<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _____ TO _____
Commission file number 000-24643
DIGITAL RIVER, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1901640
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9625 WEST 76TH STREET, SUITE 150
EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices)
-------------------
(612) 253-1234
(Registrant's telephone number, including area code)
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Common Stock, $0.01 par value 20,559,775 shares
----------------------------- -------------------------------
(Class) Outstanding as of July 31, 1999
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<PAGE>
DIGITAL RIVER, INC.
Form 10-Q
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
at June 30, 1999 and December 31, 1998......................... 3
Condensed Consolidated Statements of Operations
for the three and six months ended June 30, 1999 and 1998...... 4
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998................ 5
Notes to Condensed Consolidated Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 8
Item 3. Qualitative and Quantitative Disclosure about Market Risk...... 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds...................... 14
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES .............................................................. 17
EXHIBIT INDEX ........................................................... 18
</TABLE>
2.
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,515 $ 63,503
Short-term investments 30,793 10,894
Accounts receivable, net 1,095 1,487
Prepaid expenses and other 433 420
------------ ------------
Total current assets 63,836 76,304
PROPERTY AND EQUIPMENT, NET 4,841 3,914
GOODWILL, NET AND OTHER ASSETS 22,151 110
------------ ------------
$ 90,828 $ 80,328
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,332 $ 3,880
Accrued payroll 1,064 807
Other current liabilities 907 1,054
------------ ------------
Total current liabilities 8,303 5,741
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value; 5,000,000 shares
authorized; no shares issued and outstanding - -
Common Stock, $.01 par value; 45,000,000 shares authorized;
20,531,947 and 19,544,791 shares issued and outstanding 205 195
Additional paid-in capital 113,447 93,883
Deferred compensation (982) (1,368)
Accumulated deficit (30,145) (18,123)
------------- ------------
Total stockholders' equity 82,525 74,587
------------- ------------
$ 90,828 $ 80,328
============= ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Data; Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES $ 15,814 $ 3,476 $ 27,521 $ 5,746
COST OF SALES 12,832 2,895 22,636 4,791
---------- ---------- ---------- ----------
Gross profit 2,982 581 4,885 955
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing 4,346 2,373 7,969 3,433
Product development and operations 3,726 908 7,290 1,611
General and administrative 1,070 1,205 2,024 1,413
Amortization of goodwill and other acquisition
related costs 1,302 - 1,302 -
---------- ---------- ---------- ----------
Total operating expenses 10,444 4,486 18,585 6,457
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (7,462) (3,905) (13,700) (5,502)
INTEREST INCOME 784 108 1,678 150
---------- ---------- ---------- ----------
Net loss $ (6,678) $ (3,797) $ (12,022) $ (5,352)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.33) $ (0.30) $ (0.60) $ (0.47)
---------- ---------- ---------- ----------
Basic and diluted weighted average common shares outstanding 20,169 12,632 19,900 11,279
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4.
<PAGE>
DIGITAL RIVER, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands; Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
---------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (12,022) $ (5,352)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of goodwill and other acquisition related costs 1,302 -
Depreciation and other amortization 748 259
Deferred compensation expense 496 689
Changes in assets and liabilities:
Accounts receivable and prepaid expenses 572 (383)
Accounts payable 885 1,124
Other current liabilities 94 214
---------- ---------
Net cash used in operating activities (7,925) (3,449)
---------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (59,899) (4,894)
Proceeds from sales of investments 40,000 -
Acquisitions, net of cash received (3,320) -
Purchases of equipment (1,569) (1,578)
Patent acquisition costs (26) (23)
--------- ---------
Net cash used in investing activities (24,814) (6,495)
--------- ---------
FINANCING ACTIVITIES:
Sales of Common Stock 751 12,617
Payment of debt issuance costs and other - (44)
--------- ---------
Net cash provided by financing activities 751 12,573
--------- ---------
Net increase (decrease) in cash and cash equivalents (31,988) 2,629
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 63,503 2,126
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 31,515 $ 4,755
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Issuance of Common Stock in connection with acquisitions and purchase of assets $ 18,713 $ -
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5.
<PAGE>
DIGITAL RIVER, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The unaudited condensed consolidated financial statements included herein
reflect all adjustments, consisting only of normal recurring adjustments, which
in the opinion of management are necessary to fairly state the Company's
consolidated financial position, results of operations and cash flows for the
periods presented. These condensed consolidated financial statements should be
read in conjunction with the Company's audited consolidated financial statements
included in the Company's Form 10-K for the year ended December 31, 1998 as
filed with the Securities and Exchange Commission. The results of operations for
the period ended June 30, 1999 are not necessarily indicative of the results to
be expected for any subsequent quarter or for the entire fiscal year ending
December 31, 1999. The December 31, 1998 balance sheet was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles.
2. PRINCIPLES OF CONSOLIDATION:
The condensed consolidated financial statements include the accounts of
Digital River, Inc. and its wholly owned subsidiaries. All intercompany balances
and transactions have been eliminated.
3. NET LOSS PER SHARE:
Basic loss per share is computed using the weighted-average number of
common shares outstanding excluding contingently issuable or returnable shares,
and diluted loss per share is computed using the weighted-average number of
common shares outstanding and dilutive potential common shares outstanding. As a
result of the losses incurred by the Company for the six months ended June 30,
1999 and 1998, respectively, all potential common shares were anti-dilutive and
were excluded from the diluted net loss per share calculations.
The following table summarizes securities outstanding as of each period end
which were not included in the calculation of diluted net loss per share since
their inclusion would be anti-dilutive:
<TABLE>
<CAPTION>
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Preferred Stock - 1,000,000
Common Stock warrants 388,513 803,008
Common Stock options 2,712,766 1,532,087
</TABLE>
4. ACQUISITIONS AND PURCHASES OF ASSETS:
In April 1999, pursuant to an Agreement and Plan of Merger by and among the
Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"), and
Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and into the
Company (the "Merger"). At the effective time of the Merger, Mr. Maaghul's
shares of Maagnum common stock converted into the right to receive from the
Company $2.5 million in cash, 88,809 shares of Common Stock of the Company, and
up to an additional 320,161 shares of Common Stock that may be earned by Mr.
Maaghul upon the achievement of certain business goals over the 24-month period
following the closing date of the Merger. In addition, pursuant to a Stock
Purchase Agreement dated April 1, 1999 by and between the Company and Meiman
Kentjana,
6.
<PAGE>
a key employee of Maagnum, in consideration for Mr. Kentjana's agreement to
waive certain rights with respect to Maagnum, the Company issued to
Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock
and gave him the right to receive up to an additional 192,374 shares of Common
Stock that may be earned by Mr. Kentjana upon the achievement of certain
business goals over the 24-month period following the closing date of the
Merger.
Also in April 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially all
of the assets and assumed certain liabilities of Seller in exchange for an
aggregate of 161,842 shares of Common Stock of the Company.
In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow Merger").
At the effective time of the RegNow Merger, the Stockholders received from the
Company $2.0 million in cash and 306,884 shares of Common Stock of the Company
in exchange for all outstanding RegNow shares. In addition, the Stockholders may
receive additional shares of Common Stock upon the achievement of certain
revenue goals over the 12-month period following the closing date of the RegNow
Merger. In addition, certain individuals who are Stockholders are also eligible
to receive up to an additional $2 million in cash if they remain employees of
the Company for a period of 12 months following the closing date of the RegNow
Merger.
Each of the above transactions was accounted for using the purchase method.
The purchase price in each transaction was allocated substantially to goodwill,
which is being amortized over three years. If any earn-out payments, as listed
above, are earned, they will be recognized as compensation expense in the period
in which the required milestones are achieved.
The following unaudited pro forma condensed results of operations for the
six months ended June 30, 1999 and 1998 have been prepared as if each of the
three transactions had occurred on January 1, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
---------- ---------
(In Thousands)
<S> <C> <C>
Sales $31,509 $ 8,464
Loss from operations (16,103) (9,294)
Net loss (14,526) (9,265)
Basic and diluted loss per share $ (0.71) $ (0.78)
</TABLE>
This financial information does not purport to represent results that would
actually have been obtained if the transactions had been in effect on January 1,
1999 and 1998 or any future results that may in fact be realized.
5. SUBSEQUENT EVENT:
In July 1999, the Company entered into a definitive agreement with Tech
Squared Inc., an owner of approximately 15% of the Company's Common Stock,
whereby the Company will purchase certain Tech Squared's assets consisting of
3.0 million shares of the Company's Common Stock and $1.2 million of
7.
<PAGE>
cash in exchange for 2.65 million shares of the Company's Common Stock, thus
resulting in a net 350,000 shares being retired from outstanding shares. The
transaction will be accounted for as a tax-free reorganization. The transaction
is subject to approval by the shareholders of Tech Squared and other
pre-closing conditions including the sale or liquidation of the operations of
Tech Squared. The Company may, under certain circumstances prior to closing,
cancel the transaction. The closing of this transaction is anticipated to take
place in the Company's fourth quarter of 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE COMPANY NOTES THAT, EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED
HEREIN, THE MATTERS DISCUSSED BELOW CONTAIN FORWARD-LOOKING STATEMENTS WHICH
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE
THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY
RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR
ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE
COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION TO UPDATE THIS INFORMATION OR
PUBLICLY RELEASE ANY REVISION OR REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
OF THIS REPORT. SUCH FACTORS INCLUDE, AMONG OTHERS: THE COMPANY'S LIMITED
OPERATING HISTORY AND VARIABILITY OF OPERATING RESULTS, EXPECTATION OF FUTURE
LOSSES, RISKS ASSOCIATED WITH ELECTRONIC SOFTWARE DELIVERY, DEPENDENCE ON THE
INTERNET AND GROWTH IN ELECTRONIC COMMERCE AND INTERNET INFRASTRUCTURE
DEVELOPMENT, DEPENDENCE ON SOFTWARE PUBLISHERS, DEPENDENCE ON ONLINE RETAILERS,
SYSTEM DEVELOPMENT AND ELECTRONIC COMMERCE SECURITY RISKS, RAPID TECHNOLOGICAL
CHANGES, COMPETITION IN THE ELECTRONIC COMMERCE INDUSTRY, THE IMPORTANCE OF
ATTRACTING AND RETAINING PERSONNEL, MANAGEMENT OF THE COMPANY'S GROWTH,
INTEGRATION OF ACQUIRED COMPANIES, DEPENDENCE ON KEY EMPLOYEES AND OTHER RISK
FACTORS REFERENCED IN THE COMPANY'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1998.
OVERVIEW
The Company is a leading provider of comprehensive electronic commerce
outsourcing solutions to software publishers and online retailers. The Company
was incorporated in February 1994 and commenced offering products for sale
through its clients' Web stores in August 1996. From inception through August
1996, the Company had no sales, and its activities related primarily to the
development of its Commerce Network Server ("CNS") technology related to
electronic commerce. In 1996, the Company began to focus its business
development efforts on building its inventory of software products through
contracts with software publishers and in 1997, the Company began to develop
distribution relationships through contracts with online retailers. In the
second quarter of 1999 the Company added approximately 3,000 software publisher
clients through its acquisition of three commerce outsourcing providers to the
shareware publishing industry, Maagnum Internet Group, Public Software Library
and Universal Commerce, Incorporated. As of June 30, 1999, the Company had
approximately 4,800 software publisher clients and 1,200 online retailer
clients.
The Company derives its revenue primarily from sales of third-party
software. The Company has contractual relationships with its software publisher
and online retailer clients which obligate the Company to pay to the client a
specified percentage of each sale. Revenues from the sale of software products,
net of estimated returns, are recognized upon either delivery through electronic
software delivery ("ESD") or shipment of the physical product to the end-user.
The amount payable to the software publisher or online retailer is reported as
cost of sales. The Company bears full credit risk with respect to substantially
all sales. In late 1998, the Company began development of a transaction fee
based e-commerce service for products other than third-party software and began
offering this service in early 1999. There can be no assurance that the Company
will derive any significant revenue from this service.
8.
<PAGE>
The Company has a limited operating history upon which investors may
evaluate its business and prospects. Since inception, the Company has incurred
significant losses, and as of June 30, 1999, had an accumulated deficit of
approximately $30.1 million. The Company intends to expend significant financial
and management resources on the development of additional services, sales and
marketing, technology and operations to support larger-scale operations and
greater service offerings. As a result, the Company expects to incur additional
losses and continued negative cash flow from operations for the foreseeable
future, and such losses are anticipated to increase significantly from current
levels. There can be no assurance that the Company's sales will increase or even
continue at their current level or that the Company will achieve or maintain
profitability or generate cash from operations in future periods. The Company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as electronic
commerce. To address these risks, the Company must, among other things, maintain
existing and develop new relationships with software publishers and online
retailers, implement and successfully execute its business and marketing
strategy, continue to develop and upgrade its technology and
transaction-processing systems, provide superior customer service and order
fulfillment, respond to competitive developments, and attract, retain and
motivate qualified personnel. There can be no assurance that the Company will be
successful in addressing such risks, and the failure to do so would have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company's current and future expense levels are based
largely on its planned operations and estimates of future sales. Sales and
operating results generally depend on the volume and timing of orders received,
which are difficult to forecast. The Company may be unable to adjust spending in
a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in sales would have an immediate adverse effect on the
Company's business, financial condition and results of operations. In view of
the rapidly evolving nature of the Company's business and its limited operating
history, the Company is unable to accurately forecast its sales and believes
that period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
9.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated condensed statements of operations as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 81.1 83.3 82.2 83.4
------ ------- ------ ------
Gross profit 18.9 16.7 17.8 16.6
------ ------- ------ ------
Operating expenses:
Sales and marketing 27.5 68.2 29.0 59.8
Product development and operations 23.6 26.1 26.5 28.0
General and administrative 6.8 34.7 7.4 24.6
Amortization of goodwill and other acquisition
related costs 8.2 - 4.7 -
------ ------- ------ ------
Total operating expenses (1) 66.1 129.0 67.6 112.4
------ ------- ------ ------
Loss from operations (47.2) (112.3) (49.8) (95.8)
------ ------- ------ ------
Interest income, net 5.0 3.1 6.1 2.7
------ ------- ------ ------
Net loss (42.2)% (109.2)% (43.7)% (93.1)%
====== ======= ====== ======
</TABLE>
(1) Operating expenses include non-cash employee stock compensation charges of
$284,000 and $689,000 (1.8% and 19.8% of sales, respectively) for the three
months ended June 30, 1999 and 1998, respectively, and non-cash employee
stock compensation charges of $496,000 and $689,000 (1.8% and 12.0% of
sales, respectively) for the six months ended June 30, 1999 and 1998,
respectively
SALES
Sales increased to $15.8 million for the quarter ended June 30, 1999, up
from $3.5 million for the quarter ended June 30, 1998. The increase was
primarily a result of significant growth in the number of the Company's software
publisher and online retailer clients as well as increasing market acceptance of
ESD. International sales represented approximately 25% and 33% of sales for the
six months ended June 30, 1999 and 1998, respectively.
GROSS PROFIT
Cost of sales increased to $12.8 million in the quarter ended June 30, 1999
from $2.9 million in the quarter ended June 30, 1998. This increase reflects the
Company's growth in sales. The Company's gross profit margin increased to 18.9%
in the quarter ended June 30, 1999 versus 16.7% in the quarter ended June 30,
1998. This increase was due mainly to the increase in the number of higher
margin, fee based orders that the Company processed during the most recent
quarter. The Company believes that Internet commerce and related services will
become more competitive in the near future. Accordingly, the Company may reduce
or alter its pricing structure and policies in the future and any such change
could reduce gross margins.
10.
<PAGE>
SALES AND MARKETING
Sales and marketing expense increased to $4.3 million in the quarter ended
June 30, 1999 from $2.4 million in the quarter ended June 30, 1998. This
increase resulted from expanding the sales and marketing infrastructure required
to increase the number of and provide support to the Company's software
publisher and online retailer clients and variable expenses which increase in
relation to sales. The primary components of this increase for the comparable
quarters ended June 30 were an increase in wages and benefits of $691,000 and an
increase in credit card fees and chargeback costs of $711,000. As a percentage
of sales, sales and marketing expense decreased to 27.5% in the quarter ended
June 30, 1999 from 68.2% in the quarter ended June 30, 1998, primarily
reflecting the Company's increased sales volume. The Company expects that sales
and marketing expense will continue to increase in absolute dollars as the
Company continues to build its sales and marketing infrastructure and to develop
marketing programs.
PRODUCT DEVELOPMENT AND OPERATIONS
Product development and operations expense increased to $3.7 million in the
quarter ended June 30, 1999 from $908,000 in the quarter ended June 30, 1998.
The increase was primarily related to increased personnel and consulting costs
related to developing, enhancing and maintaining the Company's CNS and related
facilities and customer service related personnel costs. The primary components
of this increase for the comparable quarters ended June 30, were an increase in
consulting costs of $1.4 million, an increase in wages and benefits of $679,000
and an increase in depreciation expense of $201,000. As a percentage of sales,
product development and operations expense decreased to 23.6% in the quarter
ended June 30, 1999 from 26.1% in the quarter ended June 30, 1998. The Company
believes that continued investment in product development and operations is
critical to attaining its strategic objectives and, and as a result, expects
product development and operations expenses will continue to increase in
absolute dollars. As a percentage of sales, these expenses are expected to
decrease as sales increase.
GENERAL AND ADMINISTRATIVE
General and administrative expense decreased to $1,070,000 in the quarter
ended June 30, 1999 from $1,205,000 in the quarter ended June 30, 1998. The
decrease was primarily due to a decline in deferred compensation expense of
$405,000. Offsetting this decline were increased personnel and related expenses,
legal expenses and investor relations expenses. As a percentage of sales,
general and administrative expense decreased to 6.8% in the quarter ended June
30, 1999 from 34.7% in the quarter ended June 30, 1998, primarily reflecting the
Company's growth in sales. The Company expects general and administrative
expense, excluding the impact of deferred compensation expense, to increase in
absolute dollars in the future, particularly as the Company continues to build
infrastructure to support growth and incurs costs associated with being a public
company. As a percentage of sales, these expenses are expected to decrease as
sales increase.
