook,
personnel policy manual, or similar document that creates prospective employment
rights or obligations; (v) the employees of the Company are not covered by any
collective bargaining agreement; (vi) the Company has provided
21
<PAGE>
or will timely provide prior to Closing all material notices required by law to
be given prior to Closing to all local, state, federal or national labor, wage-
payment, equal employment opportunity, unemployment insurance and related
agencies; (vii) the Company has paid or properly accrued in the ordinary course
of business all wages and compensation due to employees, including all vacations
or vacation pay, holidays or holiday pay, sick days or sick pay, and bonuses;
and (viii) the transactions contemplated by this Agreement will not create
material liability under any Laws of any Governmental Entity respecting
reductions in force or the impact on employees on plant closing or sales of
businesses. All employees of the Company are legally able to work in the United
States.
5.21 Employee Benefit Plans and Arrangements. Schedule 5.21 sets forth
--------------------------------------- -------------
a complete and accurate list of each Benefit Plan covering any present or former
officers, employees or directors of the Company. "Benefit Plan" means each
"employee pension benefit plan" (as defined in Section 3(2) of ERISA,
hereinafter a "Pension Plan"), "employee welfare benefit plan" (as defined in
Section 3(1) of ERISA, hereinafter a "Welfare Plan") and each other plan or
arrangement (written or oral) relating to deferred compensation, bonus,
performance compensation, stock purchase, stock option, stock appreciation,
severance, vacation, sick leave, holiday pay, fringe benefits, personnel policy,
reimbursement program, incentive, insurance, welfare or similar plan, program,
policy or arrangement, in each case maintained or contributed to, or required to
be maintained or contributed to, by the Company or its affiliates or any other
person or entity that, together with the Company, is treated as a single
employer under Section 414(b), (c), (m) or (o) of the Code (each, together with
the Company, a "Commonly Controlled Entity") for the benefit of any present or
former officer, employee or director. The Company has no intent or commitment
to create any additional Benefit Plan or amend any Benefit Plan so as to
increase benefits thereunder. The Company has not created any Benefit Plan or
declared or paid any bonus compensation in contemplation of the transactions
contemplated by this Agreement. A current, accurate and complete copy of each
Benefit Plan has been made available to the Parent. Except as disclosed on
Schedule 5.21:
- -------------
(a) each Benefit Plan is in substantial compliance with all
reporting, disclosure and other requirements of ERISA applicable to such Benefit
Plan;
(b) each Pension Plan which is intended to be qualified under Section
401(a) of the Code, has been determined by the Internal Revenue Service to be so
qualified or has remaining a period of time under applicable Treasury
Regulations or IRS pronouncements in which to apply for such a letter and make
any amendments necessary to obtain a favorable determination as to its qualified
status and, to the knowledge of the Company, no condition exists that would
adversely affect any such determination;
(c) neither any Benefit Plan, nor the Company, nor any Commonly
Controlled Entity, nor any trustee or agent has been or is presently engaged in
any prohibited transactions as defined by Section 406 of ERISA or Section 4975
of the Code for which an exemption is not applicable which could subject the
Company to the tax or penalty imposed by Section 4975 of the Code or Section 502
of ERISA, except as would not have a material adverse effect on the Company;
22
<PAGE>
(d) there is no event or condition existing which could be deemed a
"reportable event" (within the meaning of Section 4043 of ERISA) with respect to
which the thirty-day notice requirement has not been waived; to the knowledge of
the Company, no condition exists which could subject the Company to a penalty
under Section 4071 of ERISA;
(e) neither the Company nor any Commonly Controlled Entity is or has
ever been party to any "multi-employer plan," as that term is defined in Section
3(37) of ERISA;
(f) true and correct copies of the most recent annual report on Form
5500 and any attached schedules for each Benefit Plan (if any such report was
required by applicable law) and a true and correct copy of the most recent
determination letter issued by the Internal Revenue Service for each Pension
Plan have been provided to the Parent;
(g) with respect to each Benefit Plan, there are no material actions,
suits or claims (other than routine claims for benefits in the ordinary course)
pending or, to the knowledge of the Company, threatened against any Benefit
Plan, the Company, any Commonly Controlled Entity or any trustee or agent of any
Benefit Plan;
(h) with respect to each Benefit Plan to which the Company or any
Commonly Controlled Entity is a party which constitutes a group health plan
subject to Section 4980B of the Code, each such Benefit Plan substantially
complies, and in each case has substantially complied, with all applicable
requirements of Section 4980B of the Code, except as would not have a material
adverse effect on the Company;
(i) Except as set forth on Schedule 5.21:
-------------
(i) there is no outstanding liability (except for premiums
due) under Title IV of ERISA with respect to any Pension Plan;
(ii) neither the Pension Benefit Guaranty Corporation nor the
Company nor any Commonly Controlled Entity has instituted proceedings to
terminate any Pension Plan and the Pension Benefit Guaranty Corporation has not
informed the Company of its intent to institute proceedings to terminate any
Pension Plan;
(iii) full payment has been made of all amounts which the
Company or any Commonly Controlled Entity was required to have paid as a
contribution to the Pension Plans as of the last day of the most recent fiscal
year of each of the Pension Plans ended prior to the date of this Agreement, and
none of the Pension Plans has incurred any "accumulated funding deficiency" (as
defined in Section 302 of ERISA and Section 412 of the Code), whether or not
waived, as of the last day of the most recent fiscal year of each such Pension
Plan ended prior to the date of this Agreement;
(iv) to the knowledge of the Company, the actuarial assumptions
utilized, where appropriate, in connection with determining the funding of each
Pension Plan which is a defined benefit pension plan (as set forth in the
actuarial report for such Pension Plan) are
23
<PAGE>
reasonable. Copies of the most recent actuarial reports have been furnished to
the Parent. Based on such actuarial assumptions, as of the Interim Balance Sheet
Date, the fair market value of the assets or properties held under each such
Pension Plan exceeds the actuarially determined present value of all accrued
benefits of such Pension Plan (whether or not vested) determined on an ongoing
Pension Plan basis;
(v) each of the Benefit Plans is, and its administration is
and has been during the six-year period preceding the date of this Agreement, in
substantial compliance with, and the Company has not received any claim or
notice that any such Benefit Plan is not in compliance with, all applicable laws
and orders and prohibited transaction exemptions, including without limitation,
to the extent applicable, the requirements of ERISA;
(vi) neither the Company nor any Commonly Controlled Entity is
in material default in performing any of its contractual obligations under any
of the Benefit Plans or any related trust agreement or insurance contract;
(vii) there are no material outstanding liabilities of any
Benefit Plan other than liabilities for benefits to be paid to participants in
the Benefit Plans and their beneficiaries in accordance with the terms of the
Benefit Plans;
(viii) each Benefit Plan may be amended or modified by the
Company or Commonly Controlled Entity at any time without material liability
except under any defined pension benefit plan;
(ix) no Benefit Plan other than a Pension Plan, retiree medical
plan or severance plan provides benefits to any individual after termination of
employment;
(x) the consummation of the transactions contemplated by this
Agreement will not (in and of itself): (A) entitle any employee of the Company
to severance pay, unemployment compensation or any other payment; (B) accelerate
the time of payment or vesting, or increase the amount of compensation due to
any such employee; (C) result in any liability under Title IV of ERISA; (D)
result in any prohibited transaction described in Section 406 of ERISA or
Section 4975 of the Code for which an exemption is not available; or (E) result
(either alone or in conjunction with any other event) in the payment or series
of payments by the Company or any of its affiliates to any person of an "excess
parachute payment" within the meaning of Section 280G of the Code;
(xi) with respect to each Benefit Plan that is funded wholly or
partially through an insurance policy, all premiums required to have been paid
to date under the insurance policy have been paid, all premiums required to be
paid under the insurance policy through the Effective Time will have been paid
on or before the Effective Time and, as of the Effective Time, there will be no
liability of the Company or any Commonly Controlled Entity under any insurance
policy or ancillary agreement with respect to such insurance policy in the
nature of a retroactive rate adjustment, loss sharing arrangement or other
actual or contingent liability arising wholly or partially out of events
occurring prior to the Effective Time;
24
<PAGE>
(xii) (A) each Benefit Plan that constitutes a Welfare Plan, and
for which contributions are claimed by the Company or any Commonly Controlled
Entity as deductions under any provision of the Code, is in material compliance
with all applicable requirements pertaining to such deduction;
(B) with respect to any welfare benefit fund (within the
meaning of Section 419 of the Code) related to a welfare benefit plan, there is
no disqualified benefit (within the meaning of Section 4976(b) of the Code) that
would result in the imposition of a Tax under Section 4976(a) of the Code; and
(C) all welfare benefit funds intended to be exempt from
tax under Section 501(a) of the Code have been determined by the Internal
Revenue Service to be so exempt or has remaining a period of time under
applicable Treasury Regulations or IRS pronouncements in which to apply for such
a letter and make any amendments necessary to obtain a favorable determination
as to its qualified status and no event or condition exists which would
adversely affect any such determination; and
(xiii) all benefit plans outside of the United States, if any (the
"Foreign Plans"), are in material compliance with all applicable laws and
regulations and have been operated in accordance with the plans' respective
terms. There are no material unfunded liabilities under or in respect of the
Foreign Plans, and all contributions or other payments required to be made to or
in respect of the Foreign Plans prior to the Effective Time have been made or
will be made prior to the Effective Time.
5.22 Compliance with Law; Authorizations. The Company has complied with
-----------------------------------
each, and is not in violation of any, law, ordinance, or governmental or
regulatory rule or regulation, whether federal, state, local or foreign
("Regulations"), to which the Company's business, operations, assets or
properties is subject. The Company owns, holds, possesses or lawfully uses in
the operation of its business all franchises, licenses, permits, easements,
rights, applications, filings, registrations and other authorizations
("Authorizations") which are in any manner necessary for it to conduct its
business as now or previously conducted or for the ownership and use of the
assets owned or used by it in the conduct of its business, free and clear of all
liens, charges, restrictions and encumbrances and in compliance with all
Regulations. All such Authorizations are listed and described on Schedule 5.22.
-------------
The Company is not in default and has not received any notice of any claim of
default, with respect to any such Authorization. All such Authorizations are
renewable by their terms or in the ordinary course of business without the need
to comply with any special qualification procedures or to pay any amounts other
than routine filing fees. None of such Authorizations will be adversely affected
by consummation of the transactions contemplated hereby. No director, officer,
employee or former employee of the Company or any affiliates of the Company, or
any other person, firm or corporation, owns or has any proprietary, financial or
other interest (direct or indirect) in any Authorization which the Company owns,
possesses or uses in the operation of its business as now or previously
conducted.
25
<PAGE>
5.23 Transactions With Affiliates. Except as set forth on Schedule 5.23,
---------------------------- -------------
no Shareholder and no director, officer or employee of the Company, or any
member of his or her immediate family or any other of its, his or her
affiliates, owns or has a 5% or more ownership interest in any corporation or
other entity that is or was during the last three years a party to, or in any
property which is or was during the last three years the subject of, any
contract, agreement or understanding, business arrangement or relationship with
the Company.
5.24 Litigation. (a) No litigation, including any arbitration,
----------
investigation or other proceeding of or before any court, arbitrator or
governmental or regulatory official, body or authority is pending or, to the
knowledge of the Company, threatened against the Company which relates to the
transactions contemplated by this Agreement.
(b) Except as set forth on Schedule 5.24, no litigation, including
-------------
any arbitration, investigation or other proceeding of or before any court,
arbitrator or governmental or regulatory official, body or authority is pending
or, to the knowledge of the Company, threatened against the Company or which
relates to the Company.
(c) The Company knows of no reasonably likely basis for any
litigation, arbitration, investigation or proceeding referred to in Sections
5.24(a) or (b).
(d) Except as set forth on Schedule 5.24, the Company is not a party
-------------
to or subject to the provisions of any judgment, order, writ, injunction, decree
or award of any court, arbitrator or governmental or regulatory official, body
or authority.
5.25 Restrictions. The Company is not a party to any indenture, agreement,
------------
contract, commitment, lease, plan, license, permit, authorization or other
instrument, document or understanding, oral or written, or subject to any
charter or other corporate restriction or any judgment, order, writ, injunction,
decree or award which materially adversely affects or materially restricts or,
so far as the Company can now reasonably foresee, may in the future materially
adversely affect or materially restrict, the business, operations, assets,
properties, prospects or condition (financial or otherwise) of the Company after
consummation of the transactions contemplated hereby.
5.26 Taxes. All federal, state, local and foreign tax returns, reports,
-----
statements and other similar filings required to be filed by the Company (the
"Tax Returns") with respect to any federal, state, local or foreign taxes,
assessments, interest, penalties, deficiencies, fees and other governmental
charges or impositions (including without limitation all income tax,
unemployment compensation, social security, payroll, sales and use, excise,
privilege, property, ad valorem, franchise, license, school and any other tax or
similar governmental charge or imposition under laws of the United States or any
state or municipal or political subdivision thereof or any foreign country or
political subdivision thereof) (singly, a "Tax", and collectively, the "Taxes")
have been timely filed with the appropriate governmental agencies in all
jurisdictions in which such Tax Returns are required to be filed, and all such
Tax Returns properly reflect the liabilities of the Company for Taxes for the
periods, property or events covered thereby. All Taxes, including without
limitation
26
<PAGE>
those which are called for by the Tax Returns, required to be paid, withheld or
accrued by the Company and any deficiency assessments, penalties and interest
have been timely paid, withheld or accrued. The accruals for Taxes contained in
the Interim Balance Sheet are adequate to cover the Tax liabilities of the
Company as of that date and include adequate provision for all deferred Taxes,
and nothing has occurred subsequent to that date to make any of such accruals
inadequate. Each of the Company'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.
