<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934 for the quarterly period ended December 31, 1995
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from to .
----- -----
Commission file number: 0-17154
SIERRA ON-LINE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0164293
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3380 - 146TH PLACE S.E., SUITE 300, BELLEVUE, WA 98007
(Address of principal executive offices) (Zip Code)
(206) 649-9800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports); and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of the Registrant's common stock outstanding as of January
31, 1996 was 20,003,982
<PAGE> 2
SIERRA ON-LINE, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 1995
and March 31, 1995 . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations --
three and nine months ended December 31, 1995 and 1994 . . . 4
Consolidated Statements of Cash Flows --
nine months ended December 31, 1995 and 1994 . . . . . . . . 5
Notes to Consolidated Financial Statements --
nine months ended December 31, 1995 and 1994 . . . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . 8
PART II. OTHER INFORMATION
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . 10
Item 6. Exhibits and Reports of Form 8-K . . . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
December 31, March 31,
1995 1995
------------ ----------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,861 $ 50,186
Marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . . 50,196 50,573
Accounts receivable, net of allowances of $15,988 and $7,265 . . . . . . . . . . 56,809 12,984
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,081 4,903
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,166 1,777
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 670
Other current assets (including $792 receivable from related parties on March 31) 4,510 4,262
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,623 125,355
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . . . 11,522 9,068
SOFTWARE DEVELOPMENT COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 263 1,048
GOODWILL, net of accumulated amortization of $4,026 and $2,871 . . . . . . . . . . . . 9,728 6,498
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,559 1,522
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,461 1,863
-------- --------
$182,156 $145,354
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,042 $ 6,127
Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . . . 4,799 4,118
Accrued incentive payments . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 1,562
Notes payable (including $2,430 payable to related parties on December 31) . . . . 3,301 384
Royalties payable (including $429 and $633 payable to a related party) . . . . . . 4,647 2,938
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,789 1,261
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 1,160
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,891 308
Other accrued expenses (including $247 payable to related parties on March 31) . 4,764 4,336
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 43,638 22,194
ADVANCES UNDER PUBLISHING AGREEMENT AND OTHER LIABILITIES . . . . . . . . . . . . . . . 1,010 5,907
CONVERTIBLE DEBT, net of unamortized discount and issuance costs of $615 and $1,066 . 23,360 34,634
MINORITY INTEREST IN SIERRA PIONEER JOINT VENTURE . . . . . . . . . . . . . . . . . . 1,295 ---
STOCKHOLDERS' EQUITY:
Preferred stock, par value of $.01 per share;
1,000,000 shares authorized; none outstanding . . . . . . . . . . . . . . . . --- ---
Common stock and paid in capital, par value $.01 per share;
40,000,000 shares authorized; 20,072,317 and 18,726,519 shares
issued as of December 31, 1995 and March 31, 1995, respectively . . . . . . . 86,492 70,052
Retained earnings, including net unrealized holding gain . . . . . . . . . . . . 27,147 12,797
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . (437) 119
-------- --------
113,202 82,968
Less common stock in treasury, 94,154 shares, at cost . . . . . . . . . . . . . . 349 349
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 112,853 82,619
-------- --------
$182,156 $145,354
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
------------------ --------------------
1995 1994 1995 1994
------- ------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Net sales . . . . . . . . . . . . . . . . . . . $62,702 $41,126 $120,953 $74,334
Other . . . . . . . . . . . . . . . . . . . . . 518 87 1,661 1,395
------- ------- -------- -------
63,220 41,213 122,614 75,729
------- ------- -------- -------
OPERATING EXPENSES:
Manufacturing costs . . . . . . . . . . . . . 11,915 8,310 24,668 16,242
Amortization of software development costs . . . 285 5,195 785 9,183
Royalties . . . . . . . . . . . . . . . . . . . 5,452 2,835 9,713 5,698
Selling, general and administrative . . . . . . 18,583 10,581 37,439 25,157
Research and development . . . . . . . . . . . . 9,771 6,105 26,816 15,625
------- ------- -------- -------
46,006 33,026 99,421 71,905
------- ------- -------- -------
INCOME FROM OPERATIONS . . . . . . . . . . . . . . . 17,214 8,187 23,193 3,824
------- ------- -------- -------
OTHER INCOME (EXPENSE):
Gain on sale of The ImagiNation Network . . . . --- 19,739 --- 19,739
Equity in loss from The ImagiNation Network . . --- --- --- (1,990)
Shareholder litigation costs . . . . . . . . . --- (1,500) --- (1,500)
Interest expense . . . . . . . . . . . . . . . (365) (2,670) (2,334) (3,575)
Interest income . . . . . . . . . . . . . . . 1,175 890 3,972 2,310
Amortization of goodwill . . . . . . . . . . . . (475) (301) (1,376) (905)
------- ------- -------- -------
(335) 16,158 (262) 14,079
------- ------- -------- -------
INCOME BEFORE INCOME TAXES . . . . . . . . . . . . . 17,549 24,345 23,455 17,903
INCOME TAXES:
Income tax provision . . . . . . . . . . . . . 6,210 6,549 7,925 5,631
Change in valuation allowance . . . . . . . . . (945) --- (1,215) ---
------- ------- -------- -------
NET INCOME . . . . . . . . . . . . . . . . . . . . . $12,284 $17,796 $ 16,745 $12,272
======= ======= ======== =======
NET INCOME PER SHARE:
Primary . . . . . . . . . . . . . . . $ 0.58 $ 0.97 $ 0.80 $ 0.68
Fully diluted . . . . . . . . . . . . . . . $ 0.55 $ 0.83 $ 0.77 $ 0.63
Weighted average shares outstanding:
Primary . . . . . . . . . . . . . . . 21,298 18,417 20,873 18,170
Fully diluted . . . . . . . . . . . . . . . 23,011 22,221 22,865 22,130
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
December 31,
-------------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,745 $ 12,272
Reconciliation to net cash provided by (used for) operating activities:
Depreciation and leasehold amortization . . . . . . . . . . . . . . . 3,148 2,883
Amortization of intangible assets and issuance costs . . . . . . . . 2,161 10,551
Gain on sale of The ImagiNation Network . . . . . . . . . . . . . . . --- (19,739)
Loss from The ImagiNation Network . . . . . . . . . . . . . . . . . . --- 1,990
Loss from Sierra Pioneer Joint Venture . . . . . . . . . . . . . . . 262 ---
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . 1,472 774
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . (2,424) (7,200)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (472) 364
Cash provided (used) by changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . (45,297) (12,717)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,178) (758)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . (2,946) (915)
Software development costs . . . . . . . . . . . . . . . . . . . --- (5,037)
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,100) (1,023)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . 9,915 2,402
Royalties payable . . . . . . . . . . . . . . . . . . . . . . . . 1,710 1,680
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 1,528 5,975
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . 3,269 5,741
Income taxes refundable/payable . . . . . . . . . . . . . . . . . 8,534 13,523
Advances under publishing agreement and other liabilities . . . . (2,199) 1,093
-------- --------
Net cash provided (used) by operating activities . . . . . . . . . . . (10,872) 11,859
INVESTING ACTIVITIES:
Proceeds from sale of The ImagiNation Network . . . . . . . . . . . . . . --- 19,739
Proceeds from matured or retired marketable investment securities . . . . 74,154 35,442
Purchase of marketable investment securities . . . . . . . . . . . . . . . (73,777) (40,216)
Net purchase of property, plant, and equipment . . . . . . . . . . . . . . (5,566) (3,070)
Loan to The ImagiNation Network . . . . . . . . . . . . . . . . . . . . . --- (2,895)
Incentive payments to subsidiaries . . . . . . . . . . . . . . . . . . . (1,562) (1,620)
Investment in Sierra Pioneer Joint Venture . . . . . . . . . . . . . . . (1,493) ---
-------- --------
Net cash used by investing activities . . . . . . . . . . . . . . . . (8,244) 7,380
FINANCING ACTIVITIES:
Net proceeds from convertible note offering . . . . . . . . . . . . . . . --- 48,250
Proceeds from exercise of options and warrants . . . . . . . . . . . . . . 3,780 1,806
Principal payment on note borrowings and lease obligations . . . . . . . . --- 55
-------- --------
Net cash provided by financing activities . . . . . . . . . . . . . . 3,780 50,111
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . (15,336) 69,350
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . . . . 11 (44)
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,186 3,281
-------- --------
END OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,861 $ 72,587
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE> 6
SIERRA ON-LINE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
NOTE 1 - BASIS OF PRESENTATION AND ACCOUNTING POLICIES
The accompanying financial statements of Sierra On-Line, Inc. (the
"Company") should be read in conjunction with Item 5 in this Form 10-Q. The
financial statements included in Item 5 of the Company's Form 10-Q for the
three months ended June 30, 1995, and in the Company's Form 10-K for the year
ended March 31, 1995, and the related management discussion and analysis, have
been superseded by the financial information included in Item 5 of this Form
10-Q.
The unaudited interim financial information, as of and for the periods
ended December 31, 1995 and 1994 was prepared in a manner consistent with the
audited financial statements and pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
accompanying interim financial statements reflect all adjustments which are of
a normal recurring nature and necessary to present fairly the financial
position, results of operations and cash flows for the periods presented. The
results of operations for the three and nine months ended December 31, 1995 are
not necessarily indicative of the results to be expected for the entire year.
NOTE 2 - BUSINESS COMBINATIONS
On May 31, 1995 the Company merged with The Pixellite Group
("Pixellite"), a developer of personal printing software, in exchange for
245,779 shares of Sierra's Common Stock. On June 20, 1995 the Company also
merged with Software Inspiration, Ltd. ("Inspiration"), a developer of
strategy games, in exchange for 730,352 shares of Sierra's Common Stock.
In July the Company merged with Green Thumb Software and in September
merged with Arion Software in exchange for 87,762 and 60,196 shares of Sierra
Common Stock, respectively. Green Thumb is a developer of landscape design
products and Arion is a developer of cooking software.
On November 30, 1995 the Company merged with Papyrus Design Group
("Papyrus"), developers of NASCAR Racing and Indy Car Racing, in exchange for
approximately 1.2 million shares of Sierra's Common Stock.
These mergers have been accounted for as poolings-of-interests. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the unaudited financial information presented herein
reflects the combined results of Sierra, Pixellite, Inspiration and Papyrus for
all periods presented.
The financial statements have not been restated for the Green Thumb
and Arion mergers as these companies did not impact the Company's operations
significantly.
All fees and expenses related to the mergers described above have been
expensed as required under the pooling-of-interest accounting method. These
expenses have been reflected in the consolidated statement of operations of the
Company for the three and nine months ended December 31, 1995. Such fees and
expenses total approximately $1.3 million, and $1.7 million, respectively, for
the three and nine month periods, and include legal, accounting and finders
fees.
The following summarizes amounts previously reported by Sierra prior
to the transaction for the three and nine months ended December 31, 1994 (in
thousands, except per share data): Three months ended December 31, 1994:
<TABLE>
<CAPTION>
Net Income
(Primary Earnings)
Revenues Net Income Per Share
--------- ---------- ---------
<S> <C> <C> <C>
Sierra . . . . . . . . . . . . . . . . $35,117 $16,548 $ 1.03
Pixellite, Inspiration and Papyrus . . 6,096 1,248 (0.06)
------- ------- ------
Combined . . . . . . . . . . . . . . . $41,213 $17,796 $ 0.97
======= ======= ======
</TABLE>
Nine months ended December 31, 1994:
<TABLE>
<CAPTION>
Net Income
(Primary Earnings)
Revenues Net Income Per Share
-------- ---------- ---------
<S> <C> <C> <C>
Sierra . . . . . . . . . . . . . . . $65,170 $11,676 $ 0.74
Pixellite, Inspiration and Papyrus . . 10,559 596 (0.06)
------- ------- ------
Combined . . . . . . . . . . . . . . . $75,729 $12,272 $ 0.68
======= ======= ======
</TABLE>
6
<PAGE> 7
NOTE 3 - JOINT VENTURE
In July 1995 the Company entered into a joint venture agreement with
Pioneer Electronic Corporation ("Pioneer") to market and develop entertainment
and other software titles for the Japanese market. Under this agreement Sierra
On-Line received 51% ownership of the Sierra Pioneer Joint Venture in exchange
for a capital contribution of approximately $1.5 million. Sierra On-Line also
agreed to contribute up to an additional $3.7 million, or 367 million yen, in
additional capital in proportion to its 51% ownership interest, subject to
certain conditions. The Company also licensed to the joint venture the right
to publish and distribute in Japan and Asia all of the Company's software
products in exchange for quarterly royalty payments. The results of operations
and financial position of the Sierra Pioneer Joint Venture are consolidated
with the financial statements of Sierra On- Line.
NOTE 4 - NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number
of common shares outstanding during the period as adjusted for the shares
issued in the mergers described in Note 2 and after consideration of the
dilutive effect, if any, of stock options granted using the treasury stock
method. In addition, conversion of the Company's 6-1/2% Convertible
Subordinated Notes are included in fully diluted income per share using the
if-converted method when such securities are dilutive.
NOTE 5 - INVENTORIES
<TABLE>
<CAPTION>
Inventories consist of the following: (Dollars in thousands)
December 31, March 31,
1995 1995
------------ ---------
<S> <C> <C>
Raw materials . . . . . . . $4,127 $2,841
Work in progress . . . . . . --- 65
Finished goods . . . . . . . 2,954 1,997
------ ------
$7,081 $4,903
====== ======
</TABLE>
NOTE 6 - FEDERAL INCOME TAXES - CHANGE IN VALUATION ALLOWANCE
The valuation allowance was decreased $945,000 during the three months
ended December 31, 1995 and $1,215,000 during the nine months ended December
31, 1995 as the result of the Company being able to utilize previously
allowanced credits.
NOTE 7 - NEW ACCOUNTING POLICIES
In October 1995, the Financial Accounting Standards Board issued
Statement No. 123, Accounting for Stock-Based Compensation. This pronouncement
establishes the accounting and reporting standards for stock-based employee
compensation plans, including: stock purchase plans, stock options, and stock
appreciation rights. This new standard defines a fair value-based method of
accounting for these equity instruments. This method measures compensation
cost based on the value of the award and recognizes that cost over the service
period. Companies may elect to adopt this standard or to continue accounting
for these types of equity instrument under current guidance, APB Opinion No.
25, Accounting for Stock Issued to Employees. Companies which elect to
continue using the rules of Opinion 25 must make pro forma disclosures of net
income and earnings per share as if this new statement had been applied. This
new standard is required for fiscal years beginning after December 15, 1995.
The Company is in the process of evaluating this statement and its
impact on the Company's financial condition and results of operations.
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This management's discussion and analysis and the accompanying
financial statements should be read in conjunction with Item 5 in this Form
10-Q. The financial statements included in Item 5 of the Company's Form 10-Q
for the three months ended June 30, 1995, and in the Company's Form 10-K for
the year ended March 31, 1995, and the related management discussion and
analysis, have been superseded by the financial information included in Item 5
of this Form 10-Q.
On May 31, 1995 the Company merged with Pixellite, a developer of
personal printing software, in exchange for 245,779 shares of Sierra's Common
Stock. On June 20, 1995 the Company also merged with Inspiration, a developer
of strategy games, in exchange for 730,352 shares of Sierra's Common Stock. In
July the Company merged with Green Thumb Software and in September merged with
Arion Software in exchange for 87,762 and 60,196 shares of Sierra Common Stock,
respectively. Green Thumb is a developer of landscape design products and
Arion is a developer of cooking software. On November 30, 1995 the Company
merged with Papyrus, developers of NASCAR Racing and Indy Car Racing, in
exchange for approximately 1.2 million shares of Sierra's Common Stock.
These mergers have been accounted for as poolings-of-interests. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the financial information presented herein reflects
the combined results of Sierra, Pixellite, Inspiration and Papyrus for all
periods presented. The financial statements have not been restated for the
Green Thumb and Arion mergers as these companies did not impact the Company's
operations significantly.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994
REVENUES: Net sales of $62,702,000 and total revenues of $63,220,000
for the current quarter represented increases of 52% and 53%, respectively,
compared to the same quarter in the prior year. International revenues
increased $8.9 million or approximately 86% over the $10.4 million in
international revenues for the comparable quarter of the prior year.
Due to the historically seasonal nature of the Company's business, the
quarter ending December 31, which includes the holiday shopping season,
typically has the highest sales volume of any fiscal quarter. In addition to
seasonality, consumer perception of the general economy, competition for retail
shelf space, and the success of the Company's most recent product releases,
among other factors, can have major impacts on sales volume.
For the quarter ended December 31, 1995, 47% of net sales was derived
from products released in the current quarter and 75% were from titles released
in the preceding 12 months. In the comparable prior year quarter, 64% of net
sales was derived from current quarter releases and 85% was from titles
released in the prior 12 months.
The following table sets forth the percentage of the Company's net
sales derived from software product categories for the two quarters indicated:
<TABLE>
<CAPTION>
Quarter Ended December 31,
----------------------------
1995 1994
----------- -----------
<S> <C> <C>
Category:
Adventure . . . . 43% 37%
Simulation . . . 11% 26%
Educational . . . 15% 9%
Action/Family . . 12% 6%
Sports . . . . . 18% 21%
Other . . . . . . 1% 1%
--- ----
100% 100%
==== ====
Net Sales . . . . . $62,702,000 $41,126,000
</TABLE>
OPERATING EXPENSES: Manufacturing costs decreased from 20% to 19% of
net sales due primarily to decreases in per unit media costs and increased
manufacturing efficiencies. Royalty costs increased from 7% to 9% of net sales
due primarily to higher royalty rates on certain titles resulting from the
increasing technological sophistication of the Company's products.
Selling, general and administrative expense increased $8.0 million to
$18.6 million, and from 26% to 29% of total revenues. Of this $8.0 million
increase, $4.4 million was due to increased sales and marketing expenses, $1.3
million was due to merger related costs, and $2.3 million represented increased
administrative expenses, due in part to the integration of acquired businesses.
8
<PAGE> 9
Research and development expense, which reflects total research and
development expenditures less capitalized software development costs, increased
$3.7 million, but remained constant at approximately 15% of revenues. After
excluding $1.1 million in capitalized software development costs in the prior
year quarter, development spending increased $2.6 million, or 37%. This
increase is primarily attributable to an increase in the number of development
personnel and to increased titles in development resulting from the Company's
recent acquisitions.
NINE MONTHS ENDED DECEMBER 31, 1995 AND 1994
REVENUES: For the nine months ended December 31, 1995, net sales
increased 62% to $121.0 million and total revenues increased 62% to $122.6
million when compared to the same period in the prior year. International
revenues increased $17.8 million, or approximately 98%, over the $17.9 million
in international revenues for the comparable prior year period.
OPERATING EXPENSES: Manufacturing costs for the nine month period
ended December 31, 1995 decreased from 22% to 20% of net sales. This decrease
was attributable primarily to lower per unit media costs and increased
manufacturing efficiencies.
Selling, general and administrative expense increased $12.3 million
but decreased from 33% to 31% of total revenues. This increase was
attributable primarily to increased spending on sales and marketing activities
and to merger related costs.
Research and development expense increased $11.2 million from 21% to
22% of total revenues, due primarily to a decrease in deferred development
costs of $5.0 million.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash, cash equivalents and
marketable investment securities aggregating approximately $85 million, a
decrease of $16 million from the balance at March 31, 1995.
The Company's working capital requirements are seasonal and are
primarily for accounts receivable. The Company's cash flow from operations for
the period was negative due primarily to an increase in net receivables of $45
million, a large portion of which occurred late in the third quarter. Net
receivables increased due to strong shipments of many of the Company's holiday
titles such as Phantasmagoria, NASCAR Racing, Police Quest 5: SWAT, Front Page
Sports: Football '96, Print Artist 3.0, The Lost Mind of Dr. Brain, and the
MasterCook series.
In the normal course of business the Company evaluates business
acquisition opportunities that will broaden its product selection for the home
consumer.
The Company believes its existing cash, cash equivalents and
marketable securities are sufficient to meet its current planned requirements
for the foreseeable future.
9
<PAGE> 10
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On May 31, 1995 the Company merged with Pixellite, a developer of
personal printing software, in exchange for 245,779 shares of Sierra's Common
Stock. On June 20, 1995 the Company also merged with Inspiration, a developer
of strategy games, in exchange for 730,352 shares of Sierra's Common Stock. In
July the Company merged with Green Thumb Software and in September merged with
Arion Software in exchange for 87,762 and 60,196 shares of Sierra Common Stock,
respectively. Green Thumb is a developer of landscape design products and
Arion is a developer of cooking software. On November 30, 1995 the Company
merged with Papyrus, developers of NASCAR Racing and Indy Car Racing, in
exchange for approximately 1.2 million shares of Sierra's Common Stock.
These mergers have been accounted for as poolings-of-interests. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the unaudited financial information presented herein
reflects the combined results of Sierra, Pixellite, Inspiration and Papyrus for
all periods presented. The financial statements have not been restated for the
Green Thumb and Arion mergers as these companies did not impact the Company's
operations significantly.
OVERVIEW
This management's discussion and analysis should be read in
conjunction with the audited financial statements appearing elsewhere in this
Item 5. The Company derives its revenues primarily from the sale of
entertainment and education software products. Substantially all of net sales,
ninety-five percent in fiscal 1995, represent product sold primarily through
large computer superstores, software specialty retail chains, wholesale clubs,
and mass merchandisers. The remainder represents income from licensing of
software products for software bundling arrangements. Other revenues consist
of income from the Company's 900 telephone number hintline and advertising
revenue from the Company's INTERAction! magazine.
Sales arrangements with retailers and mass merchandisers permit them
to exchange products or receive price protection under certain circumstances.
Net sales reflects allowances for estimated returns and exchanges and price
protection. During 1995, the Company increased direct distribution sales to
superstores and wholesale clubs and experienced an increase in average price
per unit through a movement in technology platform from disk-based to
CD-ROM-based sales. These changes have led to a disproportionate increase in
the reserve for sales returns and allowances, included in accounts receivable,
relative to net sales.
A majority of product development is done internally through employees
and independent contractors. The Company's average cost for developing a
product has continued to increase substantially each year due to the greater
number of more technologically sophisticated products being developed
simultaneously.
The Company typically owns all rights to contributions to products by
independent contractors under license or assignment agreements requiring the
payment of royalties by the Company. Aggregate royalty rates on the Company's
current principal software products generally range from approximately 1% to
20% of gross revenue derived from the product, less certain associated costs.
Royalties as a percentage of net sales were 4%, 6% and 8% in fiscal 1993, 1994
and 1995, respectively. As the Company develops more complex multimedia
products, such as CD-ROM-based products, it anticipates that royalty costs will
increase as a percentage of net sales.
SEASONALITY AND QUARTERLY RESULTS
The Company's revenues and earnings are highly seasonal due to
traditional consumer buying habits. The Company expects the historical trend
of realizing its highest revenues and earnings during the holiday shopping
season in the quarter ended December 31 and its seasonal lows in revenues and
earnings in the quarter ended June 30 to continue. The Company's quarterly
operating results may fluctuate throughout the year as a result of a variety of
additional factors, including delays in market acceptance, changes in platform
standards, the timing of the introduction of the Company's or its competitors'
products, the timing of orders for the Company's products and increases in
product returns. Because a majority of the unit sales for a particular product
typically occurs in the first several months after the product is introduced,
the Company's revenues may increase in a quarter in which a major product
introduction occurs and may decline in following quarters. The Company's
expenses are based, in part, on expected future revenues. A significant amount
of the Company's marketing, administrative, design and development expenses do
not vary in relation to revenues. As a result, if net revenues are below
expectations, the Company's operating results are likely to be materially and
adversely affected. During any given fiscal year, a substantial proportion of
the Company's gross sales is generated from titles introduced during that
fiscal year. During fiscal years 1993,
10
<PAGE> 11
1994, and 1995, sales of new titles represented 52%, 55%, and 69% of gross
sales, respectively. Over the next several years, the Company expects that an
increasing portion of its revenues will come from sales of simulation, action
and educational products, as well as new product lines. The Company believes
that the impact of inflation and changing prices has not had a significant
impact on income.
FOREIGN CURRENCY
The Company generates revenues from customers throughout the world,
maintains sales and representative offices in its major foreign markets and
holds certain deposits and accounts in foreign currencies. The majority of the
Company's foreign operations are conducted by its France and United Kingdom
subsidiaries in French Francs (the Franc) and British Pound Sterling (the
Pound). Foreign revenues, expenses, currency and other accounts can be
affected by foreign currency fluctuations. Revenues generally exceed expenses
and assets exceed liabilities in non-U.S. currencies.
For the fiscal year ended March 31, 1995, there was a weakening of the
U.S. Dollar in Europe which had the effect of increasing the dollar value of
net revenues denominated in these non-U.S. currencies. The Company estimates
that the weakening of the U.S. Dollar accounted for approximately $1.1 million
of the Company's consolidated net revenues and approximately $70,000 of the
consolidated net income for the fiscal year ended March 31, 1995. Foreign
currency denominated transactions and the respective fluctuations in foreign
currency in fiscal 1994 and 1993 did not have a significant impact on results
of operations.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994
REVENUES
Net sales of $95.8 million and total revenues of $98.9 million for
fiscal year 1995 represented increases of 36% and 34%, respectively, over the
prior fiscal year. European net sales were $18.0 million for fiscal 1995
compared to $9.8 million in the prior year. Sales outside the United States
and Europe increased $1.3 million primarily due to growth in Asia.
During fiscal 1995, 23 new products were released compared to 39 new
product releases in the prior year. In addition, four collections of series
titles were released in fiscal 1995. In fiscal 1995, 69% of gross software
sales were derived from titles released in that fiscal year while 55% of
gross software sales were derived from current releases in fiscal 1994. The
following table provides a comparison of net sales by category:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Category:
Adventure . . . . . . . 32% 45%
Simulation/Strategy . . 30% 20%
Home and Education . . . 13% 13%
Action/Family . . . . . 9% 8%
Sports . . . . . . . . . 13% 6%
Other . . . . . . . . . 3% 8%
--- ---
100% 100%
=== ===
Net Sales . . . . . . . . . $95,821,000 $70,712,000
</TABLE>
Other revenues include income from the Company's telephone hint line
and advertising. These revenues decreased from $2.4 million to $2.1 million.
11
<PAGE> 12
OPERATING EXPENSES
Manufacturing costs increased $1.6 million, but decreased from 28% to
23% of net sales over the prior fiscal year. This decrease was due primarily
to decreases in media costs, increased manufacturing efficiencies, and the
shift from disk-based to CD-based products.
Amortization of software development costs increased $1.3 million, but
decreased as a percentage of net sales from 12% to 10%. The increase in
software amortization costs was the result of a corresponding increase in
revenue derived from current year releases.
Royalty costs increased $3.4 million, from 6% to 8% of net sales, due
to increased sales of sports titles, which have higher royalties and
increased payments to authors due to the increasing complexity of developing
multimedia products.
Selling, general and administrative ("SG&A") expense increased $7.1
million, but decreased from 35% to 33% of total revenues. Of this increase,
$3.4 million was attributable to increased spending on sales and marketing
activities, and $1 million was due to increased spending on technical and
customer support. The amount of SG&A expense attributable to the Company's
European operations increased $3.3 million but was partially offset by the
$2.6 million decrease in SG&A expense attributable to INN for the period
through July 1993 when INN was consolidated.
Research and development expense, which reflects total research and
development expenditures less capitalized software development costs,
increased $4.3 million but decreased from 24% to 22% of total revenues.
NON-OPERATING INCOME OR EXPENSE
The Company recorded a gain of $19.7 million as a result of the sale
of its remaining equity ownership interest in INN to AT&T on December 19,
1994.
In December 1994 the Company also recorded $1.5 million in shareholder
litigation costs in settlement of a securities class action lawsuit filed in
December 1992. The Company determined that this settlement was in the best
interests of its shareholders by obviating the burden and expense of the
litigation process even though it believed that it had good defenses to the
claims asserted and that the Company would have prevailed at trial.
Amortization of goodwill increased approximately $0.5 million due to
approximately $1.6 million in accrued incentive payments attributable to
prior acquisitions being added to goodwill at March 31, 1994.
FISCAL YEAR ENDED MARCH 31, 1994 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1993
REVENUES
Net sales of $70.7 million and total revenues of $73.1 million for the
fiscal year ended March 31, 1994 represented increases of 29% and 30%,
respectively, over the prior fiscal year. European net sales were $9.8
million for the current year compared to $5.2 million for fiscal 1993. The
increase in European net sales was primarily attributable to the $2.7 million
in net sales from Coktel Vision, the Company's French subsidiary acquired in
October 1993.
During fiscal 1994, 39 new products were released compared to 22 new
product releases in the prior year. In fiscal 1994, 55% of gross software
sales were derived from titles released in that fiscal year while in fiscal
1993 52% of gross software sales were derived from current releases.
Revenues for fiscal 1994 attributable to INN and included in the Company's
consolidated financial statements were $2.6 million compared to $2.8 million
in fiscal 1993.
Other revenues increased $1.0 million over the prior year total of
$1.4 million due primarily to increased hint line revenue.
OPERATING EXPENSE
Manufacturing costs decreased from 33% to 28% of net sales due
primarily to decreases in disk and CD costs and to increases in manufacturing
efficiencies. Coktel's manufacturing costs in fiscal 1994 were $0.8 million,
or 31% of associated net sales.
Amortization of software development costs decreased from $11.6
million in fiscal 1993 to $8.4 million in fiscal 1994. In fiscal 1993, the
Company, recognizing new market conditions that reduced the estimated shelf
lives of certain titles, accelerated amortization of capitalized software
development costs by an additional $1.8 million.
Royalty costs increased from 4% to 6% of net sales due to an increase
in sales from sports titles.
Selling, general and administrative ("SG&A") expense increased $1.3
million over the prior year but decreased as a percentage of total revenues
from 43% to 35%. The amount of INN's SG&A expense included in the Company's
consolidated statements in fiscal 1994 (through July 26, 1993) was $2.6
million, a decrease of $2.4 million. Coktel's SG&A expense was $0.2 million
in fiscal 1994. After accounting for INN and Coktel, fiscal 1994 SG&A
expense increased $3.3
12
<PAGE> 13
million, or 6% of total revenues. This increase was attributable primarily
to increased spending on selling and marketing activities.
Research and development ("R&D") expense, which reflects total
research and development expenditures less capitalized software development
costs, increased $4.5 million to $17.7 million. Total R&D expenditures
increased by $2.4 million to 32% of total revenues compared to 40% in fiscal
1993. However, after excluding INN and Coktel, total R&D expenditures
increased $1.1 million to $20.8 million. This increase was attributable to
the increasingly complex technical and artistic nature of the Company's
products. Although the Company's development headcount (excluding INN and
Coktel) remained relatively stable, the Company increased its focus on
education products by increasing R&D spending in its Bright Star subsidiary
by approximately $1.5 million. Part of this increase was attributable to the
fact that Bright Star was acquired after the first quarter in fiscal 1993.
In accordance with Financial Accounting Standards Board Statement No.
86 ("FASB 86"), the Company capitalizes software development costs once
technological and market feasibility have been established. Within the
guidelines of FASB 86, the Company determines the anticipated life of a
product in months. During fiscal 1993, in recognition of increased
competition in the retail marketplace that has tended to shorten the shelf
life of the Company's products, the Company accelerated the amortization of
certain of its older titles and reduced the estimated lives of newer titles
to 6 to 18 months (from 12 to 24 months), except for CD-ROM-based products
which are amortized over 24 months. The Company intends to continue to
evaluate its amortization policy in light of any changes in competition and
product life cycles that may occur in the future.
As a result of the Coktel acquisition, the Company incurred a charge
of $1.1 million in fiscal 1994 representing the estimated fair market value
of in-process technology expensed at the acquisition date.
LOSS FROM THE IMAGINATION NETWORK
Fiscal 1994 reflects a loss of $5.1 million for the Company's share of
INN's losses as accounted for under the equity method starting on July 27,
1993. Prior to this date, INN's results were consolidated with the Company's
results of operations. As a result, the Company's Consolidated Statements of
Operations also reflected a $2.4 million operating loss from INN for the
fiscal period prior to July 27, 1993.
AMORTIZATION OF GOODWILL
Amortization of goodwill increased $0.2 million as a result of the
Coktel acquisition. Sierra's goodwill was increased by $2.4 million to
reflect the excess of the purchase price paid over the estimated fair value
of Coktel's net assets. This goodwill is being amortized over a seven-year
period.
INCOME TAX PROVISION
The Company did not consolidate INN's results for income tax purposes
after July 26, 1993 since the Company no longer owned 80% or more of INN's
stock and therefore the losses of INN did not generate a tax benefit to the
Company. Fiscal 1994 reflected a tax benefit of $0.7 million, or 14% of the
pretax loss excluding the loss from INN under the equity method, compared to
a tax benefit of $3.3 million, or 25% of the pretax loss, in fiscal 1993.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1995, the Company had cash, cash equivalents and
marketable investment securities aggregating approximately $101 million, an
increase of $77 million from March 31, 1994. In addition, the Company has a
$10 million line of credit available. There was no outstanding balance under
this line at March 31, 1995.
The Company raised approximately $48 million in cash from a
convertible debt offering in April 1994 and $25 million from the sale of INN
and the signing of a multi-year publishing agreement with AT&T in December
1994, accounting for most of the $75 million increase in cash, cash equivalents
and marketable investment securities.
The Company's working capital requirements are seasonal and are
primarily for accounts receivable.
In the normal course of business the Company evaluates business
acquisition opportunities that will broaden its product selection for the home
consumer.
The Company believes its existing cash, cash equivalents and
marketable investment securities, are sufficient to meet its current planned
requirements and requirements for the foreseeable future.
13
<PAGE> 14
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Sierra On-Line, Inc.
Bellevue, Washington
We have audited the accompanying consolidated balance sheets of Sierra On-Line,
Inc. and subsidiaries (the "Company") as of March 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
and its subsidiaries as of March 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1995 in conformity with generally accepted accounting principles.
The financial statements give retroactive effect to the mergers of The
Pixellite Group, Software Inspiration, Ltd., and Papyrus Design Group, Inc.
with the Company on May 31, 1995, June 20, 1995, and November 30, 1995,
respectively, which have been accounted for as poolings of interests as
described in Note 1 to the financial statements.
DELOITTE & TOUCHE LLP
Seattle, Washington
February 13, 1995
14
<PAGE> 15
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,186 $ 3,563
Marketable investment securities . . . . . . . . . . . . . . . . . . . . . . . 50,573 20,859
Accounts receivable, net of allowances of $7,265 and $4,091 . . . . . . . . . . 12,984 11,143
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,903 5,030
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,777 3,051
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 670 1,986
Other current assets (including $792 and $845 receivable from
related parties - Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . 4,262 3,207
-------- -------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,355 48,839
PROPERTY, PLANT AND EQUIPMENT, net . . . . . . . . . . . . . . . . . . . . . . . . 9,068 7,473
SOFTWARE DEVELOPMENT COSTS, net of accumulated amortization of
$8,535 in 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,048 5,683
GOODWILL, net of accumulated amortization of $2,871 and $1,687 . . . . . . . . . . 6,498 6,119
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,522
OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,863 791
-------- -------
$145,354 $68,905
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,127 $ 4,628
Accrued compensation and related benefits . . . . . . . . . . . . . . . . . . 4,118 2,051
Accrued incentive payments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,562 1,620
Royalties payable (including $633 and $117 payable to a related party - Note 13). 2,938 1,355
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,261 993
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,160 ---
Other accrued expenses (including $247 payable to related parties
in 1995 - Note 13) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,028 3,926
-------- -------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 22,194 14,573
DEFERRED INCOME TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . --- 2,592
ADVANCES UNDER PUBLISHING AGREEMENT AND
OTHER LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,907 634
CONVERTIBLE DEBT, net of unamortized discount and issuance costs of $1,066 . . . . 34,634 ---
COMMITMENTS AND CONTINGENCIES (Note 11) . . . . . . . . . . . . . . . . . . . . --- ---
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share;
1,000,000 shares authorized, none outstanding . . . . . . . . . . . . . . . --- ---
Common stock and paid-in capital, par value $.01 per share; 40,000,000
shares authorized; 18,726,519 and 17,371,291 shares issued and outstanding . . 70,052 51,986
Retained earnings (deficit), including net unrealized holding
gain on marketable investment securities of $101 in 1995 . . . . . . . . . . 12,797 (269)
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . 119 (219)
-------- -------
82,968 51,498
Less common stock in treasury, 94,154 and 104,474 shares, at cost . . . . . . . . 349 392
-------- -------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . 82,619 51,106
-------- -------
$145,354 $68,905
======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
15
<PAGE> 16
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- --------
<S> <C> <C> <C>
REVENUES:
Net sales . . . . . . . . . . . . . . . . . . . . $95,821 $70,712 $ 54,957
Other . . . . . . . . . . . . . . . . . . . . . . 2,058 2,389 1,363
------- ------- --------
97,879 73,101 56,320
------- ------- --------
OPERATING EXPENSES:
Manufacturing costs . . . . . . . . . . . . . . . 21,663 20,058 18,402
Amortization of software development costs . . . 9,689 8,379 11,572
Royalties (including $819, $256, and $443 earned
by related party - Note 13) . . . . . . . . . 7,370 4,005 2,339
Selling, general and administrative . . . . . . . 32,777 25,685 24,352
Research and development . . . . . . . . . . . . 21,967 17,686 13,202
Purchased in-process research and development . . --- 1,102 ---
------- ------- -------
93,466 76,915 69,867
------- ------- --------
INCOME (LOSS) FROM OPERATIONS . . . . . . . . . . . . 4,413 (3,814) (13,547)
------- ------- --------
OTHER INCOME (EXPENSE):
Gain on sale of The ImagiNation Network . . . . . 19,739 --- ---
Equity in loss from The ImagiNation Network . . . (1,990) (5,066) ---
Shareholder litigation costs . . . . . . . . . . . (1,500) --- ---
Interest income (including $84, $152 and $81
earned from related parties - Note 13) . . . . 3,713 1,331 1,659
Interest expense . . . . . . . . . . . . . . . . (4,306) (280) (476)
Amortization of goodwill and convertible debt
issuance costs . . . . . . . . . . . . . . . . (1,212) (722) (504)
------- ------- --------
14,444 (4,737) 679
------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES . . . . . . . . . . 18,857 (8,551) (12,868)
INCOME TAX PROVISION (BENEFIT) . . . . . . . . . . . . 5,865 (679) (3,257)
------- ------- --------
NET INCOME (LOSS) . . . . . . . . . . . . . . . . . . $12,992 $(7,872) $ (9,611)
======= ======= ========
NET INCOME (LOSS) PER SHARE:
Primary . . . . . . . . . . . . . . . . . . . . . $ 0.70 $(0.46) $ (0.57)
Fully diluted . . . . . . . . . . . . . . . . . . 0.68 --- ---
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary . . . . . . . . . . . . . . . . . . . . . 18,513 17,143 16,826
Fully diluted . . . . . . . . . . . . . . . . . . 22,216 --- ---
</TABLE>
See Notes to Consolidated Financial Statements.