INTEREST INCOME
Interest income consists of earnings on the Company's cash, cash
equivalents and short-term investments. The increase over the prior period was
attributable to interest received on higher average cash and cash equivalent
balances resulting from the sales of Common Stock in the latter half of 1998.
The Company expects interest income to decrease in the future as cash is used to
fund operations and is used for investments in infrastructure.
11.
<PAGE>
INCOME TAXES
The Company paid no income taxes in any reported period. The Company has
incurred a net loss for each period since inception. As of June 30, 1999, the
Company had approximately $34.2 million of net operating loss carryforwards for
federal income tax purposes, which expire beginning in 2009. Due to the
uncertainty of future profitability, a valuation allowance equal to the deferred
tax asset has been recorded. Certain changes in ownership that resulted from the
sales of Common and Preferred Stock will limit the future annual realization of
the tax net operating loss carryforwards to a specified percentage under Section
382 of the Internal Revenue Code.
LIQUIDITY AND CAPITAL RESOURCES
In the first six months of 1999, the Company used $7.9 million of cash to
fund operations and made additions of equipment and software totaling $1.6
million. The Company used $3.3 million for the acquisition of Maagnum Internet
Group, Public Software Library Ltd. and Universal Commerce, Incorporated, net of
cash received from the acquisitions completed during the quarter. The Company
also purchased $59.9 million in short-term investments which were partially
offset by $40.0 million in sales of investments.
As of June 30, 1999 the Company had approximately $31.5 million of cash and
cash equivalents and $30.8 million of short-term investments. The Company's
principal commitments consisted of obligations outstanding under operating
leases. Although the Company has no material commitments for capital
expenditures, it anticipates an increase in the rate of capital expenditures
consistent with its anticipated growth in operations, infrastructure and
personnel. The Company anticipates that it will expend approximately $8.0
million over the next 18 months on capital expenditures based on the Company's
current anticipated growth rate. The Company further anticipates that it will
expend approximately $15.0 million over the next 18 months on product
development based on the Company's current anticipated growth rate in
operations. The Company may also use cash to acquire or license technology,
products or businesses related to the Company's current business. The Company
also anticipates that it will continue to experience significant growth in its
operating expenses for the foreseeable future and that its operating expenses
will be a material use of the Company's cash resources. The Company believes
that existing sources of liquidity will provide adequate cash to fund its
operations for at least the next 18 months.
YEAR 2000 COMPLIANCE
Like many other companies, Year 2000 computer issues create certain risks
for the Company. If the Company's internal management information systems and
external electronic commerce information systems do not correctly recognize and
process date information beyond the Year 1999, there could be an adverse impact
on the Company's operations. To address these Year 2000 issues with its internal
and external systems, the Company has evaluated such systems. The Company
believes it has completed all activities to remediate Year 2000 issues as of
June 30, 1999, although it will continue testing throughout the year. These
activities are intended to encompass all major categories of systems used by the
Company, including electronic commerce, sales processing, sales and financial
systems. The costs incurred to date related to these programs have been less
than $25,000. The total cost does not include potential costs related to any
customer or other claims or the cost of internal software and hardware replaced
in the normal course of business. The total cost is subject to change should
events arise that indicate a Year 2000 issue.
The Company is also working with key suppliers of products and services to
determine that their operations and products are Year 2000 Compliant or to
monitor their progress toward Year 2000
12.
<PAGE>
Compliance, as appropriate. The failure of a major supplier to become Year 2000
Compliant on a timely basis, or a conversion that is incompatible with the
Company's systems could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition the
Company's business, financial condition and results of operations may be
materially adversely affected to the extent its end-users are unable to use
their credit cards due to the Year 2000 issues that are not rectified by their
credit card vendors.
In addition, the Company has begun internal discussions concerning
contingency planning to address potential problem areas with internal systems
and with suppliers and other third parties. It is expected that assessment,
remediation and contingency planning activities will be on-going throughout
calendar year 1999 with the goal of appropriately resolving all material
internal and external systems and third party issues.
As used by the Company, "Year 2000 Compliant" shall mean software that can
individually, and in combination and in conjunction with all other systems,
products or processes with which they are required or designed to interface,
continue to be used normally and to operate successfully (both in functionality
and performance in all material respects) over the transition into the twenty
first century when used in accordance with the documentation relating to such
software, including being able to, before, on and after January 1, 2000
substantially conform to the following: (i) use logic pertaining to dates which
allow users to identify and/or use the century portion of any date fields
without special processing; and (ii) respond to all date elements and date input
so as to resolve any ambiguity as to century in a disclosed, defined and
pre-determined manner and provide date information in ways which are unambiguous
as to century, either by permitting or requiring the century to be specified or
where the data element is represented without a century, the correct century is
unambiguous for all manipulations involving that element. Based on currently
available information, the Company does not believe that the Year 2000 matters
discussed above related to internal systems or products sold to customers will
have a material adverse impact on the its financial condition or overall trends
in results of operations; however, it is still uncertain to what extent the
Company may be affected by such matters. In addition, customers may delay
purchase decisions because of uncertainty about Year 2000 issues. There also can
be no assurance that the failure to ensure Year 2000 Compliance by a supplier or
another third party would not have a material adverse effect on the Company.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
The Company does not enter into financial instruments for trading or
speculative purposes and does not currently utilize derivative financial
instruments. The operations of the Company are conducted primarily in the United
States and as such are not subject to material foreign currency exchange rate
risk. The Company has no long-term debt.
13.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(c) In April 1999, pursuant to an Agreement and Plan of Merger by and among
the Company, Maagnum Internet Group, a Connecticut corporation ("Maagnum"), and
Cyrus Maaghul, the sole shareholder of Maagnum, Maagnum merged with and into the
Company (the "Merger"). At the effective time of the Merger, Mr. Maaghul's
shares of Maagnum common stock converted into the right to receive from the
Company $2.5 million in cash, 88,809 shares of Common Stock of the Company, and
up to an additional 320,161 shares of Common Stock that may be earned by Mr.
Maaghul upon the achievement of certain business goals over the 24-month period
following the closing date of the Merger. In addition, pursuant to a Stock
Purchase Agreement dated April 1, 1999 by and between the Company and Meiman
Kentjana, a key employee of Maagnum, in consideration for Mr. Kentjana's
agreement to waive certain rights with respect to Maagnum, the Company issued to
Mr. Kentjana on the closing date of the Merger 22,841 shares of Common Stock
and gave him the right to receive up to an additional 192,374 shares of Common
Stock that may be earned by Mr. Kentjana upon the achievement of certain
business goals over the 24-month period following the closing date of the
Merger.
Also in April 1999, pursuant to an Asset Purchase Agreement by and among
the Company, Public Software Library Ltd., a Texas limited partnership
("Seller"), and the partners of Seller, the Company purchased substantially all
of the assets and assumed certain liabilities of Seller in exchange for an
aggregate of 161,842 shares of Common Stock of the Company.
In June 1999, pursuant to an Agreement and Plan of Merger and
Reorganization by and among the Company, Universal Commerce, Incorporated, a
Delaware corporation ("RegNow"), certain stockholders of RegNow (the
"Stockholders"), RegNow merged with and into the Company (the "RegNow Merger").
At the effective time of the RegNow Merger, the Stockholders received from the
Company $2.0 million in cash and 306,884 shares of Common Stock of the Company
in exchange for all outstanding RegNow shares. In addition, the Stockholders may
receive additional shares of Common Stock upon the achievement of certain
revenue goals over the 12-month period following the closing date of the RegNow
Merger. In addition, certain individuals who are Stockholders are also eligible
to receive up to an additional $2 million in cash if they remain employees of
the Company for a period of 12 months following the closing date of the RegNow
Merger.
The issuance and sale of the Common Stock was intended to be exempt from
registration and prospectus delivery requirements under the Securities Act of
1933, as amended (the "Securities Act"), by virtue of Section 4(2) thereof due
to, among other things, (i) the limited number of persons to whom the Common
Stock was issued, (ii) the distribution of disclosure documents to the investor,
(iii) the fact that such person represented and warranted to the Company, among
other things, that such person was acquiring the Common Stock for investment
only and not with a view to the resale or distribution thereof, and (iv) the
fact that a certificate representing the Common Stock was issued with a legend
to the effect that such Common Stock had not been registered under the
Securities Act or any state securities laws and could not be sold or transferred
in the absence of such registration or an exemption therefrom.
(d) The effective date of the Company's registration statement, filed on Form
S-1 under the Securities Act (File No. 333-56787), was August 11, 1998 (the
"Registration Statement"). The class of securities registered was Common Stock
and all securities registered were sold in this initial public offering (the
"IPO"). The managing underwriters for the offering were BT Alex. Brown,
BancAmerica
14.
<PAGE>
Robertson Stephens and Bear, Stearns & Co. Inc. Pursuant to the Registration
Statement, the Company sold 3,000,000 shares of its Common Stock for an
aggregate gross offering price of $25.5 million.
In connection with the IPO, the Company incurred expenses of approximately
$2.8 million, of which approximately $1.8 million represented underwriting
discounts and commissions and approximately $1 million represented other
expenses related to the offering. All such expenses were direct or indirect
payments to others. The net offering proceeds to the Company were $22.7 million.
Through June 30, 1999, the Company has used $3.3 million of the net
proceeds from the IPO to purchase equipment and software, $3.3 million related
to acquisitions and $12.2 million of the net proceeds for working capital and
general corporate purposes. The Company has invested the net proceeds in
short-term, investment-grade, interest bearing financial instruments. The use of
the proceeds from the offering does not represent a material change in the use
of the proceeds described in the Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's annual meeting of stockholders was held on April 27, 1999
(the "Annual Meeting").
The following matters were considered and voted upon at the Annual Meeting:
The first matter related to the election of two director nominees, Thomas
F. Madison and Charles E. Reese, Jr. as directors to serve until the 2002 annual
meeting of stockholders. The votes cast for and against such nominees were as
follows:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
------------------------------------------------------------------
<C> <S> <S>
Thomas F. Madison 14,422,502 19,235
Charles E. Reese, Jr. 14,397,202 44,535
</TABLE>
The second matter related to the approval of an amendment to the Company's
1998 Stock Option Plan to increase the aggregate number of shares of Common
Stock authorized for issuance under such plan by 950,000 shares. 14,420,126
votes were cast for approval and 13,146 votes were cast against approval. There
were 8,465 abstentions and no broker non-votes.
The third matter related to the ratification of the appointment of Arthur
Andersen LLP as independent auditors of the Company for its fiscal year ending
December 31, 1999. 14,420,126 votes were cast for ratification and 13,146 votes
were cast against ratification. There were 8,465 abstentions and no broker
non-votes.
Based on these voting results, each of the directors nominated was elected
and the second and third matters were approved.
15.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------- ------------------------
<S> <C>
2.1 (1) Agreement and Plan of Merger, dated April 1,
1999, by and among the Registrant, Maagnum and Mr.
Maaghul
2.2 (1) Stock Purchase Agreement, dated April 1, 1999, by
and among the Registrant and Mr. Kentjana
2.3 (1) Asset Purchase Agreement, dated as of April 15,
1999, by and among the Registrant, Public Software
Library Ltd. and the partners of Public Software
Library Ltd.
2.4 Agreement and Plan of Merger and Reorganization,
dated June 11, 1999, by and among the Registrant,
Universal Commerce, Incorporated and certain
stockholders of Universal Commerce, Incorporated
3.1 (2) Amended and Restated Certificate of Incorporation
3.2 (2) Bylaws of the Registrant
4.1 (2) Specimen Common Stock Certificate
11.1 (3) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's current report on Form 8-K filed
by the Company on April 16, 1999, incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-1, File No. 333-56787, declared effective on August 11, 1998,
incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
(b) REPORTS ON FORM 8-K
The Company filed one current report on Form 8-K during the quarter ended
June 30, 1999. The report was filed on April 16, 1999 and reported the Company's
acquisition of Maagnum Internet Group and the purchase by the Company of
substantially all of the assets and assumption of certain liabilities of Public
Software Library Ltd.
16.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 11, 1999 DIGITAL RIVER, INC.
By: /s/ Robert E. Strawman
______________________
Robert E. Strawman
Chief Financial Officer
(Principal Financial and Accounting Officer)
17.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENTS
------ ------------------------
<S> <C>
2.1 (1) Agreement and Plan of Merger, dated April 1, 1999,
by and among the Registrant, Maagnum and Mr.
Maaghul
2.2 (1) Stock Purchase Agreement, dated April 1, 1999, by
and among the Registrant and Mr. Kentjana
2.3 (1) Asset Purchase Agreement, dated as of April 15,
1999, by and among the Registrant, Public Software
Library Ltd. and the partners of Public Software
Library Ltd.
2.4 Agreement and Plan of Merger and Reorganization,
dated June 11, 1999, by and among the Registrant,
Universal Commerce, Incorporated and certain
stockholders of Universal Commerce, Incorporated
3.1 (2) Amended and Restated Certificate of Incorporation
3.2 (2) Bylaws of the Registrant
4.1 (2) Specimen Common Stock Certificate
11.1 (3) Statement of Computation of Per Share Earnings
27.1 Financial Data Schedule
</TABLE>
(1) Filed as an exhibit to the Company's current report on Form 8-K filed
by the Company on April 16, 1999, incorporated herein by reference.
(2) Filed as an exhibit to the Company's Registration Statement on Form
S-1, File No. 333-56787, declared effective on August 11, 1998,
incorporated herein by reference.
(3) See Note 3 to Condensed Consolidated Financial Statements.
18.
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among:
DIGITAL RIVER, INC.,
a Delaware corporation;
UNIVERSAL COMMERCE, INCORPORATED,
a Delaware corporation;
CERTAIN STOCKHOLDERS OF UNIVERSAL COMMERCE, INCORPORATED,
and
THE STOCKHOLDERS' AGENT
---------------------------
Dated as of June 11, 1999
---------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
<TABLE>
EXHIBITS
<S> <C>
Exhibit A - Certain definitions
Exhibit B - [Reserved]
Exhibit C - [Reserved]
Exhibit D - Escrow Agreement
Exhibit E - Employment Agreements
Exhibit F - Form of Noncompetition Agreement
Exhibit G - Form of Release
Exhibit H - Form of Investment Representation Letter
Exhibit I - Form of Proprietary Information Agreement
Exhibit J - Form of legal opinions of Mark T. Thatcher
Exhibit K - Certain employees
Exhibit L - Form of legal opinion of Cooley Godward LLP
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SECTION 1 DESCRIPTION OF TRANSACTION...........................................................1
1.1 Merger of the Company into Buyer.................................................1
1.2 Effect of the Merger.............................................................1
1.3 Closing; Effective Time..........................................................1
1.4 Conversion of Shares.............................................................2
1.5 Earn-outs........................................................................2
(b) CNET Earn-out...........................................................3
(c) Gross Revenues Earn-out.................................................3
1.6 Resale Shelf.....................................................................4
1.7 Closing of the Company's Transfer Books..........................................5
1.8 Exchange of Certificates.........................................................5
1.9 Stockholder Approval; Dissenting Shares..........................................6
1.10 Tax Consequences.................................................................7
1.11 Accounting Treatment.............................................................7
1.12 Further Action...................................................................7
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE STOCKHOLDERS...........................................................7
2.1 Due Organization; Good Standing; No Subsidiaries.................................7
2.2 Certificate of Incorporation and Bylaws; Records.................................7
2.3 Capitalization; Title to Shares..................................................8
2.4 Financial Statements.............................................................8
2.5 Absence of Changes...............................................................9
2.6 Title to Assets.................................................................10
2.7 Bank Accounts; Receivables......................................................10
2.8 Equipment; Leasehold............................................................11
2.9 Proprietary Assets..............................................................11
2.10 Contracts.......................................................................13
2.11 Liabilities.....................................................................14
2.12 Compliance with Legal Requirements..............................................14
2.13 Governmental Authorizations.....................................................15
i.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
2.14 Tax Matters.....................................................................15
2.15 Employee and Labor Matters; Benefit Plans.......................................16
2.16 Environmental Matters...........................................................18
2.17 Insurance.......................................................................18
2.18 Related Party Transactions......................................................18
2.19 Legal Proceedings; Orders.......................................................18
2.20 Clients.........................................................................19
2.21 Material Relationships..........................................................19
2.22 Sales Policies; Warranties......................................................19
2.23 Brokers and Finders.............................................................19
2.24 Authority; Binding Nature of Agreement..........................................19
2.25 Non-Contravention; Consents.....................................................20
2.26 Database Backup.................................................................20
2.27 Full Disclosure.................................................................21
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER.............................................21
3.1 SEC Filings; Financial Statements...............................................21
3.2 Authority; Binding Nature of Agreement..........................................21
3.3 Valid Issuance..................................................................22
SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND THE STOCKHOLDERS...............................22
4.1 Access and Investigation........................................................22
4.2 Operation of the Company's Business.............................................22
4.3 Notification; Updates to Disclosure Schedule....................................24
4.4 No Negotiation..................................................................24
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES.................................................25
5.1 Filings and Consents............................................................25
5.2 Public Announcements............................................................25
5.3 Best Efforts....................................................................25
5.4 Employment and Noncompetition Agreements........................................25
5.5 FIRPTA Matters..................................................................25
5.6 Release.........................................................................25
ii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
5.7 Investment Representation Letter................................................25
5.8 Proprietary Information Agreement...............................................26
5.9 CNET Warrant....................................................................26
5.10 Volume Limitations on Sale of Earnout Shares....................................26
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER........................................26
6.1 Accuracy of Representations.....................................................27
6.2 Performance of Covenants........................................................27
6.3 Consents........................................................................27
6.4 Agreements and Documents........................................................27
6.5 FIRPTA Compliance...............................................................28
6.6 No Restraints...................................................................28
6.7 No Legal Proceedings............................................................28
6.8 Employees.......................................................................28
6.9 Stockholder Approval............................................................28
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY..................................28
7.1 Accuracy of Representations.....................................................28
7.2 Performance of Covenants........................................................28
7.3 Documents.......................................................................29
7.4 No Restraints...................................................................29
SECTION 8. TERMINATION.........................................................................29
8.1 Termination Events..............................................................29
8.2 Termination Procedures..........................................................29
8.3 Effect of Termination...........................................................30
8.4 Termination Fee.................................................................30
SECTION 9. INDEMNIFICATION, ETC...............................................................30
9.1 Survival of Representations, Etc................................................30
9.2 Indemnification by Principal Stockholders.......................................30
9.3 Threshold; Ceiling..............................................................31
9.4 Satisfaction of Indemnification Claim...........................................31
9.5 No Contribution.................................................................31
iii.