Except as set forth on Schedule 5.26, the Company has not received any notice of
-------------
assessment or proposed assessment in connection with any Tax Returns and there
are not pending tax examinations of or tax claims asserted against the Company
or any of its assets or properties, and no notice of any audit, examination or
claim for Taxes, whether pending or threatened, has been received. The Company
has not extended, or waived the application of, any statute of limitations of
any jurisdiction regarding the assessment or collection of any Taxes. There are
now (and as of immediately following the Closing there will be) no Liens (other
than any Lien for current Taxes not yet due and payable) on any of the assets or
properties of the Company relating to or attributable to Taxes. To the knowledge
of the Company, there is no basis for the assertion of any claim relating to or
attributable to Taxes which, if adversely determined, would result in any Lien
on the assets of the Company or otherwise have an adverse effect on the Company
or its business, operations, assets, properties, prospects or condition
(financial or otherwise). The Company does not have any knowledge of any basis
for any additional assessment of any Taxes. All Tax payments related to
employees, consultants, independent contractors, creditors of the Company,
including, without limitation, income tax withholding, FICA, FUTA, unemployment
and worker's compensation, required to be made by the Company has been fully and
properly paid, withheld, accrued or recorded. The Company currently has no
liability, and there are no circumstances under which the Company will be liable
in the future, for any tax or insurance contribution imposed on any employee,
including any common law employee or any person later deemed to be an employee
by any governmental authority, of the Company, or for any tax or insurance
contribution imposed on the Company, in connection with any remuneration of any
type paid to any employee, including any common law employee or any person later
deemed to be an employee by any governmental authority, of the Company. There
are no contracts, agreements, plans or arrangements, including but not limited
to the provisions of this Agreement, covering any current or former officer,
director, employee, consultant or independent contractor of the Company that,
individually or collectively, could give rise to or entail any payment (or
portion thereof) that would not be deductible pursuant to Sections 280G, 404 or
162(m) of the Code. The Company has not filed a consent under Section 341(f) of
the Code. The Company is not and has not been a United States real property
holding company within the meaning of Section 897(c) of the Code during the
period specified in Section 897(c)(1(A)(ii) of the Code. The Company is not nor
has been at any time, a party to a Tax sharing, Tax indemnity or Tax allocation
agreement, and the Company (A) has not been a member of an affiliate group
filing a consolidated federal Tax Return (other than a group the common parent
of which was the Company, or (B) has no liability for the Taxes of any Person
(other than any of the Company) under Treasury Regulation Section 1.1502-6 (or
any similar provision of state, local or foreign law), as a transferee or
successor or assumed the Tax liability of any other Person under contract.
Correct and complete copies of (a) all Tax examinations, (b) all extensions of
statutory limitations and (c) all federal, state and local income tax returns
and franchise tax returns of the Company for the last five fiscal years, or such
shorter period of time as any of them shall have
27
<PAGE>
existed, have heretofore been delivered by the Company to the Parent. The
Company currently utilizes the accrual method of accounting for income tax
purposes and has not changed its method of accounting for income tax purposes in
the past five years.
5.27 Intellectual Property Matters.
-----------------------------
(a) The Company has utilized or currently utilizes only those
patents, trademarks, trade names, service marks, copyrights, software, trade
secrets or know-how listed on Schedule 5.27 (the "Intellectual Property"), all
-------------
of which are owned by the Company free and clear of any liens, security
interests, claims, charges or encumbrances, or are licensed by the Company or
are in the public domain. The Intellectual Property constitutes all such assets,
properties and rights which are used or held for use in, and are necessary for,
the conduct of the business of the Company, as such business is now conducted
and as proposed to be conducted.
(b) Except as set forth on Schedule 5.27, there are no royalty,
-------------
commission, options, or similar arrangements, and no licenses, sublicenses or
agreements, pertaining to any of the Intellectual Property or products or
services of the Company.
(c) The Company does not infringe upon or unlawfully or wrongfully
use any patent, trademark, trade name, service mark, copyright or trade secret
owned or claimed by another. No action, suit, proceeding or investigation has
been instituted or, to the knowledge of the Company, threatened relating to any,
patent, trademark, trade name, service mark, copyright or trade secret formerly
or currently used by the Company. None of the Intellectual Property is subject
to any outstanding order, decree or judgment. The Company has not agreed to
indemnify any person or entity for or against any infringement of or by the
Intellectual Property.
(d) Except as set forth on Schedule 5.27, no present or former
-------------
employee of the Company and no other person or entity owns or has any
proprietary, financial or other interest, direct or indirect, in whole or in
part, in any patent, trademark, trade name, service mark or copyright, or in any
application therefor, or in any trade secret, which the Company owns, possesses
or uses in its business as now or heretofore conducted. Schedule 5.27 lists all
-------------
confidentiality or non-disclosure agreements currently in force and effect to
which the Company or any of its employees is a party.
(e) Schedule 5.27 sets forth a complete and accurate list of all
-------------
items of Intellectual Property duly registered in, filed in or issued by the
United States Copyright Office or the United States Patent and Trademark Office,
any offices in the various states of the United States and any offices in other
jurisdictions.
(f) All rights of the Company in the Intellectual Property shall vest
in the applicable Surviving Corporation pursuant to the transactions
contemplated hereby without any consent or other approval.
(g) Except as described in Schedule 5.27, all technology owned,
-------------
developed, licensed, or used in connection with the Company, or, to the
Company's best knowledge, the Company's suppliers and vendors, (including, but
not limited to, information systems and
28
<PAGE>
technology, commercial and noncommercial hardware and software, firmware,
mechanical or electrical products, embedded systems, or any other electro-
mechanical or processor-based system, whether as part of a desktop system,
office system, building system or otherwise) (collectively, the "Technology"),
is Year 2000 Compliant (as defined below).
"Year 2000 Compliant" means that the Technology does not and will not, without
requiring any modifications, experience any malfunctions, premature cancellation
or expiration of contractual rights or deletion of data, or any other problems
in connection with (i) the year 2000 (and all subsequent years) as distinct from
1900's years, (ii) the date February 29, 2000, and all subsequent leap years,
(iii) the date September 9, 1999, or (iv) any other date before, on, or after
January 1, 2000.
5.28 Completeness; No Violations. The certified copies of the Charter
---------------------------
Documents, as amended to date, of the Company, and the copies of all leases,
instruments, agreements, licenses, permits, certificates or other documents
which are included on schedules attached hereto or which have been delivered or
which have been made available to the Parent in connection with the transactions
contemplated hereby, are complete and correct; neither the Company nor, to the
knowledge of the Company, any other party to any of the foregoing is in material
default thereunder; and, except as set forth in the schedules and documents
attached to this Agreement, the rights and benefits of the Company thereunder
will not be materially and adversely affected by the transactions contemplated
hereby, and the execution of this Agreement and the performance of the
obligations hereunder will not result in a material violation or breach or
constitute a material default under any of the terms or provisions thereof.
Except as set forth on Schedule 5.28, none of such leases, instruments,
-------------
agreements, contracts, licenses, permits, certificates or other documents
requires notice to, or the consent or approval of, any governmental agency or
other third party to any of the transactions contemplated hereby to remain in
full force and effect. The consummation of the transactions contemplated hereby
will not give rise to any right of termination, cancellation or acceleration or
result in the loss of any right or benefit thereunder.
5.29 Absence of Changes. Since the Audited Balance Sheet Date, except, as
------------------
set forth on Schedule 5.29, the Company has not:
-------------
(a) incurred any liabilities, other than liabilities incurred in the
ordinary course of business consistent with past practice, or discharged or
satisfied any lien or encumbrance, or paid any liabilities, other than in the
ordinary course of business consistent with past practice, or failed to pay or
discharge when due any liabilities of which the failure to pay or discharge has
caused or will cause any material damage or risk of material loss to it or any
of its assets or properties;
(b) sold, encumbered, assigned or transferred any assets, properties
or rights or any interest therein, except for the sales in the ordinary course
of business consistent with past practice, or made any agreement or commitment
or granted any option or right with, of or to any person to acquire any assets,
properties or rights of the Company or any interest therein;
(c) created, incurred, assumed or guaranteed any indebtedness for
money borrowed, or mortgaged, pledged or subjected any of its assets to any
mortgage, lien, pledge,
29
<PAGE>
security interest, conditional sales contract or other encumbrance of any nature
whatsoever, except in the ordinary course of business consistent with past
practice;
(d) made or suffered any amendment or termination of any material
agreement, contract, commitment, lease or plan to which it is a party or by
which it is bound, or canceled, modified or waived any substantial debts or
claims held by it or waived any rights of substantial value, whether or not in
the ordinary course of business;
(e) declared, set aside or paid any dividend or made or agreed to
make any other distribution or payment in respect of its capital shares or
redeemed, purchased or otherwise acquired or agreed to redeem, purchase or
acquire any of its shares of capital stock or other ownership interests;
(f) suffered any damage, destruction or loss, whether or not covered
by insurance, (i) materially and adversely affecting its business, operations,
assets, properties or prospects or (ii) of any item or items carried on its
books of account individually or in the aggregate at more than $10,000, or
suffered any repeated, recurring or prolonged shortage, cessation or
interruption of supplies or utility or other services required to conduct its
business and operations;
(g) suffered any material adverse change in its business, operations,
assets, properties, prospects or condition (financial or otherwise);
(h) received notice or had knowledge of any actual or threatened
labor trouble, strike or other occurrence, event or condition of any similar
character which has had or might have an adverse effect on its business,
operations, assets, properties or prospects;
(i) made commitments or agreements for capital expenditures or
capital additions or betterments exceeding in the aggregate $50,000, except such
as may be involved in ordinary repair, maintenance or replacement of its assets;
(j) increased the salaries or other compensation of, or made any
advance (excluding advances for ordinary and necessary business expenses) or
loan to, any of its employees, or their respective family members or made any
increase in, or any addition to, other benefits to which any of its employees
may be entitled, except with respect to non-officer employees of the Company
consistent with practice in the ordinary course of business;
(k) changed any of the accounting principles followed by it or the
methods of applying such principles;
(l) entered into any transaction other than in the ordinary course of
business consistent with past practice;
(m) changed its authorized capital or its securities outstanding or
otherwise changed its ownership interests, or granted any options, warrants,
calls, conversion rights or commitments with respect to any of its capital stock
or other ownership interests; or
30
<PAGE>
(n) agreed to take any of the actions referred to above.
5.30 Deposit Accounts; Powers of Attorney. Attached hereto as Schedule
------------------------------------ --------
5.30 is an accurate list of:
- ----
(a) the name of each financial institution in which the Company has
accounts or safe deposit boxes;
(b) the names in which the accounts or boxes are held;
(c) the type of account;
(d) the name of each person authorized to draw thereon or have access
thereto; and
(e) the name of each person, corporation, firm or other entity
holding a general or special power of attorney from the Company and a
description of the terms of such power.
5.31 Books of Account. The books, records and accounts of the Company
----------------
accurately and fairly reflect, in reasonable detail, the transactions and the
assets and liabilities of the Company. The Company has not engaged in any
transaction, maintained any bank account or used any of the funds of the Company
except for transactions, bank accounts and funds which have been and are
reflected in the normally maintained books and records of the business.
5.32 Environmental Matters. (a) The Company has secured, and is in
---------------------
compliance in all material respects with, all Environmental Permits, with
respect to any premises on which its business is operated, all of which
Environmental Permits shall vest in the applicable Surviving Corporation upon
consummation of the transactions contemplated hereby. The Company is in
compliance in all material respects with all Environmental Laws.
(b) The Company has not received any communication from any
Governmental Entity that alleges that the Company is not in compliance with any
Environmental Laws or Environmental Permits.
(c) The Company has not entered into or agreed to any court decree or
order, and the Company is not subject to any judgment, decree or order, relating
to compliance with any Environmental Law or to investigation or cleanup of a
Hazardous Substance under any Environmental Law.
(d) No lien, charge, interest or encumbrance has been attached,
asserted, or to the knowledge of the Company, threatened to or against any
assets or properties of the Company pursuant to any Environmental Law.
31
<PAGE>
(e) There has been no treatment, storage, disposal or release of any
Hazardous Substance on any property owned, operated or leased by the Company
other than common household and office products in de minimis quantities.
(f) The Company has not received a CERCLA 104(e) information request
nor has the Company been named a potentially responsible party for any National
Priorities List site under CERCLA or any site under analogous state law or
received an analogous notice or request from any non-U.S. Governmental Entity,
which notice, request or any resulting inquiry or litigation has not been fully
and finally resolved without possibility of reopening.
(g) There are no aboveground tanks or underground storage tanks on,
under or about any property owned, operated or leased by the Company and any
former aboveground or underground tanks on any property owned, operated or
leased by the Company have been removed in accordance with all Environmental
Laws and no residual contamination, if any, remains at such sites in excess of
applicable standards.
(h) To the Company's best knowledge, there are no Hazardous
Substances in the soil, surface water or groundwater of any property owned,
leased, operated, occupied or used at any time by the Company, nor are there any
articles, containers or equipment on, under or about any property owned, leased,
operated, occupied or used by the Company which contain any such Hazardous
Substances, except for Hazardous Substances the existence of which would not
result in any material liability to the Company. There is no asbestos containing
material in a condition or location currently constituting a violation of any
Environmental Law at, on, under or within any property owned, operated or leased
by the Company.
