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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended March 31, 1996
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 SE., Suite 300, Bellevue, Washington 98007
(Address of principal executive offices)
(206) 649-9800
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
------
Aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the shares outstanding and the closing sale price as of June
17, 1996: $980,860,343.
Number of shares of Common Stock, $0.01 par value, outstanding as of June 17,
1996: 20,869,369
Documents Incorporated by Reference
Portions of the Registrant's definitive proxy statement for its 1996 Annual
Meeting of Stockholders, to be filed within 120 days after the end of the
Registrant's fiscal year to which this Form 10-K relates, are incorporated by
reference in Part III hereof.
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SIERRA ON-LINE, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
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PAGE
<S> <C>
Item 1. Business .............................................................................. 3
Item 2. Properties ............................................................................ 11
Item 3. Legal Proceedings ..................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ................................... 11
PART II
Item 5. Market for Registrant's Common Equity and
Related Stockholder Matters ......................................................... 12
Item 6. Selected Financial Data ............................................................... 12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................................. 13
Item 8. Financial Statements and Supplementary Data ........................................... 18
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure .................................................. 34
PART III
Item 10. Directors and Executive Officers of the Registrant .................................... 35
Item 11. Executive Compensation ................................................................ 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management ...................................................................... 35
Item 13. Certain Relationships and Related Transactions ........................................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ................................................................. 37
SIGNATURES ................................................................ 41
INDEX TO EXHIBITS ............................................................ 42
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PART I
ITEM 1. BUSINESS
Sierra On-Line, Inc. ("Sierra" or the "Company") is a leading publisher and
distributor of interactive entertainment, education and personal productivity
software titles for multimedia personal computers ("PCs"), including
CD-ROM-based PC systems, and selected emerging platforms. Sierra uses its design
and development capabilities, as well as outside acquisitions, to create branded
products and product series with complex and interesting storylines and
sophisticated graphics, sound and other features. Sierra offers more than 50
software titles, including popular products such as the King's Quest series,
Leisure Suit Larry series, Police Quest series, Phantasmagoria, Gabriel Knight:
The Beast Within, Front Page Sports: Football Pro '96, IndyCar Racing II, The
Lost Mind of Dr. Brain and Print Artist.
Sierra sells its products through a domestic field sales force and a network of
independent domestic and foreign distributors. The Company sells through a
variety of distribution channels, including computer and electronic superstores,
software specialty stores, mass merchants, wholesale clubs, direct mail and
bundling arrangements. Internationally, the Company sells primarily through
independent distributors in specified territories and, in the United Kingdom,
directly to software retailers. The Company is continually evaluating new and
potentially promising distribution channels, including on-line distribution
through commercial on-line services and the Internet.
The multimedia PC consumer software market has grown dramatically in recent
years, driven by the increasing installed base of multimedia PCs in the home,
the proliferation of new software titles and new and expanding distribution
channels. These factors have led to the development of a mass market for
software products, which has been characterized by a rise in importance of
strong distribution channels, a significant increase in the number of new
software titles offered in the market, increased competition for limited retail
shelf space to accommodate the abundance of new titles, and increased price
pressure. Consumer reaction to different software titles is often unpredictable.
Certain titles may gain broad popularity while others may not be received well
in the market. Generally, entertainment and education software producers
differentiate themselves by their ability to design products that are fun and/or
educational, while at the same time exploiting the graphics, image, animation,
audio and video capabilities of various hardware platforms.
During the fiscal year ended March 31, 1996, the Company significantly expanded
its product line and brand awareness by continuing to develop high-quality
entertainment and education titles incorporating state-of-the-art software
technology and by acquiring other successful or promising titles from third
parties. The Company released 40 new internally developed titles in fiscal 1996
(ended March 31, 1996) and acquired an additional 18 titles in the
entertainment, education, simulation and personal productivity categories. In
addition, the Company entered into a joint venture agreement with Pioneer
Electronics Corporation relating to development of titles for the Japanese
market.
New platform technologies for consumer software continue to emerge. The
introduction of CD-ROM technology for use with PCs has stimulated the
development and introduction of new software that is more sophisticated and
complex than has been available to date on PCs or other video game platforms.
The Company believes that growth in the installed base of CD-ROM drives for PCs
has led to increased sales of more complex, CD-ROM-based consumer software. In
addition, several companies are developing new hardware platforms which promise
greater processing power, more advanced three-dimensional graphics, realistic
sound and increased memory and storage devices such as CD-ROM and DVD (Digital
Video Disk). These systems are expected to offer a more realistic experience
than their video game predecessors through the use of real-time responses,
computer-generated character interaction, compression and networking
capabilities. The Company believes that the introduction of CD-ROM based PCs and
emerging platforms represents a significant market opportunity for software
producers that can design creative and interesting products while taking
advantage of the technological capabilities of new hardware platforms.