16
<PAGE> 17
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock
and Paid-in Capital Retained Cumulative Treasury Stock Total
--------------------- Earnings Translation --------------------- Stockholders'
Shares Amount (Deficit) Adjustment Shares Amount Equity
---------- ------- --------- ----------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 1992 16,613,483 $43,342 $17,537 $(224) 104,474 $ (392) $60,263
Net loss (9,611) (9,611)
Equity contributions 4 4
Stock options exercised 138,428 501 501
Tax benefit of stock option
transactions 243 243
Shares issued to Dynamix
shareholders 24,272 221 221
Distributions (28) (28)
Foreign currency translation
adjustment (23) (23)
---------- ------- ------- ----- ------- -------- -------
BALANCE, MARCH 31, 1993 16,776,183 44,311 7,898 (247) 104,474 (392) 51,570
Net loss (7,872) (7,872)
Stock options exercised 595,108 3,256 3,256
Tax benefit of stock option
transactions 442 442
INN liquidation preference 3,977 3,977
Distributions (295) (295)
Foreign currency translation
adjustment 28 28
---------- ------- ------- ----- ------- -------- -------
BALANCE, MARCH 31, 1994 17,371,291 51,986 (269) (219) 104,474 (392) 51,106
Net income 12,992 12,992
Equity contributions 266 266
Stock options exercised 333,807 2,131 2,131
Tax benefit of stock option
transactions 1,772 1,772
Conversion of convertible
debt 1,021,421 13,897 13,897
Treasury stock issued (10,320) 43 43
Net unrealized holding gains
on marketable investment
securities available-for-sale 101 101
Distributions (27) (27)
Foreign currency translation
adjustment 338 338
---------- ------- ------ ----- ------- -------- -------
BALANCE, MARCH 31, 1995
18,726,519 $70,052 $12,797 $ 119 94,154 $ (349) $82,619
========== ======= ======= ===== ======= ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
17
<PAGE> 18
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,992 $ (7,872) $ (9,611)
Reconciliation to net cash provided by (used for) operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,298 3,085 2,732
Amortization of intangible assets and issuance costs . . . . . . . . 11,153 9,102 12,077
Gain on sale of The ImagiNation Network . . . . . . . . . . . . . . . (19,739) --- ---
Equity loss from The ImagiNation Network . . . . . . . . . . . . . . 1,990 5,066 ---
Purchased in-process research and development . . . . . . . . . . . . --- 1,102 ---
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . 829 650 1,115
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . (2,840) (1,394) (1,394)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 (661) (96)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . (2,670) (5,020) (2,230)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 (898) 842
Refundable income taxes . . . . . . . . . . . . . . . . . . . . . . . 3,088 1,825 (825)
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . (151) 55 (2,064)
Software development costs . . . . . . . . . . . . . . . . . . . . . (5,037) (6,060) (9,414)
Research and development acquired . . . . . . . . . . . . . . . . . --- (2,452) ---
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,090) (225) (46)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . 1,498 (219) 1,201
Accrued compensation and related benefits . . . . . . . . . . . . . . 2,067 212 ---
Royalties payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,583 570 17
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . 268 993 ---
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . 1,160 --- ---
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . 1,093 489 2,592
Advances under publishing agreement and other liabilities . . . . . . 4,692 (14) 105
-------- -------- ---------
Net cash provided by (used for) operating activities . . . . . . . . . . 16,191 (1,666) (4,999)
INVESTING ACTIVITIES:
Proceeds from sale of The ImagiNation Network . . . . . . . . . . . . . 19,739 --- ---
Proceeds from matured marketable investment securities . . . . . . . . . 40,319 67,865 119,435
Purchases of marketable investment securities . . . . . . . . . . . . (69,880) (65,550) (139,209)
Net purchases of property, plant and equipment . . . . . . . . . . . . (4,901) (3,628) (3,586)
Loan to The ImagiNation Network . . . . . . . . . . . . . . . . . . . . (2,895) --- ---
Payment for purchase of subsidiaries, net of cash acquired
and research and development . . . . . . . . . . . . . . . . . . . . (1,620) (2,797) (1,056)
Net repayment of advances to The ImagiNation Network . . . . . . . . . --- 1,646 ---
-------- -------- ---------
Net cash used by investing activities . . . . . . . . . . . . . . . . . . (19,238) (2,464) (24,416)
FINANCING ACTIVITIES:
Net proceeds from convertible debt offering . . . . . . . . . . . . . . 48,250 --- ---
Proceeds from exercise of options and warrants . . . . . . . . . . . . 2,131 3,255 501
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (807) (255) 83
-------- -------- ---------
Net cash provided by financing activities . . . . . . . . . . . . . 49,574 3,000 584
-------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,527 (1,130) (28,831)
EFFECT OF EXCHANGE RATE CHANGES ON CASH . . . . . . . . . . . . . . . . . 96 --- 27
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . 3,563 4,693 33,497
-------- -------- ---------
END OF YEAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 50,186 $ 3,563 $ 4,693
======== ======== =========
</TABLE>
See Notes to Consolidated Financial Statements
18
<PAGE> 19
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Supplemental disclosure of cash flow and noncash investing and financing
information for the years ended March 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ ----
<S> <C> <C> <C>
Cash paid (received) during the year for:
Income taxes . . . . . . . . . . . . . $7,181 $(739) $ 23
Interest . . . . . . . . . . . . . . . $4,578 $ (73) $(58)
</TABLE>
1995:
During fiscal 1995 the Company induced conversion of $14,300,000 of
convertible debt into 1,021,421 shares of common stock.
1994:
The Company purchased all of the capital stock of Coktel Vision for
$5,332,000. In connection with the acquisition, liabilities assumed were
as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net assets acquired . . . . . . . . . . . . . . $7,641
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . (5,332)
------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . $2,309
======
</TABLE>
1993:
The Company purchased all of the capital stock of Bright Star for
$1,087,000. In connection with this acquisition, liabilities assumed were
as follows (in thousands):
<TABLE>
<S> <C>
Fair value of net assets acquired . . . . . . . . . . . . . . $1,193
Cash paid . . . . . . . . . . . . . . . . . . . . . . . . . (1,087)
------
Liabilities assumed . . . . . . . . . . . . . . . . . . . . $ 106
======
</TABLE>
See Notes to Consolidated Financial Statements.
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1995, 1994 AND 1993
NOTE 1: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sierra On-Line,
Inc. (Sierra), a Delaware corporation, and its wholly-owned subsidiaries,
Sierra On-Line Limited (Sierra U.K.), Dynamix, Inc. (Dynamix), Sierra On-Line
Japan, K.K. (Sierra Japan), Bright Star Technology, Inc. (Bright Star),
Coktel Vision, S.A. (Coktel), Interactive Associates, Inc., Sierra/Dynamix
International Sales Company, Inc., a foreign sales corporation, Software
Inspiration, Ltd. (Inspiration), PXL Acquisition Corp. (Pixellite), and
Papyrus Design Group, Inc. (Papyrus) (collectively referred to as the
Company). The accounts of The ImagiNation Network, Inc. (INN) were
consolidated with those of the Company through July 26, 1993 and accounted
for under the equity method until December 1994, when the Company sold its
remaining interest in INN to AT&T.
As described in Note 2, Pixellite, Inspiration and Papyrus became wholly
owned subsidiaries of Sierra On-Line, Inc. These consolidated financial
statements have been prepared under the pooling-of-interests method of
accounting and reflect the combined financial position and operating results
of Sierra, Pixellite, Inspiration and Papyrus for all periods presented.
Upon issuance of the Company's third quarter fiscal 1996 results of
operations in this Form 10-Q these consolidated financial statements will
become the historical financial statements of the Company.
All significant intercompany balances and transactions are eliminated.
BUSINESS
The Company's primary business is the development and publication of
entertainment, education and home productivity software for personal
computers for distribution in North America, Europe and Asia.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, certificates of deposit and short
term investments with original maturities of three months or less.
MARKETABLE INVESTMENT SECURITIES
Marketable investment securities consist of municipal securities, corporate
stocks and bonds, U.S. Treasury notes, and commercial paper. The Company
adopted Statement of Financial Accounting Standard (SFAS) No. 115, Accounting
for Certain Investments in Debt and Equity Securities, effective April 1,
1994 and classified all investment securities as available-for-sale. As a
result, securities are reported at fair value with net unrealized holding
gains and losses excluded from earnings and reported in stockholders' equity.
Fair value is based upon quoted market prices using the specific
identification method. The impact of the adoption of this statement on
stockholders' equity was insignificant.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost. Depreciation and
amortization are provided using a straight-line method over estimated useful
lives ranging from approximately 2 to 18 years.
SOFTWARE DEVELOPMENT COSTS AND PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT
EXPENSES
Under the criteria set forth in SFAS No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, capitalization of
software development costs begins upon the establishment of technological
feasibility of the product. The establishment of technological feasibility
and the on-going assessment of the recoverability of costs require
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future gross product revenues,
estimated economic life and changes in software and hardware technology.
Amounts that have been capitalized under this statement, after consideration
of the above factors, are amortized on either a straight-line
20
<PAGE> 21
basis over the estimated useful lives of the products (6 to 24 months) or the
ratio of current product revenues to the total revenues expected over the
life of the product, whichever produces the greater expense.
Purchased in-process research and development is charged to expense on the
date acquired if it has no alternative future use and technological
feasibility is not established.
GOODWILL
Goodwill represents the excess purchase price paid over the net assets of
acquired companies. Goodwill is amortized on a straight-line basis over
seven years.
The carrying value of goodwill is reviewed on a regular basis for the
existence of facts or circumstances both internally and externally that may
suggest impairment. To date, no such impairment has been indicated. Should
there be an impairment in the future, the Company will measure the amount of
the impairment based on the undiscounted expected future cash flows from the
impaired assets.
FOREIGN CURRENCY
Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues, costs
and expenses are translated at average rates of exchange prevailing during
the year. The translation adjustment resulting from this process is
presented separately in shareholders' equity. The gains and losses from
foreign currency transactions are included in selling, general and
administrative expense in the statements of operations.
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position (SOP) No. 91-1, Software
Revenue Recognition. Revenue from product sales is recognized upon shipment,
provided no significant vendor obligations remain and collection of the
resulting receivable is deemed probable. Other insignificant vendor
obligations consisting primarily of costs associated with telephone support
to customers after delivery of software are accrued.
The Company's agreements with certain distributors and retailers permit them
to exchange products or provide price protection under certain circumstances.
The Company provides an allowance for estimated exchanges and price
protection.
During the period that INN was consolidated with the balances of the Company,
revenue from INN was recognized over the period services were provided.
ADVERTISING
The Company accounts for advertising costs in accordance with SOP No. 93-7,
Reporting on Advertising Costs. Direct response advertising is capitalized
only if customer sales can be directly correlated to the advertising and if
future benefit can be demonstrated. Capitalized advertising costs are
amortized using the straight-line method over the estimated benefit period.
Advertising expense for fiscal 1995, 1994 and 1993 was $8,750,000, $7,850,000
and $5,500,000, respectively. Amounts capitalized at March 31, 1995 and 1994
approximated $598,000 and $296,000, respectively.
INCOME TAXES (BENEFIT)
During 1994, the Company adopted Statement of Financial Accounting Standard
No. 109, Accounting for Income Taxes. Accordingly, the Company computes
income taxes using the asset and liability method, under which deferred
income taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
The cumulative effect of this change in accounting method was not
significant.
Prior to 1994, the Company utilized APB Opinion No. 11, Accounting for Income
Taxes.
21
<PAGE> 22
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of
common shares outstanding during the period as adjusted for the shares issued
in the mergers with Pixellite, Inspiration and Papyrus described in Note 2
and after consideration of the dilutive effect, if any, of stock options
granted using the treasury stock method. In addition, conversion of the
Company's 6-1/2% Convertible Subordinated Notes (see Note 8) are included in
fully diluted income per share using the if-converted method when such
securities are dilutive.
STOCK SPLIT
On March 3, 1995, the Company recorded a two-for-one stock split to holders
of record on February 17, 1995. Outstanding shares, stock options and per
share data have been retroactively restated for all periods to give effect to
the stock split.
CONCENTRATION OF CREDIT RISK
Accounts receivable include amounts from geographically dispersed dealers and
distributors in the computer software industry. Concentrations of credit
risk are considered minimal and bad debts have not been significant. The
Company does not require collateral or other security to support credit
sales.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1993 and 1994 balances to
conform with the 1995 presentation.
22
<PAGE> 23
NOTE 2: BUSINESS COMBINATIONS
PIXELLITE, INSPIRATION AND PAPYRUS
On May 31, 1995 the Company merged with The Pixellite Group ("Pixellite"), a
developer of personal printing software in exchange for 245,779 shares of
Sierra's common stock. On June 20, 1995 the Company also merged with
Software Inspiration, Ltd. ("Inspiration"), a developer of strategy games,
in exchange for 730,352 shares of Sierra's common stock.
On November 30, 1995 the Company merged with Papyrus Design Group
("Papyrus"), developers of NASCAR Racing and Indy Car Racing, in exchange for
approximately 1.2 million shares of Sierra's common stock.
These mergers have been accounted for as a pooling-of-interests. The
pooling-of-interests method of accounting is intended to present as a single
interest two or more common shareholders' interests which were previously
independent; accordingly, the historical financial statements for the periods
prior to the mergers are restated as though the companies had been combined.
All fees and expenses related to the merger of the combined companies will be
expensed as required under the pooling-of-interests accounting method. These
expenses have not been reflected in the consolidated statements of earnings
but will be reflected in the consolidated statement of operations of the
Company for the three and nine months ended December 31, 1995. Such fees and
expenses through December 31, 1995 total approximately $1.7 million and
include legal, accounting and finders fees.
The following summarizes amounts previously reported by Sierra prior to the
transaction for the years ended March 31, 1995, 1994 and 1993 (in thousands,
except per share data):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
REVENUES:
Sierra . . . . . . . . . . . . . . . . . $83,440 $62,745 $49,716
Pixellite, Inspiration and Papyrus . . . 14,439 10,356 6,604
------- ------- -------
Combined . . . . . . . . . . . . . . . . $97,879 $73,101 $56,320
======= ======= =======
NET INCOME (LOSS)
Sierra . . . . . . . . . . . . . . . . . $11,938 $(8,676) $(8,398)
Pixellite, Inspiration and Papyrus . . . 1,054 804 (1,213)
------- ------- -------
Combined . . . . . . . . . . . . . . . . $12,992 $(7,872) $(9,611)
======= ======= =======
PRIMARY NET INCOME (LOSS) PER SHARE:
Sierra . . . . . . . . . . . . . . . . $ 0.74 $ (0.59) $ (0.58)
Pixellite, Inspiration and Papyrus . . (0.04) 0.13 0.01
-------- ------- -------
Combined . . . . . . . . . . . . . . . . $ 0.70 $ (0.46) (0.57)
======== ======= =======
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Sierra . . . . . . . . . . . . . . . . $ 0.71 $ -- $ ---
Pixellite, Inspiration and Papyrus . . . (0.03) -- ---
-------- ------- -------
Combined . . . . . . . . . . . . . . . . $ 0.68 $ -- ---
======== ======= =======
</TABLE>
COKTEL
On October 29, 1993, the Company acquired Coktel Vision S.A. ("Coktel"), a
developer and publisher of educational and entertainment software products,
for an initial purchase price of approximately $5,332,000. This business
combination was accounted for as a purchase, and, accordingly, the net assets
and operations of Coktel are included in the Company's consolidated financial
statements beginning on October 29, 1993. Approximately $1,102,000 of the
purchase price was attributed to in-process research and development and
accordingly was charged to expense at the date of acquisition. Amounts
allocated to software development costs approximated $1,350,000 and amounts
allocated to goodwill were approximately $2,419,000 and will be amortized
over its estimated useful life of seven years on a straight-line basis. The
remainder of the purchase price was allocated to the net assets of Coktel and
consist primarily of current assets and current liabilities.
23
<PAGE> 24
During the fiscal years ended March 31, 1995 and 1994, approximately
$1,562,000 and $1,313,000 were earned under this plan. At March 31, 1995 and
1994, incentive payments due approximated $1,562,000 and $1,313,000. In
December 1995 the Company amended the Coktel acquisition agreement whereby it
issued 150,000 shares of Common Stock in exchange for each former Coktel
shareholder relinquishing their rights to receive any further incentive
payments. As a result of this agreement, the Company capitalized goodwill of
approximately $4.1 million which will be amortized over its remaining useful
life of approximately five years on a straight-line basis. The Company could
be obligated to make additional payments as provided in the agreement.
BRIGHT STAR
On July 6, 1992, the Company acquired Bright Star, a developer and publisher
of educational computer software, for an initial purchase price of $1,000,000
plus transaction costs of $87,000. This business combination was accounted
for as a purchase and, accordingly, the net assets and operations of Bright
Star are included in the Company's consolidated financial statements
beginning on July 6, 1992. The $1,087,000 purchase price was assigned to the
net assets acquired based on the fair values of such assets and liabilities
at the date of acquisition. The excess of cost and liabilities assumed over
tangible assets acquired was recorded as goodwill ($929,000 at the purchase
date). Goodwill is being amortized on a straight-line basis over seven years
from the date of the original acquisition.
As part of this transaction, the common and preferred shareholders of Bright
Star as of July 2, 1992, certain key executives and a financial advisor
obtained the right to receive a maximum of up to $2,500,000 in cash or a
maximum of up to 400,000 shares of the Company's common stock over a
five-year period based on the attainment of certain revenue goals, in
addition to the $1,000,000 cash payment described above. Amounts earned by
the shareholders and executives may be paid in cash, stock or a combination
of cash and stock, at the sole discretion of the Company. Amounts received
by the financial advisor may only be paid in cash. These contingent amounts
will be allocated to goodwill as they are earned. In fiscal 1994, $307,000
was earned under this agreement and payable at March 31, 1994. No amounts
were earned during 1995 and 1993.
UNAUDITED PRO FORMA INFORMATION
The following unaudited combined pro forma information shows the results of
the Company's operations for the fiscal year presented had the acquisition of
Coktel occurred at the beginning of the year (in thousands, except per share
data).
<TABLE>
<CAPTION>
1994
------
<S> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $72,800
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(8,101)
Net loss per share . . . . . . . . . . . . . . . . . . . $ (0.47)
</TABLE>
This pro forma information may not be indicative of the results that actually
would have been obtained had the acquisition occurred at the beginning of the
period, and is not intended to be a projection of future results.
NOTE 3: SALE OF THE IMAGINATION NETWORK
The operating activities of INN were consolidated with those of the Company
through July 26, 1993. On July 27, 1993, the Company sold 42% of INN's voting
stock and reduced its ownership interest to 58% and reduced its voting control
such that the Company began recording INN operations utilizing the equity
method. Upon sale of its 42% interest, the Company recorded its liquidation
preference in excess of recorded book value as shareholders' equity.
In December 1994, the Company sold its remaining equity interest in INN to AT&T
and recorded a gain of $19,739,000. The Company also entered into a multi-year
publishing agreement with AT&T to provide content for INN. The publishing
agreement provides for AT&T to fund up to $4,000,000 of the Company's
development expenditures under an existing publishing agreement and up to
$23,000,000 of Sierra's development expenditures, subject to certain
limitations, through non-refundable royalty advances. The non-refundable
royalty advances are reflected net of research and development expense. A
summary of gross research and development expense and non-refundable royalty
advances for the year ended March 31 is as follows (in thousands):
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Research and development expense $23,552
Non-refundable royalty advances
--
(1,585)
-------
$21,967
=======
</TABLE>
24
<PAGE> 25
NOTE 4: MARKETABLE INVESTMENT SECURITIES
The Company's investments, including aggregate fair values, cost, gross
unrealized holding gains, and gross unrealized holding losses, consist of the
following at March 31 (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
UNREALIZED UNREALIZED
FAIR HOLDING HOLDING
VALUE COST GAINS LOSSES
------- ------- ---------- -----------
<S> <C> <C> <C> <C>
1995:
U.S. Government obligations $10,394 $10,357 $ 39 $ 2
Corporate securities 23,050 22,996 80 26
Commercial paper 17,129 17,067 64 2
------- ------- ---- -----
$50,573 $50,420 $183 $ 30
======= ======= ==== =====
1994:
U.S. Government obligations $14,939 $15,003 $--- $ 64
Corporate securities 544 438 106 ---
Tax-exempt municipal bonds and notes 1,831 1,830 1 ---
Commercial paper 2,915 2,915 --- ---
Money market funds 673 673 --- ---
------- ------- ---- -----
$20,902 $20,859 $107 $ 64
======= ======= ==== =====
</TABLE>
Fair values of investments are based on quoted market prices on the last
business day of the fiscal year. All investments available-for-sale at March
31, 1995 will mature within one year.
NOTE 5: INVENTORIES
Inventories consist of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Raw materials . . . . . . . . . . . . . . . $2,841 $3,477
Work in progress . . . . . . . . . . . . . . 65 85
Finished goods . . . . . . . . . . . . . . . 1,997 1,468
------ ------
$4,903 $5,030
====== ======
</TABLE>
NOTE 6: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at March 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Land . . . . . . . . . . . . . . . . . $ 203 $ 203
Buildings and improvements . . . . . . . 3,591 3,236
Computers and equipment . . . . . . . . 16,703 12,810
Furniture and fixtures . . . . . . . . . 1,312 785
-------- -------
21,809 17,034
Less accumulated depreciation . . . . . (12,741) (9,561)
-------- -------
$ 9,068 $ 7,473
======== =======
</TABLE>
25
<PAGE> 26
NOTE 7: SOFTWARE DEVELOPMENT COSTS
In fiscal 1993, the Company reduced capitalized software development costs for
certain current titles and deferred fewer costs related to software development
due to a changing retail environment and increased competition in the
marketplace. Following careful review of its markets, the Company recognized
that the increase in the number of new titles and emerging formats in the
entertainment and educational software industries significantly reduced the
shelf life for products in these categories. To address the new market
conditions, the Company reduced capitalization of software development costs
for certain current products that had been discontinued or had experienced
shortened shelf life, expensed development costs of certain products for new
markets and new platforms where market acceptance was less predictable and
amortized new titles over a shorter life. The effect of accelerating
amortization was to increase net loss by $1,842,000, or $0.11 per common share
in fiscal 1993.
NOTE 8: FINANCING ARRANGEMENTS
LINE OF CREDIT
In fiscal 1995, the Company entered into an unsecured bank line of credit
that provides for borrowings of up to $10 million, expiring August 31, 1996.
Any borrowings under this line of credit would be collateralized by
substantially all the Company's assets and incur interest at either the
bank's prime rate or IBOR plus 175 basis points at borrower's choice. The
line contains covenants requiring the Company to maintain certain financial
ratios and minimum balances in cash and cash equivalents. The Company is in
compliance with all covenants under this line of credit as of March 31, 1995.
There have been no borrowings by the Company under this line of credit to
date.
CONVERTIBLE NOTES
On April 12, 1994, the Company issued $50,000,000 in principal amount of
6-1/2% convertible subordinated notes due April 1, 2001 (the "Notes").
Interest on the Notes is payable semi-annually on April 1 and October 1 of
each year and commenced October 1, 1994. The Notes are convertible into
common stock of the Company, at a conversion price of $14.00 per share,
subject to adjustment under certain conditions. The Notes are redeemable
after April 2, 1997, at the option of the Company, at specified redemption
prices. The Notes will be subordinated to all existing and future Senior
Indebtedness (as defined in the Indenture governing the Notes) of the
Company. Issuance costs have been netted against the principal convertible
debt balance and are being amortized on a straight-line basis over seven
years. The fair value of these notes at March 31, 1995 was $58,548,000 as
determined by the Private Offerings, Resales and Trading through Automated
Linkages ("PORTAL") Market.
During fiscal 1995 the Company paid $1.0 million, included in interest
expense, to induce conversion of $14,300,000 of convertible debt into
1,021,421 shares of common stock. If conversion had occurred on April 1,
1994, earnings per share and weighted average shares outstanding would have
been as follows:
<TABLE>
<S> <C>
Supplementary primary earnings per share: $0.80
Supplementary primary weighted average shares outstanding: 18,888,000
</TABLE>
26
<PAGE> 27
NOTE 9: INCOME TAX PROVISION (BENEFIT)
A reconciliation of the statutory federal income tax rate to the Company's
effective income tax rate is as follows for the years ended March 31:
<TABLE>
<CAPTION>
1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Statutory rate . . . . . . . . . . . . . . . . . . . . 35.0% (35.0)% (34.0)%
State income taxes, net of federal income tax benefit . . 3.0
Utilization of net operating losses . . . . . . . . . . (3.9)
Non-consolidated losses . . . . . . . . . . . . . . . . (4.5) 18.3
Foreign subsidiaries . . . . . . . . . . . . . . . . . (2.2) 3.4 1.5
Non-deductible expenses . . . . . . . . . . . . . . . . 4.5 2.1 2.1
Subchapter S Corporation earnings . . . . . . . . . . . (1.3) (0.6) ---
Other . . . . . . . . . . . . . . . . . . . . . . . . . 0.5 3.9 5.1
---- ----- -----
Effective rate . . . . . . . . . . . . . . . . . . . . 31.1% (7.9)% (25.3)%
==== ===== =====
</TABLE>
The provision for income taxes (benefit) consists of the following for the
years ended March 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . $ 7,772 $ 540 $(1,686)
State . . . . . . . . . . . . . . . . . . . . . . . 922 32 5
Foreign . . . . . . . . . . . . . . . . . . . . . . (55) 143 (182)
------- ------- -------
8,639 715 (1,863)
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . (2,298) (1,003) (1,394)
State . . . . . . . . . . . . . . . . . . . . . . . (268) (391) ---
Foreign . . . . . . . . . . . . . . . . . . . . . . . (208) --- ---
------- ------- -------
(2,774) (1,394) (1,394)
------- ------- -------
$ 5,865 $ (679) $(3,257)
======= ======= =======
</TABLE>
Deferred income tax liabilities (assets) reflect the tax effect of temporary
differences between the amounts of assets and liabilities for financial
reporting purposes and amounts as measured for tax purposes. A valuation
allowance against deferred tax assets has been provided for when it is more
likely than not that some or all of the deferred tax assets will not be
realized. The effect of temporary differences that cause significant portions
of deferred tax assets and liabilities are as follows at March 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred Assets:
Inventory overhead allocation . . . . . . . . . . . . $ (398) $ (778)
Accrued expenses . . . . . . . . . . . . . . . . . . . (5,638) (1,991)
Tax credits . . . . . . . . . . . . . . . . . . . . . . (77) (1,845)
Net operating losses . . . . . . . . . . . . . . . . . (334) (899)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (187) (717)
------- -------
Subtotal . . . . . . . . . . . . . . . . . . . . . (6,634) (6,230)
Valuation allowance . . . . . . . . . . . . . . . . . . 3,230 3,772
------- -------
Deferred Liabilities:
Software development costs . . . . . . . . . . . . . . 105 1,999
------ -------
$(3,299) $ (459)
======= =======
</TABLE>
27
<PAGE> 28
NOTE 10: STOCK OPTION PLAN
The Company has reserved 4,170,000 shares of common stock for issuance under
its 1987 Stock Option Plan (the "1987 Plan") for officers, employees,
directors, vendors, consultants and independent contractors. Options granted
under this plan may be either incentive stock options or nonqualified stock
options and are granted at the fair market value of the Company's common stock
at the date of grant. Options vest and expire under the terms established at
the date of grant. The Company also has 218,556 shares reserved for issuance
under an option plan it acquired through its merger with Papyrus (the "Papyrus
Plan"). A summary of stock option transactions under both plans follows:
<TABLE>
<CAPTION>
Range of Price
Shares Per Share
--------- ---------------
<S> <C> <C>
Options outstanding, April 1, 1992 . . . . . . 1,464,446 0.47 - 10.13
Granted . . . . . . . . . . . . . . . . . 947,700 5.62 - 8.57
Exercised . . . . . . . . . . . . . . . . (138,428) 0.47 - 5.50
Canceled . . . . . . . . . . . . . . . . . (158,950) 4.58 - 7.75
--------- ---------------
Options outstanding, March 31, 1993 . . . . . 2,114,768 0.47 - 10.13
Granted . . . . . . . . . . . . . . . . . 760,838 0.09 - 11.50
Exercised . . . . . . . . . . . . . . . . (541,108) 0.47 - 10.13
Canceled . . . . . . . . . . . . . . . . . (457,366) 3.86 - 10.13
--------- ---------------
Options outstanding, March 31, 1994 . . . . . . 1877,132 0.09 - 11.50
Granted . . . . . . . . . . . . . . . . . . 963,217 0.09 - 22.00
Exercised . . . . . . . . . . . . . . . . . (333,807) 0.47 - 11.50
Canceled . . . . . . . . . . . . . . . . . (215,482) 4.59 - 11.88
--------- ---------------
Options outstanding, March 31, 1995 . . . . . . 2,291,060 $0.09 - 22.00
=========
</TABLE>
Of the options outstanding at March 31, 1995, 516,288 options are currently
exercisable at prices ranging from $0.09 to $11.50 per share, and 409,083
options remain available for future grants.
In March 1995, the Board of Directors approved the adoption of the 1995 Stock
Option and Award Plan (the "1995 Plan") and the Employee Stock Purchase Plan
(the "ESPP"). The Company will reserve 2,000,000 and 200,000 shares of common
stock for issuance under the 1995 Plan and the ESPP, respectively. Both plans
are subject to shareholder approval.
NOTE 11: COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into long-term lease obligations for certain office
and warehouse facilities in addition to various leases for office equipment
and company vehicles. These commitments expire at various times through
fiscal 2003. The Company's expense for lease obligations for the years ended
March 31, 1995, 1994 and 1993 were $2,062,000, $1,356,000 and $740,000,
respectively.
Future minimum annual lease payments on these obligations are as follows for
the years ended March 31 (in thousands):
<TABLE>
<CAPTION>
Year Ending March 31, Payments
--------------------- --------
<S> <C>
1996 . . . . . . . . . . . . . $ 2,231
1997 . . . . . . . . . . . . . 2,354
1998 . . . . . . . . . . . . . 2,227
1999 . . . . . . . . . . . . . 1,994
2000 . . . . . . . . . . . . . 1,907
Thereafter . . . . . . . . . . 2,791
-------
Total . . . . . . . . . . . $13,504
=======
</TABLE>
CONTINGENCIES
The Company is a defendant in various lawsuits arising in the ordinary course
of business. Management believes that losses to the Company from these
lawsuits, if any, will not have a material adverse effect on its financial
condition or results of operations. In fiscal 1995, the Company paid
approximately $1.5 million in shareholder litigation costs in settlement of a
securities class action lawsuit filed in December 1992.
28
<PAGE> 29
NOTE 12: GEOGRAPHIC INFORMATION
The following schedule presents financial information of the Company classified
by geographic area for the years ended March 31 (in thousands):
<TABLE>
<CAPTION>
UNITED
STATES EUROPE OTHER ELIMINATIONS CONSOLIDATED
-------- ------- ------ ------------ ------------
<S> <C> <C> <C> <C> <C>
1995
Sales to unaffiliated customers $ 72,847 $17,969 $5,005 $ --- $ 95,821
Intercompany transfers 880 --- --- (880) ---
-------- ------- ------ ------- --------
$ 73,727 $17,969 $5,005 $ (880) $ 95,821
======== ======= ====== ======= ========
Income from operations $ 2,503 $ 1,910 $ --- $ --- $ 4,413
======== ======= ====== ======= ========
Identifiable assets $142,814 $ 8,238 $ (38) $(5,660) $145,354
======== ======= ====== ======= ========
1994
Sales to unaffiliated customers $ 57,896 $ 9,106 $3,710 $ --- $ 70,712
Intercompany transfers 3,901 720 --- (4,621) ---
-------- ------- ------ ------- --------
$ 61,797 $ 9,826 $3,710 $(4,621) $ 70,712
======== ======= ====== ======= ========
Income (loss) from operations $ (4,240) $ 514 $ --- $ (88) $ (3,814)
======== ======= ====== ======= ========
Identifiable assets $ 63,416 $ 5,902 $ (443) $ 30 $ 68,905
======== ======= ====== ======= ========
1993
Sales to unaffiliated customers $ 46,999 $ 5,166 $2,792 $ --- $ 54,957
Intercompany transfers 3,707 --- --- (3,707) ---
-------- ------- ------ ------- --------
$ 50,706 $ 5,166 $2,792 $(3,707) $ 54,957
======== ======= ====== ======= ========
Income (loss) from operations $(12,738) $ (980) $ --- $ 171 $(13,547)
======== ======== ====== ======= ========
Identifiable assets $ 67,543 $ 445 $ (362) $(2,432) $ 65,194
======== ======= ====== ======= ========
</TABLE>
Intercompany transfers primarily represent shipments of finished goods
inventory to international subsidiaries. The intercompany transfers are made
at transfer prices which approximate prices charged to unaffiliated customers
and have been eliminated from consolidated net sales. In the years ended March
31, 1995 and 1994, the majority of the Company's sales to Europe were conducted
by Coktel, Papyrus and Sierra U.K. Export sales, primarily to Canada and Asia,
were $5,005,000, $3,710,000 and $2,792,000, for the years ended March 31, 1995,
1994 and 1993, respectively.
NOTE 13: RELATED PARTY TRANSACTIONS
The Company pays royalties to certain independent developers, including a
director of the Company. Royalty expense related to this director was
approximately $819,000, $256,000 and $443,000 during the years ended March 31,
1995, 1994 and 1993, respectively. Royalties payable to the director at March
31, 1995 and 1994 were $633,000 and $117,000, respectively.
From July 1993 through December 1994, the Company paid certain operating
expenses on behalf of INN. Total amounts advanced under this arrangement
totaled $456,000 and $3,271,000 during fiscal 1995 and fiscal 1994,
respectively. In April 1994, the Company accepted an unsecured Promissory Note
from INN for approximately $2,895,000. This amount was paid in full, including
interest accrued at Bank of America's prime rate, in December 1994.
As of March 31, 1995, the Company held certain notes receivable from officers
of a subsidiary. Amounts receivable from those officers at March 31, 1995 and
1994 were $792,000 and $845,000, respectively. Interest earned under these
agreements was $84,000, $152,000 and $81,000 for the years ended March 31,
1995, 1994 and 1993, respectively. The notes were paid in full in May 1995.
As of March 31, 1995 the Company owed $247,000 in dividends payable for
undistributed S Corporation earnings to the shareholders of Papyrus.
29
<PAGE> 30
NOTE 14: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial information for fiscal 1995 and fiscal 1994 is
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Primary Fully
Net Diluted
Net Income Net
Income (Loss) Income
Revenues (Loss) Per Share Per Share
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Quarter ended:
June 30, 1994 $13,550 $(4,304) $(0.25) $ ---
September 30, 1994 20,966 (1,220) (0.07) ---
December 31, 1994(1) 41,213 17,796 0.97 0.83
March 31, 1995 22,150 720 0.05 ---
------- -------
$97,879 $12,992
======= =======
Quarter ended:
June 30, 1993(2) $12,498 $(3,475) $(0.20) $ ---
September 30, 1993 16,623 (1,325) (0.08) ---
December 31, 1993 31,370 4,010 0.22 ---
March 31, 1994 12,610 (7,082) (0.41) ---
------- -------
$73,101 $(7,872)
======= =======
</TABLE>
(1) Includes $19,739,000 gain on sale of the Company's 58% interest in The
ImagiNation Network to AT&T.
(2) One hundred percent of the operating activities of INN have been included
in the Company's operating results through July 26, 1993. Subsequent to
that date, the Company sold 42% of INN's voting stock and reduced its
ownership interest to 58% and began recording INN operations under the
equity method.
NOTE 15: SUBSEQUENT EVENT
In July 1995 the Company announced the formation of a joint venture with
Pioneer Electronic Corporation to market and develop entertainment and other
software titles for the Japanese market. The joint venture requires a minimum
capital contribution from the Company of approximately $1.5 million which the
Company funded in September 1995. Under certain circumstances, the Company may
be required to contribute up to a maximum of $6.0 million over the duration of
the joint venture.
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K.
(a) The following exhibits are filed herewith:
Exhibit 2.1 - Agreement and Plan of Merger among Sierra
On-Line, Inc., PDG Acquisition Corp., Papyrus
Design Group, Inc. and the shareholders of
Papyrus Design Group, Inc. dated as of
November 30, 1995
Exhibit 10.1 - Registration Rights Agreement between Sierra
On-Line, Inc. and the former shareholders of
Papyrus Design Group, Inc. dated November
30, 1995
Exhibit 10.2 - Amendment to Acquisition Agreement between
Sierra On-Line, Inc. and Roland Oskian, Arnaud
Delrue, and Manuelle Chapoullie-Mauger
Exhibit 10.3 - Limited Liability Company Agreement of Collier
Sierra L.L.C. effective as of October 31, 1995
Exhibit 11.0 - Statement Re Computation of Per Share Earnings
(b) Reports on Form 8-K.
None.
30
<PAGE> 31
SIERRA ON-LINE, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SIERRA ON-LINE, INC.
Date: February 13, 1996 By: /s/ Michael A. Brochu
----------------------------------
Michael A. Brochu President
and Chief Operating Officer
By: /s/ Fred Schapelhouman
----------------------------------
Fred Schapelhouman
Chief Accounting Officer
31
<PAGE> 32
SIERRA ON-LINE, INC., AND SUBSIDIARIES
LIST OF EXHIBITS FILED WITH THIS REPORT
<TABLE>
<CAPTION>
Exhibit No. Item Page No.
- ----------- ---- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger among Sierra On-Line,
Inc., PDG Acquisition Corp., Papyrus Design Group,
Inc. and the Shareholders of Papyrus Design Group,
Inc. dated as of November 30, 1995 33
10.1 Registration Rights Agreement between Sierra On-Line,
Inc. and the former shareholders of Papyrus Design
Group, Inc. dated November 30, 1995 96
10.2 Amendment to Acquisition Agreement between Sierra
On-Line, Inc. and Roland Oskian, Arnaud Delrue, and
Manuelle Chapoullie-Mauger 111
10.3 Limited Liability Company Agreement of Collier Sierra
L.L.C. effective as of October 31, 1995 118
11.0 Statement Re Computation of Per Share Earnings 165
</TABLE>
32
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA ON-LINE, INC.,
PDG ACQUISITION CORP.,
PAPYRUS DESIGN GROUP, INC.
AND
THE SHAREHOLDERS OF PAPYRUS DESIGN GROUP, INC.