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
9.6 Interest........................................................................32
9.7 Defense of Third Party Claims...................................................32
9.8 Exercise of Remedies by Indemnitees Other Than Buyer............................32
SECTION 10. MISCELLANEOUS PROVISIONS.............................................................32
10.1 Stockholders' Agent.............................................................32
10.2 Further Assurances..............................................................33
10.3 Fees and Expenses...............................................................33
10.4 Attorneys' Fees.................................................................33
10.5 Notices.........................................................................33
10.6 Confidentiality.................................................................34
10.7 Time of the Essence.............................................................34
10.8 Headings........................................................................34
10.9 Counterparts....................................................................35
10.10 Governing Law...................................................................35
10.11 Successors and Assigns..........................................................35
10.12 Remedies Cumulative; Specific Performance.......................................35
10.13 Waiver..........................................................................35
10.14 Amendments......................................................................35
10.15 Severability....................................................................35
10.16 Entire Agreement................................................................36
10.17 Construction....................................................................36
</TABLE>
iv.
<PAGE>
AGREEMENT AND PLAN
OF MERGER AND REORGANIZATION
THIS AGREEMENT AND PLAN OF MERGER AND REORGANIZATION (the
"Agreement") is made and entered into as of June 11, 1999, by and among
DIGITAL RIVER, INC., a Delaware corporation ("Buyer"), UNIVERSAL COMMERCE,
INCORPORATED, a Delaware corporation (the "Company"), the individuals
identified on the signature pages hereto (the "Stockholders"), and BENJAMIN
F. RESER, as the Stockholders' Agent (as defined below). Certain other
capitalized terms used in this Agreement are defined in EXHIBIT A.
RECITALS
A. Buyer and the Company intend to effect a merger of the
Company into Buyer in accordance with this Agreement and the Delaware General
Corporation Law (the "Merger"). Upon consummation of the Merger, the Company
will cease to exist.
B. It is intended that the Merger qualify as a tax-free
reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code of 1986, as amended (the "Code"). For accounting purposes, it is
intended that the Merger be accounted for using purchase accounting.
C. This Agreement has been approved by the respective boards of
directors of Buyer and the Company.
D. The Stockholders own a total of 1,500 shares of the Common
Stock (with no par value) of the Company ("Company Common Stock"),
constituting all of the outstanding capital stock of the Company.
Contemporaneously with the execution and delivery of this Agreement, the
Stockholders are executing and delivering to Buyer certain other agreements.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION
1.1 MERGER OF THE COMPANY INTO BUYER. Upon the terms and
subject to the conditions set forth in this Agreement, at the Effective Time,
the Company shall be merged with and into Buyer, and the separate existence
of the Company shall cease. Buyer will continue as the surviving corporation
in the Merger.
1.2 EFFECT OF THE MERGER. The Merger shall have the effects set
forth in this Agreement and in the applicable provisions of the Delaware
General Corporation Law.
1.3 CLOSING; EFFECTIVE TIME. The consummation of the
transactions contemplated by this Agreement (the "Closing") shall take place
at the offices of Cooley Godward LLP, One Maritime Plaza, 20th Floor, San
Francisco, California 94111 at 10:00 a.m. on June 11, 1999, or at such other
time and date as the parties may agree (the "Scheduled Closing Time"). (The
date on which the Closing actually takes place is referred to in this
Agreement as the "Closing Date.")
1.
<PAGE>
Contemporaneously with or within forty-eight (48) hours after the Closing, a
properly executed agreement of merger conforming to the requirements of
Subchapter IX of the Delaware General Corporation Law shall be filed with the
Secretary of State of the State of Delaware. The Merger shall become
effective at the time such agreement of merger is filed with the Secretary of
State of the State of Delaware (the "Effective Time").
1.4 CONVERSION OF SHARES.
(a) Subject to Section 1.8, at the Effective Time, by
virtue of the Merger and without any further action on the part of Buyer, the
Company or any Stockholder of the Company, each share of Company Common Stock
outstanding immediately prior to the Effective Time shall be converted into
the right to receive (1) 204.59 shares of common stock (par value $0.01 per
share) of Buyer ("Buyer Common Stock") (the "Stock Consideration"), provided
that any fractional shares of Buyer Common Stock created thereby shall
instead constitute the right to receive cash, and (2) $1,333.33 in cash (the
"Cash Consideration").
(b) At the Closing, the documents, certificates and
instruments described in Sections 6 and 7 shall be executed and delivered to
the applicable party and, subject to the satisfaction or waiver, if
permissible, of the conditions set forth in Section 6, and subject to the
provisions regarding Escrow set forth in Section 1.4(d), Buyer shall deliver
the Stock Consideration and the Cash Consideration (by federal bank wires or
by delivery of bank certified checks) to the Stockholders.
(c) If any shares of Company Common Stock outstanding
immediately prior to the Effective Time are unvested or are subject to a
repurchase option, risk of forfeiture or other condition under any applicable
restricted stock purchase agreement or other agreement with the Company, then
the shares of Buyer Common Stock issued in exchange for such shares of
Company Common Stock will also be unvested and subject to the same repurchase
option, risk of forfeiture or other condition, and the certificates
representing such shares of Buyer Common Stock may accordingly be marked with
appropriate legends.
(d) Notwithstanding anything to the contrary contained
in this Agreement, 38,360 shares of the Stock Consideration shall be
deposited by Buyer in Escrow pursuant to the Escrow Agreement substantially
in the form attached hereto as EXHIBIT D (the "Escrow Agreement") (rather
than issued and delivered to the Stockholders) at the Effective Time.
1.5 EARN-OUTS.
(a) EARN-OUT ESCROW. At the Closing, Buyer shall issue
to each Stockholder his or her Pro Rata Share of 400,000 shares of Buyer
Common Stock which may be earned in the earn-outs described in subsections
(b) and (c) below; PROVIDED HOWEVER, that such shares shall be held in escrow
(the "Earn-Out Escrow") by the Secretary of Buyer and shall be subject to the
further provisions of this Section 1.5. Promptly following the First
Anniversary, any of the shares in the Earn-out Escrow that are not delivered
to the Stockholders pursuant to subsections (b) and (c) below shall be
forfeited and returned to Buyer without consideration. Each of the
Stockholders hereby instructs the Secretary of Buyer to take all necessary
acts to cause such forfeiture to Buyer in such event, and agrees to deliver
at the Closing such stock powers or assignments separate from certificate as
may be necessary to facilitate such forfeiture in such event. In the event
that the number of shares to be delivered to the Stockholders pursuant to
2.
<PAGE>
subsections (b) or (c) below exceeds the shares in the Earn-out Escrow, Buyer
shall issue at the First Anniversary such number of additional shares to the
Stockholders as is necessary to comply with subsections (b) and (c) below;
provided that such shares shall not be deemed issued until such date for any
purpose.
(b) CNET EARN-OUT.
(i) GENERALLY. Promptly following the one
year anniversary of the Effective Time (the "First Anniversary"), Buyer shall
deliver from the Earn-out Escrow to each Stockholder his or her Pro Rata
Share of Buyer Common Stock equal to the following: (a) one-half (1/2) of the
CNET Sales DIVIDED by (b) the average closing price of the Buyer Common Stock
as reported on the Nasdaq National Market System during the ten (10)
consecutive trading days immediately prior to the First Anniversary (but in
no event less than $20), (c) rounded down to the nearest whole number;
provided that if either of Benjamin F. Reser or Charles Rose (collectively,
the "Principal Stockholders") shall have voluntarily terminated their
employment with Buyer or been terminated for "cause" (as such term is defined
in their Employment Agreements) during such one year period, then such
terminated Principal Stockholder shall receive a reduced number of shares
pursuant to this Section 1.5 determined by multiplying the number of shares
otherwise receivable under this Section 1.5 by a fraction, the numerator of
which is the number of days in such one year period prior to such
termination, and the denominator of which is 365.
(ii) DEFINITIONS. As used in this subsection
(b), the following terms have the following meanings:
"CNET Sales" means amounts collected from
the sale of software (less refunds, chargebacks and amounts paid to CNET,
Inc.) between the Effective Time and the First Anniversary, as determined by
Buyer using standards historically used by Buyer in calculating sales, from
consumers who access the Company's website (y) directly from a link on a CNET
Site, or (z) indirectly from sites other than CNET Sites when the author of
such software is an Approved Author, as set forth in that certain Online
Software Distributor Agreement, dated November 24, 1998, between the Company
and CNET, Inc.
"CNET Sites" means www.download.com,
www.shopper.com, www.gamecenter.com, www.builder.com and www.shareware.com.
An "Approved Author" is a software author
who is registered with the Company as a result of a direct link referral from
a CNET Site, excluding software authors that are registered with an Exempt
Entity.
An "Exempt Entity" means Buyer or any
Affiliate of Buyer, Maagnum Internet Group, Inc., a Connecticut corporation,
Public Software Library Ltd., a Texas limited partnership, or any Entity
acquired by Buyer prior to or after the date of this Agreement.
(c) GROSS REVENUES EARN-OUT.
(i) GENERALLY. Promptly following the First
Anniversary, Buyer shall deliver from the Earn-out Escrow (as defined below)
to each Stockholder his or her Pro Rata Share of Buyer Common Stock equal to
the following:
3.
<PAGE>
(1) if the Gross Revenues are equal
to or greater than $1,155,000 and not more than $1,485,000, (i) $3,000,000
DIVIDED by (ii) the average closing price of the Buyer Common Stock as
reported on the Nasdaq National Market System during the ten (10) consecutive
trading days immediately prior to such one year anniversary, (iii) rounded
down to the nearest whole number, (iv) but in no event more than 150,000
shares; or
(2) if the Gross Revenues are
greater than $1,485,000 and not more than $1,815,000, (i) $4,000,000 DIVIDED
by (ii) the average closing price of the Buyer Common Stock as reported on
the Nasdaq National Market System during the ten (10) consecutive trading
days immediately prior to such one year anniversary, (iii) rounded down to
the nearest whole number, (iv) but in no event more than 200,000 shares; or
(3) if the Gross Revenues are
greater than $1,815,000 and not more than $1,980,000, (i) $6,000,000 DIVIDED
by (ii) the average closing price of the Buyer Common Stock as reported on
the Nasdaq National Market System during the ten (10) consecutive trading
days immediately prior to such one year anniversary, (iii) rounded down to
the nearest whole number, (iv) but in no event more than 300,000 shares; or
(4) if the Gross Revenues are
greater than $1,980,000, (i) $8,000,000 DIVIDED by (ii) the average closing
price of the Buyer Common Stock as reported on the Nasdaq National Market
System during the ten (10) consecutive trading days immediately prior to such
one year anniversary, (iii) rounded down to the nearest whole number, (iv)
but in no event more than 400,000 shares.
(II) DEFINITIONS. As used in this subsection
(c), "Gross Revenues" means the gross revenues of the division of Buyer
previously represented by the Company (the "Universal Division") between the
Effective Time and the First Anniversary after deducting CNET Sales, returns,
refunds and chargebacks and amounts paid by the Universal Division to
software authors, dealers and referral sites. Gross Revenues shall also
exclude revenues from Exempt Entities.
1.6 RESALE SHELF.
(a) On or before August 18, 1999, Buyer shall file a
registration statement on Form S-3 (or any other similar successor form)
("Registration Statement") with the SEC for the public sale by the Stockholders
of one-half (1/2) of the Stock Consideration. If the SEC decides not to review
the Registration Statement, Buyer shall use commercially reasonable efforts to
cause the Registration Statement to become effective not later than seven days
following the SEC's communication of such no-review to Buyer and to remain
effective for a period of 90 days following such effectiveness. If the SEC does
review the Registration Statement, Buyer shall use commercially reasonable
efforts to cause the Registration Statement to become effective as soon as
possible and in any event no later than 75 days after the date of filing and to
remain effective for a period of 90 days following such date of effectiveness.
Buyer shall pay all expenses in connection with the preparation and filing of
the Registration Statement, but in no event will Buyer be obligated to pay the
Stockholders' underwriting discounts, if any.
(b) Notwithstanding the foregoing, Buyer's obligation to
file or maintain the effectiveness of the Registration Statement shall be
suspended for a period of up to 60 days if Buyer furnishes to the Stockholders'
Agent a certificate signed by the Chief Executive Officer of
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Buyer stating that in the good faith judgment of Buyer it would be materially
harmful to Buyer for such Registration Statement to be filed or maintained
effective at such time; PROVIDED, HOWEVER, that if the Registration Statement
shall have already been declared effective, then Buyer shall maintain the
effectiveness of the Registration Statement for an additional period equal to
the number of days during which the effectiveness was suspended. Buyer shall
notify the Stockholders' Agent of the date the Registration Statement becomes
effective at the time the Registration Statement becomes effective.
(c) Notwithstanding any other provision of this Section
1.6, each of the Stockholders irrevocably agrees that he or she will not,
directly or indirectly, (1) offer for sale, sell, pledge, or otherwise dispose
of (or enter into any transaction or device that is designed to, or could be
expected to, result in the disposition by any person at any time in the future)
any shares of the Stock Consideration, or (2) enter into any swap or other
derivatives transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of such shares of the Stock
Consideration, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of the Stock Consideration or other securities, in
cash or otherwise, for a period beginning on the date of this Agreement and
ending on September 15, 1999. In furtherance of the foregoing, the stock
certificates evidencing the Stock Consideration shall bear a legend providing
for the foregoing and Buyer and its transfer agent are hereby authorized to
decline to make any transfer of securities if such transfer would constitute a
violation or breach of this Section 1.6(c).
(d) During the effective period of the Registration
Statement, Buyer agrees that the shares of Stock Consideration to be registered
thereby will be exempted from Buyer's standard policies regarding restrictions
on employees' sale of Buyer's securities as in effect at such time; PROVIDED,
HOWEVER, that the Stockholders will be subject to any restrictions on sale
imposed by applicable securities laws.
1.7 CLOSING OF THE COMPANY'S TRANSFER BOOKS. At the Effective
Time, holders of certificates representing shares of the Company's capital
stock that were outstanding immediately prior to the Effective Time shall
cease to have any rights as Stockholders of the Company, and the stock
transfer books of the Company shall be closed with respect to all shares of
such capital stock outstanding immediately prior to the Effective Time. No
further transfer of any such shares of the Company's capital stock shall be
made on such stock transfer books after the Effective Time. If, after the
Effective Time, a valid certificate previously representing any of such
shares of the Company's capital stock (a "Company Stock Certificate") is
presented to Buyer, such Company Stock Certificate shall be canceled and
shall be exchanged as provided in Section 1.8.
1.8 EXCHANGE OF CERTIFICATES.
(a) Upon surrender of a Company Stock Certificate to
Buyer for exchange, together with such other documents as may be reasonably
required by Buyer, the holder of such Company Stock Certificate shall be
entitled to receive in exchange therefor a certificate representing the
number of whole shares of Buyer Common Stock that such holder has the right
to receive pursuant to the provisions of this Section 1, and the Company
Stock Certificate so surrendered shall be canceled. Until surrendered as
contemplated by this Section 1.8, each Company Stock Certificate shall be
deemed, from and after the Effective Time, to represent only
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the right to receive upon such surrender a certificate representing shares of
Buyer Common Stock (and cash in lieu of any fractional share of Buyer Common
Stock) as contemplated by this Section 1. If any Company Stock Certificate
shall have been lost, stolen or destroyed, Buyer may, in its discretion and
as a condition precedent to the issuance of any certificate representing
Buyer Common Stock, require the owner of such lost, stolen or destroyed
Company Stock Certificate to provide an appropriate affidavit and to deliver
a bond (in such sum as Buyer may reasonably direct) as indemnity against any
claim that may be made against Buyer with respect to such Company Stock
Certificate.
(b) No dividends or other distributions declared or
made with respect to Buyer Common Stock with a record date after the
Effective Time shall be paid to the holder of any unsurrendered Company Stock
Certificate with respect to the shares of Buyer Common Stock represented
thereby, and no cash payment in lieu of any fractional share shall be paid to
any such holder, until such holder surrenders such Company Stock Certificate
in accordance with this Section 1.8 (at which time such holder shall be
entitled to receive all such dividends and distributions and such cash
payment).
(c) No fractional shares of Buyer Common Stock shall
be issued in connection with the Merger, and no certificates for any such
fractional shares shall be issued. In lieu of such fractional shares, any
holder of capital stock of the Company who would otherwise be entitled to
receive a fraction of a share of Buyer Common Stock (after aggregating all
fractional shares of Buyer Common Stock issuable to such holder) shall, upon
surrender of such holder's Company Stock Certificate(s), be paid in cash the
dollar amount (rounded to the nearest whole cent), without interest,
determined by multiplying such fraction by the Designated Buyer Stock Price.