(i) The Company has provided to the Parent true and complete copies
of, or access to, all written environmental assessment materials and reports in
their possession that have been prepared by or on behalf of the Company during
the past five years.
5.33 No Illegal Payments. None of the Company nor, to the knowledge of the
-------------------
Company, any affiliate, officer, agent or employee thereof, directly or
indirectly, has, on behalf of or with respect to the Company or any affiliate
thereof, (a) made any unlawful domestic or foreign political contributions, (b)
made any payment or provided services which were not legal to make or provide or
which the Company or any affiliate thereof or any such officer, agent or
employee should have known were not legal for the payee or the recipient of such
services to receive, (c) received any payment or any services which were not
legal for the payer or the provider of such services to make or provide, (d)
made any payment to any person or entity, or agent or employee thereof, in
connection with any Lease (as hereinafter defined) to induce such person or
entity to enter into a Lease transaction, (e) had any transactions or payments
related to the Company which are not recorded in their accounting books and
records or (f) had any off-book bank or cash accounts or "slush funds" related
to the Company.
32
<PAGE>
5.34 Disclosure. The Company has delivered to the Parent true and
----------
complete copies of each agreement, contract, commitment or other document (or,
in the case of any such document not in the possession of or reasonably
available to the Company or a Principal Shareholder, accurate and complete
summaries thereof) that is referred to in the schedules to this Agreement or
that has been requested by the Parent or its representatives. Without limiting
any exclusion, exception or other limitation contained in any of the
representations and warranties made herein, this Agreement and the schedules
hereto do not and will not include any untrue statement of a material fact or
omit to state a material fact necessary to make the statements herein and
therein not misleading in light of the circumstances in which they were made. If
the Company becomes aware of any fact or circumstance that would change a
representation or warranty in this Agreement or any representation made on
behalf of the Company, then the Company shall immediately give notice of such
fact or circumstance to the Parent. However, such notification shall not relieve
the Company of its obligations under this Agreement, and at the sole option of
the Parent, the truth and accuracy of any and all warranties and representations
of the Company at the date of this Agreement and at the Closing, shall be a
precondition to the consummation of this transaction.
5.35 Inventory and Equipment. All inventory and equipment of the
-----------------------
Company reflected on the Financial Statements, and all inventory and equipment
owned by the Company was acquired and has been maintained in accordance with the
regular business practices of the Company, consists of items of a quality and
quantity useable in the ordinary course of its business consistent with past
practice, and is valued in conformity with generally accepted accounting
principles applied on a consistent basis; no significant amount of such
inventory or equipment is obsolete.
5.36 Corporate Records. The minute books of the Company contain
-----------------
complete, correct and current copies of its Charter Documents and the records of
all minutes of meetings, resolutions and other proceedings of its Board of
Directors and shareholders set forth in such minute books are accurate. The
stock record books of the Company are complete, correct and current.
5.37 Customers. The Company has used reasonable business efforts to
---------
maintain, and currently maintains, good working relationships with all of its
customers. Schedule 5.37 contains a list of the names of each of the 10
-------------
customers that, in the aggregate, for the period from January 1, 1999 through
the date hereof were the largest dollar volume customers of products or
services, or both, sold by the Company. Except as specified in Schedule 5.37,
-------------
none of such customers has given the Company written notice terminating,
canceling or threatening to terminate or cancel any Contract or relationship
with the Company.
5.38 Product Warranties. Except as set forth in Schedule 5.38: (a) the
------------------ -------------
Company does not have any unexpired expressed or implied product warranty with
respect to any product that it manufactures or sells or that it has heretofore
manufactured or sold; (b) the Company has not received any notice of any claim
based on any product warranty; and (c) the Company does not know nor has any
reasonable ground to know of any claim (actual or threatened) based on any
product warranty. The Company does not make any other warranties expressed or
implied, with respect to any of the products that it manufactures or sells.
33
<PAGE>
5.39 No Defective Products. The Company has not manufactured, sold or
---------------------
supplied any products or services which are, have or, to the knowledge of the
Company, will become in any material respect faulty or defective or which do not
comply in any material respect with any warranty or representation expressly or
impliedly made by it, or with all laws, regulations, standards and requirements
applicable to such products or the provision of such services.
5.40 Brokers. Except as described in Schedule 5.40, none of the Company
------- -------------
nor any of its officers, directors or employees have employed any broker,
financial advisor or finder or incurred any liability for any brokerage fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement.
6. REPRESENTATIONS OF THE PARENT AND NEWCO
As of the date hereof and as of each of the Closing Date and the Effective
Time, the Parent and Newco, jointly and severally, represent and warrant to the
Shareholders as follows. As used in this Agreement, any reference to any event,
change or effect being material or having a material adverse effect on or with
respect to the Parent means such event, change or effect is materially adverse
to the financial condition, properties, business or results of operations of the
Parent and its subsidiaries, taken as a whole, it being understood that none of
the following shall be deemed by itself or by themselves, either alone or in
combination, to constitute a material adverse effect: (i) a change in the market
price or trading volume of the Parent's common stock or (ii) a failure by the
Parent to meet internal earnings or revenue projections or the revenue or
earnings predictions of equity analysts for any period ending (or for which
earnings are released) on or after the date of this Agreement and prior to the
Effective Time.
6.1 Corporate Existence. The Parent is a corporation duly incorporated,
-------------------
validly existing and in good standing under the Laws of the Commonwealth of
Pennsylvania and Newco is a corporation duly incorporated, validly existing and
in good standing under the Law of the State of California, each with full
corporate power and authority to conduct its business as now conducted and as
currently proposed to be conducted and to own, use and lease its Assets and
properties. Each of the Parent and Newco are duly qualified, licensed or
admitted to do business and are in good standing in each jurisdiction in which
the ownership, use, licensing or leasing of its assets and properties, or the
conduct or nature of its business, makes such qualification, licensing or
admission necessary, except for such failures to be so duly qualified, licensed
or admitted and in good standing that would not reasonably be expected to have a
material adverse effect on the business or condition of the Parent.
6.2 Corporate Power and Authorization. Each of the Parent and Newco has
---------------------------------
full corporate power and authority to execute and deliver this Agreement, to
perform their obligations hereunder and to consummate the transactions
contemplated hereby and thereby. The execution an delivery by the Parent and
Newco of this Agreement and the consummation by the Parent and Newco of the
transactions contemplated hereby have been duly and validly authorized by all
necessary actions by the Board of Directors of each of the Parent and Newco, and
no other action on the part of the Board of Directors of either the Parent or
Newco is required to authorize the execution, delivery and performance of this
Agreement and the consummation by the Parent and Newco of the transactions
contemplated hereby. This Agreement has been duly and validly executed
34
<PAGE>
and delivered by the Parent and Newco and, assuming the due authorization,
execution and delivery hereof by the Company and the Principal Shareholders,
constitutes a legal, valid and binding obligation of the Parent and Newco
enforceable against the Parent and Newco in accordance with its terms, except as
the enforceability thereof may be limited by bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium or other similar Laws relating to the
enforcement of creditors' rights generally and by general principles of equity.
6.3 Consents and Approvals. Except for filings that may be required to
----------------------
effect the Merger under the Laws of California and any consents specified in
Schedule 6.3 (collectively the "Parent Required Consents"), neither the
- ------------
execution and delivery by the Parent and Newco of this Agreement, nor the
performance of the transactions contemplated hereby, require any filing, consent
or approval, constitute a default or cause any payment obligation to arise under
(a) any law or court order to which the Parent or Newco is subject, (b) the
Charter Documents of the Parent or Newco, or (c) any contract, Governmental
Permit or other document to which any the Parent or Newco is a party or by which
the properties or other assets of the Parent or Newco may be subject.
6.4 Parent Common Stock. The shares of Parent Common Stock to be issued
-------------------
pursuant to the Merger, when issued, will be duly authorized, validly issued,
fully paid and non-assessable.
6.5 SEC Documents; Parent Financial Statements. The Parent has filed or
------------------------------------------
prior to the Closing Date will file with the SEC all documents required to be
filed with the SEC and has furnished or made available to the Company and the
Principal Shareholders true and complete copies of all SEC documents filed by it
with the SEC since February 11, 1999 (the "SEC Documents"), all in the form so
filed. As of their respective filing dates, such SEC Documents filed by the
Parent and all SEC Documents filed after the date hereof but before the Closing
complied or will comply in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the SEC
thereunder, as the case may be, and to the knowledge of the Parent, none of the
SEC Documents contained or 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 such SEC Documents have been
corrected, updated or superseded by a document subsequently filed with the SEC.
The financial statements of the Parent, including the notes thereto, included in
the SEC Documents (the "Parent Financial Statements") comply as to form in all
materials respects with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP consistently applied
(except as may be indicated in the notes thereto) and present fairly the
consolidated financial position of the Parent at the dates thereof and the
consolidated results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited financial statements, to normal year-end
adjustments). There has been no change in the Parent's accounting policies
except as described in the Parent Financial Statements. Except as reflected or
reserved against in the Parent Financial Statements, the Parent has no material
liabilities or other obligations, except for liabilities and obligations (i)
incurred in the ordinary course of business or (ii) that would not be required
to be reflected or reserved against in the balance sheet of the Parent prepared
in accordance with GAAP.
35
<PAGE>
6.6 No Conflicts. The execution and delivery by the Parent and Newco of
------------
this Agreement does not, and the performance by the Parent and Newco of its
respective obligations under this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Charter Documents of the Parent or Newco;
or
(b) conflict with or result in a violation or breach of any law or
order applicable to the Parent or Newco or their respective assets or
properties, except as would not be reasonably expected to have material adverse
effect on the business or condition of the Company or Newco.
6.7 Absence of Changes. Since the Audited Balance Sheet Date, there has
------------------
not been a material adverse effect, or any event or development which,
individually or together with other such events, would reasonably be expect to
result in a material adverse effect, on the business or condition of the Parent.
6.8 Ownership of Newco; No Prior Activities. As of the date hereof and
---------------------------------------
the Effective Time, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by this
Agreement and except for this Agreement and any other agreements or arrangements
contemplated by this Agreement, Newco has not and will not have incurred,
directly or indirectly, through any subsidiary or affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind whatsoever
or entered into any agreements or arrangements with any Person.
6.9 Brokers. Neither the Parent or Newco or any of their respective
-------
officers, directors or employees have employed any broker, financial advisor or
finder or incurred any liability for any brokerage fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement.
7. COVENANTS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
7.1 Conduct of Business. During the period from the date of this
-------------------
Agreement and continuing until the earlier of (a) the termination of this
Agreement, or (b) the Effective Time, the Company shall, and the Principal
Shareholders shall cause the Company to, (unless Parent shall give its prior
consent in writing which consent will not be unreasonably withheld or delayed)
carry on its business in the usual, regular and ordinary course consistent with
past practice, to pay its Liabilities and Taxes consistent with the Company's
past practices, to pay or perform other obligations when due consistent with the
Company's past practices, subject to any good faith disputes over such
Liabilities, Taxes and other obligations and, to the extent consistent with such
business, to use commercially reasonable efforts and institute all policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, independent
contractors and other Persons having business dealings with it, all with the
express purpose and intent of preserving unimpaired its goodwill and ongoing
businesses at the Effective Time. Without limiting
36
<PAGE>
6.5 SEC Documents; Parent Financial Statements. The Parent has filed or
------------------------------------------
prior to the Closing Date will file with the SEC all documents required to be
filed with the SEC and has furnished or made available to the Company and the
Principal Shareholders true and complete copies of all SEC documents filed by it
with the SEC since February 11, 1999 (the "SEC Documents"), all in the form so
filed. As of their respective filing dates, such SEC Documents filed by the
Parent and all SEC Documents filed after the date hereof but before the Closing
complied or will comply in all material respects with the requirements of the
Securities Act and the Exchange Act and the rules and regulations of the SEC
thereunder, as the case may be, and to the knowledge of the Parent, none of the
SEC Documents contained or 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 such SEC Documents have been
corrected, updated or superseded by a document subsequently filed with the SEC.
The financial statements of the Parent, including the notes thereto, included in
the SEC Documents (the "Parent Financial Statements") comply as to form in all
materials respects with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP consistently applied
(except as may be indicated in the notes thereto) and present fairly the
consolidated financial position of the Parent at the dates thereof and the
consolidated results of its operations and cash flows for the periods then ended
(subject, in the case of unaudited financial statements, to normal year-end
adjustments). There has been no change in the Parent's accounting policies
except as described in the Parent Financial Statements. Except as reflected or
reserved against in the Parent Financial Statements, the Parent has no material
liabilities or other obligations, except for liabilities and obligations (i)
incurred in the ordinary course of business or (ii) that would not be required
to be reflected or reserved against in the balance sheet of the Parent prepared
in accordance with GAAP.
6.6 No Conflicts. The execution and delivery by the Parent and Newco of
------------
this Agreement does not, and the performance by the Parent and Newco of its
respective obligations under this Agreement and the consummation of the
transactions contemplated hereby do not and will not:
(a) conflict with or result in a violation or breach of any of the
terms, conditions or provisions of the Charter Documents of the Parent or Newco;
or
(b) conflict with or result in a violation or breach of any law or
order applicable to the Parent or Newco or their respective assets or
properties, except as would not be reasonably expected to have material adverse
effect on the business or condition of the Company or Newco.
