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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
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CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: MAY 3, 2000
COMMISSION FILE NUMBER 000-26365
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GOTO.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4652060
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
74 NORTH PASADENA AVENUE, 3RD FLOOR
PASADENA, CALIFORNIA 91103
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE: (626) 685-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 3, 2000, GoTo.com, Inc. (GoTo) acquired AuctionRover.com, Inc.
(AuctionRover), an online resource for auctions which gives buyers a simple tool
to search for products and services being auctioned on the Internet. Pursuant to
the Agreement and Plan of Reorganization, GoTo acquired all of the outstanding
shares of capital stock and assumed all outstanding options to acquire shares of
capital stock of AuctionRover for 3,470,588 shares of GoTo common stock,
including 521,408 shares to be issued upon the exercise of options assumed by
GoTo. The purchase price was valued at approximately $174.2 million, which
consisted of GoTo Common Stock of $173.7 million valued at the closing price of
GoTo Common Stock on the date of exchange ratio was set (March 8, 2000), net of
expected proceeds from the exercise of stock options assumed by GoTo and
including acquisition costs of approximately $500,000 for legal and accounting
services. The purchase price was determined by arms-length negotiations between
the parties. Timothy Draper, a director of GoTo, is affiliated with certain
entities, which are principal shareholders of AuctionRover. GoTo intends to
continue to operate AuctionRover's business.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Audited financial information of acquired business.
See exhibit 99.4
(b) Pro forma condensed combined financial information of Registrant.
See exhibit 99.3.
(c) Exhibits:
Exhibit No. Description
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2.1 Agreement and Plan of Reorganization, dated March 8,
2000, by and among GoTo.com, Inc., AuctionRover.com,
Inc., Paw Acquisition Corp., M. Scot Wingo, Aris A.
Buinevicius and as to certain sections, U.S. Bank Trust
National Association. as escrow agent and M. Scot Wingo
as representative of the AuctionRover securityholders.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
99.1 Press release of GoTo.com, Inc., dated March 9, 2000.
99.2 Press release of GoTo.com, Inc., dated May 4, 2000.
99.3 Unaudited Pro Forma Condensed Combined Financial
Information.
99.4 AuctionRover.com, Inc. Financial Statements for 1999.
2
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 5, 2000 GoTo.com, Inc.
By: /s/ TODD TAPPIN
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Todd Tappin
Chief Financial Officer and Secretary
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EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
GOTO.COM, INC.,
PAW ACQUISITION CORP.
AUCTIONROVER.COM, INC.
M. SCOT WINGO
AND
ARIS A. BUINEVICIUS
DATED AS OF MARCH 8, 2000
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TABLE OF CONTENTS
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ARTICLE I THE MERGER...................................................................................2
1.1 The Merger...........................................................................2
1.2 Effective Time.......................................................................2
1.3 Effect of the Merger.................................................................2
1.4 Articles of Incorporation; Bylaws....................................................2
1.5 Directors and Officers...............................................................3
1.6 Merger Consideration.................................................................3
1.7 Dissenting Shares for Holders of Company Capital Stock...............................5
1.8 Surrender of Certificates............................................................6
1.9 Tax Consequences.....................................................................8
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS...............8
2.1 Organization of the Company..........................................................9
2.2 Company Capital Structure............................................................9
2.3 Subsidiaries........................................................................10
2.4 Authority...........................................................................10
2.5 Company Financial Statements........................................................11
2.6 No Undisclosed Liabilities..........................................................11
2.7 No Changes..........................................................................12
2.8 Tax and Other Returns and Reports...................................................13
2.9 Restrictions on Business Activities.................................................15
2.10 Title to Properties; Absence of Liens and Encumbrances..............................16
2.11 Intellectual Property...............................................................16
2.12 Agreements, Contracts and Commitments...............................................19
2.13 Interested Party Transactions.......................................................21
2.14 Litigation..........................................................................21
2.15 Insurance...........................................................................21
2.16 Minute Books........................................................................21
2.17 Environmental Matters...............................................................22
2.18 Brokers' and Finders' Fees; Third Party Expenses....................................22
2.19 Employee Matters and Benefit Plans..................................................23
2.20 Compliance with Laws................................................................26
2.21 Officer Matters.....................................................................26
2.22 Year 2000 Compliance................................................................26
2.23 Warranties; Indemnities.............................................................27
2.24 Complete Copies of Materials........................................................27
2.25 Representations Complete............................................................27
2.26 HSR Representation..................................................................27
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TABLE OF CONTENTS
(CONTINUED)
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ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...................................27
3.1 Organization, Standing and Power....................................................27
3.2 Authority...........................................................................27
3.3 Capital Structure...................................................................28
3.4 SEC Documents; Parent Financial Statements..........................................29
3.5 No Material Adverse Effect..........................................................29
3.6 Litigation..........................................................................29
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME........................................................29
4.1 Conduct of Business of the Company..................................................29
4.2 No Solicitation by the Company......................................................33
ARTICLE V ADDITIONAL AGREEMENTS.......................................................................34
5.1 Fairness Hearing; Shareholder Approval..............................................34
5.2 Nasdaq Listing......................................................................35
5.3 Restrictions on Transfer............................................................35
5.4 Access to Information...............................................................35
5.5 Confidentiality.....................................................................35
5.6 Expenses............................................................................35
5.7 Public Disclosure...................................................................36
5.8 Consents............................................................................36
5.9 FIRPTA Compliance...................................................................36
5.10 Reasonable Efforts..................................................................36
5.11 Notification of Certain Matters.....................................................36
5.12 Affiliate Agreements................................................................37
5.13 Additional Documents and Further Assurances.........................................37
5.14 S-8 Registration....................................................................37
5.15 Termination of 401(k) Plan..........................................................37
5.16 Conversion of Preferred Stock.......................................................37
5.17 Exercise of Warrant.................................................................37
5.18 HSR Act.............................................................................38
5.19 Waiver of Acceleration..............................................................38
5.20 Release of Guaranties...............................................................38
5.21 Disability Insurance................................................................39
ARTICLE VI CONDITIONS TO THE MERGER...................................................................39
6.1 Conditions to Obligations of Each Party to Effect the Merger........................39
6.2 Additional Conditions to Obligations of the Company.................................39
6.3 Additional Conditions to the Obligations of Parent and Merger Sub...................40
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TABLE OF CONTENTS
(CONTINUED)
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ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY; ESCROW.............................42
7.1 Survival of Representations and Warranties..........................................42
7.2 Indemnity...........................................................................42
7.3 Exclusive Remedy....................................................................43
7.4 Escrow Arrangements.................................................................43
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................................................50
8.1 Termination.........................................................................50
8.2 Effect of Termination...............................................................51
8.3 Amendment...........................................................................52
8.4 Extension; Waiver...................................................................52
ARTICLE IX GENERAL PROVISIONS.........................................................................52
9.1 Notices.............................................................................52
9.2 Interpretation......................................................................54
9.3 Counterparts........................................................................54
9.4 Entire Agreement; Assignment........................................................54
9.5 Severability........................................................................54
9.6 Other Remedies......................................................................54
9.7 Governing Law.......................................................................55
9.8 Rules of Construction...............................................................55
9.9 Specific Performance................................................................55
9.10 Attorney's Fees.....................................................................55
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is made and
entered into as of March 8, 2000 among GoTo.com, Inc., a Delaware corporation
("Parent"), Paw Acquisition Corp., a North Carolina corporation and a
wholly-owned subsidiary of Parent ("Merger Sub"), AuctionRover.com, Inc., a
North Carolina corporation (the "Company"), M. Scot Wingo and Aris A.
Buinevicius (collectively, the "Principal Shareholders"), U.S. Bank Trust,
National Association, the undersigned escrow agent (the "Escrow Agent") and M.
Scot Wingo (the "Securityholder Agent") (the Escrow Agent being party with
respect to Article VII hereof only).
RECITALS
A. The Boards of Directors of each of the Company, Parent and Merger Sub
believe it is in the best interests of each company and its respective
shareholders that Parent acquire the Company through the statutory merger of
Merger Sub with and into the Company (the "Merger") and, in furtherance thereof,
have approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the terms and
conditions of this Agreement (i) all of the issued and outstanding capital stock
of the Company will be converted into shares of common stock of Parent and (ii)
all issued and outstanding options, warrants or other rights to acquire or
receive shares of capital stock of the Company shall be assumed by Parent for
common stock of Parent.
C. A portion of the shares of Parent Common Stock otherwise issuable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions,
all as set forth in Article VII hereof.
D. It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code").
E. As a material inducement for Parent to consummate the Merger, certain
key employees of the Company will enter into non-competition agreements
substantially in the form attached hereto as Exhibit A (the "Non-Competition
Agreement") with Parent, each of which shall become effective as of the
Effective Time (as defined herein).
F. Concurrent with the execution and delivery of this Agreement, as a
material inducement to Parent to enter into this Agreement, certain affiliate
shareholders of the Company are executing and delivering shareholder support
agreements (the "Support Agreements"), substantially in the form attached hereto
as Exhibit B, to Parent.
H. The Company, Parent and Merger Sub desire to make certain
representations and warranties and other agreements in connection with the
Merger.
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NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2 hereof)
and subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the North Carolina General Statutes ("North Carolina
Law"), Merger Sub shall be merged with and into Company, the separate corporate
existence of Merger Sub shall cease and Company shall continue as the surviving
corporation. The surviving corporation after the Merger is sometimes referred to
hereinafter as the "Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant to
Section 8.1 hereof, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than two (2) business days following
satisfaction or waiver of the conditions set forth in Article VI hereof, at the
offices of Wilson Sonsini Goodrich & Rosati, Professional Corporation, 650 Page
Mill Road, Palo Alto, California, unless another place or time is agreed to in
writing by Parent and the Company. The date upon which the Closing actually
occurs is herein referred to as the "Closing Date." On the Closing Date, the
parties hereto shall cause the Merger to be consummated by filing Articles of
Merger (or like instrument) (the "Articles of Merger") with the Secretary of
State of the State of North Carolina, in accordance with the relevant provisions
of applicable law (the time of acceptance by the Secretary of State of North
Carolina of such filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of North Carolina Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, except as provided herein, all the property, rights, privileges, powers
and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Articles of Incorporation of the Company shall be
amended and restated as of the Effective Time to conform to the Articles of
Incorporation of Merger Sub as in effect immediately prior to the Effective Time
such amended and restated Articles of Incorporation of the Surviving Corporation
shall remain in effect until thereafter amended in accordance with the North
Carolina Law and as provided in such Articles of Incorporation; provided,
however, that at the Effective Time, Article 1 of such amended and restated
Articles of Incorporation of the Surviving Corporation shall be read as follows:
"The name of the corporation is AuctionRover.com, Inc."
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(b) Unless otherwise determined by Parent prior to the Effective Time,
the Bylaws of the Company shall be amended and restated as of the Effective Time
to conform to the Bylaws of Merger Sub as in effect immediately prior to the
Effective Time and such amended and restated Bylaws of the Surviving Corporation
shall remain in effect, until thereafter amended in accordance with North
Carolina Law and as provided in the Articles of Incorporation of the Surviving
Corporation and such Bylaws.
1.5 Directors and Officers. Unless otherwise determined by Parent prior to
the Effective Time, the directors of Merger Sub immediately prior to the
Effective Time shall become the directors of the Surviving Corporation at the
Effective Time, each to hold the office of a director of the Surviving
Corporation in accordance with the provisions of North Carolina Law and the
Articles of Incorporation and Bylaws of the Surviving Corporation until their
successors are duly elected and qualified. The officers of Merger Sub
immediately prior to the Effective Time shall become the officers of the
Surviving Corporation at the Effective Time, each to hold office in accordance
with the provisions of the Bylaws of the Surviving Corporation.
1.6 Merger Consideration.
(a) Certain Definitions. For purposes of this Agreement, the following
terms shall have the following meanings:
"Aggregate Share Number" shall mean 3,470,588 shares of Parent Common
Stock.
"Company Capital Stock" shall mean shares of Company Common Stock,
Company Preferred Stock and any shares of other capital stock of Company.
"Company Common Stock" shall mean shares of common stock of Company.
"Company Convertible Securities" shall mean the Company Options and
other rights (other than Company Preferred Stock) to acquire or receive shares
of Company Capital Stock.
"Company Options" shall mean all issued and outstanding options to
purchase or otherwise acquire Company Capital Stock (whether or not vested) held
by employees or directors of or consultants to Company (other than Company
Preferred Stock).
"Company Preferred Stock" shall mean shares of Company Series A
Preferred Stock.
"Company Series A Preferred Stock" shall mean shares of Series A
Preferred Stock of Company.
"Company Shareholders" shall mean holders of any shares of Company
Capital Stock immediately prior to the Effective Time.
"Escrow Amount" shall mean 520,588 shares of Parent Common Stock.
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"Exchange Ratio" shall mean (x) a number of shares of Parent Common
Stock equal to the quotient obtained by dividing (i) the Aggregate Share Number
by (ii) the Total Outstanding Shares (with the result rounded to four decimal
places).
"Knowledge" shall mean, with respect to Company or Parent, what is
within the actual knowledge, after due inquiry, of any of the officers of
Company or Parent, as the case may be, and, in the case of the Company only, the
Principal Shareholders.
"Total Outstanding Shares" shall mean the aggregate number of shares
of Company Common Stock outstanding immediately prior to the Effective Time,
including Company Common Stock issuable upon the exercise of Company Options
plus the aggregate number of shares of Company Common Stock issuable, with or
without the passage of time or satisfaction of other conditions, upon exercise
of or conversion of all Company Convertible Securities and Company Preferred
Stock outstanding immediately prior to the Effective Time.
(b) Shares to be Issued; Effect on Capital Stock. The maximum number
of shares of Parent Common Stock issued (including Parent Common Stock to be
reserved for issuance upon exercise of any of the Company Convertible Securities
to be assumed by Parent) in exchange for the acquisition by Parent of all
outstanding Company Capital Stock and all unexpired and unexercised Company
Convertible Securities shall be equal to the Aggregate Share Number. Subject to
the terms and conditions of this Agreement, as of the Effective Time, by virtue
of the Merger and without any action on the part of Merger Sub, the Company or
the holder of any shares of the Company Capital Stock or Company Convertible
Securities, the following shall occur:
(i) Effect on Company Capital Stock. At the Effective Time, by
virtue of the Merger and without any action on the part of Company or the
Company Shareholders, each share of Company Capital Stock issued and outstanding
immediately prior to the Effective Time (other than any Dissenting Shares, as
defined in Section 1.7 hereof and any shares owned by Parent, Merger Sub or
Company or any direct or indirect wholly-owned subsidiary thereof) shall be
canceled and extinguished and shall be converted automatically into the right to
receive, upon surrender of the certificate representing such share of Company
Capital Stock and upon the terms and subject to conditions set forth below and
throughout this Agreement, a number of shares of Parent Common Stock equal to
the Exchange Ratio (the "Merger Consideration").
(ii) Assumption of Company Convertible Securities. As soon as
practicable following the Closing but effective as of the Effective Time, each
outstanding Company Option, collectively, issued pursuant to Company's 1999
Stock Award Plan and 1999 Executive Stock Award Plan (collectively, the "Option
Plans") or otherwise and each other Company Convertible Security, in each case
whether vested or unvested, will be assumed by Parent in connection with the
Merger. Each Company Convertible Security so assumed by Parent under this
Agreement shall continue to have, and be subject to, the same terms and
conditions set forth in the Option Plan and/or as provided in the respective
option or similar agreement immediately prior to the Effective Time (including,
without limitation, any vesting schedule or repurchase rights), except that (i)
each Company Convertible Security will be exercisable for that number of whole
shares of
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Parent Common Stock equal to the product of the number of shares of Company
Common Stock that were issuable upon exercise of such Company Convertible
Security immediately prior to the Effective Time multiplied by the Exchange
Ratio, rounded down to the nearest whole number of shares of Parent Common Stock
and (ii) the per share exercise price for the shares of Parent Common Stock
issuable upon exercise of such assumed Company Convertible Security will be
equal to the quotient determined by dividing the exercise price per share of
Company Capital Stock at which such Company Convertible Security was exercisable
immediately prior to the Effective Time by the Exchange Ratio, rounded up to the
nearest whole cent.
(iii) Option Status. It is the intention of the parties hereto
that the Company Options assumed by Parent following the Closing pursuant to
this Section 1.6 will, to the extent permitted by applicable law, qualify as
incentive stock options as defined in Section 422 of the Code, to the extent any
such Company Options qualified as incentive stock options immediately prior to
the Effective Time.
(iv) Fractional Shares. No fractional share of Parent Common
Stock shall be issued in the Merger. In lieu thereof, any fractional share shall
be rounded to the nearest whole share of Parent Common Stock (with .5 being
rounded up).
(v) Cancellation of Parent-Owned and Company-Owned Stock. At the
Effective Time, by virtue of the Merger and without any action on the part of
any of the parties hereto, each share of Company Capital Stock owned by Parent,
Merger Sub, Company or any direct or indirect wholly-owned subsidiary thereof
immediately prior to the Effective Time, shall be cancelled and extinguished
without any conversion thereof.
(vi) Capital Stock of Merger Sub. At the Effective Time, by
virtue of the Merger and without any action on the part of any of the parties
hereto, each share of capital stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall be converted into and exchanged
for one validly issued, fully paid and nonassessable share of common stock of
the Surviving Corporation. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of such shares
of capital stock of the Surviving Corporation.
1.7 Dissenting Shares for Holders of Company Capital Stock.
(a) Notwithstanding any provision of this Agreement to the contrary,
any shares of Company Capital Stock held by a holder (i) who has not voted in
favor of the Merger, (ii) from whom the Company shall have received, before the
vote is taken at the Company shareholders' meeting to adopt this Agreement,
written notice of such holder's intent to demand payment for such holder's
shares of Company Capital Stock, in accordance with Article 13 of Chapter 55 of
the North Carolina Law if the Merger is effectuated, and (iii) who has preserved
such holder's right to receive payment for such shares by taking those actions
required by such Article 13 within the time periods stipulated therein
(collectively, the "Dissenting Shares") shall not be converted into or represent
the
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right to receive the Merger Consideration. Such shareholders shall be entitled
to receive the amounts determined in accordance with the provisions of such
Article 13.
(b) Notwithstanding the provisions of subsection (a), if any holder of
shares of Company Capital Stock who demands appraisal of such shares under North
Carolina Law shall effectively withdraw or lose (through failure to perfect or
otherwise) the right to appraisal, then, as of the later of the Effective Time
and the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Parent Common Stock as
provided in Section 1.6 (and subject to the provisions of Section 7.4 hereof),
without interest thereon, upon surrender of the certificate representing such
shares.
(c) Company shall give Parent (i) prompt notice of any written demands
for appraisal of any shares of Company Capital Stock, withdrawals of such
demands, and any other instruments served pursuant to North Carolina Law and
received by Company and (ii) the opportunity to participate in all negotiations
and proceedings with respect to demands for appraisal under North Carolina Law.
Company shall not, except with the prior written consent of Parent, voluntarily
make any payment with respect to any demands for appraisal of capital stock of
Company or offer to settle or settle any such demands. Notwithstanding anything
to the contrary contained herein, Parent shall have full recourse to the Escrow
Fund (as defined in Section 7.4(a)) for the amount, if any, paid by Company or
Parent in respect of Dissenting Shares.
1.8 Surrender of Certificates.
(a) Exchange Agent. The transfer agent of Parent (or another entity
reasonably acceptable to Parent and the Company) shall serve as exchange agent
(the "Exchange Agent") in the Merger.
(b) Parent to Provide Parent Common Stock. Prior to the Closing,
Parent shall make available to the Exchange Agent for exchange in accordance
with this Article I the shares of Parent Common Stock issuable to Company
Shareholders pursuant to Section 1.6 hereof in exchange for outstanding shares
of Company Capital Stock, less the Escrow Amount which Parent shall deposit into
the Escrow Fund (as defined in Section 7.4(a) hereof) on behalf of the Company
Shareholders. The portion of the Escrow Amount contributed on behalf of each
Company Shareholder shall be in proportion to the aggregate number of shares of
Parent Common Stock each such Company Shareholder would otherwise be entitled to
receive in the Merger (excluding any shares of Parent Common Stock issuable upon
exercise of any assumed Company Convertible Securities) by virtue of ownership
of outstanding shares of Company Capital Stock immediately prior to the
Effective Time and, in the case of the shares of Parent Common Stock contributed
to the Escrow Amount by the Principal Shareholders, one-third (1/3) of the
shares of Parent Common Stock so contributed by the Principal Shareholders shall
be "Vested Shares" as defined in the repurchase agreement between such Principal
Shareholder and the Company (the "Repurchase Agreement") and the remainder of
the shares so contributed shall be "Unvested Shares" (as defined in such
Repurchase Agreement) which vest on May 31, 2001.
