<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
_______________
March 31, 1999
Date of Report
Interactive Objects, Inc.
Name of small business issuer as specified in its charter
_______________
State of Washington 0-25373 87-0434226
State or Other Jurisdiction of Commission File Number IRS Employer
Incorporation or Organization Identification
217 Pine Street, Suite 800
Seattle, Washington 98101
Address of Principal Executive Offices
(206) 464-1008
Issuer Telephone Number
_______________
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
Effective March 31, 1999, Interactive Objects, Inc. (the "Registrant") closed
its acquisition of Avatar Interactive Inc., a Washington corporation ("Avatar").
The acquisition of Avatar was effected by means of a forward merger of a newly
formed Washington corporation and wholly-owned subsidiary of the Registrant with
and into Avatar, pursuant to the terms of an Agreement and Plan of Merger dated
March 31, 1999 (the "Merger Agreement"). A copy of the Merger Agreement is
filed as Exhibit 99.1 to this Current Report on Form 8-K. Following the merger,
Avatar will continue as a wholly-owned subsidiary of the Registrant, under the
name "Avatar Interactive, Inc." The merger was accounted for as pooling-of-
interests.
The purchase price for the acquisition was $1.5 million, less adjustments that
may be required by the Merger Agreement, and is to be paid in shares of Common
Stock of the Registrant to be issued to the former sole shareholder of Avatar.
The number of shares of Common Stock to be issued in the merger is calculated as
$1.5 million divided by the "Merger Price Per Share." The Merger Price Per
Share is defined as the average of (i) the average closing trading price as
reported by OTC Bulletin Board ("OTC") for the Common Stock for the ten trading
days prior to March 31, 1999 (the closing date); and (ii) the average closing
trading price as reported by the OTC for Common Stock for the ten trading days
after March 31, 1999; provided, that, if the Merger Price Per Share is greater
than $2.25, the Merger Price Per Share shall be deemed to be $2.25 and if the
Merger Price Per Share is less than $1.25, the Merger Price Per Share shall be
deemed to be $1.25. Although the final number of shares has not been
calculated, based on the calculation of the Merger Price Per Share through the
eight trading days post-closing of approximately $1.625, the number of shares
issuable in the merger would be approximately 923,077 shares. In addition,
pursuant to the Merger Agreement, the former shareholder of Avatar has agreed to
pledge shares representing approximately 50% of the total number of shares to
be issued to her in the merger (valued at $750,000) as collateral to secure
certain representations and warranties included in the Merger Agreement.
Effective upon the merger, the former principal and shareholder of Avatar,
Kayleen Arafiles, entered into a one-year employment agreement with Avatar
Interactive, Inc., the surviving entity in the merger and wholly-owned
subsidiary of the Registrant. Ms. Arafiles will serve as the President of
Avatar. In addition, Steven G. Wollach, the Registrant's President and Chief
Financial Officer, will serve as the Chief Executive Officer and as a director
of Avatar.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
(i) Report of Peterson Sullivan P.L.L.C., Independent Auditors
(ii) Avatar Interactive, Inc. Balance Sheet as of December 31, 1998
(iii) Avatar Interactive, Inc. Statement of Operations for the period
from March 20, 1998 (inception) to December 31, 1998
(iv) Avatar Interactive, Inc. Statement of Stockholder's Equity for
the period from March 20, 1998 (inception) to December 31, 1998
(v) Avatar Interactive, Inc. Statement of Cash Flows for the period
from March 20, 1998 (inception) to December 31, 1998
(vi) Notes to Financial Statements for the period from March 20, 1998
(inception) to December 31, 1998
(b) Pro Forma Financial Information.
(i) Unaudited Pro Forma Consolidated Balance Sheet of Interactive
Objects, Inc. and subsidiary as of December 31, 1998
(ii) Unaudited Pro Forma Consolidated Statement of Operations of
Interactive Objects, Inc. and subsidiary for the year ended
December 31, 1998
<PAGE>
(iii) Notes to Unaudited Pro Forma Consolidated Financial Statements
(c) Exhibits.
Exhibit No. Description
- ----------- -----------
99.1 Agreement and Plan of Merger (exclusive of schedules and exhibits)
dated as of March 31, 1999 by and between Interactive Objects,
Inc., IO Acquisition Corp., Avatar Interactive, Inc. and Kayleen
Arafiles
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 15, 1999
INTERACTIVE OBJECTS, INC.
By: /s/ Steven G. Wollach
-----------------------
Steven G. Wollach, President
<PAGE>
[Letterhead of Peterson Sullivan P.L.L.C.]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Avatar Interactive, Inc.
Seattle, Washington
We have audited the accompanying balance sheet of Avatar Interactive, Inc. as of
December 31, 1998, and the related statements of operations, stockholder's
equity, and cash flows for the period from March 20, 1998 (inception) 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 audit.
We conducted our audit 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 audit provides 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 Avatar Interactive, Inc. as of
December 31, 1998, and the results of its operations and its cash flows for the
period from March 20, 1998 (inception) to December 31, 1998, in conformity with
generally accepted accounting principles.
/s/ Peterson Sullivan P.L.L.C.
March 31, 1999
<PAGE>
AVATAR INTERACTIVE, INC.
BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets
Cash $ 48,257
Prepaid expenses 6,877
--------
Total current assets 55,134
Furniture and Equipment, at cost,
less accumulated depreciation of $12,843 113,736
--------
$168,870
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable 19,439
Accrued expenses 119,515
Current portion long-term debt 97,017
--------
Total current liabilities 235,971
Long-term debt, less current portion 17,757
Stockholder's Equity
Common stock, $.01 par value; 1,000,000 authorized,
10,000 shares issued and outstanding 100
Additional paid-in capital 10,904
Retained deficit (95,862)
--------
(84,858)
--------
$168,870
========
</TABLE>
See Notes to Financial Statements
<PAGE>
AVATAR INTERACTIVE, INC.
STATEMENT OF OPERATIONS
For the Period From March 20, 1998 (Inception) to December 31, 1998
<TABLE>
<S> <C>
Service revenue $2,138,981
Expenses
Labor and benefits 1,699,284
Selling, general and administrative 245,282
----------
1,944,566
----------
Income from operations 194,415
Interest income 174
Interest expense (1,852)
----------
Net income $ 192,737
==========
</TABLE>
See Notes to Financial Statements
<PAGE>
AVATAR INTERACTIVE, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
For the Period From March 20, 1998 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Additional Retained
Capital Paid-in Earnings
Stock Capital (Deficit) Total
---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Issuance of stock $ 200 $ 21,807 $ - $ 22,007
Stock redemption (100) (10,903) (38,997) (50,000)
Net income 192,737 192,737
Distributions (249,602) (249,602)
------ -------- --------- ---------
Balances, December 31, 1998 $ 100 $ 10,904 $ (95,862) $ (84,858)
===== ======== ========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
AVATAR INTERACTIVE, INC.
STATEMENT OF CASH FLOWS
For the Period From March 20, 1998 (Inception) to December 31, 1998
<TABLE>
<S> <C>
Cash Flows From Operating Activities
Net income $ 192,737
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation 12,843
Changes in operating assets and liabilities
Prepaid expenses (6,877)
Accounts payable 19,439
Accrued expenses 119,515
---------
Cash provided by operating activities 337,657
Cash Flows From Investing Activities
Purchase of equipment (126,579)
Cash Flows From Financing Activities
Issuance of common stock 22,007
Distributions paid (249,602)
Proceeds of notes payable 75,566
Payments on notes payable (10,792)
---------
Cash used in financing activities (162,821)
----------
Net increase in cash and cash at end of period $ 48,257
=========
</TABLE>
See Notes to Financial Statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization and Significant Accounting Policies
Organization
Avatar Interactive, Inc. ("Avatar") was incorporated under the laws of the state
of Washington on March 20, 1998. Avatar sells computer consulting services in
western Washington. Revenue from an international company (SAFECO) accounted
for 64% of total revenue and revenue from another customer (interactive objects,
inc. ("Interactive Objects")) accounted for 36% of total revenue during the
period from March 20, 1998 (inception) to December 31, 1998.
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 the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period.
accordingly, actual results could differ from the estimates that were used.
Software Consulting Services Revenue Recognition
Software consulting service revenue (including post-contract customer support)
is recognized as the services are performed and is determined by multiplying the
hours incurred by an established hourly rate.
Cash
Cash includes cash balances held at a bank and all highly liquid debt
instruments with original maturities of three months or less. Cash balances are
at times in excess of amounts insured by the Federal Deposit Insurance
Corporation.
Avatar paid $1,852 for interest during the period from March 20, 1998
(inception) to December 31, 1998.
Furniture and Equipment
Furniture and equipment are depreciated using the straight-line method over the
estimated useful lives of the related assets.
Taxes on Income
Avatar is an C-corporation for income tax purposes, so income tax effects are
recognized at the stockholder level.
Note 2. Redemption of Common Stock
On July 1, 1998, Avatar redeemed and retired 10,000 shares of its common stock.
As consideration for the stock, a note payable for $50,000 was issued, payable
in monthly installments of $2,000, including interest at 8%.
<PAGE>
Note 3. Notes Payable
<TABLE>
<S> <C>
Note payable to the sole shareholder of Avatar. The note has no set due
date, bears no interest, and is unsecured. It is assumed to be due
within one year. $ 74,348
Note payable to former shareholder. The terms are described in note 2. 39,208
Other 1,218
--------
114,774
Less current portion 97,017
--------
$ 17,757
========
</TABLE>
Principal maturities of long-term debt are as follows for the years ending
December 31:
<TABLE>
<S> <C>
1999 $ 97,017
2000 17,757
--------
$114,774
========
</TABLE>
Note 4. Leases
Avatar leases office space from Interactive Objects on a month-to-month lease.
Rent expense was $8,875 for the period from March 20, 1998 (inception) to
December 31, 1998.
Note 5. Subsequent Events
Subsequent to December 31, 1998, Avatar paid a former officer $10,000 and issued
a note payable for $90,000 to settle any potential claims this former officer
had against Avatar. Management believes all claims with this former officer are
settled, but it is possible the former officer may make new claims.
Effective March 31, 1999, Avatar was acquired by Interactive Objects in a
business combination accounted for as a pooling of interests.
