SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
December 24, 1999
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(Date of earliest event reported)
The American Education Corporation
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(Exact name of registrant as specified in its charter)
Colorado
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(State or other jurisdiction of incorporation)
0-11078
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(Commission File Number)
84-0838184
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(IRS Employer Identification No.)
7506 North Broadway Extension, Suite 505, Oklahoma City, Oklahoma
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(Address of principal executive offices)
73116
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(Zip Code)
(405) 840-6031
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(Registrant's telephone number, including area code)
Item 1. Changes in Control of Registrant.
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Not applicable.
Item 2. Acquisition or Disposition of Assets.
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On December 24, 1999, The American Education Corporation, a Colorado
corporation (the "Company"), acquired Dolphin, Inc., a New Jersey corporation
("Dolphin"). Dolphin produces educational, computer-based training, tutorial
and testing programs and software. The Company currently intends to operate
Dolphin in substantially the same manner as it was operated prior to this
transaction.
The transaction was consummated pursuant to a Stock Purchase Agreement (the
"Agreement") between the Company and Dolphin's sole shareholder, Andrew K.
Gardner (the "Seller"). Pursuant to the Agreement, the Company paid the
Seller $1,752,000 cash plus 35,148 shares of the Company's restricted
common stock, par value $0.025 per share. As part of the transactions
contemplated by the Agreement, Dolphin entered into an Employment Agreement
with the Seller pursuant to which the Seller will serve as President of Dolphin.
The Company funded the cash portion of the purchase price with borrowings
from UMB Oklahoma Bank and cash on hand. The purchase price was determined
based upon an evaluation of the business of Dolphin and the results of arm's
length negotiations between representatives of the Company and the Seller.
The shares of common stock of the Company that were issued to the Seller
were not registered in reliance upon Section 4(2) of the Securities Act of
1933, as amended.
The information set forth above is a summary only and is qualified in its
entirety by reference to the Agreement, a copy of which is attached as
Exhibit 2.1 and is incorporated by reference.
Item 3. Bankruptcy or Receivership.
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Not Applicable.
Item 4. Changes in Registrant's Certifying Accountant.
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Not Applicable.
Item 5. Other Events.
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Not applicable.
Item 6. Resignations of Registrant's Directors.
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Not Applicable.
Item 7. Financial Statement, Pro Forma Financial Information and Exhibits.
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(a) TO BE FILED BY AMENDMENT. Pursuant to Item 7(a)(4) of Form 8-K, the
Company hereby undertakes to file the financial statements required in
response to this Item in an amendment to this Current Report on Form 8-K no
later than 60 days after the date that this Form 8-K must be filed.
(b) TO BE FILED BY AMENDMENT. Pursuant to Item 7(b)(2) of Form 8-K, the
Company hereby undertakes to file the pro forma financial statements required
in response to this Item in an amendment to this Current Report on Form 8-K
no later than 60 days after the date that this Form 8-K must be filed.
(c) EXHIBITS. 2.1 Stock Purchase Agreement between The American Education
Corporation and Andrew K. Gardner.
Item 8. Change in Fiscal Year.
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Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE AMERICAN EDUCATION CORPORATION
Date: January 7, 2000 By: /s/ Jeffrey E. Butler
Jeffrey E. Butler
Chairman of the Board
of Directors,
President and Chief
Executive Officer
STOCK PURCHASE AGREEMENT
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This Stock Purchase Agreement (the "Agreement") is made and entered into
this 23rd day of December, 1999, by and between The American Education
Corporation, a Colorado corporation (the "Buyer"), and Andrew K. Gardner (the
"Seller").
RECITALS
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A. The Seller owns all of the issued and outstanding Capital Stock of
Dolphin, Inc., a New Jersey corporation.
B. Pursuant to this Agreement the Buyer will purchase from the Seller, and
the Seller will sell to the Buyer, all of the issued and outstanding Capital
Stock of the Company.
Now, therefore, in consideration of the premises and the mutual promises
made herein, and in consideration of the representations, warranties, and
covenants herein contained, the parties agree as follows.
ARTICLE I
DEFINITIONS
The capitalized terms used in this Agreement have the meanings specified in
Schedule 1.
ARTICLE II
PURCHASE AND SALE OF SHARES
II.1 Agreement to Purchase and Sell the Shares. Pursuant to this Agreement
the Buyer agrees to purchase all of the Shares from the Seller, and the
Seller agrees to sell all of the Shares to the Buyer, for the consideration
specified below.
II.2 Purchase Price. Subject to the escrow provisions of Section 2.3 below,
the purchase price (the "Purchase Price") for the Shares shall be One Million
Eight Hundred Thousand Dollars ($1,800,000.00), comprised of (i) One Million
Four Hundred Ninety-Two Thousand Two Hundred Fifty Dollars and Thirty Cents
($1,492,250.30) payable to the Seller in certified funds at the Closing; plus
(ii) One Hundred Twenty-Seven Thousand Seven Hundred Forty-Nine Dollars and
Seventy Cents ($127,749.70) payable to National Capital Companies, L.L.C.
(the "Finders Fee") on behalf of the Seller; plus (iii) One Hundred Thirty-Two
Thousand Dollars ($132,000.00) in certified funds to be deposited into escrow
at the Closing (the "Escrow Cash"), plus (iv) Escrow Shares with an aggregate
Share Price of Forty-eight Thousand Dollars ($48,000.00), to be deposited into
escrow at the Closing. No fractional shares shall be issued, and an amount in
cash (if any) shall be paid in lieu thereof equal to such fractional part of
a share multiplied by the foregoing average price.
II.3 Escrow.
II.3.1 Escrow Shares. All of the Escrow Shares shall be placed in escrow
on the Closing Date. The Seller will endorse in blank his certificates
representing the Escrow Shares or will execute in blank, stock transfer
powers to accompany such certificates. The Escrow Shares shall be maintained
by UMB Oklahoma Bank (the "Escrow Agent"), pursuant to the terms of an Escrow
Agreement among the Buyer, the Seller, and the Escrow Agent in form and
substance reasonably satisfactory to the Buyer and the Seller (the "Escrow
Agreement") for a period beginning at the Closing Date and ending, subject to
the terms of the Escrow Agreement, on the first anniversary of the Closing
Date, as an escrow available to satisfy the indemnification rights of the
Buyer. The costs of the Escrow Agent shall be borne by the Buyer and the
Seller as provided in the Escrow Agreement.
II.3.2 Escrow Cash. All of the Escrow Cash shall also be placed in escrow
with the Escrow Agent on the Closing Date, in an interest-bearing account.
II.3.3 Application of the Escrow Shares and the Escrow Cash. The Escrow
Shares and the Escrow Cash shall be distributed as required by Section 4 of
the Escrow Agreement. The escrow established pursuant to this Section 2.3
shall terminate on the first anniversary of the Closing Date or as otherwise
provided in the Escrow Agreement; provided, however, that the escrow shall
continue beyond such period to the extent (and only to the extent) that the
Buyer has given the Seller a notice of claim prior to such time and the
indemnification claims asserted therein remain unsatisfied or unresolved.
Upon termination of the escrow, the remaining Escrow Shares and Escrow Cash
(along with any dividends, other distributions and interest earned thereon)
shall be delivered by the Escrow Agent to the Seller.
II.4 The Closing. Subject to and in accordance with the provisions of this
Agreement, the closing of the transactions contemplated by this Agreement
(the "Closing") shall take place at the offices of Hartzog Conger & Cason,
1600 Bank of Oklahoma Plaza, Oklahoma City, Oklahoma 73102 commencing at
10:00 a.m. local time on December 22, 1999 unless (i) either the Buyer or
the Seller unilaterally extends the Closing Date to a date no later than
December 30, 1999 or (ii) the Buyer and the Seller mutually agree to a further
extension in writing (the "Closing Date"). The parties intend for the Closing
to be effective as of October 1, 1999.
II.5 Deliveries by the Seller at the Closing. At the Closing, the Seller
shall deliver or cause to be delivered the following to the Buyer:
(a) stock certificate(s) representing all, and not less than all, of the
Shares, duly endorsed in blank for transfer or accompanied by irrevocable
and duly executed stock transfer powers, together with evidence satisfactory
to the Buyer that the Buyer or its nominee has been entered upon the books of
the Company as the holder of record of all of the Shares;
(b) an opinion from the Seller's counsel addressed to the Buyer and the
Buyer's counsel in form and substance as set forth in Exhibit "A" attached
hereto;
(c) evidence acceptable to the Buyer that all corporate books, minutes,
records, Tax Returns, reports, files and other data related to the Company
and the Business are in place at the Company and possession thereof has been
relinquished to the Buyer;
(d) the Seller's duly executed general release of all Liabilities of the
Company to the Seller and of any claim that the Seller may have against the
Company, in form and substance as set forth in Exhibit "B" hereto;
(e) a duly authorized amendment to the Company's bylaws to permit the
Company to have three or more directors;
(f) certificates from the appropriate public officials to the effect that
the Company is a validly existing corporation in good standing in its state
of incorporation and in each state in which the Company carries on its
business as required to be listed in Section 4.1 of the Disclosure Schedule,
as of a date in December 1999;
(g) a true and correct copy of the Certificate of Incorporation of the
Company as of a date in December 1999, certified by the appropriate public
official in its state of incorporation, and bylaws of the Company as of the
Closing Date, certified by the secretary of the Company and by the Seller;
(h) the duly executed Employment Agreement, a form of which is attached at
Exhibit "C";
(i) the investor representation letter referenced in Section 4.36(a) below;
(j) one or more letters in form and substance satisfactory to the Buyer from
the Company's independent accountant addressed to the Buyer in which such
accountant (i) consents to the filing of the Most Recent Fiscal Year End
Financial Statements in the Buyer's SEC filings; (ii) consents to the
incorporation by reference of such Most Recent Fiscal Year End Financial
Statements in the Buyer's SEC registration statements; and (iii) acknowledges
awareness of the use in the Buyer's Form 8-K, or any amendment thereto, of a
report on unaudited interim financial information;
(k) written confirmation from Commerce Bank, N.A. that the total balance of
all its loans to the Company, including the Line of Credit, does not exceed
$26,000.00;
(l) a duly executed stock power executed in blank to permit the Escrow
Agent to deliver the Escrow Shares in accordance with Escrow Agreement;
(m) a release in form and substance satisfactory to the Buyer from National
Capital Companies, L.L.C.;
(n) an estoppel letter and consent in form and substance satisfactory to the
Buyer from the landlord of the Leased Property;
(o) resolutions duly adopted by the Company's board of directors, in form
and substance satisfactory to the Buyer and UMB Oklahoma Bank, approving the
Company's guaranty of a loan to the Buyer and the Company's pledge of assets
to secure such guaranty;
(p) a release of all UCC-1 financing statements filed by the Seller to
perfect his security interest in the Capital Stock sold to Byron Preiss
Multimedia Company, Inc.; and
(q) all other certificates, documents, and other instruments required to be
delivered by the Seller or the Company pursuant to this Agreement.