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(c) Exchange Procedures. Prior to the Closing, Parent shall cause to
be delivered to each Company Shareholder (i) a letter of transmittal (which
shall be in such form and contain such provisions as Parent may reasonably
specify and shall specify that delivery shall be effected, and risk of loss and
title to the certificates (the "Certificates") which immediately prior to the
Effective Time represent outstanding shares of Company Capital Stock whose
shares are converted into the right to receive such Company Shareholder's pro
rata portion of the Merger Consideration pursuant to Section 1.6 hereof, shall
pass, only upon delivery of the Certificates to the Exchange Agent) and (ii)
instructions for use in effecting the surrender following the Closing of the
Certificates in exchange for certificates representing such Company
Shareholder's pro rata portion of the Merger Consideration. Upon surrender of a
Certificate at the Closing for cancellation to the Exchange Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly completed and validly executed in accordance with the
instructions thereto, the Company Shareholder shall be entitled to receive, and
the Exchange Agent shall promptly deliver in exchange therefor, a certificate
representing the number of whole shares of Parent Common Stock (less the number
of shares of Parent Common Stock to be deposited in the Escrow Fund on such
holder's behalf pursuant to Section 1.8(b) and Article VII hereof) to which such
holder is entitled pursuant to Section 1.6 hereof, and the Certificate so
surrendered shall forthwith be canceled. As soon as practicable after the
Effective Time, and subject to and in accordance with the provisions of Article
VII hereof, Parent shall cause to be distributed to the Escrow Agent (as defined
in Article VII hereof) a certificate or certificates representing that number of
shares of Parent Common Stock equal to the Escrow Amount which shall be
registered in the name of the Escrow Agent. Such shares shall be beneficially
owned by the holders on whose behalf such shares were deposited in the Escrow
Fund and shall be available to compensate Parent as provided in Article VII
hereof. Until so surrendered, each outstanding Certificate that, prior to the
Effective Time, represented shares of Company Capital Stock will be deemed from
and after the Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full shares of Parent
Common Stock into which such shares of Company Capital Stock shall have been so
converted.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock in exchange
therefor, plus the amount of dividends or other distributions (without interest)
with a record date after the Effective Time theretofore paid with respect to
such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the Certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the Certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
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exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than that of the registered holder of the
Certificate surrendered.
(f) Lost, Stolen or Destroyed Certificates. In the event any
Certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the delivery by the holder thereof of an
affidavit of that fact by the holder thereof containing customary
indemnification provisions; provided, however, Parent may, in its discretion and
as a condition precedent to the issuance thereof, require the Company
Shareholder who is the owner of such lost, stolen or destroyed certificate to
deliver a bond in such amount as Parent may reasonably direct against any claim
that may be made against Parent, the Surviving Corporation or the Exchange Agent
with respect to the certainties alleged to have been lost, stolen or destroyed.
(g) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, neither Parent nor any party hereto shall be liable to a holder of
shares of Parent Common Stock or Company Capital Stock for any amount properly
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
(h) No Further Ownership Rights in Company Capital Stock. The shares
of Parent Common Stock issued in accordance with the terms hereof shall be
deemed to be full satisfaction of all rights pertaining to shares of Company
Capital Stock outstanding prior to the Effective Time, and there shall be no
further registration of transfers on the records of the Surviving Corporation of
shares of Company Capital Stock that were outstanding prior to the Effective
Time. If, after the Effective Time, Certificates are presented to Parent or the
Surviving Corporation for any reason, they shall be canceled and exchanged as
provided in this Article I.
(i) Taking of Necessary Action; Further Action. If, at any time after
the Effective Time, any further action is necessary or desirable to carry out
the purposes of this Agreement and to vest Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of Company, Parent and Merger Sub, the officers and directors of
Company, Parent and Merger Sub are fully authorized in the name of their
respective corporations or otherwise to take, and will take, all such lawful and
necessary action.
1.9 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.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
As of the date hereof and as of the Closing Date, the Company and each of
the Principal Shareholders, jointly and severally, represents and warrants to
Parent and Merger Sub, subject to
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such exceptions as are specifically disclosed in the disclosure letter
(referencing the appropriate section number) supplied by the Company to Parent
(the "Company Disclosure Letter") and dated as of the date hereof, as follows:
2.1 Organization of the Company. The Company is a corporation duly
organized and validly existing under the laws of the State of North Carolina.
The Company has the corporate power to own its properties and to carry on its
business as now being conducted and as proposed to be conducted. The Company is
duly qualified to do business and in good standing as a foreign corporation in
each jurisdiction in which it conducts its business. The Company has delivered a
true and correct copy of its Articles of Incorporation and Bylaws, each as
amended to date and in full force and effect on the date hereof, to Parent. Part
2.1 of the Company Disclosure Letter lists the directors and officers of the
Company. The operations now being conducted by the Company are not now and have
never been conducted by the Company under any other name.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 75,000,000
shares of authorized Common Stock, of which 14,200,000 shares are issued and
outstanding as of the date hereof, and 25,000,000 shares of authorized Preferred
Stock, 6,025,000 of which are designated Series A Preferred Stock, 5,900,000 of
which Series A Preferred Stock shares are issued and outstanding as of the date
hereof. Except for grants of stock options permitted under Section 4.1(h) hereof
and stock or options issued with the written consent of Parent between the date
hereof and the Effective Time, the total number of shares of Company Common
Stock outstanding as of immediately prior to the Effective Time (assuming the
conversion, exercise or exchange of all securities convertible into, or
exercisable or exchangeable for, shares of Company Common Stock, and the
exercise of all Company Options) will be as set forth in Part 2.2(a) of the
Company Disclosure Letter. Except for exercises of warrants set forth on the
Company Disclosure Letter between the date hereof and the Effective Time, the
Company Capital Stock is held of record by the persons, with the addresses of
record and in the amounts set forth on Part 2.2(a) of the Company Disclosure
Letter. All outstanding shares of Company Capital Stock are duly authorized,
validly issued, fully paid and non-assessable and not subject to preemptive
rights created by statute, the Articles of Incorporation or Bylaws of the
Company or any agreement to which the Company is a party or by which it is
bound, and have been issued in compliance with federal and state securities
laws. There are no declared or accrued but unpaid dividends with respect to any
shares of Company Common Stock. As of the date hereof, the Company has no other
capital stock authorized, issued or outstanding. Each share of Company Series A
Preferred Stock converts into one share of Company Common Stock.
(b) Except for the Option Plans, the Company has never adopted or
maintained any stock option plan or other plan providing for equity compensation
of any person. The Company has reserved an aggregate of 4,385,000 shares of
Common Stock for issuance to employees, directors and consultants upon the
exercise of Company Options pursuant to the Option Plans, of which (i) 3,874,500
shares are issuable, as of the date hereof, upon the exercise of outstanding,
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unexercised Company Options granted under the Option Plans and (ii) 510,500
shares remain available for future grant as of the date hereof. The Company has
reserved a sufficient number of shares of Common Stock for issuance upon
exercise of outstanding Company Convertible Securities granted outside the
Option Plans. Part 2.2(b) of the Company Disclosure Letter sets forth for each
outstanding Company Convertible Security, the name of the holder of such Company
Convertible Security, the domicile address of such holder, the number of shares
of Common Stock subject to such Convertible Security, the exercise price of such
Convertible Security and the vesting schedule for such Convertible Security,
including the extent vested to date and whether the vesting exercisability of
such Convertible Security will be accelerated and become exercisable by reason
of the transactions contemplated by this Agreement and whether such Convertible
Security is intended to qualify as an incentive stock option as defined in
Section 422 of the Code, each as of the date hereof. Except for grants of stock
options permitted under Section 4.1(h) hereof and issuances with the written
consent of Parent between the date hereof and the Effective Time, there are no
options, warrants, calls, rights, commitments or agreements of any character,
written or oral, to which the Company is a party or by which it is bound
obligating the Company to issue, deliver, sell, repurchase or redeem, or cause
to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company or obligating the Company to grant, extend,
accelerate the vesting of, change the price of, otherwise amend or enter into
any such option, warrant, call, right, commitment or agreement. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or other similar rights with respect to the Company. Except as
contemplated hereby, there are no voting trusts, proxies, or other agreements or
understandings with respect to the voting stock of the Company. The holders of
Company Convertible Securities have been or will be given, or shall have
properly waived, any required notice prior to the Merger. As a result of the
Merger, Parent will be the record and sole beneficial owner of all capital stock
of the Company and rights to acquire or receive such capital stock.
2.3 Subsidiaries. The Company does not have and has never had any
subsidiaries or affiliated companies and does not otherwise own and has never
otherwise owned any shares of capital stock or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Subject only to the requisite approval of the Merger and
this Agreement by the Company's shareholders, the Company has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The vote required of the Company's
shareholders to duly approve the Merger and this Agreement is a majority of
shares of Company Series A Preferred Stock and a majority of shares of Company
Common Stock (collectively, the "Required Shares"). Company Shareholders who in
the aggregate hold the Required Shares have executed Support Agreements. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of the Company, subject only to the approval of the
Merger by the Company Shareholders. The Company's Board of Directors has
unanimously approved the Merger and this Agreement. This Agreement has been duly
executed and delivered by the Company and constitutes the valid and binding
obligation of the Company, enforceable
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in accordance with its terms. Subject only to the approval of the Merger and
this Agreement by the Company Shareholders, the execution and delivery of this
Agreement by the Company does not, and, as of the Effective Time, the
consummation of the transactions contemplated hereby will not, conflict with, or
result in any violation of, or default under (with or without notice or lapse of
time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under (any such event, a
"Conflict") (i) any provision of the Articles of Incorporation or Bylaws of the
Company or (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise, license, judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Company or its
properties or assets. No consent, waiver, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party (so as not to trigger any Conflict) is required by or with respect
to the Company in connection with the execution and delivery of this Agreement
or the consummation of the transactions contemplated hereby, except for (i) the
filing of the Articles of Merger with the North Carolina Secretary of State,
(ii) termination of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended ("HSR Act"), and (ii) such
consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as may be required under applicable federal and state
securities laws.
2.5 Company Financial Statements. Part 2.5 of the Company Disclosure Letter
sets forth the Company's audited balance sheet as of December 31, 1999 (the
"Balance Sheet") and the related audited statements of operations and cash flows
from inception (June 9, 1999) to December 31, 1999 (collectively, the "Company
Financials"). The Company Financials are correct in all material respects and
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a basis consistent throughout the periods indicated and
consistent with each other. The Company Financials present fairly the financial
condition and operating results of the Company as of the dates and during the
periods indicated therein. At no time has the Company factored its accounts
receivable or otherwise sold or transferred the right to collect any of its
accounts receivable. In addition, at no time has the Company, or any assets of
the Company, been placed in receivership or otherwise been subject to any
bankruptcy, insolvency or liquidation proceeding.
2.6 No Undisclosed Liabilities. The Company does not have any liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements in accordance
with GAAP), which individually or in the aggregate, (i) has not been reflected
in the Balance Sheet, or (ii) has not arisen (x) in the ordinary course of the
Company's business since the date of the Balance Sheet, consistent with past
practices or (y) permitted in accordance with Section 4.1 hereof, which in each
case, is not material to the business, results of operations or financial
condition of the Company.
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2.7 No Changes. Except as set forth in Part 2.7 of the Company Disclosure
Letter, since the date of the Balance Sheet and until the date hereof, there has
not been, occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business as conducted on the date of the Balance Sheet and consistent with past
practices;
(b) amendments or changes to the Articles of Incorporation or Bylaws
of the Company;
(c) payment, discharge or satisfaction, in any amount in excess of
$25,000 in any one case, or $50,000 in the aggregate, of any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than payment, discharge or satisfaction in the ordinary course of business
of liabilities reflected or reserved against on the Balance Sheet;
(d) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $25,000;
(e)destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance);
(f) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(g) event or condition that has had or would be reasonably expected to
have a Material Adverse Effect (as defined in Section 9.2 hereof) on the
Company;
(h) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(i) revaluation by the Company of any of its assets;
(j) declaration, setting aside or payment of a dividend or other
distribution with respect to the capital stock of the Company, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of (i)
its capital stock or (ii) options, warrants or rights convertible into,
exercisable or exchangeable for its capital stock;
(k) increase in the salary or other compensation payable or to become
payable to any of its officers or directors, or the declaration, payment or
commitment or obligation of any kind for the payment of a bonus or other
additional salary or compensation to any such person except as otherwise
contemplated by this Agreement;
(l) sale, lease, license or other disposition of any of the assets or
properties of the Company, except in the ordinary course of business as
conducted on that date and consistent with past practices;
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(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, in each case for borrowed money (including leases and
capitalized leases), except for advances to employees for travel and business
expenses in the ordinary course of business, consistent with past practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company;
(o) change in pricing or royalties set or charged by the Company to
its customers or licensees or in pricing or royalties set or charged by persons
who have licensed Intellectual Property (as defined in Section 2.11) to the
Company;
(p) issuance, sale, or contract to issue or sell, by the Company of
any shares of Company capital stock or securities convertible into, or
exercisable or exchangeable for, shares of Company capital stock, or any
securities, warrants, options or rights to purchase any of the foregoing; except
for issuances of Company Common Stock upon the exercise thereof;
(q) change in any election in respect of Taxes (as defined in Section
2.8 hereof), adoption or change in any accounting method in respect of Taxes,
agreement or settlement of any claim or assessment in respect of Taxes, or
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes; or
(r) negotiation or agreement by the Company or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
through (q) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.8 Tax and Other Returns and Reports.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax" or,
collectively, "Taxes," means (i) any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions and
liabilities, including taxes based upon or measured by gross receipts, income,
profits, sales, use and occupation, and value added, ad valorem, transfer,
franchise, withholding, payroll, recapture, employment, excise and property
taxes, together with all interest, penalties and additions imposed with respect
to such amounts, (ii) any liability for the payment of any amounts of the type
described in clause (i) of this Section 2.8(a) as a result of being a member of
an affiliated, consolidated, combined or unitary group for any period, and (iii)
any liability for the payment of any amounts of the type described in clauses
(i) or (ii) of this Section 2.8(a) as a result of any express or implied
obligation to indemnify any other person or as a result of any obligations under
any agreements or arrangements with any other person with respect to such
amounts and including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
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(i) The Company as of the Effective Time will have prepared and
filed all required federal, state, local and foreign returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
concerning or attributable to the Company, its operations or the Merger that are
required to be filed by the Effective Time and such Returns are true and correct
and have been completed in accordance with applicable law.
(ii) The Company as of the Effective Time: (A) will have paid or
accrued all Taxes it is required to pay or accrue attributable to events
occurring prior to the Effective Time and (B) will have reported and withheld
with respect to its employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be reported and withheld attributable to events
occurring prior to the Effective Time.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, proposed or assessed against
the Company attributable to events occurring prior to the Effective Time, nor
has the Company executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax attributable to
events occurring prior to the Effective Time.
(iv) No audit or other examination of any Return of the Company
is currently in progress, nor has the Company been notified of any request for
such an audit or other examination.
(v) The accrual for Taxes on the Balance Sheet is an amount at
least equal to the sum of the Company's liability for Taxes (other than Taxes
previously paid over to the appropriate taxing authority) for all Tax periods
(and portions thereof) ending on or before the date of the Balance Sheet plus
its deferred Tax liability. Since the date of the Balance Sheet, the Company has
not incurred any liability for Taxes other than in the ordinary course of
business.
(vi) The Company has provided to Parent copies of all foreign,
federal, state and local income and all state and local sales and use Tax
Returns for all periods since the date of Company's incorporation.
(vii) There are (and as of immediately following the Effective
Date there will be) no liens, pledges, charges, claims, security interests or
other encumbrances of any sort ("Liens") on the assets of the Company relating
to or attributable to Taxes, except for (i) Liens for Taxes not yet at the time
delinquent, (ii) Liens thereafter payable without penalty, or (iii) liens being
contested in good faith by appropriate proceedings and supported by appropriate
reserves on the Balance Sheet.
(viii) The Company has no Knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company.
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(ix) None of the Company's assets are treated as "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
(x) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to Sections 280G, 404 or 162 of the Code.
(xi) The Company has not filed any consent agreement under
Section 341(f) of the Code or agreed to have Section 341(f)(2) of the Code apply
to any disposition of a subsection (f) asset (as defined in Section 341(f)(4) of
the Code) owned by the Company.
(xii) The Company is not a party to a tax sharing or allocation
agreement nor does the Company owe any amount under any such agreement.
(xiii) The Company is not, and has not been at any time, a
"United States real property holding corporation" within the meaning of Section
897(c)(2) of the Code.
(xiv) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income tax
deductions is accurately reflected on the Company's tax books and records.
(xv) No adjustment relating to any Return filed by the Company
has been proposed formally or, to the Knowledge of the Company, informally by
any tax authority to the Company or any representative thereof.
(xvi) Neither the Company nor any of its subsidiaries has
constituted either a "distributing corporation" or a "controlled corporation" in
a distribution of stock qualifying for tax-free treatment under Section 355 of
the Code (i) in the two years prior to the date of this Agreement or (ii) in a
distribution which could otherwise constitute part of a "plan" or "series of
related transactions" (within the meaning of Section 355(e) of the Code) in
conjunction with the Merger.
2.9 Restrictions on Business Activities. There is no agreement (noncompete
or otherwise), commitment, judgment, injunction, order or decree to which the
Company is a party or otherwise binding upon the Company which has or reasonably
would be expected to have the effect of prohibiting or impairing any business
practice of the Company, any acquisition of property (tangible or intangible) by
the Company or the conduct of business by the Company. Without limiting the
foregoing, the Company has not entered into any agreement under which the
Company is restricted from selling, licensing or otherwise distributing any of
its technology or products to or providing services, to any class of customers
or potential customers, in any geographic area, during any period of time or in
any segment of the market.
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2.10 Title to Properties; Absence of Liens and Encumbrances.
(a) The Company owns no real property, nor has it ever owned any real
property. Part 2.10(a) of the Company Disclosure Letter sets forth a list of all
real property currently, or at any time in the past, leased by the Company, the
name of the lessor, the date of the lease and each amendment thereto and, with
respect to any current lease, the aggregate annual rental and/or other fees
payable under any such lease. All such current leases are in full force and
effect, are valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any existing default or event of default
(or event which with notice or lapse of time, or both, would constitute a
default).
(b) The Company has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens (as defined in Section 2.8(b)(vii)),
except as reflected in the Company Financials and except for (i) Liens for taxes
not at the time delinquent or thereafter payable without penalty; (ii) Liens
being contested in good faith by appropriate proceedings and supported by
adequate reserves on the Balance Sheet, and (iii) such imperfections of title
and encumbrances, if any, which are not material in character, amount or extent,
and which do not materially detract from the value, or materially interfere with
the present use, of the property subject thereto or affected thereby.
2.11 Intellectual Property.
For the purposes of this Agreement, the following terms have the following
definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith: (i) all United
States, international and foreign patents and applications therefor
and all reissues, divisions, renewals, extensions, provisionals,
continuations and continuations-in-part thereof; (ii) all inventions
(whether patentable or not), invention disclosures, improvements,
trade secrets, proprietary information, know how, technology,
technical data and customer lists, and all documentation relating to
any of the foregoing; (iii) all copyrights, copyrights registrations
and applications therefor, and all other rights corresponding thereto
throughout the world; (iv) all industrial designs and any
registrations and applications therefor throughout the world; (v) all
trade names, logos, URLs, common law trademarks and service marks,
trademark and service mark registrations and applications therefor
throughout the world; (vi) all databases and data collections and all
rights therein throughout the world; (vii) all moral and economic
rights of authors and inventors, however denominated, throughout the
world and (viii) any similar or equivalent rights to any of the
foregoing anywhere in the world.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, the Company.
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"Registered Intellectual Property" means all United States,
international and foreign: (i) patents and patent applications
(including provisional applications); (ii) registered trademarks,
applications to register trademarks, intent-to-use applications, or
other registrations or applications related to trademarks; (iii)
registered copyrights and applications for copyright registration; and
(iv) any other Intellectual Property that is the subject of an
application, certificate, filing, registration or other document
issued, filed with, or recorded by any state, government or other
public legal authority.
"Company Registered Intellectual Property" means all of the Registered
Intellectual Property owned by, or filed in the name of, the Company.