<PAGE>
INTERACTIVE OBJECTS, INC. AND SUBSIDIARY
PROFORMA CONSOLIDATED BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
Proforma
Consolidated
Interactive Avatar Proforma Balance
Objects, Inc. Interactive, Inc. Adjustments Sheet
-------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash $ 3,298,278 $ 48,257 $ $ 3,346,535
Other current assets 267,576 6,877 274,453
----------- --------- ------ ------------
Total current assets 3,565,854 55,134 3,620,988
Furniture and Equipment, net 226,598 113,736 340,334
Other Assets 6,934 6,934
----------- --------- ------ ------------
$ 3,799,386 $168,870 $ $ 3,968,256
============ ========= ====== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses $ 340,490 $138,954 $ $ 479,444
Current portion long-term debt 97,017 97,017
----------- --------- ------ ------------
Total current liabilities 340,490 235,971 576,461
Long-term debt, less current portion 17,757 17,757
Stockholders' Equity
Preferred stock
Common stock and additional paid-in capital 9,147,574 11,004 9,158,578
Retained deficit (5,688,678) (95,862) (5,784,540)
----------- --------- ------ ------------
3,458,896 (84,858) - 3,374,038
----------- --------- ------ ------------
$ 3,799,386 $168,870 $ $ 3,968,256
=========== ========= ====== ============
</TABLE>
See Notes to Proforma Consolidated Financial Statements
<PAGE>
INTERACTIVE OBJECTS, INC. AND SUBSIDIARY
PROFORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1998
<TABLE>
<CAPTION>
Proforma
Consolidated
Interactive Avatar Proforma Statement of
Objects, Inc. Interactive, Inc. Adjustments Operations
-------------- ----------------- ----------- -------------
<S> <C> <C> <C> <C>
Revenue
Service revenue $ 2,122,846 $2,138,981 $ (675,636) $ 3,586,191
Expenses
Labor and benefits 3,427,782 1,699,284 (675,636) 4,451,430
Selling, general and administrative 2,956,963 245,282 - 3,202,245
----------- --------- -------- -----------
6,384,745 1,944,566 (675,636) 7,653,675
----------- --------- -------- -----------
Income (loss) from operations (4,261,899) 194,415 - (4,067,484)
Other income (expense) 116,385 (1,678) 114,707
----------- --------- -------- -----------
Net income (loss) $(4,145,514) $ 192,737 $ $(3,952,777)
=========== ========= ======== ===========
</TABLE>
See Notes to Proforma Consolidated Financial Statements
<PAGE>
NOTES TO PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The proforma balance sheet as of December 31, 1998, and the proforma
consolidated statement of operations for the year then ended ("the proforma
consolidated financial statements") have been prepared by Interactive Objects,
Inc. ("Interactive Objects") pursuant to the rules and regulations of the
Securities and Exchange Commission. As described in Note 2, on March 31, 1999,
Interactive Objects acquired all of the equity interests of Avatar Interactive,
Inc. ("Avatar"). These proforma consolidated financial statements have been
prepared under the pooling of interests method of accounting and reflect the
combined financial position and operating results of Interactive Objects and
Avatar as of and for the year ended December 31, 1998. These proforma
consolidated financial statements will become the historical financial
statements of Interactive when Interactive issues its financial statements for
the first fiscal quarter of 1999. Material intercompany transactions during
1998 have been eliminated.
Note 2. Avatar Merger
On March 31, 1999, Interactive Objects acquired all of the equity interests of
Avatar, a Washington corporation formed on March 20, 1998. The business
combination transaction has been accounted for as a pooling of interests for
accounting and financial reporting purposes. The pooling-of-interests method of
accounting is intended to present as a single interest two or more common
shareholders' interests which were previously independent; accordingly, the
historical financial statements for the period prior to the business combination
are restated as though the companies had been combined. As Avatar was formed in
1998, proforma information for periods prior to 1998 is not applicable.
<PAGE>
EXHIBIT 99.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement") is entered into as of
March 31, 1999 by and among Interactive Objects, Inc., a Washington corporation
("IO"), IO Acquisition, Inc., a Washington corporation and the wholly owned
subsidiary of IO (the "Merger Sub"), Avatar Interactive, Inc., a Washington
corporation ("Avatar"), and Kayleen Arafiles, the sole shareholder of Avatar
("Shareholder").
The Boards of Directors of IO, the Merger Sub and Avatar have determined
that it is advisable and in the best interests of their respective companies and
have each approved the merger of the Merger Sub with and into Avatar in a
reverse triangular merger (the "Merger"), upon the terms and subject to the
conditions set forth herein, in accordance with the applicable provisions of the
Washington Business Corporation Act (the "WBCA");
IO, the Merger Sub and Avatar intend, by approving resolutions authorizing
this Agreement, that this reorganization be accounted for as a "pooling of
interests" and to adopt this Agreement as a plan of reorganization and that the
Merger qualify as a tax-free reorganization within the meaning of Section 368(a)
of the Internal Revenue Code of 1986, as amended (the "Code"), and the
regulations promulgated thereunder; and
In consideration of the foregoing and the mutual covenants and agreements
herein contained, and intending to be legally bound hereby, IO, the Merger Sub,
Avatar and the Shareholder hereby agree as follows:
ARTICLE 1. THE MERGER
1.1. The Merger.
(a) Effective Time. At the Effective Time, and subject to and upon
the terms and conditions of this Agreement and the WBCA, the Merger Sub shall
be merged with and into Avatar, the separate corporate existence of the Merger
Sub shall cease, and Avatar shall continue as the surviving corporation and the
wholly-owned subsidiary of IO. Avatar as the surviving corporation after the
Merger is hereinafter sometimes referred to as the "Surviving Corporation."
(b) Closing. Unless this Agreement shall have been terminated
pursuant to Section 8.1, and subject to the satisfaction or waiver, if
permissible, of the conditions set forth in Article 5, the closing of the
transactions contemplated by this Agreement (the "Closing") shall take place (i)
at the offices of IO, 217 Pine St., Suite 800, Seattle, Washington, as promptly
as practicable after satisfaction or waiver, if permissible, of the conditions
set forth in Article 5; or (ii) at such other time, date or place as IO and
Avatar may agree.
1.2. Effective Time. As promptly as practicable after the satisfaction or
waiver, if permissible, of the conditions set forth in Article 5, but no later
than 15 days thereafter, the parties hereto shall cause the Merger to be
consummated by filing the articles of merger as contemplated by the WBCA (the
"Articles of Merger"), together with any required related documents, with the
Secretary of State for the State of Washington, substantially in the form
attached hereto as Exhibit A. The Merger shall be effective upon filing of the
Articles of Merger with the Secretary of State for the State of Washington (the
"Effective
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<PAGE>
Time"). The parties agree that, notwithstanding a later filing of Articles of
Merger, the Merger will be treated for accounting purposes as having been
completed as of March 31, 1999.
1.3. Effect of the Merger. At the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Articles of Merger and the
applicable provisions of the WBCA. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time all the property, rights,
privileges, powers and franchise of Avatar shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Avatar shall become the
debts, liabilities and duties of the Surviving Corporation.
1.4. Articles of Incorporation; Bylaws.
(a) Articles of Incorporation. At the Effective Time, the Articles
of Incorporation of Avatar, amended as provided in Exhibit A hereto, shall
be the Articles of Incorporation of the Surviving Corporation until
thereafter duly amended in accordance with applicable law and such Articles
of Incorporation.
(b) Bylaws. At the Effective Time, the Bylaws of Avatar, amended as
set forth in Exhibit B hereto, shall be the Bylaws of the Surviving
Corporation until thereafter duly amended in accordance with applicable
law, the Articles of Incorporation of the Surviving Corporation and such
Bylaws.
1.5. Directors and Officers. The directors of IO immediately prior to the
Effective Time shall be the directors of the Surviving Corporation, each to hold
office in accordance with the Articles of Incorporation and Bylaws of the
Surviving Corporation, and the officers of IO immediately prior to the Effective
Time shall be the officers of the Surviving Corporation, in each case until
their respective successors are duly elected or appointed and qualified in the
manner provided in the Articles of Incorporation and Bylaws of the Surviving
Corporation and in accordance with applicable law. Except for the Shareholder
and Norresa Calos who shall continue after the Merger as the President and
Controller of the Surviving Corporation, respectively, the Shareholder will
cause each officer and director of Avatar to tender his or her resignation prior
to the Effective Time, with each such resignation effective as of the Effective
Time.
1.6. Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any further action on the part of IO, the Merger Sub, Avatar
or the Shareholder:
(a) Conversion of Avatar Securities. All shares of Avatar Common
Stock issued and outstanding immediately prior to the Effective Time shall
automatically be canceled and converted, without any action on the part of
the holder thereof, into the right to receive that number of fully paid and
non-assessable shares of IO common stock, $.01 par value per shares ("IO
Common Stock"), equal to the quotient of (i) $1,500,000 divided by (ii) the
Merger Price Per Share (as defined in Section 1.7). The shares of IO
Common Stock issued in connection with the Merger are sometimes referred to
herein as the "Merger Shares." All such shares of Avatar Common Stock,
when so converted, shall no longer be outstanding and shall automatically
be cancelled and shall cease to exist, and each holder of a certificate
representing any such shares shall cease to have any rights with respect
thereto, except the right to receive the shares of IO Common Stock to be
issued or paid in consideration therefor upon the surrender of such
certificate in accordance with Section 1.8 of this Agreement.
(b) No Fractional Shares. No fractional shares of IO Common Stock
shall be issued upon conversion of the shares of Avatar Common Stock held
by any holder. Instead, the number of
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<PAGE>
Merger Shares to be issued to any holder of Avatar Common Stock shall be
rounded to the nearest whole number of shares (such that any fraction equal
or greater than one-half shall be rounded up and any fraction less than
one-half shall be rounded down) and IO shall issue such additional share,
if any, after such rounding.
(c) Conversion of Merger Sub Securities. Each share of common stock
of the Merger Sub issued and outstanding immediately prior to the Effective
Date shall automatically be canceled and converted, without any action on
the part of the holder thereof, into one fully paid and non-assessable
share of common stock of the Surviving Corporation.
1.7. Merger Consideration. The Merger Consideration shall be equal to the
dollar amount of $1,500,000, less any adjustments required by Sections 1.13 and
Article 7. The Merger Consideration shall be paid in shares of IO Common Stock,
valued at the Merger Price Per Share. The Merger Price Per Share shall be
calculated as the average of: (i) the average closing trading price as reported
by OTC Bulletin Board ("OTC") for IO Common Stock for the ten trading days prior
to Closing; and (ii) the average closing trading price as reported by the OTC
for IO Common Stock for the ten trading days after Closing; provided, that, if
the Merger Price Per Share is greater than $2.25, the Merger Price Per Share
shall be deemed to be $2.25 and if the Merger Price Per Share is less than
$1.25, the Merger Price Per Share shall be deemed to be $1.25.
1.8. Surrender and Delivery of Certificates. At the Effective Time, the
Shareholder shall deliver to IO the certificates (the "Certificates")
representing Avatar Common Stock, duly endorsed in blank by the Shareholder, or
accompanied by blank stock powers duly executed by the Shareholder. The
Certificates so delivered shall forthwith be canceled. Until so surrendered,
each Certificate shall be deemed for all corporate purposes to evidence only the
right to receive the aggregate number of Merger Shares into which the Avatar
Common Stock represented thereby shall have been converted. After calculation
of the Merger Price Per Share and upon surrender of the Certificates, IO shall
deliver to the Shareholder the certificates representing the Merger Shares, duly
authorized and issued as provided herein.
1.9. Stock Transfer Books. At the Effective Time, the stock transfer
books of the Surviving Corporation will register the issuance of shares
described in Section 1.6(d). The shares of IO Common Stock delivered upon the
surrender for exchange of Avatar Common Stock in accordance with the terms
hereof shall be deemed to have been issued in full satisfaction of all rights
pertaining to all shares of Avatar Common Stock outstanding immediately prior to
the Effective Time, and there shall be no further registration of transfers of
Avatar Common Stock which were outstanding immediately prior to the Effective
Time on the records of the Surviving Corporation.
1.10. Tax Consequences. It is intended by the parties hereto that the
Merger shall constitute a reorganization within the meaning of Section 368(a) of
the Code. The parties hereto hereby adopt this Agreement as a "plan of
reorganization" within the meaning of Sections 1.368-2(g) and 1.368-3(a) of the
U.S. Treasury Regulations.