(d) Buyer shall be entitled to deduct and withhold
from any consideration payable or otherwise deliverable to any holder or
former holder of capital stock of the Company pursuant to this Agreement such
amounts as Buyer may be required to deduct or withhold therefrom under the
Code or under any provision of state, local or foreign tax law. To the extent
such amounts are so deducted or withheld, such amounts shall be treated for
all purposes under this Agreement as having been paid to the Person to whom
such amounts would otherwise have been paid.
(e) Buyer shall not be liable to any holder or former
holder of capital stock of the Company for any shares of Buyer Common Stock
(or dividends or distributions with respect thereto), or for any cash
amounts, delivered to any public official pursuant to any applicable
abandoned property, escheat or similar law.
1.9 STOCKHOLDER APPROVAL; DISSENTING SHARES. Each of the
Stockholders hereby agrees and acknowledges the following:
(a) that the terms of the Merger, this Agreement, the
Escrow Agreement and all other agreements contemplated herein are hereby
approved, ratified and confirmed and the officers of the Company are, and
each of them hereby is, authorized and directed, in the name and on behalf of
the Company, to consummate the transactions contemplated by this Agreement,
the Escrow Agreement on the terms set forth in such documents and such other
agreements, and
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any amendments thereto, as the officers executing such agreements may in
their discretion deem reasonable and appropriate; and
(b) that he or she hereby agrees to waive any
"appraisal rights" within the meaning of Section 262 of the Delaware General
Corporation Law with respect to the Merger.
1.10 TAX CONSEQUENCES. For federal income tax purposes, the
Merger is intended to constitute a reorganization within the meaning of
Section 368(a)(1)(A) of the Code. The parties to this Agreement hereby adopt
this Agreement as a "plan of reorganization" within the meaning of Sections
1.368-2(g) and 1.368-3(a) of the United States Treasury Regulations.
1.11 ACCOUNTING TREATMENT. For accounting purposes, the Merger
is intended to be accounted for by Buyer as a purchase under GAAP.
1.12 FURTHER ACTION. If, at any time after the Effective Time,
any further action is determined by Buyer to be necessary or desirable to
carry out the purposes of this Agreement or to vest Buyer with full right,
title and possession of and to all rights and property of the Company, the
officers and directors of Buyer shall be fully authorized (in the name of the
Company and otherwise) to take such action.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE
STOCKHOLDERS
Except as set forth in the Disclosure Schedule with respect
to specifically identified subsections of this Section 2, the Company and the
Stockholders jointly and severally represent and warrant, to and for the
benefit of the Indemnitees, as follows:
2.1 DUE ORGANIZATION; GOOD STANDING; NO SUBSIDIARIES.
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware
and has all necessary power and authority: (i) to conduct its business in the
manner in which its business is currently being conducted; (ii) to own and
use its assets in the manner in which its assets are currently owned and
used; and (iii) to perform its obligations under all Company Contracts.
(b) The Company is not and has not been required to be
qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction, other than in the State of Washington. With
respect to such jurisdiction, the Company is in good standing as a foreign
corporation in such jurisdiction.
(c) The Company has no subsidiaries and the Company
has never owned, beneficially or otherwise, any shares or other securities
of, or any direct or indirect interest of any nature, in any Entity, other
than a corporate money market account standing in the name of "Universal
Commerce, Incorporated".
2.2 CERTIFICATE OF INCORPORATION AND BYLAWS; RECORDS. The Company
has delivered to Buyer accurate and complete copies of: (a) the Company's
certificate of incorporation and bylaws, including all amendments thereto; (b)
the stock records of the Company; and (c) the minutes and other records of the
meetings and other actions or proceedings
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(including any actions taken by written consent or otherwise without a
meeting) of the Stockholders of the Company, the board of directors of the
Company and all committees of the board of directors of the Company. There
have been no annual or special meetings or other actions or proceedings of
the Stockholders of the Company, the board of directors of the Company or any
committee of the board of directors of the Company that are not fully
reflected in such minutes or other records. The books of account, stock
records, minute books and other records of the Company are accurate,
up-to-date and complete in all material respects, and have been maintained in
accordance with prudent business practices.
2.3 CAPITALIZATION; TITLE TO SHARES.
(a) The authorized capital stock of the Company
consists of 1,500 shares of Common Stock (no par value), of which 1,500
shares have been issued and are outstanding and all of which shares are
registered in the name of the Stockholders (the "Shares"). The Shares are
owned by the individuals and in the amounts set forth on Schedule 2.3 to the
Disclosure Schedule. All of the Shares have been duly authorized and validly
issued, are fully paid and non-assessable and have been issued in full
compliance with all applicable securities laws and other applicable legal
requirements. The Stockholders have, and at the Closing will have, good and
valid title to the Shares, and all of such Shares are free and clear of all
liens and other Encumbrances and legends (other than customary securities law
legends). The Stockholders has delivered to Buyer accurate and complete
copies of the stock certificate(s) representing such shares.
(b) Except for the transactions contemplated by this
Agreement, there is no: (i) outstanding subscription, option, call, warrant
or right (whether or not currently exercisable) to acquire any shares of the
capital stock or other securities of the Company; (ii) outstanding security,
instrument or obligation that is or may become convertible into or
exchangeable for any shares of the capital stock or other securities of the
Company; or (iii) Contract under which the Company is or may become obligated
to sell or otherwise issue any shares of its capital stock or any other
securities. The Company has never repurchased, redeemed or otherwise
reacquired any shares of capital stock or other securities of the Company.
2.4 FINANCIAL STATEMENTS.
(a) The Company has delivered to Buyer the following
financial statements and notes (collectively, the "Company Financial
Statements"): (i) the unaudited balance sheet of the Company as of December
31, 1998, and the related unaudited income statements of the Company for the
year then ended; and (ii) the unaudited balance sheet of the Company as of
March 31, 1999 (the "Balance Sheet"), and the related unaudited income
statement of the Company for the three months then ended.
(b) The Company Financial Statements are accurate and
complete in all material respects and present fairly the financial position
of the Company as of the respective dates thereof and the results of
operations and (in the case of the financial statements referred to in
Section 2.4(a)(i)) cash flows of the Company for the periods covered thereby.
The Company Financial Statements are free of material misstatements and
present fairly the financial position of the Company.
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2.5 ABSENCE OF CHANGES. Since the date of the Balance Sheet (the
"Balance Sheet Date"):
(a) there has not been any material adverse change in the
Company's business, condition, assets, liabilities, operations, financial
performance or prospects and, to the best of the knowledge of the Company and
the Stockholders, no event has occurred that will, or could reasonably be
expected to, have a Material Adverse Effect on the Company;
(b) there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any of the Company's
assets (whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or
paid any dividend or made any other distribution in respect of any shares of
capital stock, and has not repurchased, redeemed or otherwise reacquired any
shares of capital stock or other securities;
(d) the Company has not sold, issued or authorized the
issuance of (i) any capital stock or other security, (ii) any option or right to
acquire any capital stock or any other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security;
(e) there has been no amendment to the Company's
certificate of incorporation or bylaws, and the Company has not effected or been
a party to any Acquisition Transaction, recapitalization, reclassification of
shares, stock split, reverse stock split or similar transaction;
(f) the Company has not formed any subsidiary or acquired
any equity interest or other interest in any other Entity;
(g) the Company has not made any capital expenditure
which, when added to all other capital expenditures made on behalf of the
Company since the Balance Sheet Date, exceeds $20,000;
(h) the Company has not (i) entered into or permitted any
of the assets owned or used by it to become bound by any Contract that is or
would constitute a Material Contract, or (ii) amended or prematurely terminated,
or waived any material right or remedy under, any such Contract;
(i) the Company has not (i) acquired, leased or licensed
any right or other asset from any other Person, (ii) sold or otherwise disposed
of, or leased or licensed, any right or other asset to any other Person, or
(iii) waived or relinquished any right, except for immaterial rights or other
immaterial assets acquired, leased, licensed or disposed of in the ordinary
course of business and consistent with the Company's past practices;
(j) the Company has not written off as uncollectible, or
established any extraordinary reserve with respect to, any account receivable or
other indebtedness;
(k) the Company has not made any pledge of any of its
assets or otherwise permitted any of its assets to become subject to any
Encumbrance, except for pledges of
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immaterial assets made in the ordinary course of business and consistent with
the Company's past practices;
(l) the Company has not (i) lent money to any Person
(other than pursuant to routine travel advances made to employees in the
ordinary course of business), or (ii) incurred or guaranteed any indebtedness
for borrowed money;
(m) the Company has not (i) established or adopted any
employee benefit Plans, (ii) paid any bonus or made any profit-sharing or
similar payment to, or increased the amount of the wages, salary, commissions,
fringe benefits or other compensation or remuneration payable to, any of its
directors, officers or employees, or (iii) hired any new employee;
(n) the Company has not changed any of its methods of
accounting or accounting practices in any respect;
(o) the Company has not made any Tax election;
(p) the Company has not commenced or settled any Legal
Proceeding;
(q) the Company has not entered into any material
transaction or taken any other material action outside the ordinary course of
business or inconsistent with its past practices; and
(r) the Company has not agreed or committed to take any
of the actions referred to in clauses "(c)" through "(q)" above.
2.6 TITLE TO ASSETS.
(a) The Company owns, and has good, valid and marketable
title to, all assets purported to be owned by it, including: (i) all assets
reflected on the Balance Sheet; (ii) all assets referred to in Parts 2.7(b) and
2.9 of the Disclosure Schedule and all of the Company's rights under the
Contracts identified in Part 2.10(a) of the Disclosure Schedule; and (iii) all
other assets reflected in the Company's books and records as being owned by the
Company. All of said assets are owned by the Company free and clear of any liens
or other Encumbrances, except for (x) any lien for current Taxes not yet due and
payable, and (y) minor liens that have arisen in the ordinary course of business
and that do not (in any case or in the aggregate) materially detract from the
value of the assets subject thereto or materially impair the operations of the
Company.
(b) Part 2.6 of the Disclosure Schedule identifies all
assets that are material to the business of the Company and that are being
leased or licensed to the Company.
2.7 BANK ACCOUNTS; RECEIVABLES.
(a) Part 2.7(a) of the Disclosure Schedule identifies
each account maintained by or for the benefit of the Company at any bank or
other financial institution and the names of each Person authorized to access
such account.
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(b) Part 2.7(b) of the Disclosure Schedule provides an
accurate and complete report showing all accounts receivable, notes receivable
and other receivables of the Company as of the Balance Sheet Date. All existing
accounts receivable of the Company (including those accounts receivable
reflected on the Balance Sheet that have not yet been collected and those
accounts receivable that have arisen since the Balance Sheet Date and have not
yet been collected) (i) represent valid obligations of clients of the Company
arising from bona fide transactions entered into in the ordinary course of
business, and (ii) are current and collectible in full. None of the Company's
accounts receivable is subject to any Encumbrance, offset, setoff or
counterclaim and neither of the Company nor the Stockholders has any knowledge
of any facts or circumstances that would give rise to any Encumbrance.
2.8 EQUIPMENT; LEASEHOLD.
(a) All material items of equipment and other tangible
assets owned by or leased to the Company are adequate for the uses to which they
are being put, are in good condition and repair (ordinary wear and tear
excepted) and are adequate for the conduct of the Company's business in the
manner in which such business is currently being conducted.
(b) Part 2.8(b) of the Disclosure Schedule identifies all
real property owned or leased by the Company.
2.9 PROPRIETARY ASSETS.
(a) Part 2.9(a)(i) of the Disclosure Schedule sets forth,
with respect to each Company Proprietary Asset registered with any Governmental
Body or for which an application has been filed with any Governmental Body, (i)
a brief description of such Proprietary Asset, and (ii) the names of the
jurisdictions covered by the applicable registration or application. Part
2.9(a)(ii) of the Disclosure Schedule identifies and provides a brief
description of all other Company Proprietary Assets owned by the Company. Part
2.9(a)(iii) of the Disclosure Schedule identifies and provides a brief
description of each Proprietary Asset licensed to the Company by any Person
(except for any Proprietary Asset that is licensed to the Company under any
third party software license generally available to the public at a cost of less
than $10,000), and identifies the license agreement under which such Proprietary
Asset is being licensed to the Company. The Company has good, valid and
marketable title to all of the Company Proprietary Assets identified in Parts
2.9(a)(i) and 2.9(a)(ii) of the Disclosure Schedule, free and clear of all liens
and other Encumbrances, and has a valid right to use all Proprietary Assets
identified in Part 2.9(a)(iii) of the Disclosure Schedule. Part 2.9(a)(iv) of
the Disclosure Schedule sets forth all obligations of the Company to make any
payment to any Person for the use of any Company Proprietary Asset. The Company
has not developed jointly with any other Person any Company Proprietary Asset
with respect to which such other Person has any rights.
(b) The Company has taken all measures and precautions
necessary to protect and maintain the confidentiality and secrecy of all Company
Proprietary Assets (except Company Proprietary Assets whose value would be
unimpaired by public disclosure) and otherwise to maintain and protect the value
of all Company Proprietary Assets. Part 2.9(b) of the Disclosure Schedule
identifies all Persons to whom the Company has disclosed or delivered or
permitted the disclosure or delivery of: (i) the source code, or any portion or
aspect of the source code, of any Company Proprietary Asset, or (ii) the object
code, or any portion or aspect of the
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object code, of any Company Proprietary Asset, other than pursuant to license
agreements identified in Part 2.10(a) of the Disclosure Schedule.
(c) To the best knowledge of the Company and the
Stockholders, none of the Company Proprietary Assets infringes or conflicts with
any Proprietary Asset owned or used by any other Person. The Company is not
infringing, misappropriating or making any unlawful use of, and the Company has
not at any time infringed, misappropriated or made any unlawful use of, or
received any notice or other communication (in writing or otherwise) of any
actual, alleged, possible or potential infringement, misappropriation or
unlawful use of, any Proprietary Asset owned or used by any other Person. To the
best of the knowledge of the Company and the Stockholders, no other Person is
infringing, misappropriating or making any unlawful use of, and no Proprietary
Asset owned or used by any other Person infringes or conflicts with, any Company
Proprietary Asset.
(d) Except as set forth in Part 2.9(d) of the Disclosure
Schedule: (i) each Company Proprietary Asset conforms in all material respects
with any specification, documentation, performance standard, representation or
statement made or provided with respect thereto by or on behalf of the Company;
and (ii) there has not been any claim by any client or other Person alleging
that any Company Proprietary Asset (including each version thereof that has ever
been licensed or otherwise made available by the Company to any Person) does not
conform in all material respects with any specification, documentation,
performance standard, representation or statement made or provided by or on
behalf of the Company, and, to the best of the knowledge of the Company and the
Stockholders, there is no basis for any such claim. The Company has established
adequate reserves on the Balance Sheet to cover all costs associated with any
obligations that the Company may have with respect to the correction or repair
of programming errors or other defects in the Company Proprietary Assets.
(e) The Company Proprietary Assets constitute all the
Proprietary Assets necessary to enable the Company to conduct its business in
the manner in which such business has been and is being conducted. Part 2.9(e)
of the Disclosure Schedule sets forth (i) any license by the Company of the
Company Proprietary Assets to any Person on an exclusive basis, and (ii) any
covenant not to compete or Contract limiting the Company's ability to exploit
fully any of its Proprietary Assets or to transact business in any market or
geographical area or with any Person.
(f) To the knowledge of the Company and the Stockholders,
(i) each computer, computer program and other item of software (whether
installed on a computer or on any other piece of equipment, including firmware)
that is owned, licensed or used by the Company for its internal business
operations is Year 2000 Compliant; and (ii) each computer program and other item
of software that has been designed, developed or licensed by the Company is Year
2000 Compliant. The Company has conducted sufficient Year 2000 compliance
testing for each computer, computer program and item of software referred to
above to be able to determine whether such computer, computer program and item
of software is Year 2000 Compliant, and has obtained warranties or other written
assurances from each of its suppliers to the effect that the products and
services provided by such suppliers to the Company is Year 2000 Compliant.
Notwithstanding any other provision in this Section 2.9, the Company makes no
representation that any computer, computer program or other item of software
will be Year 2000 compliant after the Year 2038.
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2.10 CONTRACTS.
(a) Part 2.10(a) of the Disclosure Schedule identifies:
(i) the ten (10) largest Company Contract with
software authors, based upon net sales from January 1, 1999 through April 30,
1999;
(ii) each Company Contract relating to the
employment of, or the performance of services by, any employee, consultant or
independent contractor;
(iii) each Company Contract relating to the
acquisition, transfer, use, development, sharing or license of any technology or
any Proprietary Asset;
(iv) each Company Contract imposing any
restriction on the Company's right or ability (A) to compete with any other
Person, (B) to acquire any product or other asset or any services from any other
Person, (C) to sell any product or other asset to or perform any services for
any other Person or to transact business or deal in any other manner with any
other Person, or (D) develop or distribute any technology;
(v) each Company Contract creating or involving
any agency relationship, distribution arrangement or franchise relationship;
(vi) each Company Contract relating to the
acquisition, issuance or transfer of any securities;
(vii) each Company Contract relating to the
creation of any Encumbrance with respect to any asset of the Company;
(viii) each Company Contract involving or
incorporating any guaranty, any pledge, any performance or completion bond, any
indemnity or any surety arrangement;
(ix) each Company Contract creating or relating
to any partnership or joint venture or any sharing of revenues, profits, losses,
costs or liabilities;
(x) each Company Contract relating to the
purchase or sale of any product or other asset by or to, or the performance of
any services by or for, any Related Party;
(xi) each Company Contract constituting or
relating to a Contract with a Governmental Body;
(xii) any other Company Contract that was entered
into outside the ordinary course of business or was inconsistent with the
Company's past practices;
(xiii) any other Company Contract that has a term
of more than 60 days and that may not be terminated by the Company (without
penalty) within 60 days after the delivery of a termination notice by the
Company; and
(xiv) any other Company Contract that contemplates
or involves (A) the payment or delivery of cash or other consideration in an
amount or having a value in excess of
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$10,000 in the aggregate, or (B) the performance of services having a value
in excess of $10,000 in the aggregate.