II.6 Deliveries by the Buyer at the Closing. At the Closing, the Buyer
shall deliver, or cause to be delivered, the following to the Seller:
(a) a wire transfer into an account designated by the Seller of the cash
portion of the Purchase Price specified in Section 2.2(i) above; a check to
National Capital Companies, L.L.C. in the amount of the Finders Fee specified
in Section 2.2(ii) above; and a wire transfer into the Escrow Account of the
Escrow Cash specified in Section 2.2(iii) above;
(b) certificates representing the Escrow Shares, duly issued in the Seller's
name, which Escrow Shares shall be delivered to the Escrow Agent pursuant to
Section 2.3;
(c) an opinion from the Buyer's counsel addressed to the Seller and the
Seller's counsel in form and substance set forth in Exhibit "D";
(d) a wire transfer by the Buyer on behalf of the Company to Commerce Bank,
N.A. in the amount of $25,197.11 representing the Total balance outstanding
under the Line of Credit as of December 23, 1999 (with a per diem of $6.78
after that date);
(e) a certificate, signed by the secretary or assistant secretary of the
Buyer, in form satisfactory to the Seller, certifying as of the Closing Date
to the form of and adoption of resolutions by the board of directors of the
Buyer approving the transactions contemplated by this Agreement;
(f) the duly executed Employment Agreement, a form of which is attached at
Exhibit "C"; and
(g) all other certificates, documents and other instruments required to be
delivered by the Buyer pursuant to this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES CONCERNING THE TRANSACTION
The Seller represents and warrants to the Buyer that the statements contained
in this Article III are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article III) and acknowledges and confirms that the Buyer is
relying upon such representations and warranties in connection with the purchase
by the Buyer hereunder.
III.1 Authorization of Transaction. The Seller has full power and authority
to execute and deliver this Agreement and the Ancillary Agreements and to
perform his obligations hereunder and thereunder. This Agreement and the
Ancillary Agreements to which the Seller is a party constitute the valid and
legally binding obligation of the Seller, enforceable in accordance with
their terms and conditions, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles. The foregoing limitations on enforceability shall not be deemed
in any way to limit or affect the representations made in Section 3.4.
III.2 Noncontravention. Neither the execution, delivery or performance of
this Agreement or the Ancillary Agreements, nor the consummation of the
transactions contemplated hereby or thereby, will (i) violate any Law or other
restriction to which the Seller is subject, or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create
in any party the right to accelerate, terminate, modify, or cancel, or require
any notice under any agreement, contract, lease, license, instrument or other
arrangement to which the Seller is a party or by which he is bound or to which
any of his assets is subject. The Seller need not give any notice to, make
any filing or registration with, or obtain any authorization, consent or
approval of any Person to execute, deliver or perform this Agreement or the
Ancillary Agreements or to consummate the transactions contemplated by this
Agreement and the Ancillary Agreements.
III.3 Shares. The Seller holds of record and owns beneficially One Hundred
(100) Shares (represented by certificate no. 3), constituting all of the
issued and outstanding Shares, free and clear of any restrictions on transfer
(other than any restrictions under the Securities Act and state securities
laws), Taxes, Security Interests, options, warrants, purchase rights, contracts,
commitments, equities, claims and other encumbrances of any kind. The Seller
is not a party to any option, warrant, purchase right, or other contract or
commitment that could require the Seller to sell, transfer, or otherwise
dispose of any Capital Stock (other than this Agreement). The Seller is not
a party to any voting trust, proxy, or other agreement or understanding with
respect to the voting of any Capital Stock. Upon completion of the transaction
contemplated by this Agreement, the Buyer will own good and marketable title
to all of the Shares, free and clear of any valid and enforceable Security
Interests or restrictions on transfer (other than any restrictions under the
Securities Act and state securities laws). Without limiting any of the
foregoing (i) neither Bushinghall Limited nor any of its Affiliates has a
valid and enforceable Security Interest in any of the Shares and (ii) neither
Byron Preiss Multimedia Company, Inc., its successor, nor any of its or their
Affiliates has any ownership interest, whether of record or beneficially, in
any of the Shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY
The Seller represents and warrants to the Buyer that the statements contained
in this Article IV are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article IV) and acknowledges and confirms that the Buyer is
relying upon such representations and warranties in connection with the
purchase by the Buyer hereunder. The Disclosure Schedule shall be arranged
in paragraphs corresponding to the numbered paragraphs contained in Article
IV. The mere listing (or inclusion of a copy) of a document or other item
shall not be deemed adequate to disclose an exception to a representation or
warranty made herein unless, in light of all the circumstances, such exception
is fairly disclosed.
IV.1 Organization and Authorization.
(a) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of New Jersey. The Company has
full corporate power and authority necessary to carry on the Business and to
own and use the properties owned and used by it. The Company is not required
to be qualified, licensed or registered to do business as a foreign corporation
in any jurisdiction. Section 4.1 of the Disclosure Schedule lists the current
directors and officers of the Company (as well as any all officers and directors
who served at any time during the last three years). The Company is not in
default under or in violation of any provision of its charter or bylaws.
The Seller has delivered to the Buyer true, correct and complete copies of
the Company's Certificate of Incorporation and Bylaws (both as amended to date).
(b) The Company has conducted the Business since September 1991 at 10 Foster
Avenue, Suite A2, Gibbsboro, New Jersey only under the name "Dolphin, Inc.,"
"Dolphin Inc.," "Dolphin Interactive" or "Dolphin".
(c) The Company is not under any statutory, contractual or other obligation
to (i) file any reports with the Securities and Exchange Commission pursuant
to the Securities Exchange Act or any applicable state regulatory bodies or
(ii) register any of its presently outstanding securities.
(d) The Company has all requisite right, power and authority to execute,
deliver and perform the Ancillary Agreements to which it is a party and to
consummate the transactions contemplated thereby. The Ancillary Agreements
to which the Company is a party have been duly authorized by all requisite
corporate action on the part of the Company and have been and will be duly
executed and delivered by the Company and constitute the legal, valid and
binding obligation of the Company enforceable in accordance with their
respective terms and conditions, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditor's rights generally or by general equitable
principles. The foregoing limitations on enforceability shall not be deemed
in any way to limit or affect the representations made in Section 3.4.
IV.2 Noncontravention. The execution, delivery and performance of the
Ancillary Agreements to which the Company is a party and the consummation
of the transactions contemplated thereby (i) will not violate the articles/
certificate of incorporation or bylaws of the Company; (ii) do not (or would
not with the giving of notice, the lapse of time or the happening of any other
event or condition) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
the Company is a party or by which or to which its assets is subject (or
result in the imposition of any Security Interest upon any of the Company's
assets); (iii) will not result in the violation of any Law or other restriction
to which the Company is subject; and (iv) will not result in a breach of, or
cause the termination or revocation of, any authorization held by the Company
necessary to the operation of the Business. There is no requirement to give
any notice to, make any filing or registration with, or obtain any
authorization, consent, or approval of any Person in order for the parties to
consummate the transactions contemplated by this Agreement and the Ancillary
Agreements.
IV.3 Brokers' Fees. The Seller shall discharge all Liability to National
Capital Companies, L.L.C. under that certain letter agreement dated January
29, 1999, as amended and extended (the "National Capital Agreement"). Neither
the Seller nor the Company has any other Liability or obligation to pay any
fees or commissions to any broker, finder or agent with respect to the
transactions contemplated by this Agreement for which the Company or the
Buyer could become liable or obligated.
IV.4 Shares and Capitalization. The entire authorized Capital Stock of the
Company consists (and will consist as of the Closing Date) of eighteen
thousand (18,000) shares of common stock, no par value, of which one hundred
(100) shares (and no more) are issued, outstanding and owned by the Seller and
no shares are held in treasury. All of the issued and outstanding Shares
have been duly authorized, are validly issued, fully paid, and nonassessable,
and are held of record by the Seller. No shares of Capital Stock have
been issued in violation of any preemptive rights. There are no dividends
which have accrued or been declared but are unpaid on the Capital Stock.
All taxes required to be paid in connection with the issuance and any transfers
of the Capital Stock have been paid. All permits or authorizations required
to be obtained from or registrations required to be effected with any Person
in connection with any and all issuances of Capital Stock from the date
of the Company's incorporation to the date hereof have been obtained or
effected, and all securities of the Company have been issued and are held in
accordance with the provisions of all applicable securities Laws. There are no
obligations (contingent or otherwise) outstanding or options, warrants, purchase
rights, subscription rights, conversion rights, exchange rights, or other
contracts or commitments that could require the Company to issue, purchase,
sell, or otherwise cause to become outstanding any of its Capital Stock.
There are no outstanding or authorized stock appreciation, phantom stock,
profit participation, or similar rights with respect to the Company. There
are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of the Capital Stock of the Company.
IV.5 Intentionally Omitted.
IV.6 Subsidiaries. The Company has no direct or indirect equity interest
in any corporation, partnership, limited liability company, joint venture,
business association or other entity.
IV.7 Financial Statements. Attached as Section 4.7 of the Disclosure
Schedules are the following financial statements (collectively the "Financial
Statements") of the Company: (i) audited balance sheets and statements of
income, changes in stockholders' equity, and cash flow as of and for the
fiscal year ended December 31, 1996, the period ended March 21, 1997, and the
year ended December 31, 1998 (the "Most Recent Fiscal Year End"); and (ii) an
unaudited balance sheet and statement of income (the "Most Recent Financial
Statements") as of and for the interim nine months ended September 30, 1999
(the "Most Recent Fiscal Month End"). The Financial Statements (including
the notes thereto) (i) have been prepared in accordance with GAAP applied on
a consistent basis throughout the periods covered thereby, and present fairly
in all material respects the assets, Liabilities, and financial condition of
the Company as of such dates and the results of operations of the Company
for such periods; and (ii) are materially consistent with the books and records
of the Company (which books and records are materially correct and complete);
provided, however, that the March 21, 1997 Financial Statements were, and the
Most Recent Financial Statements are, subject to normal year-end adjustments
(which are not in the case of the Most Recent Financial Statements anticipated
to be material individually or in the aggregate) and may lack footnotes and
other presentation items of the type required in GAAP statements.
IV.8 Events Subsequent to Most Recent Fiscal Month End. Since the Most
Recent Fiscal Month End, the Company has conducted the Business only in the
Ordinary Course of Business and, without limiting the foregoing, since such
date, there has not been (i) any material damage, destruction or loss
(whether or not covered by insurance) to any of the material assets of the
Company; (ii) any material change by the Company in its accounting method,
principles or practices; (iii) any material revaluation by the Company of any
of the assets of the Company, including without limitation, writing down
the value of inventory or writing off notes or any accounts receivable other
than in the Ordinary Course of Business; or (iv) any other material adverse
change in the Business, properties or condition (financial or otherwise)
of the Company.
IV.9 Undisclosed Liabilities. Except as set forth in Section 4.9 of the
Disclosure Schedule and in the Financial Statements, the Company has no
Liabilities and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand
against the Company giving rise to any Liability, except for Liabilities
which have arisen after the Most Recent Fiscal Month End in the Ordinary
Course of Business (and which did not result from, arise out of, or relate to
any breach of contract, breach of warranty, tort, infringement or violation
of Law) and except for Liabilities which will not, individually or in the
aggregate, have a material adverse effect upon the Business, properties, or
condition (financial or otherwise) of the Company.
IV.10 Legal Compliance. The Company has complied with, and is conducting
the Business in accordance with, all applicable Laws, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand or notice
has been filed or commenced or, to the Knowledge of the Seller, threatened
against the Company alleging any failure so to comply, except in each case
where a failure or failures to comply will not, individually or in the
aggregate, have a material adverse effect upon the Business, properties, or
condition (financial or otherwise) of the Company. There is no basis for any
such action, suit, proceeding or investigation (i) which would have a material
adverse effect on the Business, properties or condition (financial or otherwise)
of the Company or (ii) which would impair the Company's ability or obligation
to perform fully on a timely basis any obligations which it may have or will
have under this Agreement. There are no existing violations of any Laws
by the Company which materially or adversely affect the Business or the
possession, use, occupancy or operation of the Leased Property.