(a) No Company Intellectual Property or product or service of the
Company is subject to any proceeding or outstanding decree, order, judgment,
agreement or stipulation restricting in any manner the use, transfer, or
licensing thereof by the Company, or which may affect the validity, use or
enforceability of such Company Intellectual Property.
(b) Part 2.11(b) of the Company Disclosure Letter is a complete and
accurate list of all Company Registered Intellectual Property as of the date
hereof and specifies, where applicable, the jurisdictions in which each such
item of Company Registered Intellectual Property has been issued or registered
or in which an application for such issuance and registration has been filed,
including the respective registration or application numbers. Each item of
Company Registered Intellectual Property is valid and subsisting, all necessary
registration, maintenance and renewal fees currently due in connection with such
Registered Intellectual Property have been made and all necessary documents,
recordations and certificates in connection with such Registered Intellectual
Property have been filed with the relevant patent, copyright, trademark or other
authorities in the United States or foreign jurisdictions, as the case may be,
for the purposes of maintaining such Registered Intellectual Property.
(c) The Company owns and has good and exclusive title to, or has
license (sufficient for the conduct of its business as currently conducted and
as currently proposed to be conducted) to, each item of Company Intellectual
Property or other Intellectual Property used by the Company free and clear of
any lien or encumbrance (excluding licenses and related restrictions); and the
Company is the exclusive owner of all trademarks and trade names used in
connection with the operation or conduct of the business of the Company,
including the sale of any products or the provision of any services by the
Company.
(d) The Company owns exclusively, and has good title to, all
copyrighted works that are included within the Company products or which the
Company otherwise expressly purports to own. The Company owns exclusively, and
has good title to, all source-code and object-code used in or incorporated in
the Company's products or services.
(e) To the extent that any Intellectual Property has been developed or
created by a third party for the Company, the Company has a written agreement
with such third party with respect thereto and the Company thereby either (i)
has obtained ownership of, and is the exclusive
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owner of or (ii) has obtained a license (sufficient for the conduct of its
business as currently conducted and as currently proposed to be conducted) to
all such third party's Intellectual Property in such work, material or invention
by operation of law or by valid assignment, to the fullest extent it is legally
possible to do so.
(f) The Company has not transferred ownership of, or granted any
exclusive license with respect to, any Intellectual Property that is or was
material to the Company Intellectual Property, to any third party.
(g) Part 2.11(g) of the Company Disclosure Letter list all material
contracts, licenses and agreements to which the Company is a party as of the
date hereof (i) with respect to the Company Intellectual Property licensed or
transferred to any third party (other than end-user licenses in the ordinary
course); or (ii) pursuant to which a third party has licensed or transferred any
material Intellectual Property to the Company.
(h) All contracts, licenses and agreements relating to Company
Intellectual Property are in full force and effect. The consummation of the
transactions contemplated by this Agreement will neither violate nor result in
the breach, modification, cancellation, termination or suspension of such
contracts, licenses and agreements. The Company is in compliance with, and has
not breached any term any of such contracts, licenses and agreements and, to the
Knowledge of the Company, all other parties to such contracts, licenses and
agreements are in compliance with, and have not breached any term of, such
contracts, licenses and agreements. Following the Closing Date, the Surviving
Corporation will be permitted to exercise all of the Company's rights under such
contracts, licenses and agreements to the same extent the Company would have
been able to had the transactions contemplated by this Agreement not occurred.
(i) Neither this Agreement nor the transactions contemplated hereby,
including the assignment to Parent by operation of law or otherwise of any such
contracts, licenses and agreements of the Company will result in: (i) Parent,
Merger Sub, the Company or the Principal Shareholders granting to any third
party any right to or with respect to any Intellectual Property owned by, or
licensed to, any of them, (ii) Parent, Merger Sub, the Company or the Principal
Shareholders being bound by, or subject to, any non-compete or other material
restriction on the operation or scope of their respective businesses or conduct
in the case of the Principal Shareholders, or (iii) Parent, Merger Sub, the
Company or the Principal Shareholders being obligated to pay any royalties or
other material amounts to any third party in excess of those payable by any of
them, respectively, in the absence of this Agreement or the transactions
contemplated hereby.
(j) The Company is not engaged in any of the businesses described in
Part 2.11(j) of the Company Disclosure Letter.
(k) The operation of the business of the Company as such business
currently is conducted, including the Company's design, development,
manufacture, marketing and sale of the products or services of the Company
(including with respect to products and services currently under
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<PAGE> 23
development) has not, does not and will not infringe or misappropriate the
Intellectual Property of any third party or constitute unfair competition or
trade practices under the laws of any jurisdiction.
(l) The Company has not received notice from any third party that the
operation of the business of the Company or any act, product or service of the
Company, infringes or misappropriates the Intellectual Property of any third
party or constitutes unfair competition or trade practices under the laws of any
jurisdiction.
(m) To the Knowledge of the Company, no person has or is infringing or
misappropriating, in any respect materially adverse to the Company, any Company
Intellectual Property.
(n) The Company has taken reasonable steps to protect the Company's
rights in the Company's confidential information and trade secrets that it
wishes to protect or any trade secrets or confidential information of third
parties provided to the Company, and, without limiting the foregoing, the
Company has and enforces a policy requiring each employee and contractor to
execute a proprietary information/confidentiality and invention assignment
agreement and all current and former employees and contractors of the Company
have executed such an agreement, except where the failure to do so is not
reasonably expected to be material to the Company.
2.12 Agreements, Contracts and Commitments.
(a) As of the date hereof, the Company does not have, is not a party
to nor is it bound by:
(i) any collective bargaining agreements,
(ii) any agreements or arrangements that contain any severance
pay or post-employment liabilities or obligations,
(iii) any bonus, deferred compensation, pension, profit sharing
or retirement plans, or any other employee benefit plans or arrangements,
(iv) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or any
consulting or sales agreement, contract or commitment under which any firm or
other organization provides services to the Company,
(v) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement,
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(vi) any fidelity or surety bond or completion bond,
(vii) any lease of personal or real property having a value
individually in excess of $15,000,
(viii) any agreement of indemnification or guaranty,
(ix) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person,
(x) any agreement, contract or commitment relating to capital
expenditures or involving future payments in excess of $25,000,
(xi) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business,
(xii) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit, including guaranties referred to in clause
(viii) hereof,
(xiii) any purchase order or contract for the purchase of raw
materials involving $25,000 or more,
(xiv) any construction contracts,
(xv) any sales representative, original equipment manufacturer,
value added, remarketer, reseller or independent software vendor or other
agreement for use of distribution of the Company's products, technologies or
services;
(xvi) any distribution, joint marketing or development agreement,
(xvii) any agreement pursuant to which the Company has granted or
may grant in the future, to any party, a source-code license or option or other
right to use or acquire source-code,
(xviii) any agreement pursuant to which the Company has developed
and/or delivered or has received funds from any Governmental Entity to develop
and/or deliver any Intellectual Property, or
(xix) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
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<PAGE> 25
(b) The Company has not breached, violated or defaulted under, or
received notice that it has breached, violated or defaulted under, any of the
terms or conditions of any agreement, contract or commitment required to be set
forth on Part 2.12(a) of the Company Disclosure Letter or Part 2.11(g) of the
Company Disclosure Letter (any such agreement, contract or commitment, a
"Contract"). Each Contract is in full force and effect and is not subject to any
default thereunder of which the Company has Knowledge by any party obligated to
the Company pursuant thereto.
2.13 Interested Party Transactions. No officer, director or shareholder of
the Company (nor any ancestor, sibling, descendant or spouse of any of such
persons, or any trust, partnership or corporation in which any of such persons
has or has had an interest), has or has had, directly or indirectly, (i) an
economic interest in any entity which furnished or sold, or furnishes or sells,
services or products that the Company furnishes or sells, or proposes to furnish
or sell, (ii) an economic interest in any entity that purchases from or sells or
furnishes to, or licenses to or licenses from, the Company, any goods or
services or intellectual property or (iii) a beneficial interest in any
Contract; provided, that ownership of no more than one percent (1%) of the
outstanding voting stock of a publicly traded corporation shall not be deemed an
"economic interest in any entity" for purposes of this Section 2.13.
2.14 Litigation. There is no action, suit or proceeding of any nature
pending or to the Company's Knowledge threatened against the Company, its
properties or any of its officers or directors, in their respective capacities
as such. To the Company's Knowledge, there is no investigation pending or
threatened against the Company, its properties or any of its officers or
directors by or before any governmental entity. Part 2.14 of the Company
Disclosure Letter sets forth, with respect to any pending or threatened action,
suit, proceeding or investigation, the forum, the parties thereto, the subject
matter thereof and the amount of damages claimed or other remedy requested. No
governmental entity has at any time challenged or questioned the legal right of
the Company to manufacture, offer or sell any of its products.
2.15 Insurance. With respect to the insurance policies and fidelity bonds
covering the assets, business, equipment, properties, operations, employees,
officers and directors of the Company, there is no claim by the Company pending
under any of such policies or bonds as to which coverage has been questioned,
denied or disputed by the underwriters of such policies or bonds. All premiums
due and payable under all such policies and bonds have been paid and the Company
is otherwise in material compliance with the terms of such policies and bonds
(or other policies and bonds providing substantially similar insurance
coverage). The Company has no Knowledge of any threatened termination of, or
material premium increase with respect to, any of such policies.
2.16 Minute Books. The minute books of the Company made available to
counsel for Parent through the Effective Time are the only minute books of the
Company and contain a reasonably accurate summary of all meetings of directors
(or committees thereof) and shareholders or actions by written consent since the
time of incorporation of the Company.
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2.17 Environmental Matters.
(a) Hazardous Material. The Company has not operated any underground
storage tanks, and has no Knowledge of the existence, at any time, of any
underground storage tank (or related piping or pumps), at any property that the
Company has at any time owned, operated, occupied or leased. The Company has not
released any amount of any substance that has been designated by any
Governmental Entity or by applicable federal, state or local law to be
radioactive, toxic, hazardous or otherwise a danger to health or the
environment, including, without limitation, PCBs, asbestos, oil and petroleum
products, urea-formaldehyde and all substances listed as a "hazardous
substance," "hazardous waste," "hazardous material" or "toxic substance" or
words of similar import, under any law, including but not limited to, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended; the Resource Conservation and Recovery Act of 1976, as amended; the
Federal Water Pollution Control Act, as amended; the Clean Air Act, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material").
No Hazardous Materials are present as a result of the actions or omissions of
the Company, or, to the Company's Knowledge, as a result of any actions of any
third party or otherwise, in, on or under any property, including the land and
the improvements, ground water and surface water thereof, that the Company has
at any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Effective Time, nor has the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Material Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's Knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company. The Company is not
aware of any fact or circumstance which could involve the Company in any
environmental litigation or impose upon the Company any environmental liability.
2.18 Brokers' and Finders' Fees; Third Party Expenses. The Company has not
incurred, nor will it incur, directly or indirectly, any liability for brokerage
or finders' fees or agents' commissions or any similar charges in connection
with this Agreement or any transaction contemplated hereby. Part 2.18 of the
Company
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<PAGE> 27
Disclosure Letter sets forth the principal terms and conditions of any
agreement, written or oral, with respect to such fees. Part 2.18 of the Company
Disclosure Letter also sets forth the Company's current reasonable estimate of
all Third Party Expenses (as defined in Section 5.6) expected to be incurred by
the Company in connection with the negotiation and effectuation of the terms and
conditions of this Agreement and the transactions contemplated hereby. Third
Party Expenses will not exceed $250,000.
2.19 Employee Matters and Benefit Plans.
(a) Definitions. With the exception of the definition of "Affiliate"
set forth in Section 2.19(a)(i) below (which definition shall apply only to this
Section 2.19), for purposes of this Agreement, the following terms shall have
the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income Security
Act of 1974, as amended;
(iii) "Company Employee Plan" shall refer to any plan, program,
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or
stock-related awards, fringe benefits or other employee benefits or remuneration
of any kind, whether formal or informal, funded or unfunded and whether or not
legally binding, including without limitation, each "employee benefit plan",
within the meaning of Section 3(3) of ERISA which is or has been maintained,
contributed to, or required to be contributed to, by the Company or any
Affiliate for the benefit of any "Employee" (as defined below), and pursuant to
which the Company or any Affiliate has or may have any material liability
contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each management,
employment, severance, consulting, relocation, repatriation, expatriation,
visas, work permit or similar agreement or contract between the Company or any
Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
(vii) "Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan", as defined in Section 3(37) of
ERISA; and
(viii) "Pension Plan" shall refer to each Company Employee Plan
which is an "employee pension benefit plan", within the meaning of Section 3(2)
of ERISA.
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(b) Schedule. Part 2.19(b) of the Company Disclosure Letter contains
an accurate and complete list of each Company Employee Plan and, as of the date
hereof, each Employee Agreement, together with a schedule of all liabilities,
whether or not accrued, under each such Company Employee Plan or Employee
Agreement. The Company does not have any plan or commitment, whether legally
binding or not, to establish any new Company Employee Plan or Employee
Agreement, to modify any Company Employee Plan or Employee Agreement (except to
the extent required by law or to conform any such Company Employee Plan or
Employee Agreement to the requirements of any applicable law), or to enter into
any Company Employee Plan or Employee Agreement, nor does it have any intention
or commitment to do any of the foregoing (in each case, except to the extent
previously disclosed to Parent in writing, or as required by this Agreement, or
as consented to in writing by Parent between the date hereof and the Effective
Time).
(c) Documents. The Company has provided to Parent through the
Effective Time (i) correct and complete copies of all documents embodying or
relating to each Company Employee Plan and each Employee Agreement including all
amendments thereto and written interpretations thereof; (ii) the most recent
annual actuarial valuations, if any, prepared for each Company Employee Plan;
(iii) the three most recent annual reports (Series 5500 and all schedules
thereto), if any, required under ERISA or the Code in connection with each
Company Employee Plan or related trust; (iv) if the Company Employee Plan is
funded, the most recent annual and periodic accounting of Company Employee Plan
assets; (v) the most recent summary plan description together with the most
recent summary of material modifications, if any, required under ERISA with
respect to each Company Employee Plan; (vi) all IRS determination letters and
rulings relating to Company Employee Plans and copies of all applications and
correspondence to or from the IRS or the Department of Labor ("DOL") with
respect to any Company Employee Plan; (vii) all communications material to any
Employee or Employees relating to any Company Employee Plan and any proposed
Company Employee Plans, in each case, relating to any amendments, terminations,
establishments, increases or decreases in benefits, acceleration of payments or
vesting schedules or other events which would result in any material liability
to the Company; (viii) all registration statements, annual reports (Form 11-K
and all attachments thereto) and prospectuses prepared in connection with each
Company Employee Plan; (ix) all material written agreements contacts relating
Company Employee Plan, including without limitation, administrative service
agreements and group insurance contracts; (x) all correspondence to or from any
governmental agency relating to any Company Employee Plan; (xi) all COBRA forms
and related notices; and (xii) all policies pertaining to fiduciary liability
insurance covering the fiduciaries for each Company Employee Plan.
(d) Employee Plan Compliance. (i) the Company has performed all
obligations required to be performed by it under each Company Employee Plan, is
not in default or violation of, and has no Knowledge of any default of violation
by any party to each Company Employee Plan, and each Company Employee Plan has
been established and maintained in all material respects in accordance with its
terms and in compliance with all applicable laws, statutes, orders, rules and
regulations, including but not limited to ERISA or the Code; (ii) no "prohibited
transaction," within the meaning of Section 4975 of the Code or Section 406 and
407 of ERISA, and not otherwise
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exempt under Section 408 of ERISA, has occurred with respect to any Company
Employee Plan; (iii) there are no actions, suits or claims pending, or, to the
Knowledge of the Company, threatened or anticipated (other than routine claims
for benefits) against any Company Employee Plan or against the assets of any
Company Employee Plan; and (iv) each Company Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance with
its terms, without liability to the Company, Parent or any of its Affiliates
(other than ordinary administration expenses typically incurred in a termination
event); (v) there are no audits, inquiries or proceedings pending or, to the
Knowledge of the Company or any affiliates, threatened by the IRS or DOL with
respect to any Company Employee Plan; and (vi) neither the Company nor any
Affiliate is subject to any penalty or tax with respect to any Company Employee
Plan under Section 502(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Company Employee Plan provides,
or has any liability to provide, life insurance, medical or other employee
benefits to any Employee upon his or her retirement or termination of employment
for any reason, except as may be required by statute, and the Company has never
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) that such Employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) COBRA. The Company and each Affiliate has, prior to the Effective
Time, complied with the health care continuation requirements of COBRA, the
requirement of FMLA or any similar provisions of state law applicable to its
Employees.
(i) Effect of Transaction.
(i) The execution of this Agreement and the consummation of the
transactions contemplated hereby will not (either alone or upon the occurrence
of any additional or subsequent events) constitute an event under any Company
Employee Plan, Employee Agreement, trust or loan that will or may result in any
payment (whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by the
Company or Parent or any of their respective affiliates with respect to any
Employee will be characterized as an "excess parachute payment", within the
meaning of Section 280G(b)(1) of the Code.
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(j) Employment Matters. The Company (i) is in compliance with all
applicable foreign, federal, state and local laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to Employees; (ii) has withheld
and reported all amounts required by law or by agreement to be withheld and
reported with respect to the wages, salaries and other payments to Employees by
virtue of employment, the Merger or otherwise; (iii) is not liable for any
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice). There are no pending or to the
Knowledge of the Company threatened, or reasonably anticipated claims or actions
against the Company under any worker's compensation policy or long-term
disability policy.
(k) Labor. No work stoppage or labor strike against the Company is
pending or, to the best Knowledge of the Company, threatened. The Company is not
involved in or, to the Knowledge of the Company, threatened with, any labor
dispute, grievance, or litigation relating to labor, safety or discrimination
matters involving any Employee, including, without limitation, charges of unfair
labor practices or discrimination complaints, which, if adversely determined,
would, individually or in the aggregate, result in liability to the Company.
Neither the Company nor any of its subsidiaries has engaged in any unfair labor
practices within the meaning of the National Labor Relations Act which would,
individually or in the aggregate, directly or indirectly result in a liability
to the Company. The Company is not presently, nor has it been in the past, a
party to, or bound by, any collective bargaining agreement or union contract
with respect to Employees and no collective bargaining agreement is being
negotiated by the Company.
2.20 Compliance with Laws. The Company has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
2.21 Officer Matters. To the Company's Knowledge, no officer of the Company
has ever been convicted of a felony or been the subject of a governmental
investigation. To the Company's Knowledge, no company of which any officer of
the Company is or was an officer has ever been subject to any bankruptcy or
insolvency proceeding.
2.22 Year 2000 Compliance. As of the date hereof, to the Company's
Knowledge the Company's products, services and internal systems have been
designed to ensure date and time entry recognition, calculations that
accommodate same century and multi-century formulas and date values, leap year
recognition and calculations, and date data interface values that reflect the
century. As of the date hereof, to the Company's Knowledge the Company's
products, services and internal systems manage and manipulate data involving
dates and times, including single century formulas and multi-century formulas,
and do not cause an abnormal ending scenario within the application or generate
incorrect values or invalid results involving such dates.
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2.23 Warranties; Indemnities. Except for the warranties and indemnities
contained in those contracts and agreements set forth in Part 2.12(a)(viii) of
the Company Disclosure Letter and warranties implied by law, as of the date
hereof the Company has not given any warranties or indemnities relating to
products or technology sold or services rendered by the Company.
2.24 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been requested by Parent or its counsel.
2.25 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Company Disclosure Letter), nor any
statement made in any schedule or certificate furnished by the Company pursuant
to this Agreement, or furnished in or in connection with documents mailed or
delivered to the shareholders of the Company in connection with soliciting their
consent to this Agreement and the Merger, contains or will contain at the
Effective Time, any untrue statement of a material fact, or omits or will omit
at the Effective Time to state any material fact necessary in order to make the
statements contained herein or therein, in the light of the circumstances under
which made, not misleading.
2.26 HSR Representation. Each of the Principle Shareholders, taken together
with their spouse and minor children (in each case, if applicable), have less
than $10,000,000 in total assets as of the date hereof and as of immediately
prior to the Effective Time and did not control any entity or entities which in
the aggregate had greater than $10,000,000 in total revenues for the most
recently completed fiscal year.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
As of the date hereof and as of the Closing Date, Parent and Merger Sub
represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of the State of North Carolina. Each of Parent and
Merger Sub has the corporate power to own its properties and to carry on its
business as now being conducted and is duly qualified to do business and is in
good standing in each jurisdiction in which the failure to be so qualified would
be material to Parent and Merger Sub as a whole.