Contracts in the respective categories described in clauses "(i)" through
"(xiii)" above are referred to in this Agreement as "Material Contracts."
(b) The Company has delivered to Buyer accurate and
complete copies of all written Contracts identified in Part 2.10(a) of the
Disclosure Schedule, including all amendments thereto. Part 2.10(a) of the
Disclosure Schedule provides an accurate description of the terms of each
Company Contract that is not in written form. Each Contract identified in Part
2.10(a) of the Disclosure Schedule is valid and in full force and effect and, to
the best of the knowledge of the Company and the Stockholders, is enforceable by
the Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
(c) Except as set forth in Part 2.10(c) of the Disclosure
Schedule:
(i) the Company has not violated or breached, or
committed any default under, any Company Contract, and, to the best of the
knowledge of the Company and the Stockholders, no other Person has violated or
breached, or committed any default under, any Company Contract;
(ii) to the best of the knowledge of the Company
and the Stockholders, no event has occurred, and no circumstance or condition
exists, that (with or without notice or lapse of time) will, or could reasonably
be expected to, (A) result in a violation or breach of any of the provisions of
any Company Contract, (B) give any Person the right to declare a default or
exercise any remedy under any Company Contract, (C) give any Person the right to
accelerate the maturity or performance of any Company Contract, or (D) give any
Person the right to cancel, terminate or modify any Company Contract;
(iii) since October 15, 1997, the Company has not
received any notice or other communication regarding any actual or possible
violation or breach of, or default under, any Company Contract; and
(iv) the Company has not waived any of its
material rights under any Material Contract.
2.11 LIABILITIES. The Company has no accrued, contingent or other
liabilities of any nature, either matured or unmatured, except for: (a)
liabilities identified as such in the "liabilities" column of the Balance Sheet;
(b) accounts payable or accrued salaries that have been incurred by the Company
since the Balance Sheet Date in the ordinary course of business and consistent
with the Company's past practices; and (c) liabilities under the Company
Contracts identified in Part 2.10(a) of the Disclosure Schedule, to the extent
the nature and magnitude of such liabilities can be specifically ascertained by
reference to the text of such Company Contracts.
2.12 COMPLIANCE WITH LEGAL REQUIREMENTS. The Company is, and has at
all times since October 15, 1997 been, to the best of the knowledge of the
Company and the Stockholders,
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in compliance with all applicable Legal Requirements, except where the
failure to comply with such Legal Requirements has not had and will not have
a Material Adverse Effect on the Company. Except as set forth in Part 2.12 of
the Disclosure Schedule, since October 15, 1997, the Company has not received
any notice or other communication from any Governmental Body regarding any
actual or possible violation of, or failure to comply with, any Legal
Requirement.
2.13 GOVERNMENTAL AUTHORIZATIONS. Part 2.13 of the Disclosure
Schedule identifies each material Governmental Authorization held by the
Company, and the Company has delivered to Buyer accurate and complete copies of
all Governmental Authorizations identified in Part 2.13 of the Disclosure
Schedule. The Governmental Authorizations identified in Part 2.13 of the
Disclosure Schedule are valid and in full force and effect, and collectively
constitute all Governmental Authorizations necessary to enable the Company to
conduct its business in the manner in which its business is currently being
conducted. The Company is, and at all times since October 15, 1997 has been, in
substantial compliance with the terms and requirements of the respective
Governmental Authorizations identified in Part 2.13 of the Disclosure Schedule.
Since October 15, 1997, the Company has not received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
2.14 TAX MATTERS.
(a) All Tax Returns required to be filed by or on behalf
of the Company with any Governmental Body with respect to any taxable period
ending on or before the Closing Date (the "Company Returns") (i) have been or
will be filed on or before the applicable due date (including any extensions of
such due date), and (ii) have been, or will be when filed, accurately and
completely prepared in all material respects in compliance with all applicable
Legal Requirements. All amounts shown on the Company Returns to be due on or
before the Closing Date have been or will be paid on or before the Closing Date.
The Company has delivered to Buyer accurate and complete copies of all Company
Returns filed since October 15, 1997 that have been requested by Buyer.
(b) The Company Financial Statements fully accrue all
actual and contingent liabilities for Taxes with respect to all periods through
the dates thereof. The Company will establish, in the ordinary course of
business and consistent with its past practices, reserves adequate for the
payment of all Taxes for the period from the Balance Sheet Date through the
Closing Date, and the Company will disclose the dollar amount of such reserves
to Buyer on or prior to the Closing Date.
(c) Part 2.14(c) of the Disclosure Schedule identifies
all examinations or audits of any Company Return. The Company has delivered to
Buyer accurate and complete copies of all audit reports and similar documents
(to which the Company has access) relating to the Company Returns. Part 2.14(c)
of the Disclosure Schedule sets forth any extension or waiver of the limitation
period applicable to any of the Company Returns that has been granted to the
Company or has been requested by the Company, if any.
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(d) No claim or Legal Proceeding is pending or has been
threatened against or with respect to the Company in respect of any Tax. There
are no unsatisfied liabilities for Taxes (including liabilities for interest,
additions to tax and penalties thereon and related expenses) with respect to any
notice of deficiency or similar document received by the Company with respect to
any Tax (other than liabilities for Taxes asserted under any such notice of
deficiency or similar document that are being contested in good faith by the
Company and with respect to which adequate reserves for payment have been
established). There are no liens for Taxes upon any of the assets of the Company
except liens for current Taxes not yet due and payable. The Company has not
entered into or become bound by any agreement or consent pursuant to Section
341(f) of the Code. The Company has not been, and the Company will not be,
required to include any adjustment in taxable income for any tax period (or
portion thereof) pursuant to Section 481 or 263A of the Code or any comparable
provision under state or foreign Tax laws as a result of transactions or events
occurring, or accounting methods employed, prior to the Closing.
(e) There is no agreement, plan, arrangement or other
Contract covering any employee or independent contractor or former employee or
independent contractor of the Company that, considered individually or
considered collectively with any other such Contracts, will, or could reasonably
be expected to, give rise directly or indirectly to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the
Code. The Company is not, and has never been, a party to or bound by any tax
indemnity agreement, tax sharing agreement, tax allocation agreement or similar
Contract.
2.15 EMPLOYEE AND LABOR MATTERS; BENEFIT PLANS.
(a) Part 2.15(a) of the Disclosure Schedule lists each
salary, bonus, employee pension, profit sharing, deferred compensation,
severance, cafeteria, stock option, stock purchase, incentive, golden parachute,
group or individual medical and health benefits, welfare, insurance or other
employee benefit plan, program or arrangement regardless of whether such plan is
described in Section 3 of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") (the "Plans") that is maintained by the Company or to which
the Company is required to contribute on behalf of employees of the Company, and
the basis of the Company's contributions. The Company's 401(k) Plan, and any
other retirement plan sponsored or contributed to by the Company that is
intended to be a qualified plan, is a qualified plan under Section 401(a) of the
Code, has received a current favorable determination letter from the Internal
Revenue Service or for which the Company has made application for a favorable
determination letter within the applicable time limits of Section 401(b) of the
Code, complies in all respects with ERISA and has been administered in
compliance with ERISA and the Code. With respect to each Plan listed in Part
2.15(a) of the Disclosure Schedule, the Company does not have any liability for
any failure to comply with ERISA or the Code or for any action or failure to act
in connection with the administration of such Plan. The Company does not sponsor
any Plan that is subject to Section 412 of the Code or Title IV of ERISA or is a
multiemployer plan, and no reportable event (as defined in Section 4043 of
ERISA) has occurred with respect to any Plan and no proceeding by the Pension
Benefit Guaranty Corporation has been commenced to terminate any Plan. The
Company does not participate in, sponsor or contribute to a multiple employer
welfare arrangement. No liability under the Plans exists that, on or after the
Closing Date, could subject the Company or Buyer to any liability or have any
adverse effect on the assets of the Company or Buyer, and no event has occurred
which might give rise to any such
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liability or which could subject the Company or Buyer to any such liability
or have any adverse effect on the business, financial condition or results of
operations of the Company or Buyer.
(b) In addition to, but not in limitation of, the
foregoing, (i) the Company has complied in all respects with the continuation
coverage rules of the Consolidated Omnibus Budget Reconciliation Act of 1985;
(ii) no nonexempt prohibited transactions under the Code or ERISA have occurred
with respect to any Plan; and (iii) there are no current investigations or
audits of any of the Plans by any governmental agency, nor has the Company been
notified in writing or orally of such a pending investigation or audit. The
Company has the power to amend or terminate any of the Plans, or any contracts,
related to the Plans, at any time and with no penalty. No claim under ERISA has
been filed with respect to any Plan. The Company has provided copies of all Plan
documents and amendments thereto, trust agreements, contracts relating to the
Plan administration, determination letter or, if none, application to the
Internal Revenue Service for a determination letter, all Form 5500s for the last
three years, including schedules and attachments, the most recent summary plan
descriptions and summaries of material modifications and the most recent annual
report.
(c) Except as set forth in Part 2.15(c) of the Disclosure
Schedule, neither the execution, delivery or performance of this Agreement, nor
the consummation of the Merger or any of the other transactions contemplated by
this Agreement, will result in any payment (including any bonus, golden
parachute or severance payment) to any current or former employee, consultant or
director of the Company (whether or not under any Plan), or materially increase
the benefits payable under any Plan, or result in any acceleration of the time
of payment or vesting of any such benefits.
(d) Part 2.15(d) of the Disclosure Schedule contains a
list of all salaried employees and all consultants of the Company as of the date
of this Agreement, and correctly reflects, in all material respects, their
salaries, any other compensation payable to them (including compensation payable
pursuant to bonus, deferred compensation or commission arrangements), their
dates of hire and their positions. The Company is not a party to any collective
bargaining contract or other Contract with a labor union or similar organization
involving any of its employees. All of the Company's employees are "at will"
employees. The Company has delivered to Buyer accurate and complete copies of
all employee manuals and handbooks, policy statements and other materials
relating the employment of the Company's employees.
(e) Part 2.15(e) of the Disclosure Schedule identifies
each employee who is not fully available to perform work because of disability
or other leave and sets forth the basis of such leave and the anticipated date
of return to full service.
(f) The Company is in compliance in all material respects
with all applicable Legal Requirements and Contracts relating to employment,
employment practices, wages, bonuses and terms and conditions of employment,
including employee compensation matters.
(g) Except as set forth in Part 2.15(g) of the Disclosure
Schedule, the Company has good labor relations, and neither the Company nor the
Stockholders has any reason to believe that (i) the consummation of the Merger
or any of the other transactions contemplated by this Agreement will have a
Material Adverse Effect on the Company's labor relations, or
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(ii) any of the Company's employees intends to terminate his or her
employment with the Company.
2.16 ENVIRONMENTAL MATTERS. To the best of the knowledge of the
Company and the Stockholders, the Company is in compliance in all material
respects with all applicable Environmental Laws, which compliance includes the
possession by the Company of all permits and other Governmental Authorizations
required under applicable Environmental Laws, and compliance with the terms and
conditions thereof. The Company has not received any notice or other
communication (in writing or otherwise), whether from a Governmental Body,
citizens group, employee or otherwise, that alleges that the Company is not in
compliance with any Environmental Law, and, to the best of the knowledge of the
Company and the Stockholders, there are no circumstances that may prevent or
interfere with the Company's compliance with any Environmental Law in the
future. To the best of the knowledge of the Company and the Stockholders, no
current or prior owner of any property leased or controlled by the Company has
received any notice or other communication (in writing or otherwise), whether
from a Government Body, citizens group, employee or otherwise, that alleges that
such current or prior owner or the Company is not in compliance with any
Environmental Law. All Governmental Authorizations currently held by the Company
pursuant to Environmental Laws are identified in Part 2.16 of the Disclosure
Schedule.
2.17 INSURANCE. Part 2.17 of the Disclosure Schedule identifies all
insurance policies maintained by, at the expense of or for the benefit of the
Company and identifies any material claims made thereunder, and the Company has
delivered to Buyer accurate and complete copies of the insurance policies
identified on Part 2.17 of the Disclosure Schedule. Each of the insurance
policies identified in Part 2.17 of the Disclosure Schedule is in full force and
effect. Since October 15, 1997, the Company has not received any notice or other
communication regarding any actual or possible (a) cancellation or invalidation
of any insurance policy, (b) refusal of any coverage or rejection of any claim
under any insurance policy, or (c) material adjustment in the amount of the
premiums payable with respect to any insurance policy.
2.18 RELATED PARTY TRANSACTIONS. Except as set forth in Part 2.18
of the Disclosure Schedule: (a) no Related Party has, and no Related Party has
at any time since October 15, 1997 had, any direct or indirect interest in any
material asset used in or otherwise relating to the business of the Company; (b)
no Related Party is, or has at any time since October 15, 1997 been, indebted to
the Company; (c) since October 15, 1997, no Related Party has entered into, or
has had any direct or indirect financial interest in, any material Contract,
transaction or business dealing involving the Company; (d) no Related Party is
competing, or has at any time since October 15, 1997 competed, directly or
indirectly, with the Company; and (e) no Related Party has any claim or right
against the Company (other than rights to receive compensation for services
performed as an employee of the Company).
2.19 LEGAL PROCEEDINGS; ORDERS.
(a) There is no pending Legal Proceeding, and (to the
best of the knowledge of the Company and the Stockholders) no Person has
threatened to commence any Legal Proceeding: (i) that involves the Company or
any of the assets owned or used by the Company or any Person whose liability
the Company has or may have retained or assumed, either contractually or by
operation of law; or (ii) that challenges, or that may have the effect of
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preventing, delaying, making illegal or otherwise interfering with, the
Merger or any of the other transactions contemplated by this Agreement. To
the best of the knowledge of the Company and the Stockholders, no event has
occurred, and no claim, dispute or other condition or circumstance exists,
that will, or that could reasonably be expected to, give rise to or serve as
a basis for the commencement of any such Legal Proceeding.
(b) No Legal Proceeding has ever been commenced by or has
ever been pending against the Company.
(c) There is no order, writ, injunction, judgment or
decree to which the Company, or any of the assets owned or used by the Company,
is subject. The Stockholders is not subject to any order, writ, injunction,
judgment or decree that relates to the Company's business or to any of the
assets owned or used by the Company. To the best of the knowledge of the Company
and the Stockholders, no officer or other employee of the Company is subject to
any order, writ, injunction, judgment or decree that prohibits such officer or
other employee from engaging in or continuing any conduct, activity or practice
relating to the Company's business.
2.20 CLIENTS. Part 2.20 of the Disclosure Schedule sets forth the
names and amounts of the respective purchases for the twelve-month period ended
on the Balance Sheet Date for each of the ten (10) largest software authors,
based upon net sales from January 1, 1999 through April 30, 1999. Neither the
Company nor the Stockholders is aware nor has any reason to believe that any of
the clients listed on Part 2.20 of the Disclosure Schedule has reduced
materially or terminated, or intends to reduce materially or to terminate, the
amount of its business with the Company. Part 2.20 of the Disclosure Schedule
lists the Company's order backlog as of the Balance Sheet Date.
2.21 MATERIAL RELATIONSHIPS. No material supplier to or client or
distributor of the Company has notified the Company of an intention to terminate
or substantially alter its existing business relationship with the Company, and
neither the Company nor the Stockholders has any reason to believe that such
termination or alteration of the relationship with the Company is likely to
occur.
2.22 SALES POLICIES; WARRANTIES. Part 2.22 of the Disclosure
Schedule lists all sales or product fitness warranty policies of the Company. No
Person has asserted or, to the best knowledge of the Company and the
Stockholders, threatened to assert a claim for a breach of any such warranty
policy.
2.23 BROKERS AND FINDERS. None of the Company or any of its
officers, directors, employees or agents nor the Stockholders has had dealings
with any broker or finder in such a way as to incur, or has otherwise incurred,
any liability for which the Company or Buyer may ever be in any way responsible
with respect to any brokerage fees, commissions or finders' fees in connection
with the transactions contemplated hereby.
2.24 AUTHORITY; BINDING NATURE OF AGREEMENT. Each of the Company
and the Stockholders has the absolute and unrestricted right, power and
authority to enter into and to perform its obligations under this Agreement; and
the execution, delivery and performance by the Company and the Stockholders of
this Agreement has been duly authorized by all necessary corporate or other
action on the part of the Company and the Stockholders, as applicable. This
Agreement constitutes the legal, valid and binding obligation of each of the
Company and the
19.
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Stockholders, enforceable against the Company and the Stockholders in
accordance with its terms, subject to (i) laws of general application
relating to bankruptcy, insolvency and the relief of debtors, and (ii) rules
of law governing specific performance, injunctive relief and other equitable
remedies.
2.25 NON-CONTRAVENTION; CONSENTS. Neither (1) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, nor (2) the consummation of the Merger or any of
the other transactions contemplated by this Agreement, will directly or
indirectly (with or without notice or lapse of time):
(a) contravene, conflict with or result in a violation of
(i) any of the provisions of the Company's certificate of incorporation or
bylaws, or (ii) any resolution adopted by the Stockholders, the Company's board
of directors or any committee of the Company's board of directors;
(b) contravene, conflict with or result in a violation
of, or give any Governmental Body or other Person the right to challenge any of
the transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ, injunction,
judgment or decree to which the Company, or any of the assets owned or used by
the Company, is subject;
(c) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right to
revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a violation or
breach of, or result in a default under, any provision of any Company Contract
that is or would constitute a Material Contract, or give any Person the right to
(i) declare a default or exercise any remedy under any such Company Contract,
(ii) accelerate the maturity or performance of any such Company Contract, or
(iii) cancel, terminate or modify any such Company Contract; or
(e) result in the imposition or creation of any lien or
other Encumbrance upon or with respect to any asset owned or used by the Company
(except for minor liens that will not, in any case or in the aggregate,
materially detract from the value of the assets subject thereto or materially
impair the operations of the Company).