IV.11 Tax Matters.
(a) The Company has filed in accordance with applicable Law all Tax Returns
required to be filed by it, provided that the Company's federal income Tax
Return for 1998 was filed late in October 1999. All such Tax Returns were
correct and complete in all respects. All Taxes owed by the Company (whether
or not shown on any Tax Return) have been paid. The Company is not currently
the beneficiary of any extension of time within which to file any Tax Return.
No claim has ever been made by an authority in any jurisdiction where the
Company does not file Tax Returns that the Company is or may be subject to
taxation by that jurisdiction.
(b) The Company has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any Person.
(c) The Seller has no reason to believe that any taxing authority may
assess any additional Taxes for any period for which Tax Returns have been
filed. There is no dispute or claim concerning any Tax Liability of the
Company either (i) claimed or raised by any taxing authority in writing or
(ii) as to which the Seller has Knowledge. Section 4.11 of the Disclosure
Schedule lists all federal, state, local and foreign income Tax Returns filed
with respect to the Company for taxable periods ended on or after December 31,
1995, indicates those Tax Returns that have been audited to the Seller's
Knowledge, and indicates those Tax Returns that currently are the subject of
audit to the Seller's Knowledge. The Seller has delivered to the Buyer correct
and complete copies of all federal income Tax Returns, examination reports and
statements of deficiencies assessed against or agreed to by the Company since
December 31, 1995.
(d) The Company has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Company has not filed a consent under Code #341(f) concerning
collapsible corporations. The Company has not made any payments, and is not
obligated to make any payments, and is not a party to any agreement that
under certain circumstances could obligate the Company to make any payments
that will not be deductible under Code #280G. The Company has not been a
United States real property holding corporation within the meaning of Code
#897(c)(2) during the applicable period specified in Code #897(c)(1)(A)(ii).
The Company has disclosed on its federal income Tax Returns all positions taken
therein that could give rise to a substantial understatement of federal income
Taxes within the meaning of Code #6662. The Company is not a party to any Tax
allocation or sharing agreement. The Company (i) has not been a member of an
affiliated group filing a consolidated federal income Tax Return and (ii) has
no Liability for the Taxes of any Person under Treasury Regulation #1.1502-6
(or any other similar provision of state, local or foreign Law), as a
transferee or successor, by contract or otherwise.
(f) The unpaid Taxes of the Company (i) did not, as of the Most Recent
Fiscal Month End exceed the reserve for Tax Liability (as opposed to any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) and (ii) do not exceed that reserve as
adjusted for the passage of time through the Closing Date in accordance with
the past custom and practice of the Company in filing its Tax Returns.
IV.12 Real Property.
(a) The Company does not currently own and has never owned any real property.
(b) The Company's operations were initially conducted from the Seller's
residence. The Company does not currently lease and has never leased any
real property other than as set forth in Section 4.12 of the Disclosure
Schedule, which sets forth the street address of the sole parcel of real
property leased by the Company (the "Leased Property"). The Company has
previously delivered to the Buyer a true and complete copy of the lease, as
amended to date (the "Lease"), relating to the Leased Property.
(c) The Company enjoys a peaceful and undisturbed possession of the Leased
Property. There are no parties (other than the Company) in possession of the
Leased Property and, to the Knowledge of the Seller, no Person other than
the Company has any right to use or occupy any part of the Leased Property.
The Lease is in full force and effect and is a valid and legally binding
obligation of the Company and, to the Seller's Knowledge, the landlord thereto,
and will continue to be legal, valid, binding, enforceable and in full force
and effect on identical terms following the consummation of the transactions
contemplated hereby.
(d) All rent and other sums and charges payable under the Lease are current,
no notice of default or termination under the Lease is outstanding, and no
termination event or condition or uncured default on the part of the Company
or, to the Knowledge of the Seller, the landlord exists under the Lease, and
no event has occurred and no condition exists which, with the giving of
notice or the lapse of time or both, would constitute such a default or
termination event or condition by the Seller. No party to the Lease has
repudiated any provision thereof, and there are no disputes, oral agreements,
or forbearance agreements in effect as to the Lease or the Leased Property.
(e) The Company has not experienced any material interruption in the services
provided to the Leased Property within the past one (1) year. The Leased
Property is supplied with utilities and other services necessary for the
operation of the Business. To the Seller's Knowledge, the landlord under the
Lease has no plans to make any material alteration to the Leased Property, the
cost of which would be borne in any part by the Company except as otherwise set
forth in Section 4.12 of the Disclosure Schedule. To the Seller's Knowledge,
all permits, licenses, franchises, approvals and authorizations of all
governmental authorities having jurisdiction over the Leased Property required
to have been issued to the Company to enable the Leased Property to be lawfully
occupied and used for all of the purposes for which it is currently occupied
are, as of the date hereof, in full force and effect.
IV.13 Intellectual Property.
(a) The Company has applied for or obtained any registrations for copyrights,
patents, trade or service marks, trade names or logo types reasonably necessary
to conduct the Business. Section 4.13A of the Disclosure Schedule sets forth
all the material Owned Intellectual Property in current use by the Company.
Section 4.13B of the Disclosure Schedule is a list of all Licensed Intellectual
Property (categorized by licensor and licensee). All Licensed Intellectual
Property that includes tools, libraries, utilities or routines identified or
required to be identified in Section 4.13A of the Disclosure Schedule has been
published under appropriate copyright notices. Except as set forth in Section
4.13C of the Disclosure Schedule: (a) the Company is the sole and exclusive
owner of all right, title and interest in and to all the Owned Intellectual
Property;
(b) to the Seller's Knowledge, no royalties or fees (license or otherwise)
are payable by the Company to any Person by reason of the ownership or use
of any of the Intellectual Property; (c) there have been no claims made against
the Company asserting the invalidity, abuse, misuse, or unenforceability of any
Owned Intellectual Property, and to the Seller's Knowledge, there are no
reasonable grounds for any claims against the Intellectual Property; (d) the
Company has not made any claim of any violation or infringement by others of
its rights in Owned Intellectual Property, and to the Seller's Knowledge, no
reasonable grounds for such claims exist; (e) the Company has not received
any written notice or, to the Seller's Knowledge, any other type of overt
notice that it is in conflict with or infringing upon the asserted rights of
others in connection with the Intellectual Property; (f) neither the use of the
Owned Intellectual Property by the Company, the operation of the Business, the
manufacture of its products, nor any formula, method, process, part or material
employed by the Company in connection therewith, is infringing or has
infringed upon any rights of others; (g) the Intellectual Property includes
all rights necessary for the Company to legally conduct the Business as
currently being conducted; (h) the consummation of the transactions contemplated
hereby will not alter or impair in any material respects any of the Intellectual
Property; (i) no interests or rights of the Company to any Owned Intellectual
Property have been assigned, transferred, licensed or sublicensed by the
Company to third parties outside the Ordinary Course of Business; and (j) each
item of Intellectual Property will be available for use by the Company on
substantially the same terms and conditions immediately subsequent to the
Closing, free and clear of any Security Interests, Licenses, or other
restrictions.
(b) The Company has all necessary software, copyrights and other rights to
publish its current existing titles, subject to the term of the licenses
granted to the Company with respect to such titles. Section 4.13D of the
Disclosure Schedule hereby sets forth a true, complete and correct list of all
titles of third parties used by the Company (published, unpublished and in
process) and primary licensors. Except as disclosed in Section 4.13D of the
Disclosure Schedule hereto, during 1998, no third party developed in excess
of 15% of any title developed by the Company, excepting development work
performed internally by the customer of the Company that commissioned the
title.
(c) Except as set forth in Section 4.13E of the Disclosure Schedule:
(i) subject to and/or with the exception of royalty obligations and any other
contractual restrictions specifically described in Section 4.13E of the
Disclosure Schedule, the Company owns, has the right to use, sell, license,
and, to the Seller's Knowledge, prepare derivative works for, or dispose of
all the Owned Intellectual Property required for or incident to the development,
manufacture, operation and sale of all products and services in the manner
currently expected to be sold by the Company, free and clear of any rights,
Security Interests or claims of others;
(ii) the Company owns or has the current right to use all software and/or
programs of others as well as other Intellectual Property required for the
conduct of the Business;
(iii) the execution, delivery and performance of this Agreement and the
Ancillary Agreements and the consummation of the transactions contemplated
herein and therein will not breach, violate or conflict with any instrument or
agreement governing any material Intellectual Property right or in any way
exclude the right of the Company to use, sell, license or dispose of or
bring any action for the infringement of, any Owned Intellectual Property right;
(iv) the manufacture, marketing, modification, license, sale or use of the
Intellectual Property used by the Company in connection with the conduct or
operation of the Business does not violate any license or agreement with any
third party or infringe any license or agreement with any Person or infringe
any proprietary right or interest of any Person, except where such violation
would not adversely affect the Business, operations or properties of the
Company; and there are no pending or, to the Seller's Knowledge, threatened
claims or litigation contesting the validity, ownership or right to use, sell,
license or dispose of any Owned Intellectual Property that is required in
connection with the conduct or operation of the Business, nor has the Company
received any written notice asserting that any Owned Intellectual Property,
or the proposed use, sale, license or disposition thereof by it conflicts or
will conflict with the rights of any other party;
(v) to the Seller's Knowledge, the Company has not disposed of or permitted to
lapse any rights to the use of any material Owned Intellectual Property; and
(vi) the Company currently possesses all licenses and sublicenses required to
operate the Business and is not in default under any such licenses and
sublicenses.
(d) Payments. No material payments, including maintenance fees, filings or
registrations are required to be made so as to maintain the Intellectual
Property in full force and effect, except those payments made in the ordinary
course of the Buyer's business pursuant to agreements which are in full force
and effect.
(e) Technical Documentation. The Company owns and maintains such technical
and descriptive materials relating to the acquisition, design, development,
use, and maintenance of computer code and program documentation and materials
related to the Licensed Intellectual Property as are adequate to conduct the
Company's Business as it is currently conducted.
(f) No Material Defects. To the Knowledge of the Seller and the Company,
the Company's software products are free of all material flaws or defects
which could reasonably be expected to have a material adverse effect on the
Company's Business.
(g) Section 4.13F of the Disclosure Schedule contains a list of all past
and present employees and independent contractors ("Recipients") who have or
have had access to the Company's Intellectual Property that is of a confidential
nature and whose continued confidentiality is reasonably necessary for the
conduct of the Company's Business as it is currently conducted. The Company
has never given its consent to any Person, including any Recipients, to use
its Intellectual Property except as necessary or convenient to the Company's
Business. To the Seller's Knowledge, no Person has disclosed any portion of
the Intellectual Property to any Person, other than to past and present
Recipients and Persons subject to appropriate confidentiality limitations.
All of the Recipients have signed appropriate confidentiality agreements
containing customary restrictive provisions. To the Knowledge of the Seller,
no currently employed Recipients are working for any Person that is currently
a competitor of the Company except as disclosed in Section 4.13F of the
Disclosure Schedule.