3.2 Authority. Parent and Merger Sub have all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate and stockholder action on the part of Parent and
Merger Sub. This Agreement has been duly executed and delivered by Parent and
Merger Sub and
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constitutes the valid and binding obligations of Parent and Merger Sub,
enforceable in accordance with its terms. The execution and delivery of this
Agreement by the Parent and Merger Sub does not, and, as of the Effective Time,
the consummation of the transactions contemplated hereby will not, conflict
with, or result in any violation of, or default under (with or without notice or
lapse of time, or both), or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any benefit under (such event, a
"Conflict") (i) any provision of the Certificate of Incorporation or Bylaws of
Parent or Merger Sub, or (ii) any mortgage, indenture, lease, contract or other
agreement or instrument, permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation applicable to Parent
or Merger Sub or its properties or assets except as would not have a Parent
Material Adverse effect. For purposes of this Agreement, "Parent Material
Adverse Effect" shall mean a material adverse effect on the business, assets
(including intangible assets), financial condition, capitalization or results of
operations of the Parent and its subsidiaries taken as a whole, but other than
those adverse effects occurring as a result of general or market or industry
conditions (including, without limitation, any change in trading prices, in and
of itself and without the occurrence of any other Parent Material Adverse
Effect, of Parent's public traded equity securities). No consent, waiver,
approval, order or authorization of, or registration, declaration or filing
with, any court, administrative agency or commission or other federal, state,
county, local or foreign governmental authority, instrumentality, agency or
commission ("Governmental Entity") or any third party (so as not to trigger any
Conflict) is required by or with respect to Parent or Merger Sub in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated hereby, except for (i) the filing by Merger Sub of the
Articles of Merger with the North Carolina Secretary of State, (ii) termination
of any applicable waiting period under the HSR Act, (iii) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable federal and state securities laws,
except such consents, waivers, approvals, orders, authorizations, registrations,
declarations and filings as would not have a Parent Material Adverse Effect.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 200,000,000 shares of
Common Stock, of which not more than 50,000,000 shares were issued and
outstanding as of as of the date hereof, and 10,000,000 shares of Preferred
Stock as of the date hereof, none of which is issued or outstanding. The
authorized capital stock of Merger Sub consists of 1,000 shares of Common Stock,
1,000 shares of which, as of the date hereof, are issued and outstanding and are
held by Parent. All such shares have been duly authorized, and all such issued
and outstanding shares have been validly issued, are fully paid and
non-assessable and are free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger, when issued, will be duly authorized, validly issued, fully paid,
non-assessable and issued in compliance with applicable federal and state
securities laws.
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3.4 SEC Documents; Parent Financial Statements. Parent has furnished or
made available to the Company true and complete copies of all reports or
registration statements filed by it with the Securities and Exchange Commission
(the "SEC") since June 18, 1999, all in the form so filed (all of the foregoing
being collectively referred to as the "SEC Documents"). As of their respective
filing dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933 (the "Securities Act") or the
Securities Exchange Act of 1934 (the "Exchange Act") as the case may be, and
none of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements made therein, in light of the circumstances in which they
were made, not misleading, except to the extent corrected by a document
subsequently filed with the SEC on or prior to the date hereof. The financial
statements of Parent, including the notes thereto, included in the SEC Documents
(the "Parent Financial Statements") comply as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto, have been prepared in accordance
with generally accepted accounting principles consistently applied (except as
may be indicated in the notes thereto or, in the case of unaudited statements,
as permitted by Form 10-Q of the SEC) and present fairly the consolidated
financial position of Parent at the dates thereof and the consolidated results
of its operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal audit adjustments). There has been no
change in Parent accounting policies except as described in the notes to the
Parent Financial Statements; provided, however, the Parent may have restated or
may restate one or more of the Parent Financial Statements to reflect
acquisitions entered into subsequent to the respective dates thereof.
3.5 No Material Adverse Effect. Since December 31, 1999 and until the date
hereof, Parent has conducted its business in the ordinary course and there has
not occurred any Parent Material Adverse Effect.
3.6 Litigation. To Parent's knowledge, there is no action, suit,
proceeding, claim, arbitration or investigation pending, or threatened, against
Parent or Merger Sub which in any manner challenges or seeks to prevent, enjoin,
alter or materially delay any of the transactions contemplated hereunder.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement and the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing) to carry on its business in the
usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay its debts and Taxes when due, to pay or perform
other obligations when due, and, to the extent consistent with such business, to
use all reasonable efforts consistent with past practice and policies to
preserve intact its present business organization, keep available the services
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of its present officers and key employees and preserve their relationships with
customers, suppliers, distributors, licensors, licensees, and others having
business dealings with it, all with the goal of preserving unimpaired its
goodwill and ongoing businesses at the Effective Time. The Company shall
promptly notify Parent of any event or occurrence or emergency not in the
ordinary course of its business, and any material event involving or adversely
affecting the Company or its business. Except as expressly contemplated by this
Agreement, the Company shall not, without the prior written consent of Parent:
(a) Enter into any commitment, activity or transaction not in the
ordinary course of business or involving in excess of $25,000 individually or
$200,000 in the aggregate;
(b) Transfer to any person or entity any rights to any Company
Intellectual Property (other than pursuant to end-user licenses in the ordinary
course of business) or enter into any agreement with respect to Company
Intellectual Property with any person or entity other than in the ordinary
course of business consistent with past practice;
(c) Terminate any employees other than for cause or encourage any
employees to resign from the Company;
(d) Enter into or amend any Contract pursuant to which any other party
is granted marketing, distribution, development or similar rights of any type or
scope with respect to any products or technology of the Company;
(e) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any Contract;
(f) Commence or settle any litigation;
(g) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor) except for (i)
repurchases of Company Capital Stock upon the termination of service of any
service providers of Company in accordance with the standard terms set forth in
the agreements governing such repurchases, all of which agreements have been
provided or made available to Parent, (ii) conversion of Company Preferred Stock
and (iii) exercises or conversion of Company Convertible Securities (including
options);
(h) Except for the issuance of shares of Company Capital Stock upon
exercise or conversion of presently outstanding Company Options or Convertible
Securities, issue, sell, grant, contract to issue, grant or sell, or authorize
the issuance, delivery, sale or purchase of any shares of Company Capital Stock
or securities convertible into, or exercisable or exchangeable for, shares of
Company Capital Stock, or any securities, warrants, options or rights to
purchase any of the
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foregoing, except for (i) issuances of Company Capital Stock upon the exercise
thereof or upon exercise or conversion of Company Convertible Securities or
Company Preferred Stock outstanding as of the date of this Agreement and (ii)
issuances of Company Options from the Company's 1999 Stock Award Plan in the
ordinary course of business consistent with past practice and in no event
Company Options to purchase more than 5,000 shares (in any one case) or 290,000
shares (in the aggregate; provided that (i) the vesting schedule for each of
such Company Options is the same as Parent's standard vesting schedule for
employees; (ii) the exercise price for each of such Company Options is not less
than 90% of the market price of Parent common stock as quoted on the Nasdaq
Stock Market on the date of grant, as adjusted for the Exchange Ratio (assuming
that the Merger were completed on such date); and (iii) such Company Options are
granted in accordance with Part 4.1(h) of the Company Disclosure Letter;
(i) Cause or permit any amendments to its Articles of Incorporation or
Bylaws;
(j) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to the business of
the Company;
(k) Sell, lease, license or otherwise dispose of any of the assets or
properties of Company which are not Company Intellectual Property other than in
the ordinary course of business and consistent with past practices, including
but not limited to the performance of obligations under contractual arrangements
listed on the Company Disclosure Letter existing as of the date hereof, or
create any security interest in such assets or properties;
(l) Grant any loan to any person or entity, incur any indebtedness or
guarantee any indebtedness, issue or sell any debt securities, guarantee any
debt securities of others, purchase any debt securities of others or amend the
terms of any outstanding agreements related to borrowed money, other than (i)
indebtedness incurred for purchase money financing not to exceed $50,000 in the
aggregate, and (ii) advances to employees for travel and business expenses in
the ordinary course of business consistent with past practices.
(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any employee or consultant, except payments made pursuant to
standard written agreements outstanding as of the date hereof and disclosed on
Part 4.1(m) of the Company Disclosure Letter, or increase in the salary or other
compensation payable or to become payable by Company to any of its officers,
directors, employees or advisors, or declare, pay or make any commitment or
obligation of any kind for the payment by Company of a bonus or other additional
salary or compensation to any such person, or adopt or amend any employee
benefit plan or enter into any employment contract, other than entering into
standard terms and conditions of employment with employees not at the executive
level consistent with past practices and consistent with Parent's employment
practices, provided that (i) such employment contracts are at-will and do not
provide for any severance arrangements or post-employment compensation, and (ii)
the compensation payable (including
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bonus obligations) to any such employee is consistent with the Company's past
practices and does not exceed $100,000 annually individually;
(n) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business and consistent with past practice;
(o) Take any action to accelerate the vesting schedule of any of the
outstanding Company Options or Company Capital Stock;
(p) Pay, discharge or satisfy, in an amount in excess of $25,000 (in
any one case) or $50,000 (in the aggregate) any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Company Financial Statements or
payment of trade payables incurred in the ordinary course of business since the
December 31, 1999;
(q) Make or change any election in respect of Taxes, adopt or change
any accounting method in respect of Taxes, enter into any closing agreement,
settle any claim or assessment in respect of Taxes, or consent to any extension
or waiver of the limitation period applicable to any claim or assessment in
respect of Taxes;
(r) Enter into any strategic alliance, joint development or joint
marketing arrangement or agreement;
(s) Fail to pay or otherwise satisfy its monetary obligations as they
become due, except such as are being contested in good faith;
(t) Waive or commit to waive any rights with a value in excess of
$25,000 (in any one case) or $50,000 (in the aggregate);
(u) Cancel, materially amend or renew any insurance policy other than
in the ordinary course of business;
(v) Take any action to accelerate the vesting of any outstanding
Company Convertible Security or Company Capital Stock;
(w) Hire any executive level employees;
(x) Terminate any employees, or encourage any employees to resign from
the Company except for cause;
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(y) Alter, or enter into any commitment to alter, its interest in any
corporation, association, joint venture, partnership or business entity in which
the Company directly or indirectly holds any interest on the date hereof;
(z) Give or make any warranties or indemnities relating to products or
technology sold or services rendered by the Company, other than warranties
implied by law and warranties and indemnities given in the ordinary course of
business; or
(aa) Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (z) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation by the Company. Until the earlier of the Effective Time
and the date of termination of this Agreement pursuant to the provisions of
Section 8.1 hereof, the Company will not (nor will the Company permit any of the
Company's officers, directors, employees, shareholders, agents, representatives
or affiliates to) directly or indirectly, take any of the following actions with
any party other than Parent and its designees: (a) solicit, initiate, entertain,
or encourage any proposals or offers from, or conduct discussions with or engage
in negotiations with, any person relating to any possible acquisition of the
Company or any of its subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise), any material portion of its
capital stock or assets or any equity interest in the Company or any of its
subsidiaries, (b) provide information with respect to it to any person, other
than Parent, relating to, or otherwise cooperate with, facilitate or encourage
any effort or attempt by any such person with regard to, any possible
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise), any material portion of its capital stock or
assets or any equity interest in the Company or any of its subsidiaries, (c)
enter into an agreement with any person, other than Parent, providing for the
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise), any material portion of its capital stock or
assets or any equity interest in the Company or any of its subsidiaries, or (d)
make or authorize any statement, recommendation or solicitation in support of
any possible acquisition of the Company or any of its subsidiaries (whether by
way of merger, purchase of capital stock, purchase of assets or otherwise), any
material portion of its capital stock or assets or any equity interest in the
Company or any of its subsidiaries by any person, other than by Parent. The
Company shall immediately cease and cause to be terminated any such contacts or
negotiations with third parties relating to any such transaction or proposed
transaction. In addition to the foregoing, if the Company receives prior to the
Effective Time or the termination of this Agreement any offer or proposal
relating to any of the above, the Company shall immediately notify Parent
thereof, including information as to the identity of the offeror or the party
making any such offer or proposal and the specific terms of such offer or
proposal, as the case may be, and such other information related thereto as
Parent may reasonably request. Except as contemplated by this Agreement,
disclosure by the Company of the terms hereof (other than the prohibition of
this Section 4.2) shall be deemed to be a violation of this Section 4.2. The
parties hereto agree that irreparable damage would occur in the event that the
provisions of this Section 4.2 were not performed in accordance with their
specific terms or were otherwise breached. It is
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accordingly agreed by the parties hereto that Parent shall be entitled to seek
an injunction or injunctions to prevent breaches of the provisions of this
Section 4.2 and to enforce specifically the terms and provisions hereof in any
court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which Parent may be entitled at law or in
equity.
4.3 No Solicitation by Parent of Competing Transactions. Until the earlier
of the Effective Time and the date of termination of this Agreement pursuant to
the provisions of Section 8.1 hereof, Parent will not (nor will Parent permit
any of Parent's officers; directors, employee, stockholder, agents,
representatives or affiliates to), directly or indirectly, negotiate to acquire
any company primarily engaged in creating both auction software tools and
auction meta-search products other than the Company and its designees.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Fairness Hearing; Shareholder Approval.
(a) As soon as reasonably practicable following the execution of this
Agreement, Parent and Company shall prepare, and the Principal Shareholders
shall cause the Company to prepare, the necessary documents and Parent shall
apply to obtain a permit (a "California Permit") from the Commissioner of
Corporations of the State of California (after a hearing before such
Commissioner) pursuant to Section 25121 of the California Corporate Securities
Law of 1968, so that the issuance of Parent Common Stock in the Merger shall be
exempt from registration under Section 3(a)(10) of the Securities Act. Company
and Parent will respond to, and the Principal Shareholders will cause the
Company to respond to, any comments from the California Department of
Corporations and use their commercially reasonable efforts to have the
California Permit granted as soon as practicable after such filing. As promptly
as practical after the date of this Agreement, Parent and Company shall prepare
and make, and the Principal Shareholder shall cause the Company to prepare and
make, such filings as are required under applicable Blue Sky laws relating to
the transactions contemplated by this Agreement.
(b) At the election of Parent, in lieu of the application for the
California Permit, Parent and Company shall prepare, and the Principal
Shareholder shall cause the Company to prepare, the necessary documents and
Parent shall apply to obtain a permit (a "North Carolina Permit") from the
Secretary of State of the State of North Carolina (after a hearing before such
Secretary) pursuant to Section 78A-30 of the North Carolina Securities Act, so
that the issuance of Parent Common Stock in the Merger shall be exempt from
registration under Section 3(a)(10) of the Securities Act. Company and Parent
will respond to, and the Principal Shareholders will cause the Company to
respond to, any comments from the Secretary of State of North Carolina and use
their commercially reasonable efforts to have the North Carolina Permit granted
as soon as practicable after such filing.
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(c) As promptly as practicable after the receipt of a California
Permit or North Carolina Permit, as the case may be, the Company shall submit,
and the Principal Shareholders shall cause the Company to submit, this Agreement
and the transactions contemplated hereby to its shareholders for approval and
adoption as provided by North Carolina Law and its Articles of Incorporation and
Bylaws. The Company shall use its best efforts to solicit and obtain the consent
of its shareholders, and the Principal Shareholder shall cause to the Company to
solicit and obtained the consent of its shareholders, sufficient to approve the
Merger and this Agreement and to enable the Closing to occur as promptly as
practicable and, in any event, within 15 business days following the receipt of
the California Permit or the North Carolina Permit, as the case may be. The
materials submitted to the Company Shareholders shall be subject to review and
approval by Parent and include information regarding the Company, the terms of
the Merger and this Agreement and the unanimous recommendation of the Board of
Directors of the Company in favor of the Merger and this Agreement, and the
transactions contemplated hereby.
5.2 Nasdaq Listing. Parent shall use commercially reasonable efforts to
ensure that at the Effective Time, the shares of Parent Common Stock to be
delivered to the Company Shareholders pursuant to this Agreement shall have been
accepted for quotation on the National Association of Securities Dealers
Automated Quotation National Market System.
5.3 Restrictions on Transfer. All certificates representing Parent Common
Stock deliverable to any shareholder of the Company pursuant to this Agreement
and in connection with the Merger and any certificates subsequently issued with
respect thereto or in substitution therefor (including any shares issued or
issuable in respect of any such shares upon any stock split stock dividend,
recapitalization, or similar event) also shall bear any legend required by the
Commissioner of Corporations of the State of California or the Secretary of
State of the State of North Carolina or such as are required pursuant to any
federal, state, local or foreign law governing such securities.
5.4 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of its
properties, books, contracts, commitments, records and auditors, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of it as Parent may reasonably request.
No information or knowledge obtained in any investigation pursuant to this
Section 5.4 shall affect or be deemed to modify any representation or warranty
contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.5 Confidentiality. Each of the parties hereto hereby agrees that any
confidential information obtained in any investigation pursuant to Section 5.4,
or pursuant to the negotiation and execution of this Agreement or the
effectuation of the transactions contemplated hereby, shall be governed by the
terms of that certain Mutual Nondisclosure Agreement dated as of August 20, 1999
between Parent and the Company (the "Mutual Nondisclosure Agreement").
5.6 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory,
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consulting and all other fees and expenses of third parties ("Third Party
Expenses") incurred by a party in connection with the negotiation and
effectuation of the terms and conditions of this Agreement and the transactions
contemplated hereby, shall be the obligation of the respective party incurring
such fees and expenses; provided that all Third Party Expenses incurred by the
Principal Shareholders incurred directly in connection with the transactions
contemplated hereby shall be the obligation of the Company.
5.7 Public Disclosure. Unless otherwise required by law (including, without
limitation, federal and state securities laws) or, as to Parent, by the rules
and regulations of the National Association of Securities Dealers, Inc., no
disclosure (whether or not in response to an inquiry) of the subject matter of
this Agreement shall be made by any party hereto unless approved by Parent and,
prior to the Effective Time, the Company prior to release, provided that such
approval shall not be unreasonably withheld.
5.8 Consents. The Company shall use its best efforts and the Principal
Shareholders shall cause the Company to use its best efforts to obtain the
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Company Disclosure Letter) so as to preserve all rights of and benefits
to the Company thereunder.
5.9 FIRPTA Compliance. On or prior to the Closing Date, the Company shall
deliver, and the Principals Shareholders shall cause the Company to deliver, to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.10 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use its reasonable efforts to
ensure that its representations and warranties remain true and correct in all
material respects, and to take promptly, or cause to be taken, all actions, and
to do promptly, or cause to be done, all things necessary, proper or advisable
under applicable laws and regulations to consummate and make effective the
transactions contemplated hereby, to obtain all necessary waivers, consents and
approvals, to effect all necessary registrations and filings, and to remove any
injunctions or other impediments or delays, legal or otherwise, in order to
consummate and make effective the transactions contemplated by this Agreement
for the purpose of securing to the parties hereto the benefits contemplated by
this Agreement, subject to the limitations on divestiture set forth in Section
5.18 hereof.
5.11 Notification of Certain Matters. The Company and the Principal
Shareholders shall give prompt notice to Parent, and Parent shall give prompt
notice to the Company, of (i) the occurrence or non-occurrence of any event, the
occurrence or non-occurrence of which is likely to cause any representation or
warranty of the Company and the Principal Shareholders, on the one hand, and
Parent, on the other hand, respectively, contained in this Agreement to be
untrue or inaccurate at or prior to the Effective Time and (ii) any failure of
the Company and the Principal Shareholders, on the one hand, or Parent, on the
other hand, as the case may be, to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder; such
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that the conditions set forth in Section 6.2(a) or Section 6.2(b) hereof, or
Section 6.3(a) or Section 6.3(b) hereof, as the case may be, would not be
satisfied; provided, however, that the delivery of any notice pursuant to this
Section 5.11 shall not limit or otherwise affect any remedies available to the
party receiving such notice.
5.12 Affiliate Agreements. Part 5.12 of the Company Disclosure Letter sets
forth those persons who, in the Company's reasonable judgment, are or may be
"affiliates" of the Company within the meaning of Rule 145 (each such person a
"Company Affiliate") promulgated under the Securities Act ("Rule 145"). The
Company shall provide Parent such information and documents as Parent shall
reasonably request for purposes of reviewing such list. The Company and the
Principal Shareholders shall deliver or cause to be delivered to Parent,
concurrently with the execution of this Agreement (and in any case prior to the
Closing) from each of the Company Affiliates, an executed Affiliate Agreement in
the form attached hereto as Exhibit C. Parent shall be entitled to place
appropriate legends on the certificates evidencing any Parent Common Stock to be
received by such Company Affiliates pursuant to the terms of this Agreement, and
to issue appropriate stop transfer instructions to the transfer agent for Parent
Common Stock, consistent with the terms of such Affiliate Agreements.