6.7 Absence of Changes. Since the Audited Balance Sheet Date, there has
------------------
not been a material adverse effect, or any event or development which,
individually or together with other such events, would reasonably be expect to
result in a material adverse effect, on the business or condition of the Parent.
37
<PAGE>
6.8 Ownership of Newco; No Prior Activities. As of the date hereof and
---------------------------------------
the Effective Time, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions contemplated by this
Agreement and except for this Agreement and any other agreements or arrangements
contemplated by this Agreement, Newco has not and will not have incurred,
directly or indirectly, through any subsidiary or affiliate, any obligations or
liabilities or engaged in any business activities of any type or kind whatsoever
or entered into any agreements or arrangements with any Person.
6.9 Brokers. Neither the Parent or Newco or any of their respective
-------
officers, directors or employees have employed any broker, financial advisor or
finder or incurred any liability for any brokerage fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement.
7. COVENANTS OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS
7.1 Conduct of Business. During the period from the date of this
-------------------
Agreement and continuing until the earlier of (a) the termination of this
Agreement, or (b) the Effective Time, the Company shall, and the Principal
Shareholders shall cause the Company to, (unless Parent shall give its prior
consent in writing which consent will not be unreasonably withheld or delayed)
carry on its business in the usual, regular and ordinary course consistent with
past practice, to pay its Liabilities and Taxes consistent with the Company's
past practices, to pay or perform other obligations when due consistent with the
Company's past practices, subject to any good faith disputes over such
Liabilities, Taxes and other obligations and, to the extent consistent with such
business, to use commercially reasonable efforts and institute all policies to
preserve intact its present business organization, keep available the services
of its present officers and key employees and preserve its relationships with
customers, suppliers, distributors, licensors, licensees, independent
contractors and other Persons having business dealings with it, all with the
express purpose and intent of preserving unimpaired its goodwill and ongoing
businesses at the Effective Time. Without limiting the foregoing, except as
expressly contemplated by this Agreement, the Company shall not, without the
prior written consent of the Parent:
(a) enter into any Contract, commitment or transaction or incur any
Liabilities in excess of $10,000 in the aggregate outside of the ordinary course
of business consistent with past practice;
(b) enter into any Contract in connection with any transaction
involving a Business Combination;
(c) alter, or enter into any Contract or other commitment to alter,
its interest in any corporation, association, joint venture, partnership or
business entity in which the Company directly or indirectly holds any interest
on the date hereof;
38
<PAGE>
(d) enter into any strategic alliance, joint development or joint
marketing Contract;
(e) materially amend or otherwise modify (or agree to do so), except
in the ordinary course of business consistent with past practice, or materially
violate the terms of, any of the Contracts set forth in Schedule 5.16;
(f) enter into any transaction with any officer, director, shareholder
or Affiliate of the Company, other than (i) compensation consistent with
existing policies or as otherwise permitted by this Agreement or (ii)
reimbursement of business expenses and similar matters in the ordinary course of
business;
(g) enter into or amend any Contract pursuant to which any other
Person is granted manufacturing, marketing, distribution, licensing or similar
rights of any type or scope with respect to any products of the Company and the
Intellectual Property;
(h) commence any Action or Proceeding;
(i) except for (i) the issuance of shares of Company capital stock
upon exercise or conversion of presently outstanding Company options, Company
warrants or convertible securities listed on Schedule 5.6 , and (ii) the grant
------------
to new Company employees hired after the date hereof but before the Closing Date
of options to purchase Company common stock in a manner consistent with the
stock option policies and practices of the Parent, which option grants shall not
exceed 10,000 shares per individual new employee or 50,000 shares in the
aggregate, the Company will not (A) declare, set aside or pay any dividends on
or make any other distributions (whether in cash, stock or property) in respect
of any Company capital stock, or split, combine or reclassify any Company
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of Company capital stock,
or repurchase, redeem or otherwise acquire, directly or indirectly, any shares
of Company capital stock; (B) issue, grant, deliver, sell or authorize or
propose the issuance, grant, delivery or sale of, or purchase or propose the
purchase of, any shares of Company capital stock or options, warrants or other
instruments convertible, exchangeable or exercisable therefor, or modify or
amend the rights of any holder of any outstanding shares of Company capital
stock (including to reduce or alter the consideration to be paid to the Company
upon the exercise of any outstanding Company options, Company warrants or other
convertible securities), or (C) enter into any agreements, arrangements, plans
or understandings with respect to any such modification or amendment, nor shall
the Company take any action to affect the number of shares of Company capital
stock for which any shares of Company capital stock, Company options, Company
warrants or other securities are convertible or exchangeable into, nor shall the
Company issue any shares of Company capital stock which exchange or convert into
shares of Company capital stock at a ratio other than one-for-one;
(j) take any action that would change the corporate governance of the
Company, including (i) cause or permit any amendments to its Articles of
Incorporation, other than to file an
39
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amendment to its Articles of Incorporation to: (1) increase the Company's
authorized number of Common Stock to 20,000,000 shares, and (2) increase the
Company's authorized number of Preferred Stock to 8,000,000, of which 3,000,000
shall be designated Series A Preferred Stock and 5,000,000 shall be designated
Series B Preferred Stock, (ii) cause or permit any amendments to its by-laws, or
(iii) change the number of directors or the Persons serving as directors of the
Company;
(k) transfer (by way of a license or otherwise) to any Person rights
to any Intellectual Property other than licenses incidental to the sale of the
Company's products in the ordinary course of business;
(l) dispose of or sell, waive any right to license or lease, or incur
any lien on, any assets and properties of the Company, other than acquisitions
or dispositions of inventory, or Licenses of products as permitted by clause (k)
of this Section 7.1, or as the result of the payment for goods and services in
the ordinary course or as otherwise permitted by this Agreement;
(m) purchase any assets and properties of any Person other than
acquisitions of inventory (including office supplies) or licenses of products in
the ordinary course of business of the Company consistent with past practice;
(n) make any capital expenditures or commitments by the Company for
additions to property, plant or equipment of the Company constituting capital
assets, individually or in the aggregate in an amount exceeding $50,000;
(o) except to comply with generally accepted accounting principles in
the United States ("GAAP"), write-off or write-down or make any determination to
write off or write-down, or revalue, any of the assets and properties of the
Company, or make changes in any reserves or liabilities associated therewith,
individually or in the aggregate in an amount exceeding $10,000;
(p) pay, discharge or satisfy, in an amount in excess of $10,000, in
any one case, or $10,000 in the aggregate, any claim, Liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise) owing by
the Company, other than the payment, discharge or satisfaction in the ordinary
course of business of Liabilities reflected or reserved against in the Company
Financial Statements or incurred after the Audited Balance Sheet Date in the
ordinary course of business consistent with this Agreement;
(q) fail to pay or otherwise satisfy its Liabilities consistent with
the Company's past practices, except such as are being contested in good faith;
(r) except for the indebtedness under the Loan Agreement, incur any
Indebtedness or guarantee any such Indebtedness in an aggregate amount exceeding
$10,000, or issue or sell any debt securities of the Company or guarantee any
debt securities of others;
40
<PAGE>
(s) grant any severance or termination pay to any director, officer,
employee or consultant, except payments made pursuant to written agreements
outstanding on the date hereof, the terms of which are disclosed in Schedule
--------
5.16;
- ----
(t) increase greater than five percent (5%) the salary, rate of
commissions, rate of consulting fees or any other compensation of any current or
former officer, director, shareholder, employee, independent contractor or
consultant of the Company;
(u) make any payment of consideration of any nature whatsoever to any
current or former officer, director, shareholder, employee, independent
contractor or consultant of the Company, other than (i) salary, commissions or
consulting fees and customary benefits paid to any current or former officer,
director, shareholder, employee or consultant of the Company or (ii)
discretionary or stay bonuses which (x) continue existing employee compensation
arrangements or (y) do not exceed $10,000 individually or $20,000 in the
aggregate;
(v) establish or modify (i) targets, goals, pools or similar
provisions under any employee benefit plan, employment Contract or other
employee compensation arrangement or independent contractor Contract or other
compensation arrangement or (ii) salary ranges, increased guidelines or similar
provisions in respect of any Plan, employment Contract or other employee
compensation arrangement or independent contractor Contract or other
compensation arrangement;
(w) adopt, enter into, amend, modify or terminate (partial or
complete) any Plan;
(x) make or change any material election in respect of Taxes, adopt or
change any material accounting method in respect of Taxes, enter into
any tax allocation agreement, tax sharing agreement, tax indemnity
agreement or closing agreement, settle or compromise 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 with any Taxing authority or otherwise;
(y) except as required by GAAP, make any material change in the
accounting policies, principles, methods, practices or procedures of the Company
(including without limitation for bad debts, contingent liabilities or
otherwise, respecting capitalization or expense of research and development
expenditures, depreciation or amortization rates or timing of recognition of
income and expense);
(z) commence, terminate or change any line of business;
(aa) cancel, materially amend or fail to renew any insurance policy
other than in the ordinary course of business consistent with past practice, or
fail to use commercially reasonable efforts to give all notices and present all
claims under all such policies in a timely fashion;
41
<PAGE>
(bb) fail to undertake any commercially reasonable action, including
but not limited to paying or otherwise satisfying any obligations to procure,
maintain, renew, extend or enforce any Intellectual Property;
(cc) take, or agree in writing or otherwise to take, any of the
actions described in Section 5.29 above; and
(dd) take, or agree in writing or otherwise to take, any of the
actions described in Sections 7.1(a) through (cc) above, or any other action
that would prevent the Company from performing or cause the Company not to
perform its agreements and covenants hereunder.
7.2 Compliance with Laws, etc. The Company shall, and the Principal
--------------------------
Shareholders shall cause the Company to, comply with all laws, ordinances,
rules, regulations and orders applicable to the Company or its business,
operations, properties or assets, noncompliance with which might materially
affect the Company.
7.3 Exclusivity. Except with respect to this Agreement and the
-----------
transactions contemplated hereby, none of the Company, the Principal
Shareholders or their affiliates shall, and each of them shall cause its
respective employees, agents and representatives (including, without limitation,
any investment banking, legal or accounting firm retained by it or them and any
individual member or employee of the foregoing) (each, an "Agent") not to, (a)
initiate, solicit or seek, directly or indirectly, any inquiries or the making
or implementation of any proposal or offer (including, without limitation, any
proposal or offer to its shareholders or any of them) with respect to a merger,
acquisition, consolidation, recapitalization, liquidation, dissolution or
similar transaction involving, or any purchase of all or any portion of the
assets or any equity securities of, the Company (any such proposal or offer
being hereinafter referred to as an "Acquisition Proposal"), or (b) engage in
any negotiations concerning, or provide any confidential information or data to,
or have any substantive discussions with, any person relating to an Acquisition
Proposal, (c) otherwise cooperate in any effort or attempt to make, implement or
accept an Acquisition Proposal, or (d) enter into or consummate any agreement or
understanding with any person or entity relating to an Acquisition Proposal,
except for the Merger contemplated hereby. If the Company or any Principal
Shareholder, or any of their respective Agents, have provided any person or
entity (other than the Parent) with any confidential information or data
relating to an Acquisition Proposal, then they shall request the immediate
return thereof. The Company and the Principal Shareholders shall notify the
Parent immediately if any inquiries, proposals or offers related to an
Acquisition Proposal are received by, any confidential information or data is
requested from, or any negotiations or discussions related to an Acquisition
Proposal are sought to be initiated or continued with, it or any individual or
entity referred to in the first sentence of this Section 7.3. The covenant
contained in this Section 7.3 shall not survive any termination of this
Agreement pursuant to Article 11.
7.4 Third-Party Approvals. Prior to the Closing Date, the Company
---------------------
shall, and the Principal Shareholders shall cause the Company to, satisfy any
requirement for notice and approval of the transactions contemplated by this
Agreement under applicable agreements with third parties,
42
<PAGE>
"approval of the shareholders" of the Company within the meaning of Section 153
of the California Code to the Merger and this Agreement and the transactions
contemplated hereby and to enable the Closing to occur as promptly as
practicable. The materials submitted to the shareholders of the Company in
respect of the Special Meeting shall include any materials required by the rules
andxregulations promulgated under the California Code in connection with
obtaining the Fairness Approval and shall have been subject to prior review and
comment by Parent (which such comments will be promptly conveyed by Parent,
which shall have at least five (5) Business Days to review such materials) and
shall include information regarding the Company, the terms of the Merger and
this Agreement and the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger, this Agreement and the transactions contemplated
thereby (and, if a Registration Statement is used, the prospectus included as
part of the Registration Statement). The Parent will promptly provide to the
Company any information in its possession or reasonably available to it that is
necessary for preparation of the information or proxy statement that the Company
will send to its shareholders in connection with the Company's solicitation of
written consents or proxies for the Special Meeting. The written information
that the Parent will supply to the Company expressly for inclusion by the
Company in such information or proxy statement, and any written information that
the Company will supply to the Parent expressly for inclusion in either the
materials to be filed with the California Department of Corporations in
connection with the Fairness Hearing or the Registration Statement, will not
knowingly contain any untrue statement of material fact or omit any material
facts 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.