DATED AS OF NOVEMBER 30, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I - THE MERGER 1
1.1 The Merger............................................... 1
1.2 The Closing.............................................. 2
1.3 Effective Date and Time.................................. 2
1.4 Articles of Organization of the Surviving Corporation.... 2
1.5 Bylaws of the Surviving Corporation...................... 2
1.6 Conversion of Shares..................................... 3
1.6.1 Exchange Ratio................................... 3
1.6.2 Exchange of Certificates......................... 4
1.6.3 No Fractional Shares............................. 4
1.6.4 No Further Transfers............................. 5
1.7 Pooling Restrictions on Transfer of the Securities....... 5
1.8 Form S-8 for Company Option Plan......................... 5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE SHAREHOLDERS.................................. 5
2.1 Good Title, etc.......................................... 6
2.2 Organization............................................. 6
2.3 Enforceability........................................... 7
2.4 Capitalization........................................... 7
2.5 Subsidiaries and Affiliates.............................. 8
2.6 No Approvals; No Conflicts............................... 8
2.7 Financial Statements..................................... 9
2.8 Absence of Certain Changes or Events..................... 10
2.9 Taxes.................................................... 13
2.10 Property................................................. 14
2.11 Contracts................................................ 16
2.12 Customers and Suppliers.................................. 17
2.13 Orders, Commitments and Returns.......................... 18
2.14 Claims and Legal Proceedings............................. 18
</TABLE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page i
<PAGE> 3
<TABLE>
<S> <C>
2.15 Labor and Employment Matters............................. 18
2.16 Employee Benefit Plans................................... 19
2.17 Patents, Trademarks, etc................................. 22
2.18 Accounts Receivable...................................... 25
2.19 Inventory................................................ 25
2.20 Corporate Books and Records.............................. 26
2.21 Licenses, Permits, Authorizations, etc................... 26
2.22 Compliance With Laws..................................... 26
2.23 Insurance................................................ 26
2.24 Brokers or Finders....................................... 27
2.25 Absence of Questionable Payments......................... 27
2.26 Bank Accounts............................................ 27
2.27 Insider Interests........................................ 28
2.28 Securities Act Matters................................... 28
2.29 Pooling Matters.......................................... 31
2.30 Full Disclosure.......................................... 31
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SIERRA
AND THE PURCHASER............................................. 32
3.1 Organization............................................. 32
3.2 Enforceability........................................... 32
3.3 Securities............................................... 32
3.4 No Approvals or Notices Required; No Conflicts With
Instrument............................................... 33
3.5 Capitalization........................................... 33
3.6 SEC Documents............................................ 33
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF
THE PURCHASER AND SIERRA....................................... 34
4.1 Accuracy of Representations and Warranties............... 34
4.2 Performance of Agreements................................ 34
4.3 Opinion of Counsel for the Company....................... 34
</TABLE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page ii
<PAGE> 4
<TABLE>
<S> <C>
4.4 Shareholder Approval..................................... 34
4.5 Resignations............................................. 34
4.6 Consents to Merger....................................... 35
4.7 Compliance Certificate................................... 35
4.8 Material Adverse Change.................................. 35
4.9 Due Diligence............................................ 35
4.10 Approvals and Consents................................... 35
4.11 Proceedings and Documents; Secretary's Certificate....... 35
4.12 Nonforeign Affidavit..................................... 36
4.13 Compliance With Laws..................................... 36
4.14 Pooling of Interests..................................... 36
4.15 Legal Proceedings........................................ 36
4.16 Operative Documents...................................... 36
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF
THE SHAREHOLDERS AND THE COMPANY.............................. 37
5.1 Accuracy of Representations and Warranties............... 37
5.2 Performance of Agreements................................ 37
5.3 Opinion of Counsel....................................... 37
5.4 Compliance Certificate................................... 37
5.5 Legal Proceedings........................................ 37
5.6 Operative Documents...................................... 38
5.7 Material Adverse Change.................................. 38
5.8 Approvals and Consents................................... 38
5.9 Compliance With Laws..................................... 38
ARTICLE VI - COVENANTS...................................................... 38
6.1 Conduct of Business by the Company Pending the Merger.... 38
6.2 Access to Information; Confidentiality................... 40
6.3 No Alternative Transactions.............................. 41
6.4 Notification of Certain Matters.......................... 41
6.5 Further Action; Reasonable Best Efforts.................. 42
</TABLE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page iii
<PAGE> 5
<TABLE>
<S> <C>
6.6 Publicity................................................ 42
6.7 Distribution True-Up..................................... 43
ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER............................. 43
7.1 Termination.............................................. 43
7.2 Effect of Termination.................................... 44
7.3 Amendment................................................ 44
7.4 Waiver................................................... 45
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION................................. 45
8.1 Survival................................................. 45
8.2 Indemnification.......................................... 45
8.3 Threshold and Limitations................................ 46
8.4 Procedure for Indemnification............................ 46
8.6 Holdback................................................. 48
8.6.1 Pledge........................................... 48
8.6.2 Release of Holdback Shares....................... 49
8.6.3 Claims Procedure................................. 49
8.6.4 Voting; Disposition.............................. 50
8.6.5 Merger or Recapitalization....................... 51
8.6.6 Taxation of Dividends............................ 51
8.7 Remedies................................................. 51
ARTICLE IX - GENERAL........................................................ 51
9.1 Expenses................................................. 51
9.2 Notices.................................................. 52
9.3 Severability............................................. 53
9.4 Entire Agreement......................................... 53
9.5 Assignment............................................... 53
9.6 Parties in Interest...................................... 54
9.7 Arbitration.............................................. 54
9.8 Governing Law............................................ 54
9.9 Headings................................................. 54
9.10 Counterparts............................................. 54
</TABLE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page iv
<PAGE> 6
<TABLE>
<S> <C>
9.11 Termination of Stockholders Agreement . . . . . . . 55
</TABLE>
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page v
<PAGE> 7
EXHIBITS
- --------
1.3 - Articles of Merger
1.4 - Articles of Organization of the Surviving Corporation
1.5 - Bylaws of the Surviving Corporation
2.1 - Disclosure Memorandum
2.1A - Form of Registration Rights Agreement
2.1B - Form of Noncompetition Agreement
4.3 - Form of Opinion of Counsel for the Company
4.12 - Foreign Investment in Real Property Tax Act Affidavit
5.3 - Form of Opinion of Counsel for Sierra
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page vi
<PAGE> 8
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and entered
into as of November __, 1995 by and among Sierra On- Line, Inc., a Delaware
corporation ("Sierra"), PDG Acquisition Corp., a Washington corporation and
wholly-owned subsidiary of Sierra (the "Purchaser"), Papyrus Design Group,
Inc., a Massachusetts corporation (the "Company"), and the shareholders of the
Company listed on the signature pages hereto (the "Shareholders").
RECITALS
A. The Company, the Shareholders, Sierra and the Purchaser believe it
advisable and in their respective best interests to effect a merger of the
Company and the Purchaser pursuant to this Agreement (the "Merger").
B. The Board of Directors and the Shareholders of the Company have
approved the Merger as required by applicable law.
C. The Board of Directors and the sole shareholder of the Purchaser
have approved the Merger as required by applicable law.
D. For federal income tax purposes, the parties hereto intend to treat
the Merger as a reorganization under Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code").
AGREEMENT
In consideration of the terms hereof, the parties hereto agree as follows:
ARTICLE I - THE MERGER
1.1 THE MERGER
Upon the terms and subject to the conditions hereof, (a) at the Effective
Time (as defined in Section 1.3 hereof) the separate existence of the Purchaser
shall cease and the Purchaser shall be merged with and into the Company (the
Company is sometimes referred to herein as the "Surviving Corporation"), and
(b) from and after the Effective Time, the Merger shall have all the effects of
a merger under the laws of the State of Washington, the Commonwealth of
Massachusetts and other applicable law.
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 1
<PAGE> 9
1.2 THE CLOSING
The closing of the Merger pursuant to this Agreement (the "Closing") shall
take place on the earliest practicable business day after the conditions to the
Closing of the Merger set forth in Articles IV and V hereof are satisfied or
waived (the "Closing Date") at 10:00 a.m. local time at the offices of Perkins
Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington, or such other time or
location as Sierra and the Company shall agree. At the Closing, each of the
parties hereto shall deliver all such documents, instruments, certificates and
other items as may be required under this Agreement or the other Operative
Documents (as defined in Section 2.1) or otherwise.
1.3 EFFECTIVE DATE AND TIME
On the Closing Date and subject to the terms and conditions hereof,
articles of merger (collectively, the "Articles of Merger") complying with the
applicable provisions of the Washington Business Corporation Act ("Washington
Law") and the Massachusetts General Corporation Law ("Massachusetts Law"),
substantially in the form or forms attached hereto as Exhibit 1.3, and in such
form and executed in such manner as required by Washington Law and
Massachusetts Law, shall be delivered for filing to the Secretary of State of
the State of Washington (the "Washington Secretary of State") and the Secretary
of State of the Commonwealth of Massachusetts (the "Massachusetts Secretary of
State"), respectively. The Merger shall become effective on the date (the
"Effective Date") and at the time (the "Effective Time") of filing of the
Articles of Merger or at such other time as may be specified in the Articles of
Merger as filed. If the Washington Secretary of State or the Massachusetts
Secretary of State requires any changes in the Articles of Merger as a
condition to their filing or to issuing its certificate to the effect that the
Merger is effective, Sierra, the Purchaser, the Company and the Shareholders
will execute any necessary revisions incorporating such changes, provided such
changes are not inconsistent with and do not result in any substantial change
in the terms of this Agreement.
1.4 ARTICLES OF ORGANIZATION OF THE SURVIVING CORPORATION
At the Effective Time, the Articles of Organization of the Company shall
be in the form attached hereto as Exhibit 1.4 and shall be the Articles of
Organization of the Surviving Corporation. Thereafter, the Articles of
Organization of the Surviving Corporation may be amended in accordance with
their terms and as provided by law.
1.5 BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, the Bylaws of the Company shall be in the form
attached hereto as Exhibit 1.5 and shall be the Bylaws of the Surviving
Corporation.
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 2
<PAGE> 10
Thereafter, the Bylaws may be amended or repealed in accordance with their
terms, the Articles of Organization of the Surviving Corporation and as
provided by law.
1.6 CONVERSION OF SHARES
1.6.1 EXCHANGE RATIO
As of the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof:
(a) All shares of any class of capital stock of the Company held
by the Company as treasury shares shall be canceled.
(b) Each issued and outstanding share of Common Stock of the
Company, no par value per share ("Company Common Stock"), shall be converted
into the right to receive from Sierra a number of whole shares of Sierra common
stock, $.01 par value per share ("Sierra Common Stock"), determined by dividing
1,400,000 by the total number of shares of Company Common Stock outstanding
immediately prior to the Effective Time on a fully diluted basis, assuming for
this purpose that all outstanding options to purchase shares of Company Common
Stock ("Stock Options") have been validly exercised prior to the Effective
Time, regardless of any vesting limitations or other restrictions on
exercisability, and that the shares of Company Common Stock issuable upon such
exercise have been validly issued (such shares of Sierra Common Stock being
referred to herein as the "Merger Consideration" or the "Securities" and the
quotient so derived being referred to herein as the "Ratio"); provided,
however, that 10% of such Securities (the "Holdback Shares") shall be held by,
and pledged by the Shareholders at Closing to, Sierra pursuant to Section 8.6
hereof. The number of Securities to be issued to each Shareholder under this
paragraph shall be calculated by aggregating all shares of Company Common Stock
held by each such Shareholder, so that such number of Securities to be issued
shall be equal to the number of shares of Company Common Stock held by such
Shareholder multiplied by the Ratio, with cash paid in lieu of any fractional
share of Sierra Common Stock pursuant to Section 1.6.3 below.
(c) Each issued and outstanding share of capital stock of the
Purchaser shall be converted into one share of common stock of the Surviving
Corporation.
(d) Each outstanding Stock Option granted under the Company's 1992
Stock Option Plan (the "Company Option Plan"), whether vested or unvested,
shall be deemed assumed by Sierra and deemed to constitute an option to
acquire, on substantially the same terms and conditions as are applicable under
the Company Option Plan, a number (rounded down to the nearest whole number) of
shares of
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<PAGE> 11
Sierra Common Stock equal to (i) the maximum number of shares of Company Common
Stock otherwise issuable upon exercise of such Stock Option multiplied by (ii)
the Ratio, at an exercise price per share (rounded up to the nearest whole
cent) equal to (x) the previous exercise price per share of such Stock Option
prior to the assumption contemplated by this paragraph divided by (y) the
Ratio. The vesting schedules of all Stock Options shall remain unchanged as a
result of the assumption contemplated by this paragraph.
1.6.2 EXCHANGE OF CERTIFICATES
(a) As soon as practicable after the Effective Date, Sierra shall
make available, and each Shareholder will be entitled to receive, upon
surrender to Sierra of one or more certificates representing Company Common
Stock for cancellation, certificates representing the number of shares of
Sierra Common Stock that such Shareholder is entitled to receive pursuant to
Section 1.6.1 hereof; provided, however, that the certificates representing the
Holdback Shares shall be retained by Sierra in accordance with this Agreement.
The shares of Sierra Common Stock that each Shareholder shall be entitled to
receive pursuant to the Merger shall be deemed to have been issued at the
Effective Time. No interest shall accrue on the Merger Consideration. If the
Merger Consideration (or any portion thereof) is to be delivered to any person
other than the person in whose name the certificate or certificates
representing shares of Company Common Stock surrendered in exchange therefor is
registered, it shall be a condition to such exchange that the person requesting
such exchange shall pay to Sierra any transfer or other taxes required by
reason of the payment of the Merger Consideration to a person other than the
registered holder of the certificate or certificates so surrendered, or shall
establish to the satisfaction of Sierra that such tax has been paid or is not
applicable. Notwithstanding the foregoing, neither Sierra nor any other party
hereto shall be liable to a holder of shares of Company Common Stock for any
Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws.
(b) As soon as practicable after the Effective Date, Sierra shall
make available to each holder of a Stock Option a replacement stock option
letter agreement setting forth such holder's rights to purchase Sierra Common
Stock as determined under this Agreement. Sierra shall take all corporate
action necessary to reserve for issuance a sufficient number of shares of
Sierra Common Stock as may be issuable pursuant to the Stock Options in
accordance with this Section 1.6.
1.6.3 NO FRACTIONAL SHARES
No certificates or scrip representing fractional shares of Sierra Common
Stock shall be issued upon the surrender for exchange of certificates
representing Company
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AGREEMENT AND PLAN OF MERGER Page 4
<PAGE> 12
Common Stock pursuant to the Merger, and no dividend, stock split or other
distribution with respect to Sierra Common Stock shall relate to any such
fractional interest, and any such fractional interests shall not entitle the
owner thereof to vote or to any rights of a security holder. In lieu of each
such fractional share, Sierra shall pay to the holder thereof, as soon as
practicable after the Effective Date, an amount in cash equal to such fraction
multiplied by the closing price of Sierra Common Stock on the Nasdaq National
Market on the trading day prior to the Closing Date.
1.6.4 NO FURTHER TRANSFERS
After the Effective Time, there shall be no transfers of any shares of
Company Common Stock on the stock transfer books of the Surviving Corporation.
If, after the Effective Time, certificates formerly representing shares of
Company Common Stock are presented to the Surviving Corporation, they shall be
forwarded to Sierra and be canceled and exchanged in accordance with this
Section 1.6, subject to applicable law in the case of Dissenting Shares.
1.7 POOLING RESTRICTIONS ON TRANSFER OF THE SECURITIES
The Shareholders shall not transfer the Securities received pursuant to
the Merger until at least 5 business days after the publication by Sierra of
financial results for the first fiscal quarter of Sierra ending after the
Closing which contains a period of at least 30 days of combined financial
results of Sierra and the Surviving Corporation.
1.8 FORM S-8 FOR COMPANY OPTION PLAN
As soon as practicable after the Effective Date, Sierra shall prepare and
file a Registration Statement on Form S-8 (the "Form S-8") with the Securities
and Exchange Commission registering under the Securities Act of 1933, as
amended, the shares of Sierra Common Stock issuable upon exercise of the Stock
Options assumed under Section 1.6.1(d) above and shall use reasonable efforts
to maintain the effectiveness of such Registration Statement for such period as
shall be necessary for the holders of such Stock Options to realize the benefit
thereof.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS
To induce Sierra and the Purchaser to enter into and perform this
Agreement and the other Operative Documents (as defined in Section 2.1 hereof),
and except as is otherwise set forth in the Disclosure Memorandum attached
hereto as Exhibit 2.1 (the "Disclosure Memorandum"), which shall specifically
identify or cross-reference the paragraph or paragraphs of this Article II to
which the exceptions therein relate, and which shall constitute in its entirety
a representation and warranty under this
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AGREEMENT AND PLAN OF MERGER Page 5
<PAGE> 13
Article II, the Company and the Shareholders jointly and severally represent
and warrant (except as to Sections 2.1, 2.6(b) and 2.28, as to which they
severally but not jointly represent and warrant) to Sierra and the Purchaser as
of the date of this Agreement and as of the Closing as follows in this Article
II.
2.1 GOOD TITLE, ETC.
Each Shareholder represents with respect to itself only (and not with
respect to any other Shareholder) that (a) such Shareholder owns, beneficially
and of record, the shares of Company Common Stock listed opposite such
Shareholder's name on Schedule 2.4(b) to the Disclosure Memorandum; (b) such
shares of Company Common Stock are free and clear of any lien, encumbrance,
adverse claim, restriction on sale or transfer (other than restrictions imposed
by applicable securities laws), preemptive right or option; (c) such
Shareholder has all necessary power, right and authority to enter into this
Agreement and each of the agreements, certificates, instruments and documents
executed or delivered pursuant to the terms of this Agreement by such
Shareholder, including, without limitation and as applicable, the Registration
Rights Agreement in substantially the form attached hereto as Exhibit 2.1A to
be entered into as of the Closing among Sierra and the Shareholders, and the
Noncompetition Agreement in substantially the form attached hereto as Exhibit
2.1B to be entered into as of the Closing among Sierra and each of the
Shareholders (collectively, and including this Agreement, the "Operative
Documents"), to consummate the transactions contemplated hereby and thereby,
and to sell and transfer the shares of Company Common Stock held by such
Shareholder hereunder without the consent or approval of any other Person (as
defined in Section 2.6 hereof), other than as set forth on Schedule 2.6 to the
Disclosure Memorandum; and (d) this Agreement and the other Operative Documents
to which such Shareholder is a party have each been duly authorized, executed
and delivered by such Shareholder and each is a legal, valid and binding
obligation of such Shareholder, enforceable in accordance with its terms.
2.2 ORGANIZATION
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the Commonwealth of Massachusetts. The Company has
all requisite corporate power and authority to own, operate and lease its
properties and assets, to carry on its business as now conducted and as
proposed to be conducted, to enter into and perform its obligations under this
Agreement and the Operative Documents, and to consummate the transactions
contemplated hereby and thereby. The Company is duly qualified and licensed as
a foreign corporation to do business and is in good standing in each
jurisdiction listed on Schedule 2.2 to the Disclosure Memorandum, which
jurisdictions constitute all jurisdictions where the character of
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AGREEMENT AND PLAN OF MERGER Page 6
<PAGE> 14
the Company's properties occupied, owned or held under lease or the nature of
the business conducted by the Company makes such qualification necessary,
except as set forth on Schedule 2.2 to the Disclosure Memorandum.
2.3 ENFORCEABILITY
All corporate action on the part of the Company and its officers,
directors and shareholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Operative Documents, the consummation
of the Merger, and the performance of all of the Company's obligations under
this Agreement and the Operative Documents has been taken or will be taken as
of or prior to the Effective Time. This Agreement has been, and each of the
Operative Documents at the Closing will have been, duly executed and delivered
by the Company, and this Agreement is, and each of the Operative Documents to
which the Company is a party will be at the Closing, a legal, valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms.
2.4 CAPITALIZATION
(a) The authorized capital stock of the Company consists of 15,000
shares of Company Common Stock.
(b) The issued and outstanding capital stock of the Company
consists solely of 8,540 shares of Company Common Stock (the "Outstanding
Shares"), which are and as of the Closing will be held of record and
beneficially by the Shareholders as set forth on Schedule 2.4(b) to the
Disclosure Memorandum. The Outstanding Shares are, and immediately prior to
the Closing will be, duly authorized and validly issued, fully paid and
nonassessable, and issued in compliance with all applicable federal, state and
foreign securities laws. No Person other than the Shareholders holds any
interest in any of the Outstanding Shares. True and correct copies of the
stock records of the Company, showing all issuances and transfers of shares of
capital stock of the Company since inception, have been provided to Sierra.
(c) Other than Stock Options to purchase up to 1,684 shares of
Company Common Stock which have been granted under the Company Option Plan,
there are no outstanding rights of first refusal, preemptive rights, options,
warrants, conversion rights or other agreements, either directly or indirectly,
for the purchase or acquisition from the Company or any Shareholder of any
shares of the Company's capital stock. Set forth on Schedule 2.4(c) to the
Disclosure Memorandum is a spreadsheet accurately reflecting the number of such
Stock Options outstanding, the grant dates, vesting schedules and exercise
prices thereof, and the identities of the optionees and an indication of their
relationships to the Company. The Company has
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AGREEMENT AND PLAN OF MERGER Page 7
<PAGE> 15
delivered to Sierra true and correct copies of the Company Option Plan and the
form of stock option letter agreement relating to Stock Options granted
thereunder.
(d) Except as set forth on Schedule 2.4(d) to the Disclosure
Memorandum, the Company is not a party or subject to any agreement or
understanding, and there is no agreement or understanding between any Persons
(as defined in Section 2.6 hereof), that affects or relates to the voting or
giving of written consents with respect to any securities of the Company or the
voting by any director of the Company. No Shareholder or any affiliate thereof
is indebted to the Company, and the Company is not indebted to any Shareholder
or any affiliate thereof. The Company is not under any contractual or other
obligation to register any of its presently outstanding securities or any of
its securities which may hereafter be issued.
2.5 SUBSIDIARIES AND AFFILIATES
Except as set forth on Schedule 2.5 to the Disclosure Memorandum, the
Company does not own, directly or indirectly, any ownership, equity, profits or
voting interest in, or otherwise control, any corporation, partnership, joint
venture or other entity, and has no agreement or commitment to purchase any
such interest.
2.6 NO APPROVALS; NO CONFLICTS
(a) Except as set forth on Schedule 2.6(a) to the Disclosure
Memorandum, the execution, delivery and performance of this Agreement and the
other Operative Documents by the Company and the consummation of the
transactions contemplated hereby and thereby will not (i) constitute a
violation (with or without the giving of notice or lapse of time, or both) of
any provision of law or any judgment, decree, order, regulation or rule of any
court or other governmental authority applicable to the Company, (ii) require
any consent, approval or authorization of, or declaration, filing or
registration with, any person, corporation, partnership, joint venture,
association, organization, other entity or governmental or regulatory authority
(a "Person"), except compliance with applicable securities laws and the filing
of all documents necessary to consummate the Merger with the Washington
Secretary of State and the Massachusetts Secretary of State (the consent of all
such Persons to be duly obtained by the Company at or prior to the Closing),
(iii) result in a default (with or without the giving of notice or lapse of
time, or both) under, acceleration or termination of, or the creation in any
party of the right to accelerate, terminate, modify or cancel, any agreement,
lease, note or other restriction, encumbrance, obligation or liability to which
the Company is a party or by which it is bound or to which any assets of the
Company are subject, (iv) result in the creation of any lien or encumbrance
upon the assets of the Company or upon any Outstanding Shares or other
securities of the Company, (v) conflict with or result in a breach of or
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AGREEMENT AND PLAN OF MERGER Page 8
<PAGE> 16
constitute a default under any provision of the Articles of Organization or
Bylaws of the Company, or (vi) invalidate or adversely affect any governmental
permit, license, authorization or status used in the conduct of the business of
the Company.
(b) Except as set forth on Schedule 2.6(b) to the Disclosure
Memorandum, the execution, delivery and performance of this Agreement by each
Shareholder and the consummation of the transactions contemplated hereby will
not (i) constitute a violation by such Shareholder (with or without the giving
of notice or lapse of time, or both) of any provisions of law or any judgment,
decree, order, regulation or rule of any court, agency or other governmental
authority applicable to such Shareholder, (ii) require any consent, approval or
authorization of, or declaration, filing or registration with, any Person,
except for compliance with applicable securities laws and the filing of all
documents necessary to consummate the Merger with the Washington Secretary of
State and the Massachusetts Secretary of State (the consent of all such Persons
to be duly obtained by the Company or the Shareholder at or prior to the
Closing), (iii) result in the creation of any lien or encumbrance upon the
shares of Company Common Stock owned by such Shareholder, or (iv) conflict with
or result in a breach of or constitute a default under any provision of the
Articles of Organization or Bylaws of the Company.
2.7 FINANCIAL STATEMENTS
The Company has delivered to Sierra (a) consolidated balance sheets,
statements of income and expense, statements of cash flow, and statements of
shareholders' equity of the Company as of or for the fiscal years ended
December 31, 1994 and 1993, as audited by and together with the reports thereon
of Tofias, Fleischman & Shapiro, independent certified public accountants, and
(b) a consolidated balance sheet, statement of income and expense, statement of
cash flow, and statement of shareholders' equity of the Company as of and for
the nine-month period ended September 30, 1995 which have been compiled by
Tofias, Fleischman & Shapiro. All of the foregoing financial statements are
herein referred to as the "Financial Statements." The audited consolidated
balance sheet of the Company as of December 31, 1994 is herein referred to as
the "Company Balance Sheet." The Financial Statements have been prepared in
conformity with generally accepted accounting principles in the United States
("GAAP"), consistently applied throughout the periods covered thereby, and
fairly present the financial position, results of operations and changes in
financial position of the Company as of the dates and for the periods
indicated, subject, in the case of unaudited statements, to normal recurring
period- end audit adjustments which will not exceed $25,000 in the aggregate.
The Company has no liabilities or obligations of any nature (absolute,
contingent or otherwise) which are not fully reflected or reserved against in
the Company Balance Sheet, except liabilities or obligations incurred since the
date of the Company Balance
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AGREEMENT AND PLAN OF MERGER Page 9
<PAGE> 17
Sheet in the ordinary course of business and consistent with past practice
which are not in excess of $25,000 in the aggregate or $5,000 individually.
The Company maintains standard systems of accounting which are adequate for its
business. Except as set forth on Schedule 2.7 to the Disclosure Memorandum,
the Company is not a guarantor, indemnitor, surety or other obligor of any
indebtedness of any other Person. The Company's practices with respect to
capitalizing software development costs, as reflected in the Financial
Statements, are reasonable, in accordance with industry standards, and
consistent with the advice of the Company's independent accountants.
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth on Schedule 2.8 to the Disclosure
Memorandum and except for transactions specifically contemplated in this
Agreement, since the date of the Company Balance Sheet, neither the Company nor
any of its officers or directors in their representative capacities on behalf
of the Company has:
(a) taken any action or entered into or agreed to enter into any
transaction, agreement or commitment other than in the ordinary course of
business;
(b) forgiven or canceled any indebtedness or waived any claims or
rights of material value (including, without limitation, any indebtedness owing
by any Shareholder or any officer, director, employee or affiliate of the
Company);
(c) granted, other than in the ordinary course of business and
consistent with past practice, any increase in the compensation of directors,
officers, employees or consultants (including any such increase pursuant to any
employment agreement or bonus, pension, profit-sharing, lease payment or other
plan or commitment) or any increase in the compensation payable or to become
payable to any director, officer, employee or consultant;
(d) suffered any material adverse change in its business,
operations, assets, liabilities (absolute, accrued, contingent or otherwise),
sales, margins, profitability, condition (financial or other) or prospects;
(e) borrowed or agreed to borrow any funds, incurred or become
subject to, whether directly or by way of assumption or guarantee or otherwise,
any obligations or liabilities (absolute, accrued, contingent or otherwise) in
excess of $25,000, except liabilities and obligations incurred in the ordinary
course of business and consistent with past practice, or increased, or
experienced any change in any assumptions underlying or methods of calculating,
any bad debt, contingency or other reserves;
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(f) paid, discharged or satisfied any claims, liabilities or
obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction in the ordinary course of business and
consistent with past practice of claims, liabilities and obligations reflected
or reserved against in the Company Balance Sheet or incurred in the ordinary
course of business and consistent with past practice since the date of the
Company Balance Sheet, or prepaid any obligation having a fixed maturity of
more than 90 days from the date such obligation was issued or incurred;
(g) permitted or allowed any of its property or assets (real,
personal or mixed, tangible or intangible) to be subjected to any mortgage,
pledge, lien, security interest, encumbrance, restriction or charge, except (i)
assessments for current taxes not yet due and payable, (ii) landlord's liens
for rental payments not yet due and payable, and (iii) mechanics',
materialmen's, carriers' and other similar statutory liens securing
indebtedness that was incurred in the ordinary course of business and is not
yet due and payable;
(h) written down the value of any inventory (including write-downs
by reason of shrinkage, markdown or obsolescence) or written off as
uncollectible any notes or accounts receivable, except in the ordinary course
of business and consistent with past practice;
(i) sold, transferred or otherwise disposed of any of its
properties or assets (real, personal or mixed, tangible or intangible), except
the sale of inventory in the ordinary course of business and consistent with
past practice;
(j) disposed of or permitted to lapse any rights to the use of any
trademark, trade name, patent or copyright, or disposed of or disclosed to any
Person without obtaining an appropriate confidentiality agreement from any such
Person any trade secret, formula, process or know-how not theretofore a matter
of public knowledge;
(k) made any single capital expenditure or commitment in excess of
$25,000 for additions to property, plant, equipment or intangible capital
assets or made aggregate capital expenditures in excess of $25,000 for
additions to property, plant, equipment or intangible capital assets;
(l) made any change in any method of accounting or accounting
practice or internal control procedure;
(m) issued any capital stock or other securities, or declared,
paid or set aside for payment any dividend or other distribution in respect of
its capital stock, or redeemed, purchased or otherwise acquired, directly or
indirectly, any shares of
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<PAGE> 19
capital stock or other securities of the Company, or otherwise permitted the
withdrawal by any of the holders of capital stock of the Company of any cash or
other assets (real, personal or mixed, tangible or intangible), in
compensation, indebtedness or otherwise, other than payments of compensation in
the ordinary course of business and consistent with past practice;
(n) paid, loaned or advanced any amount to, or sold, transferred
or leased any properties or assets (real, personal or mixed, tangible or
intangible) to, or entered into any agreement or arrangement with, any
Shareholder or any of the Company's officers, directors or employees or any
affiliate of any Shareholder or any of the Company's officers, directors or
employees, except compensation paid to officers and employees at rates not
exceeding the rates of compensation paid during the fiscal year last ended, and
except for those increased in the ordinary course of business and consistent
with past practice.
(o) entered into or agreed to enter into, or otherwise suffered to
be outstanding, any power of attorney of the Company or any obligations or
liabilities (absolute, accrued, contingent or otherwise) of the Company, as
guarantor, surety, cosigner, endorser, comaker, indemnitor or otherwise in
respect of the obligation of any other Person;
(p) received notice of, or otherwise obtained knowledge of: (i)
any claim, action, suit, arbitration, proceeding or investigation involving,
pending against or threatened against the Company or any employee of the
Company before or by any court or governmental or nongovernmental department,
commission, board, bureau, agency or instrumentality, or any other Person; (ii)
any valid basis for any claim, action, suit, arbitration, proceeding,
investigation or the application of any fine or penalty adverse to the Company
or any employee of the Company before or by any Person; or (iii) any
outstanding or unsatisfied judgments, orders, decrees or stipulations to which
the Company or any employee of the Company is a party and where such items in
subparagraphs (i), (ii) and (iii) above relate directly to the transactions
contemplated herein;
(q) entered into or agreed to any sale, assignment, transfer or
license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of the Company or any amendment or change to any existing
license or other agreement relating to intellectual property, other than in the
ordinary course of business;
(r) received notice that there has been a loss of, or contract
cancellation by, any material current or prospective customer, licensor or
distributor of the Company;
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AGREEMENT AND PLAN OF MERGER Page 12
<PAGE> 20
(s) taken any action, or become aware of any action taken by any
Shareholder, which alone or together with other facts or circumstances could
affect the ability of Sierra to account for the Merger as a "pooling of
interests" transaction consistent with GAAP consistently applied; or
(t) agreed, whether in writing or otherwise, to take any action
described in this Section 2.8.
2.9 TAXES
Except as described on Schedule 2.9 to the Disclosure Memorandum, the
Company has (a) duly and timely filed, including valid extensions, with the
appropriate governmental agencies (domestic and foreign) all tax returns,
information returns and reports ("Returns") for all Taxes (as defined below)
required to have been filed with respect to the Company and its business, (b)
all such Returns are true, correct and complete, and (c) except as set forth on
Schedule 2.9 to the Disclosure Memorandum, paid in full or provided for all
Taxes that are due or claimed to be due by any governmental agency. "Taxes"
shall mean all taxes, charges, fees, levies or other assessments, including,
but not limited to, income, excise, gross receipts, property, sales, use, ad
valorem, transfer, franchise, profits, license, withholding, payroll,
employment, severance, stamp, occupation, windfall profits, social security and
unemployment or other taxes imposed by the United States or any agency or
instrumentality thereof, any state, county, local or foreign government, or any
agency or instrumentality thereof, and any interest or fines, and any and all
penalties or additions relating to such taxes, charges, fees, levies or other
assessments. Except as described on Schedule 2.9 to the Disclosure Memorandum,
(i) the reserves and provisions for Taxes reflected in the Financial Statements
are adequate for the payment of Taxes not yet due and payable; (ii) no
unresolved claim for assessment or collection of Taxes has been asserted or
threatened against the Company, and no audit or investigation by any
governmental authority is under way with respect to Taxes, interest or other
governmental charges; (iii) to the best of its knowledge, no circumstances
exist or have existed which would constitute grounds for assessment against the
Company of any tax liability with respect to any period for which Returns have
been filed, including, but not limited to, any circumstances relating to the
existence of a valid S corporation election for the Company for any such
period; (iv) the Company has not filed or entered into any election, consent or
extension agreement or any waiver that extends any applicable statute of
limitations; (v) any Taxes incurred by the Company or accrued by it since the
date of the Company Balance Sheet have arisen in the ordinary course of
business; and (vi) the Company has not filed any consent to the application of
Section 341(f)(2) of the Code, to any assets held, acquired or to be acquired
by it. The Company has furnished Sierra with complete and correct copies of
all Returns. There are no tax liens on any property or
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<PAGE> 21
assets of the Company other than liens for current taxes not yet payable. No
claim has been made by an authority in any jurisdiction where the Company does
not file Returns that the Company is or may be subject to taxation by that
jurisdiction. The Company has not made any payments, is not obligated to make
any payments, and is not a party to any agreement that could obligate it to
make any payments that will not be deductible under Section 280G of the Code;
the Company is not a party to any Tax allocation or sharing agreement, and,
except as set forth on Schedule 2.9 to the Disclosure Memorandum, the Company
(A) has not been a member of an affiliated group filing a consolidated income
Tax Return and (B) does not have any liability for Taxes of any person under
Treasury Regulations Section 1.1502-6 (or any similar provision of state,
local or foreign law) as a transferor or successor by contract or otherwise.
The Company's election to be taxed as a Subchapter S Corporation under Section
1361 of the Code has been in effect throughout the existence of the Company
and, accordingly, the Company has never been subject to any federal income tax
by reason of being a "C Corporation" (as that term is defined in the Code). No
Shareholder is a nonresident alien for purposes of U.S. income taxation,
including for purposes of Section 897 of the Code.
2.10 PROPERTY
(a) The Company owns no real property other than the leasehold
interests described in Schedule 2.10(a) to the Disclosure Memorandum, which
contains a complete and accurate list of all real property of the Company which
is leased, rented or used by the Company (the "Real Property"). The Company
has delivered to Sierra true and complete copies of all written leases,
subleases, rental agreements, contracts of sale, tenancies or licenses relating
to the Real Property and written summaries of the terms of any oral leases,
subleases, rental agreements, contracts of sale, tenancies or licenses relating
to the Real Property.
(b) Schedule 2.10(b) to the Disclosure Memorandum contains a
complete and accurate list of each item of personal property having a value in
excess of $5,000, and all computer equipment, which is owned, leased, rented or
used by the Company (the "Personal Property"); provided that such list need not
describe the Listed Intellectual Property or the Intellectual Property Licenses
(as defined in Section 2.17 hereof). The Company has delivered to Sierra true
and complete copies of all leases, subleases, rental agreements, contracts of
sale, tenancies or licenses relating to the Personal Property. The Real
Property and the Personal Property include all properties and assets (whether
real, personal or mixed, tangible or intangible) (other than, in the case of
the Personal Property, property rights with an individual value of less than
$1,000, the Listed Intellectual Property and the Intellectual Property
Licenses) reflected in the Company Balance Sheet and all the properties and
assets purchased by the Company since the date of the Company
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<PAGE> 22
Balance Sheet (except for such properties or assets sold since the date of the
Company Balance Sheet in the ordinary course of business and consistent with
past practice). The Real Property and the Personal Property include all
material property used in the business of the Company, other than the Listed
Intellectual Property and the Intellectual Property Licenses.
(c) The Company's leasehold interest in each parcel of the Real
Property is free and clear of all material liens, mortgages, pledges, deeds of
trust, security interests, charges, encumbrances and other adverse claims or
interests of any kind, except as set forth on Schedule 2.10(c) to the
Disclosure Memorandum. Each lease of any portion of the Real Property is
valid, binding and enforceable in accordance with its terms against the parties
thereto and any other Person with an interest in such Real Property, the
Company has performed in all material respects all obligations imposed upon it
thereunder, and neither the Company nor any other party thereto is in default
thereunder nor is there any event which with notice or lapse of time, or both,
would constitute a default thereunder. Except as set forth on Schedule 2.6 to
the Disclosure Memorandum, no consent is required from any Person under any
lease or other agreement or instrument relating to the Real Property in
connection with the consummation of the transactions contemplated by this
Agreement and the other Operative Documents, and the Company has not received
notice that any party to any such lease or other agreement or instrument
intends to cancel, terminate or refuse to renew the same or to exercise or
decline to exercise any option or other right thereunder. The Company has not
granted any lease, sublease, tenancy or license of, or entered into any rental
agreement or contract of sale with respect to, any portion of the Real
Property.
(d) Except as described on Schedule 2.10(d) to the Disclosure
Memorandum, the Company's offices, warehouse and other structures and its
Personal Property are of quality consistent with industry standards, are in
good operating condition and repair, normal wear and tear excepted, are
adequate for the uses to which they are being put, and comply in all material
respects with applicable safety and other laws and regulations.
(e) Except as set forth on Schedule 2.10(e) to the Disclosure
Memorandum, and except for (i) assessments for current taxes not yet due and
payable, (ii) landlord's liens for rental payments in respect of the Real
Property incurred in the ordinary course of business and not yet due and
payable, and (iii) mechanics', materialmen's, carriers' and other similar
statutory liens securing indebtedness that was incurred in the ordinary course
of business and is not yet due and payable, the Personal Property is free and
clear of all liens, and, other than leased Personal Property which is so noted
on the list supplied pursuant to paragraph (b) of this Section 2.10, the
Company owns such Personal Property.
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(f) Except as set forth on Schedule 2.10(f) to the Disclosure
Memorandum, each lease, license, rental agreement, contract of sale or other
agreement to which the Personal Property is subject is valid, binding and
enforceable in accordance with its terms against the parties thereto, the
Company has performed in all material respects all obligations imposed upon it
thereunder, and neither the Company nor, to the best of the Company's
knowledge, any other party thereto is in default thereunder, nor is there any
event which with notice or lapse of time, or both, would constitute a default
by the Company or, to the best of the Company's knowledge, any other party
thereunder. Except as set forth on Schedule 2.10(f) to the Disclosure
Memorandum, no consent is required from any Person under any lease or other
agreement or instrument relating to the Personal Property in connection with
the consummation of the transactions contemplated by in this Agreement and the
other Operative Documents, and the Company has not received notice that any
party to any such lease or other agreement or instrument intends to cancel,
terminate or refuse to renew the same or to exercise or decline to exercise any
option or other right thereunder. The Company has not granted any lease,
sublease, tenancy or license of any portion of the Personal Property, except in
the ordinary course of business.