5.13 Additional Documents and Further Assurances. Each party hereto, at the
request of the other party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby, subject to the limitations on divestiture set
forth in Section 5.18 hereof.
5.14 S-8 Registration. Not later than forty-five (45) days after the
Closing Date, Parent agrees to file, if available for use by Parent, with the
Securities and Exchange Commission a registration statement on Form S-8
registering a number of shares of Parent Common Stock equal to the number of
shares of Parent Common Stock issuable upon the exercise of all Company Options
assumed by Parent with Parent options pursuant to Section 1.6(b) hereof.
5.15 Termination of 401(k) Plan. The Company agrees to cause its 401(k)
plan to terminate as of two days preceding the Closing Date. Parent shall,
consistent with the terms of its 401(k) plan, use commercially reasonable
efforts to allow employees of the Company to participate in its 401(k) plan and
to transfer funds (to the extent requested by employees) held in employee's
accounts in the Company's 401(k) plan to Parent's 401(k) plan.
5.16 Conversion of Preferred Stock. The Company and the Principal
Shareholders shall use best efforts to cause the conversion of all outstanding
Company Preferred Stock into Company Common Stock in accordance with the terms
of the Company's Articles of Incorporation.
5.17 Exercise of Warrant. The Company and the Principal Shareholders shall
use best efforts to cause that certain Warrant to Purchase Common Stock of the
Company dated September 22, 1999 to be exercised prior to the Closing.
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5.18 HSR Act. As soon as may be reasonably practicable, to the extent
applicable, Company and Parent (and/or any applicable Company Shareholder) each
shall file, and the Company and the Principal Shareholders shall use best
efforts to cause any applicable shareholder of the Company to file and the
Principle Shareholders shall use best efforts to cause the Company to file, with
the United States Federal Trade Commission (the "FTC") and the Antitrust
Division of the United States Department of Justice ("DOJ") Notification and
Report Forms relating to the transactions contemplated herein as required by the
HSR Act as well as comparable pre-merger notification forms required by the
merger notification or control laws and regulations of any applicable
jurisdiction, as agreed to by the parties. Company and Parent (and/or any
applicable shareholder) each shall, the Company and the Principal Shareholders
shall use best efforts to cause any applicable shareholder of the Company to,
and the Principal Shareholders shall cause the Company to, promptly (a) supply
the others with any information which may be required in order to effectuate
such filings and (b) supply any additional information which reasonably may be
required by the FTC, the DOJ or the competition or merger control authorities of
any other jurisdiction and which the parties may reasonably deem appropriate;
provided, however, that Parent shall not be required to agree to any divestiture
by Parent or the Company or any of Parent's subsidiaries or affiliates of shares
of capital stock or of any business, assets or property of Parent or its
subsidiaries or affiliates or of the Company, its affiliates, or the imposition
of any material limitation on the ability of any of them to conduct their
businesses or to own or exercise control of such assets, properties and stock.
5.19 Waiver of Acceleration. Prior to the Closing Date, the Company and the
Principal Shareholders shall cause each employee of the Company to execute a
waiver of the rights to acceleration of vesting of such employee's Company
Options and other Company Convertible Securities as a result of the Merger;
provided, however, each such employee shall be entitled to accelerated vesting
of up to a total of twenty-five percent (25%) of their aggregate total holdings
of Company Capital Stock and Company Convertible Securities, with the remainder
of such Company Options and other Company Convertible Securities vesting
quarterly over the remainder of the vesting periods specified in such Company
Options or Company Convertible Securities as of the date hereof; provided that
such employee agrees to forfeit the accelerated vesting resulting from the
transactions contemplated hereby in an amount equal to that which may be deemed
to constitute "parachute payments" pursuant to Section 280(G) of the Code such
that such employee would not receive any vesting which would constitute
"parachute payments" pursuant to Section 280(G) of the Code unless exemption
from such treatment under Section 280(G) of the Code (if such section of the
Code is applicable) is received by means of consent of the Company Shareholders
or at a meeting of the Company Shareholders.
5.20 Release of Guaranties. Parent shall use commercially reasonable
efforts to have the lenders set forth in Part 5.20 of the Company Disclosure
Letter release the guaranties of the Principal Shareholders set forth in Part
5.20 of the Company Disclosure letter, provided that if Parent is unable to
obtain release of such guaranties, Parent will provide a guaranty of the
Principal Shareholders obligations under the guaranties of the Principal
Shareholder set forth in Part 5.20 of the Company
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Disclosure Letter, not to exceed in the aggregate the amount set forth on Part
5.20 of the Company Disclosure Letter.
5.21 Disability Insurance. The Principal Shareholders shall use
commercially reasonable efforts to assist Parent in obtaining disability
insurance on each of the Principal Shareholders in the amount of fifty million
dollars ($50,000,000) for each Principal Shareholder, with the proceeds of such
policy payable to Parent, including allowing insurance underwriters' usual and
customary medical examinations.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Closing of the following
conditions:
(a) Shareholder Approval. This Agreement and the Merger shall have
been approved and adopted by the shareholders of the Company by the requisite
vote under applicable law and the Company's Articles of Incorporation.
(b) Permit. The Commissioner of Corporations for the State of
California or the Secretary of State for the State of North Carolina shall have
approved the terms and conditions of the transactions contemplated by this
Agreement, and the fairness of such terms and conditions following a hearing for
such purpose, and shall have issued a California Permit or North Carolina
Permit, as the case may be.
(c) HSR Act. All waiting periods, if any, under the HSR Act relating
to the transactions contemplated hereby will have expired or terminated early
and all material foreign antitrust approvals required to be obtained prior to
the Merger in connection with the transactions contemplated hereby shall have
been obtained.
(d) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal or regulatory restraint or prohibition
preventing the consummation of the Merger shall be in effect.
(e) Nasdaq Listing. The shares of Parent Common Stock to be issued in
the Merger shall have been approved for listing on the Nasdaq Stock Market's
National Market, subject to official notice of issuance.
6.2 Additional Conditions to Obligations of the Company. The obligations of
the Company to consummate the Merger and the transactions contemplated by this
Agreement shall be
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subject to the satisfaction at or prior to the Closing of each of the following
conditions, any of which may be waived, in writing, exclusively by the Company:
(a) Representations and Warranties. The representations and warranties
of Parent and Merger Sub contained in this Agreement shall be true and correct
in all material respects on and as of the Closing Date, except for those
representations and warranties which address matters only as of a particular
date (which shall remain true and correct in all material respects as of such
date), with the same force and effect as if made on and as of the Closing Date,
and the Company shall have received a certificate to such effect signed on
behalf of Parent by a duly authorized officer of Parent.
(b) Agreements and Covenants. Parent and Merger Sub shall have
performed or complied in all material respects with all agreements and covenants
required by this Agreement to be performed or complied with by them on or prior
to the Effective Time, and the Company shall have received a certificate to such
effect signed by a duly authorized officer of Parent.
(c) No Material Adverse Change. There shall not have occurred any
event or condition of any character that has had or is reasonably likely to have
a Parent Material Adverse Effect since the date of this Agreement.
6.3 Additional Conditions to the Obligations of Parent and Merger Sub. The
obligations of Parent and Merger Sub to consummate the Merger and the
transactions contemplated by this Agreement shall be subject to the satisfaction
at or prior to the Closing of each of the following conditions, any of which may
be waived, in writing, exclusively by Parent:
(a) Representations and Warranties. The representations and warranties
of the Company and the Principal Shareholders contained in this Agreement shall
have been true and correct in all material respects on and as of the date
hereto. In addition, the representations and warranties of the Company and the
Principal Shareholders shall be true and correct in all material respects on and
as of the Closing Date with the same force and effect as if made on and as of
the Closing Date, except for those representations and warranties which address
matters only as of a particular date (which shall remain true and correct as of
such date), and Parent and Merger Sub shall have received a certificate to such
effect signed on behalf of the Company by the chief executive officer of the
Company, the chief financial officer of the Company and each of the Principal
Shareholders;
(b) Agreements and Covenants. The Company and the Principal
Shareholders shall have performed or complied in all material respects with all
agreements and covenants required by this Agreement to be performed or complied
with by each of them on or prior to the Effective Time, and Parent and Merger
Sub shall have received a certificate to such effect signed by a duly authorized
officer of the Company and the Principal Shareholders;
(c) No Material Adverse Effect. There shall not have occurred any
event or condition of any character that has had or is reasonably likely to have
a Material Adverse Effect on the Company since the date of this Agreement.
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(d) Third Party Consents. Parent shall have been furnished with
evidence satisfactory to it that the Company has obtained the consents,
approvals, modifications and waivers set forth in Part 6.3(d) of the Company
Disclosure Letter.
(e) Termination of Agreements. The Company shall have terminated each
of those agreements listed on Part 6.3(e) of the Company Disclosure Letter and
each such agreement shall be of no further force or effect.
(f) Legal Opinion. Parent shall have received a legal opinion from
Daniels & Daniels, P.A., legal counsel to the Company, in the form attached
hereto as Exhibit C.
(g) Affiliate Agreements. Each of the parties identified by the
Company as being a Company Affiliate shall have delivered to Parent an executed
Affiliate Agreement in form of Exhibit D which shall be in full force and
effect.
(h) Repurchase Agreements. The Repurchase Agreements previously
executed and delivered to the Company by each of the persons listed on Part
6.3(h) of the Company Disclosure Letter, in the form of Exhibit E, shall be in
full force and effect and the Company shall have delivered evidence that each
such person shall have filed an election pursuant to Section 83(b) of the Code
to be taxed currently on any difference between the purchase price of the shares
and their fair market value.
(i) Non-Competition Agreements. Each of the persons listed on Part
6.3(i) of the Company Disclosure Letter shall have executed and delivered to
Parent a Non-Competition Agreement in substantially the form of Exhibit A, and
all of the Non-Competition Agreements shall be in full force and effect.
(j) No Dissenters. Holders of more than 4.9% of the outstanding shares
of Company Capital Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(k) Waiver of Acceleration. Each employee of the Company shall have
executed a waiver of the rights to acceleration of vesting of such employee's
Company Options and other Company Convertible Securities as a result of the
Merger, and such waiver shall be in full force and effect; provided, however,
each such employee shall be entitled to accelerated vesting of up to a total of
twenty-five percent (25%) of their total holdings of Company Capital stock and
Company Convertible Securities, with the remainder of such Company Options and
other Company Convertible Securities vesting quarterly over the remainder of the
vesting periods specified in such Company Options or Company Convertible
Securities as of the date hereof, provided that such employee shall have
forfeited the accelerated vesting resulting from the transactions contemplated
hereby in an amount equal to that which may be deemed to constitute "parachute
payments" pursuant to Section 280(G) of the Code such that such employee would
not receive any vesting which would constitute "parachute payments" pursuant to
Section 280(G) of the Code unless
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exemption from such treatment under Section 280(G) of the Code (if such section
of the Code is applicable) was received by means of consent of the Company
Shareholders or at a meeting of the Company Shareholders.
(l) Termination of 401(k) Plan. Parent shall have received from the
Company evidence that the Company's 401(k) plan has been terminated pursuant to
resolution of the Company's Board of Directors (the form and substance of which
shall have been subject to review and approval of Parent), effective as of two
days preceding the Closing Date.
(m) Conversion of Preferred Stock. All outstanding Company Preferred
Stock shall have been converted into Company Common Stock in accordance with the
terms of the Company's Articles of Incorporation as of immediately prior to the
Effective Time.
(n) Warrant Exercise. That certain Warrant to Purchase Common Stock of
the Company dated September 22, 1999 issued to Draper Atlantic Venture Fund,
L.P. shall have been exercised prior to the Closing.
(o) Repayment of Indebtedness. The Company shall have repaid all
outstanding indebtedness to the Principal Shareholders.
(p) Disability Insurance. Parent shall have obtained disability
insurance on each of the Principal Shareholders in the amount of fifty million
dollars ($50,000,000) for each Principal Shareholder, with the proceeds of such
policy payable to Parent.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNITY; ESCROW
7.1 Survival of Representations and Warranties. All of the representations
and warranties of the Company and the Principal Shareholders in this Agreement
or in any certificate, instrument or other document delivered pursuant to this
Agreement (each as modified by the Company Disclosure Letter) shall survive the
Merger and continue until 5:00 p.m., California time, on the date which is
fifteen months following the Closing Date (the "Expiration Date"). All of the
representations and warranties of Parent and Merger Sub contained herein or in
any certificate, instrument or other document delivered pursuant to this
Agreement shall terminate at the Closing.
7.2 Indemnity.
(a) Subject to Section 7.3 hereof, each of the Company Shareholders
(including, without limitation, the Principal Shareholders for all purposes of
this Article VII) agrees to jointly and severally indemnify and hold Parent, its
officers, directors, or affiliates (including the Surviving Corporation) (the
"Indemnified Parties") harmless against all claims, losses, liabilities,
damages, deficiencies, costs and expenses, including reasonable attorneys' fees
and expenses, and expenses of investigation and defense (including, without
limitation, indirect and consequential damages)
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(hereinafter individually a "Loss" and collectively "Losses") incurred by any
Indemnified Party directly or indirectly as a result of (i) any inaccuracy or
breach of a representation or warranty of the Company or the Principal
Shareholders contained herein (as modified by the Company Disclosure Letter) or
in any certificate, instrument or other document delivered by the Company or the
Principal Shareholders pursuant to the terms of this Agreement, (ii) any failure
by the Company or the Principal Shareholders to perform or comply with any
covenant contained herein, (iii) any Dissenting Shares or (iv) any of the
matters set forth on Schedule 7.2 hereof. The Company and the Company
Shareholders shall have no right of contribution or indemnification with respect
to any Loss claimed by an Indemnified Party pursuant to this Section 7.2(a).
(b) The Company Shareholders shall not be required to indemnify any
other Indemnified Party unless and until Officer's Certificates (as defined in
Section 7.4(d) below) identifying Losses, the aggregate amount of which exceed
$100,000, have been delivered to the Escrow Agent as provided in Section 7.4(b)
hereof.
7.3 Exclusive Remedy. The Escrow Fund shall be the exclusive remedy for all
such Losses incurred by any Indemnified Party, provided that nothing contained
herein shall limit the liability of the Principal Shareholders for Losses
resulting from (i) any knowing, intentional or willful inaccuracy or breach of
the Company's or the Principal Shareholders' respective representations and
warranties contained herein (as modified by the Company Disclosure Letter) or in
any certificate, instrument or other document delivered by the Company or the
Principal Shareholders pursuant to the terms of this Agreement, (ii) any
knowing, intentional or willful failure by the Company or the Principal
Shareholders to perform or comply with any covenant contained herein, and (iii)
any of the matters set forth on Schedule 7.2 hereof. Losses resulting from the
matters described in clauses (i), (ii) and (iii) of the preceding sentence shall
herein be referred to as "Special Losses." The obligations of the Principal
Shareholder to indemnify for Special Losses shall continue notwithstanding any
thing contained in Section 7.1 hereof. Nothing herein shall limit the liability
of the Company or the Principal Shareholders for any breach of any
representation, warranty or covenant if the Merger does not close.
7.4 Escrow Arrangements.
(a) Escrow Fund. At the Effective Time, as security for the indemnity
provided for in Section 7.2(a) hereof with respect to the Company Shareholders
other than the Principal Shareholders and, with respect to the Principal
Shareholders, as partial security for the indemnity provided for in Section
7.2(a) hereof and by virtue of this Agreement, the Company Shareholders will be
deemed to have received and deposited with the Escrow Agent (as defined below)
the Escrow Amount (plus any additional shares as may be issued in respect of any
stock split, stock dividend or recapitalization effected by Parent after the
Effective Time) without any act of any Company Shareholder. As soon as
practicable after the Effective Time, the Escrow Amount, without any act of any
Company Shareholder, will be deposited with U.S. Bank Trust, National
Association (or other institution acceptable to Parent and the Securityholder
Agent (as defined in Section 7.3(g) below)), as Escrow Agent (the "Escrow
Agent"), such deposit to constitute an escrow
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fund (the "Escrow Fund") to be governed by the terms set forth herein and at
Parent's cost and expense. The Escrow Fund shall be available to compensate any
Indemnified Party for any Losses incurred or suffered by such Indemnified Party
for which such party is entitled to recovery under this Article VII.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate at 5:00 p.m.,
California time, on the Expiration Date (the "Escrow Period"); provided that the
Escrow Period shall not terminate with respect to such amount (or some portion
thereof), that together with the aggregate amount remaining in the Escrow Fund
is necessary in the reasonable judgment of Parent, subject to the objection of
the Securityholder Agent and the subsequent arbitration of the matter in the
manner provided in Section 7.2(f) hereof, to satisfy any unsatisfied claims
concerning facts and circumstances existing prior to the termination of such
Escrow Period specified in any Officer's Certificate delivered to the Escrow
Agent prior to termination of such Escrow Period. As soon as all such claims
have been resolved, the Escrow Agent shall deliver to the Company Shareholders
the remaining portion of the Escrow Fund and not required to satisfy such claims
(other than Unvested Shares which shall be placed in escrow under the terms of
the Repurchase Agreement). Deliveries of Escrow Amounts to the Company
Shareholders pursuant to this Section 7.4(b) shall be made in proportion to
their respective original contributions to the Escrow Fund as determined
pursuant to Section 1.8(b).
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity securities
issued or distributed by Parent (including shares issued upon a stock split)
("New Shares") in respect of Parent Common Stock in the Escrow Fund which have
not been released from the Escrow Fund shall be added to the Escrow Fund and
become a part thereof. New Shares issued in respect of shares of Parent Common
Stock which have been released from the Escrow Fund shall not be added to the
Escrow Fund but shall be distributed to the recordholders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the recordholders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
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(d) Claims Upon Escrow Fund and Claims in Respect of Special Losses.
(i) Upon receipt by the Escrow Agent at any time on or before the
last day of the Escrow Period of a certificate signed by any officer of Parent
(an "Officer's Certificate"): (A) stating that Parent has paid or properly
accrued or reasonably anticipates that it will have to pay or accrue Losses, and
(B) specifying in reasonable detail the individual items of Losses included in
the amount so stated, the date each such item was paid or properly accrued, or
the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant or other indemnity to which
such item is related, the Escrow Agent shall, subject to the provisions of
Section 7.4(e) hereof, deliver to Parent out of the Escrow Fund, as promptly as
practicable, shares of Parent Common Stock held in the Escrow Fund in an amount
equal to such Losses. Shares of the Principal Shareholders contributed to the
Escrow Fund in accordance with Section 1.8(b) hereof shall be delivered to
Parent out of the Escrow Fund in the following order: first, out of Vested
Shares (as defined in such Principal Shareholder's Repurchase Agreement) which
have been contributed to the Escrow Fund and, after all Vested Shares have been
delivered, out of Unvested Shares (as defined in such Repurchase Agreement)
which have been contributed to the Escrow Fund.
(ii) Upon receipt by the Principal Shareholders of an Officer's
Certificate (A) stating that Parent has paid or properly accrued or reasonably
anticipates that it will have to pay or accrue Special Losses, and (B)
specifying in reasonable detail the individual items of Special Losses included
in the amount so stated, the date each such item was paid or properly accrued,
or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant or other indemnity to which
such item is related, the Principal Shareholder shall promptly, and in no event
later than thirty (30) days after delivery of an Officer's Certificate to
Principal Shareholder, wire transfer to such Indemnified Party the total amount
of the Special Losses set forth in the Officer's Certificate, unless the
Principal Shareholders elects to contest such claim in accordance with Section
7.4(e) hereof; provided, however, Parent may, in its sole discretion, elect to
recover all or a portion of such Losses by repurchasing a number of Unvested
Shares of the Principal Shareholders up to the total amount of the Special
Losses at a purchase price of $0.01 per share (subject to adjustment for stock
splits, stock dividends and the like) by giving notice to the Principal
Shareholders in accordance with terms of the Repurchase Agreement and following
the procedures for closing of a purchase set forth in the Repurchase Agreement.