1.11. Accounting Treatment.
(a) The parties hereto intend for the Merger to be treated as a
"pooling of interests" for accounting purposes. From and after the date of this
Agreement and until the Effective Time, neither IO, the Merger Sub, Avatar nor
the Shareholder nor any of their respective subsidiaries or other affiliates (i)
shall knowingly take any action, or shall knowingly fail to take any action,
that would jeopardize the treatment of the Merger as a "pooling of interests"
for accounting purposes; or (ii) shall enter into any contract, agreement,
commitment or arrangement with respect to the foregoing; provided, however, that
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<PAGE>
no action or omission by any party shall constitute a breach of this sentence if
such action or omission is permitted by the terms of this Agreement or is made
with the written consent of the other parties hereto.
(b) IO shall have the right to place a restrictive legend on all
shares of IO Common Stock, to instruct its transfer agent not to permit the
transfer of any such shares and/or to take any other steps reasonably necessary
to ensure compliance with ASR 135 and other rules and releases related to
pooling of interests accounting treatment.
(c) Notwithstanding the above, IO, in its sole discretion, may elect
at any time not to proceed with qualifying the Merger to be treated as a pooling
of interests for accounting purposes.
1.12. Taking of Necessary Action; Further Action. Each of IO, the Merger
Sub, Avatar and the Shareholder will take all such reasonable lawful action as
may be necessary or appropriate in order to effect the Merger in accordance with
this Agreement as promptly as practicable. If, at any time before or after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest IO with full right, title and
possession to all the property, rights, privileges, power and franchises of
Avatar through its ownership of the Surviving Corporation after the Effective
Time, or to fully vest the Shareholder with all Merger Consideration described
in this Agreement or to fully vest Shareholder with the Pledged Assets, subject
only to the express limitations set forth in Section 1.13 and Article 7, the
officers and directors of IO, the Merger Sub and Avatar immediately prior to the
Effective Time are fully authorized in the name of their respective corporations
or otherwise to take, and will take, all such lawful and necessary action.
1.13 Pledged Assets.
(a) Litigation Pledge. As collateral security for the payment of any
indemnification obligations of the Shareholder pursuant to Article 7 arising out
of any claims brought by the parties which settled claims with Avatar as
described in Schedule 2.14 (the "Potential Plaintiffs") against Shareholder,
Avatar or IO (the "Settlement Litigation"), the Shareholder shall, and by
execution hereof does hereby, transfer, pledge and assign to IO, for the benefit
of IO, a security interest in that aggregate number of shares of IO Common Stock
equal to $750,000 divided by the Merger Price Per Share, and the certificates
and instruments, if any, representing or evidencing any such shares (the
"Litigation Pledge"). The shares of IO Common Stock in the Litigation Pledge
are referred to herein as the "Pledged Assets."
(b) In addition to the foregoing and as security for the Litigation
Pledge, the Shareholder shall, and by execution hereof does hereby, transfer,
pledge and assign to IO, for the benefit of IO, a security interest in the
following:
(i) all securities hereafter delivered to the Shareholder with
respect to or in substitution for Shareholder's Pledged Assets, all
certificates and instruments representing or evidencing such securities,
and all cash and non-cash dividends and other property at any time
received, receivable or otherwise distributed in respect of or in exchange
for any or all thereof; and in the event the Shareholder receives any such
property, the Shareholder shall hold such property in trust for IO and
shall immediately deliver such property to IO to be held hereunder as
Pledged Assets; and
(ii) all non-cash proceeds of all of the foregoing property and
all rights, titles, interests, privileges and preferences appertaining or
incident to the foregoing property.
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(c) Each certificate, if any, evidencing the Shareholder's Pledged
Assets issued in her name in the Merger, shall be delivered to IO directly by
the transfer agent, such certificate bearing no restrictive or cautionary legend
other than those imprinted by the transfer agent at IO's request. The
Shareholder shall deliver to IO, for each such certificate, a stock power duly
signed in blank by her.
(d) The Shareholder shall be entitled to exercise any voting powers
incident to a Pledged Asset until such time, if any, as such Pledged Asset is
applied to satisfy any indemnification obligation of the Shareholder pursuant to
Article 7. In addition, the Shareholder shall be entitled to the cash or other
proceeds from a Pledged Asset upon the release of such Pledged Asset from the
pledge pursuant to the terms hereof.
(e) The assets pledged to secure the Litigation Pledge pursuant to
this Section shall be available to satisfy any indemnification obligations of
the Shareholder pursuant to Article 7 arising out of the Settlement Litigation
until the earlier of (i) two weeks after the date of receipt by IO or the
Surviving Corporation of a signed settlement and release from the Potential
Plaintiffs; (ii) two weeks after the date of the final adjudication of any
lawsuit brought by the Potential Plaintiffs by a court of competent
jurisdiction, including the expiration of any applicable appeal period; or (iii)
the second (2nd) anniversary of the Closing ("Second Anniversary"), unless at
that time, IO, Avatar or the Shareholder is party to a lawsuit with the
Potential Plaintiffs or has received written notice from a Potential Plaintiff
of an intent to bring a lawsuit ("Notice"), in which event, this subsection
(e)(iii) shall be of no effect. The expiration of any such period for the
Litigation Pledge shall be referred to as a "Release Date". If, on or before
the Second Anniversary, IO, Avatar or the Shareholder has received a Notice, the
Release Date shall occur on the later of (i) the Second Anniversary or (ii) four
(4) months after the date the Notice was received, unless within such 4-month
period a lawsuit is commenced, in which case the Release Date shall be the
earlier of (e)(i) or (e)(ii), above.
Promptly following any Release Date for the Litigation Pledge, IO
shall return or cause to be returned to the Shareholder the respective Pledged
Assets. For purposes of this Section and Article 7, the IO Common Stock held
as Pledged Assets shall be valued at the Merger Price Per Share.
ARTICLE 2. REPRESENTATIONS AND WARRANTIES OF AVATAR AND THE SHAREHOLDER
Each of Avatar and the Shareholder, jointly and severally, makes the
following representations and warranties to IO, the Merger Sub and the Surviving
Corporation, which representations and warranties are (as of the date hereof),
and will be (as of the Effective Time), true and correct:
2.1 Organization of Avatar. Avatar is a corporation duly organized,
validly existing and in good standing under the laws of the State of Washington.
Avatar has full corporate power and authority to conduct its business as it is
presently being conducted and to own or lease, as applicable, its assets.
Avatar is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which such qualification is necessary under
applicable law and where the failure to be so qualified would have a material
adverse effect on Avatar or its business. Each jurisdiction in which Avatar is
qualified to do business as a foreign corporation is set forth in Schedule 2.1.
Avatar has previously delivered or made available to IO true, complete and
correct copies of its Articles of Incorporation and Bylaws, and any and all
amendments thereto (collectively, the "Avatar Charter Documents") as in effect
on the date hereof. Avatar is not in violation of any of its Charter Documents.
A true copy of the Avatar minute book has been made available to IO and is
correct and complete in all material respects.
2.2. Capitalization of Avatar.
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(a) The capital stock of Avatar consists of 1,000,000 shares of
Avatar Common Stock authorized under the Avatar Charter Documents, 10,000 of
which are issued and outstanding. Avatar has no other capital stock authorized,
issued or outstanding.
(b) There are no outstanding options, warrants, convertible
securities or rights of any kind to purchase or otherwise acquire any shares of
capital stock or other securities of Avatar.
(c) All issued and outstanding shares of Avatar Common Stock are
validly issued, fully paid and non-assessable and not subject to any preemptive
rights. There are no voting agreements or voting trusts with respect to any of
the outstanding shares of Avatar Common Stock and none of such shares are
subject to repurchase upon termination of employment. The outstanding shares of
Avatar Common Stock have been issued in compliance with all applicable federal
and state corporate and securities laws.
2.3. Shareholder's Ownership of Stock. The Shareholder owns, of record
and beneficially, all of the outstanding Avatar Common Stock. The Shareholder
has good and marketable title to all of the outstanding shares of Avatar Common
Stock, free and clear of any liens, claims or encumbrances of any kind
whatsoever.
2.4. Authorization. Avatar and the Shareholder have all necessary
corporate or other power and authority to enter into this Agreement and have
taken all corporate or other action necessary to consummate the transactions
contemplated hereby and to perform their respective obligations hereunder. This
Agreement has been duly executed and delivered by Avatar and the Shareholder,
and this Agreement is a legal, valid and binding obligation of Avatar and the
Shareholder, except that enforceability may be limited by the effect of
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights of creditors.
2.5. Officers and Directors. Schedule 2.5 contains a true, correct and
complete list of all the officers and directors of Avatar.
2.6. Bank Accounts. Schedule 2.6 contains a list of all of Avatar's bank
accounts, safe deposit boxes, and persons authorized to draw thereon or have
access thereto. Avatar has no outstanding powers of attorney.
2.7. Subsidiaries. Avatar does not own or hold any equity interest of any
kind in any corporation, partnership or any other entity.
2.8. Title to, and Sufficiency of, Assets. Except as set forth on
Schedule 2.8, Avatar has good and marketable fee simple title to its assets, and
none of its assets are subject to any liens, claims or encumbrances whatsoever.
Such assets constitute all of the assets, rights and properties, tangible or
intangible, real or personal, which are required for the operation of Avatar's
business as it is presently conducted and as presently contemplated.
2.9. Fixtures and Equipment. Schedule 2.9 contains a true, complete and
correct list of all fixtures and equipment of Avatar where the value of an
individual item exceeds $1,000. All of Avatar's tangible assets are in good
operating condition and repair and are usable in the ordinary course of
business.
2.10. Contracts.
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(a) Disclosure. Schedule 2.10 sets forth a true, complete and
correct list of all of Avatar's oral or written contracts of the following
categories: (i) Contracts not made in the ordinary course of business; (ii)
Contracts, licenses and agreements to which Avatar is a party with respect to
any intellectual property, with a value or cost in excess of $1,000, other than
"shrink wrap" and similar commercial end-user licenses, whether Avatar is the
licensor or licensee thereunder; (iii) Confidentiality and non-disclosure
agreements (whether Avatar is the beneficiary or the obligated party
thereunder); (iv) Customer orders or sales contracts under which the customer is
to make or made a payment of $1,000 or more; (v) Contracts involving
expenditures or a liability, actual or potential, in excess of $1,000 or
otherwise material to Avatar's business or assets; (vi) Contracts or commitments
relating to commission arrangements with others; (vii) Employment contracts,
consulting contracts and severance agreements; (viii) Indemnification
agreements; (ix) Promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money, whether Avatar shall be the borrower, lender or
guarantor thereunder; (x) Contracts containing covenants limiting the freedom of
Avatar or any officer, director, employee of Avatar, to engage in any line of
business or compete with any entity; (xi) Any contract with the federal, state
or local government or any agency or department thereof; (xii) Any contract with
an affiliate; (xiii) Leases of real or personal property involving in aggregate
more than $1,000 under any such lease; and (xiv) Any other material contract.
True, correct and complete copies of all of the contracts listed on
Schedule 2.10 (the "Contracts"), including all amendments and supplements
thereto, have been delivered to IO.
(b) Absence of Defaults. All of the Contracts are valid, binding and
enforceable in accordance with their terms with no existing (or to the knowledge
of Avatar or the Shareholder, threatened) default or dispute. Avatar has
fulfilled, or taken all action necessary to enable it to fulfill when due, all
of its material obligations under each of such Contracts
(c) Product and Service Warranties. To the knowledge of Avatar or
the Shareholder, Avatar has not committed any act, and there has been no
omission, which may result in, and there has been no occurrence which may give
rise to, tort product liability or liability for breach of warranty (whether
covered by insurance or not) on the part of Avatar, with respect to products
designed, manufactured, assembled, sold, repaired, maintained, delivered or
installed or services rendered prior to or on the Effective Time.