8.3 Access to Information. Between the date of this Agreement and the
---------------------
earlier of the Effective Time or the termination of this Agreement, upon
reasonable notice the Company shall (i) give Parent, Newco and their respective
officers, employees, accountants, counsel, financing sources and other agents
and representatives full access (subject to reasonable supervision and, at the
Company's option, logging of information to which access is provided) to all
buildings, offices, and other facilities and to all books and records of the
Company, whether located on the premises of the Company or at another location;
(ii) permit Parent and Newco to make such inspections as they may require; (iii)
cause its officers to furnish Parent and Newco such financial, operating,
technical and product data and other information with respect to the business
and assets and properties of the Company as Parent and Newco from time to time
may request, including without limitation financial statements and schedules
available at any location other than the Company's headquarters and none of such
technical information shall be removed from such headquarters (whether in
written, electronic or other format) without the prior written consent of the
Company); (iv) allow Parent and Newco the opportunity to interview such
employees and other personnel and affiliates of the Company with the Company's
prior written consent, which consent shall not be unreasonably withheld or
delayed; and (v) assist and cooperate with the Parent and Newco in the
development of integration plans for implementation by the Parent and the
Surviving Corporation following the Effective Time; provided, however, that no
investigation pursuant to this Section 8.3 shall affect or be deemed to modify
any representation or warranty made by the Company herein. Materials furnished
to the Parent pursuant to this Section 8.3 may be used by the Parent for
strategic and integration planning purposes relating to accomplishing the
transactions contemplated hereby.
43
<PAGE>
8.4 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including all legal, accounting,
financial advisory, consulting and all other fees and expenses of third parties
incurred by a party in connection with the negotiation and effectuation of the
terms and conditions of this Agreement and the transactions contemplated hereby,
shall be the obligation of the respective party incurring such fees and
expenses; provided, however, that Parent shall pay to the Company the sum of One
Million Dollars ($1,000,000), less any outstanding amounts owed by the Company
to the Parent under the Loan Agreement (which amounts shall be forgiven as of
the Effective Time) in the event that the Company terminates this Agreement due
to the Parent's wilful breach of this Agreement; and further, provided, that the
Company shall be obligated to pay to the Parent the sum of One Million Five
Hundred Thousand Dollars ($1,500,000) in the event that: (x) this Agreement is
terminated (other than by the Company due to the Parent's wilful breach of this
Agreement), and (y) the Company consummates (within 9 months after the
---
termination of this Agreement) a transaction with a third Person with respect to
an Acquisition Proposal.
8.5 Public Disclosure. Unless otherwise required by law (including
-----------------
federal and state securities laws) or, as to the Parent, by the rules and
regulations of the NASD, prior to the Effective Time, no disclosure (whether or
not in response to any inquiry) of the existence of any subject matter of, or
the terms and conditions of, this Agreement shall be made by any party hereto
unless approved by the Parent and the Company prior to release, provided that
such approval shall not be unreasonably withheld or delayed. The Parent will use
its good faith efforts to provide advance notice to the Company of any
disclosure that it intends to make as required by Law or by the rules and
regulations of the NASD. The parties have, prior to the execution and delivery
of this Agreement, agreed upon the text of a joint press release with respect to
the announcement of this Agreement.
8.6 Approvals. The Parent and the Company shall use commercially
---------
reasonable efforts to obtain the approvals from Governmental Entities or under
any of the Contracts or other agreements as may be required in connection with
the Merger so as to preserve all rights of and benefits to the Parent or the
Company (as applicable) thereunder and each party shall provide the other with
such assistance and information as is reasonably required to obtain such
approvals.
8.7 FIRPTA Compliance. On or prior to the Closing Date, the Company
-----------------
shall deliver to the Parent a properly executed statement in a form reasonably
acceptable to the Parent forxpurposes of satisfying the Parent's obligations
under Treasury Regulation Section 1.1445-2(c) (3).
8.8 Additional Documents and Further Assurances. Each party hereto, at
-------------------------------------------
the request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things (including, but not
limited to, all action reasonably necessary to seek and obtain any and all
consents and approvals of any Government Entity or Person, provided that the
Parent shall not be obligated to consent to any divestitures or operational
limitations or activities in connection therewith and no party shall be
obligated to make a payment of money as a condition to obtaining any such
condition or approval) as may be reasonably necessary or desirable for effecting
completely the consummation of this Agreement and the transactions contemplated
hereby.
44
<PAGE>
8.9 NNM Listing of Additional Shares Application. The Parent shall use
--------------------------------------------
its commercially reasonable efforts to cause to be authorized for listing on the
NNM the shares of the Parent Common Stock to be issued, and the shares of the
Parent Common Stock required to be reserved for issuance, in connection with the
Merger, will be converted upon disposition, upon official notice of issuance.
8.10 Takeover Statutes. If any takeover statute is or may become
-----------------
applicable to the transactions contemplated hereby, the Board of Directors of
the Company will grant such approvals and take such actions as are necessary so
that the transactions contemplated hereby may be consummated as promptly as
practicable on the terms contemplated hereby and otherwise act to eliminate the
effects of any takeover statute on any of the transactions contemplated hereby.
8.11 Notification of Certain Matters. (a) The Company shall give
-------------------------------
prompt notice to the Parent of (i) the occurrence or non-occurrence of any event
known to the Company the occurrence or non-occurrence of which would be likely
to cause any representation or warranty contained in Article 5 to be untrue or
inaccurate in any material respect at or prior to the Closing Date or the
Effective Time and (ii) any material failure of the Company to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
the Company hereunder.
(b) The Principal Shareholders shall give prompt notice to the Parent
of (i) the occurrence or non-occurrence of any event known to the Principal
Shareholders the occurrence or non-occurrence of which would be likely to cause
any representation or warranty contained in Article 4 to be untrue or inaccurate
in any material respect at or prior to the Closing Date or the Effective Time
and (ii) any material failure of the Principal Shareholders to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied by
the applicable Principal Shareholder hereunder.
(c) The Parent shall give prompt notice to the Company of (i) the
occurrence or non-occurrence of any event known to the Parent or Newco the
occurrence of non-occurrence of which would be likely to cause any
representation or warranty contained in Article 6 to be untrue or inaccurate in
any material respect at or prior to the Closing Date or the Effective Time and
(ii) any material failure of the Parent or Newco to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder.
(d) The delivery of any notice pursuant to this Section 8.11 shall
not be deemed to (i) modify the representations or warranties hereunder of the
party delivering such notice, (ii) modify the conditions set forth in Section 9
or (iii) limit or otherwise affect the remedies available hereunder to the party
receiving such notice.
8.12 Company Options, Warrants, etc. As of the Closing Date, all
------------------------------
fully-vested and partially-vested options and all warrants for capital stock of
the Company and other convertible securities of the Company shall be either
exercised (or, with respect to partially-vested options, partially exercised to
the extent vested) by the holders thereof or canceled by the Company. As of the
Closing Date, all non-vested options (and partially-vested options to the extent
not vested) for
45
<PAGE>
capital stock of the Company shall be exchanged for options to purchase Parent
Common Stock in accordance with Section 2.1(d) hereof.
8.13 Tax Matters. (a) Prior to the Merger, Parent will be in "Control"
-----------
of Newco within the meaning of Section 368(c) of the Code. At the Effective
Time, the Company will not have outstanding any warrants, options, convertible
securities, or any other type of right pursuant to which any Person could
acquire any capital stock of the Company that, if exercised or converted, would
affect Parent's acquisition or retention of Control of the Company.
(b) Parent has no plan or intention to cause the Company after the
Effective Time to issue additional shares of stock or to sell or otherwise
dispose of shares of the Company that would result in Parent losing Control of
the Company;
(c) Neither Parent nor any corporation affiliated with Parent, has
any plan or intention to liquidate the Company, to merge the Company with or
into another corporation (except pursuant to the Merger), to sell, distribute or
otherwise dispose of the capital stock of the Company except for transfers of
stock described in Section 368(a)(2)(C) or Treas. Reg. Section 1.368-2(k)(2); or
to cause the Company to sell or otherwise dispose of any of its assets acquired
from Newco except for dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) or Treas. Reg. Section 1.368-
2(k)(2);
(d) Following the Merger, the "historic business" of the Company will
be continued or a significant portion of the Company's "historic business"
assets will be used in a business, as each such term is used in Treas. Reg.
Section 1.368-1(d). The business currently carried on by the Company is its
"historic business," within the meaning of Treasury Reg. Section 1.368-1(d) and
no assets of the Company have been acquired, or sold, transferred or otherwise
disposed of, which would prevent Parent, or the members of Parent's qualified
group (as defined in Treasury Reg. Section 1.368-1(d)(4)(ii)), from continuing
the "historic business" of the Company or from using a "significant portion" of
the Company's "historic business" assets in a business following the Merger, as
such terms are used in Treasury Reg. Section 1.368-1(d); and
(e) Following the Merger, Parent will comply with the record-keeping
and information filing requirements of Treas. Reg. Section 1.368-3.
9. CONDITIONS TO THE MERGER
9.1 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 Closing of the following
conditions:
(a) Governmental Entity Approvals. Approvals from any Governmental
-----------------------------
Entity (if any) deemed appropriate or necessary by any party to this Agreement
shall have been timely obtained.
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<PAGE>
(b) No Injunctions or Regulatory Restraints; Illegality. No temporary
---------------------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or Governmental Entity or other legal or
regulatory restraint or prohibition preventing the consummation of the Merger
shall be in effect; nor shall there be any action taken, or any law enacted,
entered, enforced or deemed applicable to the Merger or the other transactions
contemplated by the terms of this Agreement that would prohibit the consummation
of the Merger or which would permit consummation of the Merger only if certain
divestitures were made or if Parent were to agree to limitations on its business
activities or operations (unless such divestitures would be required as a result
of the acquisition of another business entity by Parent after the date hereof).
(c) Shareholder Approval. The Merger shall have been approved by the
--------------------
requisite votes of the Company's Shareholders in accordance with the California
Code.
(d) Fairness Approval; Effectiveness of Registration Statement. The
----------------------------------------------------------
Fairness Approval shall have been obtained, or, if Parent elects to proceed with
the Registration Statement as provided in Section 8.1, the Registration
Statement shall have been declared effective by the SEC under the Securities
Act, and no stop order (or similar action) suspending the Fairness Approval or,
if applicable, the effectiveness of the Registration Statement shall have been
issued by the Commissioner or the SEC, as applicable, and no proceedings for
that purpose and no similar proceeding in respect of the Company's information
or proxy statement shall have been initiated or threatened by the Commissioner
or the SEC, as applicable.
9.2 Additional Conditions to Obligations of the Company. The
---------------------------------------------------
obligations of the Company to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing of each of following conditions, any of which may be waived, in
writing, exclusively by the Company:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties made by Parent and Newco in this Agreement shall be true and correct
on and as of the Closing Date as though each such representation and warranty
was made on and as of the Closing Date, and any representation and warranty made
as of a specified date shall also have been true and correct on and as of such
earlier date, except where the failure of any such representations and
warranties to be true and correct (without regard to any materiality qualifier
contained therein and considered individually or in the aggregate) would not be
reasonably expected to have a material adverse effect on the business or
condition of Parent, and the Company shall have received a certificate to such
effect signed by the Chief Executive Officer of Parent.
(b) Performance. Parent and Newco shall have performed and complied
-----------
with in all material respects each agreement, covenant and obligation required
by this Agreement to be so performed or complied with by the Parent or Newco at
or before the Closing, and the Company shall have received a certificate to such
effect signed by the Chief Executive Officer of Parent.
(c) Legal Opinion. The Company shall have received a legal opinion
-------------
from Morgan, Lewis & Bockius LLP, counsel to Parent, in form and substance
reasonably satisfactory to it.
47
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(d) NNM Listing. The shares of Parent Common stock issuable to
-----------
shareholders of the Company pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger will be
converted upon disposition shall have been authorized for listing on the NNM
upon official notice of issuance.
(e) Parent Common Stock Options. The Parent shall have reserved
---------------------------
250,000 shares of common stock, par value $.01 per share, of the Parent for
grants of options in such amounts and to such employees of the Company as the
Company and the Parent shall mutually agree, which options shall be granted
under the Parent's equity compensation plan and in accordance with the Parent's
stock option policies, and the board of directors of the Parent shall have
authorized the same. All such options shall be granted within ten (10) Business
Days after the Closing Date with an exercise price equal to the fair market
value of Parent's common stock on such date, subject to Parent's equity
compensation plan and in accordance with the Parent's stock option policies.
Such options shall vest in 25% increments on each of the first four succeeding
six month anniversaries of the Closing Date.
9.3 Additional Conditions to the Obligations of Parent and Newco. The
------------------------------------------------------------
obligations of Parent and Newco to consummate the Merger and the transactions
contemplated by this Agreement shall be subject to the satisfaction at or prior
to the Closing of each of the following conditions, any of which may be waived,
in writing, exclusively by Parent:
(a) Representations and Warranties. Each of the representations and
------------------------------
warranties made by the Company and the Principal Shareholders in this Agreement
shall be true and correct on and as of the Closing Date as though each such
representation and warranty made as of a specified date shall also have been
true and correct on and as of such earlier date, except where the failure of any
such representations and warranties to be true and correct (without regard to
any materiality qualifier contained therein and considered individually or in
the aggregate) would not be reasonably expected to have a material adverse
effect on the business or condition of the Company, and Parent and the Principal
Shareholders shall have received a certificate to such effect signed by the
Chief Executive Officer of the Company.