(iii) For the purposes of determining the number of shares of
Parent Common Stock to be delivered to Parent out of the Escrow Fund pursuant to
Section 7.4(d)(i) hereof and the number of Unvested Shares which Parent may
repurchase in respect of a Special Loss from the Principal Shareholders pursuant
to Section 7.4(d)(ii) hereof, the shares of Parent Common Stock shall be valued
at $85.00 per share.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Securityholder Agent (as defined in Section 7.4(g)) and for a
period of thirty (30) days after such delivery, the Escrow Agent shall make no
delivery to Parent of any Escrow Amounts pursuant to Section 7.4(d)(i) hereof
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unless the Escrow Agent shall have received written authorization from the
Securityholder Agent to make such delivery. After the expiration of such thirty
(30)day period, the Escrow Agent shall make delivery of shares of Parent Common
Stock from the Escrow Fund in accordance with Section 7.4(d) hereof, provided
that no such payment or delivery may be made if the Securityholder Agent shall
object in a written statement to the claim made in the Officer's Certificate,
and such statement shall have been delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period. At the time of delivery of any
Officer's Certificate to the Principal Shareholders, a duplicate copy of such
certificate shall be delivered to the Securityholder Agent and for a period of
thirty (30) days after such delivery, Parent shall not close the repurchase of
any Unvested Shares of the Principal Shareholders in respect of Special Losses
in accordance with Section 7.4(d )(ii) hereof unless the Escrow Agent shall have
received written authorization from the Securityholder Agent to make such
closing of the repurchase. After the expiration of such thirty day period,
Parent may close the repurchase Unvested Shares of the Principal Shareholder in
respect of Special Loss in accordance with Section 7.4(d)(ii) hereof, provided
that no repurchase may be made if the Securityholder Agent shall object in a
written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to Parent prior to the expiration of such
thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Securityholder Agent shall so object in writing
to any claim or claims made in any Officer's Certificate, the Securityholder
Agent and Parent shall attempt in good faith to agree upon the rights of the
respective parties with respect to each of such claims. If the Securityholder
Agent and Parent should so agree, a memorandum setting forth such agreement
shall be prepared and signed by both parties and shall be furnished to the
Escrow Agent, or, in the case of Special Losses, the Principal Shareholders
shall pay the agreed upon amount of such Losses as set forth in Section
7.4(d)(ii) (or Parent shall elect in its discretion to purchase Unvested Shares
in lieu of all or part of such payment). The Escrow Agent shall be entitled to
rely on any such memorandum and distribute shares of Parent Common Stock from
the Escrow Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Securityholder Agent may demand arbitration of
the matter unless the amount of the damage or loss is at issue in pending
litigation with a third party, in which event arbitration shall not be commenced
until such amount is ascertained or both parties agree to arbitration; and in
either such event the matter shall be settled by arbitration conducted by three
arbitrators. Parent and the Securityholder Agent shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The arbitrators shall set a limited time period and establish procedures
designed to reduce the cost and time for discovery while allowing the parties an
opportunity, adequate in the sole judgment of the arbitrators, to discover
relevant information from the opposing parties about the subject matter of the
dispute. The arbitrators shall rule upon motions to compel or limit discovery
and shall have the authority to impose sanctions, including attorneys' fees and
costs, to the extent as a court of competent law or equity, should the
arbitrators determine that discovery was sought without substantial
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justification or that discovery was refused or objected to without substantial
justification. The decision of a majority of the three arbitrators as to the
validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement, and notwithstanding anything
in Section 7.4(e) hereof, the Escrow Agent shall be entitled to act in
accordance with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set forth the
award, judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators may be
entered in any court having jurisdiction. Any such arbitration shall be held in
Los Angeles County, California under the rules then in effect of the American
Arbitration Association. For purposes of this Section 7.4(f), in any arbitration
hereunder in which any claim or the amount thereof stated in the Officer's
Certificate is at issue, Parent shall be deemed to be the Non-Prevailing Party
in the event that the arbitrators award Parent less than the sum of one-half
(1/2) of the disputed amount plus any amounts not in dispute; otherwise, the
shareholders of the Company as represented by the Securityholder Agent shall be
deemed to be the Non Prevailing Party. The Non Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration and the expenses, including without
limitation, reasonable attorneys' fees and costs, incurred by the other party to
the arbitration.
(g) Securityholder Agent of the Shareholders; Power of Attorney.
(i) In the event that the Merger is approved, effective upon such
vote, and without further act of any Company Shareholder, M. Scot Wingo shall be
appointed as agent and attorney-in-fact (the "Securityholder Agent") for each
Company Shareholder (except such shareholders, if any, as shall have perfected
their appraisal or dissenters' rights under North Carolina Law), for and on
behalf of the Company Shareholders, to give and receive notices and
communications, to authorize delivery to Parent of shares of Parent Common Stock
from the Escrow Fund in satisfaction of claims by Parent, to object to such
deliveries, to agree to, negotiate, enter into settlements and compromises of,
and demand arbitration and comply with orders of courts and awards of
arbitrators with respect to such claims, and to take all actions necessary or
appropriate in the judgment of Securityholder Agent for the accomplishment of
the foregoing. Such agency may be changed by the Company Shareholders from time
to time upon not less than thirty (30) days prior written notice to Parent;
provided that the Securityholder Agent may not be removed unless holders of a
two-thirds interest of the Escrow Fund agree to such removal and to the identity
of the substituted agent. Any vacancy in the position of Securityholder Agent
may be filled by approval of the holders of a majority in interest of the Escrow
Fund. No bond shall be required of the Securityholder Agent, and the
Securityholder Agent shall not receive compensation for his or her services.
Notices or communications to or from the Securityholder Agent shall constitute
notice to or from each of the Company Shareholders.
(ii) The Securityholder Agent shall not be liable for any act
done or omitted hereunder as Securityholder Agent while acting in good faith and
in the exercise of
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reasonable judgment. The Company Shareholders on whose behalf the Escrow Amount
was contributed to the Escrow Fund shall severally indemnify the Securityholder
Agent and hold the Securityholder Agent harmless against any loss, liability or
expense incurred without negligence or bad faith on the part of the
Securityholder Agent and arising out of or in connection with the acceptance or
administration of the Securityholder Agent's duties hereunder, including the
reasonable fees and expenses of any legal counsel retained by the Securityholder
Agent.
(h) Actions of the Securityholder Agent. A decision, act, consent or
instruction of the Securityholder Agent shall constitute a decision of all the
shareholders for whom a portion of the Escrow Amount otherwise issuable to them
are deposited in the Escrow Fund and shall be final, binding and conclusive upon
each of such Company Shareholder, and the Escrow Agent and Parent may rely upon
any such decision, act, consent or instruction of the Securityholder Agent as
being the decision, act, consent or instruction of each and every such Company
Shareholder. The Escrow Agent and Parent are hereby relieved from any liability
to any person for any acts done by them in accordance with such decision, act,
consent or instruction of the Securityholder Agent.
(i) Third-Party Claims. In the event Parent becomes aware of a third
party claim which Parent believes may result in a demand against the Escrow Fund
or indemnity in respect of a Special Loss, Parent shall notify the
Securityholder Agent of such claim, and the Securityholder Agent, as
representative for the shareholders of the Company, shall be entitled, at their
expense, to participate in any defense of such claim. Parent shall have the
right in its sole discretion to settle any such claim; provided, however, that
except with the consent of the Securityholder Agent, no settlement of any such
claim with thirdparty claimants shall alone be determinative of the amount of
any claim against the Escrow Fund or indemnity in respect of a Special Loss. In
the event that the Securityholder Agent has consented to any such settlement,
the Securityholder Agent shall have no power or authority to object under any
provision of this Article VII to the amount of any claim by Parent against the
Escrow Fund or indemnity in respect of a Special Loss with respect to such
settlement.
(j) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the performance
of such duties as are specifically set forth herein, and as set forth in any
additional written escrow instructions which the Escrow Agent may receive after
the date of this Agreement which are signed by an officer of Parent and the
Securityholder Agent, and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed to be genuine and
to have been signed or presented by the proper party or parties. The Escrow
Agent shall not be liable for any act done or omitted hereunder as Escrow Agent
while acting in good faith and in the exercise of reasonable judgment, and any
act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to comply
with and obey orders, judgments or decrees of any court of law, notwithstanding
any notices, warnings or other communications from any party or any other person
to the contrary. In case the Escrow Agent
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obeys or complies with any such order, judgment or decree of any court, the
Escrow Agent shall not be liable to any of the parties hereto or to any other
person by reason of such compliance, notwithstanding any such order, judgment or
decree being subsequently reversed, modified, annulled, set aside, vacated or
found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of
any rights under any statute of limitations with respect to this Agreement or
any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow
Agent shall not be liable to any party for damages, losses, or expenses, except
for gross negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with the legal counsel in connection
with Escrow Agent's duties under this Agreement and shall be fully protected in
any act taken, suffered, or permitted by him/her in good faith in accordance
with the advice of counsel. The Escrow Agent is not responsible for determining
and verifying the authority of any person acting or purporting to act on behalf
of any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and shares of Parent Common Stock and may wait for
settlement of any such controversy by final appropriate legal proceedings or
other means as, in the Escrow Agent's discretion, the Escrow Agent may be
required, despite what may be set forth elsewhere in this Agreement. In such
event, the Escrow Agent will not be liable for damage. Furthermore, the Escrow
Agent may at its option, file an action of interpleader requiring the parties to
answer and litigate any claims and rights among themselves. The Escrow Agent is
authorized to deposit with the clerk of the court all documents and shares of
Parent Common Stock held in escrow, except all cost, expenses, charges and
reasonable attorney fees incurred by the Escrow Agent due to the interpleader
action and which the parties jointly and severally agree to pay. Upon initiating
such action, the Escrow Agent shall be fully released and discharged of and from
all obligations and liability imposed by the terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, and
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disbursements that may be imposed on Escrow Agent or incurred by Escrow Agent in
connection with the performance of his/her duties under this Agreement,
including but not limited to any litigation arising from this Agreement or
involving its subject matter.
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a successor
escrow agent which shall be accomplished as follows: the parties shall use their
best efforts to mutually agree on a successor escrow agent within thirty (30)
days after receiving such notice. If the parties fail to agree upon a successor
escrow agent within such time, the Escrow Agent shall have the right to appoint
a successor escrow agent authorized to do business in the State of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow agent
as if originally named as escrow agent. The Escrow Agent shall be discharged
from any further duties and liability under this Agreement.
(k) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent. It is understood that the fees and usual
charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or if
the Escrow Agent renders any service not provided for in this Agreement, or if
the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes in,
any litigation pertaining to this escrow or its subject matter, the Escrow Agent
shall be reasonably compensated for such extraordinary services and reimbursed
for all costs, attorney's fees, and expenses occasioned by such default, delay,
controversy or litigation. Parent promises to pay these sums upon demand.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred before 5:00 p.m. (Pacific time) on June 30, 2000 (the "End Date")
(provided that the right to terminate this Agreement under this Section
8.1(b)(i) shall not be available to any party whose willful failure to fulfill
any obligation hereunder has been the cause of, or resulted in, the failure of
the Effective Time to occur on or before such date); (ii) there shall be a final
nonappealable order of a federal or state court in effect preventing
consummation of the Merger; or (iii) there shall be any statute, rule,
regulation or order enacted, promulgated or issued or deemed applicable to the
Merger by any governmental entity that would make consummation of the Merger
illegal;
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(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger, by any Governmental Entity, which would: (i) prohibit Parent's or
the Company's ownership or operation of all or any portion of the business of
the Company or (ii) compel Parent or the Company to dispose of or hold separate
all or a portion of the business or assets of the Company or Parent as a result
of the Merger;
(d) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
hereof would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue, provided that if such
inaccuracy in the Company's representations and warranties or breach by the
Company is curable by the Company through the exercise of its commercially
reasonable efforts, then Parent may not terminate this Agreement under this
Section 8.1(d) prior to the End Date, provided the Company continues to exercise
commercially reasonable efforts to cure such breach (it being understood that
Parent may not terminate this Agreement pursuant to this Section 8.1(d) if it
shall be in material breach of this Agreement or if such breach by the Company
is cured prior to 30 days following notice to the Company of the breach,
provided, however, no cure period shall be required for a breach which by its
nature cannot be cured);
(e) by the Company, upon a breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become untrue, in either
case such that the conditions set forth in Section 6.2(a) or Section 6.2(b)
hereof would not be satisfied as of the time of such breach or as of the time
such representation or warranty shall have become untrue, provided, that if such
inaccuracy in Parent's representations and warranties or breach by Parent is
curable by Parent through the exercise of its commercially reasonable efforts,
then the Company may not terminate this Agreement under this Section 8.1(e)
prior to the End Date, provided Parent continues to exercise commercially
reasonable efforts to cure such breach (it being understood that the Company may
not terminate this Agreement pursuant to this Section 8.1(e) if it shall be in
material breach of this Agreement or if such breach by Parent is cured prior to
30 days following notice to Parent of the breach, provided, however, no cure
period shall be required for a breach which by its nature cannot be cured).
(f) By the Company, if a Material Adverse Effect with respect to
Parent shall have occurred and be continuing.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement as
provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Merger Sub or the
Company, or their respective officers, directors or shareholders (including the
Principal Shareholders), provided that each party shall remain liable for
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<PAGE> 56
any breaches of this Agreement prior to its termination; and provided further
that, the provisions of Section 5.5 and Section 5.6 and Article VIII of this
Agreement shall remain in full force and effect and survive any termination of
this Agreement.
8.3 Amendment. Except as is otherwise required by applicable law after the
shareholders of the Company approve this Agreement, this Agreement may be
amended by the parties hereto at any time by execution of an instrument in
writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Merger Sub, on the one hand, and the Company, on the other, may, to the extent
legally allowed, (i) extend the time for the performance of any of the
obligations of the other party hereto, (ii) waive any inaccuracies in the
representations and warranties made to such party contained herein or in any
document delivered pursuant hereto, and (iii) waive compliance with any of the
agreements or conditions for the benefit of such party contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in an instrument in writing signed on behalf of such
party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or mailed by registered or certified mail (return receipt
requested) or sent via facsimile (with acknowledgment of complete transmission)
to the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(i) if to Parent or Merger Sub, to:
GoTo.com, Inc.
74 North Pasadena Avenue
Pasadena, California 91103
Attention: Joshua Metzger, Esq.
Telephone No.: (626) 685-5600
Facsimile No.: (626) 685-5601
with a copy to:
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<PAGE> 57
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Martin W. Korman, Esq.
Daniel R. Mitz, Esq.
Bradley L. Finkelstein, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 493-6811
(ii) if to the Company, to:
AuctionRover.com, Inc.
3000 Aerial Center Suite 160
Morrisville, North Carolina 27560
Attention: M. Scot Wingo
Telephone No.: (919) 465-4682
Facsimile No.: (919) 388-9405
with a copy to:
Daniels & Daniels, P.A
Post Officer Drawer 12218
Research Triangle Park, NC 27709-2218
Attention: Walter E. Daniels, Esq.
Telephone No.: (919) 544-5444
Facsimile No.: (919) 544-5920
(iii) if to the Securityholder Agent:
M. Scot Wingo
c/o AuctionRover.com, Inc.
3000 Aerial Center Suite 160
Morrisville, North Carolina 27560
Telephone No.: (919) 465-4682
Facsimile No.: (919) 388-9405
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<PAGE> 58
(iv) if to the Escrow Agent:
U.S. Bank Trust, National Association
Corporate Trust Services
One California Street
San Francisco, California 94111
Attention: Ann Gadsby
Telephone No.: (415) 273-4532
Facsimile No.: (415) 273-4593
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." As used herein, the term "Material Adverse Effect" shall mean a
material adverse effect on the business, assets (including intangible assets),
financial condition, prospects, capitalization or results of operations of the
Company. The table of contents and headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart and that the Escrow Agent need not
sign this Agreement for it to be effective among the other parties hereto.
9.4 Entire Agreement; Assignment. This Agreement, the Company Disclosure
Letter and Exhibits hereto, the Mutual Nondisclosure Agreement and the documents
and instruments and other agreements among the parties hereto referenced herein:
(a) constitute the entire agreement among the parties with respect to the
subject matter hereof and supersede all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof; (b) are not intended to confer upon any other person any rights or
remedies hereunder; and (c) shall not be assigned by operation of law or
otherwise except as otherwise specifically provided, except that Parent and
Merger Sub may assign their respective rights and delegate their respective
obligations hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other
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<PAGE> 59
remedy conferred hereby, or by law or equity upon such party, and the exercise
by a party of any one remedy will not preclude the exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
9.9 Specific Performance. The parties hereto agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached. It
is accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any court of the United States or any state
having jurisdiction, this being in addition to any other remedy to which they
are entitled at law or in equity.
9.10 Attorney's Fees. Except as provided in Section 7.4(f)(iii), if any
action or other proceeding relating to the enforcement of any provision of this
Agreement is brought by any party hereto, the prevailing party shall be entitled
to recover reasonable attorney's fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled); provided, in
the event the Company is liable for such fees hereunder, Parent shall not be
restricted to satisfying such liability out of the Escrow Fund.
(Remainder of page intentionally left blank.)
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<PAGE> 60
IN WITNESS WHEREOF, Parent, Merger Sub, the Company, the Principal
Shareholders, and, with respect to Article VII only, the Escrow Agent and the
Securityholder Agent, and have caused this Agreement to be signed by their duly
authorized respective officers, all as of the date first written above.
AUCTIONROVER.COM, INC. GOTO.COM, INC.
By: By:
--------------------------------- ----------------------------------
Name: Name:
------------------------------- --------------------------------
Title: Title:
---------------------------- -------------------------------
PRINCIPAL SHAREHOLDERS PAW ACQUISITION CORP.
By: By:
--------------------------------- ----------------------------------
M. Scott Wingo
Name:
--------------------------------
By: Title:
--------------------------------- -------------------------------
Aris A. Buinevicius
SECURITYHOLDER AGENT ESCROW AGENT:
U.S. BANK TRUST,
NATIONAL ASSOCIATION
- ------------------------------------
M. Scott Wingo By:
----------------------------------
Name:
--------------------------------
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-76415) pertaining to the 1998 Stock Plan and 1999 Employee
Stock Purchase Plan of GoTo.com and to the incorporation by reference in the
Registration Statement (Form S-8 dated February 10, 2000) pertaining to the
Cadabra, Inc. 1998 Stock Plan, and to the incorporation by reference in the
Registration Statement (Form S-8 dated May 3, 2000) pertaining to the
AuctionRover.com, Inc. 1999 Stock Award Plan and the AuctionRover.com, Inc.
1999 Executive Stock Award Plan of our report dated February 26, 2000, with
respect to the financial statements of AuctionRover.com, Inc. included in the
Current Report (Form 8-K) filed with the Securities and Exchange Commission on
May 5, 2000.
/s/ Ernst & Young LLP
Los Angeles, California
May 2, 2000
<PAGE> 1
EXHIBIT 99.1
GOTO.COM ENTERS AUCTION ARENA
WITH AGREEMENT TO ACQUIRE AUCTIONROVER.COM
3.47 Million Share Stock Deal to Extend GoTo.com's Functionality
with Services for Auction Buyers And Sellers
PASADENA, California -- March 9, 2000 -- GoTo.com (NASDAQ: GOTO), the company
that pioneered an online marketplace introducing consumers and advertisers,
today announced that it entered into a definitive agreement to acquire
AuctionRover.com, a one-stop resource for online auctions, for 3.47 million GoTo
shares. The purchase will allow GoTo to carry listings of more than 50 other
major auction sites such as eBay, Yahoo! Auctions and Amazon Auctions.
AuctionRover was the first auction site licensed to search eBay and display eBay
listings on its search results. The transaction is expected to close in April
2000.
AuctionRover.com is a leading site for auction resources on the Web.
AuctionRover's proprietary technology gives buyers a simple tool to search for
products and services being auctioned on the Internet. AuctionRover helps
auction sellers address the problem of managing inventories, keeping track of
multiple auctions, and completing transactions. This powerful set of tools
assists sellers in posting, ad creation, and post sale management, enabling them
to more efficiently reach consumers across the Web and across multiple auction
sites. Further, AuctionRover is the only major auction site licensed to search
eBay and display eBay listings on its search results.
AuctionRover.com Chief Executive Officer Scot Wingo said, "AuctionRover
understands the online auction space, and we've created a leading auction
resource site with powerful and widely used seller tools. The combination of
AuctionRover's expertise with GoTo.com's unique capabilities and large base of
consumers and merchants will create tremendous value for all the participants in
online auctions."
The acquisition of AuctionRover.com represents a further expansion of the
GoTo.com search offering to be supported by its unique business model. With the
addition of shopping and auction search capabilities, GoTo is building the most
comprehensive way for consumers to find the most relevant products and services
across the Internet. GoTo's advertisers and merchants will be able to place
search listings within GoTo's search results, place product shopping listings
within GoTo shopping through Cadabra, and place products and services into the
auction channel through AuctionRover.