2.11. No Conflict or Violation; Consents. The execution, delivery or
performance of this Agreement, the consummation of the transactions contemplated
hereby, and compliance by Avatar or the Shareholder with any of the provisions
hereof, will not (a) violate or conflict with any provision of the Avatar
Charter Documents, (b) violate, conflict with, or result in a breach of or
constitute a default (with or without notice of passage of time) under, or
result in the termination of, or accelerate the performance required by, or
result in a right to terminate, accelerate, modify or cancel under, or require a
notice under (except to the extent that notice has been given), or result in the
creation of any material encumbrance upon any of Avatar's assets under any
Contract to which Avatar or the Shareholder is a party or by which Avatar or the
Shareholder is bound or to which any of Avatar's assets are subject, or (c) to
the knowledge of Avatar and the Shareholder, violate any applicable federal,
state or local laws or regulations or court order. Except as set forth on
Schedule 2.11, no notices to, declaration, filing or registration with,
approvals or consents of, or assignments by, any persons or entities
(hereinafter "Persons") (including any federal, state or local governmental or
administrative authorities) are necessary to be made or obtained by Avatar or
the Shareholder in connection with the execution, delivery or performance of
this Agreement or the consummation of the transactions contemplated hereby.
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2.12. Permits. Schedule 2.12 sets forth a true, complete and correct list
of all governmental permits held by Avatar, and all of such permits are in full
force and effect. Avatar has, and at all times has had, all material permits
required under any applicable governmental regulation in the operation of its
business or in the ownership of its assets, and owns or possesses such permits
free and clear of all encumbrances. To the knowledge of Avatar or the
Shareholder, Avatar is not in default, and neither Avatar nor the Shareholder
has received any notice of any claim of default, with respect to any such
permit.
2.13. Financial Statements; Books and Records.
(a) The Avatar Financial Statements for the period from March 20,
1998 through December 31, 1998 ("Avatar Financial Statements") are complete, are
in accordance with the Avatar's books and records, fairly present Avatar's
assets, its liabilities and financial condition and results of operations
indicated thereby. The Avatar Financial Statements have been prepared in
accordance with GAAP consistently applied throughout the period covered thereby.
(b) Avatar maintains a system of internal accounting controls
sufficient to provide assurance that (i) transactions are executed with
management's authorizations; and (ii) transactions are recorded as necessary to
permit preparation of Avatar's financial statements in accordance with GAAP and
to maintain accountability for assets.
(c) The Avatar books and records accurately and fairly reflect the
activities of Avatar and its business and have been provided to IO for its
inspection. Avatar has not engaged in any transaction, maintained any bank
account or used any corporate funds except for transactions, bank accounts or
funds which have been and are reflected in the normally maintained Avatar Books
and Records.
(d) The stock records and minute books of Avatar that are made
available to IO fully reflect all minutes of meetings, resolutions and other
material actions and proceedings of its shareholder and board of directors and
all committees thereof, all issuances, transfers and redemptions of Avatar's
capital stock of which Avatar or the Shareholder are aware and contain true,
correct and complete copies of Avatar's Articles of Incorporation and Bylaws and
all amendments thereto through the date hereof.
2.14. Absence of Certain Changes or Events. Except as set forth on
Schedule 2.14, since December 31, 1998, there has not been any: (a) materially
adverse change to Avatar's business; (b) resignation or termination of any
officer or employee, or any increase in the rate of compensation payable or to
become payable to any officer, employee of Avatar; (c) transaction outside the
ordinary course of business and consistent with past practice; (d) actual or
threatened termination of any material customer account or group of accounts;
(e) commencement or notice or, to the knowledge of the Avatar and the
Shareholder, threat of commencement of any lawsuit or proceeding against, or
investigation of, Avatar; (f) declaration, setting aside or payment of dividends
or distributions in respect of any stock of Avatar or any redemption, purchase
or other acquisition of any of Avatar's equity securities; (g) issuance or
reservation for issuance by Avatar of, or commitment of it to issue or reserve
for issuance, any shares of stock or other equity securities or obligations or
securities convertible into or exchangeable for shares of stock or other equity
securities or the increase, decrease or reclassification of Avatar's stock; (h)
amendment of the Avatar Charter Documents; (i) capital expenditure or execution
of any lease or any incurring of liability therefor by Avatar, involving
payments in excess of $3,000 in the aggregate; (j) failure to pay any material
obligation of Avatar when due; (k) liability incurred by Avatar except in the
ordinary course of business and consistent with past practice, or any increase
or change in any assumptions underlying or methods of calculating any bad debt,
contingency or other reserves; or (l) negotiation or agreement by Avatar, or any
officer or employee thereof to do any of the foregoing (other than negotiations
with IO and its representatives regarding the transactions contemplated by this
Agreement).
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2.15. Liabilities. Avatar has no liabilities or obligations (absolute,
accrued, contingent, matured, unmatured or otherwise) except (a) liabilities
which are reflected and properly reserved against in the Avatar Financial
Statements; (b) liabilities incurred in the ordinary course of business and
consistent with past practice since the date of the Avatar Financial Statements;
and (c) liabilities arising under the contracts (other than obligations which
are required to be reflected on a balance sheet prepared in accordance with
GAAP) set forth on Schedule 2.10 or which are not required to be disclosed on
such Schedule and which have arisen or been incurred in the ordinary course of
business.
2.16 Litigation. Except as set forth on Schedule 2.16, there is no
action, order, writ, injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, investigation or dispute (collectively, "Actions")
pending or, to the knowledge of Avatar or the Shareholder, threatened or
anticipated (i) against, relating to or affecting the Shareholder, Avatar, any
of its assets or any of its officers and directors as such; (ii) which seek to
enjoin or obtain damages in respect of the transactions contemplated hereby; or
(iii) with respect to which there is a reasonable likelihood of a determination
which would prevent Avatar or the Shareholder from consummating the transactions
contemplated hereby. There are presently no outstanding judgments, decrees or
orders of any court or any governmental or administrative agency against or
affecting the Shareholder or Avatar. Schedule 2.16 contains a complete and
accurate description of all Actions since Avatar's inception to which Avatar has
been a party or which relate to any of its assets or officers or directors as
such, or any such Actions which were settled prior to the institution of formal
proceedings, other than Actions brought by Avatar for collection of monies owed
in the ordinary course of business.
2.17. Employees; Labor Matters.
(a) Avatar is not a party to any labor agreement with respect to its
employees with any labor organization, group or association and has not
experienced any attempt by organized labor or its representatives to make Avatar
conform to demands of organized labor relating to its employees or to enter into
a binding agreement with organized labor that would cover the employees of
Avatar. There are no material controversies pending or, to the knowledge of
Avatar or the Shareholder, threatened between Avatar and any of its employees,
and neither Avatar nor the Shareholder is aware of any facts which could
reasonably result in any such controversy.
(b) To the knowledge of Avatar or the Shareholder, Avatar is in
material compliance with all applicable governmental regulations respecting
employment practices, terms and conditions of employment, wages and hours, equal
employment opportunity, and the payment of social security, unemployment,
worker's compensation and similar taxes, and is not engaged in any unfair labor
practice. Avatar is not liable for any claims for past due wages or any
penalties for failure to comply with any of the foregoing.
(c) Avatar has not entered into any severance or similar arrangement
in respect of any present or former employee that will result in any obligation
(absolute or contingent) of IO or Avatar to make any payment to any present or
former Employee following termination of employment or upon consummation of the
transactions contemplated by this Agreement.
(d) Schedule 2.17 set forth a list of the names of all present
employees and their current salary or hourly wages and other compensation
payable by Avatar.
2.18. Employee Benefit Plans.
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(a) Schedule 2.18 sets forth a complete and accurate list of all
agreements, contracts, and understandings relating to any employee benefit plan,
program, agreement or arrangement maintained by Avatar, including any "employee
pension benefit plan" and any "employee welfare benefit plan," each as defined
in ERISA ("Benefit Plans"). With the exception of the Avatar Interactive, Inc.
401(k) Profit Sharing Plan and Trust, effective August 14, 1998, (the "401(k)
Plan"), Avatar has never maintained, been required to contribute to or pay any
amount with respect to and has no liability with respect to any (i) "employee
pension benefit plan" (as such term is defined in Section 401(a) of the Code or
Title IV of ERISA, or (ii) "multiemployer plan" (as such term is defined in
Section 3(37) of ERISA).
(b) Each Benefit Plan (and each related trust, insurance contract or
fund) complies in form and in operation in all material respects with the
applicable requirements of ERISA, the Code, and other applicable laws.
(c) All required reports and descriptions (including Form 5500 Annual
Reports, summary annual reports and summary plan descriptions) have been timely
filed and distributed appropriately with respect to each Benefit Plan to which
such requirements apply. The requirements of COBRA have been met in all material
respects with respect to each Benefit Plan which is an "employee welfare benefit
plan," within the meaning of Section 3(1) of ERISA.
(d) Avatar has delivered to IO correct and complete copies of (to the
extent applicable) the plan documents and summary plan descriptions, the most
recent determination letter received from the IRS, the most recent Form 5500
Annual Report, and all related trust agreements, insurance contracts, and other
funding agreements which implement each Benefit Plan.
(e) Avatar neither maintains nor has ever maintained or contributed to
any employee welfare benefit plan providing medical, health, or life insurance
or other welfare-type benefits for current or future retired or terminated
employees, their spouses, or their dependents (other than in accordance with
COBRA).
(f) There has not occurred nor, to the knowledge of the Shareholder
or Avatar, is any person contractually bound to enter into, any non-exempt
"prohibited transaction" within the meaning of Section 4975 of the Code or
Section 406 of ERISA with respect to any Benefit Plan.
(g) There is no pending or threatened litigation or other claims
under or relating to any Benefit Plan.
(h) With respect to the 401(k) Plan:
(i) The 401(k) Plan has received a favorable determination letter
from the IRS (under Revenue Procedure 93-39 or an applicable successor
thereto) stating that the 401(k) Plan meets the requirements of Section
401(a) of the Code and that the trust associated with the 401(k) Plan is
exempt from tax under Section 501(a) of the Code.
(ii) No facts exist that could reasonably be expected to affect
adversely the tax-qualified status of the 401(k) Plan;
(iii) The 401(k) Plan, the administrator and fiduciaries of the
401(k) Plan, and Avatar have at all times complied in all material respects
with all legal requirements, including, but not limited to, ERISA
(including the fiduciary responsibilities imposed by Part 4 of Title I,
Subtitle B of ERISA) and the Code, and the regulations and rulings
thereunder that apply
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to the 401(k) Plan, and the 401(k) Plan has at all times been properly
administered in all material respects in accordance with all such legal
requirements and in accordance with its terms to the extent consistent with
such legal requirements; and
(iv) Avatar is not delinquent as to contributions to or in
respect of the 401(k) Plan as to which Avatar is obligated to make, and all
required contributions under the 401(k) Plan with respect to periods
occurring prior to the Closing Date have been made as of the Closing Date.
2.19. Transactions with Related Parties. Except for employment agreements
and other compensation arrangements disclosed on Schedule 2.19, to the knowledge
of Avatar or the Shareholder, no party which is an officer or director of
Avatar, or any partners, associates or relatives of such officers and directors
has (a) borrowed or loaned money or other property to Avatar which has not been
repaid or returned, (b) any contractual or other claims, express or implied, of
any kind whatsoever against Avatar or (c) has any interest in any property used
by Avatar.