Except as set forth in Part 2.25 of the Disclosure Schedule, the Company is not
and will not be required to make any filing with or give any notice to, or to
obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of the Merger or any of
the other transactions contemplated by this Agreement.
2.26 DATABASE BACKUP. The Company currently backs up its Oracle
databases in a method prescribed and supported by Oracle and warrants that, to
the Company's knowledge, the current data from such databases is recoverable.
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2.27 FULL DISCLOSURE. No representation or warranty by the Company
or the Stockholders contained in this Agreement, and no statement contained in
any letter, certificate, schedule, exhibit, list or other writing furnished to
Buyer by the Company or the Stockholders in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
material fact necessary in order to make the statements contained herein or
therein not misleading. All copies of all writings furnished to Buyer by the
Company or the Stockholders hereunder or in connection with the transactions
contemplated hereby are true and complete.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to the Company and the
Stockholders as follows:
3.1 SEC FILINGS; FINANCIAL STATEMENTS.
(a) Buyer has delivered to the Company accurate and
complete copies (excluding copies of exhibits) of each report, registration
statement (on a form other than Form S-8) and definitive proxy statement
filed by Buyer with the SEC between January 1, 1999 and the date of this
Agreement (the "Buyer SEC Documents"). As of the time it was filed with the
SEC (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing): (i) each of the Buyer SEC
Documents complied in all material respects with the applicable requirements
of the Securities Act or the Exchange Act (as the case may be); and (ii) none
of the Buyer SEC Documents contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(b) The consolidated financial statements contained in
the Buyer SEC Documents: (i) complied as to form in all material respects with
the published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered, except as may be indicated in the notes to such financial
statements and (in the case of unaudited statements) as permitted by Form 10-Q
of the SEC, and except that unaudited financial statements may not contain
footnotes and are subject to year-end audit adjustments; and (iii) fairly
present the consolidated financial position of Buyer and its subsidiaries as of
the respective dates thereof and the consolidated results of operations of Buyer
and its subsidiaries for the periods covered thereby.
3.2 AUTHORITY; BINDING NATURE OF AGREEMENT. Buyer has the absolute
and unrestricted right, power and authority to perform its obligations under
this Agreement; and the execution, delivery and performance by Buyer of this
Agreement (including the contemplated issuance of Buyer Common Stock in the
Merger in accordance with this Agreement) have been duly authorized by all
necessary action on the part of Buyer and its board of directors. No vote of
Buyer's stockholders is needed to approve the Merger. This Agreement constitutes
the legal, valid and binding obligation of Buyer, enforceable against Buyer in
accordance with its terms, subject to (i) laws of general application relating
to bankruptcy, insolvency and the relief of debtors, and (ii) rules of law
governing specific performance, injunctive relief and other equitable remedies.
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3.3 VALID ISSUANCE. Subject to Section 1.4(c), the Buyer Common
Stock to be issued in the Merger will, when issued in accordance with the
provisions of this Agreement, be validly issued, fully paid and nonassessable.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY AND THE STOCKHOLDERS
4.1 ACCESS AND INVESTIGATION. During the period from the date of
this Agreement through the Effective Time (the "Pre-Closing Period"), the
Company shall, and shall cause its Representatives to: (a) provide Buyer and
Buyer's Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Buyer and Buyer's Representatives with copies of such existing books,
records, Tax Returns, work papers and other documents and information relating
to the Company, and with such additional financial, operating and other data and
information regarding the Company, as Buyer may reasonably request.
4.2 OPERATION OF THE COMPANY'S BUSINESS. During the Pre-Closing
Period:
(a) the Company shall conduct its business and operations
in the ordinary course and in substantially the same manner as such
business and operations have been conducted prior to the date of this
Agreement;
(b) the Company shall use reasonable efforts to preserve
intact its current business organization, keep available the services
of its current officers and employees and maintain its relations and
good will with all suppliers, clients, landlords, creditors, employees
and other Persons having business relationships with the Company;
(c) the Company shall keep in full force all insurance
policies identified in Part 2.17 of the Disclosure Schedule, or
suitable replacements or renewals;
(d) the Company shall cause its officers to report
regularly (but in no event less frequently than weekly) to Buyer
concerning the status of the Company's business;
(e) the Company shall not declare, accrue, set aside or
pay any dividend or make any other distribution in respect of any
shares of capital stock, and shall not repurchase, redeem or otherwise
reacquire any shares of capital stock or other securities;
(f) the Company shall not sell, issue or authorize the
issuance of (i) any capital stock or other security, (ii) any option or
right to acquire any capital stock or other security, or (iii) any
instrument convertible into or exchangeable for any capital stock or
other security;
(g) neither the Company nor any of the Stockholders shall
amend or permit the adoption of any amendment to the Company's
certificate of incorporation or bylaws, or effect or permit the Company
to become a party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
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(h) the Company shall not form any subsidiary or acquire
any equity interest or other interest in any other Entity;
(i) the Company shall not make any capital expenditure,
except for capital expenditures that, when added to all other capital
expenditures made on behalf of the Company during the Pre-Closing
Period, do not exceed $20,000 per month;
(j) the Company shall not (i) enter into, or permit any
of the assets owned or used by it to become bound by, any Contract that
is or would constitute a Material Contract, or (ii) amend or
prematurely terminate, or waive any material right or remedy under, any
such Contract;
(k) except in the ordinary course of business consistent
with past practice, the Company shall not (i) acquire, lease or license
any right or other asset from any other Person, (ii) sell or otherwise
dispose of, or lease or license, any right or other asset to any other
Person, or (iii) waive or relinquish any right, except for assets
acquired, leased, licensed or disposed of by the Company pursuant to
Contracts that are not Material Contracts;
(l) the Company shall not (i) lend money to any Person
(except that the Company may make routine travel advances to employees
in the ordinary course of business), or (ii) incur or guarantee any
indebtedness for borrowed money;
(m) the Company shall not (i) establish, adopt or amend
any employee benefit plan, (ii) pay any bonus or make any
profit-sharing payment, cash incentive payment or similar payment to,
or increase the amount of the wages, salary, commissions, fringe
benefits or other compensation or remuneration payable to, any of its
directors, officers or employees, or (iii) hire any new employee whose
aggregate annual compensation is expected to exceed $35,000;
(n) the Company shall not change any of its methods of
accounting or accounting practices in any material respect;
(o) the Company shall not make any Tax election;
(p) the Company shall not commence or settle any material
Legal Proceeding;
(q) the Company shall not agree or commit to take any of
the actions described in clauses "(e)" through "(q)" above.
Notwithstanding the foregoing, the Company may take any action described in
clauses "(e)" through "(r)" above if Buyer gives its prior written consent to
the taking of such action by the Company, which consent will not be unreasonably
withheld (it being understood that Buyer's withholding of consent to any action
will not be deemed unreasonable if Buyer determines in good faith that the
taking of such action would not be in the best interests of Buyer or would not
be in the best interests of the Company).
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4.3 NOTIFICATION; UPDATES TO DISCLOSURE SCHEDULE.
(a) During the Pre-Closing Period, the Company shall
promptly notify Buyer in writing of:
(i) the discovery by the Company of any event,
condition, fact or circumstance that occurred or existed on or prior to
the date of this Agreement and that caused or constitutes an inaccuracy
in or breach of any representation or warranty made by the Company or
any of the Stockholders in this Agreement;
(ii) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that
would cause or constitute an inaccuracy in or breach of any
representation or warranty made by the Company or any of the
Stockholders in this Agreement if (A) such representation or warranty
had been made as of the time of the occurrence, existence or discovery
of such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or
prior to the date of this Agreement;
(iii) any breach of any covenant or obligation of
the Company or any of the Stockholders; and
(iv) any event, condition, fact or circumstance
that would make the timely satisfaction of any of the conditions set
forth in Section 6 or Section 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is
required to be disclosed pursuant to Section 4.3(a) requires any change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance would
require such a change assuming the Disclosure Schedule were dated as of the date
of the occurrence, existence or discovery of such event, condition, fact or
circumstance, then the Company shall promptly deliver to Buyer an update to the
Disclosure Schedule specifying such change. No such update shall be deemed to
supplement or amend the Disclosure Schedule for the purpose of (i) determining
the accuracy of any of the representations and warranties made by the Company or
any of the Stockholders in this Agreement, or (ii) determining whether any of
the conditions set forth in Section 6 has been satisfied.
4.4 NO NEGOTIATION. During the Pre-Closing Period, neither the
Company nor any of the Stockholders shall, directly or indirectly:
(a) solicit or encourage the initiation of any inquiry,
proposal or offer from any Person (other than Buyer) relating to a
possible Acquisition Transaction;
(b) participate in any discussions or negotiations or
enter into any agreement with, or provide any non-public information
to, any Person (other than Buyer) relating to or in connection with a
possible Acquisition Transaction; or
(c) consider, entertain or accept any proposal or offer
from any Person (other than Buyer) relating to a possible Acquisition
Transaction.
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The Company shall promptly notify Buyer in writing of any material inquiry,
proposal or offer relating to a possible Acquisition Transaction that is
received by the Company or any of the Stockholders during the Pre-Closing
Period.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES
5.1 FILINGS AND CONSENTS. As promptly as practicable after the
execution of this Agreement, each party to this Agreement (a) shall make all
filings (if any) and give all notices (if any) required to be made and given by
such party in connection with the Merger and the other transactions contemplated
by this Agreement, and (b) shall use all commercially reasonable efforts to
obtain all Consents (if any) required to be obtained (pursuant to any applicable
Legal Requirement or Contract, or otherwise) by such party in connection with
the Merger and the other transactions contemplated by this Agreement, other than
those Consents identified on Section 2.25 of the Disclosure Schedule. The
Company shall (upon request) promptly deliver to Buyer a copy of each such
filing made, each such notice given and each such Consent obtained by the
Company during the Pre-Closing Period.
5.2 PUBLIC ANNOUNCEMENTS. After the date hereof, (a) neither the
Company nor any of the Stockholders shall (and the Company shall not permit any
of its Representatives to) issue any press release or make any public statement
regarding this Agreement or the Merger, or regarding any of the other
transactions contemplated by this Agreement, without Buyer's prior written
consent, and (b) Buyer will use reasonable efforts to consult with the Company
prior to issuing any press release or making any public statement regarding the
Merger.
5.3 BEST EFFORTS. During the Pre-Closing Period, (a) the Company
and the Stockholders shall use their best efforts to cause the conditions set
forth in Section 6 to be satisfied on a timely basis, and (b) Buyer shall use
its best efforts to cause the conditions set forth in Section 7 to be satisfied
on a timely basis.
5.4 EMPLOYMENT AND NONCOMPETITION AGREEMENTS. At or prior to the
Closing, each of the Principal Stockholders shall execute and deliver to the
Company and Buyer employment agreements in the forms of EXHIBIT E (the
"Employment Agreements") and each of the Stockholders shall execute and deliver
to the Company and Buyer a noncompetition agreement in the form of EXHIBIT F (a
"Noncompetition Agreement").
5.5 FIRPTA MATTERS. At the Closing, (a) the Company shall deliver
to Buyer a statement (in such form as may be reasonably requested by counsel to
Buyer) conforming to the requirements of Section 1.897 - 2(h)(1)(i) of the
United States Treasury Regulations, and (b) the Company shall deliver to the IRS
the notification required under Section 1.897 - 2(h)(2) of the United States
Treasury Regulations.
5.6 RELEASE. At the Closing, each of the Stockholders shall
execute and deliver to the Company a release in the form of EXHIBIT G (a
"Release").
5.7 INVESTMENT REPRESENTATION LETTER. At the Closing, each of the
Stockholders shall execute and deliver to the Company an investment
representation letter in the form of EXHIBIT H (an "Investment Representation
Letter").
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5.8 PROPRIETARY INFORMATION AGREEMENT. At the Closing, all
employees of the Company and all consultants and independent contractors to the
Company shall have executed and delivered to the Company a Proprietary
Information Agreement in the form attached hereto as EXHIBIT I (a "Proprietary
Information Agreement").
5.9 CNET WARRANT. The parties understand and agree that at the
Closing, the CNET Warrant to acquire 75 shares of Company Common Stock will
entitle CNET, pursuant to its terms, to the per share kind and amount of
consideration received by holders of the Common Stock of the Company in the
Merger (including a pro rata portion of the Stock Consideration and Cash
Consideration, and a pro rata portion of any Buyer Common Stock issued pursuant
to the earnouts set forth in Section 1.5. The Principal Stockholders represent
that they have agreed to cancel 75 shares (the "5% Shares) of Company Common
Stock currently held by them in joint tenancy with right of survivorship in the
event that the CNET Warrant is exercised. In the event that the CNET Warrant is
exercised following the Closing, the Principal Stockholders intend that any
consideration from the Merger relating to the 5% Shares will also be cancelled
and terminated. Accordingly, following the Closing, the Principal Stockholders
agree with Buyer that all Stock Consideration and Cash Consideration that would
otherwise be issued at the Closing in exchange for the 5% Shares shall instead
be retained by Buyer at the Closing, and any such Stock Consideration shall be
held by the Secretary of Buyer in escrow. In the event that the CNET Warrant is
exercised during its term, then (i) all such Stock Consideration shall be
cancelled, (ii) all such Cash Consideration shall be retained by Buyer without
any obligation to pay the same to the Principal Stockholders, (iii) all rights
of the Principal Stockholders under Section 1.5 with respect to the 5% Shares
shall terminate and be of no further force or effect, and (iv) CNET shall become
entitled to receive all such Stock Consideration, Cash Consideration and rights
under Section 1.5 to which the 5% Shares were entitled. The parties hereto agree
and acknowledge that all rights and interests of CNET in the CNET Warrant will
remain in full force and effect following the Closing until the CNET Warrant
expires pursuant to its terms. In the event that the CNET Warrant expires
unexercised, then all Stock Consideration and Cash Consideration relating to the
5% Shares that would have otherwise have been paid at the Closing shall be
promptly paid or delivered out of escrow to the Principal Stockholders, and the
Principal Stockholders shall have full rights under Section 1.5 with respect to
such 5% Shares. Any payment to the Principal Stockholders with respect to the 5%
Shares pursuant to this Section 5.9 shall be made 56% to Charles G. Rose, IV and
44% to Benjamin F. Reser.
5.10 VOLUME LIMITATIONS ON SALE OF EARNOUT SHARES. The Stockholders
agree with Buyer that in the event shares of Buyer Common Stock are issued
pursuant to Section 1.5, each Stockholder agrees to limit such Stockholder's
sale of shares of Buyer Common Stock obtained pursuant to Section 1.5 to no more
than 100,000 shares during any one (1) month period; provided that the
limitations set forth in this Section 5.10 shall terminate on the second
anniversary of the Closing.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER
The obligations of Buyer to effect the Merger and otherwise
consummate the transactions contemplated by this Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions:
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6.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by the Company and the Stockholders in this Agreement and in
each of the other agreements and instruments delivered to Buyer in connection
with the transactions contemplated by this Agreement shall have been accurate in
all material respects as of the date of this Agreement (without giving effect to
any Material Adverse Effect or other materiality qualifications, or any similar
qualifications, contained or incorporated directly or indirectly in such
representations and warranties), and shall be accurate in all material respects
as of the Closing Date as if made at the Closing Date (without giving effect to
any update to the Disclosure Schedule, and without giving effect to any Material
Adverse Effect or other materiality qualifications, or any similar
qualifications, contained or incorporated directly or indirectly in such
representations and warranties).
6.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations
that the Company and the Stockholders are required to comply with or to perform
at or prior to the Closing shall have been complied with and performed in all
respects.
6.3 CONSENTS. All Consents required to be obtained in connection
with the Merger and the other transactions contemplated by this Agreement (other
than the Consents identified in Part 2.25 of the Disclosure Schedule) shall have
been obtained and shall be in full force and effect.
6.4 AGREEMENTS AND DOCUMENTS. Buyer and the Company shall have
received the following agreements and documents, each of which shall be in full
force and effect:
(a) the Employment Agreements executed by the Principal
Stockholders;
(b) a Noncompetition Agreement executed by each of the
Stockholders other than the Principal Stockholders;
(c) a Release executed by each of the Stockholders;
(d) an Investment Representation Letter executed by each
of the Stockholders;
(e) a Proprietary Information Agreement executed by all
employees of the Company and all consultants and independent
contractors to the Company who have not already signed such agreements;
PROVIDED, HOWEVER, that the Company may deliver a Proprietary
Information Agreement executed by independent contractor Larry Shatzer
after the Closing;
(f) the statement referred to in Section 5.5(a), executed
by the Company;
(g) an estoppel certificate, dated as of a date not more
than five days prior to the Closing Date and satisfactory in form and
content to Buyer, executed by Murray Franklyn Development Corp.;
(h) legal opinions of Mark T. Thatcher, dated as of the
Closing Date, in the forms of EXHIBIT J;
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(i) a certificate executed by the Stockholders and
containing the representation and warranty of each Stockholder that
each of the representations and warranties set forth in Section 2 is
accurate in all respects as of the Closing Date as if made on the
Closing Date and that the conditions set forth in Sections 6.1, 6.2,
6.3 and 6.4 have been duly satisfied (the "Stockholders' Closing
Certificate"); and
(j) written resignations of all directors of the Company,
effective as of the Effective Time.
6.5 FIRPTA COMPLIANCE. The Company shall have filed with the IRS
the notification referred to in Section 5.5(b).