(g) Neither the whole nor any portion of the leaseholds or any
other assets or property of the Company is subject to any currently outstanding
governmental decree or order to be sold or is being condemned, expropriated or
otherwise taken by any public authority with or without payment of compensation
therefor, nor has any such condemnation, expropriation or taking been proposed.
2.11 CONTRACTS
Schedule 2.11 to the Disclosure Memorandum contains a complete and
accurate list (other than the Intellectual Property Licenses) of all material
contracts, agreements and understandings, oral or written, to which the Company
is currently a party or by which the Company is currently bound, including,
without limitation, security agreements, license agreements, software
development agreements, distribution agreements, joint venture agreements,
reseller agreements, credit agreements and instruments relating to the
borrowing of money. Except as set forth on Schedule 2.11 to the Disclosure
Memorandum, all contracts set forth in such Schedule are valid, binding and
enforceable in accordance with their terms against each party thereto, are in
full force and effect, the Company has performed in all material respects all
obligations imposed upon it thereunder, and neither the Company nor, to the
best of the Company's knowledge, any other party thereto is in default
thereunder, nor is there any event which with notice or lapse of time, or both,
would constitute a default by the Company or, to the best of the Company's
knowledge, any other party thereunder. True and complete copies of each such
written contract (or written summaries of the terms of any such oral contract)
have been heretofore
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AGREEMENT AND PLAN OF MERGER Page 16
<PAGE> 24
delivered to Sierra. Except as specifically set forth on Schedule 2.11 to the
Disclosure Memorandum, the Company has no:
(a) outstanding sales or service contracts, commitments or
proposals of the Company which are expected by the Company to result in any
loss or the realization of less than the Company's usual and customary margins
upon completion or performance thereof, in excess of the inventory reserve
provided in the Company Balance Sheet, or any outstanding contracts, bids, or
sales or service proposals quoting prices which the Company, based upon the
Company's current operations, expects not to result in a profit;
(b) contracts with directors, officers, shareholders, employees,
agents, consultants, advisors, salesmen, sales representatives, distributors or
dealers that are not, except as provided by law to the contrary without regard
to the express terms of such contract, cancelable by it within 30 days' notice
without liability, penalty or premium, any agreement or arrangement providing
for the payment of any bonus or commission based on sales or earnings, or any
compensation agreement or arrangement affecting or relating to former employees
of the Company;
(c) employment agreement, whether express or implied, or any other
agreement for services that contains any severance or termination pay
liabilities or obligations;
(d) noncompetition agreement or other restriction from carrying on
its business anywhere in the world;
(e) liability or obligation with respect to the return of
inventory or merchandise other than on account of a defective condition,
incorrect quantities or missed delivery dates;
(f) notice that any party to a material contract intends to
cancel, terminate or refuse to renew such contract or to exercise or decline to
exercise any option or right thereunder; or
(g) material disagreement with any of its suppliers, customers,
distributors, OEM resellers, licensors or licensees.
2.12 CUSTOMERS AND SUPPLIERS
Schedule 2.12 to the Disclosure Memorandum sets forth: (a) a complete and
accurate list of the customers of the Company accounting for 5% or more of the
Company's sales during the fiscal year last ended showing the approximate total
sales by the Company to each such customer during the fiscal year last ended
and (b) a
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AGREEMENT AND PLAN OF MERGER Page 17
<PAGE> 25
complete and accurate list of the suppliers of the Company from whom the
Company has purchased 5% or more of the goods or services purchased by the
Company in the fiscal year last ended. The Company has no reasonable basis to
expect any material modification to its relationship with any customer or
supplier named on Schedule 2.12 to the Disclosure Memorandum.
2.13 ORDERS, COMMITMENTS AND RETURNS
Schedule 2.13 to the Disclosure Memorandum contains an accurate summary of
the Company's total backlog of orders (including all accepted and unfulfilled
sales orders) and the aggregate of all outstanding purchase orders issued by
the Company (which include all contracts or commitments for the purchase by the
Company of materials or other supplies). All such sale and purchase
commitments were made in the ordinary course of business. Except as set forth
in Schedule 2.13 to the Disclosure Memorandum, there are no outstanding claims
against the Company to return merchandise by reason of alleged overshipments,
defective merchandise, missed delivery dates, incorrect quantities or
otherwise, or of merchandise in the hands of customers under an understanding
that such merchandise would be returnable.
2.14 CLAIMS AND LEGAL PROCEEDINGS
Except as set forth on Schedules 2.14 and 2.17 to the Disclosure
Memorandum, there are no claims, actions, suits, arbitrations, investigations
or proceedings pending or involving or, to the Company's best knowledge,
threatened against the Company before or by any court or governmental or
nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person. Except as set forth on Schedules 2.14
and 2.17 to the Disclosure Memorandum, to the Company's best knowledge, there
is no valid basis for any material claim, action, suit, arbitration, proceeding
or investigation against the Company before or by any Person. There are no
outstanding or unsatisfied judgments, orders, decrees or stipulations to which
the Company is a party which involve the transactions contemplated herein.
Schedule 2.14 to the Disclosure Memorandum sets forth a description of any
material disputes which have been settled or resolved by litigation or
arbitration within the last five years.
2.15 LABOR AND EMPLOYMENT MATTERS
Except as set forth on Schedule 2.15 to the Disclosure Memorandum, there
are no material labor disputes, employee grievances or disciplinary actions
pending or, to the Company's best knowledge, threatened against or involving
the Company or any of its present or former employees. The Company has
complied with all provisions of law relating to employment and employment
practices, terms and conditions of employment, wages and hours. The Company is
not engaged in any unfair labor
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AGREEMENT AND PLAN OF MERGER Page 18
<PAGE> 26
practice and has no liability for any arrears of wages or Taxes or penalties
for failure to comply with any such provisions of law. There is no labor
strike, dispute, slowdown or stoppage pending or, to the Company's best
knowledge, threatened against or affecting the Company, and the Company has not
experienced any work stoppage or other labor difficulty since its
incorporation. No collective bargaining agreement is binding on the Company.
The Company has no knowledge of any organizational efforts presently being made
or threatened by or on behalf of any labor union with respect to employees of
the Company, and the Company has not been requested by any group of employees
or others to enter into any collective bargaining agreement or other agreement
with any labor union or other employee organization. Each employee, officer
and consultant of the Company has executed a nondisclosure agreement in the
form provided to Sierra. To the best of the Company's knowledge, no employee
(or person performing similar functions) of the Company is in violation of any
such agreement or any employment agreement, noncompetition agreement, patent
disclosure agreement, invention assignment agreement, proprietary information
agreement or other contract or agreement relating to the relationship of such
employee with the Company or any other party, and the Company will use its best
efforts to prevent any such violation. Schedule 2.15 to the Disclosure
Memorandum sets forth a true and complete list of: (a) the names and current
compensation amounts of all directors and officers of the Company; (b) the wage
rates for nonsalaried and non-officer salaried employees of the Company by
classification, and all labor union contracts (if any); (c) all group insurance
programs in effect for employees of the Company; and (d) the names and current
compensation packages of all independent contractors and consultants of the
Company. The Company is not in default with respect to any of its obligations
referred to in clause (b) above and has no obligation or liability for
severance or back pay owed through or by virtue of the Closing. Except as
disclosed on Schedule 2.15 to the Disclosure Memorandum, all employees of the
Company are employed on an "at will" basis.
2.16 EMPLOYEE BENEFIT PLANS
(a) Employee Benefit Plans. Schedule 2.16(a) to the Disclosure
Memorandum sets forth an accurate and complete list and description of each
employee benefit plan, policy, program, contract or arrangement, whether formal
or informal and whether legally binding or not, covering or benefiting any
officer, employee, former employee, director or former director of the Company
or any dependents or beneficiaries of any such person, or with respect to which
the Company has (or could have) any obligation or liability, including, but not
limited to, each "employee benefit plan," within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
specifically including, but not limited to, each retirement, pension, profit
sharing, stock bonus, savings, thrift, bonus, cafeteria, medical, health,
hospitalization, dental, vision,
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AGREEMENT AND PLAN OF MERGER Page 19
<PAGE> 27
welfare, life insurance, disability, accident insurance, group insurance,
medical expense reimbursement, dependent care expense reimbursement, or tuition
reimbursement plan, policy or program, each sick pay, holiday and vacation
policy or program, each executive or deferred compensation plan or contract,
each stock purchase, stock option or stock appreciation rights plan or
arrangement, each severance agreement or plan and each employment, consulting
or personal services contract with any officer, director or employee (or any
person who prior to entering into such contract was an officer, director or
employee) of the Company (such items are hereinafter referred to collectively
as "Employee Benefit Plans" and each individually as an "Employee Benefit
Plan"). Also set forth on such Schedule 2.16(a) is the annual amount expected
to be paid by the Company pursuant to each Employee Benefit Plan for the fiscal
year last ended.
(b) Documents Provided. The Company has delivered to Sierra true,
correct and complete copies of all Employee Benefit Plans (including all
amendments thereto), along with, to the extent applicable to the particular
Employee Benefit Plan, the following information: (i) copies of the annual
reports (Form 5500 series) filed with respect to the Employee Benefit Plan for
the last three years; (ii) copies of the most recent summary plan descriptions,
summary annual reports, summaries of material modifications and all material
employee manuals or communications filed or distributed with respect to the
Employee Benefit Plan; (iii) copies of any insurance contracts or trust
agreements through which the Employee Benefit Plan is funded; (iv) copies of
all contracts relating to the Employee Benefit Plan, including, but not limited
to, service provider agreements, insurance contracts, investment management
agreements, subscription and prescription agreements and record keeping
agreements; (v) a copy of the most recent IRS determination letter issued with
respect to the Employee Benefit Plan; and (vi) notice of any material adverse
change occurring with respect to the Employee Benefit Plan since the date of
the most recently completed and filed annual report.
(c) Compliance With Laws. Except as provided in Schedule 2.16,
with respect to each Employee Benefit Plan: (i) the Company is, and at all
times has been, in compliance in all material respects with, and such Employee
Benefit Plan is, and at all times has been, maintained and operated in all
material respects in compliance with, the terms of such Employee Benefit Plan
and all applicable laws, rules and regulations, including, but not limited to,
ERISA and the Code; (ii) all tax returns, information returns, reports and
information relating to such Employee Benefit Plan required to be filed with
any governmental entity have been accurately, timely and properly filed; (iii)
all notices, statements, reports and other disclosure required to be given or
made to participants in such Employee Benefit Plan or their beneficiaries have
been accurately, timely and properly disclosed or provided; (iv) neither the
Company nor any other fiduciary of such Employee Benefit Plan has
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AGREEMENT AND PLAN OF MERGER Page 20
<PAGE> 28
engaged in any transaction or acted or failed to act in a manner that violates
the fiduciary requirements of Section 404 of ERISA with respect to such
Employee Benefit Plan; and (v) no event has occurred or, to the best knowledge
of the Shareholders or the Company, is threatened or about to occur which would
constitute a prohibited transaction under Section 406 of ERISA or under Section
4975 of the Code. Moreover, neither the Company nor any Employee Benefit Plan
is liable for any federal, state, local or foreign taxes, including, but not
limited to, excise taxes under Sections 4971, 4972, 4975, 4979, 4980 and 4980B
of the Code, or taxes on unrelated business income under Section 511 of the
Code or any penalty under Section 502 of ERISA, with respect to any Employee
Benefit Plan. No Employee Benefit Plan has ever incurred an "accumulated
funding deficiency," as defined in Section 301 of ERISA or Section 412 of the
Code, whether or not waived.
(d) Qualified Plans. Each Employee Benefit Plan and related trust
intended to be qualified under Section 401(a) of the Code (i) is and has, at
all times since inception, been qualified under Section 401(a) of the Code, and
the trust established thereunder is, and at all times since inception, has been
exempt from taxation under Section 501(a) of the Code, and (ii) has been
determined to be so qualified (and a determination letter to that effect has
been issued) by the IRS, and no circumstances exist that have adversely
affected (or could adversely affect) such Employee Benefit Plan's qualified
status or result in a revocation of such determination letter.
(e) Welfare Plans. Each Employee Benefit Plan that constitutes a
"group health plan," within the meaning of Section 4980B(g)(2) of the Code or
Section 607(1) of ERISA, has been operated at all times in all material
respects in compliance with the requirements of Section 4980B of the Code and
Part 6 of Title I of ERISA. No Employee Benefit Plan that is an "employee
welfare benefit plan," within the meaning of Section 3(1) of ERISA, provides or
has any obligation to provide benefits with respect to current or former
employees of the Company or any other entity beyond their retirement or other
termination of service, including, without limitation, post-retirement (or
post-termination) medical, dental, life insurance, severance or any other
similar benefit, whether provided on an insured or self-insured basis, other
than benefits mandated by applicable law, including, but not limited to,
continuation coverage required to be provided under Section 4980B of the Code
or Part 6 of Subtitle B of Title I of ERISA.
(f) Contributions. All contributions and other payments required
to have been made by the Company (including any pre-tax or post-tax
contributions or payments by employees or their dependents) to any Employee
Benefit Plan (or to any person pursuant to the terms thereof) have been so made
or the amount of any such
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AGREEMENT AND PLAN OF MERGER Page 21
<PAGE> 29
payment or contribution obligation that is not yet due has been properly
reflected in the Company's Financial Statements.
(g) Other Claims and Investigations. There are no actions, suits
or claims (other than routine claims for benefits) pending or, to the best
knowledge of the Shareholders or the Company, threatened with respect to any
Employee Benefit Plan or against the assets of any Employee Benefit Plan, nor,
to the best knowledge of the Shareholders or the Company, is there a reasonable
basis for any such action, suit or claim. None of the Employee Benefit Plans
is currently under investigation, audit or review, directly or indirectly, by
the IRS or the Department of Labor (the "DOL"), and, to the best knowledge of
the Shareholders or the Company, no such action is contemplated or under
consideration by the IRS or DOL.
(h) Other Binding Commitments. The Company has no agreement,
arrangement, commitment or obligation, whether formal or informal, whether
written or unwritten, and whether legally binding or not, to create any plan,
policy, program, contract or arrangement not identified in Section 2.16 of the
Disclosure Memorandum or to modify or amend any of the existing Employee
Benefit Plans.
(i) Multiemployer and Title IV Plans. Neither the Company nor any
ERISA Affiliate maintains or contributes to, or has ever maintained or
contributed to (or been obligated to contribute to), any multiemployer plan,
within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA, or any plan
that is subject to Section 302 or Title IV of ERISA or Section 412 of the Code.
For purposes of this Section 2.16, "ERISA Affiliate" means any person or
entity, whether or not incorporated, that, together with the Company, is (or
has ever been) treated as a single employer under Section 414(b), (c), (m) or
(o) of the Code.
(j) ERISA Affiliates. The Company has no liability or potential
liability to participants, beneficiaries or any other person or entity under
any employee benefit plan, policy, program, practice, contract or arrangement
currently (or previously) maintained or contributed to by any ERISA Affiliate.
(k) Payments Resulting From Transactions. The consummation of any
transaction contemplated by this Agreement will not result in any (i) payment
(whether of severance pay or otherwise) becoming due from the Company to any
officer, employee, former employee or director thereof or to the trustee under
any "rabbi trust" or similar arrangement, or (ii) benefit under any Employee
Benefit Plan being established or becoming accelerated, vested or payable. The
consummation of any transaction contemplated by this Agreement will not result
in a payment or series of payments by the Company, directly or indirectly, to
any person that would constitute a "parachute payment" within the meaning of
Section 280G of the Code.
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<PAGE> 30
2.17 PATENTS, TRADEMARKS, ETC.
Set forth on Schedule 2.17 to the Disclosure Memorandum is a true and
complete list of all inventions, patents, trademarks, trade names, brand names,
copyrights, Software Products (as defined below), trade secrets and formulae of
any kind now used or anticipated to be used in the business of the Company
(collectively, the "Listed Intellectual Property"). Other than nondisclosure
agreements and beta test licenses (the "Unlisted Agreements"), Schedule 2.17
contains a complete and accurate list of all licenses or agreements which in
any way affect the rights of the Company to any of the Listed Intellectual
Property (the "Intellectual Property Licenses"); such list indicates the
specific Listed Intellectual Property affected by each such license or
agreement. Except as set forth on Schedule 2.17 to the Disclosure Memorandum,
neither the Company's operations nor any Listed Intellectual Property or
Intellectual Property License infringes, or to the Company's knowledge provides
any basis to believe that its operations or any Listed Intellectual Property or
Intellectual Property License would infringe, upon any validly issued or
pending trademark, trade name, service mark, copyright or, to the knowledge of
the Company, any validly issued patent or other right (including, without
limitation, any right of privacy or right of publicity) of any other Person,
nor, to the knowledge of the Company, is there any infringement by any other
Person of any of the Listed Intellectual Property or of the intellectual
property to which the Intellectual Property Licenses relate. The consummation
of the transactions contemplated hereby and by the other Operative Documents
will not materially alter or impair the Company's rights to any of the Listed
Intellectual Property or under any Intellectual Property License. The manner
in which the Company has manufactured, packaged, shipped, advertised, labeled
and sold its products complies in all material respects with all applicable
laws and regulations pertaining thereto.
Except as set forth on Schedule 2.17 of the Disclosure Memorandum, the
Company is the sole and exclusive owner or licensee of:
(a) the Listed Intellectual Property and the technology, know-how
and processes now used by it, or used in connection with any product now being
manufactured and sold by it, in the manner that such product is now being
manufactured and sold; and
(b) all rights, title and interest of whatever kind or nature
throughout the world in and to the fully or partially developed computer
software products listed on Schedule 2.17 to the Disclosure Memorandum (the
"Software"), with all modifications, enhancements and additions thereto,
including, without limitation, all rights in and to all versions thereof and
all source code, object code, manuals and other documentation and related
materials thereof (collectively, the "Software
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AGREEMENT AND PLAN OF MERGER Page 23
<PAGE> 31
Products"). Without limiting the generality of the above, the Software
Products shall also include all of the Company's related programs, trade
secrets, algorithms and processes relating to the Software Products or such
programs, the Company's copyright in and to each of the Software Products and
all works derivative therefrom (including the registrations of copyright listed
on Schedule 2.17 to the Disclosure Memorandum), all current, previous, enhanced
and developmental versions of the source and object code and any variations
thereof, all user and programmer documentation, all design specifications, all
maintenance and installation job control language, all system documentation
(including all flow charts, systems procedures and program component
descriptions), all procedures for modification and preparation for the release
of enhanced versions and all test data available (excluding all proprietary
information of third parties) with respect to the Software Products.
Except as set forth on Schedule 2.17 to the Disclosure Memorandum, each of
the Intellectual Property Licenses is valid, binding and enforceable in
accordance with its terms against the parties thereto, the Company has
performed all obligations imposed upon it thereunder, and neither the Company
nor, to the best of the Company's knowledge, any other party thereto is in
default thereunder, nor is there any event which with notice or lapse of time,
or both, would constitute a default by the Company or, to the best of the
Company's knowledge, any other party thereunder. To the best of the Company's
knowledge, each of the Unlisted Agreements is valid, binding and enforceable in
accordance with its terms against the parties thereto, the Company has
performed all obligations imposed upon it thereunder, and neither the Company
nor any other party thereto is in default thereunder, nor is there any event
which with notice or lapse of time, or both, would constitute a default by the
Company or any other party thereunder. Except as set forth on Schedule 2.17 to
the Disclosure Memorandum, the Company has not received notice that any party
to any of the Intellectual Property Licenses intends to cancel, terminate or
refuse to renew the same or to exercise or decline to exercise any option or
other right thereunder. Except as set forth on Schedule 2.17 to the Disclosure
Memorandum, no licenses, sublicenses, covenants or agreements have been granted
or entered into by the Company in respect of any of the Listed Intellectual
Property. No director, officer, shareholder or employee of the Company owns,
directly or indirectly, in whole or in part, any of the Listed Intellectual
Property. None of the officers, directors or employees of the Company, nor to
the Company's knowledge any of the Company's consultants, has entered into any
agreement with respect to the Company's business regarding know-how, trade
secrets, assignment of rights in inventions, or prohibition or restriction of
competition or solicitation of customers, or any other similar restrictive
agreement or covenant, whether written or oral, with any Person other than the
Company.
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Except as set forth in the Disclosure Memorandum, to the Company's
knowledge, no Person has asserted any claim of infringement or other
interference with third-party rights with respect to the Listed Intellectual
Property. Except as set forth on Schedule 2.17 to the Disclosure Memorandum,
(i) the Company has not disclosed any source code regarding the Software
Products to any person other than an employee of the Company or to Sierra or
the Purchaser; (ii) the Company has at all times maintained reasonable
procedures to protect and has enforced all trade secrets of the Company; (iii)
neither the Company nor any escrow agent is under any contractual or other
obligation to disclose the source code or any other proprietary information
included in or relating to the Software Products nor, to the knowledge of the
Company, is any other party to the Intellectual Property Licenses or any escrow
agent under any such obligation to disclose any source code or other
proprietary information included in or relating to Software Products, if any,
that are licensed to the Company, to any person or entity and no event has
taken place, including the execution of this Agreement or any related change in
the Company's business activities, which would give rise to such obligation;
and (iv) the Company has not deposited any source code regarding the Software
Products into any source code escrows or similar arrangements. If, as
disclosed on Schedule 2.17 to the Disclosure Memorandum, the Company has
deposited any source code to Software Products into source code escrows or
similar arrangements, no event has occurred that has or could reasonably form
the basis for a release of such source code from such escrows or arrangements.
Except as set forth on Schedule 2.17 to the Disclosure Memorandum, the
Software Products are free from known significant defects and substantially
conform to the specifications, documentation and sample demonstration furnished
to the Company's customers, Sierra or the Purchaser.
2.18 ACCOUNTS RECEIVABLE
All accounts receivable of the Company reflected in the Company Balance
Sheet, or existing at the Effective Time, represent sales actually made in the
ordinary course of business and were recorded in the Company's books
consistently with the advice of the Company's independent accountants and
auditors regarding revenue recognition matters. Except as described on
Schedule 2.18 to the Disclosure Memorandum, the bad debt reserves and sales
return allowances reflected in the Company Balance Sheet are adequate. Set
forth on Schedule 2.18 to the Disclosure Memorandum is a full and complete list
and aging study of all consolidated accounts receivable of the Company existing
as of September 30, 1995.
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<PAGE> 33
2.19 INVENTORY
Subject to such reserves and write-downs as may be reflected in the
Financial Statements, all items in the inventory reflected in the Company
Balance Sheet or as currently owned by the Company are of a quality and
quantity usable and salable in the ordinary course of business. Such inventory
consists of materials and supplies used or sold in the business of the Company.
2.20 CORPORATE BOOKS AND RECORDS
The Company has furnished to Sierra or its representatives for their
examination true and complete copies of (a) the Articles of Organization and
Bylaws of the Company as currently in effect, including all amendments thereto,
(b) the minute books of the Company and (c) the stock transfer books of the
Company. Such minutes reflect all meetings of the Company's shareholders,
Board of Directors and any committees thereof since the Company's inception,
and such minutes accurately reflect in all material respects the events of and
actions taken at such meetings. Such stock transfer books accurately reflect
all issuances and transfers of shares of capital stock of the Company since its
inception.
2.21 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in Schedules 2.2 and 2.6 to the Disclosure
Memorandum, the Company has received all currently required governmental
approvals, authorizations, consents, licenses, orders, registrations and
permits of all agencies, whether federal, state, local or foreign. The Company
has not received any notifications of any asserted present failure by it to
have obtained any such governmental approval, authorization, consent, license,
order, registration or permit, or past and unremedied failure to obtain such
items.
2.22 COMPLIANCE WITH LAWS
Except as described on Schedule 2.22 to the Disclosure Memorandum, the
Company has at all times complied, and is in compliance, with all federal,
state, local and foreign laws, rules, regulations, ordinances, decrees and
orders applicable to it, to its employees, or to the Real Property and the
Personal Property, including, without limitation, all such laws, rules,
ordinances, decrees and orders relating to intellectual property protection,
antitrust matters, consumer protection, currency exchange, environmental
protection, equal employment opportunity, health and occupational safety,
pension and employee benefit matters, securities and investor protection
matters, labor and employment matters and trading-with-the-enemy matters. The
Company has not received any notification of any asserted present or past
unremedied
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<PAGE> 34
failure by the Company to comply with any of such laws, rules, ordinances,
decrees or orders.
2.23 INSURANCE
The Company maintains (a) insurance on all of its property (including
leased premises) that insures against loss or damage by fire or other casualty
(including extended coverage) and (b) insurance against liabilities, claims and
risks of a nature and in such amounts as are normal and customary in the
software publication industry for companies of similar size and financial
condition. All insurance policies of the Company are in full force and effect,
all premiums with respect thereto covering all periods up to and including the
date this representation is made have been paid, and no notice of cancellation
or termination has been received with respect to any such policy or binder.
Such policies or binders are sufficient for compliance with all requirements of
law currently applicable to the Company and of all agreements to which the
Company is a party, will remain in full force and effect through the respective
expiration dates of such policies or binders without the payment of additional
premiums, and will not in any way be affected by, or terminate or lapse by
reason of, the transactions contemplated by this Agreement. The Company has
not been refused any insurance with respect to its assets or operations, nor
has its coverage been limited, by any insurance carrier to which it has applied
for any such insurance or with which it has carried insurance.
2.24 BROKERS OR FINDERS
Except as set forth on Schedule 2.24 to the Disclosure Memorandum, the
Company has not incurred, and will not incur, directly or indirectly, as a
result of any action taken by or on behalf of the Company, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with the Merger, this Agreement or any transaction contemplated
hereby.
2.25 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Company, nor any director, officer, agent, employee or other
Person acting on behalf of the Company, has used any Company funds for improper
or unlawful contributions, payments, gifts or entertainment, or made any
improper or unlawful expenditures relating to political activity to domestic or
foreign government officials or others. The Company has adequate financial
controls to present such improper or unlawful contributions, payments, gifts,
entertainment or expenditures. Neither the Company, nor any current director,
officer, agent, employee or other Person acting on behalf of the Company, has
accepted or received any improper or unlawful contributions, payments, gifts or
expenditures. The Company has at all times complied, and is in compliance, in
all respects with the Foreign Corrupt
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Practices Act and all foreign laws and regulations relating to prevention of
corrupt practices and similar matters.
2.26 BANK ACCOUNTS
Schedule 2.26 to the Disclosure Memorandum sets forth the names and
locations of all banks, trust companies, savings and loan associations and
other financial institutions at which the Company maintains safe deposit boxes
or accounts of any nature and the names of all Persons authorized to draw
thereon, make withdrawals therefrom or have access thereto.
2.27 INSIDER INTERESTS
Except as set forth on Schedule 2.27 to the Disclosure Memorandum, no
Shareholder or officer or director or other representative of the Company has
any interest (other than as a Shareholder of the Company) (a) in any property,
real or personal, tangible or intangible, used in or directly pertaining to the
business of the Company, including, without limitation, inventions, patents,
trademarks or trade names, or (b) in any agreement, contract, arrangement or
obligation relating to the Company, its present or prospective business or its
operations. Except as set forth on Schedule 2.27 to the Disclosure Memorandum,
there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, holders, affiliates or any
affiliate thereof. The Company and its officers and directors have no
interest, either directly or indirectly, in any entity, including, without
limitation, any corporation, partnership, joint venture, proprietorship, firm,
licensee, business or association (whether as an employee, officer, director,
shareholder, agent, independent contractor, security holder, creditor,
consultant or otherwise) that presently (a) provides any services, produces
and/or sells any products or product lines, or engages in any activity which is
the same, similar to or competitive with any activity or business in which the
Company is now engaged or proposes to engage; (b) is a supplier, customer,
creditor, or has an existing contractual relationship with any of the Company's
employees (or persons performing similar functions); or (c) has any direct or
indirect interest in any asset or property, real or personal, tangible or
intangible, of the Company or any property, real or personal, tangible or
intangible, that is necessary or desirable for the present or anticipated
future conduct of the Company's business.
2.28 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and warrants to
the Purchaser and Sierra as follows:
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AGREEMENT AND PLAN OF MERGER Page 28
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(a) Ability to Bear Risk. Such Shareholder is in a financial
position to hold the Securities for an indefinite period of time and is able to
bear the economic risk and withstand a complete loss of his investment in the
Securities.
(b) SEC Documents. Such Shareholder acknowledges that he has had
the opportunity to review to his satisfaction all publicly available filings
and reports of Sierra filed with the Securities and Exchange Commission (the
"SEC") (collectively, the "Public Filings"). Such Shareholder acknowledges
that an investment in the Securities involves a high degree of risk.
(c) Professional Advice. Such Shareholder has obtained, to the
extent that he deems necessary, his own professional advice with respect to the
risks inherent in acquiring the Securities, the condition of Sierra and the
suitability of its investment in the Securities in light of his financial
condition and investment needs.
(d) Sophistication. Such Shareholder, either alone or with the
assistance of his professional advisors, is a sophisticated investor, is able
to fend for himself in the transactions contemplated by this Agreement relating
to the Securities and has such knowledge and experience in financial and
business matters that he is capable of evaluating the merits and risks of the
prospective investment in the Securities.
(e) Accredited Investor. Such Shareholder is an "accredited
investor" as defined in Regulation D under the Securities Act of 1933, as
amended (the "1933 Act").
(f) Access to Information. Such Shareholder has been given access
to full and complete information regarding Sierra and the Company, including,
in particular, the current respective financial conditions of Sierra and the
Company and the risks associated therewith, and has utilized such access to his
satisfaction for the purpose of obtaining information about Sierra.
(g) Acquisition Entirely for Own Account. The Securities are
being acquired by such Shareholder for investment for its respective account,
not as a nominee or agent, and not with a view to the distribution of any part
thereof; such Shareholder has no present intention of selling, granting any
participation in or otherwise distributing any of the Securities in a manner
contrary to the 1933 Act or to any applicable state securities or Blue Sky law,
nor does such Shareholder have any contract, undertaking, agreement or
arrangement with any person to sell, transfer or grant a participation to such
person or to any third person with respect to any of the Securities.
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<PAGE> 37
(h) Due Diligence. Such Shareholder has conducted his own due
diligence investigation of Sierra and its business and analysis of the merits
and risks of an investment in the Securities being acquired pursuant to this
Agreement and is not relying on anyone else's investigation or analysis of
Sierra or its business or the merits and risks of an investment in the
Securities, other than professionals, if any, employed specifically by him to
assist him.
(i) Restricted Securities. Such Shareholder acknowledges that the
Securities have not been and will not prior to issuance be registered under the
1933 Act and that the Securities are characterized under the 1933 Act as
"restricted securities" and, therefore, cannot be sold or transferred unless
such sale or transfer is registered under the 1933 Act or an exemption from
such registration is available. The financial condition of such Shareholder is
such that it is not likely that it will be necessary to dispose of any of the
Securities in the foreseeable future. In this connection, such Shareholder
represents that he is familiar with Rule 144 under the 1933 Act as presently in
effect, and understands the resale limitations imposed thereby and by the 1933
Act.
(j) Exemption Reliance. Such Shareholder has been advised that
the Securities are being issued under this Agreement pursuant to exemptions
from applicable federal and state securities laws, and that Sierra's reliance
upon such exemptions is predicated in part upon the Shareholder's
representations contained herein.
(k) Further Limitations on Disposition. Without in any way
limiting the representations set forth herein, each Shareholder further agrees
not to make any disposition of all or any portion of the Securities unless and
until:
(i) There is in effect a registration statement under the
1933 Act covering such proposed disposition and such disposition is
made in accordance with such registration statement;
(ii) (A) Such Shareholder shall have notified Sierra of the
proposed disposition and shall have furnished Sierra with a detailed
statement of the circumstances surrounding the proposed disposition
and (B) if reasonably requested by Sierra, such Shareholder shall
have furnished Sierra with an opinion of counsel, reasonably
satisfactory to Sierra, that such disposition will not require
registration under the 1933 Act; or
(iii) Sierra shall be satisfied that such proposed
disposition complies in all respects with Rule 144 or Rule 145 under
the 1933 Act or any successor rule providing a safe harbor for such
disposition without registration.
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<PAGE> 38
(l) Residency. For purposes of the application of state
securities laws, each Shareholder is a resident of the jurisdiction specified
on Schedule 2.28 to the Disclosure Memorandum.
(m) Legend. It is understood that the certificates evidencing the
Securities may bear the following or a comparable legend:
The securities evidenced by this certificate have not been registered under
the Securities Act of 1933, as amended (the "Act"), or applicable state
securities laws, and no interest therein may be sold, distributed,
assigned, offered, pledged or otherwise transferred unless (i) there is an
effective registration statement under the Act and applicable state
securities laws covering any such transaction involving such securities,
(ii) this corporation receives an opinion of legal counsel for the holder
of the securities reasonably satisfactory to this corporation stating that
such transaction is exempt from registration, or (iii) this corporation
otherwise satisfies itself that such transaction is exempt from
registration.
2.29 POOLING MATTERS
The Company has not taken, and the Shareholders have not taken, directly
or indirectly, and the Company and the Shareholders have no knowledge that any
other Person has taken any actions involving any recapitalization or repurchase
or redemption of any securities of the Company, or any grant or acceleration of
any options to acquire securities of the Company, or any purchase or sale of
securities of Sierra, and to the best of their knowledge there have occurred no
other events with respect to or involving the Company or its Shareholders,
which taken individually or together would affect the ability of Sierra to
account for the transactions contemplated by this Agreement as a "pooling of
interests" transaction in accordance with GAAP, and neither the Company nor the
Shareholders is aware of any facts which otherwise could prevent such
accounting treatment.
2.30 FULL DISCLOSURE
No information furnished by the Company or the Shareholders to Sierra or
its representatives in connection with this Agreement (including, but not
limited to, the Financial Statements and all information in the Disclosure
Memorandum and the other Exhibits hereto) or the other Operative Documents, or
by the Company to the Shareholders in connection with their approval of the
Merger and execution and delivery of this Agreement, contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements so made or information so delivered not
misleading. The Company has provided to Sierra an
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AGREEMENT AND PLAN OF MERGER Page 31
<PAGE> 39
accurate and complete copy of the disclosure materials (the "Shareholder
Disclosure Statement") delivered to the Shareholders in connection with their
consideration and approval of the Merger and the other transactions
contemplated hereby. The Shareholder Disclosure Statement does not contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements made therein not misleading.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
OF SIERRA AND THE PURCHASER
To induce the Company and the Shareholders to enter into and perform this
Agreement and the Operative Documents, Sierra and the Purchaser jointly and
severally represent and warrant to the Company and the Shareholders as follows
in this Article III:
3.1 ORGANIZATION
Sierra is a corporation validly existing and in good standing under the
laws of the State of Delaware. The Purchaser is a corporation duly organized
and validly existing under the laws of the State of Washington. Each of Sierra
and the Purchaser has full corporate power and authority to own, operate and
lease its properties and assets and to carry on its business as now conducted
and as proposed to be conducted, to execute, deliver and perform this Agreement
and the Operative Documents to which either is a party, and to carry out the
transactions contemplated hereby and thereby.
3.2 ENFORCEABILITY
All corporate action on the part of Sierra and the Purchaser and their
respective officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Operative Documents, the consummation of the Merger, and the performance of all
of their respective obligations under this Agreement and the Operative
Documents has been taken or will be taken prior to the Effective Time. This
Agreement has been, and each of the Operative Documents to which Sierra is a
party will have been at the Closing, duly executed and delivered by Sierra, and
this Agreement is, and each of the Operative Documents to which Sierra is a
party will be at the Closing, a legal, valid and binding obligation of Sierra,
enforceable against Sierra in accordance with its terms. This Agreement has
been, and each of the Operative Documents to which the Purchaser is a party
will have been at the Closing, duly executed and delivered by the Purchaser,
and this Agreement is, and each of the Operative Documents to which the
Purchaser is a party will be at the Closing, a legal, valid and binding
obligation of the Purchaser, enforceable against the Purchaser in accordance
with its terms.
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AGREEMENT AND PLAN OF MERGER Page 32
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3.3 SECURITIES
The Securities to be issued pursuant to this Agreement have been duly
authorized for issuance, and such Securities, when issued and delivered to the
Shareholders pursuant to this Agreement, shall be validly issued, fully paid
and nonassessable.
3.4 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS
The execution, delivery and performance of this Agreement and the
Operative Documents by the Purchaser and Sierra and the consummation by them of
the transactions contemplated hereby and thereby will not (i) constitute a
violation (with or without the giving of notice or lapse of time, or both) of
any provision of law or any judgment, decree, order, regulation or rule of any
court or other governmental authority applicable to Sierra or the Purchaser,
(ii) require any consent, approval or authorization of, or declaration, filing
or registration with, any Person, except compliance with applicable securities
laws and the filing of all documents necessary to consummate the Merger with
the Washington Secretary of State and the Massachusetts Secretary of State (the
consent of all such Persons to be duly obtained at or prior to the Closing),
(iii) result in a default (with or without the giving of notice or lapse of
time, or both) under, acceleration or termination of, or the creation in any
party of the right to accelerate, terminate, modify or cancel, any agreement,
lease, note or other restriction, encumbrance, obligation or liability to which
Sierra or the Purchaser is a party or by which either of them is bound or to
which any of their assets are subject, (iv) conflict with or result in a breach
of or constitute a default under any provision of the Certificate of
Incorporation or By-laws of Sierra or the Articles of Incorporation or Bylaws
of the Purchaser, or (v) invalidate or adversely affect any material permit,
license, authorization or status used in the conduct of the business of Sierra.
3.5 CAPITALIZATION
The authorized capital stock of Sierra consists of 40,000,000 shares of
common stock, $.01 par value per share, of which 18,634,774 shares were issued
and outstanding as of October 31, 1995, and 1,000,000 shares of preferred
stock, $.01 par value per share, none of which are issued and outstanding.
Such issued and outstanding shares of Sierra Common Stock are validly issued,
fully paid and nonassessable. The total number of outstanding options to
purchase Sierra Common Stock, as of October 31, 1995, was 2,127,209.
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3.6 SEC DOCUMENTS
Sierra has furnished the Shareholders with true and complete copies of its
Annual Report on Form 10-K for the fiscal year ending March 31, 1995, as
amended, its Quarterly Reports on Form 10-Q for the fiscal quarters ending June
30 and September 30, 1995, and its Proxy Statement relating to its 1995 Annual
Meeting of Stockholders on August 17, 1995 (collectively, the "SEC Documents").
As of their respective filing dates, each of the SEC Documents complied in all
material respects with the requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the SEC promulgated thereunder.
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PURCHASER AND SIERRA
The obligations of Sierra and the Purchaser to perform and observe the
covenants, agreements and conditions hereof to be performed and observed by
them at or before the Closing shall be subject to the satisfaction of the
following conditions, which may be expressly waived only in writing signed by
Sierra:
4.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company and each Shareholder
contained herein (including applicable Exhibits or Schedules to the Disclosure
Memorandum) and in the other Operative Documents shall have been true and
correct when made and shall be true and correct as of the Closing Date as
though made on that date.
4.2 PERFORMANCE OF AGREEMENTS
The Company and the Shareholders shall have performed all obligations and
agreements and complied with all covenants and conditions contained in this
Agreement or any other Operative Document to be performed and complied with by
them at or prior to the Closing.
4.3 OPINION OF COUNSEL FOR THE COMPANY
Sierra shall have received the opinion letter of Testa, Hurwitz &
Thibeault, counsel for the Company and the Shareholders, dated the Closing
Date, substantially in the form attached hereto as Exhibit 4.3.