2.20. Compliance with Law. To the knowledge of Avatar and the
Shareholder, Avatar has conducted its business in material compliance with all
applicable governmental regulations.
2.21. Intellectual Property.
(a) General. Schedule 2.21 sets forth a correct and complete list of
all patents, trademarks, service marks, copyrights and applications therefor now
or heretofore used in Avatar's business. Except as disclosed in Schedule 2.21:
(i) Avatar owns or possesses adequate licenses or other valid rights to use such
intellectual property and know-how and other proprietary information necessary
to conduct its business as presently conducted; (ii) Avatar has not, to the
knowledge of Avatar and the Shareholder, infringed or misappropriated the
intellectual property of any other person, violated the rights of any person
(including rights to privacy or publicity), or engaged in unfair competition;
and (iii) to the knowledge of Avatar and the Shareholder, no other Person has
infringed or misappropriated the intellectual property of Avatar.
(b) Protection of Proprietary Rights. Except as set forth on
Schedule 2.21, Avatar has, and enforces a policy requiring each employee and
contractor to execute proprietary information and confidentiality agreements
substantially in Avatar's standard forms and all current and former employees
and contractors of Avatar have executed such an agreement, true and complete
copies of which have been provided to IO.
2.22. Tax Matters.
(a) Avatar has filed or caused to be filed on a timely basis all
federal, state, local, foreign and other tax returns, reports and declarations
(collectively, "Tax Returns") required to be filed by it and has paid all taxes,
including, but not limited to, income, capital gains, license, gross receipts,
net worth, capital stock, profits, stamp, occupation, transfer, value added,
excise, franchise, sales, use, property (whether real, personal or mixed),
employment, unemployment, disability, withholding, social security and workers'
compensation taxes and estimated income and franchise tax payments, and
interest, penalties, fines, costs and assessments (collectively, "Taxes"), due
and payable with respect to the periods covered by such Tax Returns (whether or
not reflected thereon). All Tax Returns filed by or on behalf of Avatar are
true, complete and correct in all material respects.
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(b) There are no tax liens on any of the Assets. The accrual for
Taxes reflected in the Avatar Financial Statements accurately reflects the total
amount of all unpaid Taxes, whether or not disputed and whether or not presently
due and payable, of Avatar as of the close of the period covered by the Avatar
Financial Statements. Adequate accruals and reserves have been made in the
Avatar Financial Statements and the books and records of Avatar for the payment
of all unpaid federal, state, local and other Taxes for all periods through the
respective dates thereof, through the date of this Agreement and through the
Closing, whether or not yet due and payable and whether or not disputed by
Avatar, and nothing has occurred subsequent to the dates of such Financial
Statements or such accruals or reserves in such books and records which makes
such accruals and reserves inadequate.
(c) Since December 31, 1998, Avatar has not incurred any tax liability
other than in the ordinary course of business. No deficiency in Taxes for any
period has been asserted by any taxing authority which remains unpaid. No
written inquiries or notices have been received by Avatar from a taxing
authority with respect to possible claims for Taxes which have not been resolved
and neither Avatar nor the Shareholder has any reason to believe that such an
inquiry or notice is pending or threatened. Avatar has not agreed to the
extension of the statute of limitations with respect to any Tax Returns or tax
periods. There are no assessments relating to Avatar's Tax Returns pending or,
to the knowledge of Avatar, or the Shareholder, threatened. Avatar has delivered
to IO copies of the federal and state income (or franchise) Tax Returns filed by
Avatar for all past periods.
(d) Avatar has never been taxable as a C Corporation, as that term is
defined in the Code. Avatar has elected, pursuant to Section 1362 of the Code,
to be treated as an S Corporation, as that term is defined in Section 1361 of
the Code, for all taxable years beginning on and after March 20, 1998. Avatar's
election to be treated as an S Corporation was valid and timely filed and has
never been challenged by the Internal Revenue Service or any state taxing
authority, and Avatar's election to be treated as an S Corporation has been at
all times and is valid and effective under the Code and in all states where
Avatar is subject to Taxes.
2.23. Insurance. Schedule 2.23 contains a complete and accurate list of
all policies or binders of insurance of which Avatar is the owner, insured or
beneficiary. All of such policies are sufficient for (i) compliance with all
governmental regulations (to the knowledge of Avatar and the Shareholder) and
all of the Contracts; and (ii) providing replacement cost insurance coverage for
all of its assets, fixtures and equipment and all leasehold improvements.
Avatar is not in default under any of such policies or binders, and it has not
failed to give any notice or to present any claim under any such policy or
binder in a due and timely fashion. There are no facts known to Avatar or the
Shareholder upon which an insurer might be justified in reducing or denying
coverage or increasing premiums on existing policies or binders. There are no
outstanding unpaid claims under any such policies or binders. Such policies and
binders are in full force and effect on the date hereof and shall be kept in
full force and effect by Avatar through the Effective Time.
2.24. Accounts Receivable. The accounts and notes receivable reflected in
the Avatar Balance Sheet, and all accounts or notes receivable arising since the
date of the Avatar Financial Statements, represent bona fide claims against
debtors for sales, services performed or other charges arising on or before the
date of recording thereof, and all the goods delivered and services performed
which gave rise to said accounts were delivered or performed in accordance with
the applicable orders, contracts or customer requirements. All accounts
receivable of Avatar arose in the ordinary course of business and are carried at
values determined in accordance with GAAP consistently applied. To the
knowledge of Avatar or the Shareholder, all such receivables are fully
collectible in the ordinary course of business except to the extent of an amount
not in excess of the reserve for doubtful accounts reflected on Avatar's
Balance Sheet.
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2.25. Work-in-Progress; Outstanding Projects. Schedule 2.25 accurately
reflects the status of Avatar's work-in-progress as of March 15, 1999. No
outstanding service contract or commitment by Avatar presently is in excess of
the normal, ordinary and usual requirements of Avatar's business or contains
terms and conditions more onerous than those usual and customary in Avatar's
business. To the knowledge of Avatar or the Shareholder, there is no
outstanding bid, proposal, contract or unfilled order of Avatar which will or
would, if accepted, result in a net loss to Avatar.
2.26. Customers. Schedule 2.26 sets forth a complete and accurate list of
the names and addresses of the ten customers (or if fewer than ten existed, all
customers) who purchased from Avatar the greatest dollar volume of services
during its last fiscal year and last fiscal quarter, showing the approximate
total sales in dollars to each such customer during such fiscal year and
quarter. Avatar has not received any written communication from any customer or
supplier named on Schedule 2.26 of any intention to return, terminate or
materially reduce purchases from or supplies to Avatar.
2.27. Environmental Matters. To the knowledge of Avatar or the
Shareholder, Avatar is in compliance with all applicable federal, state and
local environmental laws and regulations.
2.28. Brokers. Neither Avatar nor the Shareholder has entered into and
will not enter into any contract, agreement, arrangement or understanding with
any entity which will result in the obligation of IO, the Merger Sub, Avatar or
the Shareholder to pay any finder's fee, brokerage commission or similar payment
in connection with the transactions contemplated hereby. The Shareholder agrees
to indemnify and to hold harmless IO, Avatar and the Merger Sub from any
liability for any commission or compensation in the nature of a finder's fee or
broker's fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Shareholder, Avatar or any of its officers,
employees, or representatives is responsible.
2.29. Information About IO. The Shareholder acknowledges that (a) she has
received or has had access to copies of all documents filed by IO with the SEC
pursuant to the Securities Act of 1933, as amended, and the Securities Exchange
Act of 1934, as amended, and the regulations promulgated thereunder (the "SEC
Filings"), (b) all other books, records and documents of IO have been and remain
available for inspection by the Shareholder upon reasonable notice, (c) all
requests for documents and other information about IO have been answered to the
Shareholder's satisfaction.
2.30. Information About Avatar; Business Plan. Avatar and the Shareholder
have delivered or made available true and complete copies of each document (or
summaries of same) that has been requested by IO or its counsel.
2.31. Material Misstatements Or Omissions. No representations or
warranties by Avatar or the Shareholder in this Agreement or in any document,
written information, exhibit, statement, certificate or schedule heretofore or
hereinafter furnished by Avatar or the Shareholder to IO or the Merger Sub in
connection with the transactions contemplated by this Agreement contains or will
contain any untrue statement of a material fact, or omits or will omit to state
any material fact necessary to make the statements or facts contained therein
not misleading.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF IO AND THE SUB
IO and the Merger Sub jointly and severally represent and warrant to Avatar
and the Shareholder as follows, which representations and warranties are (as of
the date hereof), and will be (as of the Effective Time), true and correct:
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3.1. Organization of IO and the Merger Sub. Each of IO and the Merger Sub
is a corporation duly organized, validly existing and in good standing under the
laws of the State of Washington and has full corporate power and authority to
conduct its business as it is presently being conducted and to own or lease, as
applicable, its assets. Each is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which such
qualification is necessary under applicable law as a result of the conduct of
its business or the ownership of its properties and where the failure to be so
qualified would have a material adverse effect on it or its business. True and
correct copies, as in the effect on the date hereof, of the Articles of
Incorporation and Bylaws, each as amended, of IO (collectively, the "IO Charter
Documents") have been previously delivered or made available to Avatar. IO is
not in violation of any IO Charter Document. A true copy of the IO minute book
has been made available to Avatar and is correct and complete in all material
respects.
3.2. Capitalization of IO.
(a) There are 50,000,000 shares of IO Common Stock authorized under
its Articles of Incorporation, 13,758,927 shares of which are issued and
outstanding. There are 10,000,000 shares of Preferred Stock authorized under
its Articles, none of which are outstanding. IO has no other capital stock
authorized, issued or outstanding.
(b) There are 2,000,000 shares of IO Common Stock reserved for
issuance upon the exercise of stock options granted or available for grant under
its stock option plans (the "IO Option Pool") under the terms and conditions set
forth in the SEC Filings.
(c) There are issued and outstanding warrants to purchase up to
978,401 shares of IO Common Stock (the "IO Warrants") under the terms and
conditions set forth in the SEC Filings.
(d) Except for options subject to the IO Option Pool and the IO
Warrants listed above, there are no outstanding options, warrants, convertible
securities or rights of any kind to purchase or otherwise acquire any shares of
capital stock or other securities of IO. Except as set forth above, no shares
of capital stock of IO are reserved for issuance.
(e) Upon consummation of the Merger and issuance of the Merger Shares
in accordance with this Agreement and upon surrender and cancellation of the
Certificates for shares of Avatar Common Stock, the Merger Shares will be duly
authorized, validly issued, fully paid and non-assessable, and shall have been
issued in compliance with all applicable federal and state corporate and
securities laws.
3.3. Authorization. Each of IO and the Merger Sub has all necessary
corporate power and authority to enter into this Agreement and has taken all
action necessary to consummate the transactions contemplated hereby and to
perform its respective obligations hereunder and thereunder. This Agreement has
been duly executed and delivered by each, and this Agreement is a legal, valid
and binding obligation of each, enforceable against it in accordance with its
terms, except that enforceability may be limited by the effect of bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting the rights of creditors.