"GoTo is dedicated to helping consumers find what they're looking for, and
AuctionRover is a natural extension to our marketplace," said Ted Meisel,
GoTo.com's Chief Executive Officer.
"For example, visitors who search on GoTo for 'CD Player' will get a
well-organized listing of online stores selling CD players, and Web sites with
information and reviews about different brands and models of CD players. GoTo
Shopping gives consumers a way to search for a CD player by price as well as by
attribute, such as 'disk capacity.' Now with AuctionRover, consumers will also
get a list of auctions for CD players and accessories."
GoTo.com will be able to realize three powerful synergies through the
acquisition of AuctionRover. First, once the acquisition is fully integrated,
GoTo believes it will gain a new source of revenue, as they leverage their pay
for placement model across an increased set of auction listings. Second, GoTo
will be able to promote auctions and auction sales across both its 15 million
unique visitors, and its database of over 21,000 existing advertisers. Lastly,
auctions will provide two important benefits to GoTo's affiliate partners - a
valuable new feature for the consumers visiting affiliate sites, and a new
source of revenue for the affiliate.
About GoTo.com GoTo.com (NASDAQ: GOTO) operates an online marketplace that
introduces consumers and advertisers. Consumers conduct searches using the
GoTo.com search service at its Web site and through its affiliate partners, at
thousands of locations across the Internet. Advertisers bid in an ongoing
auction for priority placement in the search results with the highest bidder's
site appearing first in the results. Each advertiser pays GoTo.com the amount of
its bid whenever a consumer clicks on an advertiser's listing in the search
results. This dynamic, together with GoTo.com's streamlined search method,
improves a consumer's ability to quickly and easily find relevant Web sites
providing products, services and information. GoTo.com is located in Pasadena
and can be found online at http://www.goto.com.
<PAGE> 2
About AuctionRover.com Founded in July 1999, AuctionRover.com is the one-stop
resource empowering the online auction community. This powerful new site allows
buyers to search for items across auction sites at its Web site and through its
growing community of affiliate partners. Sellers are able to host images and
counters, manage inventory and schedule postings. AuctionRover.com provides
innovative, relevant content keeping buyers and sellers informed and
entertained. AuctionRover.com is headquartered in Research Triangle Park, N.C.,
with a West Coast office in San Francisco. The company has received funding from
Draper Atlantic - the East Coast affiliate of Silicon Valley's Draper Fisher
Jurvetson - and internet.com Venture Fund I LLC, the venture capital arm of
internet.com Corporation (NASDAQ: INTM). For more information, visit
AuctionRover.com at http://www.auctionrover.com.
Certain statements in this news release constitute "forward-looking statements."
These forward-looking statements are inherently uncertain. Actual results may
differ materially from these forward-looking statements due to risks such as:
the risk that the transaction between GoTo.com and AuctionRover may not close,
the risk that GoTo.com will not be able to integrate AuctionRover in an
efficient and timely manner and the risk that GoTo.com will not realize value
from the acquisition. For a discussion of some of the other risks and factors
that could affect GoTo.com's future results, see the discussion of "Risk
Factors" in its Quarterly Report on Form 10-Q for the quarter ended September
30, 1999.
CONTACTs:
Middleberg and Associates Al Duncan
Rob Argento, 212/699-2567 GoTo.com
[email protected] 626/685-5714
Richard Berman, 415/374-2207 [email protected]
[email protected]
<PAGE> 1
EXHIBIT 99.2
CONTACTS:
Al Duncan Richard Berman
GoTo.com Middleberg + Associates
626-685-5714 415-374-2207
[email protected] [email protected]
GOTO.COM COMPLETES ACQUISITION OF AUCTIONROVER.COM
GOTO.COM EXPANDS ITS ONLINE MARKETPLACE THROUGH ACQUISITION OF LEADING
COMPANY THAT PROVIDES TOOLS FOR AUCTION BUYERS AND SELLERS
PASADENA, CALIFORNIA (MAY 4, 2000) -- GoTo.com (NASDAQ: GOTO), the company
that revolutionizes the way people and businesses find products, services and
information on the Internet, today announced that it has completed the
acquisition of AuctionRover.com, a one-stop resource for online auctions. the
deal was first announced on March 9, 2000, for 3.47 million GoTo shares. The
purchase will allow GoTo to carry listings of more than 100 other major auction
sites licensed to search eBay and display eBay listings on its search results.
The acquisition of AuctionRover.com represents a further expansion of the
GoTo.com search offering and an extension of its unique business model. With
the addition of shopping and auction search capabilities, GoTo offers its
partners the most comprehensive set of tools with which their users can find
the most relevant products and services across the Internet. GoTo's advertisers
and merchants will be able to place search listings within GoTo's search
results, place product shopping listings within GoTo shopping through Cadabra,
and place products and services into the auction channel through AuctionRover,
which will be renamed GoTo Auctions.
"AuctionRover is a natural extension to our marketplace," said Ted Meisel,
GoTo.com's Chief Executive Officer. "The completion of this acquisition
represents another valuable service -- auctions -- that we will provide to our
affiliate partners."
ABOUT GOTO.COM
GoTo.com (NASDAQ: GOTO) revolutionizes the way consumers and businesses find
products, services and information, by operating a vast collection of vertical
markets on the Internet. GoTo.com provides ecommerce services to Web sites
across the Internet, including Web site search, comparison shopping and
auctions. GoTo.com reaches an estimated 22 million unique users through its
tens of thousands of affiliate partners, including Earthlink/Mindspring,
Microsoft, Netscape and Go2Net, and has more than 25,000 active, paying
advertisers. GoTo.com ended the first quarter of 2000 having made approximately
88,000,000 paid introductions between consumers and advertisers. GoTo.com is
located in Pasadena, California and can be found online at www.goto.com.
# # #
Certain statements in this news release constitute "forward-looking
statements." These forward-looking statements are inherently uncertain. Actual
results may differ materially from these forward-looking statements due to
risks such as: the risk that GoTo.com will not realize value from the
acquisition and the risk that GoTo.com will not be able to integrate
AuctionRover in an efficient and timely manner. For a discussion of some of the
other risks and factors that could affect GoTo.com's future results, see the
discussion of "Risk Factors" in its Form 10-K for the quarter ended
December 31, 1999.
<PAGE> 1
EXHIBIT 99.3
GOTO.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
OVERVIEW
On May 3, 2000, GoTo.com, Inc. (GoTo) acquired AuctionRover.com, Inc.
(AuctionRover), an online resource for auctions. Pursuant to the Agreement and
Plan of Reorganization, GoTo acquired all of the outstanding shares of capital
stock and assumed all outstanding options to acquire shares of capital stock of
AuctionRover for 3,470,588 shares of GoTo common stock, including 521,408 shares
to be issued upon the exercise of options assumed by GoTo. The acquisition will
be accounted for as a purchase. Under the purchase method of accounting, the
purchase price is allocated to the assets acquired and liabilities assumed based
on their estimated fair values as determined by GoTo at the date of the
acquisition. The excess of the acquisition cost over the fair value of the net
tangible assets will be allocated to any identified intangible assets, with the
remaining balance allocated to goodwill. Goodwill is expected to be amortized on
a straight-line basis over three years. The purchase price was valued at
approximately $174.2 million, which consisted of GoTo Common Stock of $173.7
million valued at the closing price of GoTo Common Stock on the date the
exchange ratio was set (March 8, 2000), net of expected proceeds from the
exercise of stock options assumed by GoTo and including acquisition costs of
approximately $500,000 for legal and accounting services. The purchase price was
determined by arms-length negotiations between the parties. Timothy Draper, a
director of GoTo, is affiliate with certain entities, which are principal
shareholders of AuctionRover. GoTo intends to continue to operate AuctionRover's
business.
On January 31, 2000, GoTo acquired Cadabra Inc. (Cadabra), an online
comparison shopping engine. Pursuant to the Agreement and Plan of
Reorganization, GoTo acquired all of the outstanding shares of capital stock and
assumed all outstanding options to acquire shares of capital stock of Cadabra,
for $8 million in cash and 3,283,672 shares of GoTo common stock, including
214,833 shares to be issued upon exercise of options assumed by GoTo. The
acquisition was accounted for as a purchase. The total purchase price of the
acquisition was approximately $263.1 million and consisted of cash of $8
million; GoTo common stock of $252.5 million valued at the closing price of
GoTo's common stock on the date the acquisition exchange ratio was set, net of
expected proceeds from the exercise of Cadabra stock options assumed by GoTo;
and acquisition costs of $2.6 million, primarily for investment banking, legal
and accounting services. On March 16, 2000 GoTo filed a Form 8-K/A, which
amended the Current Report on Form 8-K filed on February 3, 2000 to include
required information under Item 7, Financial Statements and Exhibits related to
GoTo's acquisition of Cadabra.
The following unaudited pro forma condensed combined balance sheet as of
December 31, 1999 give effect to the acquisitions of AuctionRover and Cadabra as
if they had occurred on December 31, 1999 and the unaudited pro forma condensed
combined statement of operations for the year ended December 31, 1999 give
effect to the acquisitions of AuctionRover and Cadabra as if they had occurred
as of January 1, 1999.
The unaudited pro forma condensed combined information is for illustrative
purposes only and reflect certain estimates and assumptions regarding the
transactions as described in the notes to unaudited pro forma condensed combined
financial information. The unaudited pro forma condensed combined financial
information is based on the historical financial statements of GoTo,
AuctionRover and Cadabra and should be read in conjunction with those financial
statements and related notes. The unaudited pro forma condensed combined balance
sheet and statement of operations are not necessarily indicative of the
financial position and operating results that would have been achieved had the
transactions been in effect as of the beginning of the period presented and
should not be construed as being representative of future financial position or
operating results.
<PAGE> 2
GOTO.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
(CADABRA PRO FORMA ADJUSTMENTS AS
PREVIOUSLY FILED ON FORM 8-K/A ON
MARCH 16, 2000)
----------------------------------
AUCTIONROVER CADABRA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
GOTO AUCTIONROVER ADJUSTMENTS BALANCES CADABRA ADJUSTMENTS COMBINED
-------- ------------ ------------ --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $11,914 $ 1,653 $ -- $ 13,567 $ 5,018 $ -- $ 18,585
Short-term investments................. 93,409 -- -- 93,409 -- (8,000)(f) 85,409
Accounts receivable, net............... 2,927 -- -- 2,927 52 -- 2,979
Prepaid expenses and other............. 851 47 -- 898 110 (88)(g) 920
Prepaid marketing expenses............. 2,034 -- -- 2,034 -- -- 2,034
-------- --------- --------- --------- -------- --------- ---------
Total current assets..................... 111,135 1,700 -- 112,835 5,180 (8,088) 109,927
Property and equipment:
Furniture and fixtures................. 1,923 89 -- 2,012 130 -- 2,142
Computer hardware...................... 9,036 682 -- 9,718 380 -- 10,098
Computer software...................... 4,234 8 -- 4,242 95 -- 4,337
-------- --------- --------- --------- -------- --------- ---------
15,193 779 -- 15,972 605 -- 16,577
Accumulated depreciation and amortization (2,490) (40) -- (2,530) (162) -- (2,692)
-------- --------- --------- --------- -------- --------- ---------
12,703 739 -- 13,442 443 -- 13,885
Goodwill............................... -- -- 171,799 (a) 171,799 -- 244,501 (f) 416,300
Intangible assets, net................. -- -- -- -- -- 6,035 (f) 6,035
Long-term investments.................. 4,932 -- -- 4,932 -- -- 4,932
Other assets........................... 742 217 -- 959 101 (721)(h) 339
--- --------- --------- --------- -------- --------- ---------
Total assets............................. $129,512 $ 2,656 $ 171,799 $ 303,967 $ 5,724 $ 241,727 $ 551,418
======== ========= ========= ========= ======== ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $10,465 $ 122 $ -- $ 10,587 $ 517 $ -- $ 11,104
Accrued expenses....................... 2,562 114 500 (b) 3,176 193 1,879 (h) 5,248
Deferred revenue....................... 2,058 -- -- 2,058 -- (88)(g) 1,970
Current portion of debt................ 131 -- -- 131 -- -- 131
Current portion of capital lease
obligations ......................... 754 22 -- 776 -- -- 776
--------- --------- --------- --------- -------- --------- ---------
Total current liabilities................ 15,970 258 500 16,728 710 1,791 19,229
Long-term capital lease obligations...... 768 40 -- 808 -- -- 808
Convertible redeemable preferred stock... -- -- -- -- 7,704 (7,704)(i) --
STOCKHOLDERS' EQUITY:
Convertible preferred stock............ -- 2,380 (2,380)(c) -- 1,498 (1,498)(i) --
Common stock........................... 5 1,712 (1,712)(c) 5 15,500 (15,500)(i) 5
Additional paid-in capital on common
stock ............................... 158,799 -- 173,657 (a) 332,456 -- -- 584,956
-- -- -- -- 252,500 (f)
Warrants on common stock............... -- 753 (753)(c) -- -- -- --
Deferred compensation, net............. (2,584) (926) 926 (c) (2,584) (11,446) 11,446 (i) (2,584)
Accumulated deficit.................... (43,405) (1,561) 1,561 (c) (43,405) (8,242) 8,242 (i) (50,955)
-- -- (7,550)(f) --
Unrealized losses on short-term and
long-term investments................ (41) -- -- (41) -- -- (41)
-------- --------- --------- --------- -------- --------- ---------
Total stockholders' equity............... 112,774 2,358 171,299 286,431 (2,690) 247,640 531,381
-------- --------- --------- --------- -------- --------- ---------
Total liabilities and stockholders'
equity ................................ $ 129,512 $ 2,656 $ 171,799 $ 303,967 $ 5,724 $ 241,727 $ 551,418
========= ========= ========= ========= ======== ========= =========
</TABLE>
See accompanying notes.
<PAGE> 3
GOTO.COM, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(CADABRA PRO FORMA ADJUSTMENTS AS
PREVIOUSLY FILED ON FORM 8-K/A ON
MARCH 16, 2000)
---------------------------------
AUCTIONROVER CADABRA
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
GOTO AUCTIONROVER ADJUSTMENTS BALANCES CADABRA ADJUSTMENTS COMBINED
-------- ------------ ------------ ---------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................................... $26,809 $ -- $ -- $ 26,809 $ 48 $ (112)(j) $ 26,745
Cost of revenue........................... 6,213 -- -- 6,213 108 -- 6,321
-------- -------- --------- ---------- -------- --------- ----------
Gross profit............................ 20,596 -- -- 20,596 (60) (112) 20,424
Operating expenses:
Marketing, sales and services........ 34,459 701 -- 35,160 499 (112)(j) 35,547
General and administrative........... 12,467 292 -- 12,759 1,224 -- 13,983
Product development.................. 3,689 525 -- 4,214 2,078 -- 6,292
Amortization of goodwill............. -- -- 57,266 (d) 57,266 -- 81,500 (k) 138,766
Amortization of intangible assets.... -- -- -- -- -- 2,012 (l) 2,012
Amortization of deferred compensation 3,585 76 -- 3,661 3,420 -- 7,081
-------- -------- --------- ---------- -------- --------- ----------
54,200 1,594 57,266 113,060 7,221 83,400 203,681
-------- -------- --------- ---------- -------- --------- ----------
Loss from Operations..................... (33,604) (1,594) (57,266) (92,464) (7,281) (83,512) (183,257)
Other income:
Government grant....................... -- -- -- -- 580 -- 580
Interest income........................ 3,777 33 -- 3,810 202 (440)(m) 3,572
Other income........................... 566 -- -- 566 -- -- 566
-------- -------- --------- ---------- -------- --------- ----------
Other income............................. 4,343 33 -- 4,376 782 (440) 4,718
Net loss before tax...................... (29,261) (1,561) (57,266) (88,088) (6,499) (83,952) (178,539)
Loss before provision for income taxes... 1 -- -- 1 1 -- 2
- -------- --------- ---------- -------- --------- ----------
Net loss................................ $(29,262) $ (1,561) $ (57,266) $ (88,089) $ (6,500) $ (83,952) $ (178,541)
======== ======== ========= ========== ======== ========= ==========
Pro forma net loss per share............. $ (0.77) $ (2.21) $ (4.24)
Historical basic and diluted net loss
per share ............................. $ (1.04) $ (2.94) $ (5.55)
Weighted average shares used to compute
pro forma net loss per share........... 38,219 1,707 (e) 39,926 2,230 (n) 42,156
Weighted average shares used to compute
historical basic and diluted net loss
per share .............................. 28,207 1,707 (e) 29,914 2,230 (n) 32,144
</TABLE>
See accompanying notes.
<PAGE> 4
GOTO.COM, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
Pro forma adjustments giving effect to the acquisition of AuctionRover in
the unaudited pro forma condensed combined balance sheet as of December 31,
1999, reflect the following:
(a) Preliminary allocation of purchase consideration to the fair value
of net tangible assets as illustrated below (in thousands):
Estimated acquisition cost:
Stock issued.................................... $ 173,657
Acquisition expenses............................ 500
---------
Total estimated acquisition cost.................. $ 174,157
=========
Purchase price allocation:
Fair value of net tangible assets............... $ 2,358
Excess of the acquisition cost over the fair value
of the net tangible assets (Goodwill)......... 171,799
---------
Total purchase price allocation................. $ 174,157
=========
For purposes of the unaudited pro forma condensed combined financial
information above, amounts allocated to goodwill are based on the estimated
fair value of assets acquired and liabilities as of December 31, 1999. The
allocation of the purchase price is preliminary due to the recent timing of
the acquisition and is subject to more detailed analysis of intangible
assets which is expected to be performed during the second quarter of 2000.
(b) Accrual of estimated acquisition costs of $500,000.
(c) Elimination of AuctionRover's stockholders' equity, including
convertible preferred stock and deferred compensation.
Pro forma adjustments giving effect to the acquisition of AuctionRover in
the unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999, reflect the following:
(d) Amortization of the excess of acquisition cost over the fair value
of net tangible assets acquired from the AuctionRover acquisition on a
straight-line basis over three years.
(e) Increase to the denominator in the loss per share calculation is
based on approximately 1,707,414 shares of GoTo common stock as calculated
below. The effect of outstanding stock options and restricted stock are excluded
from the calculation of pro forma net loss per share and historical basic and
diluted net loss per share as their inclusion would be antidilutive.
Total GoTo common stock..................... 3,470,588
Unissued shares related to options.......... (521,408)
Restricted GoTo common stock................(1,241,766)
-----------
1,707,414
===========
Pro forma adjustments giving effect to the acquisition of Cadabra in the
unaudited pro forma condensed combined balance sheet as of December 31, 1999,
reflect the following:
(f) Allocation of purchase consideration to the fair value of net
tangible assets, identified intangible assets, and in-process research and
development acquired as illustrated below (in thousands):
<PAGE> 5
Estimated acquisition cost:
Short-term investments.......................... $ 8,000
Stock issued.................................... 252,500
Acquisition expenses............................ 2,600
---------
Total estimated acquisition cost................ $ 263,100
=========
Purchase price allocation:
Fair value of net tangible assets............... $ 5,014
In-process research and development............. 7,550
Identified intangible assets.................... 6,035
Goodwill........................................ 244,501
---------
Total purchase price allocation................. $263,100
=========
The projects identified as in-process research and development are those
that are currently underway, that will require additional effort to establish
technological feasibility and have no alternative future use. The projects are
expected to add features that will enhance the functionality of the service. To
determine the value of in-process research and development, the expected future
cash flows, including costs to reach technological feasibility, were discounted,
taking into account risks related to the characteristics and applications of the
technology, existing and future markets, and assessments of the life cycle stage
of the technology. GoTo obtained an independent expert's appraisal to derive the
purchase price allocation. The resulting valuation of $7.6 million will be
expensed immediately following the acquisition. The effect of the write-off of
in-process research and development is reflected in the unaudited pro forma
condensed combined balance sheet as an increase to accumulated deficit; however,
the unaudited pro forma condensed combined statement of operations does not
reflect this charge.
Identified intangible assets consist of developed technology of $5.5
million and assembled workforce of $585,000. To determine the value of developed
technology, the expected future cash flows attributable to existing technology
were discounted, taking into account risks related to the characteristics and
applications of the technology, existing and future markets, and assessments of
the life cycle stage of the technology. The value of the assembled work force
was derived by estimating the costs to replace the existing employees, including
recruiting and hiring costs and training costs for each category of employee.
GoTo obtained an independent expert's appraisal to derive the purchase price
allocation. Identified intangible assets will be amortized on a straight-line
basis over three years.