IV.14 Contracts. Section 4.14 and the other Sections of the Disclosure
Schedule list each contract and agreement (oral or written), not fully
performed, to which the Company is a party or by which the Company or any of
its property is bound, which contract or agreement (i) restricts the Company
from engaging in any line of business or from competing with any Person; (ii)
may involve the receipt or payment of more than $20,000 in any twelve-month
period commenced after December 31, 1998; or (iii) is otherwise material
to the Business, properties or condition (financial or otherwise) of the
Company. The Seller has delivered or made available to the Buyer a correct
and complete copy of each written agreement listed or required to be listed
in Section 4.14 and the other Sections of the Disclosure Schedule (as amended
to date) and a written summary setting forth the terms and conditions of each
oral agreement referred to in Section 4.14 of the Disclosure Schedule. With
respect to each such agreement (i) the agreement is in full force and effect
and is the legal, valid, binding and enforceable obligation of the Company
and, to the Seller's Knowledge, the other parties thereto; (ii) the agreement
will continue to be the legal, valid, binding and enforceable obligation of
the Company and, to the Seller's Knowledge, the other parties thereto on
identical terms immediately following the consummation of the transactions
contemplated hereby; (iii) neither the Company nor, to the Seller's Knowledge,
any other party is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach or deffault, or permit
termination, modification or acceleration, under the agreement; and (iv) no
party has repudiated any provision of the agreement.
IV.15 Inventory. Intentionally left blank.
IV.16 Tangible Assets. Section 4.16 of the Disclosure Schedule lists and
briefly describes all material tangible assets comprising a part of or used
in the Business. The Company has good and marketable title to each material
item of equipment and other tangible personal property included as an asset in
the Most Recent Fiscal Year End Financial Statements or acquired since such
date (other than properties subsequently utilized or disposed of in the
Ordinary Course of Business), free and clear of any Security Interests,
except as set forth in Section 4.16 of the Disclosure Schedule. The Company
owns or leases (pursuant to leases disclosed in Section 4.16 of the Disclosure
Schedule) all buildings, machinery, equipment and other tangible assets
necessary for the conduct of the Business as presently conducted. To the
Knowledge of the Seller and without expanding Section 4.34 as to Year 2000
compliance, each such item of personal property with a replacement value in
excess of Four Thousand Dollars ($4,000) is free from defects (patent and
latent), has been maintained in accordance with normal industry practice, is
in good operating condition and repair (subject to normal wear and tear), and
is suitable for the purposes for which it presently is used and presently is
proposed to be used. Following the Closing, the Company will continue to be
entitled to the ownership and use of all assets necessary for the continued
operation of the Business in the manner it is currently conducted.
IV.17 Notes and Accounts Receivable. All notes and accounts receivable of
the Company at September 30, 1999 are reflected properly on its books and
records, are valid receivables subject to no setoffs or counterclaims, are
current (except as set forth in Section 4.17 of the Disclosure Schedule) and
will be fully collected within one hundred eighty (180) days of the Closing
Date at their recorded amounts.
IV.18 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company.
IV.19 Insurance.
(a) Section 4.19 of the Disclosure Schedule identifies each insurance policy
(including policies providing property, casualty, liability and workers'
compensation coverage and bond and surety arrangements) to which the Company
is a party, a named insured, or otherwise the beneficiary of coverage.
Section 4.19 of the Disclosure Schedule also contains a summary of the loss
experience under each policy.
(b) With respect to each such insurance policy: (i) the policy is legal,
valid, binding, enforceable and in full force and effect; (ii) to the Seller's
Knowledge, the policy will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms immediately following the
consummation of the transactions contemplated hereby; (iii) neither the
Company nor to the Seller's Knowledge any other party to the policy is in
breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default, or permit termination,
modification or acceleration, under the policy; and (iv) no party to the
policy has given written notice repudiating any provision thereof. The Seller
has no reason to believe that any such insurance policy will not be renewed
upon the expiration thereof at premiums substantially equivalent to those
currently being paid, except for changes in such premiums applicable to
insureds similarly situated. The Company is covered by insurance in scope
and amount customary and reasonable for the business in which it has engaged.
Section 4.19 of the Disclosure Schedule identifies any self-insurance
arrangements affecting the Company.
IV.20 Litigation. Section 4.20 of the Disclosure Schedule sets forth each
instance in which the Company (i) is subject to any outstanding injunction,
judgment, order, decree, ruling or charge or (ii) is (or has been) a party
or, to the Knowledge of the Seller, is threatened to be made a party to any
action, suit, proceeding, hearing, or investigation of, in, or before any
court or quasi-judicial or administrative agency of any federal, state, local
or foreign jurisdiction or before any arbitrator, in each case where such
matter may result in any material adverse change in the Business, properties
or condition (financial or otherwise) of the Company. The Seller has no
reason to believe that any such action, suit, proceeding, hearing or
investigation will be brought or threatened against the Company.
IV.21 Product Warranty. Except for matters that are not reasonably likely
to result in any material adverse change in the Business, properties or
condition (financial or otherwise) of the Company, each title or product
manufactured, sold, distributed, leased or delivered by the Company has been
in conformity with all applicable contractual commitments and all express and
implied warranties, and the Company has no Liabilities (and, to the Knowledge
of the Seller, there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against
the Company giving rise to any Liabilities) for recall, withdrawal, replacement
or repair thereof or other damages in connection therewith, subject only to the
reserve for product warranty claims set forth on the face of the Most Recent
Balance Sheet (rather than in any notes thereto) as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of the Company.
IV.22 Product Liability. To the Knowledge of the Seller, the Company has
no Liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against
the Company giving rise to any Liability) arising out of any injury to
individuals or property as a result of the ownership, possession or use of
any title or product manufactured, sold, distributed, leased or delivered by
the Company. No title or product manufactured, sold, distributed, leased
or delivered by the Company is subject to any guaranty, warranty or other
indemnity other than as set forth in the related development contract.
IV.23 Labor Relations.
(a) The Company is not a party to, otherwise bound by or overtly threatened
with any labor or collective bargaining agreement affecting its employees
generally. There has not been in the past and the Seller has no Knowledge of
any current organizational effort being made or threatened by or on behalf of
any labor union with respect to employees of the Company. Without limiting
the generality of Section 4.10, except as identified in Section 4.23 of the
Disclosure Schedule (i) the Company has not committed or engaged in any
unfair labor practice, and no unfair labor practice complaints or grievances,
administrative proceedings or arbitration proceedings are pending or have been
filed against the Company with any governmental or regulatory agency, of which
either the Seller or the Company has received notice; (ii) the Company has not
received any notice or communication reflecting an intention or threat to file
any such complaint, grievance, arbitration proceeding, or arbitration hearing;
(iii) no Person has made any claim or, to the Knowledge of the Seller,
threatened any claim against the Company under any statute, regulation or
ordinance relating to discrimination with respect to employees or employment
practices and there exists no basis for any such claim, and (iv) no claim is
pending or, to the Knowledge of the Seller, threatened against the Company in
connection with the United States Wage and Hour Law, the Americans with
Disabilities Act, the Occupational Safety and Health Act or similar Laws,
where any such matter would result in a material adverse effect on the
Business, properties or condition (financial or otherwise) of the Company.
(b) To the Seller's Knowledge, no employee, consultant or agent of the Company
is in violation of any term of any employment contract, confidentiality or
non-disclosure agreement or any other contract, agreement, commitment or
understanding relating to the relationship of such employee, consultant or
agent with the Company or any other party.
(c) The Seller has no Knowledge that any officer or key employee or group of
employees intends to terminate employment with the Company.
(d) Except as set forth on Section 4.23 of the Disclosure Schedule, the Company
is not required to make, and it is not currently making, a "reasonable
accommodation" for any of its employees under the Americans With Disabilities
Act or any similar New Jersey Law. All current employees of the Company have
agreed in writing to be bound by the confidentiality provisions contained in
the Company's employee handbook and/or are subject to written employment
agreements with the Company, all of which employment agreements are identical
in all material respects to the Employment Agreement between the Company and
Mary McLean, a true, correct and complete copy of which has been provided to
the Buyer; provided, however, that David Sides' Employment Agreement and the
Seller's existing Employment Agreement (which will be restated in its
entirety by the Employment Agreement) are different, and true, correct and
complete copies of these Employment Agreements have also been provided to the
Buyer. The Seller has also provided to the Buyer a true, correct and complete
copy of the Consulting Agreement between the Company and Rebecca Shepherd.
Other than the agreements referenced in the two immediately preceding sentences,
no employee or independent contractor has any other agreement, whether oral
or written, with respect to length of notice or severance payment required to
terminate his or her employment or engagement. Except as set forth in Section
4.23 of the Disclosure Schedule or as set forth in the Company's articles/
certificate of incorporation or bylaws, and except with respect to the Company's
liability insurance policy, there are no indemnification arrangements between
the Company and any officer, director, consultant or employee. Without
limiting Section 4.10, the Company is in compliance with all Laws respecting
employment and employment practices, terms and conditions of employment, and
wage and hours of work, except where any non-compliance would not result in a
material adverse effect on the Business, properties or condition (financial or
otherwise) of the Company.
IV.24 ERISA Compliance.
(a) Section 4.24 of the Disclosure Schedules identifies each and every
employee benefit plan, including each employee pension benefit plan and
employee welfare benefit plan (as such terms are defined in ERISA) (an
"ERISA Plan") and each other retirement, deferred compensation, stock option,
stock bonus, or other benefit program (a "Non-ERISA Plan") that is currently
sponsored, maintained by or contributed to by the Company or any of its
predecessors or ERISA Affiliates. Such ERISA Plan and Non-ERISA Plan are
collectively referred to as "Employee Benefit Plans."
(b) None of the Employee Benefit Plans is (i) a plan subject to Title IV of
ERISA (a "Title IV Plan") or (ii) a multiemployer plan within the meaning of
Section 3(37) of ERISA (a "Multiemployer Plan"). Neither the Company nor any
ERISA Affiliate has ever sponsored, maintained or contributed to a Title IV
Plan, nor has ever contributed or had an obligation to contribute to a
Multiemployer Plan.
(c) Without limiting any other representation or warranty provided by the
Seller herein, with respect to each and every Employee Benefit Plan:
(i) Each such Employee Benefit Plan complies in form and in operation in all
material respects with the applicable requirements of ERISA, the Code and all
other applicable Laws.
(ii) Except as specifically set forth in Section 4.24 of the Disclosure
Schedule, all reports and descriptions required by ERISA, the Code, or other
applicable Laws, including Forms 5500, the summary annual reports and summary
plan descriptions have been filed or distributed appropriately with respect to
each such Employee Benefit Plan.
(iii) The requirements of ERISA and of Code Section 4980B have, in all
material respects, been met with respect to each such Employee Benefit Plan
(to the extent such requirements apply to such Plans).
(iv) All contributions including all employer contributions and employee
salary reduction contributions which are due have been paid to each such
Employee Benefit Plan which is an employee pension benefit plan and all
contributions for any period ending on or before the Closing Date which are
not yet due have been paid to each such employee pension benefit plan or
accrued in accordance with the past customs and practice of the Company.
All such contributions and other payments have been made in accordance with
all applicable Laws including without limitation, Laws governing the timing
of such payments. All premiums or other payments for all periods ending on
or before the Closing Date have been paid with respect to each such Employee
Benefit Plan which is an employee welfare benefit plan.
(v) Each Employee Benefit Plan which is an employee pension plan meets and
has met, in form and operation, the requirements for qualification under Code
Section 401(a).