3.4. Title to, and Sufficiency of, Assets. IO has good and marketable fee
simple title to its assets, and none of its assets are subject to any liens,
claims or encumbrances whatsoever. IO owns all of the assets, rights and
properties, tangible or intangible, real or personal, which are required for the
operation of IO's business as it is presently conducted and as presently
contemplated. All of IO's tangible assets are in good operating condition and
repair and are usable in the ordinary course of business.
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3.5. IO Contracts. All of the IO's material oral and written contracts
are valid, binding and enforceable in accordance with their terms with no
existing (or to the knowledge of IO, threatened) default or dispute. IO has
fulfilled, or taken all action necessary to enable it to fulfill when due, all
of its material obligations under each of such IO contracts. IO has not
committed any act, and there has been no omission, which may result in, and
there has been no occurrence which may give rise to, tort product liability or
liability for breach of warranty (whether covered by insurance or not) on the
part of IO, with respect to products designed, manufactured, assembled, sold,
repaired, maintained, delivered or installed or services rendered prior to or on
the Effective Time.
3.6. No Conflict or Violation; Consents. The execution, delivery or
performance of this Agreement, the consummation of the transactions contemplated
hereby, and compliance by either IO or the Merger Sub with any of the provisions
hereof, will not (a) violate or conflict with any provision of the IO Charter
Documents or any comparable charter documents of the Merger Sub, (b) violate,
conflict with, or result in a breach of or constitute a default (with or without
notice of passage of time) under, or result in the termination of, or accelerate
the performance required by, or result in a right to terminate, accelerate,
modify or cancel under, or require a notice under, or result in the creation of
any encumbrance upon any of its assets under any material IO contract to which
IO is a party or by which IO is bound or to which any of its assets are
subject, or (c) to the knowledge of IO, violate any applicable federal, state or
local law or regulation or court order. Except as set forth on Schedule 3.6, no
notices to, declaration, filing or registration with, approvals or consents of,
or assignments by, any Persons (including any federal, state or local
governmental or administrative authorities) are necessary to be made or obtained
by IO or the Merger Sub in connection with the execution, delivery or
performance of this Agreement or the consummation of the transactions
contemplated hereby.
3.7. Financial Statements.
(a) The IO Financial Statements dated as of December 31, 1998 are
complete, are in accordance with its books and records, fairly present its
assets, liabilities and financial condition and results of operations indicated
thereby in accordance with GAAP consistently applied throughout the periods
covered thereby.
(b) The IO books and records accurately and fairly reflect the
activities of Avatar and its business and have been made available to Avatar for
its inspection. IO has not engaged in any transaction, maintained any bank
account or used any corporate funds except for transactions, bank accounts or
funds which have been and are reflected in the normally maintained IO books and
records.
(c) The stock records and minute books of IO that are made available
to Avatar fully reflect all minutes of meetings, resolutions and other material
actions and proceedings of its shareholders and board of directors and all
committees thereof, all issuances, transfers and redemptions of IO's capital
stock of which IO is aware.
3.8. Absence of Certain Changes or Events. Except as set forth on
Schedule 3.8, since December 31, 1998, there has not been any: (a) materially
adverse change to IO's business; (b) actual or threatened termination of any
material customer account or group of accounts; (c) commencement or notice or,
to the knowledge of the IO, threat of commencement of any lawsuit or proceeding
against, or investigation of, IO; (d) declaration, setting aside or payment of
dividends or distributions in respect of any stock of IO or any redemption,
purchase or other acquisition of any of IO's equity securities; (e) failure to
pay any material obligation of IO when due; or (f) negotiation or agreement by
IO, or any officer or employee thereof to do any of the foregoing (other than
negotiations with Avatar and its representatives regarding the transactions
contemplated by this Agreement).
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3.9. Liabilities. IO has no liabilities or obligations (absolute,
accrued, contingent or otherwise) except (i) liabilities which are reflected and
properly reserved against in the IO Financial Statements; (ii) liabilities
incurred in the ordinary course of business and consistent with past practice
since the date of the IO Financial Statements; and (iii) liabilities arising
under the contracts (other than obligations which are required to be reflected
on a balance sheet prepared in accordance with GAAP) which have arisen or been
incurred in the ordinary course of business.
3.10. Litigation. Except as set forth on Schedule 3.10, there is no
action, order, writ, injunction, judgment or decree outstanding or claim, suit,
litigation, proceeding, investigation or dispute (collectively, "Actions")
pending or, to the knowledge of IO, threatened or anticipated (i) against,
relating to or affecting IO, any of its assets or any of its officers and
directors as such; or (ii) which seek to enjoin or obtain damages in respect of
the transactions contemplated hereby; or (iii) with respect to which there is a
reasonable likelihood of a determination which would prevent IO from
consummating the transactions contemplated hereby. There are presently no
outstanding judgments, decrees or orders of any court or any governmental or
administrative agency against or affecting IO.
3.11. Compliance with Law. To the knowledge of IO, IO has conducted its
business in material compliance with all applicable governmental regulations.
3.12. Intellectual Property. Except as disclosed in Schedule 3.12: (i)
IO owns or possesses adequate licenses or other valid rights to use such
intellectual property and know-how and other proprietary information necessary
to conduct its business as presently conducted; (ii) IO has not, to its
knowledge, infringed or misappropriated the intellectual property of any other
Person, violated the rights of any Person (including rights to privacy or
publicity), or engaged in unfair competition; and (iii) to the knowledge of IO,
no other Person has infringed or misappropriated the intellectual property of
IO.
3.13. Brokers. Neither IO nor the Merger Sub has entered into and neither
will enter into any contract, agreement, arrangement or understanding with any
entity which will result in the obligation of IO, the Merger Sub, Avatar or the
Shareholder to pay any finder's fee, brokerage commission or similar payment in
connection with the transactions contemplated hereby. IO and the Merger Sub
agree to indemnify Avatar and the Shareholder and to hold them harmless from any
liability for any commission or compensation in the nature of a finder's fee or
broker's fee (and the costs and expenses of defending against such liability or
asserted liability) for which either IO or the Merger Sub or any of its or their
officers, employees, or representatives is responsible.
3.14. Material Misstatements or Omissions. No representations or
warranties by IO or the Merger Sub in this Agreement or in any document, written
information, exhibit, statement, certificate or schedule heretofore or
hereinafter furnished by IO or the Merger Sub or any of its or their respective
representatives to Avatar or the Shareholder in connection with the transactions
contemplated by this Agreement contains or will contain any untrue statement of
a material fact, or omits or will omit to state any material fact necessary to
make the statements or facts contained therein not misleading.
ARTICLE 4. ACTIONS BY AVATAR, THE SHAREHOLDERAND IO PRIOR TO THE CLOSING
Avatar, the Shareholder, IO and the Merger Sub covenant as follows for the
period from the date hereof through the Effective Time:
4.1. Conduct of Avatar Business. From the date hereof through the
Closing, Avatar and the Shareholder shall, except as contemplated by this
Agreement, or as consented to by IO in writing, which
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consent shall not be unreasonably withheld, (i) operate its business in the
ordinary course of business and in accordance with past practice; and (ii)
preserve for itself and for IO and the Merger Sub the goodwill of the customers
and suppliers of Avatar and others with whom business relationships exist, and
Avatar shall not take any action inconsistent with this Agreement or the
consummation of the Closing, including without limitation the following:
(a) knowingly take any action which would prevent the Merger from
being treated as a pooling of interests for accounting purposes or which could
materially delay consummation of the Merger.
(b) do any other act which would cause any representation or warranty
of Avatar or the Shareholder in this Agreement to be or become untrue in any
material respect or that is not in the ordinary course of business consistent
with past practice.
4.2. Conduct of IO and the Merger Sub Business. From the date hereof
through the Closing, each of IO and the Merger Sub shall, except as contemplated
by this Agreement, or as consented to by Avatar and the Shareholder in writing,
which consent shall not be unreasonably withheld, (i) operate its business in
the ordinary course of business and in accordance with past practice; and (ii)
preserve the goodwill of the customers and suppliers of IO and others with whom
business relationships exist, and IO shall not take any action inconsistent with
this Agreement or the consummation of the Closing, including without limitation
the following:
(a) knowingly take any action which could materially delay
consummation of the Merger; or
(b) do any other act which would cause any representation or warranty
of IO or the Merger Sub in this Agreement to be or become untrue in any material
respect or that is not in the ordinary course of business consistent with past
practice.
4.3. Investigation by Avatar and IO. From the date hereof through the
Effective Time, Avatar shall, and shall cause Avatar's officers, employees and
agents to, and IO shall, and shall cause IO's officers, employees and agents to,
afford to such representatives of the other party access upon reasonable notice
and at all reasonable times to its business for the purpose of inspecting the
same.
4.4. Notification of Certain Matters. Each party shall give prompt notice
to the other of (i) the occurrence, or failure to occur, of any event which
occurrence or failure would be likely to cause any representation or warranty of
any party contained in this Agreement to be untrue or inaccurate in any material
respect; and (ii) any material failure of such party to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder.
4.5. No Mergers, Consolidations, Sale of Stock, Etc. Avatar and the
Shareholder will not, directly or indirectly, solicit any inquiries or proposals
or enter into or continue any discussions, negotiations or agreements relating
to the sale or exchange of Avatar's capital stock, the merger of Avatar with,
or the sale of a significant amount of Avatar's assets to, any Person other than
IO and the Merger Sub.
4.6. Regulatory Matters.
(a) The parties hereto will cooperate with each other and use all
reasonable efforts to prepare all necessary documentation, to effect all
necessary filings and to obtain all necessary permits, consents, approvals and
authorizations of all third parties and governmental bodies necessary to
consummate the transactions contemplated by this Agreement.
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(b) IO shall take any action required to be taken under applicable
state securities and blue sky laws in connection with the issuance of shares of
IO Common Stock in the Merger and as contemplated by this Agreement. The
Shareholder represents and warrants to IO that the state of her residence is as
set forth on the signature page hereto.
4.7. Failure to Fulfill Conditions. In the event that IO, Avatar or the
Shareholder determines that a condition to its respective obligation to
consummate the transactions contemplated hereby cannot be, or is not likely to
be, fulfilled on or prior to Closing, and that it will not waive that condition,
it will promptly notify the other parties.
4.8. Assignment of Contract Rights. Avatar shall obtain any consents,
waivers or revisions necessary to allow IO and/or the Merger Sub to accede to
all of Avatar's rights under the Contracts, without incurring substantial costs
in connection therewith. Each of IO and the Merger Sub will offer its
reasonable cooperation with Avatar in obtaining such consents, waivers and
revisions, it being understood that the obligation to obtain such consents,
waivers and revisions shall nevertheless be the obligation of Avatar.
4.9. Employees of Avatar.
(a) Avatar shall not establish any benefit plan and shall not amend or
terminate any employee benefit plan without the consultation and written
approval of IO.
(b) Avatar shall not disseminate or make available any memoranda,
notices, plan summaries, or other communications regarding IO employment or the
benefit plans without the consultation and written approval of IO.
ARTICLE 5. CLOSING CONDITIONS
5.1. Conditions to IO's and the Merger Sub's Obligations. The obligations
of IO and the Merger Sub to effect the Merger and complete the related
transactions contemplated by this Agreement are subject, in the discretion of IO
and the Merger Sub, to the satisfaction, on or prior to the Effective Time, of
each of the following conditions:
(a) Representations, Warranties and Covenants. All representations
and warranties of Avatar and the Shareholder contained in this Agreement shall
be true and correct in all material respects at and as of the Effective Time as
if such representations and warranties were made at and as of the Effective
Time, and all of the terms, covenants, agreements and conditions of this
Agreement to be complied with, performed or satisfied by Avatar and the
Shareholder on or before the Effective Time shall have been duly complied with,
performed or satisfied, and each of Avatar and the Shareholder shall have
delivered to IO a certificate executed by Avatar ("Avatar Closing Certificate")
and the Shareholder ("Shareholder's Closing Certificate") to the foregoing
effect.