4.4 SHAREHOLDER APPROVAL
The Shareholders shall have duly and validly approved the Merger by a vote
or written consent in accordance with Massachusetts Law.
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AGREEMENT AND PLAN OF MERGER Page 34
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4.5 RESIGNATIONS
Sierra shall have received copies of resignations effective as of the
Closing Date of all the directors of the Company.
4.6 CONSENTS TO MERGER
The Company shall have received and shall have delivered to Sierra written
consents to the Merger from each of the parties (other than the Company) to
those agreements, leases, notes or other documents identified on Schedules 2.6
and 2.17 to the Disclosure Memorandum as requiring consent in connection with
the Merger, which consents shall be satisfactory in all respects to Sierra in
its sole and absolute discretion.
4.7 COMPLIANCE CERTIFICATE
Sierra shall have received a certificate of the President and the Chief
Financial Officer of the Company, and of each Shareholder, dated the Closing
Date, in form and substance satisfactory to Sierra, certifying that the
conditions to the obligations of Sierra and the Purchaser have been fulfilled.
4.8 MATERIAL ADVERSE CHANGE
Since the date of this Agreement and through the Closing, there shall not
have occurred any material adverse change in the business, operations, assets,
liabilities (absolute, accrued, contingent or otherwise), sales, margins,
profitability, condition (financial or other) or prospects of the Company, and
no material adverse change shall have occurred in any domestic or foreign laws
or regulations affecting the Company or in any material third party contractual
or other business relationships of the Company.
4.9 DUE DILIGENCE
The results of Sierra's due diligence investigation of the Company shall
be satisfactory in all respects to Sierra in its sole and absolute discretion.
4.10 APPROVALS AND CONSENTS
All transfers of permits or licenses, all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby
or for the continued operation of the Company, shall have been obtained, and
all waiting periods specified by law shall have passed. All other consents,
approvals and notices referred to in this Agreement shall have been obtained or
delivered.
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4.11 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and by the other Operative Documents, and all documents and
instruments incident to such transactions, shall have been approved by Sierra's
counsel, and Sierra shall have received a certificate of the Secretary of the
Company, in form and substance satisfactory to Sierra, as to the authenticity
and effectiveness of the actions of the Board of Directors and Shareholders of
the Company authorizing the Merger and the transactions contemplated by this
Agreement and the other Operative Documents, and such other documents as are
specified by Sierra's counsel.
4.12 NONFOREIGN AFFIDAVIT
Sierra shall have received from each Shareholder, pursuant to Section 1445
of the Code, a Foreign Investment in Real Property Tax Act Affidavit in the
form attached hereto as Exhibit 4.12.
4.13 COMPLIANCE WITH LAWS
The consummation of the transactions contemplated by this Agreement and
the Operative Documents shall be legally permitted by all laws and regulations
to which Sierra or the Company is subject.
4.14 POOLING OF INTERESTS
As of the Closing no facts shall exist and no events shall have occurred
that would, in the opinion of Sierra's independent accountants, prevent Sierra
from accounting for the Merger contemplated herein as a "pooling of interests"
transaction.
4.15 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect which
enjoins, restrains, conditions or prohibits consummation of this Agreement or
any Operative Document, and no litigation, investigation or administrative
proceeding shall be pending or threatened which would enjoin, restrain,
condition or prevent consummation of this Agreement or any Operative Document.
4.16 OPERATIVE DOCUMENTS
The Operative Documents shall have been executed and delivered by all
parties thereto other than Sierra and the Purchaser, and any additional
documentation required in connection with the pledge of the Holdback Shares to
Sierra, including without limitation the stock powers referred to in Section
8.6 hereof, also shall have been executed and delivered to Sierra.
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AGREEMENT AND PLAN OF MERGER Page 36
<PAGE> 44
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE SHAREHOLDERS AND THE COMPANY
The obligations of the Shareholders and the Company to perform and observe
the covenants, agreements and conditions hereof to be performed and observed by
them at or before the Closing shall be subject to the satisfaction of the
following conditions, which may be expressly waived only in writing signed by
the Company and the Shareholders.
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Sierra and the Purchaser contained
herein and in the other Operative Documents shall have been true and correct
when made and shall be true and correct as of the Closing Date as though made
on that date.
5.2 PERFORMANCE OF AGREEMENTS
Sierra and the Purchaser shall have performed all obligations and
agreements and complied with all covenants and conditions contained in this
Agreement or any other Operative Document to be performed and complied with by
them at or prior to the Closing.
5.3 OPINION OF COUNSEL
The Shareholders shall have received the opinion letter of Perkins Coie,
counsel for Sierra and the Purchaser, dated the Closing Date, substantially in
the form attached hereto as Exhibit 5.3.
5.4 COMPLIANCE CERTIFICATE
The Company shall have received a certificate of an officer of Sierra,
dated the Closing Date, substantially in form and substance satisfactory to the
Company, certifying that the conditions to the obligations of the Shareholders
and the Company have been fulfilled.
5.5 LEGAL PROCEEDINGS
No order of any court or administrative agency shall be in effect which
enjoins, restrains, conditions or prohibits consummation of this Agreement or
any Operative Document, and no litigation, investigation or administrative
proceeding shall be pending or threatened which would enjoin, restrain,
condition or prevent consummation of this Agreement or any Operative Document.
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AGREEMENT AND PLAN OF MERGER Page 37
<PAGE> 45
5.6 OPERATIVE DOCUMENTS
Sierra and the Purchaser shall have executed and delivered to the Company
all the Operative Documents to which they are parties.
5.7 MATERIAL ADVERSE CHANGE
Since the date of this Agreement and through the Closing, there shall not
have occurred any material adverse change in the business, operations, assets,
liabilities (absolute, accrued, contingent or otherwise), sales, margins,
profitability, condition (financial or other) or prospects of Sierra, and no
material adverse change shall have occurred in any domestic or foreign laws or
regulations affecting Sierra or in any material third party contractual or
other business relationships of Sierra.
5.8 APPROVALS AND CONSENTS
All transfers of permits or licenses, all approvals of or notices to
public agencies, federal, state, local or foreign, the granting or delivery of
which is necessary for the consummation of the transactions contemplated hereby
or for the continued operation of the Company, shall have been obtained, and
all waiting periods specified by law shall have passed. All other consents,
approvals and notices referred to in this Agreement shall have been obtained or
delivered.
5.9 COMPLIANCE WITH LAWS
The consummation of the transactions contemplated by this Agreement and
the Operative Documents shall be legally permitted by all laws and regulations
to which Sierra or the Company is subject.
ARTICLE VI - COVENANTS
The parties further covenant and agree as set forth in this Article VI.
For purposes of this Article VI, all references to the Company shall also
include its Subsidiaries.
6.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE MERGER
Unless Sierra shall otherwise agree in writing, the business of the
Company shall be conducted in and only in, and the Company shall not take any
action except in, the ordinary course of business and in a manner consistent
with past practice and in accordance with applicable law; and the Company shall
use its best efforts to preserve substantially intact the business organization
of the Company, to keep available the services of the current officers,
employees and consultants of the Company and to preserve the current
relationships of the Company with customers,
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AGREEMENT AND PLAN OF MERGER Page 38
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suppliers and other persons with which the Company has significant business
relations. By way of amplification and not limitation, except as otherwise
contemplated by this Agreement, the Company shall not, between the date of this
Agreement and the Effective Time, directly or indirectly do, or propose to do,
any of the following without the prior written consent of Sierra:
(a) amend or otherwise change its Articles of Organization or
Bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber or authorize
the issuance, sale, pledge, disposition, grant or encumbrance of (i) any shares
of capital stock of any class of the Company, or any options, warrants,
convertible securities or other rights of any kind to acquire any shares of
such capital stock, or any other ownership interest (including, without
limitation, any phantom interest), of the Company or (ii) any assets of the
Company, except for sales in the ordinary course of business and in a manner
consistent with past practice;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to
any of its capital stock, except the distributions described in Schedule 6.1(c)
hereto, which shall not exceed $2,430,000 in the aggregate (the "Distribution")
except as otherwise provided in Section 6.7;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock, except in
connection with the merger of the Company and Papyrus Publishing, Inc. on
substantially the terms disclosed to Sierra prior to the execution and delivery
of this Agreement;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or division thereof or any material amount of
assets; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any Person, or make any loans or
advances, except in the ordinary course of business and consistent with past
practice; (iii) enter into any contract or agreement other than in the ordinary
course of business, consistent with past practice; (iv) authorize any single
capital expenditure which is in excess of $10,000 or capital expenditures which
are, in the aggregate, in excess of $10,000 for the Company taken as a whole;
or (v) enter into or amend any contract, agreement, commitment or arrangement
with respect to any matter set forth in this subsection (e);
(f) enter into any employment, consulting or agency agreement, or
increase the compensation payable or to become payable to its officers,
employees or
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AGREEMENT AND PLAN OF MERGER Page 39
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consultants, except as disclosed in Schedule 6.1(f) and except for increases in
accordance with existing agreements or past practices for employees of the
Company who are not officers of the Company, or grant any severance or
termination pay to, or enter into any employment or severance agreement with,
any director, officer or other employee of the Company, or establish, adopt,
enter into or amend any collective bargaining, bonus, profit sharing, thrift,
compensation, stock option, restricted stock, pension, retirement, deferred
compensation, employment, termination, severance or other plan, agreement,
trust, fund, policy or arrangement for the benefit of any director, officer or
employee;
(g) take any action, other than reasonable and usual actions in
the ordinary course of business and consistent with past practice, with respect
to accounting policies or procedures (including, without limitation, procedures
with respect to the payment of accounts payable and collection of accounts
receivable);
(h) make any tax election or settle or compromise any material
federal, state, local or foreign income tax liability;
(i) pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction, in the ordinary course of business
and consistent with past practice, of liabilities reflected or reserved against
in the Company Balance Sheet or subsequently incurred in the ordinary course of
business and consistent with past practice;
(j) take any action that would or is reasonably likely to result
in any of the representations and warranties of the Company set forth in this
Agreement being untrue, or in any covenant of the Company set forth in this
Agreement being breached, or in any of the conditions to the Merger specified
in Article IV hereof not being satisfied;
(k) take or agree to take any action specified in Section 2.8
hereof, or enter into any other material transaction other than those specified
above, or agree to do any of the foregoing.
6.2 ACCESS TO INFORMATION; CONFIDENTIALITY
From the date hereof to the Effective Time, the Company shall, and shall
cause the officers, directors, employees, auditors and agents of the Company
to, afford the officers, employees and agents of Sierra complete access at all
reasonable times to the officers, employees, agents, properties, offices,
plants and other facilities, books and records of the Company and shall furnish
Sierra with all financial, operating and other data and information as Sierra,
through its officers, employees or agents, may
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<PAGE> 48
reasonably request. From the date hereof until the Effective Time, the Company
shall provide Sierra with monthly and other financial statements of the Company
as they become available internally at the Company, all of which financial
statements shall fairly present the financial position and results of
operations of the Company as of the dates and for the periods therein
specified. No investigation pursuant to this Section 6.2 shall affect any
representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto. The parties shall continue
to comply with and to perform their respective obligations under the
Confidentiality Agreement between Sierra and the Company entered into as of
June 8, 1995, 1995 (the "Confidentiality Agreement"), which shall be deemed
terminated without any further action by the parties hereto at the Effective
Time.
6.3 NO ALTERNATIVE TRANSACTIONS
Unless this Agreement shall have been terminated in accordance with its
terms, the Company and the Shareholders shall not, directly or indirectly,
through any officer, director, agent or otherwise, solicit, initiate or
encourage the submission of any proposal or offer from any Person relating to
any acquisition or purchase of all or (other than in the ordinary course of
business) any portion of the assets of, or any equity interest in, the Company
or any business combination with the Company or participate in any negotiations
regarding, or furnish to any other Person any information with respect to, or
otherwise cooperate or negotiate in any way with, or assist or participate in,
facilitate or encourage, any effort or attempt by any other Person to do or
seek any of the foregoing. The Company immediately shall cease and cause to be
terminated any existing discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. The Company shall notify
Sierra promptly if any such proposal or offer, or any inquiry or contact with
any Person with respect thereto, is made and shall, in any such notice to
Sierra, indicate in reasonable detail the identity of the Person making such
proposal, offer, inquiry or contact and the terms and conditions of such
proposal, offer, inquiry or contact. The Company agrees not to release any
third party from, or waive any provision of, any confidentiality or standstill
agreement to which the Company is a party.
6.4 NOTIFICATION OF CERTAIN MATTERS
The Company shall give prompt notice to Sierra of (a) the occurrence or
nonoccurrence of any event which would be likely to cause any representation or
warranty of the Company contained in this Agreement to be untrue or inaccurate
and (b) any failure of the Company to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder;
provided, however, that the delivery of any notice pursuant to this Section 6.4
shall not limit or otherwise affect the remedies available to Sierra hereunder.
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6.5 FURTHER ACTION; REASONABLE BEST EFFORTS
Upon the terms and subject to the conditions hereof, each of the parties
hereto shall use its reasonable best efforts to take, or cause to be taken, all
appropriate action, and to do, or cause to be done, all things necessary,
proper or advisable under applicable laws and regulations to consummate and
make effective the transactions contemplated hereby, including, without
limitation, using its reasonable best efforts to obtain all waivers, licenses,
permits, consents, approvals, authorizations, qualifications and orders of
governmental authorities and parties to contracts with the Company as are
necessary for the consummation of the transactions contemplated hereby and to
fulfill the conditions to the Merger. In case at any time after the Effective
Time any further action is necessary or desirable to carry out the purposes of
this Agreement, each party to this Agreement shall use its reasonable best
efforts to take all such action. No Shareholder will undertake any course of
action inconsistent with this Agreement or which would make any
representations, warranties or agreements made by such party in this Agreement
or any other Operative Documents untrue or any conditions precedent to this
Agreement unable to be satisfied at or prior to the Closing. No party to this
Agreementwill take any action inconsistent with the qualification of the Merger
as a tax-free reorganization under Section 368(a) of the Code, including
without limitation a sale or transfer of Sierra Common Stock that would prevent
the Merger from meeting the "continuity of interest" requirement for a
reorganization, or a sale or transfer of capital stock or assets of the Company
which would prevent the Merger from satisfying the "continuity of business
enterprise" requirement for a reorganization under Section 368(a) of the Code;
provided, however, that Sierra may effect a such a sale or transfer if the
Board of Directors of Sierra determines that such sale or transfer is required
in order for it to comply with its fiduciary duties under applicable law.
After the Closing Date, each party hereto, at the request of and without any
further cost or expense to the other parties, will take any further actions
necessary or desirable to carry out the purposes of this Agreement or any other
Operative Document, to vest in the Surviving Corporation full title to all
properties, assets and rights of the Company and to effect the issuance of the
Sierra Common Stock to the Shareholders pursuant to the terms and conditions
hereof.
6.6 PUBLICITY
Neither the Company nor the Shareholders shall issue any press release or
otherwise make any statement to any third party with respect to this Agreement
or the transactions contemplated hereby without the prior written consent of
Sierra. Sierra shall consult with the Shareholders in the preparation of any
press release relating to the transactions contemplated hereby.
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<PAGE> 50
6.7 DISTRIBUTION TRUE-UP
In the event that the financial position and results of operations of the
Company as of and for the eleven-month period ending November 30, 1995 (after
giving effect to the Distribution) are such that, as of such date, the
difference (the "Adjustment Amount") between the Company's current assets and
its current liabilities is at least $10,000, the amount of the Distribution as
reflected in Section 6.1(c) above (the "Distribution Amount") shall be promptly
increased or decreased, as the case may be, by the Adjustment Amount, as
follows:
(a) in the event that the Adjustment Amount is greater than or
equal to $10,000 and reflects an excess of current assets over current
liabilities, the Company shall promptly pay to the Shareholders in cash, to be
divided among them pro rata in accordance with their respective shares of the
Distribution as set forth on Schedule 6.1(c) hereto, an amount equal to the
Adjustment Amount;
(b) in the event that the Adjustment Amount is greater than or
equal to $10,000 and reflects an excess of current liabilities over current
assets, the Shareholders shall promptly pay to the Company in cash, pro rata in
accordance with their respective shares of the Distribution as set forth on
Schedule 6.1(c) hereto, an amount equal to the Adjustment Amount; provided,
however, that the Shareholders shall not be required to pay under this
paragraph (b) any amount in excess of the difference between the Distribution
Amount and the amount of the Shareholders' aggregate federal income tax
liability attributable to taxable income of the Company; provided further,
however, that the payment obligations of the Shareholders under this paragraph
(b) shall be reduced pursuant to the foregoing proviso only by such amount, if
any, as will not conflict, in the sole opinion of Deloitte & Touche LLP,
Sierra's independent accountants, with Sierra's accounting for the Merger as a
"pooling-of-interests" in accordance with GAAP.
The Company shall notify the Shareholders promptly upon determining the
amount of any payments required under this Section 6.7. Notwithstanding
anything to the contrary set forth in this Section 6.7 or elsewhere in this
Agreement, no additional payment shall be required to be made by or on behalf
of the Company under this Section 6.7 if, and to the extent, that in the sole
opinion of Deloitte & Touche LLP, Sierra's independent accountants, such
additional payment would conflict with Sierra's accounting for the Merger as a
"pooling-of-interests" in accordance with GAAP.
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ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER
7.1 TERMINATION
This Agreement may be terminated and the Merger may be abandoned at any
time prior to the Effective Time (notwithstanding any approval of this
Agreement by the Shareholders of the Company):
(a) by mutual written consent duly authorized by the Boards of
Directors of the Company and Sierra;
(b) by either the Company or Sierra, if the Merger has not been
consummated by December 31, 1995; provided, however, that the right to
terminate this Agreement under this subsection (b) shall not be available to
any party whose failure to fulfill any obligation under this Agreement has been
the cause of, or resulted in, the failure of the Effective Time to occur on or
before such date;
(c) by either the Company or Sierra, if there shall be any law or
regulation that makes consummation of the Merger illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining Sierra,
the Purchaser or the Company from consummating the Merger is entered and such
judgment, injunction, order or decree shall become final and nonappealable;
provided, however, that the party seeking to terminate this Agreement pursuant
to this subsection (c) shall have used all reasonable efforts to remove such
judgment, injunction, order or decree;
(d) at any time prior to the Closing by Sierra if, at any time in
the course of its legal, accounting, financial or operational due diligence
investigation as to the Company, it shall have become aware of any facts or
circumstances that it was not aware of on the date hereof, or any additional
facts and circumstances as to matters of which it was aware on the date hereof,
in either case that would, in the reasonable judgment of Sierra, make it
inadvisable to consummate the Merger or the other transactions contemplated
hereby;
(e) by the Company, in the event of a material breach by Sierra of
any representation, warranty or agreement contained herein which has not been
cured or is not curable by December 31, 1995; or
(f) by Sierra, in the event of a material breach by the Company of
any representation, warranty or agreement contained herein which has not been
cured or is not curable by December 31, 1995.
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7.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement pursuant to Section 7.1
hereof, there shall be no further obligation on the part of any party hereto,
except that nothing herein shall relieve any party from liability for any
willful breach hereof.
7.3 AMENDMENT
This Agreement may be amended by Sierra and the Company at any time prior
to the Effective Time; provided, however, that no amendment may be made which
would reduce the amount or change the type of consideration into which each
share of Company Common Stock shall be converted upon consummation of the
Merger without the prior written consent of the Shareholders. This Agreement
may not be amended except by an instrument in writing signed by Sierra, the
Shareholders and the Company.
7.4 WAIVER
At any time prior to the Effective Time, any party hereto may (a) extend
the time for the performance of any obligation or other act of any other party
hereto, (b) waive any inaccuracy in the representations and warranties
contained herein or in any document delivered pursuant hereto or (c) waive
compliance with any agreement or condition contained herein. Any such
extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby.
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION
8.1 SURVIVAL
All representations and warranties contained in this Agreement or in the
other Operative Documents or in any certificate delivered pursuant hereto or
thereto shall survive the Closing for a period of one year, and shall not be
deemed waived or otherwise affected by any investigation made or any knowledge
acquired with respect thereto, or by any notice delivered pursuant to Section
6.4 hereof. The covenants and agreements contained in this Agreement or in the
other Operative Documents shall survive the Closing and shall continue until
all obligations with respect thereto shall have been performed or satisfied or
shall have been terminated in accordance with their terms.
8.2 INDEMNIFICATION
From and after the Closing Date, the Shareholders shall jointly and
severally indemnify and hold Sierra and its officers, directors and affiliates
(the "Indemnified
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AGREEMENT AND PLAN OF MERGER Page 45
<PAGE> 53
Parties") harmless from and against, and shall reimburse the Indemnified
Parties for, any and all losses, damages, debts, liabilities, obligations,
judgments, orders, awards, writs, injunctions, decrees, fines, penalties,
taxes, costs or expenses (including but not limited to any legal or accounting
fees or expenses) ("Losses") arising out of or in connection with:
(a) any inaccuracy in any representation or warranty made by the
Company or the Shareholders in this Agreement or in any other Operative
Document or in any certificate delivered pursuant hereto or thereto,
(b) any failure by the Company or any Shareholder to perform or
comply, in whole or in part, with any covenant or agreement in this Agreement
or in any other Operative Document;
(c) any accounts receivable reflected (net of any allowances) on
the balance sheet of the Company dated September 30, 1995 which are not
collected prior to December 31, 1995; or
(d) any inventory reflected (net of any allowances) on the balance
sheet of the Company dated September 30, 1995 which is written down in
accordance with GAAP due to obsolescence or shrink (which occurs prior to
Closing), on or prior to December 31, 1995.
8.3 THRESHOLD AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any claims for indemnification under
this Article VIII ("Claims") until the aggregate Losses for which such
Indemnified Parties would be otherwise entitled to receive indemnification
exceed $150,000 (the "Threshold"); provided, however, that once such aggregate
Losses exceed the Threshold, such Indemnified Parties shall be entitled to
indemnification only for the aggregate amount of all Losses which exceed the
Threshold.
(b) In no event shall the liability of the Shareholders hereunder
for Losses incurred by Indemnified Parties exceed an amount equal to 50% of
number of shares of Sierra Common Stock issued to the Shareholders pursuant to
the Merger (rounded to the nearest whole share) multiplied by the average of
the last reported sale prices of Sierra Common Stock on the Nasdaq National
Market over the five consecutive trading days ending with the Closing Date.
(c) The parties agree that, prior to submitting any Claim, they
shall use reasonable efforts to determine the amount, if any, by which their
Losses would be offset by Sierra's recovery of insurance proceeds and reduction
of tax liabilities
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AGREEMENT AND PLAN OF MERGER Page 46
<PAGE> 54
and to provide the Shareholders notice of and a description of such
determination. Any liability of the Shareholders for indemnification under
this Article VIII shall be reduced to the extent any Losses specified in a
Claim are reduced by such a recovery or reduction.
(d) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any Claims under this Article VIII
which are first asserted by an Indemnified Party after the first anniversary of
the Closing Date.
8.4 PROCEDURE FOR INDEMNIFICATION
(a) An Indemnified Party shall notify the indemnifying party in
writing reasonably promptly after the assertion against the Indemnified Party
of any claim by a third party (a "Third Party Claim") in respect of which the
Indemnified Party intends to base a Claim for indemnification hereunder, but
the failure or delay so to notify the indemnifying party shall not relieve it
of any obligation or liability that it may have to the Indemnified Party except
to the extent that the indemnifying party demonstrates that its ability to
defend or resolve such Third Party Claim is adversely affected thereby.
(b) (i) Subject to the rights of or duties to any insurer or
other third party having potential liability therefor, the indemnifying party
shall have the right, upon written notice given to the Indemnified Party within
30 days after receipt of the notice from the Indemnified Party of any Third
Party Claim, to assume the defense or handling of such Third Party Claim, at
the indemnifying party's sole expense, in which case the provisions of Section
8.5(b)(ii) below shall govern.
(ii) The indemnifying party shall select counsel reasonably
acceptable to the Indemnified Party in connection with conducting the defense
or handling of such Third Party Claim, and the indemnifying party shall defend
or handle the same in consultation with the Indemnified Party and shall keep
the Indemnified Party timely apprised of the status of such Third Party Claim.
The indemnifying party shall not, without the prior written consent of the
Indemnified Party, agree to a settlement of any Third Party Claim, unless (A)
the settlement provides an unconditional release and discharge of the
Indemnified Party and the Indemnified Party is reasonably satisfied with such
discharge and release and (B) Sierra shall not have reasonably objected to any
such settlement on the ground that the circumstances surrounding the settlement
could result in an adverse impact on the business, operations, assets,
liabilities (absolute, accrued, contingent or otherwise), condition (financial
or otherwise) or prospects of Sierra or the business conducted by the Company.
The Indemnified Party shall cooperate with the indemnifying party and
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AGREEMENT AND PLAN OF MERGER Page 47
<PAGE> 55
shall be entitled to participate in the defense or handling of such Third Party
Claim with its own counsel and at its own expense.
(c) (i) If the indemnifying party does not give written notice
to the Indemnified Party within 30 days after receipt of the notice from the
Indemnified Party of any Third Party Claim of the indemnifying party's election
to assume the defense or handling of such Third Party Claim, the provisions of
Section 8.5(c)(ii) below shall govern.
(ii) The Indemnified Party may, at the indemnifying party's
expense (which shall be paid from time to time by the indemnifying party as
such expenses are incurred by the Indemnified Party), select counsel in
connection with conducting the defense or handling of such Third Party Claim
and defend or handle such Third Party Claim in such manner as it may deem
appropriate, provided, however, that the Indemnified Party shall keep the
indemnifying party timely apprised of the status of such Third Party Claim and
shall not settle such Third Party Claim without the prior written consent of
the indemnifying party, which consent shall not be unreasonably withheld. If
the Indemnified Party defends or handles such Third Party Claim, the
indemnifying party shall cooperate with the Indemnified Party and shall be
entitled to participate in the defense or handling of such Third Party Claim
with its own counsel and at its own expense.
(d) If the Indemnified Party intends to seek indemnification
hereunder, other than for a Third Party Claim, then it shall notify the
indemnifying party in writing 90 days after its discovery of facts upon which
it intends to base its Claim for indemnification hereunder, but the failure or
delay so to notify the indemnifying party shall not relieve the indemnifying
party of any obligation or liability that the indemnifying party may have to
the Indemnified Party except to the extent that the indemnifying party
demonstrates that the indemnifying party's ability to defend or resolve such
Claim is adversely affected thereby.
(e) The Indemnified Party may notify the indemnifying party of a
Claim even though the amount thereof plus the amount of other Claims previously
notified by the Indemnified Party aggregate less than the Threshold.
8.6 HOLDBACK
At the Effective Time, the Shareholders shall be deemed to have pledged
10% of the Securities to Sierra as a mechanism to satisfy potential claims for
indemnification by Sierra and its affiliates under this Article VIII. Any
liability of the Shareholders for indemnification under this Article VIII shall
be satisfied, first, from Holdback Shares pursuant to a setoff under this
Section 8.6 and, second, to the extent
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AGREEMENT AND PLAN OF MERGER Page 48
<PAGE> 56
the Holdback Shares are insufficient to satisfy such liability in full, from
other Securities or proceeds from any disposition thereof, as the Shareholders
may elect.
8.6.1 PLEDGE
The Holdback Shares (which shall include for purposes of this Section 8.6
any distributions accrued or made thereon after the date of this Agreement and
any other securities or property which may be issued after the date hereof in
exchange for such shares in any merger or recapitalization or similar
transaction involving Sierra) shall be deemed as of the Effective Time to be
pledged by the Shareholders to, and shall be held by, Sierra pursuant to this
Agreement. The Shareholders shall deliver to Sierra at or as soon as
practicable after the Closing appropriate stock powers endorsed in blank and
such other documentation as Sierra may reasonably prescribe to carry out the
purposes of this Section 8.6. So long as any Holdback Shares are held by
Sierra hereunder, Sierra shall have, and the Shareholders hereby grant,
effective as of the Effective Time, a perfected, first-priority security
interest in such Holdback Shares to secure payment of amounts payable by the
Shareholders in respect of indemnification Claims under this Article VIII. In
connection therewith, each Shareholder expressly agrees to execute and deliver
such instruments as Sierra may from time to time reasonably request for the
purpose of evidencing and perfecting such security interest.
8.6.2 RELEASE OF HOLDBACK SHARES
Sierra shall hold the Holdback Shares in accordance with this Agreement
and shall transfer the Holdback Shares only as follows:
(a) Holdback Shares shall be re-transferred to Sierra in respect
of indemnification Claims made by Sierra under this Article VIII when, and to
the extent, authorized under paragraph 8.6.3 below.
(b) On the Holdback Termination Date (as defined below), any
Holdback Shares then remaining pledged to Sierra (which shall exclude shares
re-transferred to Sierra under paragraph (a)) shall be released to the
Shareholders pro rata in accordance with their percentage ownership of the
Company immediately prior to the Merger, as set forth in Schedule 2.4(b) to the
Disclosure Memorandum.
Except as otherwise set forth in Section 8.6.5 below, for purposes of this
Agreement, the "Holdback Termination Date" shall mean the date one year after
the date of execution of this Agreement.
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AGREEMENT AND PLAN OF MERGER Page 49
<PAGE> 57
8.6.3 CLAIMS PROCEDURE
The procedure for payment from the Holdback Shares of indemnification
amounts to which Sierra or other Indemnified Parties may become entitled under
this Article VIII shall be as follows:
(a) Subject to the limitation that written notice of any Claim for
indemnification hereunder must be given to the Shareholders not later than the
Holdback Termination Date, from time to time as Sierra determines that it or
another Indemnified Party is entitled to an indemnification payment under this
Article VIII, Sierra may give written notice of the Claim to the Shareholders
describing in such notice the nature of the Claim, the amount thereof if then
ascertainable and, if not then ascertainable, the estimated maximum amount
thereof, and the provisions in this Agreement on which the claim is based.
(b) If Sierra has not received written objection to a Claim in
accordance with the preceding subparagraph (a) from Shareholders representing
at least a majority in interest in the Holdback Shares within 30 days after
notice of such Claim is delivered (the "Response Period"), the Claim stated in
such notice shall be conclusively deemed to be approved by the Shareholders,
and Sierra shall promptly thereafter transfer to the Indemnified Party from the
Holdback Shares an amount of Holdback Shares equal in value to the amount of
such Claim. The Holdback Shares to be transferred shall be rounded to the
nearest whole share and shall be valued on the basis of the last reported sale
price of Sierra's Common Stock on the Nasdaq National Market on the date the
notice of claim was delivered.
(c) If within the Response Period Sierra shall have received from
the Sellers representing at least a majority in interest in the Holdback Shares
a written objection to the claim specifying the nature of and grounds for such
objection, then such claim shall be deemed to be an "Open Claim," and Sierra
shall reserve within the Holdback Shares an amount of Holdback Shares equal to
the amount of such Open Claim (which amount designated for each Open Claim is
referred to herein as the "Claim Reserve Amount"). The number of Holdback
Shares to be reserved shall be determined (rounded to the nearest whole share)
by dividing the amount of the Open Claim by the average of the last reported
sale prices of Sierra's Common Stock on the Nasdaq National Market over the 20
trading days preceding such written objection. The number of Holdback Shares
included in the Claim Reserve Amount shall be increased or reduced, as the case
may be, on a quarterly basis based on the average of the last reported sale
prices of Sierra's Common Stock on the Nasdaq National Market over the then
preceding 20 trading days.
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(d) The Claim Reserve Amount for each Open Claim shall be
transferred by Sierra from the Holdback Shares only in accordance with either
(i) a mutual agreement among Sierra and Shareholders representing at least a
majority in interest in all the Holdback Shares, which shall be memorialized in
writing, or (ii) a final and binding arbitration decision or order pertaining
to the Open Claim, except that on the Holdback Termination Date all Holdback
Shares not previously distributed or then required to be distributed to Sierra
in accordance with this Section 8.6 shall be released to the Shareholders pro
rata in accordance with Schedule 2.4(b) to the Disclosure Memorandum, whether
or not all Open Claims have then been resolved.
8.6.4 VOTING; DISPOSITION
The Holdback Shares shall be held of record by the Shareholders, who shall
have full right to vote the Holdback Shares on all matters coming before the
stockholders of Sierra. Each Shareholder hereby agrees not to sell or transfer
to any third party any interest in the Holdback Shares prior to any
distribution of the Holdback Shares to such Shareholder pursuant to paragraph
8.6.2 of this Agreement.
8.6.5 MERGER OR RECAPITALIZATION
In the event of any merger or recapitalization or similar transaction
involving Sierra prior to the time when all Holdback Shares have been
transferred or released in accordance with the terms of this Section 8.6, such
Holdback Shares shall be converted or exchanged in accordance with such
transaction in the same manner as other shares of Sierra Common Stock, and any
securities or property issued in conversion or exchange thereof shall then be
included within the definition of Holdback Shares and shall otherwise become
subject to this Agreement in lieu of such shares of Sierra Common Stock. If as
a result of any such transaction the stockholders of Sierra immediately before
the transaction will not own in excess of 50% of the voting capital stock of
Sierra immediately after the transaction, the Holdback Termination Date shall
be deemed to be the closing date of such transaction and the Holdback Shares
shall be re-transferred to Sierra or released to the Shareholders, as the case
may be, as provided herein.
8.6.6 TAXATION OF DIVIDENDS
Each Shareholder hereby acknowledges that, for federal and state income
tax purposes, any dividends or other distributions with respect to the Holdback
Shares shall be income of the Shareholders.
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8.7 REMEDIES
The indemnification provisions of this Article VIII are the sole and
exclusive remedy of any party to this Agreement for a breach of any
representation, warranty or covenant contained herein, except with respect to
any claim based on fraud in the inducement or a similar theory.
Notwithstanding the preceding sentence, each of the parties acknowledges and
agrees that the other parties hereto would 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 hereto agrees the other parties hereto shall be entitled to an
injunction to prevent breaches of the provisions of this Agreement and to
enforce specifically this Agreement and the terms and provisions hereof
(including the indemnification provisions hereof) in any competent court having
jurisdiction over the parties, in addition to any other remedy to which they
may be entitled at law or in equity.
ARTICLE IX - GENERAL
9.1 EXPENSES
Regardless of whether the transactions contemplated by this Agreement are
consummated, subject to the last sentence of this paragraph, each party shall
pay its own fees and expenses incident to the negotiation, preparation and
execution of this Agreement and the other Operative Documents (including legal
and accounting fees and expenses); provided, however, that, should any action
be brought hereunder, the attorneys' fees and expenses of the prevailing party
shall be paid by the other party to such action. The Shareholders shall pay
any transfer or similar taxes which may be payable in connection with the
transactions contemplated by this Agreement. In addition, the Shareholders
shall be responsible for the fees and expenses incurred by the Company in
connection with the negotiation and execution of the Operative Documents and
the consummation of the transactions contemplated thereby.
9.2 NOTICES
Any notice or demand desired or required to be given hereunder shall be in
writing given by personal delivery, certified or registered mail, confirmed
facsimile transmission, or overnight courier service, in each case addressed as
respectively set forth below or to such other address as any party shall have
previously designated by such a notice. The effective date of any notice or
request shall be the date of personal delivery, four days after the date of
mailing by certified or registered mail, the date on which successful facsimile
transmission is confirmed, or the date undertaken for delivery by a reputable
overnight courier service, as the case may be, in each case properly addressed
as provided herein and with all charges prepaid.
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<PAGE> 60
TO SIERRA OR THE PURCHASER:
Sierra On-Line, Inc.
3380 146th Place S.E., Suite 300
Bellevue, WA 98007
Fax: (206) 649-0214
Attention: General Counsel
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
Fax: (206) 583-8500
Attention: Stephen A. McKeon
TO THE SHAREHOLDERS:
At their respective addresses set forth on Schedule 2.1 to the Disclosure
Memorandum.
TO THE COMPANY:
Papyrus Design Group, Inc.
35 Medford Street
Somerville, Massachusetts 02143
Fax: (617) 868-5110
Attention: President
with a copy to:
Testa, Hurwitz & Thibeault
High Street Tower
125 High Street
Boston, MA 02110
Fax: (617) 248-7100
Attention: John M. Hession
9.3 SEVERABILITY
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law, or public policy, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not
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<PAGE> 61
affected in any manner adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner in order that the transactions contemplated hereby be
consummated as originally contemplated to the fullest extent possible.
9.4 ENTIRE AGREEMENT
This Agreement, the Confidentiality Agreement and the other Operative
Documents constitute the entire agreement among the parties with respect to the
subject matter hereof and thereof and supersede all prior agreements and
undertakings, both written and oral, among the parties, or any of them, with
respect to the subject matter hereof and thereof.
9.5 ASSIGNMENT
This Agreement shall not be assigned by operation of law or otherwise,
except that Sierra may assign all or any of its rights and obligations
hereunder to any of its affiliates, provided that no such assignment shall
relieve the assigning party of its obligations hereunder if such assignee does
not perform such obligations, and further provided that any such assignment
shall not change the consideration due to the Shareholders hereunder.
9.6 PARTIES IN INTEREST
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement, express or implied, is
intended to or shall confer upon any other Person any right, benefit or remedy
of any nature whatsoever under or by reason of this Agreement.
9.7 ARBITRATION
Any controversies or claims arising out of or relating to this Agreement
or the other Operative Documents shall be fully and finally settled by
arbitration in accordance with the Commercial Arbitration Rules of the American
Arbitration Association (the "AAA Rules"), conducted by one arbitrator either
mutually agreed upon by Sierra and the Shareholders or chosen in accordance
with the AAA Rules, except that the parties thereto shall have any right to
discovery as would be permitted by the Federal Rules of Civil Procedure for a
period of 90 days following the commencement of such arbitration, and the
arbitrator thereof shall resolve any dispute which arises in connection with
such discovery. The prevailing party shall be entitled to costs, expenses and
reasonable attorneys' fees, and judgment upon the award
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AGREEMENT AND PLAN OF MERGER Page 54
<PAGE> 62
rendered by the arbitrator may be entered in any court of competent
jurisdiction. Arbitration proceedings shall be conducted in Boston,
Massachusetts if commenced by Sierra and in Seattle, Washington if commenced by
the Shareholders.
9.8 GOVERNING LAW
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Washington applicable to contracts executed in and to be
performed in that State.
9.9 HEADINGS
The descriptive headings contained in this Agreement are included for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.10 COUNTERPARTS
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
9.11 TERMINATION OF STOCKHOLDERS AGREEMENT
The Shareholders hereby terminate the Stockholders Agreement dated as of
November 1, 1992, effective as of the Closing.
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AGREEMENT AND PLAN OF MERGER Page 55
<PAGE> 63
IN WITNESS WHEREOF, the parties hereto have entered into and signed this
Agreement as of the date and year first above written.
SIERRA ON-LINE, INC.
By /s/ KENNETH A. WILLIAMS
------------------------------------------
Its Chief Executive Officer
-------------------------------------
PDG ACQUISITION CORP.
By /s/ MICHAEL A. BROCHU
------------------------------------------
Its President
-------------------------------------
By /s/ RICHARD K. THUMANN
------------------------------------------
Its Vice President, Secretary & Treasurer
-------------------------------------
PAPYRUS DESIGN GROUP, INC.