(vi) There have been no prohibited transactions with respect to any Employee
Benefit Plan. No fiduciary has any liability for material breach of fiduciary
duty or any other material failure to act or comply in connection with the
administration or investment of the assets of any such Employee Benefit Plan.
No action, suit, proceeding, hearing, or investigation with respect to the
administration or the investment of the assets of any such Employee Benefit
Plan (other than routine claims for benefits) is pending or, to the Knowledge
of the Seller, threatened.
(vii) Except as set forth in Section 4.24 of the Disclosure Schedule, or as
required under Section 601 et seq. of ERISA, and/or Code Section 4980(b),
neither the Company nor any of its predecessors or Affiliates have ever
provided post-retirement or post-employment termination benefits other than
benefits under Employee Benefit Plans including without limitation, post-
retirement or post-employment termination medical or health care coverage
except to the extent required under Section 601 et seq. of ERISA and/or Code
Section 4980(b), and neither the Company nor any Affiliate has any obligation
to provide health or welfare benefits to any current or former employee
following such employee's retirement or other termination from service.
(viii) Except to the extent benefits are required to be provided pursuant to
Section 601 of ERISA and/or Code Section 4980(b), the Company has the right
to modify and/or terminate any and all benefits provided to retirees or
otherwise terminated employees other than pensions with respect to both current
and former employees.
(ix) Neither the Seller, the Company nor any ERISA Affiliate thereof has
any liability to the Internal Revenue Service with respect to any Employee
Benefit Plan including, without limitation, any liability imposed by Chapter
43 of the Code.
(x) All contributions and payments made or accrued to the Employee Benefit
Plans are deductible under Code Section 162 or Section 404. No amount of any
asset of any Employee Benefit Plan is subject to tax as unrelated business
taxable income.
(xi) No event has occurred or circumstances exist which could result in a
material increase in premium cost of any Employee Benefit Plan that is insured
or a material increase in benefit costs of such plans that are self-insured.
(xii) Other than claims for benefits submitted by plan participants and/or
beneficiaries, no claim against or legal proceeding involving any Employee
Benefit Plan is pending or, to the Seller's Knowledge, threatened.
(xiii) There does not now exist, nor do any circumstances exist, that could
result in any control group liability that would be a Liability of the Buyer
or the Company as a result of transactions contemplated by this Agreement.
(xiv) No employee of the Company will become entitled to any retirement,
severance or similar benefit or enhanced or accelerated benefits solely as a
result of the transactions contemplated by this Agreement to the extent Buyer
complies with its obligations hereunder.
(d) The Seller has delivered or made available to the Buyer:
(i) all documents that set forth the terms of each Employee Benefit Plan
including (a) all plan descriptions and summary plan descriptions of such
Employee Benefit Plans, and (b) all summaries and descriptions furnished to
participants and beneficiaries regarding such Employee Benefit Plans;
(ii) all personnel, payroll and employment manuals and policies;
(iii) all registration statements filed with respect to any Employee Benefit
Plan;
(iv) a written description of each Employee Benefit Plan which is not
otherwise in writing;
(v) all insurance policies purchased by or to provide benefits under any
Employee Benefit Plan;
(vi) all contracts with third party administrators, actuaries, investment
managers, consultants and other independent contractors that relate to any
Employee Benefit Plan;
(vii) all reports submitted within the four years preceding the date of this
Agreement by third party administrators, actuaries, investment managers,
consultants or other independent contractors with respect to any Employee
Benefit Plan;
(viii) the form(s) of notice provided to employees of their rights under
ERISA Section 601 et seq. and Code Section 4980B;
(ix) the Form 5500 filed in the most recent plan year with respect to each
Employee Benefit Plan, including all schedules thereto and the opinions of
independent accountants;
(x) all notices that were given by the Company, any predecessor or any ERISA
affiliate of the Company to the Internal Revenue Service, PBGC or any
participant or beneficiary pursuant to statute within the four years
preceding the date of this Agreement;
(xi) all notices that were given by the Internal Revenue Service, or the
Department of Labor to the Company within four years preceding the date of
this Agreement; and
(e) To the Seller's Knowledge, no statement, either written or oral, has
been made by the Company to any person with regard to any Employee Benefit
Plan that was not in accordance with the plan documents that could have a
material adverse effect to the Company or to the Buyer.
(f) Section 4.24 of the Disclosure Schedule identified each person who is
currently receiving or entitled to receive continuing benefits under any
health or other welfare benefit plan maintained by the Company or any ERISA
Affiliate.
IV.25 Guaranties. The Company is not a guarantor or otherwise liable for
any Liability or obligation (including indebtedness) of any other Person.
IV.26 Environment, Health, and Safety.
(a) The Company and, to the Seller's Knowledge, the Company's predecessors
and Affiliates have each complied with all Environmental, Health, and Safety
Laws, and no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed or commenced against any of
them alleging any failure so to comply, except where any non-compliance would
not result in a material adverse effect on the Business, properties or
condition (financial or otherwise) of the Company. Without limiting the
generality of the foregoing, the Company and, to the Seller's Knowledge, the
Company's predecessors and Affiliates have each been in compliance with all
of the terms and conditions of all permits, licenses, and other authorizations
which are required under, and have complied in all respects with all other
limitations, restrictions, conditions, standards, prohibitions, requirements,
obligations, schedules and timetables which are contained in, all Environmental,
Health, and Safety Laws, except where any non-compliance would not result in
a material adverse effect on the Business, properties or condition (financial
or otherwise) of the Company.
(b) The Company has no Liability for damage to any real property or site,
location or body of water (surface or subsurface), for any illness of or
personal injury to any employee or other individual, or for any reason under
any Environmental, Health, and Safety Law, except for matters that are not
reasonably likely to result in any material adverse change in the Business,
properties or condition (financial or otherwise) of the Company. The Seller
has no Knowledge of any written notice to the effect that the Company or its
predecessors and Affiliates have handled or disposed of any substance, arranged
for the disposal of any substance, exposed any employee or other individual
to any substance or condition, or owned or operated any property or facility
in any manner that could form the basis for any present or future action,
suit, proceeding, hearing, investigation, charge, complaint, claim or demand
against the Company giving rise to any Liability, except for matters that are
not reasonably likely to result in any material adverse change in the Business,
properties or condition (financial or otherwise) of the Company.
(c) To the Knowledge of the Seller, all properties and equipment used in
the Business of the Company have been free of asbestos, PCB's, methylene
chloride, trichloroethylene, 1,2-trans-dichloroethylene, dioxins, dibenzofurans
and other hazardous substances or wastes.
(d) To the Knowledge of the Seller, the Company has always transferred or
disposed of, or contracted or arranged for the transportation or disposal of,
any hazardous or regulated waste, hazardous or regulated substance, infectious
or medical waste, radioactive waste or sewage sludge in material compliance
with all Environmental, Health, and Safety Laws.
(e) The Company has never owned, leased or operated any underground storage
tank containing petroleum products or wastes or other hazardous substances
and regulated by 40 CFR 280 and/or other applicable federal, state or local
Laws or requirements.
(f) There are no reports, studies, analyses, tests or monitorings possessed
or initiated by the Seller or the Company pertaining to hazardous or regulated
materials or hazardous or regulated activities in, on, or under any facility
ever owned, leased or operated at any time by the Company or concerning
compliance by the Company or any other Person for whose conduct the Company is
or may be held responsible, with Environmental, Health, and Safety Laws.
IV.27 Certain Business Relationships with the Company. Except as set forth
in Section 4.27 to the Disclosure Schedule, neither the Seller nor any of his
Affiliates, owns directly or indirectly, any asset, tangible or intangible,
or right which is used in the Business. Except for compensation and benefits
accruing after November 30, 1999 in the Ordinary Course of Business (but not
any bonuses payable to the Seller), the Company is not indebted, directly or
indirectly, to any of its officers, directors or shareholders or to their
Affiliates, in any amount whatsoever, and none of such officers, directors or
shareholders, or any of their Affiliates, are indebted to the Company or have
any direct or indirect ownership interest in any Person with which the Company
is affiliated or with which the Company has a business relationship, or any
Person which competes with the Company, and no officer, director or shareholder,
or any of their Affiliates, is, directly or indirectly, interested in any
contract, agreement, lease or arrangement pertaining to or relating to the
Company, except for employment, consulting and other personal service
agreements that may be in effect and which are referenced in Section 4.14 of
the Disclosure Schedule, except with respect to a bank line of credit in favor
of the Company which has been guaranteed by the Seller (the "Line of Credit").
The representation made in the immediately preceding sentence is limited such
that David Sides shall not be included in the definition of "officer." To
the Seller's Knowledge, the Company is not indebted, directly or indirectly,
to Mr. Sides or to any of his Affiliates, in any amount whatsoever, and, to
the Seller's Knowledge, neither Mr. Sides nor any of his Affiliates are
indebted to the Company or have any direct or indirect ownership interest in
any Person with which the Company is affiliated or with which the Company has
a business relationship, and, to the Seller's Knowledge, neither Mr. Sides
nor any of his Affiliates is, directly or indirectly, interested in any
contract, agreement, lease or arrangement pertaining or relating to the
Company, except for Mr. Sides' employment agreement referenced in Section 4.14
of the Disclosure Schedule. Notwithstanding any language herein to the
contrary, it is expressly acknowledged that the Line of Credit will be
terminated in connection with the transactions contemplated hereby.
IV.28 Permits, Licenses, Etc. Except as set forth in Section 4.28 of the
Disclosure Schedule, the Company's material permits, licenses, approvals,
authorizations, franchises, certificates and similar such items and rights
relating to the Business (collectively, "Authorizations"), all of which have
been made available to the Buyer, are adequate for the operation of the
Business, are valid and in full force and effect, and neither the execution
and delivery of this Agreement or the Ancillary Agreements nor the consummation
of the transactions contemplated hereby or thereby will cause the termination
of, or interfere in any material respect with, the Company's operation under
any such Authorizations.
IV.29 Personnel. Section 4.29 of the Disclosure Schedule lists all officers,
directors and employees of the Company, whether actively at work or not and
their respective rates of compensation (including the portions thereof
attributable to bonuses or other extraordinary compensation). All amounts
due or accrued due as of November 30, 1999 for all salary, wages, bonuses,
commissions, vacation with pay or other employee benefits are reflected in
Section 4.29 of the Disclosure Statement. Section 4.29 of the Disclosure
Schedule also contains the Company's employee handbook and a list of all other
material written employee policies, employee manuals or other material written
statements of rules or policies as to working conditions, vacation and sick
pay, a complete copy of each of which has been made available to the Buyer.
IV.30 Bank Accounts. Section 4.30 of the Disclosure Schedule lists (i) the
name of each bank or other institution in which the Company has accounts or
safe deposit boxes; (ii) the name and telephone number of the Company's contact
person at such bank or institution; (iii) the names in which the accounts or
boxes are held; (iv) the type of account; and (v) the name of each person
authorized to draw thereon or have access thereto.
IV.31 Borrowings. The Company is not in default in any respect under, and
is not otherwise in violation or contravention of, any of the terms and
provisions of any agreement for the repayment of borrowed funds. Copies of all
promissory notes and other documents and instruments evidencing or relating to
indebtedness for amounts borrowed by the Company (other than the Line of Credit
documents) are attached to Section 4.31 of the Disclosure Schedule.