(b) Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit consummation of the Merger as
contemplated hereby and for the operation of the Avatar's business after the
Closing (including all required third party consents under the Contracts) shall
have been obtained.
(c) No Actions or Court Orders. No Action by any court, governmental
authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby and
which could reasonably be expected to materially damage IO,
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Avatar's assets or its business materially if the transactions contemplated
hereby are consummated, including any material adverse effect on the right or
ability of IO and/or the Merger Sub to own, operate or transfer Avatar's
business after the Closing.
(d) Closing Documents. Avatar and/or the Shareholder, as the case
may be, shall have delivered to IO and the Merger Sub the documents and other
items described in Section 6.1 and such other documents and items as IO and the
Merger Sub may reasonably require.
(e) Certificates. The Shareholder shall, and shall cause Avatar to,
furnish IO and the Merger Sub with such certificates of the officers of Avatar
or the Shareholder and others to evidence compliance with the conditions set
forth in this Article as may be reasonably requested by IO and the Merger Sub.
(f) Compliance with Federal and State Securities Laws. The issuance
of shares of IO Common Stock in the Merger, as well as the common stock of the
Surviving Corporation, shall not violate any federal or state securities laws.
(g) Employment Agreements. The Shareholder and Norresa Calos shall
have entered into employment agreements in the form attached hereto as Exhibits
C and D, respectively.
(h) Completion of IO Due Diligence. IO shall have completed its
business and legal due diligence to its satisfaction, in its sole judgment.
(i) Material Adverse Change. Since the date hereof, there shall not
have been any material adverse change to Avatar or its business.
(j) Accountant's Letter with respect to Pooling of Interests
Accounting Treatment. IO shall have received a letter from its accountant
stating their opinion that, as of the Effective Time, the transactions
contemplated by this Agreement qualify for pooling of interests accounting
treatment in accordance with GAAP.
5.2. Conditions to Avatar's and the Shareholder's Obligations. The
obligations of Avatar and the Shareholder to effect the Merger and complete the
related transactions contemplated by this Agreement are subject, in the
discretion of Avatar and the Shareholder, to each of their satisfaction, on or
prior to the Effective Time, of each of the following conditions:
(a) Representations, Warranties and Covenants. All representations
and warranties of IO and the Merger Sub contained in this Agreement shall be
true and correct in all material respects at and as of the Effective Time as if
such representations and warranties were made at and as of the Effective Time,
and all of the terms, covenants, agreements and conditions of this Agreement to
be complied with, performed or satisfied by IO or the Merger Sub on or before
the Effective Time shall have been duly complied with, performed or satisfied,
and IO and the Merger Sub shall have delivered to Avatar and the Shareholder a
certificate (signed by a senior officer of each of IO and the Merger Sub) to the
foregoing effect ("IO and Merger Sub Closing Certificates").
(b) Consents. All consents, approvals and waivers from governmental
authorities and other parties necessary to permit consummation of the Merger as
contemplated hereby shall have been obtained, all approvals required under any
applicable laws or regulations to carry out the transactions contemplated by
this Agreement shall have been obtained and the parties shall have complied with
all laws and regulations applicable to the transactions contemplated hereby.
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(c) No Actions or Court Orders. No Action by any court, governmental
authority or other Person shall have been instituted or threatened which
questions the validity or legality of the transactions contemplated hereby or
which could reasonably be expected to materially damage the Shareholder if the
transactions contemplated hereby are consummated.
(d) Closing Documents. IO and the Merger Sub shall have delivered to
Avatar and the Shareholder the documents and other items described in Section
6.2 and such other documents and items as Avatar or the Shareholder may
reasonably require.
(e) Certificates. IO and the Merger Sub shall furnish Avatar and the
Shareholder with such certificates of the officers of IO and the Merger Sub and
others to evidence compliance with the conditions set forth in this Article as
may be reasonably requested by Avatar and the Shareholder.
(f) Compliance with Federal and State Securities Laws. The issuance
of shares of IO Common Stock in the Merger, as well as the shares of common
stock of the Merger Sub, shall not violate any federal or state securities laws.
(g) Resignations of Officers and Directors. Each of the Avatar's
officers and directors shall have resigned effective on or prior to the
Effective Date.
(h) Employment Agreements. The Shareholder and Norresa Calos shall
have entered into employment agreements in the form attached hereto as Exhibits
C and D, respectively.
(i) Completion of Avatar and Shareholder Due Diligence. Avatar and
the Shareholder shall have completed their business and legal due diligence to
their satisfaction, in their sole judgment.
(j) Material Adverse Change. Since the date of this Agreement, there
shall not have been any material adverse change to IO or its business.
ARTICLE 6. CLOSING
On the Effective Time at the Closing Place:
6.1. Deliveries by Avatar and the Shareholder to IO. Avatar and the
Shareholder, as applicable, shall deliver (or cause to be delivered) to IO:
(a) any Consents required to be obtained by Avatar or the
Shareholder;
(b) the Avatar Closing Certificate and the Shareholder's Closing
Certificate;
(c) such other documents as IO may reasonably request as described in
Section 5.1(d); and
(d) all share certificates, or affidavits of lost certificate,
representing the shares of Avatar Common Stock to be canceled in connection with
the Merger.
6.2. Deliveries by IO to the Shareholder. IO and the Merger Sub shall
deliver to the Shareholder:
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(a) any Consents required to be obtained by IO and the Merger Sub;
(b) the IO and Merger Sub Closing Certificates; and
(c) such other documents as Avatar or the Shareholder may reasonably
request as described in Section 5.2(d).
6.3 Deliveries by IO to the Shareholder after the Effective Time.
Promptly after the Merger Price Per Share is determined, IO shall deliver stock
certificates representing the Merger Shares to be issued to the Shareholder,
bearing the restrictive legends required by this Agreement.
ARTICLE 7. SECURED INDEMNIFICATION
7.1 Secured Indemnity. The Shareholder shall indemnify and hold the
Surviving Corporation, IO and each of their respective partners, officers,
directors, employees, shareholders and agents (collectively, the "Settlement
Indemnified Parties") harmless from and against any judgments or settlements
(collectively, "Claims"),but not including costs and attorneys' fees, arising
out of or relating to any legal action brought by the Potential Plaintiffs or on
their behalf which litigation relates in any way to the relationship between the
Potential Plaintiffs and the Shareholder or Avatar prior to or on the date of
the applicable settlement. Except as set forth below, the indemnification
procedures set forth in Article 8 shall control.
(a) The Shareholder shall have no obligation to indemnify the
Settlement Indemnified Parties against the costs or attorneys' fees associated
with a Claim brought by the Potential Plaintiffs and IO and the Surviving
Corporation shall be wholly responsible for such costs.
(b) IO and the Surviving Corporation shall have the right to control
all aspects of the Settlement Litigation, which shall include, without
limitation, the right (i) to take control of the defense and investigation of
such lawsuit or action, subject to regular consultation with the Shareholder,
(ii) after consultation with the Shareholder, to employ and engage attorneys of
their own choice to handle and defend the same, and (iii) to compromise or
settle such claim, which compromise or settlement may be made in the reasonable
discretion of the Surviving Corporation and upon the approval of the
Shareholder, such approval not to be unreasonably withheld. The Shareholder
shall cooperate in all reasonable respects with the Surviving Corporation and/or
IO and their attorneys in the investigation, trial and defense of such lawsuit
and action and any appeal arising therefrom. If the named parties in any
Settlement Litigation include both the Shareholder and the Settlement
Indemnified Parties and the Shareholder has been advised in writing by counsel
that there may be one or more legal defenses available to such Shareholder and
the Settlement Indemnified Parties that are different from or additional to
those available to the Settlement Indemnified Parties, the Shareholder shall be
entitled, at IO and the Survivor Corporation's cost and expense, to separate
counsel of her own choosing, provided that such counsel shall be reasonably
acceptable to IO and the Survivor Corporation.
(c) The indemnity provided by this Article 7 (i) is secured by the
Litigation Pledge and (ii) shall terminate and be of no further force and effect
on the Release Date. Realizing on the Pledged Assets pursuant to the
Litigation Pledge shall be the sole and exclusive remedy of the Settlement
Indemnified Parties in connection with the indemnity provided by this Article 7.
(d) The Shareholder agrees that she will not seek indemnification on
any basis from Avatar, the Surviving Corporation or IO for any Claim covered by
the indemnity provided by this Article 7.
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ARTICLE 8. INDEMNIFICATION
8.1. Survival of Representations, Etc. The representations and warranties
of the parties contained herein shall survive until the second anniversary of
the Effective Time, at which time they will terminate. No investigation made by
any of the parties hereto (whether prior to, on or after the Effective Time)
shall in any way limit the representations and warranties of the parties.
Notwithstanding the above, at the Effective Time all representations and
warranties contained in this Agreement and made by Avatar and the Shareholder
shall expire as to Avatar and thereafter will be deemed to have been made
exclusively by the Shareholder.
8.2. Indemnification.
(a) General. Subsequent to the Closing, the each party covenants and
agrees to indemnify, defend, protect and hold harmless the other parties, and
each of their respective partners, officers, directors, employees, shareholders
and agents (collectively, the "Indemnified Parties") against and from, any
damage, claim, loss, cost, liability or expense, including without limitation,
interest, penalties, reasonable attorneys' fees and expenses of investigation,
response action, removal action or remedial action (collectively "Damages")
incurred by such Indemnified Party, that are incident to, arise out of, in
connection with, or related to, whether directly or indirectly, any breach of
any warranty, representation, covenant or agreement set forth herein. The term
"Damages" as used in this Section 8.2 is not limited to matters asserted by
third parties against Indemnified Parties, but includes Damages incurred or
sustained by such Persons in the absence of third party claims.
(b) Procedure for Claims between Parties. Any Indemnified Party
seeking indemnification hereunder shall give to the party obligated to provide
indemnification to such Indemnified Party (the "Indemnitor") a notice (a "Claim
Notice") describing in reasonable detail the facts giving rise to any claims for
indemnification hereunder and shall include in such Claim Notice (if then known)
the amount or the method of computation of the amount of such claim, and a
reference to the provision of this Agreement or any agreement, document or
instrument executed pursuant hereto or in connection herewith upon which such
claim is based; provided, that a Claim Notice in respect of any action at law or
suit in equity by or against a third Person as to which indemnification will be
sought shall be given promptly after the action or suit is commenced; and
provided further, that failure to give such notice shall not relieve the
Indemnitor of its obligations hereunder except to the extent it shall have been
prejudiced by such failure.
The Indemnitor shall have fifteen days after the giving of any Claim
Notice pursuant hereto to (i) agree to the amount or method of determination set
forth in the Claim Notice and to pay such amount to such Indemnified Party; or
(ii) to provide such Indemnified Party with notice that it disagrees with the
amount or method of determination set forth in the Claim Notice (the "Dispute
Notice"). Within fifteen days after the giving of the Dispute Notice, a
representative of Indemnitor and such Indemnified Party shall negotiate in a
bona fide attempt to resolve the matter.