(b) Performance. The Company and the Principal Shareholders shall
-----------
have performed and complied with in all material respects each agreement,
covenant and obligation required by this Agreement to be so performed or
complied with by the Company and the Principal Shareholders on or before the
Closing Date, and Parent and Newco shall have received a certificate to such
effect signed by the Chief Executive Officer of the Company.
(c) Legal Opinions. Parent shall have received legal opinions from
--------------
Wilson Sonsini Goodrich & Rosati and from Ritchey, Fisher, Whitman and Klein,
legal counsels to the Company, in form attached hereto as Exhibit F-1 and
-----------
Exhibit F-2, respectively.
- -----------
(d) Limitation on Dissent. Holders of no more than 5% of the
---------------------
outstanding shares of Company Stock shall have exercised and not withdrawn,
forfeited or otherwise permitted to lapse
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appraisal, dissenters' or similar rights under applicable law with respect to
their shares by virtue of the Merger.
(e) FIRPTA Compliance. The executed statement in the form reasonably
-----------------
acceptable to Parent for purposes of satisfying Parent's obligations under
Treasury Regulation Section 1.1445-2(c)(3) previously delivered by the Company
to Parent shall continue to be in full force and effect.
(f) Third Party Consents. Parent shall have received evidence
--------------------
satisfactory to it that the Company has obtained the consents, approvals and
waivers listed in Schedule 5.9 (with such consents, approvals or waivers to be
------------
in form and substance satisfactory to Parent and sufficient to enable Parent to
utilize, exploit or transfer any such Intellectual Property through the Company
or Parent or through or to any other subsidiary of Parent).
(g) Repayment of Indebtedness. Prior to and as of the Closing Date,
-------------------------
the Shareholders and the employees of the Company shall have repaid to the
Company in full all amounts owing to the Company by the Shareholders and the
employees of the Company.
(h) Estimated Closing Date Liabilities. The Estimated Closing Date
----------------------------------
Liabilities shall not exceed Three Million Dollars ($3,000,000).
10. INDEMNIFICATION; SURVIVAL
10.1 General Indemnification by the Company and the Shareholders. Subject
-----------------------------------------------------------
to the limitations contained in Section 10.4 hereof and the Escrow Agreement,
the Company and the Shareholders severally, but not jointly, covenant and agree
that they will indemnify, defend, protect and hold harmless the Parent, Newco
and the Surviving Corporation and their respective officers, shareholders,
directors, divisions, subdivisions, affiliates, subsidiaries, parents, agents,
employees, successors and assigns at all times from and after the date of this
Agreement until the Expiration Date (as defined in Section 10.5) from and
against all claims, damages, losses, liabilities, actions, suits, proceedings,
demands, assessments, adjustments, costs and expenses (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) (collectively, "Losses") incurred by the Parent, Newco or the
Surviving Corporation as a result of or arising from (a) any breach of the
representations and warranties made by the Company or the Principal Shareholders
set forth herein or on the schedules or certificates delivered in connection
herewith; provided that any representation or warranty of the Company or the
Principal Shareholders qualified as to materiality or as to "material adverse
effect" or words to that effect shall be deemed not to be so qualified for
purposes of determining whether a breach of such representation or warranty
shall have occurred for purposes of this Article 10; (b) any nonfulfillment of
any covenant or agreement on the part of the Principal Shareholders or the
Company under this Agreement, or on the part of the shareholders party to the
Non-Competition Agreements; provided that any covenant or agreement of the
Company or the Principal Shareholders qualified as to materiality or as to
"material adverse effect" or words to that effect shall be deemed not to be so
qualified for purposes of determining whether a breach of such covenant or
agreement shall have occurred for purposes of this Article 10;
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(c) the business, operations or assets of the Company prior to the Effective
Time or the actions or omissions of the Company's directors, officers,
shareholders, employees or agents prior to the Effective Time, other than Losses
arising from matters expressly disclosed in the Financial Statements, this
Agreement or the Schedules to this Agreement, or incurred by the Company in the
ordinary course of business in compliance with Section 7.1 hereof from the date
of the execution of this Agreement through the Closing Date, (d) any liability
or Losses in connection with the failure by the Company to withhold or pay
payroll Taxes prior to the Closing Date, (e) any claims or litigation involving
the Company which are pending or, to the knowledge of the Company, threatened
prior to the Closing Date, or (f) any liability under the Securities Act, the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or other
federal or state law or regulation, at common law or otherwise, arising out of
or based upon (i) any untrue statement or alleged untrue statement of a material
fact relating to the Company or the Principal Shareholders contained in any
preliminary prospectus, the Registration Statement or any prospectus forming a
part thereof, or any amendment thereof or supplement thereto (including any
additional registration statement filed pursuant to Rule 462(b) under the
Securities Act), which statement was provided or was based upon information or
documents provided to the Parent or its counsel by the Company or the Principal
Shareholders, or (ii) any omission or alleged omission to state therein a
material fact relating to the Company or the Shareholders required to be stated
therein or necessary to make the statements therein not misleading, which
information was not provided to the Parent or its counsel by the Company or the
Principal Shareholders; provided, however, that such indemnity shall not inure
to the benefit of the Parent, Newco or the Surviving Corporation to the extent
that such untrue statement (or alleged untrue statement) was made in, or such
omission (or alleged omission) occurred in, any preliminary prospectus and the
Principal Shareholders provided, in writing, corrected information to the Parent
for inclusion in the final prospectus, and such information was not so included.
10.2 Indemnification by the Parent and Newco. Subject to the limitations
---------------------------------------
contained in Section 10.4 hereof, the Parent and Newco, jointly and severally,
covenant and agree that they will indemnify, defend, protect and hold harmless
the Company and the Principal Shareholders, their respective heirs, personal
representatives, and successors at all times from and after the date of this
Agreement from and against all Losses incurred by the Company and the Principal
Shareholders as a result of or arising from (a) any breach of the
representations and warranties made by the Parent and Newco set forth herein or
on the schedules or certificates attached hereto, (b) any nonfulfillment of any
agreement on the part of the Parent under this Agreement, or (c) any liability
under the Securities Act, the Exchange Act or other federal or state law or
regulation, at common law or otherwise, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact relating to the Parent
contained in any preliminary prospectus, the Registration Statement or any
prospectus forming a part thereof, or any amendment thereof or supplement
thereto (including any registration statement filed pursuant to Rule 462(b)
under the Securities Act), or arising out of or based upon any omission or
alleged omission to state therein a material fact relating to the Parent
required to be stated therein or necessary to make the statements therein not
misleading, which liability is not the subject of indemnification of the Parent,
Newco and the Surviving Corporation pursuant to Section 10.1(f) above.
10.3 Third-Party Claims.
------------------
50
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(a) In order for a party hereto eligible to be indemnified hereunder
(an "Indemnified Party") to be entitled to any indemnification provided for
under this Agreement in respect of, arising out of or involving a claim or
demand made by any person or entity against the Indemnified Party (a "Third-
Party Claim"), such Indemnified Party must notify the parties obligated to
provide indemnification pursuant to Section 10.1 or 10.2 hereof (each, an
"Indemnifying Party") in writing, and in reasonable detail, of the Third-Party
Claim within 30 Business Days after receipt by such Indemnified Party of written
notice of the Third-Party Claim; provided, however, that failure to give such
notification shall not affect the indemnification provided hereunder except to
the extent the Indemnifying Party shall have been actually prejudiced as a
result of such failure. Such notice shall state the nature and the basis of such
claim and a reasonable estimate of the amount thereof. Thereafter, the
Indemnified Party shall deliver to the Indemnifying Party, within five Business
Days after the Indemnified Party's receipt thereof, copies of all notices and
documents (including court papers) received by the Indemnified Party relating to
the Third-Party Claim. To the extent the Indemnifying Party has actually paid
any amount to the Indemnified Party in respect of any Loss in connection with
such Third-Party Claim, the Indemnifying Party shall have a right of subrogation
with respect to such Third-Party Claim to the extent of such payment.
(b) The Indemnifying Party shall have right to defend and settle, at
its own expense and by its own counsel (provided that such counsel is not
reasonably objected to by the Indemnified Party), any Third-Party Claim as the
Indemnifying Party pursues the same in good faith and diligently and so long as
the Third-Party Claim does not relate to an actual or potential Loss to which
Section 10.3(e) applies in which the Indemnified Party is the Parent, Newco or
the Surviving Corporation. If the Indemnifying Party undertakes to defend or
settle, it shall promptly notify the Indemnified Party of its intention to do
so, and the Indemnified Party shall cooperate with the Indemnifying Party and
its counsel in the defense thereof and in any settlement thereof. Such
cooperation shall include, but shall not be limited to, furnishing the
Indemnifying Party with any books, records or information reasonably requested
by the Indemnifying Party that are in the Indemnified Party's possession or
control. Notwithstanding the foregoing, the Indemnified Party shall have the
right to participate in any matter through counsel of its own choosing at its
own expense (unless there is a conflict of interest that prevents counsel for
the Indemnifying Party from representing the Indemnified Party, in which case
the Indemnifying Party will reimburse the Indemnified Party for the expenses of
its counsel). After the Indemnifying Party has notified the Indemnified Party of
its intention to undertake to defend or settle any such asserted liability, and
for so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnified Party in connection with any defense or settlement
of such asserted liability, except to the extent such participation is requested
by the Indemnifying Party, in which event the Indemnified Party shall be
reimbursed by the Indemnifying Party for reasonable additional legal expenses
and out-of-pocket expenses, and except in the case of a Third-Party Claim
relating to an actual or potential Loss to which Section 10.3(e) applies in
which the Indemnified Party is the Parent, Newco or the Surviving Corporation.
(c) No Indemnifying Party shall, in the defense of any Third-Party
Claim, consent to entry of any judgment (other than a judgment of dismissal on
the merits without costs) or enter into any settlement, except with the written
consent of the Indemnified Party, which does
51
<PAGE>
not include as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party of a release from all liability in respect of
such claim or matter.
(d) If the Indemnifying Party does not assume the defense of any
Third-Party Claim, then the Indemnified Party may defend against such Third-
Party Claim in such manner as it deems appropriate at the expense of the
Indemnifying Party.
(e) Notwithstanding anything to the contrary in this Article 10, if
at any time, in the reasonable opinion of the Parent, Newco or the Surviving
Corporation as the Indemnified Party (notice of which opinion shall be given in
writing to the Indemnifying Party), any Third-Party Claim seeks material
prospective relief which could have an adverse effect on any such Indemnified
Party or any subsidiary, then such Indemnified Party shall have the right to
control or assume (as the case may be) the defense of any such Third-Party Claim
and the amount of any judgment or settlement and the reasonable costs and
expenses of defense (including, but not limited to, fees and disbursements of
counsel and experts, as well as any sampling, testing, investigation, removal,
treatment or remediation undertaken by the Parent, Newco or the Surviving
Corporation and all counseling or engineering fees and expenses related thereto)
shall be included as part of the indemnification obligations of the Indemnifying
Party hereunder. If the Indemnified Party elects to exercise such right, then
the Indemnifying Party shall have the right to participate in, but not control,
the defense of such Third-Party Claim at the sole cost and expense of the
Indemnifying Party.
10.4 Limitations on Indemnification. No Indemnified Party shall assert
------------------------------
any claim (other than a Third-Party Claim) for indemnification hereunder until
such time as the aggregate of all claims which such Indemnified Party may have
against an Indemnifying Party shall equal One Hundred Twenty-Five Thousand
Dollars ($125,000), at which time an Indemnified Party shall be entitled to
indemnification for the total amount for which indemnification may be owing,
excluding the first One Hundred Twenty-Five Thousand Dollars ($125,000). For
purposes of the preceding sentence, the Parent, Newco and the Surviving
Corporation shall be considered to be a single Indemnifying and Indemnified
Party and the Company and the Shareholders shall be considered to be a single
Indemnifying and Indemnified Party. Notwithstanding any other term of this
Agreement, in no event shall any Shareholder be liable under this Article 10 for
an amount which exceeds the aggregate value (determined at the Effective Time)
of the Merger Consideration received by such Shareholder under this Agreement,
and in no event (other than as provided in the following sentence) shall the
indemnification obligations of the Company and the Shareholders herein exceed
$7,500,000 in the aggregate. Notwithstanding anything to the contrary contained
in this Agreement, the limitations upon indemnification contained in this
Section 10.4 shall not apply to Losses arising out of: (i) any breach of the
representations and warranties of the Company contained in Sections 4.2, 4.3,
5.3, 5.5 and 5.10 hereof; and (ii) any employee benefit matters arising under
Section 5.21, including without limitation, any Losses incurred in connection
with fair wage issues.
10.5 Survival of Representations and Warranties. The parties agree that
------------------------------------------
representations and warranties made by the parties in this Agreement, or in any
certificate or other instrument delivered pursuant to this Agreement, shall
survive until the timely filing of the Parent's 1999 annual report filed on Form
10-K (which date is referred to herein as the "Expiration Date"), except that
the respective representations and warranties of the Principal Shareholders and
the
52
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Company contained in Sections 4.2, 5.3, 5.5 and 5.10 shall survive the Effective
Time without time limitation.