IV.32 Minute Book. The minute book of the Company contains a complete record
of all meetings of the directors and shareholders (and consents in lieu
of meeting) of the Company since the date of its incorporation. Such minute
book has been made available for inspection to the Buyer. All actions taken
by the Company requiring action by the board of directors or shareholders of
the Company have been duly authorized or ratified as necessary and are evidenced
in the minute book of the Company as so made available for the aforesaid
inspection. The minute book (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors, and any consents in lieu of meeting), the stock certificate books,
and the stock record books of the Company are correct and complete.
IV.33 Insolvency. The Company is able to pay its debts as they mature, and
the transfer of the Shares by the Seller to the Buyer in accordance with
the terms of this Agreement will not constitute a voidable preference or
transfer in fraud against any creditor under applicable insolvency Laws.
IV.34 Y2K. To the Knowledge of the Seller, all of the Company's date-sensitive
devices, software, systems, machinery, information technology, computer
software and hardware and other technology (jointly and severally, the
"Systems") are Year 2000 Compliant. Year 2000 Compliant means that such
systems are designed to be used prior to, during and after the Gregorian
calendar year 2000 A.D. and will operate during each such time period without
error relating to date data, specifically including any error relating to, or
the product of, date data which represents or references different centuries
or more than one century, provided that any such systems not owned or used by
the Company with which the Company's systems communicate, interact or otherwise
exchange date data are themselves Year 2000 Compliant. In addition, the
Company has (i) undertaken an inventory, review and assessment of areas within
the Business that could be materially adversely affected by the failure of
the Company to be Year 2000 Compliant; (ii) developed a plan and timetable
for becoming Year 2000 Compliant; and (iii) implemented that plan in accordance
with that timetable in all material respects.
IV.35 Major Customers and Suppliers; Supplies. Set forth in Section 4.35 of
the Disclosure Schedule is a list of the Company's ten most significant
customers (in dollar amount) during the period commenced on January 1, 1999 and
ending on the Closing Date and the Company's ten most significant suppliers
of goods or services to the Company (in dollar amount) for such period. Except
as indicated in Section 4.35 of the Disclosure Schedule, to the Seller's
Knowledge, no facts, circumstances or conditions exist which create a reasonable
basis for believing that the Company will be unable to continue to procure
the supplies and services necessary to conduct the Business on terms and
conditions materially as favorable to the Company as the terms and conditions
pursuant to which such supplies and services are currently procured, excepting
any increases in prices in the ordinary course of business. There has not
been any material adverse change in the relations of the Company or any
controversies with the customers or suppliers listed on Section 4.35 of
the Disclosure Schedule as a result of the announcement or consummation of
the transactions contemplated by this Agreement, and the Seller has not
received any notice that any of such customers or suppliers intends to
terminate its relationship with the Company.
IV.36 Securities Disclosures.
(a) Investor Representation Letter. At the Closing, the Seller shall deliver
to the Buyer a fully executed Investor Representation Letter in the form
attached hereto as Exhibit "E".
(b) Buyer's Public Documents and Access to Information. The Seller has
received copies of (i) the Buyer's Annual Report on Form 10-KSB for the year
ended December 31, 1998; (ii) the Buyer's Quarterly Reports on Form 10-QSB
with respect to its first three quarters of fiscal 1999; (iii) the Buyer's
definitive proxy statements relating to its 1998 and 1999 annual shareholders
meetings; (iv) the Buyer's Form S-8 filed on or about October 22, 1999; and (v)
the Buyer's Current Report on Form 8-K/A filed on or about February 11, 1999
(together with all other filings (other than preliminary registration and proxy
statements) made by the Buyer with the Securities and Exchange Commission
("SEC") between December 31, 1998 and the date hereof, the "SEC Documents").
(c) Legending of AEC Stock. The Seller acknowledges that there shall be
placed on all certificates representing the shares of AEC Stock issued to the
Seller hereunder appropriate restrictive legends referencing the restrictions
imposed by applicable securities Laws. The Seller hereby further acknowledges
and agrees that the AEC Stock shall be subject to volume limitations or other
restrictions provided in Rule 144 (or any successor provision thereto)
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The Seller agrees to comply with any applicable restrictions of Rule 144, and
further agrees that he will not offer to sell, sell or otherwise dispose of any
of the AEC Stock issued to him except pursuant to an effective registration
statement or an exemption from the registration requirements of the Securities
Act, and in compliance with all applicable requirements of Rule 144 (or any
other exemption). With respect to any such sale or disposition, the Seller
agrees to furnish to the Buyer upon request such information as its counsel
may deem necessary to assure that such sale or disposition is made in full
compliance with this Agreement, such Rule, and the applicable federal and
state securities Laws.
(d) Investment Representations. The Seller is receiving shares of the AEC
Stock for investment for the Seller's own account, not on behalf of others
and not with a view to sell or otherwise distribute such shares. The Seller
acknowledges that such shares of AEC Stock have not been registered under the
Securities Act or under any state securities Laws and, therefore, cannot be
resold unless registered under the Securities Act and applicable state
securities Laws or unless an exemption from registration is available and, as a
result, the Seller must bear the risk of an investment in the AEC Stock for an
indefinite period of time. The financial condition of the Seller is currently
adequate to bear the economic risk of an investment in the AEC Stock. The
Seller has sufficient knowledge and experience in investment and business
matters to understand the economic risk of such an investment and the risk
involved in a commercial enterprise such as the Buyer. The Seller has had an
opportunity to ask questions of, and receive answers from, officers of the
Buyer, concerning the Buyer and the AEC Stock and to obtain any additional
information which the Seller reasonably requested and is material to his
investment decision. The Seller is, and has been for at least the past three
(3) months, an "accredited investor" within the meaning of Regulation D under
the Securities Act.
IV.37 Complete Disclosure. No representation or warranty of the Seller in
this Agreement and no statement in the Disclosure Schedule omits to state a
material fact necessary to make the statements herein or therein, in light of
the circumstances in which they were made, not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE BUYER
The Buyer represents and warrants to the Seller that the Statements contained
in this Article V are correct and complete as of the date of this Agreement
and will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article V).
V.1 Organization of the Buyer. The Buyer is a corporation duly organized,
validly existing, and in good standing under the laws of the State of Colorado.
The Buyer has full corporate power and authority necessary to carry on the
business in which it is engaged and in which it presently proposes to engage
and to own and use the properties owned and used by it.
V.2 Authorization of Transaction. The Buyer has full corporate power and
authority to execute and deliver this Agreement and the Ancillary Agreements
to which it is a party and to perform its obligations hereunder and thereunder.
This Agreement and the Ancillary Agreements to which the Buyer is a party
constitute the valid and legally binding obligation of the Buyer, enforceable
in accordance with their terms and conditions, except as enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles.
V.3 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any articles of incorporation, charter, bylaws, constitution,
statute, regulation, rule, injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or
court to which the Buyer is subject or (ii) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require any
notice or consent under any agreement, contract, lease, license, instrument,
or other arrangement to which the Buyer is a party or by which it is bound
or to which any of its assets is subject.
V.4 Capitalization. As of the date of this Agreement, the authorized stock
of the Buyer consists of 30,000,000 shares of common stock, $0.025 par
value per share, of which 13,718,256 shares are issued and outstanding, and
50,000,000 shares of preferred stock, $0.001 par value per share, of which no
shares are issued and outstanding.
V.5 Brokers' Fees. The Buyer has no Liability or obligation to pay any fees
or commissions to any broker, finder or agent with respect to the transactions
contemplated by this Agreement for which the Seller could become liable or
obligated.
V.6 Investment. The Buyer is not acquiring the Shares with a view to, or
for sale in connection with, any distribution thereof within the meaning of
the Securities Act.
V.7 Legal Compliance. The Buyer has complied with, and is conducting its
business in accordance with, all applicable Laws, and no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, demand or notice
has been filed or commenced or, to the Knowledge of the Buyer, threatened
against the Buyer, alleging any failure so to comply, except in each case
where a failure or failures to comply will not, individually or in the
aggregate, have a material adverse effect upon the business, properties, or
condition (financial or otherwise) of the Buyer. There is no basis for any
such action, suit, proceeding or investigation (i) which would have a material
adverse effect on the business, properties or condition (financial or
otherwise) of the Buyer or (ii) which would impair the Buyer's ability or
obligation to perform fully on a timely basis any obligations which it may
have or will have under this Agreement.
V.8 Intentionally left blank.
V.9 Securities Law Compliance. The Buyer has complied with Section 10(b) of
the Securities Exchange Act and Rule 10b-5 thereunder with respect to
the sale of Escrow Shares hereunder.
ARTICLE VI
[Intentionally Omitted]
ARTICLE VII
POST-CLOSING COVENANTS
The parties agree as follows with respect to the period following the Closing:
VII.1 General. In case at any time after the Closing any further action is
necessary or desirable to carry out the purposes of this Agreement, each of the
parties will take such further action (including the execution and delivery of
such further instruments and documents) as the other party may reasonably
request, all at the sole cost and expense of the requesting party (unless the
requesting party is entitled to indemnification therefor under Article IX
below).
VII.2 Litigation Support. In the event and for so long as any party hereto
is actively contesting or defending against any action, suit, proceeding,
hearing, investigation, charge, complaint, claim or demand (including any Tax
audit) in connection with (i) any transaction contemplated under this Agreement
or (ii) any fact, situation, circumstance, status, condition, activity,
practice, plan, occurrence, event, incident, action, failure to act or
transaction on or prior to the Closing Date involving the Company, the other
party hereto will cooperate with him or it and his or its counsel in the
contest or defense, make available their personnel, and provide such testimony
and access to their books and records as shall be reasonably necessary or
convenient in connection with the contest or defense, all at the sole cost and
expense of the contesting or defending party (unless the contesting or defending
party is entitled to indemnification therefor under Article IX below).
VII.3 Intentionally omitted.
VII.4 Intentionally omitted.
VII.5 Covenant Not to Compete. The Seller agrees to be bound by the
covenant not to compete provisions contained in the Employment Agreement.
VII.6 Survivability. The provisions of this Article VII shall survive the
Closing Date.
ARTICLE VIII
[Intentionally Omitted]
ARTICLE IX
INDEMNIFICATION
IX.1 Survival of Representations and Warranties. All of the representations
and warranties of the parties contained in this Agreement shall survive the
Closing hereunder (even if the damaged party knew or had reason to know of
any misrepresentation or breach of warranty at the time of the Closing) and
continue in full force and effect thereafter, subject to Section 9.7.1.
Notwithstanding any investigation or audit conducted before or after the
Closing, or the decisions of any party to complete the Closing, each party
shall be entitled to rely upon the representations and warranties set forth
herein.