By /s/ OMAR KHUDARI
------------------------------------------
Its President
-------------------------------------
By /s/ RICHARD F. YOUNG
------------------------------------------
Its Treasurer
-------------------------------------
SHAREHOLDERS:
/s/ OMAR H. KHUDARI
-----------------------------------------------
Name: Omar H. Khudari
/s/ J. DAVID KAEMMER
-----------------------------------------------
Name: J. David Kaemmer
/s/ RICHARD S. GARCIA
-----------------------------------------------
Name: Richard S. Garcia
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 56
<PAGE> 1
Exhibit 10.1
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and
entered into as of November 30, 1995 by and among Sierra On-Line, Inc., a
Delaware corporation ("Sierra" or the "Company"), and the former shareholders of
Papyrus Design Group, Inc., a Massachusetts corporation ("Papyrus"), listed on
the signature pages hereto (collectively the "Shareholders" and individually a
"Shareholder").
RECITALS
A. The Company, PDG Acquisition Corp., a Washington corporation
and wholly owned subsidiary of Sierra ("Purchaser"), Papyrus and the
Shareholders are parties to an Agreement and Plan of Merger (the "Merger
Agreement") pursuant to which Sierra will acquire Papyrus through a merger of
Purchaser with and into Papyrus in which shares of Sierra's common stock, $.01
par value per share ("Common Stock"), will be issued to the Shareholders as set
forth in the Merger Agreement.
B. The execution and delivery of this Agreement by the parties
hereto is a condition precedent to the obligations of the parties under the
Merger Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants contained herein, the parties hereto agree as follows:
1. DEFINITIONS
For the purposes of this Agreement, the following terms have the
meanings indicted below:
1933 Act. The Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
1934 Act. The Securities Exchange Act of 1934, as amended,
and the rules and regulations promulgated thereunder.
Business Day. Each Monday, Tuesday, Wednesday, Thursday and
Friday that is not a day on which banking institutions in New York are
authorized or obligated by law or executive order to close.
Commission. The United States Securities and Exchange
Commission.
<PAGE> 2
Holder. Any person owning Registrable Securities who is a
party to this Agreement, and any transferee thereof in accordance with Section 7
of this Agreement.
Prospectus. The prospectus included in any Registration
Statement, as amended or supplemented by any prospectus supplement (including,
without limitation, any prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Securities covered by such
Registration Statement), and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.
Register, registration and registered. A registration effected
by preparing and filing a registration statement or similar document with the
Commission in compliance with the 1933 Act, and the declaration or ordering of
effectiveness of such registration statement or document.
Registrable Securities. The shares of Common Stock issued to
the Shareholders pursuant to the Merger Agreement and any securities that may be
issued by the Company or any successor to the Company from time to time with
respect to, in exchange for, or in replacement of such shares of Common Stock,
including, without limitation, securities issued as a stock dividend on or
pursuant to a stock split of such shares of Common Stock; provided, however,
that those shares as to which the following apply shall cease to be Registrable
Securities: (a) a Registration Statement with respect to the sale of such
Registrable Securities shall have become effective under the 1933 Act and such
Registrable Securities shall have been disposed of under such Registration
Statement; (b) such Registrable Securities shall have become transferable in
accordance with Rule 144, or any successor rule or provision, under the 1933
Act; (c) such Registrable Securities shall have been transferred in a
transaction in which the Holder's rights and obligations under this Agreement
were not assigned in accordance with this Agreement; or (d) such Registrable
Securities shall have ceased to be outstanding.
Registration Expenses. All expenses incident to the Company's
performance of or compliance with Sections 2 and 4, including, without
limitation, all registration and filing fees (including filing fees with respect
to the Commission and to the National Association of Securities Dealers, Inc.
and listing fees of the Nasdaq National Market), all fees and expenses of
complying with state securities or "blue sky" laws (including fees and
disbursements of underwriters' counsel in connection with any "blue sky"
memorandum or survey), all printing expenses, all registrars' and transfer
agents' fees and all fees and disbursements of the Company's counsel and
independent public accountants.
<PAGE> 3
Registration Statement. A registration statement prepared and
filed with the Commission in compliance with the 1933 Act.
Seller. Any person, including any Holder, participating in an
offering of any Registrable Securities of the Company pursuant to this
Agreement.
Selling Expenses. All applicable transfer taxes and any fees
and disbursements of any counsel, accountants or other advisors for any seller
of the Registrable Securities being registered.
Shelf Registration. A registration effected pursuant to a
shelf Registration Statement of the Company, on an appropriate form under Rule
415 under the 1933 Act, or any similar rule that may be adopted by the
Commission, all amendments and supplements to such registration statement,
including post-effective amendments, in each case including the Prospectus
contained therein, all exhibits thereto and all material incorporated by
reference therein. A Registration Statement relating to a Shelf Registration
shall be referred to herein as the "Shelf Registration Statement."
2. SHELF REGISTRATION
2.1 GENERAL
Subject to the limitations set forth elsewhere in this Section 2, on or
before January 31, 1996, the Company shall file with the Commission a Shelf
Registration Statement on Form S-3 of all the Registrable Securities held by the
Holders.
2.2 LIMITATION ON REGISTRATION OBLIGATION
Notwithstanding the provisions of Section 2.1, if, prior to the filing
or effective date of the Shelf Registration Statement referred to in Section 2.1
above, the Company shall furnish to such Holders a certificate signed by the
President and the General Counsel of the Company stating that, in their good
faith judgment:
(a) the filing of the Shelf Registration Statement or the
offering of securities pursuant thereto would materially and adversely affect
(i) a pending or scheduled public offering or private placement of Sierra's
securities, (ii) a pending or proposed acquisition, merger, consolidation,
reorganization, restructuring or similar transaction of or by Sierra, (iii) bona
fide negotiations, discussions or proposals with respect to any of the
foregoing, or (iv) the position or strategy of Sierra in connection with any
pending or threatened litigation, claim, assessment or government investigation;
and
(b) in the event the Shelf Registration Statement were
then effective and sales of Registrable Securities were made thereunder, and
disclosure of all material
<PAGE> 4
information with respect to the foregoing had not been made, such circumstances
would cause a violation of the 1933 Act or the 1934 Act and result in potential
liability to Sierra;
then the Company shall have the right to defer the filing or effectiveness, as
the case may be, of such Shelf Registration Statement for such period of time as
such the above circumstances shall continue, such period not to exceed 180 days
after the date of this Agreement.
2.3 SELLING PROCEDURES; SUSPENSION
Each Holder of Registrable Securities agrees to give written notice to
the General Counsel and the Chief Accounting Officer of the Company at least 10
Business Days prior to any intended sale or distribution of Registrable
Securities under the Shelf Registration Statement referred to in Section 2.1,
which notice shall specify the date on which such Holder intends to begin such
sale or distribution. As soon as practicable after the date such notice is
received by the Company, and in any event within 10 Business Days after such
date, the Company shall comply with either paragraph (a) or (b) below.
(a) Except in the event that paragraph (b) below applies,
the Company shall (i) if deemed necessary by the Company, prepare and file with
the Commission a post-effective amendment to the Shelf Registration Statement or
a supplement to the related Prospectus or a supplement or amendment to any
document incorporated therein by reference or file any other required document
so that such Registration Statement will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and so that, as
thereafter delivered to purchasers of the Registrable Securities being sold
thereunder, such Prospectus will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading; (ii) provide the Holders of the Registrable
Securities who gave such notice copies of any documents filed pursuant to
Section 2.3(a)(i); and (iii) inform each such Holder that the Company has
complied with its obligations in Section 2.3(a)(i) (or that, if the Company has
filed a post-effective amendment to the Shelf Registration Statement which has
not yet been declared effective, the Company will notify each such Holder to
that effect, will use its best efforts to secure the effectiveness of such
post-effective amendment and will immediately notify each such Holder pursuant
to Section 2.3(a)(i) hereof when the amendment has become effective). Each
Holder who has given notice of intention to distribute such Holder's Registrable
Securities in accordance with Section 2.3 hereof (a "Notice Holder") shall sell
all or any of such Registrable Securities pursuant to the Shelf Registration
Statement and related Prospectus only during the 30-day period commencing with
the date on which the Company gives notice, pursuant to
<PAGE> 5
Section 2.3(a)(i), that the Registration Statement and Prospectus may be used
for such purpose (such 30-day period is referred to as a "Selling Period"). The
Notice holders will not sell any Registrable Securities pursuant to such
Registration Statement or Prospectus after such Selling Period without giving a
new notice of intention to sell pursuant to Section 2.3 hereof and receiving a
further notice from the Company pursuant to Section 2.3(a)(i) hereof or
paragraph (b) below.
(b) In the event of (i) any request by the Commission or
any other federal or state governmental authority during the period of
effectiveness of the Shelf Registration Statement for amendments or supplements
to a Shelf Registration Statement or related Prospectus or for additional
information; (ii) the issuance by the Commission or any other federal or state
governmental authority of any stop order suspending the effectiveness of a Shelf
Registration Statement or the initiation of any proceedings for that purpose;
(iii) the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of the
Registrable Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose; (iv) any event or circumstance
which necessitates the making of any changes in the Shelf Registration Statement
or Prospectus, or any document incorporated or deemed to be incorporated therein
by reference, so that, in the case of the Shelf Registration Statement, it will
not contain any untrue statement of a material fact or any omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and that in the case of the Prospectus, it will not
contain any untrue statement of a material fact or any omission to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading; (v) the Company's reasonable determination that a post-effective
amendment to a Shelf Registration Statement would be appropriate; or (vi) that,
in the good faith judgment of the Company's President and Chief Financial
Officer, it is advisable to suspend use of the Prospectus for a discrete period
of time due to pending corporate developments, public filings with the
Commission or similar events; then, subject to paragraph (d) below, the Company
shall deliver a certificate in writing to the Notice Holders (the "Suspension
Notice") to the effect of the foregoing and, upon receipt of such Suspension
Notice, each such Notice Holder's Selling Period will not commence (a
"Suspension") until such Notice Holder's receipt of copies of the supplemented
or amended Prospectus provided for in Section 2.3(a)(i) hereof, or until it is
advised in writing by the Company that the Prospectus may be used, and has
received copies of any additional or supplemental filings that are incorporated
or deemed incorporated by reference in such Prospectus.
(c) In the event any of the events or circumstances
listed in the foregoing paragraph (b) occur or exist after a Selling Period has
commenced, subject to paragraph (d) below, the Company shall have the same right
to suspend such Selling Period by delivery of a Suspension Notice as the Company
would have had if the
<PAGE> 6
Selling Period had not yet commenced, and any such suspension of a Selling
Period shall be deemed included within the meaning of the term "Suspension" for
all purposes under this Agreement.
(d) In the event of any Suspension, or any delay in
effecting the Shelf Registration under Section 2.2 above, the Company will use
its best efforts to ensure that the use of the Prospectus so suspended or
delayed may be commenced or resumed, as the case may be, and that any Selling
Period so suspended will commence or resume, as the case may be, as soon as
practicable and, in the case of a pending development, filing or event referred
to in Section 2.3(b)(iv), (v) or (vi) hereof, as soon, in the judgment of the
Company's President and General Counsel, as disclosure of the material relating
to such pending development, filing or event would not have an adverse effect on
the Company's ability to consummate the transaction, if any, to which such
development, filing or event relates. Notwithstanding any other provision of
this Agreement, the Company shall have the right to cause a maximum of five
Suspensions as provided above (including for this purpose a delay in effecting
the Shelf Registration pursuant to Section 2.2 above) during any 12-month period
after the initial effective date of the Shelf Registration Statement, and the
total number of days in any 12-month period during which a Suspension or
Suspensions (including for this purpose a delay in effecting the Shelf
Registration Statement pursuant to Section 2.2 above) may be in effect shall not
exceed 180.
2.4 VOLUME LIMITATIONS
Notwithstanding any other provision of this Agreement, no Holder of
Registrable Securities shall dispose of Registrable Securities in such a way as
to result in the merger contemplated by the Merger Agreement not qualifying as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986, as amended.
3. EXPENSES
The Company will pay all Registration Expenses in connection with the
registration of Registrable Securities effected by the Company pursuant to
Section 2. Holders of Registrable Securities registered pursuant to this
Agreement shall pay all Selling Expenses with each such Holder bearing a pro
rata portion of the Selling Expenses based upon the number of Registrable
Securities registered by each such Holder.
4. REGISTRATION PROCEDURES
In connection with the registration of Registrable Securities under
this Agreement, and subject to the other provisions of this Agreement, the
Company shall:
<PAGE> 7
(a) use commercially reasonable efforts to cause the
Registration Statement filed in accordance with Section 2 to become effective as
soon as practicable after the date of filing thereof;
(b) prepare and file with the Commission such amendments
and supplements to such Registration Statement and the Prospectus used in
connection therewith as may be necessary to keep such Registration Statement
continuously effective for the shorter of (i) two years after the date hereof or
(ii) until there are no Registrable Securities outstanding, and to comply with
the provisions of the 1933 Act with respect to the disposition of the
Registrable Securities;
(c) furnish to each Seller of such Registrable Securities
such number of copies of the Prospectus included in such Registration Statement
as such Seller may reasonably request in order to facilitate the sale or
disposition of such Registrable Securities;
(d) use commercially reasonable efforts to register or
qualify all securities covered by such Registration Statement under such other
securities or "blue sky" laws of such jurisdictions as each Seller shall
reasonably request, and do any and all other acts and things that may be
necessary to enable such Seller to consummate the disposition in such
jurisdictions of its Registrable Securities covered by such Registration
Statement, except that the Company shall not for any such purpose be required to
qualify generally to do business as a foreign corporation in any jurisdiction
wherein it is not so qualified, or to subject itself to taxation in respect of
doing business in any such jurisdiction, or to consent to general service of
process in any such jurisdiction;
(e) notify each Seller of Registrable Securities covered
by such Registration Statement, at any time when a Prospectus relating thereto
is required to be delivered under the 1933 Act, of the happening of any event as
a result of which the Prospectus included in such Registration Statement, as
then in effect, includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances then existing or
if it is necessary to amend or supplement such Prospectus to comply with the
law, and at the request of any such Seller, prepare and furnish to such Seller a
reasonable number of copies of a supplement to or an amendment of such
Prospectus as may be necessary so that, as thereafter delivered to the
purchasers of such Registrable Securities or securities, such Prospectus, as
amended or supplemented, will comply with the law;
(f) timely file with the Commission such information as
the Commission may prescribe under Section 13 or 15(d) of the 1934 Act and
otherwise use commercially reasonable efforts to ensure that the public
information requirements of
<PAGE> 8
Rule 144 under the 1933 Act are satisfied with respect to the Company. The
Company shall furnish to any Holder of Registrable Securities, upon request,
copies of the Company's most recent annual and quarterly reports and other
publicly available documents filed with the Commission as a Holder may
reasonably request in availing itself of any rule or regulation of the
Commission allowing such Holder to sell Registrable Securities without
registration.
(g) use commercially reasonable efforts to qualify such
securities for inclusion in the Nasdaq National Market, and provide a transfer
agent and registrar for such Registrable Securities not later than the effective
date of such Registration Statement; and
(h) issue to any person to which any Holder of
Registrable Securities may sell such Registrable Securities in connection with
such registration certificates evidencing such Registrable Securities without
any legend restricting the transferability of the Registrable Securities.
5. SELLER INFORMATION
It shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement that all Sellers of Registrable
Securities shall furnish to the Company such information regarding themselves,
the Registrable Securities held by them and the intended method of disposition
of such Registrable Securities as shall be reasonably required to effect the
registration of their Registrable Securities and to execute such documents in
connection with such registration as the Company may reasonably request.
6. INDEMNIFICATION AND CONTRIBUTION
In the event any Registrable Securities are included in a Registration
Statement under Section 2:
(a) The Company will indemnify and hold harmless each
Seller, the officers, directors, partners, agents and employees of each Seller,
any underwriter (as defined in the 1933 Act) for such Seller and each person, if
any, who controls such Seller or underwriter within the meaning of the 1933 Act
or the 1934 Act, against any losses, claims, damages or liabilities (joint or
several) to which they may become subject under the 1933 Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively, a
"Violation"): (i) any untrue statement or alleged untrue statement of a material
fact contained in such Registration Statement, including any preliminary
prospectus or final prospectus contained therein or any amendments or
supplements thereto; (ii) the omission or alleged omission to state therein a
material fact required to be stated therein,
<PAGE> 9
or necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading; or (iii) any violation or alleged
violation by the Company of the 1933 Act, the 1934 Act, any state securities law
or any rule or regulation promulgated under the 1933 Act, the 1934 Act or any
state securities law; and the Company will reimburse each such Seller, officer,
director, partner, agent, employee, underwriter or controlling person for any
reasonable legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
Section 6(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Company (which consent shall not be unreasonably withheld or
delayed), nor shall the Company be liable in any such case for any such loss,
claim, damage, liability or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Seller, underwriter or controlling person.
(b) Each Seller will indemnify and hold harmless the
Company, each of its officers, directors, partners, agents or employees, each
person, if any, who controls the Company within the meaning of the 1933 Act, any
underwriter and any other Seller or any of its directors, officers, partners,
agents or employees or any person who controls such Seller, against any losses,
claims, damages or liabilities (joint or several) to which the Company or any
such director, officer, partner, agent, employee, controlling person or
underwriter, or other such Seller or director, officer, partner, agent, employee
or controlling person may become subject, under the 1933 Act, the 1934 Act or
other federal or state law, insofar as such losses, claims, damages or
liabilities (or actions in respect thereto) arise out of or are based upon any
Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Seller expressly for use in connection with such registration;
and each such Seller will reimburse any reasonable legal or other expenses
reasonably incurred by the Company or any such director, officer, partner,
agent, employee, controlling person or underwriter, other Seller, officer,
director, partner, agent, employee or controlling person in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided, however, that the indemnity agreement contained in this Section 6(b)
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Seller, which consent shall not be unreasonably withheld or delayed; provided
further, that the aggregate liability of each Seller in connection with any sale
of Registrable Securities pursuant to a Registration Statement in which a
Violation occurred shall be limited to the net proceeds from such sale.
(c) Promptly after receipt by an indemnified party under
this Section 6 of notice of the commencement of any action (including any
governmental action), such
<PAGE> 10
indemnified party will, if a claim in respect thereof is to be made against any
indemnifying party under this Section 6, deliver to the indemnifying party a
written notice of the commencement thereof and the indemnifying party shall have
the right to participate in, and, to the extent the indemnifying party so
desires, jointly with any other indemnifying party similarly noticed, to assume
the defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
or conflicting interests between such indemnified party and any other party
represented by such counsel in such proceeding. The failure to deliver written
notice to the indemnifying party within a reasonable time of the commencement of
any such action, to the extent prejudicial to its ability to defend such action,
shall relieve such indemnifying party of liability to the indemnified party
under this Section 6 to the extent of such prejudice, but the omission so to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 6.
(d) If recovery is not available under the foregoing
indemnification provisions of this Section 6, for any reason other than as
specified therein, the parties entitled to indemnification by the terms thereof
shall be entitled to contribution to liabilities and expenses in such proportion
as is appropriate to reflect the relative fault of the indemnifying parties and
the indemnified parties, except to the extent that contribution is not permitted
under Section 11(f) of the 1933 Act. The relative fault of such indemnifying
party and indemnified party shall be determined by reference to, among other
things, the parties' relative knowledge and access to information concerning the
matter with respect to which the claim was asserted, the opportunity to correct
and prevent any statement or omission and any other equitable considerations
appropriate under the circumstances, including, without limitation, whether any
untrue statement or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company, on the one hand, or by the Holder of Registrable Securities, on the
other hand. The Company and the Sellers of the Registrable Securities covered by
such Registration Statement agree that it would not be equitable if the amount
of such contribution were determined by pro rata or per capita allocation. No
Seller of Registrable Securities covered by such Registration Statement or
person controlling such Seller shall be obligated to make any contribution
hereunder which in the aggregate exceeds the total public offering price of the
securities sold by such Seller, less the aggregate amount of any damages which
such Seller and its controlling persons have otherwise been required to pay in
respect of the same claim or any substantially similar claim. The obligations of
such Sellers to contribute are several in proportion to their respective
ownership of the securities covered by such Registration Statement and not
joint.
<PAGE> 11
7. TRANSFERABILITY
Each Holder agrees that he will not make any disposition of all or any
portion of the Registrable Securities (a) except in a registered public offering
pursuant to the rights granted in this Agreement; or (b) until (i) such Holder
shall have furnished the Company with a statement of the circumstances
surrounding the proposed disposition and (ii) if reasonably requested by the
Company, such Holder shall have furnished the Company with an opinion of
counsel, reasonably satisfactory to counsel for the Company, that such
disposition will not require registration of such Registrable Securities or such
transaction under the 1933 Act or applicable state securities laws.
Notwithstanding any other provision of this Agreement: (x) no Holder may sell or
transfer any Registrable Securities under this Agreement or otherwise until the
date of filing with the Commission of the Company's Quarterly Report on Form
10-Q for the first fiscal quarter of the Company ending after the date of this
Agreement which contains a period of at least 30 days of combined financial
results of Sierra and Papyrus; and (y) no sale or transfer of Registrable
Securities other than in a registered public offering pursuant to the
Registration Statement referred to in Section 2.1 shall be made hereunder or
otherwise unless the purchaser or transferee of such Registrable Securities
agrees in writing to be bound by all the terms and conditions of this Agreement.
8. LEGENDS
Each Holder understands and agrees that the certificates evidencing the
Registrable Securities will bear legends in substantially the following form:
"The securities evidenced by this certificate have not been
registered under the Securities Act of 1933 or any applicable
state law, and no interest therein may be sold, distributed,
assigned, offered, pledged or otherwise transferred unless (a)
there is an effective registration statement under such act
and applicable state securities laws covering any such
transaction involving said securities or (b) this corporation
receives an opinion of legal counsel for the holder of these
securities (reasonably satisfactory to this corporation)
stating that such transaction is exempt from registration or
(c) this corporation otherwise satisfies itself that such
transaction is exempt from registration. This legend will be
canceled, and a certificate free from such legend issued to
the holder hereof, upon compliance with the following
conditions: (i) surrender of this certificate to this
corporation in the manner and at the place designated for
cancellation, (ii) a representation by the holder that it has
held the securities evidenced by this certificate for not less
than three years, and that it is not, and has not within the
preceding 90 days been, an "affiliate" (as that term is
defined for
<PAGE> 12
purposes of Rule 144) of this corporation, and (iii) an
undertaking that if at any time the holder shall again become
an affiliate or otherwise cease to enjoy free transferability
of such securities under Rule 144 either by reason of change
of circumstance or amendment of said Rule, it shall forthwith
surrender any unlegended certificate(s) received by it in
respect of the securities evidenced by this certificate for
imposition of any appropriate legend."
9. MISCELLANEOUS
9.1 AMENDMENTS AND WAIVERS
Any provision of this Agreement may be amended and the observance
thereof may only be waived (either generally or in a particular instance and
either retroactively or prospectively), with the written consent of the Company
and the Holders of a majority of the Registrable Securities then outstanding.
Any amendment or waiver effected in accordance with this Section 9.1 shall be
binding upon each Holder of Registrable Securities at the time outstanding, each
future Holder of Registrable Securities, and the Company.
9.2 NOTICES
Any notice required or permitted to be given hereunder shall be in
writing and shall be deemed given at the opening of business on the first
Business Day following the time (a) delivery is made, if by hand delivery, (b)
the facsimile is successfully transmitted, if by telecopier or facsimile
machine, or (c) the Business Day after such notice is deposited with a reputable
next-day courier, postage prepaid, for next-day delivery, addressed as
respectively set forth below or to such other address as any party shall have
previously designated by such a notice.
To the Company:
Sierra On-Line, Inc.
3380 146 Place S.E., Suite 300
Bellevue, Washington 98007
Fax: (206) 649-0214
Attention: General Counsel
with a copy to:
Perkins Coie
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
<PAGE> 13
Fax: (206) 583-8500
Attention: Stephen A. McKeon
To a Holder of Registrable Securities:
At the addresses listed in Schedule A hereto.
with a copy to:
Testa, Hurwitz & Thibeault
High Street Tower
125 High Street
Boston, MA 02110
Fax: (617) 248-7100
Attention: John M. Hession
9.3 GOVERNING LAW
This Agreement shall for all purposes be governed by and construed in
accordance with the internal laws of the State of Washington without regard to
conflicts-of-laws principles. The parties hereto agree to submit to the
jurisdiction of the federal and state courts of the State of Washington with
respect to the breach or interpretation of this Agreement or the enforcement of
any and all rights, duties, liabilities, obligations, powers and other relations
between parties arising under this Agreement.
9.4 SEVERABILITY
If one or more provisions of this Agreement are held to be
unenforceable under applicable law, such provision shall be excised from this
Agreement, and the remainder of this Agreement shall be interpreted as if such
provision were so excised and shall be enforceable in accordance with its
remaining terms.
9.5 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of
which shall be deemed to be an original and all of which together shall
constitute one and the same instrument.
<PAGE> 14
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SIERRA ON-LINE, INC.
By: /s/ MICHAEL A. BROCHU
-------------------------------
Its President
SHAREHOLDERS:
/s/ OMAR H. KHUDARI
-----------------------------------
Omar H. Khudari
/s/ J. DAVID KAEMMER
-----------------------------------
J. David Kaemmer
/s/ RICHARD S. GARCIA
-----------------------------------
Richard S. Garcia
<PAGE> 15
SCHEDULE A
<TABLE>
<CAPTION>
REGISTRABLE
HOLDERS SECURITIES
- ------- -----------
<S> <C>
Omar Khudari
55 Forest Street 550,469
Lexinton, MA 02173
SSN: ###-##-####
J. David Kaemmer
47 Bridgecourt Lane 550,469
Concord, MA 01742
SSN: ###-##-####
Richard S. Garcia
709 Summit Avenue 68,466
Northfield, MN 55057
SSN: ###-##-####
</TABLE>
<PAGE> 1
Exhibit 10.2
AMENDMENT TO ACQUISITION AGREEMENT
This Amendment to Acquisition Agreement (this "Agreement"), dated as of
December 1, 1995, is entered into by and between Sierra On-Line, Inc., a
Delaware corporation (the "Company"), and the individuals listed on the
signature pages hereto (collectively the "Coktel Group" and each individually a
"Coktel Group Member").
RECITALS
A. The Company and the Coktel Group are parties to that certain
Acquisition Agreement dated October 13, 1993 (the "Prior Agreement") pursuant to
which the Company acquired Coktel Vision, S.A. from the Coktel Group.
B. The Company and the Coktel Group now desire to amend the Prior
Agreement as set forth herein.
AGREEMENT
In consideration of the foregoing and the other terms and conditions
set forth herein, the parties hereto agree as follows:
1. ISSUANCE OF COMPANY STOCK
1.1 SHARES
Upon the terms and subject to the conditions of this Agreement, the
Company shall issue to each Coktel Group Member the number of shares of Common
Stock of the Company (the "Shares") specified opposite such Coktel Group
Member's name on Schedule A hereto, constituting in the aggregate 150,000 shares
of Common Stock of the Company.
1.2 CONSIDERATION
In consideration for the issuance of the Shares, each Coktel Group
Member hereby relinquishes his right to receive any further Earn-out Payments
(as defined in the Prior Agreement) pursuant to the Prior Agreement, and the
Company's obligation to make Earn-out Payments thereunder is hereby terminated.
2. RESALE RESTRICTIONS
2.1 SECURITIES LAWS; COMPLIANCE WITH REGULATION S
Each Coktel Group Member hereby confirms his understanding that (a) the
Shares have not been registered under the U.S. Securities Act of 1933, as
amended (the "Act"), or any other U.S., French or other securities laws, (b) the
Shares will be issued in reliance on Regulation S promulgated by the U.S.
Securities and Exchange Commission and, therefore,
<PAGE> 2
cannot be sold or transferred unless they are subsequently registered under the
Act or an exemption from such registration is available, and (c) the Shares are
subject to resale restrictions as set forth elsewhere in this Section 2. Each
Coktel Group Member represents that he is not a U.S. person (as that term is
used in Regulation S), is not located in the U.S. and is acquiring the Shares in
an offshore transaction, and such Coktel Group Member is not acquiring the
Shares for the account or benefit of any U.S. person. Each Coktel Group Member
hereby confirms that he has not, in connection with the acquisition of Shares
hereunder, offered, sold (including by any short sale), or entered into any
transaction (including the purchase of any put or sale of any call) involving
the sale or potential sale of the Common Stock of the Company in the United
States or to or for the account or benefit of any U.S. person.
2.2 LEGENDS
It is understood that the certificates evidencing the Shares may bear
legends in substantially the following form:
"THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE U.S. SECURITIES ACT OF 1933 (THE "ACT") OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE BEEN ISSUED IN A
TRANSACTION GOVERNED BY REGULATION S PROMULGATED UNDER THE ACT AND MAY NOT BE
TRANSFERRED EXCEPT IN ACCORDANCE WITH REGULATION S, OR PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT OR AN APPLICABLE EXEMPTION FROM REGISTRATION UNDER THE
ACT.
THE SECURITIES EVIDENCED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESALE RESTRICTIONS AS SET FORTH IN AN AMENDMENT TO ACQUISITION AGREEMENT
BETWEEN THE COMPANY AND CERTAIN STOCKHOLDERS, INCLUDING THE REGISTERED HOLDER, A
COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY."
2.3 RESTRICTED PERIOD
For a period of six months after the date of this Agreement (the
"Restricted Period"), no Coktel Group Member may enter into any transaction,
including the purchase of any put or sale of any call or any short sale,
involving the sale or potential sale of the Company's Common Stock.
2.4 HOLDING PERIODS
From the date of this Agreement until April 1, 1996 (the "First Sale
Date"), no Coktel Group Member may sell, assign or otherwise transfer any
interest, direct or indirect, in all or any part of the Shares. From and after
the First Sale Date until April 1, 1997 (the "Second Sale Date"), each Coktel
Group Member may from time to time sell, assign or otherwise
2
<PAGE> 3
transfer any interest, direct or indirect, in up to one-third of the Shares set
forth opposite such Coktel Group Member's name on Schedule A hereto (adjusted
for any stock splits or dividends), but the remaining Shares shall remain
subject to the restrictions set forth in the first sentence of this Section 2.4.
From and after the Second Sale Date until April 1, 1998 (the "Final Sale Date"),
each Coktel Group Member may from time to time sell, assign or otherwise
transfer any interest, direct or indirect, in up to two-thirds of the Shares set
forth opposite such Coktel Group Member's name on Schedule A hereto (adjusted
for any stock splits or dividends), but the remaining Shares shall remain
subject to the restrictions set forth in the first sentence of this Section 2.4.
From and after the Final Sale Date, the Shares may be freely transferred,
subject to the provisions of Regulation S and other applicable securities laws.
2.5 CHANGE OF CONTROL
Notwithstanding anything to the contrary contained herein, the Shares
may be transferred prior to the expiration of the holding periods specified
above in connection with any merger, reorganization, sale of stock or assets or
other transaction, in each case which will result in a change in voting control
of the Company, in which the other stockholders of the Company are exchanging
their shares of Common Stock for other consideration.
3. EARN-OUT MATTERS
3.1 1996
In the event that, as of the date on which the Earn-out Payment
relating to the year ending March 31, 1996 would have been required to be made
by the Company if such obligation had not been terminated pursuant to this
Agreement (the amount thereof being referred to as the "1996 Earn-out Amount"),
the aggregate fair market value (as defined below) of 50% of the total number of
Shares originally issued under this Agreement (as adjusted for any stock splits
or dividends) is less than 80% of such 1996 Earn-out Amount, the Company shall,
within ten business days after such date, either (a) issue to the Coktel Group,
pro rata according to their respective holdings as set forth on Schedule A
hereto, a number of shares of Common Stock with a fair market value (the "1996
Top-up Value") which, when added to the fair market value of such 50% of the
total original Shares, is equal to such 80% of the 1996 Earn-out Amount, or (b)
pay to the Coktel Group, pro rata according to their respective holdings as set
forth on Schedule A hereto, an amount in cash equal to the 1996 Top-up Value,
such choice of stock or cash to be made in the sole discretion of the Company.
3.2 1997
In the event that, as of the date on which the Earn-out Payment
relating to the year ending March 31, 1997 would have been required to be made
by the Company if such obligation had not been terminated pursuant to this
Agreement (the amount thereof being referred to as the "1997 Earn-out Amount"),
the aggregate fair market value (as defined
3
<PAGE> 4
below) of 50% of the total number of Shares originally issued under this
Agreement (as adjusted for any stock splits or dividends) is less than 80% of
such 1997 Earn-out Amount, the Company shall, within ten business days
thereafter, either (a) issue to the Coktel Group, pro rata according to their
respective holdings as set forth on Schedule A hereto, a number of shares of
Common Stock with a fair market value (the "1997 Top-up Value") which, when
added to the fair market value of such 50% of the total original Shares, is
equal to such 80% of the 1997 Earn-out Amount, or (b) pay to the Coktel Group,
pro rata according to their respective holdings as set forth on Schedule A
hereto, an amount in cash equal to the 1997 Top-up Value, such choice of stock
or cash to be made in the sole discretion of the Company.
3.3 FAIR MARKET VALUE DEFINITION
The term "fair market value" as used in this Section 3 shall mean the
average of the last reported sale prices of the Company's Common Stock on the
Nasdaq National Market over the ten consecutive trading days ending with and
including the date as of which fair market value is being determined.
3.4 RESTRICTIONS
No shares of Common Stock issued pursuant to this Section 3 may be
sold, transferred or otherwise disposed of until the earlier of (a) six months
after the date of issuance or (b) upon a change of control of the Company as
described in Section 2.5 above, whichever is earlier.
4. ENTIRE AGREEMENT; GOVERNING LAW
This Agreement constitutes the full and entire understanding and
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements with respect to the subject matter hereof,
provided that the Prior Agreement shall remain in full force and effect except
to the extent modified, superseded or terminated hereby. This Agreement shall be
governed by and construed under the laws of France.
5. NOTICE
Unless otherwise provided, any notice desired or required to be given
hereunder shall be in writing given by personal delivery or certified or
registered mail, telegram or confirmed facsimile transmission, addressed, if to
the Company, at its address listed on the signature page of this Agreement, and
if to the Coktel Group, at the addresses set forth in Schedule A attached
hereto, or to such other address as any party shall have previously designated
by such a notice. The effective date of any notice or request shall be three
days from the date it is sent by the addressor with charges prepaid so long as
it is in fact received within five days, or when successful transmission is
confirmed if sent by facsimile, or when personally delivered.
4
<PAGE> 5
6. AMENDMENTS
Any term of this Agreement may be amended and the observance of any
term may be waived (either generally or in a particular instance and either
retroactively or prospectively) only with the written consent of the Company and
a majority in interest of Coktel Group. Any amendment or waiver effected in
accordance with this Section 6 shall be binding upon each holder of Shares
acquired under this Agreement at the time outstanding, each future holder of the
Shares, and the Company.
7. COUNTERPARTS
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in separate counterparts, each of which when executed and delivered shall be
deemed to be an original but all of which taken together shall constitute one
and the same agreement.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
SIERRA ON-LINE, INC.