6.6 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
6.7 NO LEGAL PROCEEDINGS. No Person shall have commenced or
threatened to commence any Legal Proceeding challenging or seeking the recovery
of a material amount of damages in connection with the Merger or seeking to
prohibit or limit the exercise by Buyer of any material right pertaining to its
ownership of the assets of the Company.
6.8 EMPLOYEES. No more than one of the individuals identified on
EXHIBIT K shall have ceased to be employed by, or expressed an intention to
terminate their employment with, the Company.
6.9 STOCKHOLDER APPROVAL. Pursuant to Section 280G(b)(5) of the
Code, the parachute payments in the Employment Agreements shall have been
approved by a vote of Stockholders (other than the disqualified individuals) who
own more than 75% of the voting power of all outstanding stock of the Company,
and evidence of such approval shall have been delivered to Buyer.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY
The obligations of the Company to effect the Merger and
otherwise consummate the transactions contemplated by this Agreement are subject
to the satisfaction, at or prior to the Closing, of the following conditions:
7.1 ACCURACY OF REPRESENTATIONS. Each of the representations and
warranties made by Buyer in this Agreement shall have been accurate in all
material respects as of the date of this Agreement (without giving effect to any
Material Adverse Effect or other materiality qualifications, or any similar
qualifications, contained or incorporated directly or indirectly in such
representations and warranties), and shall be accurate in all material respects
as of the Closing Date as if made at the Closing Date.
7.2 PERFORMANCE OF COVENANTS. All of the covenants and obligations
that Buyer is required to comply with or to perform at or prior to the Closing
shall have been complied with and performed in all respects.
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7.3 DOCUMENTS. The Company shall have received a legal opinion of
Cooley Godward LLP, dated as of the Closing Date, in the form of EXHIBIT L; and
7.4 NO RESTRAINTS. No temporary restraining order, preliminary or
permanent injunction or other order preventing the consummation of the Merger
shall have been issued by any court of competent jurisdiction and remain in
effect, and there shall not be any Legal Requirement enacted or deemed
applicable to the Merger that makes consummation of the Merger illegal.
SECTION 8. TERMINATION
8.1 TERMINATION EVENTS. This Agreement may be terminated prior to
the Closing:
(a) by Buyer if Buyer reasonably determines that the
timely satisfaction of any condition set forth in Section 6 has become
impossible (other than as a result of any failure on the part of Buyer
to comply with or perform any covenant or obligation of Buyer set forth
in this Agreement);
(b) by the Company if the Company reasonably determines
that the timely satisfaction of any condition set forth in Section 7
has become impossible (other than as a result of any failure on the
part of the Company or any of the Stockholders to comply with or
perform any covenant or obligation set forth in this Agreement or in
any other agreement or instrument delivered to Buyer);
(c) by Buyer at or after the Scheduled Closing Time if
any condition set forth in Section 6 has not been satisfied by the
Scheduled Closing Time;
(d) by the Company at or after the Scheduled Closing Time
if any condition set forth in Section 7 has not been satisfied by the
Scheduled Closing Time;
(e) by Buyer if the Closing has not taken place on or
before June 30, 1999 (other than as a result of any failure on the part
of Buyer to comply with or perform any covenant or obligation of Buyer
set forth in this Agreement);
(f) by the Company if the Closing has not taken place on
or before July 31, 1999 (other than as a result of the failure on the
part of the Company or any of the Stockholders to comply with or
perform any covenant or obligation set forth in this Agreement or in
any other agreement or instrument delivered to Buyer); or
(g) by the mutual consent of Buyer and the Company.
8.2 TERMINATION PROCEDURES. If Buyer wishes to terminate this
Agreement pursuant to Section 8.1(a), Section 8.1(c) or Section 8.1(e), Buyer
shall deliver to the Company a written notice stating that Buyer is terminating
this Agreement and setting forth a brief description of the basis on which Buyer
is terminating this Agreement. If the Company wishes to terminate this Agreement
pursuant to Section 8.1(b), Section 8.1(d) or Section 8.1(f), the Company shall
deliver to Buyer a written notice stating that the Company is terminating this
Agreement and setting forth a brief description of the basis on which the
Company is terminating this Agreement.
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8.3 EFFECT OF TERMINATION. If this Agreement is terminated
pursuant to Section 8.1, all further obligations of the parties under this
Agreement shall terminate; PROVIDED, HOWEVER, that: (a) neither the Company nor
Buyer shall be relieved of any obligation or liability arising from any prior
breach by such party of any provision of this Agreement; (b) the parties shall,
in all events, remain bound by and continue to be subject to the provisions set
forth in Section 10; and (c) Buyer and the Company shall, in all events, remain
bound by and continue to be subject to Section 5.2.
8.4 TERMINATION FEE. If this Agreement is terminated by Buyer
pursuant to Sections 8.1(c) or (e), or if the Company shall otherwise determine
not to proceed with the transactions contemplated by this Agreement (including
without limitation in connection with the acquisition of the Company by another
party), then the Company shall pay to Buyer, in cash within two business days
after such termination, a nonrefundable fee in the amount of $1,000,000.
SECTION 9. INDEMNIFICATION, ETC.
9.1 SURVIVAL OF REPRESENTATIONS, ETC.
(a) The representations and warranties made by the
Stockholders (including the representations and warranties set forth in Section
2 and the representations and warranties set forth in the Stockholders' Closing
Certificate) shall survive the Closing and shall expire on the first anniversary
of the Closing Date; PROVIDED, HOWEVER, that if, at any time prior to the first
anniversary of the Closing Date, any Indemnitee (acting in good faith) delivers
to any of the Stockholders a written notice alleging the existence of an
inaccuracy in or a breach of any of the representations and warranties made by
the Stockholders (and setting forth in reasonable detail the basis for such
Indemnitee's belief that such an inaccuracy or breach may exist) and asserting a
claim for recovery under Section 9.2 based on such alleged inaccuracy or breach,
then the claim asserted in such notice shall survive the first anniversary of
the Closing until such time as such claim is fully and finally resolved.
Notwithstanding the foregoing, the representations and warranties set forth in
Section 2.14 shall survive until the expiration of the applicable statutes of
limitations, including extensions thereof. All representations and warranties
made by Buyer shall terminate and expire three months after the Effective Time,
and any liability of Buyer with respect to such representations and warranties
shall thereupon cease.
(b) The representations, warranties, covenants and
obligations of the Company and the Stockholders, and the rights and remedies
that may be exercised by the Indemnitees, shall not be limited or otherwise
affected by or as a result of any information furnished to, or any investigation
made by or knowledge of, any of the Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or
other item of information set forth in the Disclosure Schedule or in any update
to the Disclosure Schedule shall be deemed to be a representation and warranty
made by the Company and the Stockholders in this Agreement.
9.2 INDEMNIFICATION BY PRINCIPAL STOCKHOLDERS. From and after the
Effective Time (but subject to Section 9.1(a)), the Principal Stockholders,
jointly and severally, shall hold harmless and indemnify each of the Indemnitees
from and against, and shall compensate and reimburse each of the Indemnitees
for, any Damages which are directly or indirectly suffered or
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incurred by any of the Indemnitees or to which any of the Indemnitees may
otherwise become subject (regardless of whether or not such Damages relate to
any third-party claim) and which arise from or as a result of, or are
directly or indirectly connected with: (i) any inaccuracy in or breach of any
representation or warranty set forth in Section 2 or in the Stockholders'
Closing Certificate (without giving effect to any Material Adverse Effect or
other materiality qualification or any similar qualification contained or
incorporated directly or indirectly in such representation or warranty, but
giving effect to any update to the Disclosure Schedule delivered by the
Company to Buyer prior to the Closing); (ii) any breach of any covenant or
obligation of the Company or any of the Stockholders (including the covenants
set forth in Sections 4 and 5); or (iii) any Legal Proceeding relating to any
inaccuracy or breach of the type referred to in clause "(i)" or "(ii)" above
(including any Legal Proceeding commenced by any Indemnitee for the purpose
of enforcing any of its rights under this Section 9).
9.3 THRESHOLD; CEILING.
(a) The Principal Stockholders shall not be required to
make any indemnification payment pursuant to Section 9.2(a) for any inaccuracy
in or breach of any of their representations and warranties set forth in Section
2 until such time as the total amount of all Damages (including the Damages
arising from such inaccuracy or breach and all other Damages arising from any
other inaccuracies in or breaches of any representations or warranties) that
have been directly or indirectly suffered or incurred by any one or more of the
Indemnitees, or to which any one or more of the Indemnitees has or have
otherwise become subject, exceeds $100,000 in the aggregate. (If the total
amount of such Damages exceeds $100,000, then the Indemnitees shall be entitled
to be indemnified against and compensated and reimbursed for all of such
Damages, including claims for Damages included in the initial $100,000.
(b) The maximum liability of each Principal Stockholder
under Section 9.2(a) for breaches of the representations and warranties set
forth in Section 2 shall be equal to the aggregate value of the Stock
Consideration and the Cash Consideration received by the Principal Stockholders
measured at the Effective Time.
9.4 SATISFACTION OF INDEMNIFICATION CLAIM. In the event the
Principal Stockholders have any liability (for indemnification or otherwise) to
any Indemnitee under this Section 9, the Principal Stockholders shall satisfy
such liability first, by delivering from Escrow to such Indemnitee the number of
shares of Buyer Common Stock determined by dividing (a) the aggregate dollar
amount of such liability by (b) the average closing price of the Buyer Common
Stock as reported by Nasdaq for the ten trading days preceding the date such
liability is satisfied, and second, to the extent shares of Buyer Common Stock
are not available in Escrow to satisfy in full such liability, then such
difference in cash or Buyer Common Stock at the discretion of the Principal
Stockholders.
9.5 NO CONTRIBUTION. Each Principal Stockholder waives, and
acknowledges and agrees that he shall not have and shall not exercise or assert
(or attempt to exercise or assert), any right of contribution, right of
indemnity or other right or remedy against the Company in connection with any
indemnification obligation or any other liability to which he may become subject
under or in connection with this Agreement or the Stockholders' Closing
Certificate.
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9.6 INTEREST. Any Principal Stockholder who is required to hold
harmless, indemnify, compensate or reimburse any Indemnitee pursuant to this
Section 9 with respect to any Damages shall also be liable to such Indemnitee
for interest on the amount of such Damages (for the period commencing as of the
date on which such Principal Stockholder first received notice of a claim for
recovery by such Indemnitee and ending on the date on which the liability of
such Principal Stockholder to such Indemnitee is fully satisfied by such
Stockholder) at a floating rate equal to the rate of interest publicly announced
by Bank of America, N.T. & S.A. from time to time as its prime, base or
reference rate.
9.7 DEFENSE OF THIRD PARTY CLAIMS. In the event of the assertion
or commencement by any Person of any claim or Legal Proceeding (whether against
Buyer or against any other Person) with respect to which any of the Principal
Stockholders may become obligated to hold harmless, indemnify, compensate or
reimburse any Indemnitee pursuant to this Section 9, Buyer shall have the right,
at its election, to proceed with the defense of such claim or Legal Proceeding
on its own. If Buyer so proceeds with the defense of any such claim or Legal
Proceeding:
(a) all reasonable expenses relating to the defense of
such claim or Legal Proceeding shall be borne and paid exclusively by
the Principal Stockholders;
(b) each Principal Stockholder shall make available to
Buyer any documents and materials in his possession or control that may
be necessary to the defense of such claim or Legal Proceeding; and
(c) Buyer shall have the right to settle, adjust or
compromise such claim or Legal Proceeding with the consent of the
Stockholders' Agent; PROVIDED, HOWEVER, that such consent shall not be
unreasonably withheld.
Buyer shall give the Stockholders' Agent prompt notice of the commencement of
any such Legal Proceeding against Buyer; PROVIDED, HOWEVER, that any failure on
the part of Buyer to so notify the Stockholders' Agent shall not limit any of
the obligations of the Principal Stockholders under this Section 9 (except to
the extent such failure materially prejudices the defense of such Legal
Proceeding).
9.8 EXERCISE OF REMEDIES BY INDEMNITEES OTHER THAN BUYER. No
Indemnitee (other than Buyer or any successor thereto or assign thereof) shall
be permitted to assert any indemnification claim or exercise any other remedy
under this Agreement unless Buyer (or any successor thereto or assign thereof)
shall have consented to the assertion of such indemnification claim or the
exercise of such other remedy.
SECTION 10. MISCELLANEOUS PROVISIONS
10.1 STOCKHOLDERS' AGENT. The Stockholders hereby irrevocably
appoint Benjamin F. Reser as their agent for purposes of Sections 1.7 and 9 (the
"Stockholders' Agent"), and Benjamin F. Reser hereby accepts his appointment as
the Stockholders' Agent. Buyer shall be entitled to deal exclusively with the
Stockholders' Agent on all matters relating to Sections 1.8 and 9, and shall be
entitled to rely conclusively (without further evidence of any kind whatsoever)
on any document executed or purported to be executed on behalf of any
Stockholder by the Stockholders' Agent, and on any other action taken or
purported to be taken on behalf of any Stockholder by the Stockholders' Agent,
as fully binding upon such Stockholder. If the
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Stockholders' Agent shall die, become disabled or otherwise be unable to
fulfill his responsibilities as agent of the Stockholders, then the
Stockholders shall, within ten days after such death or disability, appoint a
successor agent and, promptly thereafter, shall notify Buyer of the identity
of such successor. Any such successor shall become the "Stockholders' Agent"
for purposes of Sections 1.7 and 9 and this Section 10.1. If for any reason
there is no Stockholders' Agent at any time, all references herein to the
Stockholders' Agent shall be deemed to refer to the Stockholders.
10.2 FURTHER ASSURANCES. Each party hereto shall execute and cause
to be delivered to each other party hereto such instruments and other documents,
and shall take such other actions, as such other party may reasonably request
(prior to, at or after the Closing) for the purpose of carrying out or
evidencing any of the transactions contemplated by this Agreement.
10.3 FEES AND EXPENSES. If the Merger is not consummated for any
reason whatsoever, each party to this Agreement shall bear and pay all fees,
costs and expenses (including legal fees and accounting fees) ("Fees and
Expenses") that have been incurred or that are incurred by such party in
connection with the transactions contemplated by this Agreement. If the Merger
is consummated, Buyer shall pay all Fees and Expenses of Buyer, and the
Stockholders shall pay the Fees and Expenses of the Stockholders and the
Company.
10.4 ATTORNEYS' FEES. If any action or proceeding relating to this
Agreement or the enforcement of any provision of this Agreement is brought
against any party hereto, the prevailing party shall be entitled to recover
reasonable attorneys' fees, costs and disbursements (in addition to any other
relief to which the prevailing party may be entitled).
10.5 NOTICES. All notices and other communications required or
permitted under this Agreement and the transactions contemplated hereby shall be
in writing and shall be deemed to have been duly given, made and received on the
date when delivered by hand delivery with receipt acknowledged, or upon the next
Business Day following receipt of facsimile transmission, or upon the fifth day
after deposit in the United States mail, registered or certified with postage
prepaid, return receipt requested, addressed as set forth below:
(a) If to Buyer:
DIGITAL RIVER, INC.
9625 West 76th Street, Suite 150
Eden Prairie, Minnesota 55344
Attention: Perry Steiner
Telephone: (612) 253-1234
Facsimile: (612) 253-8877
with a copy (not constituting notice) to:
COOLEY GODWARD LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Attention: Michael J. Sullivan, Esq.
Telephone: (415) 693-2000
Facsimile: (415) 951-3699
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(b) If to the Company:
UNIVERSAL COMMERCE, INCORPORATED
P.O. Box 1816
Issaquah, WA 98027
Attention: Benjamin F. Reser
Telephone: (425) 392-2294
Facsimile: (425) 392-0223
with a copy (not constituting notice) to:
Mark T. Thatcher, P.C.
360 Thames Street
Newport, RI 02840
Mark Thatcher, Esq.
Telephone: (401) 841-9444
Facsimile: (401) 841-9060
and
Nadeau & Simmons, P.C.
1250 Turks Head Building
Providence, RI 02903
Attention: James R. Simmons, Esq.
Telephone: (401) 272-5800
Facsimile: (401) 272-5858
(c) If to the Stockholders' Agent:
Benjamin F. Reser
c/o Universal Commerce, Incorporated
P.O. Box 1816
Issaquah, WA 98027
Telephone: (425) 392-2294
Facsimile: (425) 392-0223
10.6 CONFIDENTIALITY. Without limiting the generality of anything
contained in Section 5.2, on and at all times after the Closing Date, each
Stockholder shall keep confidential, and shall not use or disclose to any
other Person, any non-public document or other non-public information in such
Stockholder's possession that relates to the business of the Company or Buyer.
10.7 TIME OF THE ESSENCE. Time is of the essence of this Agreement.
10.8 HEADINGS. The bolded headings contained in this Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
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10.9 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which, when
taken together, shall constitute one agreement.
10.10 GOVERNING LAW. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
Minnesota (without giving effect to principles of conflicts of laws).
10.11 SUCCESSORS AND ASSIGNS. Buyer may freely assign any or all of
its rights under this Agreement (including its indemnification rights under
Section 9), in whole or in part, to any other Person without obtaining the
consent or approval of any other party hereto or of any other Person. The rights
and obligations of the Company and the Stockholders may not be assigned by the
Company or the Stockholders without the prior written consent of Buyer;
PROVIDED, HOWEVER, the rights of the Stockholders under Section 1.5 may only be
assigned by operation of law. Subject to the foregoing, the provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective heirs, personal representatives, successors and assigns.
10.12 REMEDIES CUMULATIVE; SPECIFIC PERFORMANCE. The rights and
remedies of the parties hereto shall be cumulative (and not alternative). The
parties to this Agreement agree that, in the event of any breach or threatened
breach by any party to this Agreement of any covenant, obligation or other
provision set forth in this Agreement for the benefit of any other party to this
Agreement, such other party shall be entitled (in addition to any other remedy
that may be available to it) to (a) a decree or order of specific performance or
mandamus to enforce the observance and performance of such covenant, obligation
or other provision, and (b) an injunction restraining such breach or threatened
breach.