IX.2 Indemnification by the Seller. The Seller shall indemnify and hold
harmless the Buyer and its shareholders, directors, officers, employees and
other agents and, after the Closing Date, the Company (collectively, the
"Buyer Indemnitees") in respect of any and all damages, losses, Liabilities,
diminution in value, liens, payments, obligations, penalties, claims,
injunctions, litigation, orders, demands, defenses, judgments, actions,
suits, proceedings, hearings, investigations, charges, costs, disbursements
or expenses (including, without limitation (i) reasonable fees, disbursements
and expenses of attorneys, accountants and other professional advisors
and of expert witnesses and costs of investigation and preparation and
(ii) the discounted present value of tax costs to the Buyer of receiving the
indemnification payment hereunder (including any tax costs resulting from a
reduction in basis, and the resulting reduction in depreciation and amortization
or increase in gain recognized on a sale, if the indemnification payment is
treated as an adjustment of the Purchase Price) of any kind or nature
whatsoever, net of any insurance and tax benefits (adjusted for any retroactive
premium adjustments or experience-based premium adjustments) actually received
by the Buyer (collectively "Damages") asserted against or incurred by any Buyer
Indemnitee as a result of, in connection with or arising, directly or
indirectly, out of:
(i any inaccuracy in or breach of any representation or warranty made by
the Seller herein;
(ii any breach or nonperformance (partial or total) of any covenant or
agreement of the Seller contained herein;
(iii any Liability for Taxes of the Company, beyond the reserve for Tax
liability for unpaid Taxes of the Company, as adjusted for the passage of
time through the Closing Date, as set forth in the Financial Statements of
the Company, which Taxes are attributable to the period of time ending on or
before the Closing Date, including any interest, penalties, assessments or
additions to Tax resulting from, attributable to, or incurred in connection
with, any such Tax or any contest or dispute thereof;
(iv any Damages relating directly or indirectly to the Seller's sale of
shares of Capital Stock to Byron Preiss Multimedia Company, Inc. or the
foreclosure of such shares by the Seller;
(v any Damages arising out of a claim that any of the products or software
designed or manufactured by the Company prior to the Closing Date (a) were
not the original work prepared by the Company or for which the Company had
permission to use; (b) infringe upon any intellectual property rights of any
Person; (c) contain any matter that will libel, invade the privacy of, or
otherwise violate the rights of any Person; or (d) contain a statement,
formula, experiment, instruction, or other matter that materially injured
the user; or
(vi any Damages related to the Company's failure to file Forms 5500 with
respect to the Company's Amerihealth PPO.
Notwithstanding the foregoing, the Seller shall have no liability arising
from the last sentence of Section 2.4 hereof.
IX.3 Indemnification by the Buyer. The Buyer shall indemnify and hold
harmless the Seller (the "Seller Indemnitee") in respect of any Damages
asserted against or incurred by the Seller Indemnitee as a result of, in
connection with or arising out of:
(i any inaccuracy in or breach of any representation or warranty made by
the Buyer herein;
(ii any breach or nonperformance (partial or total) of any covenant or
agreement of the Buyer contained herein;
(iii the operation of the Business after the Closing Date, except insofar
as such Damages result from conduct of the Seller in violation of this
Agreement or the Employment Agreement; or
(iv the inclusion of the last sentence of Section 2.4 hereof.
IX.4 Notice of Claims. If any party (the "Indemnified Party") believes
that it has suffered or incurred or will suffer or incur any Damages for
which it is entitled to indemnification under this Article IX, such Indemnified
Party shall so notify the party or parties from whom indemnification is being
claimed (the "Indemnifying Party") with reasonable promptness and reasonable
particularity in light of the circumstances then existing. The failure of an
Indemnified Party to give any notice required by this Section 9.4 shall not
affect any of such Indemnified Party's rights under this Article IX or
otherwise, except insofar as the Indemnifying Party is materially
prejudiced thereby. Any Damages of the Buyer subject to indemnification
hereunder and not satisfied under the provision of Section 2.3 shall be paid
promptly in cash by the Seller.
IX.5 Third Party Claims. The Indemnifying Party shall have the right to
conduct and control, through counsel selected by the Indemnifying Party but
reasonably acceptable to the Indemnified Party, the defense of any third party
claim, action or suit, and the Indemnifying Party may compromise or settle the
same, provided that the Indemnifying Party shall give the Indemnified Party
advance written notice of any proposed compromise or settlement. The
Indemnifying Party shall permit the Indemnified Party to participate in the
defense of any such action, suit or proceeding through counsel chosen by the
Indemnified Party, provided that the fees and expenses of such counsel shall
be borne by the Indemnified Party. If the Indemnifying Party undertakes to
conduct and control the conduct and settlement of such action or suit (i) the
Indemnifying Party shall not, without the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld or delayed,
permit to exist any Security Interest upon any assets of the Indemnified Party,
the Company, or the Buyer; (ii) the Indemnifying Party shall not consent to any
settlement that does not include as an unconditional term thereof the giving of
a complete release from Liability with respect to such action or suit to the
Indemnified Party; and (iii) the Indemnifying Party shall not consent to any
settlement for other than money damages without the prior written consent of
the Indemnified Party, which consent shall not be unreasonably withheld or
delayed. To the extent the Indemnifying Party elects not to defend such
proceeding (and the Indemnifying Party hereby agrees to give prompt notice to
such decision to the Indemnified Party) and the Indemnified Party defends
against such proceeding or otherwise deals with such proceeding, the Indemnified
Party may retain counsel and control, defend against, negotiate, settle or
otherwise deal with such proceeding, action or suit. The reasonable out-of-
pocket fees, costs, and expenses of the Indemnified Party in so dealing
with such proceeding, action or suit shall be included in the indemnification
obligations of the Indemnifying Party.
IX.6 Intentionally left blank.
IX.7 Limitations of Indemnification. Notwithstanding the foregoing provisions
of this Article IX:
IX.7.1 Survival Period. No claim for indemnification shall be brought after
the second anniversary of the Closing Date, except for indemnification claims
arising out of breaches of the representations and warranties set forth in
Sections 3.1, 3.2, 3.4, 4.1, 4.2, 4.3, 4.4, 4.11, 4.13 and/or 4.26, which
shall extend until the expiration of the applicable statute or period of
limitations (the "Survival Period"). Anything to the contrary notwithstanding,
the Survival Period shall be extended automatically to include any time period
necessary to resolve a written claim for indemnification that was made before
the expiration of the Survival Period but not resolved prior to its expiration,
and any such extension shall apply only as to claims asserted and not so
resolved within the Survival Period. Liabilities for any such items shall
continue until such claims shall have been finally settled, decided or
adjudicated.
IX.7.2 Exception. The provisions of Section 9.7.1 shall not apply to any
right of or to any indemnification arising out of, related to or in connection
with (i) the breach of any representation or warranty in Section 3.3; (ii)
any intentional or fraudulent misrepresentation; or (iii) any breach by the
Seller of any of his covenant not to compete obligations in his Employment
Agreement during the term of such covenant not to compete.
IX.7.3 Amount Limit. Notwithstanding anything to the contrary in this
Agreement (i) in no event shall the liability of any party relating to
the transactions contemplated by this Agreement exceed in the aggregate
$1,800,000, and (ii) no party shall be entitled to make a claim for
indemnification under this Article IX or otherwise seek or obtain monetary
damages from the other party unless and until the aggregate Damages suffered
or incurred by that party exceed (other than Damages described in Section
9.7.3(i) or 9.7.3(ii)) $75,000; provided, however, that such $75,000 "basket"
shall not apply to (i) claims for indemnification based upon or arising out
of any breach or nonperformance (partial or total) of any covenant or agreement
of the Seller or the Buyer hereunder or (ii) claims for indemnification based
upon or arising out of a breach of the representations or warranties in Section
3.3 above or for Damages incurred as a result of any claims asserted by
Bushinghall Limited, Byron Preiss Multimedia Company, Inc., or any of their
successors or Affiliates related in any way to the Seller's sale of shares of
Capital Stock to Byron Preiss Multimedia Company, Inc. or the foreclosure or
re-acquisition of such Capital Stock by the Seller. Furthermore, with respect
to such $75,000 "basket", if the aggregate amount of Damages suffered by any
party exceeds $75,000, then such party shall be entitled to indemnification
to the full extent of his or its Damages.
IX.8 Other Indemnification Provisions. The foregoing indemnification and
recoupment provisions are in addition to, and not in derogation of, any
statutory, equitable or common law remedy any party may have for breach of
representation, warranty or covenant.
IX.9 No Liability or Contribution by the Company. Except insofar as the
Company maintains insurance coverage therefor, the Seller hereby agrees
that he will not make any claim for indemnification or contribution against the
Company by reason of the fact that he was a director, officer, employee or
agent of the Company or was serving at the request of the Company as a partner,
trustee, director, officer, employee or agent of another entity (whether such
claim is for judgments, damages, penalties, fines, costs, amounts paid in
settlement, losses, expenses or otherwise and whether such claim is pursuant
to any statute, charter document, bylaw, agreement or otherwise) with respect
to any action, suit, proceeding, complaint, claim, or demand brought by
the Buyer against the Seller (whether such action, suit, proceeding, complaint,
claim or demand is pursuant to this Agreement, applicable law or otherwise).
ARTICLE X
[Intentionally Omitted]
ARTICLE XI
MISCELLANEOUS
XI.1 Press Releases and Public Announcements. The Seller shall not, and the
Seller shall not permit or cause the Company to, make any press release or
other public disclosure of this transaction without the prior written consent
of the Buyer. Without the prior written consent of the Seller, the Buyer shall
not, prior to the Closing, make any press release or other public disclosure of
this transaction; provided, however, that nothing contained in this Section
11.1 shall prohibit the Buyer from issuing a press release or making other
disclosure of the transactions contemplated by this Agreement if required to
do so by applicable Law.
XI.2 Entire Agreement. This Agreement (including the documents referred to
herein) and the Ancillary Agreements constitute the entire agreement between
the parties and supersedes any prior understandings, agreements, or
representations by or between the parties hereto, written or oral, to the
extent they related in any way to the subject matter hereof, including,
without limitation, that certain letter agreement, dated October 25, 1999.
This Agreement is not intended to have any legal effect whatsoever, or to be
a legally binding agreement or any evidence thereof, until it has been signed
by all parties hereto.
XI.3 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties named herein and their respective
successors and permitted assigns. No party may assign either this Agreement or
any of his or its rights, interests, or obligations hereunder without the prior
written approval of the other parties hereto; provided, however, that
the Buyer may, without limiting its Liabilities hereunder, (i) assign any or
all of its rights and interests hereunder to one or more of its Affiliates,
or (ii) designate one or more of its Affiliates to perform its obligations
hereunder.
XI.4. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
XI.5 Notices. All notices, requests, demands, claims and other communications
hereunder shall be in writing. Any notice, request, demand, claim or other
communication hereunder shall be deemed duly given (i) if served personally,
on the day of such service; (ii) if mailed by certified or registered mail
(return receipt requested), on the third business day after mailing; (iii) if
transmitted by recognized overnight carrier, on the next business day after
tender to the carrier; or (iv) if transmitted by facsimile, on the date such
facsimile is confirmed to have been transmitted to the other party. Such
communications shall be sent to the following addresses:
If to the Seller:
Andrew K. Gardner
1656 Lark Lane
Cherry Hill, New Jersey 08003
COPY TO:
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, PA 19103-7599
ATTN.: Jeremy T. Rosenblum
If to the Buyer:
The American Education Corporation
ATTN.: Jeffrey E. Butler, Sr.
7506 N. Broadway Extension, St. 505
Oklahoma City, OK 73116
COPY TO:
Hartzog Conger & Cason
1600 Bank of Oklahoma Plaza
201 Robert S. Kerr Avenue
Oklahoma City, Oklahoma 73102
ATTENTION: Armand Paliotta
Any party may change the address to which notices, requests, demands, claims
and other communications hereunder are to be delivered by giving the other
parties notice in the manner herein set forth.
XI.6 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF OKLAHOMA WITHOUT GIVING
EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE
THE APPLICATION OF THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF
OKLAHOMA.