11. TERMINATION, AMENDMENT AND WAIVER
11.1 Termination. This Agreement may be terminated at any time prior to
-----------
the Effective Time, whether before or after approval of matters presented in
connection with the Merger by the Shareholders of the Company:
(a) by mutual written consent of Newco and the Company;
(b) by either Newco or the Company, if any Governmental Entity shall
have issued an order, decree or ruling or taken any other action permanently
enjoining, restraining or otherwise prohibiting the acceptance for payment of,
or payment for, shares of Parent Common Stock pursuant to the Merger and such
order, decree or ruling or other action shall have become final and
nonappealable; provided, in the case of an order, decree, ruling or other order,
each of the parties shall have used their best efforts to prevent the entry of
any such order, decree, ruling or other order and to appeal as promptly as
possible any order, decree, ruling or other order that may be entered; provided
further, the right to terminate this Agreement pursuant to the foregoing clause
shall not be available to any party that fails to comply with Section 8.6;
(c) by the Parent, if the Merger shall not have been approved by the
requisite votes of the Shareholders in accordance with the California Code;
(d) by the Parent, if at any time after five days after the
shareholders' meeting held for purposes of approving the vote, holders of more
than 5% of the Company Stock shall have exercised, or have the continued right
to exercise, appraisal, dissenters' or similar rights under applicable law with
respect to their shares by virtue of the Merger;
(e) by either the Parent or the Company, if the Effective Time has
not occurred before 11:59 p.m. (Pacific Daylight Time) on September 20, 1999, or
in the event of the filing of a Registration Statement, on October 20, 1999;
provided, however, that the right to terminate this Agreement under this clause
(d) shall not be available to any party whose wilful failure to fulfill any
obligation hereunder has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before such date;
(f) by the Parent, if there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement by the Company or
the Principal Shareholders, and the Company or the Principal Shareholders have
not cured such breach after notice of the same, and as a result of such breach
the conditions set forth in Sections 9.1 or 9.3, as the case may be, would not
then be satisfied; or
(g) by the Company, if there has been a breach of any representation,
warranty, covenant or agreement contained in this Agreement by the Parent and
the Parent has not cured such
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breach after notice of the same, and as a result of such breach the conditions
set forth in Sections 9.1 or 9.2, as the case may be, would not then be
satisfied.
11.2 Effect of Termination. In the event of termination of this
---------------------
Agreement by either Newco or the Company as provided in Section 11.1, this
Agreement shall forthwith become void and have no effect, without any liability
or obligation on the part of Newco, Parent, the Company or the Principal
Shareholders, other than the provisions of Sections 8.4 and 8.5, this Section
11.2 and Articles 12 and 13 and except to the extent that such termination
results from the wilful or grossly negligent and material breach by a party of
any of its representations, warranties, covenants or agreements set forth in
this Agreement, in which case each other party shall be entitled to recover all
damages allowable at law and all relief available in equity.
11.3 Amendment. This Agreement may be amended by the mutual agreement
---------
of the parties at any time before or after any required approval of matters
presented in connection with the Merger by the Shareholders of the Company;
provided, that after any such approval, there shall not be made any amendment
that by law requires further approval by such Shareholders without the further
approval of such Shareholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
11.4 Extension; Waiver. At any time prior to the Effective Time, the
-----------------
parties may (a) extend the time for the performance of any of the obligations or
other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other party contained in this Agreement or
in any document delivered pursuant to this Agreement or (c) subject to the
proviso of Section 11.3, waive compliance by the other party with any of the
agreements or conditions contained in this Agreement. Any agreement on the part
of a party to any such extension or waiver shall be valid only if set forth in
an instrument in writing signed on behalf of such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
11.5 Procedure for Termination, Amendment, Extension or Waiver. A
---------------------------------------------------------
termination of this Agreement pursuant to Section 11.1, an amendment of this
Agreement pursuant to Section 11.3 or an extension or waiver pursuant to Section
11.4 shall, in order to be effective, require in the case of Parent, Newco or
the Company, action by its Board of Directors or the duly authorized designee of
its Board of Directors.
12. NONDISCLOSURE OF CONFIDENTIAL INFORMATION
54
<PAGE>
12.1 The Parent. The Parent recognizes and acknowledges that it has in
----------
the past, currently has, and prior to the Closing Date will have, access to
certain confidential information solely of the Company in connection with its
business. The Parent agrees that, (i) prior to the Closing Date, or, (ii) if
this Agreement terminates prior to the Closing Date, then indefinitely, it will
not disclose any such confidential information to any person, firm, corporation,
association, or other entity for any purpose or reason whatsoever without prior
written consent of the Principal Shareholders except as may be required by law
or order of a court of competent jurisdiction, unless the Parent can show that
such information has become known to the public generally through no fault of
the Parent. Prior to disclosing any confidential information required by law or
order of a court of competent jurisdiction, the Parent shall provide the
Principal Shareholders with prompt notice of the disclosure requirement so that
the Principal Shareholders may take whatever action they deem appropriate to
prohibit such disclosure. In the event of a breach or threatened breach by the
Parent of the provisions of this Section 12.1, the Principal Shareholders shall
be entitled to an injunction restraining the Parent from disclosing, in whole or
in part, such confidential information. Nothing contained herein shall be
construed as prohibiting the Principal Shareholders from pursuing any other
available remedy for such breach or threatened breach, including the recovery of
damages.
12.2 Damages. Because of the difficulty of measuring economic losses as
-------
a result of the breach of the foregoing covenants, and because of the immediate
and irreparable damage that would be caused for which they would have no other
adequate remedy, the Parent, the Surviving Corporation and the Principal
Shareholders agree that, in the event of a breach by any of them of the
foregoing covenant (and in the case of the Principal Shareholders, the non-
disclosure covenants set forth in their respective Non-Competition Agreements),
the covenant may be enforced against them by injunctions and restraining orders.
13. GENERAL
13.1 Cooperation. The Principal Shareholders, the Company, Newco and the
-----------
Parent shall each deliver or cause to be delivered to the other on the Closing
Date, and at such other times and places as shall be reasonably agreed to, such
additional instruments as the other may reasonably request for the purpose of
carrying out this Agreement. The Company and the Principal Shareholders will
cooperate and use their respective best efforts to have the officers, directors
and employees of the Company prior to the Closing Date cooperate with the Parent
on and after the Closing Date in furnishing information, evidence, testimony and
other assistance in connection with any actions, proceedings, arrangements or
disputes of any nature with respect to matters pertaining to all periods prior
to the Closing Date.
13.2 Successors and Assigns. This Agreement and the rights of the
----------------------
parties hereunder may not be assigned (by operation of law or otherwise) and
shall be binding upon and shall inure to the benefit of the parties hereto, the
successors of the Parent, and the heirs and legal representatives of the
Principal Shareholders.
13.3 Entire Agreement. This Agreement (including the schedules,
----------------
exhibits and annexes attached hereto) and the documents delivered pursuant
hereto, including, without limitation, that
55
<PAGE>
certain letter agreement among the Parent and the Principal Shareholders dated
as of the date hereof, constitute the entire agreement and understanding among
the Principal Shareholders, the Company, the Parent and Newco and supersedes any
prior agreement and understanding relating to the subject matter of this
Agreement. This Agreement, upon execution, constitutes a valid and binding
agreement of the parties hereto, enforceable in accordance with its terms, and
may be modified or amended only by a written instrument executed by the
Principal Shareholders, the Company, the Parent and Newco acting through their
respective officers, duly authorized by their respective Boards of Directors.
13.4 Counterparts. This Agreement may be executed simultaneously in two
------------
or more counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
13.5 Brokers and Agents. Each of the Parent and Newco, on the one hand,
------------------
and each of the Company and the Principal Shareholders, jointly and severally on
the other hand, agrees to indemnify the other against all loss, liability, cost
damages or expense arising out of or related to claims for fees or commissions
of brokers employed or alleged to have been employed by such indemnifying party.
13.6 Notices. All notices and other communications hereunder shall be in
-------
writing (including wire, telefax or similar writing) and shall be delivered,
addressed, or telefaxed as follows:
(a) If to the Parent or Newco, addressed to them at:
VerticalNet, Inc.
2 Walnut Grove Drive, Suite 150
Horsham, PA 19044
Attention: Gene S. Godick
Telephone: (215) 328-6130
Telefax: (215) 443-3336
with a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Attention: James W. McKenzie, Esq.
Telephone: (215) 963-5000
Telefax: (215) 963-5299
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<PAGE>
(b) If to the Company or the Principal Shareholders at:
Isadra, Inc.
1000 Elwell Court, Suite 230
Palo Alto, California 94303
Attention Nadir Ali
Telephone: (650) 691-1100
Telefax: (650) 962-5390
with a copy to:
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304
Attention: Blair W. Stewart, Jr.
Telephone: (650) 493-9300
Telefax: (650) 493-6811
If to Shareholders' Representative:
Tira Capital Management, Inc.
233 Post Street, Mezzanine
San Francisco, California 94108
Attention: John G. Appel
Telephone: (415) 296-0100
Telefax: (415) 296-0172
Each such notice, request or other communication shall be given by hand
delivery, by nationally recognized courier service or by telefax, receipt
confirmed. Each such notice, request or communication shall be effective (i) if
delivered by hand or by nationally recognized courier service, when delivered at
the address specified in this Section 13.6 (or in accordance with the latest
unrevoked written direction from such party); (ii) if given by telefax, when
such telefax is transmitted to the telefax number specified in this Section 13.6
(or in accordance with the latest unrevoked written direction from such party),
and the appropriate confirmation is received.
13.7 Governing Law. This Agreement shall be construed in accordance
-------------
with the laws of the State of California, without giving effect to any of the
provisions thereof that would require the application of the substantive laws of
any other jurisdiction. Each party to this Agreement: (a) agrees that any legal
action or proceeding under this Agreement shall be brought in the courts of the
State of California or in the United States District Court for the Northern
District of California; (b) irrevocably submits to the jurisdiction of such
courts; (c) agrees not to assert any claim or defense that it is not personally
subject to the jurisdiction of such courts, that any such forum is not
convenient or the venue thereof is improper, or that this Agreement or the
subject matter hereof may not be enforced in such courts; and (d) agrees to
accept service of process on it by certified or registered mail or by any other
method authorized by law.
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13.8 Exercise of Rights and Remedies. Except as otherwise provided
-------------------------------
herein, no delay of or omission in the exercise of any right, power or remedy
accruing to any party as a result of any breach or default by any other party
under this Agreement shall impair any such right, power or remedy, nor shall it
be construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
13.9 Time. Time is of the essence with respect to this Agreement.
----
13.10 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal or unenforceable, it shall, to the extent possible, be modified
in such manner as to be valid, legal and enforceable but so as to most nearly
retain the intent of the parties, and if such modification is not possible, such
provision shall be severed from this Agreement, and in either case the validity,
legality and enforceability of the remaining provisions of this Agreement shall
not in any way be affected or impaired thereby.
13.11 Remedies Cumulative. No right, remedy or election given by any
-------------------
term of this Agreement shall be deemed exclusive but each shall be cumulative
with all other rights, remedies and elections available at law or in equity.
13.12 Captions. The headings of this Agreement are inserted for
--------
convenience only and shall not constitute a part of this Agreement or be used to
construe or interpret any provision hereof.
14. DEFINITIONS. As used in this Agreement, the following defined terms
shall have the meanings indicated below:
"Accounts Receivable" is defined in Section 5.13.
"Acquisition Proposal" is defined in Section 7.3.
"Actions or Proceedings" means any action, suit, complaint, petition,
investigation known to the party, proceeding, arbitration, litigation or
Governmental Entity audit or other proceeding known to the party, whether
civil or criminal, in law or in equity, or before any arbitrator or
Governmental Entity.
"Actual Closing Date Liabilities" means the Liabilities of the Company as
of the Closing Date, including, without limitation: (i) indebtedness or
liability for borrowed money, (ii) obligations evidenced by bonds,
debentures, notes or other similar instruments, (iii) obligations with
respect to capitalized leases and letters of credit, (iv) obligations under
any interest rate protection agreements or similar agreements, and (v)
guarantees of or other assurances of payment with respect to any
obligations described in clauses (i) through (iv) immediately above of
another person or entity (excluding endorsements of checks or other
instruments for deposit of collection in the ordinary course of business),
but excluding Liabilities for (A) capital leases, (B) 60-day trade payables
---------
of the Company, (C) up to an
58
<PAGE>
aggregate $100,000 of documented costs, fees and expenses reasonably
incurred by the Company in connection with the consummation of the Merger
and the transactions contemplated thereby, (D) cash (but not promissory
notes) received by the Company from the exercise prior to the Closing Date
of any outstanding Company options, warrants or other convertible
securities disclosed on Schedule 5.10; (E) the Company's indebtedness to
-------------
the Parent under the Loan Agreement; (F) accruals in the ordinary course of
business consistent with the March 31, 1999 balance sheet of the Company
and accrued in accordance with GAAP. For purposes of this Agreement, the
amount of Liabilities outstanding shall include the aggregate principal
amount of, and accrued interest on, and unamortized discounts, prepayment
premiums or penalties on Liabilities and other expenses required to prepay,
defease or otherwise retire the Liabilities on or prior to Closing Date;
and (G) other Liabilities up to $200,000.
"Agent" is defined in Section 7.3.
"Aggregate Cash Consideration" is defined in Section 2.1.
"Aggregate Stock Consideration" is defined in Section 2.1.
"Agreement" is defined in the Preamble to this Agreement.
"Arbitrator" is defined in Section 2.9.
"Audited Balance Sheet Date" is defined in Section 5.11.
"Audited Financial Statements" are defined in Section 5.11.
"Authorizations" are defined in Section 5.22.
"Benefit Plan" is defined in Section 5.21.