(c) Defense of Third Party Claims. If any lawsuit or enforcement
action is filed against any Indemnified Party, written notice thereof shall be
given to the other party as promptly as practicable (and in any event within 15
calendar days after the service of the citation or summons). The failure of any
Indemnified Party to give timely notice hereunder shall not affect rights to
indemnification hereunder, except to the extent that the other party
demonstrates they were actually prejudiced by such failure. After such notice,
if the other party shall acknowledge in writing to the Indemnified Party that
they shall be obligated under the terms of their indemnity hereunder in
connection with such lawsuit or action, or that they will defend such lawsuit or
action under a reservation of rights, then they shall be entitled, if they
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so elect at their own cost, risk and expense, (i) to take control of the defense
and investigation of such lawsuit or action; (ii) to employ and engage attorneys
of their own choice to handle and defend the same unless the named parties to
such action or proceeding include both the other party and the Indemnified Party
and the Indemnified Party has been advised in writing by counsel that there may
be one or more legal defenses available to such Indemnified Party that are
different from or additional to those available to the other party, in which
event the Indemnified Party shall be entitled, at the other party's cost, risk
and expense, to separate counsel of its own choosing; and (iii) to compromise or
settle such claim, which compromise or settlement shall be made only with the
written consent of the Indemnified Party, such consent not to be unreasonably
withheld. The Indemnified Party shall cooperate in all reasonable respects with
the other party and their attorneys in the investigation, trial and defense of
such lawsuit or action and any appeal arising therefrom; provided, however, that
the Indemnified Party may, at its own cost, participate in the investigation,
trial and defense of such lawsuit or action and any appeal arising therefrom.
The parties shall cooperate with each other in any notifications to insurers. If
the other party fails to assume the defense of such claim within 15 calendar
days after receipt of the notice of claim, the Indemnified Party against which
such claim has been asserted will (upon delivering notice to such effect to the
other party) have the right to undertake, at the other party's cost, risk and
expense, the defense, compromise or settlement of such claim on behalf of and
for the account and risk of the other party; provided, however, that such claim
shall not be compromised or settled without the written consent of the other
party, which consent shall not be unreasonably withheld. If the Indemnified
Party assumes the defense of the claim, the Indemnified Party will keep the
Shareholder reasonably informed of the progress of any such defense, compromise
or settlement. The other party shall be liable for any settlement of any action
effected pursuant to and in accordance with this Section 8.2 and for any final
judgment (subject to any right of appeal), and the other party agrees to
indemnify and hold harmless an Indemnified Party from and against any Damages by
reason of such settlement or judgment.
8.3. No Right of Contribution; Remedies Cumulative. After the Closing,
the Shareholder shall have no right of contribution against the Surviving
Corporation for any breach of any representation, warranty, covenant or
agreement of Avatar. The remedies described in this Article 8 are cumulative
and shall be in addition to, and not in lieu of, any other remedies at law or in
equity that the parties may elect to pursue.
ARTICLE 9. MISCELLANEOUS
9.1. Termination.
(a) This Agreement may be terminated at any time prior to Closing:
(i) By mutual written consent of IO and Avatar;
(ii) By either IO or Avatar if the Closing shall not have
occurred on or before April 30, 1999, other than due to a breach of this
Agreement by the party seeking to terminate;
(iii) By IO if there is a material breach of any representation
or warranty set forth in Article 2 or any covenant or agreement to be
complied with or performed by Avatar or the Shareholder pursuant to the
terms of this Agreement, so long as any such breach is not caused by the
action or inaction of IO; or
(iv) By Avatar and the Shareholder if there is a material breach
of any representation or warranty set forth in Article 3 hereof or of any
covenant or agreement to be
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complied with or performed by IO or the Merger Sub pursuant to the terms of
this Agreement, so long as any such breach is not caused by the action or
inaction of Avatar or the Shareholder.
(b) In the event of termination of this Agreement:
(i) The provisions of any Confidentiality Agreement between or
among the parties shall continue in full force and effect; and
(ii) No party hereto shall have any liability to any other party
to this Agreement, except for any willful breach of, or knowing
misrepresentation made in, this Agreement occurring prior to the proper
termination of this Agreement.
9.2. Certain Securities Laws Representations. The Shareholder represents
for itself as follows with respect to the Merger Shares to be acquired in
connection with the Merger:
(a) The Shareholder is receiving such shares for investment for her
own account and not with a view to, or for resale in connection with, the
distribution or other disposition thereof, other than as contemplated hereby;
(b) The Shareholder has been given the opportunity to obtain any
information or documents relating to, and to ask questions and receive answers
about, IO and the business and prospects of IO which it deems necessary to
evaluate the merits and risks related to its investment in such shares and to
verify the information received, and the Shareholder's knowledge and experience
in financial and business matters are such that it is capable of evaluating the
merits and risks of its receipt of such shares;
(c) The Shareholder's financial condition is such that it can afford
to bear the economic risk of holding the shares for an indefinite period of time
and has adequate means for providing for the Shareholder's current needs and
contingencies and to suffer a complete loss of its investment in such shares;
(d) All information that the Shareholder has provided to IO
concerning herself and her financial position is correct and complete;
(e) The Shareholder has been advised that (i) IO's issuance of the
shares of IO Common Stock to the Shareholder will not have been registered under
the Securities Act; (ii) such shares may need to be held indefinitely, and the
Shareholder must continue to bear the economic risk of the investment in such
shares unless they are subsequently registered under the Securities Act or an
exemption from such registration is available; (iii) there may not be a public
market for such shares; (iv) when and if such shares may be disposed of without
registration in reliance on Rule 144 promulgated under the Securities Act, such
disposition can be made only in limited amounts in accordance with the terms and
conditions of such Rule; (v) if the Rule 144 exemption is not available, public
sale without registration will require compliance with an exemption under the
Securities Act; (vi) IO shall be entitled to issue appropriate stop transfer
instructions to its transfer agent consistent with the terms of this Agreement;
and (vii) a restrictive legend shall be placed on the certificates representing
such shares.
9.3. Assignment. Neither this Agreement nor any of the rights or
obligations hereunder may be assigned by Avatar or the Shareholder without the
prior written consent of IO and the Merger Sub, or by IO or the Merger Sub
without the prior written consent of Avatar and the Shareholder.
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<PAGE>
9.4. Notices. Unless otherwise provided herein, any notice, request,
instruction or other document to be given hereunder by any party to the other
shall be in writing and delivered in person or by courier, telegraphed, telexed,
sent by facsimile transmission, sent via overnight delivery service or mailed by
registered or certified mail (such notice to be effective upon receipt), as
follows:
If to the Shareholder:
to the address set forth below her name on the signature page hereto
With a copy to:
Anderson Godwin de Regt LLP
3930 Two Union Square
601 Union Street
Seattle, WA 98101
Tele: (206) 224-2877
Fax: (206) 628-3049
Attn: Paul F. Norris
If to IO:
Interactive Objects, Inc.
217 Pine St., Suite 800
Olympic Tower Building
Seattle, Washington 98101
Tele: (206) 464-1008
Fax: (206) 264-8063
Attention: Steven G. Wollach, President
With a copy to:
Cairncross & Hempelmann, P.S.
70th Floor, Columbia Center
701 Fifth Avenue
Seattle, Washington 98104-7016
Tele: (206) 587-0700
Fax: (206) 587-2308
Attention: Robert C. Seidel
If to the Surviving Corporation:
Avatar Interactive, Inc.
217 Pine St., Suite 800
Olympic Tower Building
Seattle, Washington 98101
Tele: (206) 464-1008
Fax: (206) 264-8063
Attention: Steven G. Wollach, President
With a copy to:
Cairncross & Hempelmann, P.S.
70th Floor, Columbia Center
701 Fifth Avenue
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<PAGE>
Seattle, Washington 98104-7016
Tele: (206) 587-0700
Fax: (206) 587-2308
Attention: Robert C. Seidel
or to such other place and with such other copies as any party may designate as
to itself by written notice to the others.
9.5. Publicity. After the Effective Time, IO shall have the right to make
any press release or other disclosures of this Agreement and the transactions
contemplated hereunder, subject to the prior review and approval of the
Shareholder, such approval not to be unreasonably withheld. The parties will
cooperate and consult with each other regarding public information disclosures
with respect to this Agreement or any of the transactions contemplated hereby.
Neither Avatar nor the Shareholder will make any such public announcement
without the consent of IO.
9.6. Severability; Invalidity. In the event that any one or more of the
provisions contained in this Agreement or in any other instrument referred to
herein, shall, for any reason, be held to be invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provision of this Agreement or any other such instrument.
9.7. Expenses. IO has and will pay the fees, expenses and disbursements
of IO and its agents, representatives, accountants and counsel incurred in
connection with the subject matter of this Agreement. IO shall pay all, sales,
use, transfer, stamp, duties, recording and similar taxes, if any, required to
be paid in connection with the Merger. In the event the Merger is consummated,
IO shall assume and be liable for Avatar's and the Shareholder's legal and
accounting fees and expenses (the "Shareholder's Transaction Expenses") incurred
in connection with the subject matter of this Agreement. The Shareholder, and
not Avatar or IO, shall be liable for any other fees and expenses incurred
herewith. In the event the Merger is not consummated, each party shall be
responsible for its own expenses incurred herewith and IO shall have no
obligation or liability with respect to any fees, expenses or commissions
incurred by Avatar or the Shareholder.
9.8. Time Limit on Claims and Actions. No action, regardless of form,
arising out of any breach or claimed breach of this Agreement by any party may
be brought more than two (2) years after the cause of action has accrued. For
purposes of this Agreement, a cause of action will be deemed to have accrued
when the aggrieved party first knows or reasonably should have known of the
breach or claimed breach.
9.9. Choice of Law; Jurisdiction. This Agreement shall be construed,
interpreted and the rights of the parties determined in accordance with the laws
of the State of Washington. Any disputes arising out of, in connection with or
with respect to this Agreement, the subject matter hereof, the performance or
non-performance of any obligation hereunder, or any of the transactions
contemplated hereby shall be adjudicated in the Superior Court for the State of
Washington, located in King County, Washington. Each of the parties hereto
irrevocably submits to the jurisdiction of such court for the purposes of any
suit, civil action or other proceeding arising out of, in connection with or
with respect to this Agreement, the subject matter hereof, the performance or
non-performance of any obligation hereunder, or any of the transactions
contemplated hereby (collectively, "Suit").
9.10. Entire Agreement; Amendments and Waivers. This Agreement, together
with all exhibits and schedules hereto, constitute the entire agreement among
the parties pertaining to the subject matter hereof and supersede all prior
agreements, understandings, negotiations and discussions, whether oral or
written, of the parties. No supplement, modification or waiver of this
Agreement shall be binding unless
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executed in writing by the party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
[Remainder of Page Intentionally Blank]
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9.11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
EXECUTED as of the day and year first above written.
IO:
INTERACTIVE OBJECTS, INC.
a Washington corporation
By: /s/ Steven G. Wollach
-----------------------
Steven G. Wollach, President
MERGER SUB:
IO ACQUISITION, INC.
a Washington corporation
By: /s/ Steven G. Wollach
-----------------------
Steven G. Wollach, President
AVATAR:
AVATAR INTERACTIVE, INC.,
a Washington corporation
By: /s/ Kayleen Arafiles
----------------------
Kayleen Arafiles, President
SHAREHOLDER:
/s/ Kayleen Arafiles
---------------------
Kayleen Arafiles
Address:
--------------------------------
--------------------------------
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