XI.7 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by the Buyer and
the Seller. No waiver by any party of any default, misrepresentation or breach
of warranty or covenant hereunder, whether intentional or not, shall be deemed
to extend to any prior or subsequent default, misrepresentation or breach of
warranty or covenant hereunder or affect in any way any rights arising by virtue
of any prior or subsequent such occurrence.
XI.8 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
XI.9 Expenses. Each of the parties hereto will bear his or its own costs and
expenses (including legal fees and expenses) incurred in connection with this
Agreement and the transactions contemplated hereby. The Seller covenants that
the Company has not borne and will not bear any of the Seller's costs and
expenses (including any of its legal fees and expenses) in connection with
this Agreement or any of the transactions contemplated hereby; provided,
however, that the Company has incurred no more than $7,500 of fees and expenses
required in connection with the preparation of the December 31, 1998 audited
financial statements, which expenses shall be borne by the Company.
XI.10 Construction. The parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. All pronouns and any variations thereof shall
be deemed to refer to the masculine, feminine or neuter gender thereof or to
the plurals of each, as the identity of the person or persons or the context
may require. The descriptive headings contained in this Agreement are for
reference purposes only and are not intended to describe, interpret, define
or limit the scope, extent or intent of this Agreement or any provision
contained herein. The parties intend that each representation, warranty and
covenant contained herein shall have independent significance. If any party
has breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or covenant
relating to the same subject matter (regardless of the relative levels of
specificity) which the party has not breached shall not detract from or mitigate
the fact that the party is in breach of the first representation, warranty or
covenant.
XI.11 Incorporation of Exhibits and Disclosure Schedule. The Exhibits
identified in this Agreement and the Disclosure Schedule are incorporated
herein by reference and made a part hereof.
XI.12 Arbitration Expenses. The arbitrators appointed pursuant to the
procedures set forth in Exhibit "F" hereto shall have the power to assess to
either party or to apportion between the parties any and all fees and expenses
incurred in connection with an Arbitration including, without limitation,
reasonable attorneys' fees.
XI.13 Negation of Third-Party Beneficiaries. Nothing contained in this
Agreement is intended to confer upon any Person, other than the parties hereto,
the Company and their respective successors and permitted assigns, any rights
or remedies under or by reason of this Agreement, nor is anything in this
Agreement intended to relieve or discharge any obligations or Liability of any
third Person to any party to this Agreement.
XI.14 Specific Performance. Each of the parties acknowledges and agrees that
the other party may be damaged irreparably in the event any of the provisions
of this Agreement are not performed in accordance with their specific terms
or otherwise are breached. Accordingly, each of the parties agrees that the
other party shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Agreement and to enforce specifically this
Agreement and the terms and provisions hereof, in addition to any other
remedy to which it may be entitled, at law or in equity.
XI.15 Arbitration. Any claim, controversy or dispute arising out or relating
to this Agreement or any interpretation or asserted breach thereof or
performance thereunder, including without limitation any dispute concerning
the scope of this arbitration provision, shall be settled by submission to
final, binding and non-appealable arbitration ("Arbitration") for determination,
without any right by any party to a trial de novo in a court of competent
jurisdiction or a jury verdict. The Arbitration and all pre-hearing, hearing,
post-hearing arbitration procedures, including those for disclosure and
challenge, shall be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association, as supplemented by the procedures
set forth in Exhibit "F" hereto.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first above written.
BUYER:
THE AMERICAN EDUCATION CORPORATION,
a Colorado corporation
By: Jeffrey E. Butler, Sr.,
President/Chief Executive Officer
SELLER: Andrew K. Gardner
SCHEDULE 1
"Active Status Personnel" has the meaning set forth in Section 4.13(e).
"AEC Stock" means the Buyer's restricted common stock, par value $0.025 per
share.
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Ancillary Agreements" means all agreements (including the Employment
Agreement and the Escrow Agreement), certificates and other instruments
delivered or given pursuant to this Agreement.
"Arbitration" has the meaning set forth in Section 11.15.
"Authorization" has the meaning set forth in Section 4.28 above.
"Business" means the production of educational, computer-based training,
tutorial and testing programs and software.
"Buyer" means The American Education Corporation, a Colorado corporation, and
any of its successors and permitted assigns.
"Buyer Indemnitees" has the meaning set forth in Section 9.2 above.
"Capital Stock" means any and all shares, interests, participation or other
equivalents (however designated) representing ownership (whether direct,
indirect or contingent) of the Company including, without limitation, the
common stock, no par value, and any other class of capital stock of the
Company.
"Closing" has the meaning set forth in Section 2.4 above.
"Closing Date" has the meaning set forth in Section 2.4 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means Dolphin, Inc., a New Jersey corporation.
"Confidential Information" means any information concerning the Business and
affairs of the Company that is not already generally available to the public.
"Damages" has the meaning set forth in Section 9.2.
"Determination Date" shall mean the fifth trading day immediately preceding
the Closing Date (or such shorter periods as the parties may agree) for
purposes of Section 2.2 and shall mean the fifth trading day prior to the day
the Escrow Agent delivers Escrow Shares under Section 4 of the Escrow
Agreement.
"Disclosure Schedule" has the meaning set forth in Article IV above.
"Employee Benefit Plans" has the meaning set forth in Section 4.24.
"Employment Agreement" means the Employment Agreement to be entered into by
the Company and the Seller at the Closing in form and substance as set
forth in Exhibit "C".
"Environmental, Health and Safety Laws" means the Comprehensive Environmental
Response, Compensation, and Liability Act of 1980, the Resource Conservation
and Recovery Act of 1976, the Occupational Safety and Health Act of 1970, the
Federal Water Pollution Control Act, the Safe Drinking Water Act, the Toxic
Substances Control Act, and the Clean Air Act, each as amended, together with
all other Laws concerning pollution or protection of the environment, public
health and safety, or employee health and safety, including Laws relating to
emissions, discharges, releases, or threatened releases of pollutants,
contaminants, or chemical, industrial, hazardous, or toxic materials or
wastes into ambient air, surface water, ground water, or lands or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, or chemical,
industrial, hazardous, or toxic materials or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"ERISA Affiliate" means, as of the Closing Date, any subsidiary, trade or
business that is a member of a "controlled group" of which the Company is a
part or under "common control" with the Company (within the meaning of
Sections 414(b) and (c) of the Code).
"ERISA Plan" has the meaning set forth in Section 4.24.
"Escrow Agent" and "Escrow Agreement" have the respective meanings set forth
in Section 2.3.1.
"Escrow Cash" has the meaning set forth in Section 2.2.
"Escrow Shares" shall mean the AEC Stock deposited into Escrow pursuant to
Section 2.3 hereof.
"Financial Statements" has the meaning set forth in Section 4.7 above.
"Finders Fee" has the meaning set forth in Section 2.2.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time, applied on a basis consistent with the basis on
which the Financial Statements were prepared.
"Indemnified Party" has the meaning set forth in Section 9.4.
"Indemnifying Party" has the meaning set forth in Section 9.4.
"Intellectual Property" means the Owned Intellectual Property and the
Licensed Intellectual Property.
"Knowledge" - an individual will be deemed to have "Knowledge" of a
particular fact or other matter if (a) such individual is actually aware of
such fact or other matter; or (b) a prudent individual could be expected to
discover or otherwise become aware of such fact or matter in the course of
conducting a reasonable inquiry for a transaction of this nature. A Person
other than an individual will be deemed to have "Knowledge" of a particular
fact or other matter if any individual who is serving, or who has at any time
served, as a director, officer, partner, executor, or trustee of such Person
(or in any similar capacity) has, or at any time had, Knowledge of such fact
or other matter.
"Laws" means any and all federal, state, local and foreign laws including all
statutes, codes, ordinances, decrees, rules, regulations, municipal bylaws,
judicial or arbitral or administrative or ministerial or departmental or
regulatory judgments, orders, decisions, rulings or awards, policies,
guidelines, and general principles of common and civil law and equity, binding
on or affecting the Person referred to in the context in which the word is used.
"Lease" has the meaning set forth in Section 4.12.
"Leased Property" has the meaning set forth in Section 4.12.
"Liability" means any liability (whether known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Licensed Intellectual Property" means all programs developed within the past
year by the Company for third parties, which programs the Company has either
licensed to such third parties and/or developed as work made for hire.
"Line of Credit" has the meaning set forth in Section 4.23 above.
"Most Recent Balance Sheet" means the balance sheet contained within the
Most Recent Financial Statements.
"Most Recent Financial Statements" has the meaning set forth in Section 4.7
above.
"Most Recent Fiscal Month End" has the meaning set forth in Section 4.7 above.
"Most Recent Fiscal Year End" has the meaning set forth in Section 4.7 above.
"Non ERISA Plan" has the meaning set forth in Section 4.24.
"Ordinary Course of Business" - an action taken by a Person will be deemed to
have been taken in the "Ordinary Course of Business" only if:
(a) such action is consistent with the past practices of such Person and is
taken in the ordinary course of the normal day-to-day operations of such
Person;
(b) such action is not required to be authorized by the board of directors
of such Person (or by any Person or group of Persons exercising similar
authority); and
(c) such action is similar in nature and magnitude to actions customarily
taken, without any authorization by the board of directors (or by any Person
or group of Persons exercising similar authority), in the ordinary course of
the normal day-to-day operations of other Persons that in the same line of
business as such Person.
"Owned Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures, together
with all reissuances, continuations, continuations-in-part, revisions,
extensions, and reexaminations thereof; (b) all trademarks, service marks,
domain names, trade dress, logos, trade names, and corporate names, together
with all translations, adaptations, derivations, and combinations thereof and
including all goodwill associated therewith, and all applications,
registrations, and renewals in connection therewith; (c) all copyrightable
works, all copyrights, and all applications, registrations, and renewals in
connection therewith; (d) all mask works and all applications, registrations,
and renewals in connection therewith; (e) all trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier lists,
pricing and cost information, and business and marketing plans and proposals);
(f) all tools, libraries, utilities and computer software programs (including
data and related documentation) in both source and object code form; (g) all
other proprietary rights; and (h) all copies and tangible embodiments thereof
(in whatever form or medium).
"PBGC" means the Pearson Benefit Guaranty Corporation.
"Person" means an individual, a partnership, a corporation, a limited
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization, a governmental entity (or any
department, agency, or political subdivision thereof) or any other entity of
any kind.
"Purchase Price" has the meaning set forth in Section 2.2.
"Recipients" has the meaning set forth in Section 4.13(g).
"SEC" has the meaning set forth in Section 4.36.
"SEC Documents" has the meaning set forth in Section 4.36.
"Securities Act" has the meaning set forth in Section 4.36.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Security Interest" means any mortgage, pledge, lien (including environmental
and tax liens), encumbrance, deed of trust, charge, or other security interest.
"Seller Indemnitee" has the meaning set forth in Section 9.3 above.
"Seller" means Andrew K. Gardner.
"Share Price" shall mean the average of the bid and asked price (adjusted for
any stock splits or other reclassifications during the applicable time period)
for the AEC Stock for each of the ten (10) consecutive trading days ending on
the applicable Determination Date.
"Shares" means any and all issued and outstanding shares of the common stock,
no par value, of the Company.
"Survival Period" has the meaning set forth in Section 9.7.1.
"Systems" has the meaning set forth in Section 4.34.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code Section 59A),
customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or
add-on minimum, estimated, or other tax of any kind whatsoever, including
any interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third Party Intellectual Property" has the meaning set forth in Section 4.13.