For purposes of the unaudited pro forma condensed combined financial
information above, amounts allocated to goodwill are based on the estimated fair
value of assets acquired and liabilities as of December 31, 1999. The estimated
fair value of the net tangible assets as of the acquisition closing date of
January 31, 2000, was $4.4 million, which resulted in an allocation of goodwill
in an amount of $245.1 million. Goodwill will be amortized on a straight-line
basis over a period of three years.
(g) Elimination of intercompany prepaid expenses and deferred revenue.
(h) Accrual and reclassification of estimated acquisition costs of
$2.6 million.
(i) Elimination of Cadabra's stockholders' equity, including
convertible redeemable preferred stock, convertible preferred stock and
deferred compensation.
Pro forma adjustments giving effect to the acquisition of Cadabra in the
unaudited pro forma condensed combined statement of operations for the year
ended December 31, 1999, reflect the following:
(j) Elimination of intercompany revenue and expense.
(k) Amortization of goodwill from the Cadabra acquisition on a
straight-line basis over three years.
(l) Amortization of identified intangible assets from the Cadabra
acquisition on a straight-line basis over three years.
(m) Imputed decrease in interest income resulting from pro forma
decrease in short-term investments that would have resulted from the $8
million acquisition payment calculated at GoTo's average rate of return on
short-term investments for the year.
<PAGE> 6
(n) Increase to the denominator in the loss per share calculation is
based on approximately 2,229,802 shares of GoTo common stock as calculated
below. The effect of outstanding stock options and restricted stock are
excluded from the calculation of pro forma net loss per share and
historical basic and diluted net loss per share as their inclusion would be
antidilutive.
SHARES
----------
Total GoTo common stock..........................3,283,672
Unissued shares related to options............... (214,833)
Restricted GoTo common stock..................... (839,037)
---------
2,229,802
=========
<PAGE> 1
EXHIBIT 99.4
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
AuctionRover.Com, Inc. (a Development Stage Company)
We have audited the accompanying balance sheet of AuctionRover.com, Inc. (a
development stage company) as of December 31, 1999 and the related statement of
operations, stockholders' equity, and cash flows for the period June 9, 1999
(date of inception) through December 31, 1999. 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 auditing standards generally
accepted in the United States. 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 AuctionRover.com, Inc. (a
development stage company) at December 31, 1999, and the results of its
operations and its cash flows for the period June 9, 1999 (date of inception)
through December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ Ernst & Young LLP
Los Angeles, California
February 26, 2000
<PAGE> 2
AUCTIONROVER.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
CURRENT ASSETS:
Cash................................................... $ 1,653,000
Prepaid expenses....................................... 21,000
Other current assets................................... 26,000
-----------
Total current assets..................................... 1,700,000
Property and equipment, net.............................. 739,000
Other assets............................................. 217,000
-----------
Total assets............................................. $ 2,656,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 122,000
Accrued expenses....................................... 114,000
Current portion of capital lease obligations........... 22,000
-----------
Total current liabilities................................ 258,000
Long-term capital lease obligations...................... 40,000
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock; $0.001 par
value, 25,000,000 shares authorized; 5,900,000
shares issued and outstanding; liquidation
preference of $3,000,000 ........................... 2,380,000
Common Stock, no par value, 75,000,000 shares
authorized; 14,200,000 shares issued and
outstanding......................................... 1,712,000
Warrants for common stock.............................. 753,000
Deferred compensation.................................. (926,000)
Accumulated deficit during the development stage....... (1,561,000)
-----------
Total stockholders' equity............................... 2,358,000
-----------
Total liabilities and stockholders' equity............... $ 2,656,000
===========
</TABLE>
See accompanying notes.
<PAGE> 3
AUCTIONROVER.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 9, 1999
(DATE OF INCEPTION)
THROUGH
DECEMBER 31, 1999
--------------------
<S> <C>
Operating expenses:
Marketing and sales............... $ 701,000
General and administrative........ 292,000
Product development............... 525,000
Amortization of deferred
compensation .................. 76,000
----------
1,594,000
Loss from operations................ (1,594,000)
Other income (expense):
Interest income................... 36,000
Interest expense.................. (3,000)
----------
Net loss............................ $(1,561,000)
===========
</TABLE>
See accompanying notes.
<PAGE> 4
AUCTIONROVER.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' EQUITY
PERIOD FROM JUNE 9, 1999 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1999
<TABLE>
<CAPTION>
SERIES A ACCUMULATED
PREFERRED STOCK COMMON STOCK WARRANTS DEFICIT DURING TOTAL
---------------------- ----------------------- FOR COMMON DEFERRED DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT STOCK COMPENSATION STAGE EQUITY
---------- ---------- ---------- ---------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of Common Stock.. 14,200,000 $ 710,000 $ 710,000
Issuance of Series A
Convertible Preferred
Stock, net of $31,000
of issuance costs..... 5,900,000 $2,380,000 2,380,000
Issuance of warrants..... $ 753,000 753,000
Stock option compensation. 1,002,000 $(1,002,000) --
Amortization of deferred
compensation............ 76,000 76,000
Net loss.................. $(1,561,000) (1,561,000)
-------- ---------- ---------- ---------- --------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1999.................... 5,900,000 $2,380,000 14,200,000 $1,712,000 $ 753,000 $ (926,000) $(1,561,000) $ 2,358,000
========= ========== ========== ========== ========= =========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE> 5
AUCTIONROVER.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JUNE 9, 1999
(DATE OF INCEPTION)
THROUGH
DECEMBER 31, 1999
------------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................... $(1,561,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............. 40,000
Amortization of deferred compensation..... 76,000
Changes in operating assets and liabilities:
Prepaid expenses........................ (21,000)
Other current assets.................... (26,000)
Accounts payable........................ 122,000
Accrued expenses........................ 114,000
----------
Net cash used in operating activities........ (1,256,000)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment (707,000)
Other assets................................. (54,000)
----------
Net cash used in investing activities........ (761,000)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of Common Stock... 710,000
Net proceeds from the issuance of
Preferred Stock ........................... 2,969,000
Payments under capital leases................ (9,000)
----------
Net cash provided by financing activities.... 3,670,000
----------
Net increase in cash........................... 1,653,000
Cash at beginning of period.................... --
----------
Cash at end of period.......................... $1,653,000
==========
Supplemental disclosures:
Interest paid............................. $ 3,000
Non-cash Investing and Financing Activities:
Property acquired through capital lease
obligations ............................ $ 72,000
Issuance of warrants for Common Stock..... $ 753,000
</TABLE>
See accompanying notes.
<PAGE> 6
AUCTIONROVER.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION
AuctionRover.com, Inc. (the Company) was incorporated in June 1999, in the
state of North Carolina, and officially launched its Web site on October 4,
1999. The Company has created and operates a one-stop resource for online
auctions.
The Company plans to earn revenue from listing fees for inclusion in the
search engine, fees for preferred placement and sponsorships on its Web site,
banner advertising on its Web site and transaction fees for referrals from items
listed in its search results. No revenues have been earned through December 31,
1999. To date the Company has devoted the majority of its efforts to product
development activities and the raising of capital and has recorded no revenue.
As such, the Company is considered to be in the development stage at December
31, 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less at the date of purchase to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated using the
straight-line method over the estimated useful lives of the assets.
Property and equipment under capital leases and leasehold improvements are
recorded at cost and amortized using the straight-line method over the shorter
of the estimated useful life of the asset or the lease term.
Depreciation periods for property and equipment are as follows:
Furniture and fixtures........................ 3 to 7 years
Computer hardware............................. 3 years
Computer software............................. 3 years
PRODUCT DEVELOPMENT
Product development expenses consist of costs incurred by the Company to
develop, enhance, manage, monitor and operate its Internet site. Product
development expenses include compensation and related expenses, costs of
computer hardware and software, and costs incurred in developing features and
functionality of the service. Product development costs have been expensed as
incurred in accordance with Statement of Position 98-1 "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP
98-1 requires that costs incurred in the preliminary project and
post-implementation stages of an internal use software project be expensed as
incurred and that certain costs incurred in the application development stage of
a project be capitalized.
<PAGE> 7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, which are comprised of cash in demand
deposit accounts, deposits, and accounts payable are carried at cost which
approximates their fair market value at the reporting date.
LONG-LIVED ASSETS
The Company evaluates the recoverability of its property and equipment and
other assets in accordance with Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of,"
(SFAS No. 121). The Company assesses the impairment of long-lived assets and
certain identifiable intangibles whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. SFAS No.
121 requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the estimated future undiscounted cash flows
attributable to such assets or the business to which such intangible assets
relate. To date, no such impairment has been indicated.
MARKETING AND SALES EXPENSES
Marketing and sales expenses consist of costs, including salaries and
benefits, of all personnel involved in the marketing and sales effort. Marketing
and sales expenses also include costs of advertising, trade shows and certain
indirect costs.
ADVERTISING COSTS
The cost of advertising the services and products offered by the Company
are expensed as incurred. Advertising expense for the period from June 9, 1999
(date of inception) through December 31, 1999 amounted to $374,000.
INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). Under SFAS No.
109, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax basis of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Valuation allowances are established when
necessary.
STOCK-BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB No. 25), and related
interpretations, in accounting for its employee stock options rather than the
alternative fair value accounting allowed by Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). APB
No. 25 provides that the compensation expense relative to the Company's employee
stock options is measured based on the intrinsic value of the stock option. SFAS
No. 123 requires companies that continue to follow APB No. 25 to provide a pro
forma disclosure of the impact of applying the fair value method of SFAS No.
123.
COMPREHENSIVE INCOME (LOSS)
The Company has adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," (SFAS
No. 130). SFAS No. 130 requires the Company to display an amount representing
comprehensive income for the year in a financial statement which is displayed
with the same prominence as other financial statements. The Company had no items
of comprehensive income (loss) during the reporting period.
SEGMENT AND GEOGRAPHIC INFORMATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information". This statement requires companies to report
information about operating segments in annual financial statements. It also
requires segment disclosures about products and services, geographic areas and
major customers. Management has determined that the Company does not have any
separately reportable operating segments as of the reporting date.
<PAGE> 8
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company operates in one principal business segment across domestic and
international markets. Substantially all of the operating results and
identifiable asset are in the United States.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
Furniture and fixtures.............. $ 89,000
Computer hardware................... 682,000
Computer software................... 8,000
---------
Total costs......................... 779,000
Less accumulated depreciation....... (40,000)
---------
$ 739,000
=========
The Company leases certain equipment under capital lease agreements. The
cost and accumulated amortization of equipment under capital leases at December
31, 1999 was approximately $72,000 and $11,000, respectively.
4. OTHER ASSETS
Other assets is comprised of the following:
Deposits...................... $ 53,000
Deferred Financing cost....... 164,000
---------
$ 217,000
=========
5. INCOME TAXES
The components of the deferred tax assets and related valuation allowance
at December 31, 1999, as are follows:
Net operating loss carryforwards.... $ 568,000
----------
Deferred tax assets................. 568,000
Valuation allowance................. (568,000)
----------
$ --
==========
Due to the uncertainty surrounding the timing of realizing the benefits of
its deferred tax assets in future tax returns, the Company has recorded a
valuation allowance against its deferred tax assets.
The Company has net operating loss carryforwards for federal and state tax
purposes of $1,385,000 expiring in the year 2019 for federal and 2014 for state.
The net operating losses can be carried forward to offset future taxable income.
Utilization of the above carryforwards will be subject to utilization
limitations, which may inhibit the Company's ability to use carryforwards in the
future.
6. CAPITAL STOCK
The Company's articles of incorporation authorized 75,000,000 shares of
Common Stock with no par value, of which 3,500,000 shares were reserved for
issuance under stock option plans. In September 1999, the Company authorized
25,000,000 shares of Preferred Stock, $0.001 par value, of which 5,900,000 were
designated as Series A Convertible Preferred Stock (the Series A Preferred).
Upon the closing of the Series A Preferred, 5,900,000 shares of Common Stock
were reserved for issuance under conversion of the Series A Preferred, and
1,966,568 shares of Common Stock were reserved for issuance upon exercise of a
warrant. In October 1999, an additional 885,000 shares of Common Stock were
reserved for issuance under stock option plans.
In June 1999, the Company issued 14,000,000 shares of its Common Stock to
the Company's founders for $700,000 and 200,000 shares of its Common Stock to an
investor for $10,000.
<PAGE> 9
In September and October 1999, the Company sold 5,900,000 shares of Series
A Preferred in exchange for $2,969,000, net of issuance costs of $31,000, and
issued a warrant, which expires in 2004, for the purchase of 1,966,568 shares of
Common Stock with an exercise price of $0.51 per share. The fair value of the
warrants, based on the Black-Scholes option pricing model, of $589,000 was
recorded as a reduction to Preferred Stock and an addition to warrants for
common stock.
6. CAPITAL STOCK (CONTINUED)
In December 1999, the Company issued a warrant in conjunction with the
execution of its equipment financing facility, which expires in 2006, for the
purchase of 125,000 shares of Common Stock with an exercise price of $0.51. The
fair value of the warrants, based on the Black-Scholes option pricing model, of
$164,000 was recorded as an addition to warrants for common stock and as
deferred financing costs to be amortized over the term of the equipment
financing facility.
RIGHTS, PREFERENCES AND TERMS OF CAPITAL STOCK
The following is a summary of the rights, preferences, and terms of the
Company's outstanding series of Common and Preferred stock.
Dividends
The holders of the Series A Preferred Stock are entitled to receive
noncumulative dividends when and if declared by the Board of Directors. These
dividends are in preference to any declaration or payment of any dividend on the
Common Stock of the Company. As of December 31, 1999, no dividends have been
declared.
Liquidity
In the event of any liquidation, the holders of the Series A Preferred
stock have a liquidation preference over the holders of Common Stock equal to
the original issuance price of $0.51 per share, plus any declared and unpaid
dividends. In the event the Company is liquidated to yield a return in excess of
seven times the Series A Preferred investment, then the holders of Series A
Preferred will not receive any preference payments. The remaining assets will be
distributed to the Common and Preferred stockholders on an as-if-converted
basis.
Voting
The holders of a share of Series A Preferred have a right to that number of
votes equal to the number of shares of Common Stock issuable upon conversion of
Series A Preferred.
Conversion
Subject to certain anti-dilution provisions, each share of Series A
Preferred Stock is convertible at the option of the holder, into the same number
of shares of Common Stock. The Series A Preferred stock will be automatically
converted into Common Stock in the event of an affirmative election of the
holders of at least a majority of the outstanding shares of preferred stock,
voting as a class, or a public offering that values the Company at a minimum of
$50,000,000 with gross proceeds of at least $10,000,000.
Preemptive Rights
The conversion price of the Series A Preferred is subject to adjustment to
prevent dilution, on a weighted average basis, in the event that the Company
issues additional shares of Common Stock or Common Stock equivalents at a
purchase price less than the applicable conversion price.
7. STOCK OPTIONS
The Company has two option plans which provide for the granting of options
for the purchase of up to 4,385,000 shares of the Company's Common Stock. Under
the terms of the plans, options may be granted to employees, nonemployee
directors or consultants at prices not less than the fair value at the date of
grant. Options granted to nonemployees are recorded at the value of negotiated
services received. Options to employees vest evenly over four years, on the
anniversary of the date of grant.
1
<PAGE> 10
Information relating to the outstanding stock options is as follows:
Outstanding at inception........................ --
Granted....................................... 3,579,500
Canceled...................................... (310,000)
---------
Outstanding at December 31, 1999................ 3,269,500
=========
7. STOCK OPTIONS (CONTINUED)
The following table summarizes information regarding options outstanding.
No options were exercisable at December 31, 1999.
<TABLE>
<CAPTION>
OUTSTANDING
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES NUMBER OF SHARES CONTRACTUAL LIFE EXERCISE PRICE
- ------------------------ ---------------- ------------------ ----------------
<S> <C> <C> <C>
$0.20-- $0.50.......... 3,269,500 9.55 $ 0.28
</TABLE>
Options available for future grant totaled 1,115,500 at December 31, 1999.
The fair value of these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
Risk free interest rate........ 5%
Expected lives (in years)...... 4
Dividend yield................. --
Expected volatility............ 80%
For purposes of pro forma disclosure, the estimated fair value of the
options is amortized to expense over the options' vesting period. Under SFAS No.
123, the Company would have incurred an additional compensation expense of
$72,000 for the period June 9, 1999 (date of inception) through December 31,
1999.
Net loss, as reported...... $(1,561,000)
Pro forma net loss......... $(1,633,000)
Applying SFAS No. 123 in the pro forma disclosure may not be representative
of the effects on pro forma net income (loss) for future years as options vest
over several years and additional awards will likely be made each year.
DEFERRED STOCK OPTION COMPENSATION
The excess of the deemed fair value of the Company's Common Stock over the
exercise price of options granted during the period June 9, 1999 (date of
inception) through December 31, 1999 at the date of grant, adjusted for the
return of unvested options resulting from employee terminations, amounted to an
aggregate of $1,002,000. The deemed fair value of the Common Stock was
determined by the Company based on the selling price of the sale of Series A
Preferred considering the relative rights and privileges of each security, the
stages of development of the Company's business and the inherent risks and
perceived future potential of the Company at the time of grant or issuance. The
typical vesting period of the options is 25% annually over the following four
years. The amortization of deferred compensation is charged to operations on a
graded methodology basis over the vesting period of the options. During the
period June 9, 1999 (date of inception) through December 31, 1999, deferred
compensation amortization of $76,000 was recorded. At December 31, 1999 deferred
compensation of $926,000 was reflected as a reduction of stockholders' equity.
The deferred compensation amortization relates only to stock options awarded to
employees; the salaries and related benefits of these employees are included in
the applicable cost of revenue or operating expense line item.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has entered into operating and capital leases for certain
office space and equipment which contain certain renewal options. Capital lease
obligations for equipment represent the present value of future lease payments
under the agreements. The Company has options to purchase the leased assets at
the end of the lease terms.
2
<PAGE> 11
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1999, future minimum lease payments under all
noncancellable leases were as follows:
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
2000.......................................... $ 27,000 $187,000
2001.......................................... 27,000 153,000
2002.......................................... 16,000 42,000
2003.......................................... 1,000 --
-------- --------
Total minimum lease payments.................. 71,000 $382,000
========
Less amount representing interest............. 9,000
--------
Present value of minimum lease payments....... 62,000
Less current portion of capital lease
obligations................................. 22,000
--------
Long-term capital lease obligations........... $ 40,000
========
</TABLE>
Rent expense was $42,000 during the period June 9, 1999 (date of inception)
through December 31, 1999.
In January 2000, the Company entered into a lease agreement for additional
office space for a period of five years with a monthly rental of approximately
$23,000.
EQUIPMENT FINANCING ARRANGEMENT
At December 31, 1999, the Company had a line of credit arrangement with a
bank that provides for a capital equipment financing facility of up to a maximum
of $1,000,000, of which $750,000 was available at December 31, 1999. Under the
line of credit, the Company was required to comply with certain covenants. The
Company was in compliance with all such covenants as of December 31, 1999. As of
December 31, 1999, there were no borrowings outstanding under this agreement.
The line of credit expires on December 31, 2000.
LEGAL
The Company is involved in certain legal proceedings as part of its normal
course of business. Management does not believe that the ultimate resolution of
these matters will have a material impact on the Company's results of operations
or financial position.
9. 401(K) PLAN
The Company has a savings plan that qualifies as a deferred salary
arrangement under Section 401(k) of the Internal Revenue Code (the "401(k)
Plan"). Under the Savings Plan, participating employees may defer a portion of
their eligible pretax earnings up to the Internal Revenue Service's annual
contribution limit. All employees on the payroll of the Company age 21 years or
older are eligible to participate in the 401(k) Plan. The Company matches
employee contributions 50%, up to a maximum of 3% of compensation. For the
period June 9, 1999 (date of inception) through December 31, 1999 the Company
expensed $6,000 in matching contributions.
10. RELATED PARTY TRANSACTIONS
During the period June 9, 1999 (date of inception) to December 31, 1999,
the Company paid legal fees of approximately $73,000 to a law firm in which a
holder of Common Stock is a partner. Management believes the amount paid for the
services received are representative of the fair market value of those services.
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11. EVENT SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS' REPORT (UNAUDITED)
On March 8, 2000, the Company entered into an agreement with GoTo.com, Inc.
(GoTo) whereby GoTo will acquire all outstanding shares of capital stock and
assume all of the outstanding options of the Company for 3.47 million shares of
GoTo common stock. The transaction is expected to close by April 2000.