By /s/ MICHAEL A. BROCHU
----------------------------------------
Its President
--------------------------------------
Address: 3380 146th Place S.E., Suite 300
Bellvue, WA 98007
Fax: (206) 649-0214
COKTEL GROUP:
/s/ ROLAND OSKIAN
------------------------------------------
Roland Oskian
/s/ ARNAUD DELRUE
------------------------------------------
Arnaud Delrue
/s/ MANUELLE CHAPOULLIE-MAUGER
------------------------------------------
Manuelle Chapoullie-Mauger
6
<PAGE> 7
SCHEDULE A
COKTEL GROUP HOLDINGS
<TABLE>
<CAPTION>
Name and Address Number of Shares
- ---------------- ----------------
<S> <C>
Roland Oskian 90,000
Arnaud Delrue 30,000
Manuelle Chapoullie-Mauger 30,000
TOTAL 150,000
</TABLE>
7
<PAGE> 1
Exhibit 10.3
LIMITED LIABILITY COMPANY AGREEMENT
OF
COLLIER SIERRA L.L.C.,
A DELAWARE LIMITED LIABILITY COMPANY
EFFECTIVE AS OF OCTOBER 31, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I. ORGANIZATION OF COMPANY................................................................ 1
1.1 Name.................................................................................. 1
1.2 Certificate of Formation.............................................................. 1
1.3 Term.................................................................................. 1
1.4 Principal Place of Business........................................................... 1
1.5 Registered Office and Registered Agent................................................ 1
1.6 Purpose and Nature of Business........................................................ 2
1.7 Defects as to Formalities............................................................. 2
1.8 No Partnership Intended for Nontax Purposes........................................... 2
1.9 Liability of Members to Third Parties; Reliance by Third-Party Creditors.............. 2
1.9.1 Liability of Members....................................................... 2
1.9.2 Reliance by Third Parties.................................................. 2
1.10 Defined Terms......................................................................... 3
ARTICLE II. CAPITAL STRUCTURE..................................................................... 3
2.1 Initial Capital Contributions......................................................... 3
2.2 Additional Contribution Commitment.................................................... 3
2.3 Default in Monetary Obligations....................................................... 4
2.4 Management Services................................................................... 4
2.5 Additional Members.................................................................... 4
2.6 Company Capital....................................................................... 4
2.7 Maintenance of Capital Accounts....................................................... 5
ARTICLE III. MANAGEMENT............................................................................ 6
3.1 Board of Members...................................................................... 6
3.1.1 Initial Board of Members................................................... 6
3.1.2 Term....................................................................... 6
3.1.3 Appointment; Removal....................................................... 6
3.1.4 Appointment of the Manager................................................. 6
3.1.5 Authority to Act........................................................... 6
3.1.6 Action by Board of Members................................................. 7
3.2 Unanimous Consent Requirement......................................................... 8
3.3 Manager/Officer....................................................................... 9
3.3.1 Appointment; Removal....................................................... 10
3.3.2 Term....................................................................... 10
3.4 Rights of Members..................................................................... 10
</TABLE>
- --------------------------------------------------------------------------------
-i-
<PAGE> 3
<TABLE>
<S> <C>
3.5 Other Business of Members............................................................. 10
ARTICLE IV. COMPANY'S DEALINGS WITH MEMBERS OR AFFILIATES......................................... 10
4.1 Right of Company to Deal With Members or Affiliates................................... 10
4.2 License of Collier Content and Related Technology..................................... 11
4.2.1 Grant...................................................................... 11
4.2.2 License to Collier Trademarks.............................................. 11
4.2.3 Exclusivity................................................................ 11
4.2.4 Collier Infringement Indemnity............................................. 11
4.2.5 Text Upgrades.............................................................. 12
4.2.6 Nontransferability of Licenses............................................. 12
4.3 License of Sierra Multimedia Components............................................... 12
4.3.1 Grant...................................................................... 12
4.3.2 License to Sierra Trademarks............................................... 12
4.3.3 Exclusivity................................................................ 13
4.3.4 Sierra Infringement Indemnity.............................................. 14
4.3.5 Nontransferability of Licenses............................................. 14
4.4 Production of Product................................................................. 14
4.4.1 Review for Factual Accuracy................................................ 14
4.4.2 Suppliers.................................................................. 14
4.5 Distribution Rights to the Members.................................................... 15
4.5.1 Distribution Rights Granted to Collier..................................... 15
4.5.2 Distribution Rights Granted to Sierra...................................... 15
4.5.3 Rights Reserved to the Company............................................. 15
4.5.4 Compensation to the Company................................................ 15
4.5.5 Third-Party Royalties...................................................... 16
4.5.6 Company Trademark License.................................................. 16
4.5.7 Company Infringement Indemnity............................................. 16
4.5.8 Cross-Marketing............................................................ 17
4.5.9 Customer Lists............................................................. 17
4.6 Development........................................................................... 17
4.6.1 Development Plan........................................................... 17
4.6.2 Enabling Technology........................................................ 17
4.6.3 Sierra's Development Responsibilities...................................... 18
4.6.4 Collier's Development Responsibilities..................................... 18
4.6.5 Cost of Services; Reimbursement............................................ 18
4.7 Customer Service, Licensing Fees...................................................... 18
4.7.1 Support.................................................................... 18
4.7.2 Platform License Fees...................................................... 19
4.8 OEM, On-Line Service and Similar Transactions......................................... 19
</TABLE>
- --------------------------------------------------------------------------------
-ii-
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE V. ALLOCATION OF PROFITS AND LOSSES...................................................... 19
5.1 Allocation of Profits................................................................. 19
5.2 Allocation of Losses.................................................................. 19
5.3 Other Allocation Rules................................................................ 19
5.3.1 Conventions................................................................ 19
5.3.2 Section 704(e)............................................................. 19
5.4 Intent of Allocations................................................................. 20
ARTICLE VI. CASH DISTRIBUTIONS.................................................................... 20
6.1 General............................................................................... 20
6.2 Distributions......................................................................... 20
ARTICLE VII. TRANSFERS; ADMISSIONS; WITHDRAWAL..................................................... 20
7.1 No Transfer of Economic or Management Rights.......................................... 20
7.2 Admission of Substitute Members....................................................... 21
7.3 Obligations of Substitute Member...................................................... 21
7.4 Additional Members.................................................................... 22
7.5 No Right to Withdrawal................................................................ 22
ARTICLE VIII.DISSOLUTION OF COMPANY................................................................ 22
8.1 Events Causing Dissolution............................................................ 22
8.2 Liquidation........................................................................... 23
8.3 Enabling Technology................................................................... 24
8.4 Rights to Collier Content............................................................. 24
8.5 Rights to Sierra Multimedia Components................................................ 24
8.6 Company Technology.................................................................... 25
8.7 Continuation of Use................................................................... 25
8.8 Use of Other Member's Name............................................................ 25
8.9 Deficit Capital Accounts.............................................................. 25
ARTICLE IX. BOOKS, RECORDS AND ACCOUNTING......................................................... 26
9.1 Books and Records..................................................................... 26
9.2 Fiscal Year........................................................................... 26
9.3 Bank Accounts......................................................................... 26
9.4 Annual Budget......................................................................... 27
9.4.1 Annual Budget Planning..................................................... 27
9.4.2 Review of Annual Performance............................................... 27
9.5 Annual Business Plan.................................................................. 27
ARTICLE X. INDEMNIFICATION....................................................................... 28
10.1 Indemnification....................................................................... 28
</TABLE>
- --------------------------------------------------------------------------------
-iii-
<PAGE> 5
<TABLE>
<S> <C>
10.2 Advance Payment....................................................................... 28
10.3 Nonexclusivity of Rights.............................................................. 28
10.4 Insurance............................................................................. 28
10.5 Indemnification of Others............................................................. 29
ARTICLE XI. AMENDMENT............................................................................. 29
ARTICLE XII. MISCELLANEOUS......................................................................... 29
12.1 Confidentiality....................................................................... 29
12.2 Press Releases........................................................................ 30
12.3 Application of Delaware Law........................................................... 30
12.4 Construction.......................................................................... 30
12.5 Counterparts.......................................................................... 30
12.6 Execution of Additional Instruments................................................... 30
12.7 Headings.............................................................................. 30
12.8 Heirs, Successors and Assigns......................................................... 31
12.9 Rights and Remedies Cumulative........................................................ 31
12.10 Severability.......................................................................... 31
12.11 Waivers............................................................................... 31
12.12 Notices............................................................................... 31
12.13 Attorneys' Fees....................................................................... 33
EXHIBIT A ................................................................................... 34
</TABLE>
- --------------------------------------------------------------------------------
-iv-
<PAGE> 6
LIMITED LIABILITY COMPANY AGREEMENT
OF
COLLIER SIERRA L.L.C.
This Limited Liability Company Agreement is effective as of October 31,
1995 (the "Effective Date"), and is entered into by the undersigned for the
purpose of forming Collier Sierra L.L.C. (the "Company").
ARTICLE I. ORGANIZATION OF COMPANY
1.1 NAME
The name of the Company is Collier Sierra L.L.C.
1.2 CERTIFICATE OF FORMATION
The Members shall ensure that the Certificate is duly and properly filed.
1.3 TERM
The Company shall commence as of the Effective Date of this Agreement and
shall continue until December 31, 2040 unless earlier terminated and dissolved
as provided in Section 8.1 herein.
1.4 PRINCIPAL PLACE OF BUSINESS
The principal office of the Company shall be located at such place or
places inside or without the State of Washington as the Board of Members may
designate from time to time. The principal office of the Company shall initially
be 3380 - 146th Place S.E., Suite 300, Bellevue, Washington 98007.
1.5 REGISTERED OFFICE AND REGISTERED AGENT
The name of the initial registered agent of the Company and the address of
its registered office are as follows:
Lawco of Washington, Inc.
1201 Third Avenue, 40th Floor
Seattle, Washington 98101-3099
The Board of Members may change the registered office and the registered agent
from time to time by filing an amendment to the Certificate.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 1
<PAGE> 7
1.6 PURPOSE AND NATURE OF BUSINESS
The purpose of the Company shall be to develop, produce, publish,
distribute and license the Product and to undertake any and all other acts and
things necessary, proper or advisable to effectuate and carry out any such
purpose and operate its business.
1.7 DEFECTS AS TO FORMALITIES
A failure to observe any formalities or requirements of this Agreement,
the Certificate or the Act shall not be grounds for imposing personal liability
on the Members for liabilities of the Company.
1.8 NO PARTNERSHIP INTENDED FOR NONTAX PURPOSES
The Members have formed the Company under the Act, and expressly do not
intend to form a partnership under either the Delaware Uniform Partnership Act
or the Delaware Uniform Limited Partnership Act or a corporation under the
Delaware Business Corporation Act. The MemberS do not intend to be partners to
one another, or partners as to any third party. To the extent any Member, by
word or action, represents to another Person that any other Member is a partner
or that the Company is a partnership, the Member making such wrongful
representation shall be liable to any other Member who incurs personal liability
by reason of such wrongful representation.
1.9 LIABILITY OF MEMBERS TO THIRD PARTIES; RELIANCE BY THIRD-PARTY CREDITORS
1.9.1 LIABILITY OF MEMBERS
Except as otherwise provided in the Act or in this Agreement, no Member
shall be personally liable for any debt obligation or liability of the Company,
whether arising in contract or otherwise, solely by reason of being a Member of
the Company.
1.9.2 RELIANCE BY THIRD PARTIES
This Agreement is entered into between the Members for the exclusive
benefit of the Company, its Members, and their successors and assigns. The
Agreement is expressly not intended for the benefit of any creditor of the
Company or any other Person. Except and only to the extent provided by
applicable statute, no such creditor or third party shall have any rights under
the Agreement or any agreement between the Company and any Member with respect
to any contribution or otherwise.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 2
<PAGE> 8
1.10 DEFINED TERMS
The definitions of certain terms used in this Agreement are set forth in
Exhibit A attached hereto.
ARTICLE II. CAPITAL STRUCTURE
2.1 INITIAL CAPITAL CONTRIBUTIONS
As their respective initial Capital Contributions and in exchange for
1,000 Units each, Sierra and Collier shall contribute the following cash and
property to the Company:
(a) Sierra shall contribute to the Company One Million Dollars
($1,000,000) cash. The agreed-upon value of Sierra's initial Capital
Contribution is One Million Dollars ($1,000,000).
(b) Collier shall contribute to the Company a license to the Collier
Content as described in Section 4.2 below. The agreed upon value of Collier's
initial Capital Contribution is One Million Dollars ($1,000,000).
Sierra and Collier will make such Capital Contributions upon the Board's
approval of the first Annual Budget and Annual Business Plan. Within thirty (30)
days after the Effective Date, the Manager will submit a proposed budget and
business plan to the Board for approval in accordance with Sections 9.4 and 9.5.
The Board will approve a budget and business plan within sixty (60) days after
the Effective Date.
2.2 ADDITIONAL CONTRIBUTION COMMITMENT
(a) In addition to the initial Capital Contributions, the Members shall
make additional Capital Contributions (the "Mandatory Additional Capital
Contribution") pro rata in accordance with their respective number of Units (i)
in such amounts up to an aggregate of One Hundred Thousand Dollars ($100,000)
each as shall be requested by the Manager as provided in Section 3.3 and (ii) in
such amounts as required pursuant to the Annual Budget and Development Plan not
to exceed Six Hundred Thousand Dollars ($600,000) each.
(b) Unless all Members agree otherwise, the Members shall make the
Mandatory Additional Capital Contributions within twenty (20) business days
after (i) the Manager submits the request or (ii) the dates set forth in the
Annual Budget and Development Plan.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 3
<PAGE> 9
2.3 DEFAULT IN MONETARY OBLIGATIONS
In the event of any default by a Member in the performance of its monetary
obligations under Section 2.2 of this Agreement, the other Member(s) may demand
in writing that such default be cured. If the defaulting Member shall fail to
cure the default within ten (10) days after receipt of such demand, the other
Member(s) may increase its ownership interest in the Company by making the
defaulting Member's payment to the Company. The rights of the advancing
Member(s) set forth in this Section 2.3 are in addition to, and not in lieu of,
any other rights or remedies afforded under this Agreement, by law or otherwise
on account of the default.
2.4 MANAGEMENT SERVICES
Each Member shall contribute management and accounting support to the
Company as may be reflected from time to time in the Annual Budget at such
party's direct and indirect costs.
2.5 ADDITIONAL MEMBERS
The Board of Members, by unanimous decision, shall have the sole right to
admit additional Members upon such terms and conditions, at such time or times,
and for such Capital Contributions as a unanimous Board of Members shall in its
sole discretion determine.
2.6 COMPANY CAPITAL
(a) No Member shall be paid interest on any Capital Contribution.
(b) No Member shall have the right to withdraw, or receive any return of,
its Capital Contribution, except as may be specifically provided herein. No
Member shall have priority over any other Member, either as to the return of its
Capital Contribution or as to profits, losses or distributions, except as
otherwise specifically provided herein.
(c) Under circumstances requiring a return of any Capital Contribution,
no Member shall have the right to receive property, other than cash, except as
may be specifically provided herein.
(d) A creditor who makes a nonrecourse loan to the Company will not have
or acquire at any time as a result of making such a loan any direct or indirect
interest in the profits, capital or property of the Company other than as a
secured creditor.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 4
<PAGE> 10
2.7 MAINTENANCE OF CAPITAL ACCOUNTS
The Company shall establish and maintain Capital Accounts with respect to
each Member in accordance with the following:
(a) Each Member's Capital Account shall be increased by such Member's
Capital Contributions, such Member's distributive share of Profits and the
amount of any Company liabilities assumed by such Member or which are secured by
any property distributed to such Member.
(b) Each Member's Capital Account shall be decreased by the amount of
cash and the gross fair market value of any Company property (other than cash)
distributed to such Member pursuant to any provision of this Agreement, such
Member's distributive share of Losses and the amount of any liabilities of such
Member assumed by the Company or which are secured by any property contributed
by such Member to the Company.
(c) In the event of a transfer of all or a portion of a Member's Economic
Rights in the Company in accordance with the terms of this Agreement, the
transferee shall succeed to the Capital Account of the transferor.
(d) The foregoing provisions and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner
consistent with such Regulations. In the event the Board of Members determines
that it is prudent to modify the manner in which the Capital Accounts, or any
adjustments thereto, are computed in order to comply with such Regulations, the
Board of Members may make such modification, provided that it is not likely to
have a material effect on the amounts distributed to any Member pursuant to
Section 8.2 hereof upon the dissolution of the Company. The Board of Members
also shall make any adjustments that are necessary or appropriate to maintain
equality between the Capital Accounts of the Members and the amount of Company
capital reflected on the Company's balance sheet, as computed for book purposes,
in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and make any
appropriate modifications in the event unanticipated events might otherwise
cause this Agreement not to comply with Regulations Section 1.704-1(b). Other
than as specifically required under this Article II, no Member shall have any
deficit restoration obligation or obligation to make any additional Capital
Contribution.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 5
<PAGE> 11
ARTICLE III. MANAGEMENT
3.1 BOARD OF MEMBERS
The Board of Members shall have the sole right to manage the business of
the Company and shall have all powers and rights necessary, appropriate or
advisable to effectuate and carry out the purposes and business of the Company.
Each Member shall have the right to appoint two (2) Representatives to the
Board.
3.1.1 INITIAL BOARD OF MEMBERS
The initial Board of Members shall be composed of two (2) Sierra
Representatives and two (2) Collier Representatives. In the event that either
Sierra or Collier obtains ownership of a majority of the outstanding Units, then
during the time that one Member owns a majority of the outstanding Units (i) the
Board of Members shall be increased to five (5) Representatives and (ii) the
Member owning a majority of the outstanding Units shall be entitled to appoint
the fifth Representative.
3.1.2 TERM
Each Representative shall hold office for a term expiring on his or her
death, incapacitation, resignation or removal from office.
3.1.3 APPOINTMENT; REMOVAL
A Representative may be removed with or without cause upon notice from the
Member who appointed such Representative. The Member who appointed such removed
Representative shall be entitled to appoint a replacement Representative. Each
Member shall vote its Units to cause the removal and replacement of a
Representative originally appointed by the other Member as requested by that
other Member. If a Member ceases to be a Member for any reason, that Member's
Representatives shall automatically be removed as Representatives.
3.1.4 APPOINTMENT OF THE MANAGER
The Board of Members shall appoint the Manager on such terms and to
perform such functions as described in this Agreement and as the Board of
Members shall determine in its sole discretion.
3.1.5 AUTHORITY TO ACT
The Board of Members may appoint, employ or otherwise contract with such
persons or entities for the transaction of the business of the Company or the
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Collier Sierra L.L.C. Limited Liability Company Agreement page 6
<PAGE> 12
performance of services for or on behalf of the Company as it shall determine in
its sole discretion. The Board of Members may delegate to any Manager, officer,
person or entity such authority to act on behalf of the Company as the Board of
Members may from time to time deem appropriate in its sole discretion. Upon
authorization by the Board of Members, any Manager, officer of the Company, or
any other person specifically authorized by the Board of Members may execute any
contract or other agreement or document on behalf of the Company and may execute
and file on behalf of the Company with the Secretary of State of the State of
Delaware the Certificate and any amendment thereto.
3.1.6 ACTION BY BOARD OF MEMBERS
(a) Regular meetings of the Board of Members shall be held at such times
as shall be determined by the Board of Members, but not less frequently then
semi-annually, for the purpose of the transaction of such business as may come
before the Board of Members.
(b) Special meetings of the Board of Members may be called by any Member
for any purpose or purposes.
(c) The place of any meeting shall alternate between the principal office
of the Company in Seattle, Washington, and the office of Collier in New York
City.
(d) Except as otherwise provided in this Agreement, written notice
stating the place, day and hour of the meeting of the Board of Members and the
purpose or purposes for which the meeting is called shall be delivered not less
than five (5) days nor more than sixty (60) days before the date of the meeting.
(e) If all of the Representatives meet at any time and place, either
within or outside Washington, and consent to a holding of a meeting at such time
and place, such meeting shall be valid without call or notice, and at such
meeting lawful action may be taken.
(f) A majority of the Representatives shall constitute a quorum at any
meeting of the Board of Members.
(g) If a quorum is present, all matters shall be determined by a vote of
a majority of the Representatives present in person or by proxy, except as
otherwise provided in this Agreement. Unless otherwise expressly provided herein
and required under applicable law, Representatives or the Member who appointed
such Representatives who have an interest in the outcome of any particular
matter upon which the Representatives vote or consent may vote or consent upon
any such matter
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Collier Sierra L.L.C. Limited Liability Company Agreement page 7
<PAGE> 13
and their vote or consent, as the case shall be, shall be counted in the
determination of whether the requisite matter was approved by the Board of
Members; provided that such Representative has fully disclosed the nature of
such Representative's interest in the matter prior to such vote or consent, or,
if not disclosed, the other Representatives waive such requirement.
(h) Any action required or permitted to be taken by the Board of Members
at a meeting may be taken without a meeting if a majority or all (as required
under Section 3.2) of the Board of Members shall individually or collectively
consent in writing to such action.
(i) The Representatives may participate in any meeting of the Board of
Members by use of any means of communication by which all Representatives
participating may simultaneously hear each other.
(j) The Board of Members may adopt such other procedures governing
meetings and the conduct of business as well as meetings of Representatives and
any procedures to be used in connection with voting by Representatives (which
voting may be by written consent of the percentage necessary to take such
action) as it deems appropriate.
(k) A Representative shall be entitled to vote by proxy at all meetings
of the Board of Members.
(l) If the Board of Members is unable to take action on a material item
required or permitted to be taken by the Board of Members (i.e., because the
Board of Members is deadlocked on the item), then either Member may notify the
other Members that the Board of Members has reached a deadlock ("Initial
Deadlock Notice"). If the Board of Members is unable to either (i) take action
on the item within thirty (30) days after the Initial Deadlock Notice or (ii)
agree to withdraw the item from consideration by the Board of Members within
thirty (30) days after the Initial Deadlock Notice, then, upon written notice by
either Member ("Final Deadlock Notice"), the Company shall dissolve under
Section 8.
3.2 UNANIMOUS CONSENT REQUIREMENT
The Board of Members shall not have the authority to do any of the
following actions without the approval of all the Representatives at any duly
called meeting:
(a) Form or acquire an interest in a partnership, corporation or other
legal entity;
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Collier Sierra L.L.C. Limited Liability Company Agreement page 8
<PAGE> 14
(b) Cancel, redeem or purchase any outstanding Units, other than as
contemplated by this Agreement;
(c) Merge or consolidate with any other legal entity;
(d) Except as contemplated in the applicable Annual Budget, pledge,
mortgage or otherwise encumber any of the Company's assets;
(e) Call for Capital Contributions in excess of the Mandatory Additional
Capital Contributions;
(f) Guarantee the obligation of any debtor;
(g) Approve the Annual Budget and any revisions thereto;
(h) Adopt or revise the Company's Annual Business Plan;
(i) Sell all or substantially all the assets of the Company; or
(j) Enter into agreements, contracts or arrangements between any Member
or Representative and the Company.
3.3 MANAGER/OFFICER
The Manager shall manage the day-to-day business and affairs of the
Company and implement the policies, decisions, guidelines, Annual Business
Plans, Annual Budgets and other acts of the Board; provided, however, the
Manager shall not have the authority to do or take any of the actions described
in Section 3.2 without the advance written approval of the Board. The Manager
shall have the authority to take actions and make decisions on behalf of the
Company in compliance with the policies, decisions, guidelines, Annual Business
Plans, Annual Budgets and other acts of the Board and as expressly allocated to
such Manager as provided in this Agreement. In addition, the Manager, acting
alone, shall have the authority, in his or her reasonable discretion, to enter
into contracts, reallocate Annual Budget amounts, or take other reasonable
action in the ordinary course of business (including emergencies) on behalf of
the Company in each case involving amounts up to Thirty Thousand Dollars
($30,000) (subject to an aggregate annual maximum amount of Sixty Thousand
Dollars ($60,000)) even though such contract or action was not contemplated or
authorized in the applicable Annual Business Plan or Annual Budget or by the
Board. The Manager, acting alone, shall also have the right to require each
Member to make Mandatory Additional Capital Contributions in the above
situations in amounts not greater than an aggregate of One Hundred Thousand
Dollars ($100,000) per Member. The Manager shall be designated as the Company's
President.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 9
<PAGE> 15
3.3.1 APPOINTMENT; REMOVAL
During the Initial Development Phase, the Manager shall be Lynn Luukinen.
Prior to the Operations Phase, Sierra and Collier shall jointly select and
appoint a Manager for the Operations Phase (which may be Lynn Luukinen or
another individual). During the Operations Phase, Sierra and Collier shall
jointly review and evaluate the Manager no less often than annually. The Manager
may be removed with or without cause by the Board. If the Manager is an employee
of a Member, the Company will reimburse such Member at Cost for actual time
spent working as the Manager as included in the Annual Budget.
3.3.2 TERM
The Manager shall hold office for a term expiring on his or her death,
resignation or removal from office or such shorter term specified by applicable
laws.
3.4 RIGHTS OF MEMBERS
Except as otherwise set forth in this Agreement, no Member shall have any
right or power to take part in the management or control of the Company or its
business affairs or to act for or bind the Company in any way.
3.5 OTHER BUSINESS OF MEMBERS
Except as otherwise may be required by the Act or expressly limited by
this Agreement, the Members may engage in business ventures and activities of
any nature and description, independently or with others whether or not in
competition with the business of the Company, and neither the Company nor any of
the MEMBERS shall have any rights in and to such independent ventures and
activities or the income or profits derived therefrom by reason of membership in
the Company.
ARTICLE IV.
COMPANY'S DEALINGS WITH MEMBERS OR AFFILIATES
4.1 RIGHT OF COMPANY TO DEAL WITH MEMBERS OR AFFILIATES
The Company may, upon the unanimous approval of the Board, enter into
agreements, contracts or arrangements with one or more of the Members pursuant
to which that Member provides goods, technologies or services (including without
limitation the contributions identified in Section 2.4) to the Company in
connection with the Company's activities. The terms of such agreements,
contracts or arrangements shall be those mutually agreed upon by the Company and
that Member and shall be embodied in a written agreement. Prior to the Company
entering into an
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Collier Sierra L.L.C. Limited Liability Company Agreement page 10
<PAGE> 16
agreement, contract or arrangement, with a Member, any other Member can request
the Company to obtain competitive bids for such.
4.2 LICENSE OF COLLIER CONTENT AND RELATED TECHNOLOGY
4.2.1 GRANT
Collier hereby grants to the Company a worldwide, royalty-free,
irrevocable, nontransferable right and license to adapt, convert, display,
perform, distribute, localize, make, port, use, sell and translate the Collier
Content for use in, and sale of, the Product.
4.2.2 LICENSE TO COLLIER TRADEMARKS
Collier hereby grants to the Company and Sierra a worldwide, royalty-free,
irrevocable, nontransferable license (with right to sublicense with the prior
approval of Collier) to use the Collier Trademarks in connection with the
promotion, marketing and sale of the Product. Collier will have the right to
review and approve the form of use of the Collier Trademarks prior to
distribution of the Product or any promotional material with respect thereto.
4.2.3 EXCLUSIVITY
Collier shall not grant a license, sublicense or other rights to any other
Person in the Collier Content or the Collier Trademarks in the Computer Field
for any purpose involving manufacture, use or sale of electronic multimedia
general reference encyclopedia products; provided, however, that such limitation
shall not apply to: (a) Collier's present arrangement with Information Access
Company for Text-Only on-line service; (b) Collier's distribution, prior to the
Royalty Completion Date, of the Text-Only version of the Product through any and
all of the channels except that distribution of Text-Only CD-ROM versions of the
Product in the retail and OEM channels are reserved to the Company; and (c)
thematic encyclopedias and other encyclopedia reference works other than general
reference works.
4.2.4 COLLIER INFRINGEMENT INDEMNITY
Collier shall indemnify, defend and hold the Company (and its distributors
and sublicensees, including, without limitation, Sierra) harmless from and
against any and all claims that the Collier Trademarks or Collier Content (or
any portion thereof) infringe upon any patent, copyright, trademark or other
intellectual property rights of any third party. Collier shall have no
obligation under this Section 4.2.4 with respect to any claim of copyright or
patent infringement based upon the combination or use of
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Collier Sierra L.L.C. Limited Liability Company Agreement page 11
<PAGE> 17
the Collier Content (or any portion thereof) with any other program, goods or
products not furnished by Collier where use of the Collier Content (or any
portion thereof) alone would not constitute infringement or with respect to any
claim of trademark infringement based upon the use or combination of any Collier
Trademark with any trademark, trade dress or other word, symbol or design where
the use of any Collier Trademark alone would not constitute an infringement.
4.2.5 TEXT UPGRADES
Collier shall make Upgrades available to the Company, from time to time
upon the request of a majority of the Board (but not more frequently than once
each Fiscal Year), at an initial price of Three Hundred Thousand Dollars
($300,000) per Upgrade based upon the practices of Collier in updating its print
encyclopedia. After the initial Upgrade, the Upgrade price will be determined by
the Board in connection with the Annual Budget.
4.2.6 NONTRANSFERABILITY OF LICENSES
The licenses set forth in this Section 4.2 are intended to be
nontransferable, whether by assignment or by operation of law. Without limiting
the generality of the foregoing, the licenses set forth in this Section 4.2 are
not transferable to Sierra without Collier's prior written consent.
4.3 LICENSE OF SIERRA MULTIMEDIA COMPONENTS
4.3.1 GRANT
Sierra hereby grants to the Company a worldwide, royalty-free,
irrevocable, nontransferable right and license to adapt, convert, display,
perform, distribute, localize, make, port, use, sell and translate the Sierra
Multimedia Components for use in, and sale of, the Product.
4.3.2 LICENSE TO SIERRA TRADEMARKS
Sierra hereby grants to the Company and Collier a worldwide, royalty-free,
irrevocable, nontransferable license (with right to sublicense with the prior
approval of Sierra) to use the Sierra Trademarks in connection with the
promotion, marketing and sale of the Product. Sierra will have the right to
review and approve the form of use of the Sierra Trademarks prior to
distribution of the Product or any promotional material with respect thereto.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 12
<PAGE> 18
4.3.3 EXCLUSIVITY
Sierra will not initiate a project to develop (whether for Sierra or for a
third party) an electronic multimedia English language general reference product
in the Encyclopedia Field (a "Competing Product"). If Sierra acquires (e.g.,
through the acquisition of a company with an existing or development-stage
electronic multimedia English language general reference encyclopedia, or
through the acquisition of Sierra by a third party with an existing or
development-stage multimedia English language general reference encyclopedia) a
Competing Product (completed or in development), then:
(a) Sierra will not, without Collier's prior written consent, use any of
the Collier Trademarks or any of the Developed Sierra Multimedia Components or
any Existing Sierra Multimedia Components that have been incorporated into a
Product in connection with the Competing Product.
(b) Sierra will not, without Collier's prior written consent, reduce any
of its efforts regarding development or distribution of the Product below the
efforts anticipated prior to Sierra's acquisition of the Competing Product.
(c) Sierra will promptly notify Collier in writing of Sierra's
acquisition of the Competing Product (the "Acquisition Notice").
(d) Collier may, within one hundred twenty (120) days after receipt of
the Acquisition Notice, notify Sierra in writing that Collier is exercising its
rights under (e) below (the "Exercise Notice").
(e) If Collier delivers the Exercise Notice within one hundred twenty
(120) days after Sierra delivers the Acquisition Notice, then, if Sierra has not
ceased to own and distribute the Competing Product within eighteen (18) months
after receipt of the Exercise Notice, Collier may, during the ninety (90) days
following such eighteen (18) month period;
(i) purchase Sierra's Interest (including without limitation all
Sierra's obligations to the Company or Collier under this Agreement) at
the Exercise Price, in which case the Company may continue to use the
Sierra Trademarks for transition purposes for a period of six (6) months
after the purchase, and, solely with respect to the Sierra Multimedia
Components incorporated in one or more Products (including Products in
development) in existence at the time of the purchase, the license set
forth in Section 4.3.1 will continue until December 31, 2040, or
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Collier Sierra L.L.C. Limited Liability Company Agreement page 13
<PAGE> 19
(ii) notify Sierra that the Company will dissolve pursuant to
Section 8.1.
(f) Sierra will not, without Collier's prior written consent, use any of
the Sierra Trademarks in connection with the Competing Product for one hundred
eighty (180) days after Sierra delivers the Acquisition Notice.
4.3.4 SIERRA INFRINGEMENT INDEMNITY
Sierra shall indemnify, defend and hold the Company (and its distributors
and sublicensees, including, without limitation, Collier) harmless from and
against any and all claims that the Sierra Trademarks or Sierra Multimedia
Components (or any portion thereof) infringe upon any patent, copyright,
trademark or other intellectual property rights of any third party. Sierra shall
have no obligation under this Section 4.3.4 with respect to any claim of
copyright or patent infringement based upon the combination or use of the Sierra
Multimedia Components (or any portion thereof) with any other program, goods or
products not furnished by Sierra where use of the Sierra Multimedia Components
(or any portion thereof) alone would not constitute infringement or with respect
to any claim of trademark infringement based upon the use or combination of any
Sierra Trademark with any trademark, trade dress or other word, symbol or design
where the use of any Sierra Trademark alone would not constitute an
infringement.
4.3.5 NONTRANSFERABILITY OF LICENSES
The licenses set forth in this Section 4.3 are intended to be
nontransferable, whether by assignment or by operation of law. Without limiting
the generality of the foregoing, the licenses set forth in this Section 4.3 are
not transferable to Collier without Sierra's prior written consent.
4.4 PRODUCTION OF PRODUCT
4.4.1 REVIEW FOR FACTUAL ACCURACY
Collier will have the right to review the Product for factual accuracy
prior to publication and either approve or correct the Product or Updates.
4.4.2 SUPPLIERS
Sierra and Collier will jointly agree upon one or more suppliers to
manufacture, print and assemble the Product and any related collateral
materials. If either Sierra or Collier is a supplier, the Company will pay for
such services at arm's-length prices.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 14
<PAGE> 20
4.5 DISTRIBUTION RIGHTS TO THE MEMBERS
4.5.1 DISTRIBUTION RIGHTS GRANTED TO COLLIER
The Company hereby grants to Collier the right to use, distribute, market
and sell the Product (whether as a stand-alone product or bundled with other
products) on an exclusive basis (i) through door-to-door sales worldwide; (ii)
through direct response (e.g., telemarketing and direct mail), except as set
forth in Section 4.5.2; (iii) directly to Collier's customer list; (iv) to
educational institutions and to public libraries worldwide (provided that
Collier acknowledges that Sierra may have Products sold to educational
institutions and to public libraries through the sales channels set forth in
Section 4.5.2, and Sierra acknowledges that it will not focus on or encourage
such sales); (v) retail sales in the Collier Countries, provided that Sierra may
sell the Product in the Collier Countries as long as Sierra does not actively
solicit orders from customers located within the Collier Countries; (vi) through
programmed upgrade sales that are substantially similar to Collier's sales
programs for hard-copy encyclopedias to include utilizing registration and
warranty certificates and (vii) through any on-line computer service where the
sale is by Collier direct to the consumer (i.e., sold as packaged hard copy
products, but not for on-line use).
4.5.2 DISTRIBUTION RIGHTS GRANTED TO SIERRA
The Company hereby grants Sierra the right to use, distribute, market and
sell the Product (whether as a stand-alone product or bundled with other
products), on an exclusive basis (a) in all retail distribution and retail
marketing channels (other than the Collier Countries); (b) through Sierra's own
product catalogs; (c) through Sierra's customer lists (including lists generated
through support calls for the Product); and (d) through any on-line computer
service where the sale is by Sierra, retailers or third parties (i.e., sold as
packaged hard copy products, but not for on-line use). Sierra shall be entitled
to use its standard form software license terms for the distribution and
licensing of the Product.
4.5.3 RIGHTS RESERVED TO THE COMPANY
Unless specifically granted to a Member pursuant to Sections 4.5.1 and
4.5.2 above, all rights to use, distribute, market and sell the Product are
reserved to the Company.
4.5.4 COMPENSATION TO THE COMPANY
In consideration for the grant of distribution rights to Sierra and
Collier, Sierra and Collier shall each pay to the Company a price per Product
unit Sold, which price
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Collier Sierra L.L.C. Limited Liability Company Agreement page 15
<PAGE> 21
shall be determined in accordance with the formula below based upon the
wholesale price of the Product established from time to time by the Board. The
Members anticipate that at the end of the Initial Development Phase, the Board
will determine the suggested wholesale price for the Product and have targeted a
suggested wholesale price structure under which Sierra and Collier will pay the
Company $24.00 per unit for the initial full-featured stand-alone multimedia
CD-ROM version. Each Member shall purchase Product from the Company for
distribution under this Section 4.5 at prices that are discounted from the
suggested wholesale price at a rate of forty percent (40%). Each of Sierra and
Collier shall be entitled to a credit against such fee for Product returns. Any
fees owing shall be paid to the Company on a quarterly basis, within forty-five
(45) days after the end of each quarter, which payment shall be accompanied by a
statement setting forth the calculation of such fee and any credit for returns.
4.5.5 THIRD-PARTY ROYALTIES
The Company shall pay all third-party royalties and other fees for the
license or other use of any content or other materials used or contained in the
Product.
4.5.6 COMPANY TRADEMARK LICENSE
The Company grants to Sierra and Collier the nonexclusive right (with
right to sublicense) to use any Company trademarks, trade names, trade dress or
similar property in connection with the distribution, promotion, marketing and
sale of Product.
4.5.7 COMPANY INFRINGEMENT INDEMNITY
The Company shall indemnify, defend and hold its distributors and
sublicensees, including Sierra and Collier, harmless from and against any and
all claims that a Product, or any portion thereof, infringes upon any patent,
copyright, trademark or other intellectual property right. The Company shall
have no obligation under this Section 4.5.7 with respect to any claim of
copyright or patent infringement based upon the combination or use of the
Product with any other program, goods or products not furnished by the Company
where use of the Product alone would not constitute infringement or with respect
to any claim of trademark infringement based upon the use or combination of any
Company trademark with any trademark, trade dress or other word, symbol or
design where the use of the Company trademark alone would not constitute an
infringement.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 16
<PAGE> 22
4.5.8 CROSS-MARKETING
Sierra and Collier anticipate that the Product packaging and sales
materials will include inserts and other means of cross-marketing other products
and catalogs of each Member. Sierra and Collier shall negotiate in good faith
any such cross-marketing arrangements.
4.5.9 CUSTOMER LISTS
At the end of each quarter, each Member will deliver a copy of its
customer list for the Product to the Company. The Company will maintain its list
of registered users, and will, within thirty (30) days after it receives each
Member's updated customer list, deliver to each Member a consolidated list,
including both Members' customer lists and the registered user base. Sierra and
Collier may use the consolidated list to market and promote other products and
Collier may use the list for sale of Upgrades, but neither Sierra nor Collier
will disclose the list to any third party.
4.6 DEVELOPMENT
4.6.1 DEVELOPMENT PLAN
Within ninety (90) days after the Effective Date, Sierra shall prepare, in
consultation with Collier, a plan for the development of the Company's first
multimedia encyclopedia software product (the "Development Plan").
4.6.2 ENABLING TECHNOLOGY
Collier and Sierra hereby license to the Company (and, with respect to
Collier, to Sierra in connection with Sierra's development work on Product)
during the term of this Agreement on a nonexclusive, nontransferable,
royalty-free basis and solely for use in connection with the development of
Product, the Enabling Technology, except that certain development tools and
content of Collier will be licensed to the Company under a separate Royalty
Agreement entered into between Collier and the Company concurrent with the date
of this Agreement. Sierra and Collier shall notify the Company and the other
Member of any and all third-party royalties that will arise out of the Company's
or Sierra's use of their respective tools and technology and if the Company
proceeds to use such items, the Company shall pay or reimburse the licensing
Member for any and all third-party royalties due on the Company's or Sierra's
use of the same.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 17
<PAGE> 23
4.6.3 SIERRA'S DEVELOPMENT RESPONSIBILITIES
Sierra shall be primarily responsible for implementing and completing the
Development Plan through use of its developers and facilities. The Company may,
at its option, obtain such services from third parties.
4.6.4 COLLIER'S DEVELOPMENT RESPONSIBILITIES
Collier shall, in consultation with the Manager, source photographs, sound
clips, video clips and the like for use in the Product. Collier shall, in that
regard, use reasonable efforts to make available to the Company its preferential
rate agreement with De Agostini and its affiliates. The Company may, at its
option, obtain photographs, sound clips, video clips and the like from third
parties.
4.6.5 COST OF SERVICES; REIMBURSEMENT
Work under the Development Plan will be performed under and in accordance
with the Annual Budget. It is the intention of Sierra and Collier to perform
services and contribute other items in accordance with their responsibilities
under the Development Plan and this Agreement at Cost to the Company. No Member
will reduce the resources it makes available to the development below the level
described in the Development Plan. All Member-provided goods shall be charged to
the Company at fully burdened manufacturing or acquisition cost. Each of Sierra
and Collier shall also provide the Company, at no additional charge, access to
and reasonable use of the facilities of such Member that are useful for the
Company's development and publication of Product. The Company shall advance each
party its anticipated costs for its work under the Development Plan at the
beginning of each month during Product Development. Each of Sierra and Collier
shall provide the Company and the other party with a report, within thirty (30)
days after the end of each month, detailing the costs incurred by such Member
and charged to the Company during such month. Advances to each Member in
subsequent months shall be adjusted to reflect actual charges made and
reimbursed in prior months.
4.7 CUSTOMER SERVICE, LICENSING FEES
4.7.1 SUPPORT
The Company will establish a toll-free customer support number. The
Company shall provide, at its cost, customer support and warranty services. The
Company may obtain such services from either Sierra or Collier on an
arm's-length basis.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 18
<PAGE> 24
4.7.2 PLATFORM LICENSE FEES
The Company shall pay any platform license fees or similar license fees
associated with use, reproduction and distribution in specific market segments.
4.8 OEM, ON-LINE SERVICE AND SIMILAR TRANSACTIONS
The Company may, from time to time, enter into one or more OEM
licenses, on-line content licenses or similar transactions that are not based on
sales of units of the Product. Each Member may solicit such transactions, but
the OEM sales, if any, shall be made by the Company and the Company will not
enter into any such transaction unless it is approved by the Board. The Company
will reimburse to a Member the marketing costs incurred with such transactions
if prior approval is received from the Board.
ARTICLE V. ALLOCATION OF PROFITS AND LOSSES
5.1 ALLOCATION OF PROFITS
After giving effect to any distributions for the Fiscal Year, Profits
for any Fiscal Year shall be allocated among the Members in accordance with
their Sharing Ratios.
5.2 ALLOCATION OF LOSSES
Losses for any Fiscal Year shall be allocated among the Members in
accordance with their Sharing Ratio.
5.3 OTHER ALLOCATION RULES
5.3.1 CONVENTIONS
For purposes of determining the Profits, Losses, or any other items
allocable to any period, Profits, Losses, and any such other items shall be
determined on a daily, monthly, or other basis, as determined by the Members
using any permissible method under Code Section 706 and the Regulations
thereunder.