10.13 WAIVER.
(a) No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the part
of any Person in exercising any power, right, privilege or remedy under this
Agreement, shall operate as a waiver of such power, right, privilege or remedy;
and no single or partial exercise of any such power, right, privilege or remedy
shall preclude any other or further exercise thereof or of any other power,
right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or remedy under
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be applicable
or have any effect except in the specific instance in which it is given.
10.14 AMENDMENTS. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of all of the parties hereto.
10.15 SEVERABILITY. In the event that any provision of this
Agreement, or the application of any such provision to any Person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and
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the application of such provision to Persons or circumstances other than
those as to which it is determined to be invalid, unlawful, void or
unenforceable, shall not be impaired or otherwise affected and shall continue
to be valid and enforceable to the fullest extent permitted by law.
10.16 ENTIRE AGREEMENT. This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof; PROVIDED, HOWEVER, that the Digital
River, Inc. Confidentiality and Non-Disclosure Agreement executed on behalf of
Buyer on and the Company on April 5, 1999 shall not be superseded by this
Agreement and shall remain in effect in accordance with its terms until the
earlier of (a) the Effective Time, or (b) the date on which such Digital River,
Inc. Confidentiality and Non-Disclosure Agreement is terminated in accordance
with its terms.
10.17 CONSTRUCTION.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of
construction to the effect that ambiguities are to be resolved against the
drafting party shall not be applied in the construction or interpretation of
this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections" and "Exhibits" are intended to refer to Sections of this
Agreement and Exhibits to this Agreement.
36
<PAGE>
The parties hereto have caused this AGREEMENT AND PLAN OF MERGER AND
REORGANIZATION to be executed and delivered as of the date indicated above.
"BUYER"
DIGITAL RIVER, INC.,
a Delaware corporation
By: ___________________________
Its: _________________________
THE "COMPANY"
UNIVERSAL COMMERCE, INCORPORATED,
a Delaware corporation
By: ___________________________
Its: __________________________
THE "STOCKHOLDERS"
__________________________________
CHARLES G. ROSE, IV
Shares of Common Stock Owned: 764
__________________________________
BENJAMIN F. RESER
Shares of Common Stock Owned: 601
__________________________________
TED WEST
Shares of Common Stock Owned: 38
__________________________________
JESSICA SCHNEPP
Shares of Common Stock Owned: 11
__________________________________
RYAN DEWELL
Shares of Common Stock Owned: 11
37
<PAGE>
___________________________________________
___________________________________________
BENJAMIN F. RESER AND CHARLES G. ROSE, IV,
AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP
Shares of Common Stock Owned: 75
THE "STOCKHOLDERS' AGENT"
___________________________________________
Benjamin F. Reser
38
<PAGE>
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this EXHIBIT A):
"ACQUISITION TRANSACTION" means any transaction involving:
(A) the sale, license, disposition or acquisition of all
or a material portion of the Company's business or assets;
(B) the issuance, disposition or acquisition of (i) any
capital stock or other equity security of the Company, (ii) any option,
call, warrant or right (whether or not immediately exercisable) to
acquire any capital stock or other equity security of the Company, or
(iii) any security, instrument or obligation that is or may become
convertible into or exchangeable for any capital stock or other equity
security of the Company; or
(C) any merger, consolidation, business combination,
reorganization or similar transaction involving the Company.
"AFFILIATE" means, with respect to any specified Person, any other
Person in which the specified Person has a direct or indirect interest (except
through ownership of less than 5% of the outstanding shares of any entity whose
securities are listed on a national securities exchange or traded in the
national over-the-counter market).
"AGREEMENT" shall have the meaning specified in the preamble to the
Agreement.
"APPROVED AUTHORS" shall have the meaning specified in Section
1.5(b)(ii) of the Agreement.
"BALANCE SHEET" shall have the meaning specified in Section 2.4(a)(ii)
of the Agreement.
"BALANCE SHEET DATE" shall have the meaning specified in Section 2.5 of
the Agreement.
"BUSINESS DAY" means a day, other than a Saturday or a Sunday, or a
federal holiday upon which offices of the federal government are not open for
business.
"BUYER" shall have the meaning specified in the preamble to the
Agreement.
"BUYER COMMON STOCK" shall have the meaning specified in Section 1.4(a)
of the Agreement.
"BUYER SEC DOCUMENTS" shall have the meaning specified in Section
3.1(a) of the Agreement.
"CASH CONSIDERATION" shall have the meaning specified in Section 1.4(a)
of the Agreement.
1
<PAGE>
"CLOSING" and "CLOSING DATE" shall have the meanings specified in
Section 1.3 of the Agreement.
"CNET SALES" and "CNET SITES" shall have the meanings specified in
Section 1.5(b)(ii) of the Agreement.
"CNET WARRANT" means that Warrant dated November 28, 1998 to purchase
75 shares of the Company's Common Stock for an aggregate exercise price of one
dollar ($1.00) held by CNET, Inc.
"CODE" shall have the meaning specified in the recitals to the
Agreement.
"COMPANY" shall have the meaning specified in the preamble to the
Agreement.
"COMPANY COMMON STOCK" shall have the meaning specified in the recitals
to the Agreement.
"COMPANY CONTRACT" means any Contract: (a) to which the Company is a
party; (b) by which the Company or any of its assets is or may become bound or
under which the Company has, or may become subject to, any obligation; or (c)
under which the Company has or may acquire any right or interest.
"COMPANY FINANCIAL STATEMENTS" shall have the meaning specified in
Section 2.4(a) of the Agreement.
"COMPANY PROPRIETARY ASSET" means any Proprietary Asset owned by or
licensed to the Company or otherwise used by the Company.
"COMPANY RETURNS" shall have the meaning specified in Section 2.14(a)
of the Agreement.
"COMPANY STOCK CERTIFICATE" shall have the meaning specified in Section
1.7 of the Agreement.
"CONSENT" means any approval, consent, ratification, permission, waiver
or authorization (including any Governmental Authorization).
"CONTRACT" means any written, oral or other agreement, contract,
subcontract, lease, understanding, instrument, note, warranty, insurance policy,
benefit plan or legally binding commitment or undertaking of any nature.
"DAMAGES" shall include any loss, damage, injury, decline in value,
lost opportunity, liability, claim, demand, settlement, judgment, award, fine,
penalty, Tax, fee (including reasonable attorneys' fees), charge, cost
(including costs of investigation) or expense of any nature.
"DISCLOSURE SCHEDULE" means the schedule (dated as of the date of the
Agreement) delivered to Buyer on behalf of the Company and the Stockholders.
"EARN-OUT ESCROW" shall have the meaning specified in Section 1.5(a) of
the Agreement.
2
<PAGE>
"EFFECTIVE TIME" shall have the meaning specified in Section 1.3 of the
Agreement.
"EMPLOYMENT AGREEMENTS" shall have the meaning specified in Section 5.4
of the Agreement.
"ENCUMBRANCE" means any lien, pledge, hypothecation, charge, mortgage,
security interest, encumbrance, claim, infringement, interference, option, right
of first refusal, preemptive right, community property interest or restriction
of any nature (including any restriction on the voting of any security, any
restriction on the transfer of any security or other asset, any restriction on
the receipt of any income derived from any asset, any restriction on the use of
any asset and any restriction on the possession, exercise or transfer of any
other attribute of ownership of any asset).
"ENTITY" means any corporation (including any non-profit corporation),
general partnership, limited partnership, limited liability partnership, joint
venture, estate, trust, company (including any limited liability company or
joint stock company), firm or other enterprise, association, organization or
entity.
"ENVIRONMENTAL LAW" means any federal, state, local or foreign Legal
Requirement relating to pollution or protection of human health or the
environment (including ambient air, surface water, ground water, land surface or
subsurface strata), including any law or regulation relating to emissions,
discharges, releases or threatened releases of Materials of Environmental
Concern, or otherwise relating to the manufacture, processing, distribution,
use, treatment, storage, disposal, transport or handling of Materials of
Environmental Concern.
"ERISA" shall have the meaning specified in Section 2.15(a) of the
Agreement.
"ESCROW" means the escrow established pursuant to the Escrow Agreement.
"ESCROW AGENT" means the escrow agent that is party to the Escrow
Agreement.
"ESCROW AGREEMENT" shall have the meaning specified in Section 1.4(d)
of the Agreement.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXEMPT ENTITY" shall have the meaning specified in Section 1.5(b)(ii)
of the Agreement.
"FEES AND EXPENSES" shall have the meaning specified in Section 10.3 of
the Agreement.
"FIRST ANNIVERSARY" shall have the meaning specified in Section
1.5(b)(i) of the Agreement.
"GAAP" means generally accepted accounting principles.
"GOVERNMENTAL AUTHORIZATION" means any: (a) permit, license,
certificate, franchise, permission, clearance, registration, qualification or
authorization issued, granted, given or
3
<PAGE>
otherwise made available by or under the authority of any Governmental Body
or pursuant to any Legal Requirement; or (b) right under any Contract with
any Governmental Body.
"GOVERNMENTAL BODY" means any: (a) nation, state, commonwealth,
province, territory, county, municipality, district or other jurisdiction of any
nature; (b) federal, state, local, municipal, foreign or other government; or
(c) governmental or quasi-governmental authority of any nature (including any
governmental division, department, agency, commission, instrumentality,
official, organization, unit, body or Entity and any court or other tribunal).
"GROSS REVENUES" shall have the meaning specified in Section 1.5(c)(ii)
of the Agreement.
"INDEMNITEES" means the following Persons: (a) Buyer; (b) Buyer's
current and future affiliates; (c) the respective Representatives of the Persons
referred to in clauses "(a)" and "(b)" above; and (d) the respective successors
and assigns of the Persons referred to in clauses "(a)", "(b)" and "(c)" above;
PROVIDED, HOWEVER, that the Stockholders shall not be deemed to be
"Indemnitees."
"INVESTMENT REPRESENTATION LETTER" shall have the meaning specified in
Section 5.7 of the Agreement.
"IRS" means the Internal Revenue Service.
"LEGAL PROCEEDING" means any action, suit, litigation, arbitration,
proceeding (including any civil, criminal, administrative, investigative or
appellate proceeding), hearing, inquiry, audit, examination or investigation
commenced, brought, conducted or heard by or before, or otherwise involving, any
court or other Governmental Body or any arbitrator or arbitration panel.
"LEGAL REQUIREMENT" means any federal, state, local, municipal, foreign
or other law, statute, constitution, principle of common law, resolution,
ordinance, code, edict, decree, rule, regulation, ruling or requirement issued,
enacted, adopted, promulgated, implemented or otherwise put into effect by or
under the authority of any Governmental Body.
"MATERIAL ADVERSE EFFECT" means a violation or other matter will be
deemed to have a "Material Adverse Effect" on the Company if such violation or
other matter (considered together with all other matters that would constitute
exceptions to the representations and warranties set forth in the Agreement or
in the Company and Stockholders' Closing Certificate but for the presence of
"Material Adverse Effect" or other materiality qualifications, or any similar
qualifications, in such representations and warranties) would have a material
adverse effect on the Company's business, condition, assets, liabilities,
operations, financial performance or prospects.
"MATERIAL CONTRACTS" shall have the meaning specified in Section
2.10(a) of the Agreement.
"MATERIALS OF ENVIRONMENTAL CONCERN" means chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and any
other substance that is now or hereafter regulated by any Environmental Law or
that is otherwise a danger to health, reproduction or the environment.
4
<PAGE>
"MERGER" shall have the meaning specified in the recitals to the
Agreement.
"NONCOMPETITION AGREEMENT" shall have the meaning specified in Section
5.4 of the Agreement.
"PERSON" means any individual, Entity or Governmental Body.
"PLANS" shall have the meaning specified in Section 2.15(a) of the
Agreement.
"PRE-CLOSING PERIOD" shall have the meaning specified in Section 4.1 of
the Agreement.
"PRINCIPAL STOCKHOLDERS" shall have the meaning specified in Section
1.5(b)(i) of the Agreement.
"PROPRIETARY ASSET" means any: (a) patent, patent application,
trademark (whether registered or unregistered), trademark application, trade
name, fictitious business name, service mark (whether registered or
unregistered), service mark application, copyright (whether registered or
unregistered), copyright application, maskwork, maskwork application, trade
secret, know-how, client list, franchise, system, computer software, computer
program, invention, design, blueprint, engineering drawing, proprietary
product, technology, proprietary right or other intellectual property right
or intangible asset; or (b) right to use or exploit any of the foregoing.
"PROPRIETARY INFORMATION AGREEMENT" shall have the meaning specified in
Section 5.8 of the Agreement.
"PRO RATA SHARE" shall mean each Stockholder's pro rata ownership of
Company Common Stock. At the Closing, the Pro Rata Share for each Stockholder is
as follows: Benjamin F. Reser, .400667; Charles G. Rose, IV, .509333; Ted West,
.025333; Jessica Schnepp, .007333, Ryan Dewell, .007333, and Benjamin F. Reser
and Charles G. Rose, IV, as joint tenants with right of survivorship, .050000.
In the event that CNET exercises the CNET Warrant after the Closing, the Pro
Rata Share for Benjamin F. Reser and Charles G. Rose, IV, as joint tenants with
right of survivorship, shall be reduced to zero to reflect the cancellation of
the 5% Shares as prescribed in Section 5.9 and CNET's Pro Rata Share shall be
.050000.
"REGISTRATION STATEMENT" shall have the meaning specified in Section
1.6(a) of the Agreement.
"RELATED PARTY" means: (i) the Stockholders; (ii) each individual who
is, or who has at any time since October 15, 1997 been, an officer of the
Company; (iii) each member of the immediate family of each of the individuals
referred to in clauses "(i)" and "(ii)" above; and (iv) any trust or other
entity (other than the Company) in which any one of the individuals referred to
in clauses "(i)", "(ii)" and "(iii)" above holds (or in which more than one of
such individuals collectively hold), beneficially or otherwise, a material
voting, proprietary or equity interest).
"RELEASE" shall have the meaning specified in Section 5.6 of the
Agreement.
"REPRESENTATIVES" means officers, directors, employees, agents,
attorneys, accountants, advisors and representatives.
5
<PAGE>
"SCHEDULED CLOSING TIME" shall have the meaning specified in Section
1.3 of the Agreement.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SHARES" shall have the meaning specified in Section 2.3(a) of the
Agreement.
"STOCK CONSIDERATION" shall have the meaning specified in Section
1.4(a) of the Agreement.
"STOCKHOLDERS" shall have the meaning specified in the preamble to the
Agreement.
"STOCKHOLDERS' AGENT" shall have the meaning specified in Section 10.1
of the Agreement.
"STOCKHOLDERS' CLOSING CERTIFICATE" shall have the meaning specified in
Section 6.4(i) of the Agreement.
"TAX" means any tax (including any income tax, franchise tax, capital
gains tax, gross receipts tax, value-added tax, surtax, excise tax, ad valorem
tax, transfer tax, stamp tax, sales tax, use tax, property tax, business tax,
withholding tax or payroll tax), levy, assessment, tariff, duty (including any
customs duty), deficiency or fee, and any related charge or amount (including
any fine, penalty or interest), imposed, assessed or collected by or under the
authority of any Governmental Body.
"TAX RETURN" means any return (including any information return),
report, statement, declaration, estimate, schedule, notice, notification, form,
election, certificate or other document or information filed with or submitted
to, or required to be filed with or submitted to, any Governmental Body in
connection with the determination, assessment, collection or payment of any Tax
or in connection with the administration, implementation or enforcement of or
compliance with any Legal Requirement relating to any Tax.
"UNIVERSAL DIVISION" shall have the meaning specified in Section
1.5(c)(ii) of the Agreement.
"YEAR 2000 COMPLIANT" means, with respect to a computer, computer
program or other item of software (i) the functions, calculations, and other
computing processes of the computer, program or software (collectively,
"Processes") perform in a consistent and correct manner without interruption
regardless of the date on which the Processes are actually performed and
regardless of the date input to the applicable computer system, whether before,
on, or after January 1, 2000; (ii) the computer, program or software accepts,
calculates, compares, sorts, extracts, sequences, and otherwise processes date
inputs and date values, and returns and displays date values, in a consistent
and correct manner regardless of the dates used whether before, on, or after
January 1, 2000; (iii) the computer, program or software accepts and responds to
year input, if any, in a manner that resolves any ambiguities as to century in a
defined, predetermined, and appropriate manner; (iv) the computer, program or
software stores and displays date information in ways that are unambiguous as to
the determination of the century; and (v) leap years will be determined by the
following standard (A) if dividing the year by 4
6
<PAGE>
yields an integer, it is a leap year, except for years ending in 00, but (B)
a year ending in 00 is a leap year if dividing it by 400 yields an integer.
7
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 31,515
<SECURITIES> 30,793
<RECEIVABLES> 1,428
<ALLOWANCES> 333
<INVENTORY> 114
<CURRENT-ASSETS> 63,836
<PP&E> 6,157
<DEPRECIATION> 1,316
<TOTAL-ASSETS> 90,828
<CURRENT-LIABILITIES> 8,303
<BONDS> 0
0
0
<COMMON> 205
<OTHER-SE> 82,320
<TOTAL-LIABILITY-AND-EQUITY> 90,828
<SALES> 27,521
<TOTAL-REVENUES> 27,521
<CGS> 22,636
<TOTAL-COSTS> 22,636
<OTHER-EXPENSES> 18,048
<LOSS-PROVISION> 537
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (12,022)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,022)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,022)
<EPS-BASIC> (.60)
<EPS-DILUTED> (.60)
</TABLE>