"Business Combination" means, with respect to any person, (i) any merger,
consolidation or other business combination to which such person is a
party, (ii) any sale, dividend, split or other disposition of any capital
stock or other equity interests of such person, (iii) any tender offer
(including a self tender), exchange offer, recapitalization, restructuring,
liquidation, dissolution or similar or extraordinary transaction, (iv) any
sale, dividend or other disposition of all or a material portion of the
assets and properties of such person or (v) the entering into of any
agreement or understanding, the granting of any rights or options, or the
acquiescence of the Company, with respect to any of the foregoing.
"Business Day" means a day other than Saturday, Sunday or any day on which
banks located in the State of California are authorized or obligated to
close.
"California Code" means the California Corporations Code, as amended.
59
<PAGE>
"CERCLA" means the Comprehensive Environmental Response, Compensation, and
Liability Act, 42 U.S.C. Section 9601 et seq.
"Certificates" are defined in Section 2.11.
"Charter Documents" means, with respect to any Person, its
Articles/Certificates of Incorporation and By-Laws or other organization
documents.
"Closing" is defined in Section 1.6.
"Closing Balance Sheet" is defined in Section 2.4.
"Closing Date" is defined in Section 1.6.
"Code" is defined in the Recitals to this Agreement.
"Commissioner" is defined in Section 8.1.
"Common Stock" means the common stock, no par value, of the Company.
"Commonly Controlled Entity" is defined in Section 5.21.
"Company" is defined in the Preamble to this Agreement.
"Company Documents" are defined in Section 5.2.
"Company Required Consents" is defined in Section 5.9.
"Company Stock" is defined in Section 2.1(a).
"Constituent Corporations" are defined in the Recitals to this Agreement.
"Contracts" are defined in Section 5.16.
"Conversion Number" are defined in Section 2.1(d).
"Convertible Securities" are defined in Section 5.10.
"Dissenting Shares" is defined in Section 2.10.
"Effective Time" is defined in Section 1.2.
"Employment Agreements" are defined in Section 7.8
60
<PAGE>
"Environmental Laws" mean any and all applicable treaties, laws,
regulations, ordinances, enforceable requirements, binding determinations,
orders, decrees, judgments, injunctions, permits, approvals,
authorizations, licenses or binding agreements issued, promulgated or
entered into by any Governmental Entity, relating to the environment,
preservation or reclamation of natural resources, or to the management,
Release or threatened Release of or exposure to Hazardous Substances,
including CERCLA, the Resource Conservation and Recovery Act, 42 U.S.C.
Section 6901 et seq., the Federal Water Pollution Control Act, 33 U.S.C.
Section 1251 et seq., the Clean Air Act, 42 U.S.C. Section 7401 et seq.,
the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., the
Occupational Safety and Health Act, 29 U.S.C. Section 651 et seq., the
Emergency Planning and Community Right-to-Know Act of 1986, 42 U.S.C.
Section 11001 et. seq., the Safe Drinking Water Act, 42 U.S.C. Section
300(f) et seq., the Hazardous Materials Transportation Act, 49 U.S.C.
Section 1801 et seq., and any similar or implementing state or local law
and all amendments or regulations promulgated thereunder.
"Environmental Permits" mean all permits, licenses, approvals or
authorizations from any Governmental Entity required under Environmental
Laws for the operation of the business of the Company.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Cash" is defined in Section 3.1(a)(ii).
"Escrow Property" is defined in Section 3.1(b).
"Escrow Shares" are defined in Section 3.1(a)(i).
"Estimated Closing Date Liabilities" are defined in Section 2.4.
"Exchange Act" is defined in Section 10.1.
"Exchange Agent" means the exchange agent designated by the Parent and
reasonably acceptable to the Company.
"Expiration Date" is defined in Section 10.5.
"Fairness Approval" is defined in Section 8.1.
"Financial Statements" are defined in Section 5.11(b).
"Foreign Plans" are defined in Section 5.21(i)(xiii).
"GAAP" is defined in Section 7.1(o).
"Governmental Entity" means any court, administrative or regulatory agency
or commission, or other governmental authority or instrumentality,
domestic, foreign or supranational.
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<PAGE>
"Governmental Permit" means any permit issued by a Governmental Entity.
"Hazardous Substances" mean all explosive or regulated radioactive
materials or substances, hazardous or toxic materials, wastes or chemicals,
petroleum and petroleum products (including crude oil or any fraction
thereof), asbestos or asbestos containing materials, polychlorinated
biphenyls and all other materials or chemicals regulated pursuant to any
Environmental Law, including materials listed in 49 C.F.R. (S) 172.101 and
materials defined as hazardous pursuant to Section 101(14) of CERCLA.
"Indemnified Party" is defined in Section 10.3(a).
"Indemnifying Party" is defined in Section 10.3(a).
"Indemnity Escrow Agent" is defined in Section 3.1(a).
"Intellectual Property" is defined in Section 5.27.
"Interim Balance Sheet Date" is defined in Section 5.11.
"Liabilities" or "liabilities" shall have the meaning set forth in Section
5.12.
"Loan Agreement" means that certain Loan Agreement, by and between the
Company and the Parent, dated as of even date herewith.
"Loan Documents" shall include, without limitation, this Agreement, the
Security Agreement, the Secured Promissory Note, any UCC financing
statements (and continuation statements) in connection herewith, and all
other agreements, documents, certificates, and instruments required by the
Parent in connection with the Loan Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to
any of the foregoing.
"Lock-Up Agreements" are defined in Section 7.6.
"Losses" are defined in Section 10.1.
"Merger" is defined in the Recitals to this Agreement.
"Merger Consideration" is defined in Section 2.1(a).
"Newco" is defined in the Preamble to this Agreement.
"Non-Competition Agreements" are defined in Section 7.6.
"Options" are defined in Section 2.1(d).
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<PAGE>
"Other Shareholders" means the shareholders of the Company who are not the
Principal Shareholders.
"Parent" is defined in the Preamble to this Agreement.
"Parent Common Stock" means the common stock, par value $.01 per share of
the Parent.
"Parent Financial Statements" is defined in Section 6.5.
"Parent Required Consents" is defined in Section 6.3.
"PCBs" are defined in Section 5.32(h).
"Pension Plan" is defined in Section 5.21.
"Permits" mean all permits, licenses, franchises, approvals and
authorizations from any Governmental Entity that are owned or held by the
Company, or held by any Shareholder that relate to the operations of the
Company.
"Person" means any individual, corporation, limited liability company,
partnership, estate, trust, sole proprietorship, unincorporated society or
association, or any entity or organization, including a government or
political subdivision or an agency or instrumentality thereof.
"Preferred Stock" means the preferred stock of the Company.
"Principal Shareholder Documents" are defined in Section 4.1.
"Principal Shareholders" are defined in the Preamble to this Agreement.
"Proceeding" means any action, claim, suit, or arbitration or proceeding
(including, without limitation, an investigation or partial proceeding,
such as deposition), whether commenced or, to the knowledge of the Company,
threatened.
"Qualified Company Options" are defined in Section 2.1(d).
"Registration Statement" is defined in Section 8.1.
"Regulations" are defined in Section 5.22.
"Release" means any spill, emission, leaking, pumping, injection, deposit,
disposal, discharge, dispersal, leaching, emanation or migration of any
Hazardous Substance in, into, onto or through the environment (including
ambient air, surface water, ground water, soils, land surface, subsurface
strata, workplace or structure).
"SEC" is defined in Section 8.1.
63
<PAGE>
"SEC Documents" is defined in Section 6.5.
"Secured Promissory Note" means that certain Secured Promissory Note by the
Company in favor of the Parent, issued under the Loan Agreement, in the
original, principal amount of $1,000,000.
"Securities Act" is defined in Section 5.15.
"Security Agreement" means that certain Security Agreement, by and between
the Company and the Parent, dated as of even date herewith.
"Shareholder/Employee Notes Receivable" is defined in Section 5.13.
"Shareholders" mean all of shareholders of the Company holding beneficially
and of record the issued and outstanding Common Stock and Preferred Stock.
"Shareholders' Representative" is defined in Section 2.8.
"Special Meeting" is defined in Section 8.2.
"Surviving Corporation" is defined in Section 1.1.
"Tax" or "Taxes" are defined in Section 5.26.
"Tax Returns" are defined in Section 5.26.
"Technology" is defined in Section 5.27(g).
"Third-Party Claim" is defined in Section 10.3(a).
"Total Fully-Diluted Shares Outstanding" are defined in Section 2.1.
"Transactions" are defined in Section 4.1.
"Unaudited Financial Statements" are defined in Section 5.11.
"Welfare Plan" is defined in Section 5.21.
"Year 2000 Compliant" is defined in Section 5.27.
* * *
64
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and
Plan of Merger as of the day and year first above written.
VERTICALNET, INC.
By: _____________________________________________
Name:
Title:
ISADRA ACQUISITION CORP.
By: _____________________________________________
Name:
Title:
By: _____________________________________________
Name:
Title:
ISADRA, INC.
By: _____________________________________________
Name:
Title:
By: _____________________________________________
Name:
Title:
[signatures continue on following page]
65
<PAGE>
[continuation of signature page
to Agreement and Plan of Merger]
_____________________________________________
HUGO DALEY, an individual
_____________________________________________
MUSTAFA SYED, an individual
TIRA CAPITAL MANAGEMENT, INC.,
as Shareholders' Representative
By: _________________________________________
Name:
Title:
66
<PAGE>
AMENDMENT NO. 1
TO AGREEMENT AND PLAN OF MERGER
This Amendment No. 1 to Agreement and Plan of Merger (this "Amendment
No.1"), dated as of August 4, 1999, is entered into by and among VerticalNet,
Inc., a Pennsylvania corporation ("Parent"), Isadra Acquisition Corp., a
California corporation and a wholly-owned subsidiary of Parent ("Newco"),
Isadra, Inc., a California corporation (the "Isadra"), Hugo Daley, an
individual, Mustafa Syed, an individual, and Tira Capital Management, Inc., a
California corporation, as Shareholders' Representative.
RECITALS
--------
WHEREAS, the parties hereto have entered into that certain Agreement and
Plan of Merger, dated as of May 24, 1999 (the "Agreement of Merger"), pursuant
to which, upon the closing of the transactions contemplated thereunder, Newco
shall be merged with and into Isadra and all issued and outstanding shares of
capital stock of Isadra shall be exchanged for cash and shares of Parent.
WHEREAS, on July 21, 1999, the Board of Directors of Parent approved a
split of its common stock on a two-for-one basis (the "Stock Split"), with
shares resulting from the Stock Split expected to be distributed by the Parent's
transfer agent on or about August 20, 1999.
WHEREAS, in light of the Stock Split, the parties desire to amend the
Agreement of Merger on the terms and conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the foregoing recitals and for other
good and valuable consideration the receipt and sufficiency are hereby
acknowledged, the parties hereby agree as follows:
1. Defined Terms. Capitalized terms used herein but not otherwise
-------------
defined shall have the meanings assigned to them in the Agreement of Merger.
2. Adjustment for Stock Split. The parties agree that upon the
--------------------------
effectiveness of the Stock Split:
(a) The number of shares constituting the Aggregate Stock
Consideration, the Escrow Shares, the Conversion Number and the options for
Parent Common Stock referenced in Section 9.2(e) of the Agreement of Merger
shall each be doubled;
(b) The number 0.01063829787 referenced in Sections 2.5(b), 2.6 and
2.7(b) of the Agreement of Merger shall be deleted and the number 0.02127659574
shall be inserted in its stead; and
<PAGE>
(c) The number $94 referenced in Sections 2.2 and 2.7(b) shall be
deleted and the number $47 shall be inserted in its stead.
3. Counterparts. This Amendment No. 1 may be executed in any number of
------------
counterparts, each of which when executed and delivered shall be deemed to be an
original, but all which together shall be deemed to be one and the same
instrument.
4. Headings. The subject headings of the sections and subsections of
--------
this Amendment No. 1 are included for purposes of convenience only and shall not
affect the construction or interpretation of any of its provisions.
5. Governing Law. This Amendment No. 1 shall be construed in accordance
-------------
with the laws of the State of California, without giving effect to any of the
provisions thereof that would require the application of the substantive laws of
any other jurisdiction.
6. Full Force and Effect. Except as expressly provided in this Amendment
---------------------
No. 1, the Agreement of Merger shall remain unchanged and in full force and
effect.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1
as of the date set forth above.
VERTICALNET, INC.
By:_________________________________
Name: Gene S. Godick
Title: Vice President, Finance and Chief
Financial Officer
ISADRA ACQUISITION CORP.
By:_________________________________
Name: Mark L. Walsh
Title: President and Chief Executive Officer
By:_________________________________
Name: Gene S. Godick
Title: Secretary, Vice President and Chief
Financial Officer
ISADRA, INC.
By:_________________________________
Name: Hugo Daley
Title: President and Chief Executive Officer
By:_________________________________
Name: Mustafa Syed
Title: Chief Technology Officer
HUGO DALEY, an individual
(Additional signatures on following page)
MUSTAFA SYED, an individual
<PAGE>
TIRA CAPITAL MANAGEMENT, INC.,
as Shareholders' Representative
By:_________________________________
Name: John G. Appel
Title: President
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, included in this Form 8-K, into VerticalNet, Inc.'s previously filed
Form S-8 Registration Statement File No. 333-72143.
/s/ Arthur Andersen LLP
Philadelphia, Pennsylvania
September 8, 1999