5.3.2 SECTION 704(e)
In accordance with Code Section 704(c) and the Regulations thereunder,
income, gain, loss and deduction with respect to any property contributed to the
capital of the Company shall, solely for tax purposes, be allocated among the
Members so as to take account of any variation between the adjusted basis of
such
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Collier Sierra L.L.C. Limited Liability Company Agreement page 19
<PAGE> 25
property to the Company for federal income tax purposes and its initial Gross
Asset Value. In the event the Gross Asset Value of any Partnership asset is
adjusted, subsequent allocations of income, gain, loss and deduction with
respect to such asset shall take account of any variation between the adjusted
basis of such asset for federal income tax purposes and its Gross Asset Value in
the same manner as under Code Section 704(c) and the Regulations thereunder.
5.4 INTENT OF ALLOCATIONS
The Members are authorized and directed to amend this Agreement to
allocate Profits, Losses and any other item in a manner different than that
provided above to the extent necessary so that the allocation of each Member's
distributive share is in accordance with and permitted by Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder.
ARTICLE VI. CASH DISTRIBUTIONS
6.1 GENERAL
Except as otherwise provided in the Act and this Agreement, no Member
shall have the right or power to demand or receive a distribution in a form
other than cash and shall not be required or compelled to accept a distribution
of any asset in kind, to the extent that the interest distributed would exceed
the Member's pro rata share of operating or liquidating distributions.
Notwithstanding anything contained in this Agreement or the Certificate to the
contrary, no distribution shall be made to a Member in violation of the Act.
6.2 DISTRIBUTIONS
Distributions of cash shall be made within fifteen (15) days after the
end of each quarter upon a vote of the Board. It is the intention of the Members
to distribute out of the Company all of its available cash balances at the end
of each quarter, other than cash reserves for operating and other expenditures
contemplated in the Annual Budget. Except as otherwise set forth below,
distributions of cash shall be made among the Members in proportion to their
Sharing Ratios.
ARTICLE VII. TRANSFERS; ADMISSIONS; WITHDRAWAL
7.1 NO TRANSFER OF ECONOMIC OR MANAGEMENT RIGHTS
No Member shall Transfer all or any portion of such Member's interest
in the Company except with the unanimous consent of the remaining Members;
provided, however, a Member may transfer its rights, but not its obligations,
hereunder to an
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Collier Sierra L.L.C. Limited Liability Company Agreement page 20
<PAGE> 26
Affiliate.
7.2 ADMISSION OF SUBSTITUTE MEMBERS
Subject to the other provisions of this Article VII, a transferee may
be admitted to the Company as a Substitute Member, with all of the rights of a
Member, only upon satisfaction of all of the conditions set forth below in this
Section 7.2.
(a) The Members unanimously consent to such admission, which
consent may be given or withheld in the sole and absolute discretion of the
Members.
(b) The transferee shall become a party to this Agreement as a
Member by signing an admission agreement and execute such documents and
instruments as the Company may reasonably request as may be necessary or
appropriate to confirm such transferee as a Member in the Company and such
transferee's agreement to be bound by the terms and conditions hereof.
(c) The transferee shall pay or reimburse the Company for all
reasonable legal, filing, and publication costs that the Company incurs in
connection with the admission of the transferee as a Member with respect to the
transferred Interest.
(d) The transferee obtains, at its own cost, an opinion from
counsel satisfactory to the Company that such transfer was made in accordance
with all applicable laws and regulations (including securities laws) and does
not adversely affect the taxation of the Company as a partnership for U.S.
federal income tax purposes.
7.3 OBLIGATIONS OF SUBSTITUTE MEMBER
(a) A transferee who becomes a Substitute Member has, to the extent
assigned, the rights and powers and is subject to the restrictions and
liabilities of a Member under the Act, the Certificate and this Agreement, and
is also liable for any obligations of the assignor to make Capital
Contributions, but is not obligated for liabilities reasonably unknown to the
transferee at the time the transferee becomes a Member.
(b) Even if a transferee becomes a Substitute Member, the
transferor is not released from the transferor's liability to the Company, but
ceases to be a Member when the transferee becomes a Substitute Member with
respect to the transferred Units.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 21
<PAGE> 27
7.4 ADDITIONAL MEMBERS
The Board of Members, upon unanimous approval, shall have the sole
right to admit additional Members upon such terms and conditions, at such time
or times, and for such Capital Contributions as the Board of Members shall in
its sole discretion determine. In connection with any such admission, the Board
of Members shall amend the Company's books and records to reflect the name,
address, capital contribution, number of Units of the additional Member. Any
additional Member shall have the right to appoint one (1) Representative to the
Board.
7.5 NO RIGHT TO WITHDRAWAL
No Member shall have the right to withdraw from the Company except with
the consent of the Board of Members and upon such terms and conditions as may be
specifically agreed upon between the Board of Members and the withdrawing
Member. These restrictions on withdrawal are exclusive and no Member shall be
entitled to claim any further or different distribution upon withdrawal under
the Act or otherwise.
ARTICLE VIII. DISSOLUTION OF COMPANY
8.1 EVENTS CAUSING DISSOLUTION
(a) The Company shall dissolve upon the happening of any of the
following events:
(i) the occurrence of an Event of Withdrawal of a Member
or any other event causing a dissolution of the Company under the Act, unless
the remaining Members, within ninety (90) days of such event, unanimously agree
to continue the Company (no withdrawal or resignation of a Member shall relieve
it of its Capital Contribution or Mandatory Additional Capital Contribution
obligations under Sections 2.1 and 2.2 hereof);
(ii) the sale or other disposition of all or substantially
all of the assets of the Company and the collection of all proceeds therefrom;
(iii) the vote of all MemberS to dissolve the Company;
(iv) the expiration of the term of the Company specified
in Section 1.3 hereof;
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Collier Sierra L.L.C. Limited Liability Company Agreement page 22
<PAGE> 28
(v) the delivery by any Member of a Final Deadlock Notice
to the other Members, unless the Members, within ninety (90) days of such event,
unanimously agree to continue the Company; or
(vi) exercise of the Exercise Right by Collier under
Section 4.3.3.
(b) Dissolution of the Company shall be effective on the day on
which the event giving rise to the dissolution occurs, but the Company shall not
terminate until the assets of the Company shall have been distributed as
provided in Section 8.2. Notwithstanding the dissolution of the Company, prior
to the termination of the Company the business of the Company and the affairs of
the MemberS shall continue to be governed by this Agreement.
(c) In the event of dissolution of the Company as a result of an
event described in Section 8.1(a)(i), the Member causing the dissolution shall
cease to have Management Rights and shall retain only Economic Rights with
respect to its Interest.
8.2 LIQUIDATION
(a) Upon a dissolution of the Company, proceeds shall be applied
and distributed in the following order and priority:
(i) to the payment and discharge of all of the Company's
debts and liabilities (other than those to the Members) including the
establishment of any necessary reserves;
(ii) to the payment of any debts and liabilities to the
MemberS; and
(iii) any remaining property and assets of the Company
shall be distributed among the Members in accordance with their positive Capital
Account balances.
(b) The Capital Account balances of each Member shall be
appropriately adjusted before any distributions pursuant to this Section 8.2 to
reflect sales or other dispositions by the Company giving rise to Capital
Account adjustments and to reflect the Capital Account adjustments provided
elsewhere under this Agreement. Profits and Losses resulting from such
liquidation, if any, shall be allocated among the Members as provided for in
Article V. If assets of the Company are to be distributed in kind, such
distribution shall be made in such proportions as cash would have been
distributed, if available for distribution, under this Article, after adjusting
the Members' Capital Accounts as if the property had been sold at its then fair
market value. Notwithstanding the foregoing, (i) Sections 8.4 and 8.5 hereof
shall govern the
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Collier Sierra L.L.C. Limited Liability Company Agreement page 23
<PAGE> 29
distribution of certain assets described therein, (ii) the fair market value of
the Collier Content shall equal the value assigned in Section 2.1(b) hereof, and
(iii) the fair market value of the Developed Sierra Multimedia Components shall
equal Five Hundred Thousand Dollars ($500,000).
(c) Each Member shall look solely to the assets of the Company for
all distributions with respect to the Company, including the return of its
Capital Contribution thereof, and shall have no recourse therefor, upon
dissolution or otherwise, against the Company or the other Member. Unless
otherwise agreed upon by the Members and except as provided in Sections 8.3 and
8.4 below, no Member shall have any right to demand or receive property other
than cash upon dissolution and termination of the Company.
8.3 ENABLING TECHNOLOGY
Except as set forth in Section 8.7, upon dissolution of the Company (i)
the rights and license to the enabling technology of each Member granted to the
Company and/or Sierra under Section 4.6.2 shall expire; (ii) the Company and
each Member shall destroy or return the licensed enabling technology it received
to the licensing party and cease all subsequent use of such licensed enabling
technology, and (iii) title to all technology of the Company derived from or
otherwise based upon the enabling technology licensed to the Company by a Member
and all associated copyright, patent and other intellectual property rights
shall be transferred and distributed to that Member, subject to the rights of
Sierra and Collier described in Sections 8.3, 8.4 and 8.5.
8.4 RIGHTS TO COLLIER CONTENT
Except as provided in Section 8.7, upon dissolution of the Company, all
rights to Collier Content licensed to the Company under the license grant
contained in Section 4.2 and all associated copyright, patent and other
intellectual property rights shall revert to Collier.
8.5 RIGHTS TO SIERRA MULTIMEDIA COMPONENTS
Except as provided in Section 8.7, upon dissolution of the Company, all
rights to Existing Sierra Multimedia Components licensed to the Company under
the license grant contained in Section 4.3 and all associated copyright, patent
and other intellectual property rights shall revert to Sierra. In the event that
Collier is required to make any contribution to the Company pursuant to Section
8.9, Collier shall be entitled to continue to use the Developed Sierra
Multimedia Components after dissolution of the Company.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 24
<PAGE> 30
8.6 COMPANY TECHNOLOGY
Except as provided in Section 8.7 upon dissolution of the Company,
title to all other technology and products owned by the Company and all
associated copyright, patent and other intellectual property rights shall be
liquidated and sold. In the event that the Company develops its own search
engine for use with the Product, then both Sierra and Collier shall have the
unconditional right to use it upon dissolution pursuant to whatever terms and
conditions are applicable with respect to any agreements restricting the use of
such search engine by third parties.
8.7 CONTINUATION OF USE
Upon dissolution of the Company, if the Company has entered the
Operations Phase, then Sierra and Collier may each continue for a period of
twenty-four (24) months after the effective date of such dissolution to make,
use, distribute and sell the Product incorporating any Enabling Technology, the
Collier Content, the Sierra Multimedia Components and any and all technology and
products owned by the Company. Each party shall pay the other a fee for each
Product unit sold by such party equal to one-half the fee payable to the Company
under Section 4.5.4 immediately prior to the dissolution. All such fees shall be
paid to the other party within thirty (30) days of the end of each calendar
quarter. After the expiration of the twenty-four (24) month period described in
this Section 8.7, neither Sierra nor Collier shall have any right to make, use,
distribute or sell the Product incorporating the property of the other.
8.8 USE OF OTHER MEMBER'S NAME
Except for Sierra's and Collier's continued use (in the same manner as
used by the Company) of the Collier Trademarks and the Sierra Trademarks in
connection with the rights retained by each under Section 8.7, and Sierra's or
Collier's continued use of any Company trademarks, trade names and trade dress
on the products distributed by Sierra and Collier after the dissolution of the
Company, no Member shall use the trademarks, trade name or trade dress of the
other Members or the Company without the prior written consent of the other
Member(s).
8.9 DEFICIT CAPITAL ACCOUNTS
Notwithstanding anything to the contrary contained in this Agreement,
and notwithstanding any custom or rule of law to the contrary, to the extent
that a deficit, if any, in the Capital Account of any Member results from or is
attributable to deductions and losses of the Company (including non-cash items
such as Depreciation), or distributions of money pursuant to this Agreement to
all Members,
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Collier Sierra L.L.C. Limited Liability Company Agreement page 25
<PAGE> 31
upon dissolution of the Company such deficit shall not be an asset of the
Company and such Member shall not be obligated to contribute such amount to the
Company to bring the balance of such Member's Capital Account to zero.
Notwithstanding anything herein, any custom or any rule of law to the contrary,
to the extent that Collier's Capital Account is a deficit as a result of the
distribution of the Collier Content to it, then Collier shall be required to
contribute money to the Company equal to fifty percent (50%) of such deficit
created but in no event more than two hundred fifty thousand ($250,000).
ARTICLE IX. BOOKS, RECORDS AND ACCOUNTING
9.1 BOOKS AND RECORDS
The Company shall keep and maintain a complete and accurate set of
books and records in accordance with generally accepted accounting practices
applied in a consistent manner correctly reflecting all transactions of the
Company. Unless otherwise agreed to by all Members, the Company's books shall be
maintained on an accrual basis. The Company's books and records shall be kept at
its principal office. Each of the Members shall have access to such books and
records and the right to examine, copy and audit the same at all reasonable
times. The Company's books shall be audited not less frequently than annually by
an independent certified public accountant acceptable to all Members. The
Company will provide each Member with unaudited financial statements of the
Company (including, but not necessarily limited to, a balance sheet and a
statement of the results of business for such period and such additional
information reasonably requested by a Member) within ten (10) Business Days
after the end of each calendar quarter and annual financial statements of the
Company within thirty (30) Business Days after the end of each Fiscal Year.
9.2 FISCAL YEAR
The Company's Fiscal Year shall be from January 1 through December 31.
9.3 BANK ACCOUNTS
All funds of the Company shall be deposited under the name of the
Company in such bank account or accounts at such bank or banks as shall be
approved from time to time by the Board. All drafts, checks, bills and cash
which may from time to time be received by, for or on account of the Company
shall be deposited immediately in such account or accounts in the same form in
which they are received. Withdrawals from such accounts shall be made only upon
the signature of the Manager or an individual authorized by the Board.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 26
<PAGE> 32
9.4 ANNUAL BUDGET
9.4.1 ANNUAL BUDGET PLANNING
No later than thirty (30) Business Days prior to the first day of each
Fiscal Year of the Company (or within thirty (30) Business Days after the
Effective Date with respect to the 1995 budget), the Manager shall submit to the
Board for approval a proposed budget setting forth in accordance with generally
accepted accounting practices the estimated revenue and expenses of the Company
during such Fiscal Year. The budget shall set forth a monthly operating budget
of anticipated revenue, expenses, level of profit and cash flow for such Fiscal
Year. The Manager shall revise and for a particular Fiscal Year resubmit the
proposed budget as directed by the Board. The budget approved by the Board is
referred to herein as the "Annual Budget". The Board of Members will review the
Annual Budget and operations at least twice each Fiscal Year. If during the
course of a Fiscal Year a significant change of any Annual Budget line item is
expected, the Manager shall immediately notify the Board of a revised version of
the Annual Budget (which may include reduced expenses) to address the matter.
The revised Annual Budget approved by the Board is referred to herein as the
"Revised Annual Budget."
9.4.2 REVIEW OF ANNUAL PERFORMANCE
Within ninety (90) Business Days after the end of each Fiscal Year of
the Company, the Manager shall submit to the Board actual financial information
and a comparison analysis with the Annual Budget (or Revised Annual Budget).
9.5 ANNUAL BUSINESS PLAN
No later than thirty (30) Business Days prior to the first day of each
Fiscal Year of the Company, the Manager shall submit to the Board for approval a
proposed comprehensive business plan setting forth the sales, marketing,
operation, development and other plans of the Company for such Fiscal Year and a
business plan setting forth a general outline and direction of the activities
planned for the next two Fiscal Years. The Manager shall revise and resubmit the
proposed business plan as directed by the Board. The business plan approved by
the Board for a particular Fiscal Year is referred to herein as the "Annual
Business Plan." For the 1995 business plan, within thirty (30) Business Days
after the Effective Date the Manager shall submit to the Board for approval a
proposed comprehensive business plan setting forth the sales, marketing,
operation, development and other plans of the Company for developing the
Company's business during 1995 and a business plan setting forth the general
outline and direction of the activities planned to continue the development and
expansion of such business for 1996 and 1997.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 27
<PAGE> 33
ARTICLE X. INDEMNIFICATION
10.1 INDEMNIFICATION
Each person who was or is made a party or is threatened to be made a
party to or is otherwise involved in any action, suit or proceeding, whether
civil, criminal, administrative or investigative (hereinafter a "proceeding") by
reason of the fact that he or she is or was a director, officer or manager of
the Company (hereinafter an "indemnitee"), whether the basis of such a
proceeding is alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a director, officer,
manager, employee or agent, shall be indemnified and held harmless by the
Company to the fullest extent authorized by the Act, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than such law permitted the Company to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees, judgments
fines, excise taxes or penalties and amounts paid in settlement) reasonably
incurred or suffered by such indemnitee in connection therewith.
10.2 ADVANCE PAYMENT
The right to indemnification conferred in Section 10.1 shall include
the right to be paid by the Company the expenses (including attorneys' fees)
incurred in defending any proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"). The rights to indemnification and to
the advancement of expenses conferred in Sections 10.1 and 10.2 shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a manager, officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
10.3 NONEXCLUSIVITY OF RIGHTS
The rights to indemnification and to the advancement of expenses
conferred in this Article X shall not be exclusive of any other right that any
Person may have or hereafter acquire under any statute, agreement, vote of the
Members or otherwise.
10.4 INSURANCE
The Company may maintain insurance, at its expense, to protect itself
and any Manager, officer, employee or agent of the Company or another limited
liability company, corporation, partnership, joint venture, trust or other
enterprise against any
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Collier Sierra L.L.C. Limited Liability Company Agreement page 28
<PAGE> 34
expense, liability or loss, whether or not the Company would have the power to
indemnify such person against such expense, liability or loss under the Act.
10.5 INDEMNIFICATION OF OTHERS
The Company may, to the extent authorized from time to time by the
Board of Members, grant rights to indemnification and to advancement of expenses
to any employee or agent of the Company to the fullest extent of the provisions
of this Article X with respect to the indemnification and advancement of
expenses of Managers and officers of the Company.
ARTICLE XI. AMENDMENT
This Agreement may be amended, restated or modified from time to time
only by a written instrument unanimously adopted by the Members. No Member shall
have any vested rights in this Agreement which may not be modified through an
amendment to this Agreement.
ARTICLE XII. MISCELLANEOUS
12.1 CONFIDENTIALITY
Each Member and the Company will exercise the same degree of care, but
no less than a reasonable degree of care, to keep confidential the Confidential
Information of the other Member(s) or the Company as it uses to protect its own
Confidential Information of a like nature. Without limiting the generality of
the foregoing, each Member agrees to (and to cause the Company to agree to) (a)
instruct and require all of its employees and agents who have access to the
Confidential Information to maintain the confidentiality thereof; (b) disclose
the Confidential Information of the other Member(s) or the Company only to those
individuals that have a "need to know" such Confidential Information; and (c)
take such actions as may be reasonable to limit disclosure of the Confidential
Information of the other Member(s) or the Company by such individuals. If the
Recipient is served with any subpoena or other compulsory judicial or
administrative process calling for production of Confidential Information of the
other Member(s), the Recipient will immediately notify the Discloser in order
that the Discloser may take such action as it deems necessary to protect its
interest and Recipient shall cooperate with Discloser to limit the scope and use
of the information to be disclosed.
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<PAGE> 35
12.2 PRESS RELEASES
No Member or the Company shall make any public announcements regarding
this Agreement, the formation of the Company or the other activities
contemplated hereunder without first providing the other Member(s) the proposed
text of such announcement and obtaining the approval of the other Member(s),
which approval shall not be unreasonably withheld.
12.3 APPLICATION OF DELAWARE LAW
This Agreement shall be governed by and construed in accordance with
the domestic laws of the State of Delaware without giving effect to any choice
of law or conflict of law provision or rule (whether of the State of Delaware or
any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
12.4 CONSTRUCTION
Whenever the singular number is used in this Agreement and when
required by the context, the same shall include the plural and vice versa, and
the masculine gender shall include the feminine and neuter genders and vice
versa. Each party hereto was represented by counsel and participated in the
drafting hereof and no term or condition hereof shall be construed in favor of
or against either party as the drafting party.
12.5 COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
12.6 EXECUTION OF ADDITIONAL INSTRUMENTS
Each Member hereby agrees to execute such other and further statements
of interest and holdings, designations, powers of attorney and other instruments
necessary to comply with any laws, rules or regulations.
12.7 HEADINGS
The headings in this Agreement are inserted for convenience only and
are in no way intended to describe, interpret, define, or limit the scope,
extent or intent of this Agreement or any provision hereof.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 30
<PAGE> 36
12.8 HEIRS, SUCCESSORS AND ASSIGNS
Each and all of the covenants, terms, provisions and agreements herein
contained shall be binding upon and inure to the benefit of the parties hereto
and, to the extent permitted by this Agreement, their respective heirs, legal
representatives, successors and assigns. Each of Sierra and Collier shall be
permitted to assign all of its rights, but not its obligations, under this
Agreement to an Affiliate.
12.9 RIGHTS AND REMEDIES CUMULATIVE
The rights and remedies provided by this Agreement are cumulative and
the use of any one right or remedy by any party shall not preclude or waive the
right to use any or all other remedies. Said rights and remedies are given in
addition to any other rights the parties may have by law, statute, ordinance or
otherwise.
12.10 SEVERABILITY
If any provision of this Agreement or the application thereof to any
person or circumstance shall be invalid, illegal or unenforceable to any extent,
the remainder of this Agreement and the application thereof shall not be
affected and shall be enforceable to the fullest extent permitted by law.
12.11 WAIVERS
The failure of any party to seek redress for violation of or to insist
upon the strict performance of any covenant or condition of this Agreement shall
not prevent a subsequent act, which would have originally constituted a
violation, from having the effect of an original violation.
12.12 NOTICES
Any notice, demand or communication required or permitted to be given
by any provision of this Agreement shall be deemed to have been sufficiently
given or served for all purposes if (a) delivered personally, (b) deposited with
a prepaid messenger, express or air courier or similar courier for delivery to
the address set forth below, (c) deposited in the official certified or
registered mail, postage prepaid to the address set forth below, or (d)
transmitted by telecopier or facsimile to the number specified below (with
originals mailed the same day by official mail, postage prepaid to the address
set forth below):
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Collier Sierra L.L.C. Limited Liability Company Agreement page 31
<PAGE> 37
If to Sierra: Sierra On-Line, Inc.
3380 - 146th Place S.E., Suite 300
Bellevue, WA 98007
U.S.A.
Attn: Mr. Michael Brochu
Tel. (206) 649-9800
Fax (206) 649-0340
and with a copy to: Sierra On-Line, Inc.
3380 - 146th Place S.E., Suite 300
Bellevue, WA 98007
U.S.A.
Attn: Mr. Richard Thumann
Tel. (206) 649-9800
Fax (206) 641-7617
If to Collier: P.F. Collier, L.P.
919 Third Avenue
New York, NY 10022
U.S.A.
Attn: Michael J. Goodkin
Tel. (212) 508-6015
Fax (212) 508-6151
and with a copy to: Cummings & Lockwood
4 Stamford Plaza
P.O. Box 120
Stamford, CT 06904-0120
Attn: Vincent M. Kiernan, Esq.
Tel. (203) 351-4538
Fax (203) 351-4437
Notice shall be deemed to have been received (i) upon receipt in the case of
personal delivery, (ii) three (3) Business Days after being deposited in the
case of messenger, express or air courier or similar courier, (iii) seven (7)
Business Days after the date deposited in official certified or registered mail,
and (iv) the day of receipt as evidenced by a facsimile confirmation statement
in the case of transmittal by facsimile. Any Member may change its respective
addresses and facsimile number by giving notice to the other Member(s) as
provided in this Section.
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Collier Sierra L.L.C. Limited Liability Company Agreement page 32
<PAGE> 38
12.13 ATTORNEYS' FEES
Each party hereto shall be responsible for the payment of its own
attorneys' fees and other costs incurred in connection with negotiating and
drafting this Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
P.F. COLLIER, L.P. SIERRA ON-LINE, INC.
By: By:
------------------------------ -----------------------------
Its: Its:
---------------------------- ---------------------------
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Collier Sierra L.L.C. Limited Liability Company Agreement page 33
<PAGE> 39
EXHIBIT A
DEFINED TERMS
The defined terms used in this Agreement shall, unless the context
otherwise requires, have the meanings specified in this Exhibit A. Certain
additional defined terms are set forth elsewhere in this Agreement. The singular
shall include the plural and the masculine gender shall include the feminine and
neuter, and vice versa, as the context requires.
"ACCUMULATED LOSS ACCOUNT" means a Company-maintained bookkeeping
account which shall be increased by any Losses allocated to Collier and shall be
reduced by any special allocation of Profits to Collier under Section 5.1.2 of
the Agreement.
"ACQUISITION NOTICE" shall have the meaning set forth in Section 4.3.3
of the Agreement.
"ACT" means the Delaware Limited Liability Company Act, and any
successor statute, as amended from time to time.
"AFFILIATE" means, with respect to any Person, any Person who directly
or indirectly (through one or more intermediaries) controls, is controlled by or
is under common control with such Person. For purposes of this definition, the
term "controls," "is controlled by," or "is under common control with" means the
possession, direct or indirect, of the power to direct or cause the direction of
the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.
"AGREEMENT" means this Limited Liability Company Agreement as
originally executed and as amended or restated from time to time.
"ANNUAL BUDGET" shall have the meaning set forth in Section 9.4.1 of
the Agreement.
"ANNUAL BUSINESS PLAN" shall have the meaning set forth in Section 9.5
of the Agreement.
"BANKRUPTCY" means, with respect to any Person, the occurrence of any
of the following: (a) the filing of a voluntary petition for relief under the
U.S. Bankruptcy Code or an admission by such Person of such Person's inability
to pay its debts as
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 34
<PAGE> 40
they become due, (b) the making by such Person of a general assignment for the
benefit of creditors, (c) in the case of the filing of an involuntary petition
in bankruptcy against such Person, the filing of an answer admitting the
material allegations thereof or consenting to the entry of an order for relief,
or a default in answering the petition, or (d) the entry of an order for relief
under the U.S. Bankruptcy Code against such Person.
"BOARD" or "BOARD OF MEMBERS" means the board of Members designated in
Section 3.1 hereof.
"BUSINESS DAY" means any Monday through Friday except for any such days
that are national holidays in the United States.
"CAPITAL ACCOUNT" means, with respect to any Member, the account
maintained with respect to a Member determined in accordance with Section 2.7.
"CAPITAL CONTRIBUTION" means, with respect to any Member, the amount of
money and the fair market value of any property or the fair market value of
services contributed or to be contributed to the Company with respect to the
Interest in the Company held by such Member provided, however, that any
contribution by a Member of property or services must be agreed to in advance
and in writing as a Capital Contribution by the other Members.
"CERTIFICATE" means the Certificate of Formation of the Company as
filed with the Delaware Secretary of State's Office as the same may be properly
amended or restated from time to time.
"CODE" means the Internal Revenue Code of 1986, as amended, from time
to time, or any corresponding provision or provisions of any succeeding law and
any reference to a Section of the Code shall be deemed to include a reference to
any successor provision thereto.
"COLLIER" means P.F. Collier, L.P.
"COLLIER CONTENT" means the text and line illustrations of Collier's 24
volume English language general reference encyclopedia and all updates and
revisions thereto.
"COLLIER COUNTRIES" means Italy, Spain, Mexico and Portugal.
"COLLIER TRADEMARKS" means those Collier trademarks and trade dress
used in connection with any Collier products incorporated in whole or in part
into any Product.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 35
<PAGE> 41
"COMPANY" means Sierra Collier L.L.C.
"COMPETING PRODUCT" shall have the meaning set forth in Section 4.3.3
of the Agreement.
"COMPUTER FIELD" means the use of any computer on any media or through
any now or hereafter in existence means, including, without limitation, CD-ROM
disk and on-line multimedia services.
"CONFIDENTIAL INFORMATION" means any type of information or material of
one Member or the Company (the "Discloser") that is disclosed to the other
Member(s) or the Company (the "Recipient") as a consequence of or through its
participation in the activities anticipated by this Agreement and that is
identified by the Discloser as being confidential; provided, that all source
code and non-public enabling technology licensed under this Agreement shall be
deemed to be the Confidential Information of the licensing Member without the
necessity of identifying such information or materials as confidential.
Confidential Information includes, without limitation, any such information that
relates to research, development, trade secrets, know-how, inventions, source
code, technical data, software programming, concepts, designs, procedures,
manufacturing, purchasing, accounting, engineering, marketing, merchandising,
selling, business plans or strategy, and information entrusted to a Member by
other persons or entities. However, Confidential Information does not include
any information which: (a) was in the Recipient's possession before receipt from
the Discloser; (b) is or becomes a matter of public knowledge through no fault
of the Recipient; (c) is rightfully received by the Recipient from another
Person without a duty of confidentiality; (d) is independently developed by
Recipient; or (e) is disclosed by Recipient with the Discloser's prior written
approval.
"COST" means two (2) times the direct labor cost of the applicable
item.
"DE AGOSTINI" means Istituto Geografico De Agostini, Editorial Planeta
De Agostini and their Affiliates.
"DEPRECIATION" means, for each fiscal year or other period, an amount
equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its adjusted basis for federal
income tax purposes at the beginning of such year or other period, Depreciation
shall be an amount which bears the same ratio to such beginning Gross Asset
Value as the federal income tax depreciation, amortization or other cost
recovery deduction for such year or other period bears to such beginning
adjusted tax basis.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 36
<PAGE> 42
"DEVELOPED SIERRA MULTIMEDIA COMPONENTS" means any items developed by
Sierra for the Company pursuant to Section 4.5.
"DEVELOPMENT PLAN" shall have the meaning set forth in Section 4.6.1 of
the Agreement.
"DISCLOSER" shall have the meaning set forth in the definition of
Confidential Information.
"ECONOMIC RIGHTS" means a Member's share of the Profits, Losses and
distributions of cash or Company property pursuant to the Act and this Agreement
but shall not include any Management Rights.
"EFFECTIVE DATE" shall have the meaning set forth in the first
paragraph of this Agreement.
"ENABLING TECHNOLOGY" means all development tools, enabling technology
and content useful for the creation and development of the Product that Sierra
or Collier is now or hereafter legally entitled to license or sublicense to
Collier or Sierra, as the case may be, and that the Members determine will be
used to develop the Product.
"ENCYCLOPEDIA FIELD" means the field of multimedia general reference
encyclopedias in an electronic format.
"EVENT OF WITHDRAWAL OF A MEMBER" means the bankruptcy or dissolution
of a Member or the occurrence of any other event that would terminate the
continued membership of a Member in the Company.
"EXERCISE NOTICE" shall have the meaning set forth in Section 4.3.3 of
the Agreement.
"EXERCISE PRICE" means eighty percent (80%) of the value of Sierra's
Interest, determined as of the last day of the last full fiscal quarter before
the date of the Exercise Notice. The value of Sierra's Interest will be
unanimously agreed upon by the Members. If the Members are unable to agree upon
the value of Sierra's Interest, a valuation firm mutually acceptable to the
Members engaged in the business of performing business valuations will be
selected by the Board, to determine the value of Sierra's Interest. If the
Members are unable to agree upon a valuation form within forty-five (45) days
after the date of the Exercise Notice, then either party may request Interactive
Multimedia Association to select a valuation firm, and the firm selected by
Interactive Multimedia Association will serve as the valuation firm on
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 37
<PAGE> 43
______________. The valuation shall take into account all the circumstances
relevant to the value of the Company at the time, including without limitation,
the impact of Sierra's departure on the business of the Company, the Company's
ability to develop other distribution channels or otherwise replace Sierra, the
market value of similar companies (public and private), the value of the
continuation of the license under Section 4.3.1, and any need for the Company to
seek working capital as a result of Sierra's departure, and the Company's
current and projected revenues, costs and profits.
"EXISTING SIERRA MULTIMEDIA COMPONENTS" means any animation or visual
material that is currently owned by Sierra and that the Members determine would
be appropriate for use in a multimedia general reference encyclopedia.
"FINAL DEADLOCK NOTICE" shall have the meaning set forth in Section
3.1.6 of the Agreement.
"FISCAL YEAR" means the twelve months ending on December 31 each year.
"GROSS ASSET VALUE" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a
Member to the Company shall be the gross fair market value of such asset, as
determined by the contributing Member and the Company.
(b) The Gross Asset Values of all Company assets shall be adjusted
to equal their respective gross fair market values, as determined by the
Members, as of the following times:
(1) the acquisition of an additional interest in the
Company by any new or existing Member in exchange for more than a de minimis
Capital Contribution;
(2) the distribution by the Company to a Member of more
than a de minimis amount of Company property as consideration for an interest in
the Company if the Members reasonably determine that such adjustment is
necessary or appropriate to reflect the relative economic interests of the
Member in the Company; and
(3) the liquidation of the Company within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g);
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 38
<PAGE> 44
(c) The Gross Asset Value of any Company asset distributed to any
Member shall be the gross fair market value of such asset on the date of
distribution; and
(d) The Gross Asset Values of the Company assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis of
such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to
the extent that such adjustments are taken into account in determining Capital
Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided,
however, that Gross Asset Values shall not be adjusted pursuant to this
subsection to the extent the Member determines that an adjustment pursuant to
subsection (b) is necessary or appropriate in connection with a transaction that
would otherwise result in any adjustment pursuant to this subsection.
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to subparagraphs (a), (b) or (d) hereof, such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Profits and Losses.
"INITIAL DEADLOCK NOTICE" shall have the meaning set forth in Section
3.1.6 of the Agreement.
"INITIAL DEVELOPMENT PHASE" means the period beginning on the date of
the Agreement and ending on the first commercial shipment of the Product.
"INITIAL MEMBERS" means Sierra and Collier.
"INTEREST" means a Member's entire interest in the Company, including
such Member's Economic Rights and Management Rights.
"MANAGER" means the individual appointed in accordance with Section
3.3.1.
"MEMBER" means each of the parties who executes a counterpart of this
Agreement and each of the parties who may hereafter become an additional or
Substitute Member, in his, her or its capacity as a Member of the Company.
"OPERATIONS PHASE" means the period beginning on the first day after
the end of the Initial Development Phase and ending on the dissolution of the
Company.
"PERSON" means any individual or entity, and the heirs, executors,
administrators, legal representatives, successors, and assigns of such "Person"
where the context so permits.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 39
<PAGE> 45
"PRODUCT" means an electronic multimedia English language general
reference encyclopedia (whether in Text-Only format or multimedia format, and
whether delivered on tangible media or via on-line service) derived from the
Collier Content and all upgrades, new versions, updates, error corrections and
other Company revisions and additions to such Product.
"PROFITS" and "LOSSES" means, for each Fiscal Year (or other period),
an amount equal to the Company's taxable income or loss for such Fiscal Year (or
other period), determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
(a) Any income of the Company that is exempt from federal income
tax and not otherwise taken into account in computing Profits or Losses pursuant
to this definition of "Profits" and "Losses" shall be added to such taxable
income or loss;
(b) Any expenditures of the Company described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Profits or Losses pursuant to this definition of "Profits" and
"Losses" shall be subtracted from such taxable income or loss;
(c) In the event the Gross Asset Value of any Company asset is
adjusted, the amount of such adjustment shall be taken into account as gain or
loss from the disposition of such asset for purposes of computing Profits or
Losses;
(d) Gain or loss resulting from any disposition of property with
respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value; and
(e) In lieu of the depreciation, amortization and other cost
recovery deductions taken into account in computing such taxable income or loss,
there shall be taken into account Depreciation for such fiscal year or other
period.
"RECIPIENT" shall have the meaning set forth in the definition of
Confidential Information.
"REGULATIONS" means temporary and final income tax regulations
promulgated under the Code in effect as of the date of filing the Certificate
and the corresponding
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 40
<PAGE> 46
sections of any regulations subsequently issued that amend or supersede such
regulations, from time to time.
"REPRESENTATIVE" means the individual(s) appointed in accordance with
Section 3.1.3.
"REVISED ANNUAL BUDGET" shall have the meaning set forth in Section
9.4.1 of the Agreement.
"ROYALTY COMPLETION DATE" means the date on which both the Company has
paid Collier aggregate royalties equal to $1,000,000 under the Royalty Agreement
entered into between Collier and the Company as of the date of this Agreement
and the Multimedia version of the Product is available for sale but in no event
prior to December 31, 1996.
"SHARING RATIO" means the ownership percentages of the Members in the
Company, which percentage for a Member shall be equal to the quotient where the
numerator equals the Capital Contributions by that Member and the denominator
equals the Capital Contributions by all Members. The initial Sharing Ratios of
Collier and Sierra are fifty percent (50%) each.
"SIERRA" means Sierra On-Line, Inc.
"SIERRA MULTIMEDIA COMPONENTS" means the Developed Sierra Multimedia
Components and the Existing Sierra Multimedia Components.
"SIERRA TRADEMARKS" means the Sierra name and logo.
"SOLD" means Product shipped to a Member or at a Member's request.
"SUBSTITUTE MEMBER" means a transferee who has been admitted as a
member of the Company with all of the rights and obligations of membership
pursuant to this Agreement and related admission agreement.
"TEXT ONLY" means written words and line illustrations.
"TRANSFER" means any sale, assignment, gift, hypothecation, pledge or
other disposition, directly or indirectly, whether voluntary or by operation of
law of all or any portion of an Interest in the Company.
"UNIT" means the basic share of limited liability company interest
entitling the holder thereof to all the rights and benefits of a Member under
this Agreement.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 41
<PAGE> 47
"UPGRADES" means new information, text, line illustrations and other
content desired for the Company's Product, including, without limitation and at
a minimum, those included in any revision to the text version of Collier's
general reference encyclopedia.
- --------------------------------------------------------------------------------
Collier Sierra L.L.C. Limited Liability Company Agreement page 42
<PAGE> 1
EXHIBIT 11.0
SIERRA ON-LINE, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding....... 19,834 19,834 17,390 17,390
Common share equivalents:
Dilutive effect of stock options......................... 1,464 1,464 1,027 1,285
Dilutive effect of convertible debt...................... --- 1,713 --- 3,546
------- ------- ------- -------
Total average common and common equivalent shares...... 21,298 23,011 18,417 22,221
======= ======= ======= =======
Net Income................................................. $12,284 $12,589 $17,796 $18,384
======= ======= ======= =======
Net Income per common and common equivalent share.......... $0.58 $0.55 $0.97 $0.83
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average number of common shares outstanding....... 19,051 19,611 17,333 17,333
Common share equivalents:
Dilutive effect of stock options......................... 1,262 1,264 837 1,235
Dilutive effect of convertible debt...................... 560 1,990 --- 3,562
------- ------- ------- -------
Total average common and common equivalent shares...... 20,873 22,865 18,170 22,130
======= ======= ======= =======
Net Income................................................. $16,745 $17,656 $12,272 $13,920
======= ======= ======= =======
Net Income (loss) per common and common equivalent share... $0.80 $0.77 $0.68 $0.63
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> DEC-31-1995
<CASH> 34861
<SECURITIES> 50196
<RECEIVABLES> 72797
<ALLOWANCES> 15988
<INVENTORY> 7081
<CURRENT-ASSETS> 8676
<PP&E> 26823
<DEPRECIATION> 15301
<TOTAL-ASSETS> 182156
<CURRENT-LIABILITIES> 43638
<BONDS> 0
0
0
<COMMON> 86492
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 182156
<SALES> 120953
<TOTAL-REVENUES> 122614
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 99421
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2334
<INCOME-PRETAX> 23455
<INCOME-TAX> 6710
<INCOME-CONTINUING> 16745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16745
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.77
</TABLE>