RECENT DEVELOPMENTS
The Company has entered into an Agreement and Plan of Merger with CUC
International Inc., a Delaware corporation ("CUC"), and a wholly owned
subsidiary of CUC, dated as of February 19, 1996, as amended (the "Merger
Agreement"), pursuant to which the Company has agreed, upon the terms and
subject to the conditions set forth in the Merger Agreement, including without
limitation approval of the Company's stockholders, to be acquired by CUC in a
transaction (the "Merger") in which each share of common stock of the Company
outstanding immediately prior to the effective time of the Merger will be
converted into 1.225 shares of common stock of CUC. CUC's common stock is traded
on the New York Stock Exchange, and CUC is subject to the informational
requirements of the Exchange Act, and, in accordance therewith, files reports,
proxy statements and other information with the Commission. The Merger is
subject to numerous conditions precedent, and the Merger Agreement may be
terminated under certain circumstances. A special meeting of the Company's
stockholders to vote upon the merger has been scheduled for July 24, 1996.
Attention is directed to the Company's definitive Proxy Statement/Prospectus
dated June 21, 1996
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for a complete description of the Merger, the Merger Agreement, the special
meeting and other matters related thereto. Although the Company's Board of
Directors has approved the Merger and recommended that the Company's
stockholders approve the Merger, there can be no assurance that the Merger will
be approved or consummated.
FACTORS AFFECTING FUTURE RESULTS AND FORWARD-LOOKING STATEMENTS
The Company's business, results of operations and financial condition are
subject to many risks, including without limitation those set forth below. Each
statement made in the following discussion, and elsewhere in this report,
containing any form of the words "anticipate" or "expect" or "could" or
"believe" or words of similar prospective import is a forward-looking statement
that may involve a number of such risk factors and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. The Company undertakes no obligation
to publicly release the results of any revisions to these forward-looking
statements that may be made to reflect events or circumstances after the date of
this report or to reflect the occurrence of unexpected events or developments.
DEPENDENCE ON NEW PRODUCTS; RISK OF PRODUCT DELAYS
The Company's success depends on its ability to develop and make timely
introductions of successful new products or enhancements of existing products to
replace declining revenues from older products. The effective lives of the
Company's products have tended to become shorter due to the introduction of new
hardware platforms, technologies and competitive products, the increase in
competition for retail shelf space among software products and other factors. As
a result, the Company's ability to introduce new products on a timely basis has
become increasingly important, as revenues from new products are essential to
replace declining revenues from older products. On many occasions in the past
the Company has experienced significant delays and cost overruns in product
introductions. As its products have become more complex and costly to develop,
it has become more difficult to bring products to market on schedule and on
budget. It is highly likely that the Company will experience delays in
developing and introducing at least some future new products. There can be no
assurance that such delays will not have a material adverse effect on the
Company's business and operating results.
INCREASING COST AND COMPLEXITY OF PRODUCT DEVELOPMENT
As the Company's products have become increasingly complex and technologically
sophisticated, it has become more difficult and expensive to produce new
products on a timely basis. Typically, nine to fifteen months or more are
required to complete a new title and one to two months or more are required to
convert existing titles to new hardware platforms or foreign languages. This
time period can increase if, as has occurred in the past, the Company
experiences unanticipated difficulties in the product development process. In
order to introduce titles incorporating high-quality graphics, animation,
images, video and audio, the Company has had to devote increasing financial and
human resources to new product development. Due to competitive pressures,
however, only a portion of the Company's increased development costs to date
have been offset by product price increases. Greater product development
expenditures also result in greater financial risk to the Company if the product
is not successful. The Company expects that the trend toward more complex
products and increasing product development costs will continue for the
foreseeable future. In addition, in attempting to meet product introduction
deadlines, the Company may incur higher than normal production and development
costs, placing additional pressure on gross margins. Any material delays or cost
overruns in the development or introduction of, or the presence of a material
defect in, one or more new products could materially and adversely affect the
success of the products and the Company's business and operating results.
UNCERTAINTY OF MARKET ACCEPTANCE
Consumer preferences for entertainment and education software products are
continually changing and are extremely difficult to predict. Few such products
achieve sustained market acceptance. There can be no assurance that new products
introduced by the Company will achieve any significant degree of market
acceptance or that any such acceptance, if achieved, will be sustained for a
sufficient period of time to permit the Company to recover its development and
marketing costs. In addition, the Company believes that as ownership of PCs,
CD-ROM-based PCs and other emerging platforms becomes more widespread, and as
the Company diversifies its product offerings, it must market its products to a
broader market than it has in the past. The Company plans to introduce products
and interfaces designed to appeal to this broader market and to adjust its
marketing activities accordingly. In seeking to appeal to a broader market, the
Company will face significant new challenges, including intense competition from
larger companies with established market positions. The Company will also face
the risk that it may lose existing customers who may dislike the changes in the
Company's products and marketing approach. There can be no assurance that the
Company will be able to compete successfully in this broader market.
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RAPID TECHNOLOGICAL CHANGES
The market for entertainment and education software is undergoing rapid
technological change. The Company's products must operate on widely accepted
hardware platforms and software environments in order to achieve significant
market acceptance. New hardware and software platforms are continuously being
introduced, and these and other new technologies could render existing products
of the Company unmarketable. As a result, the Company must continually
anticipate market trends and adapt its products to emerging hardware and
software platforms and changing technologies and consumer preferences. The
design and development of entertainment and education software products for new
platforms and software environments requires substantial investment and lead
time. There can be no assurance that the Company will be successful in
developing and marketing products for new platforms or that any of these
platforms will achieve significant market acceptance. Sales of the Company's
current products are highly dependent on the size of the installed base of PCs
and sales of new PCs for home use. The Company has devoted significant resources
to develop products that will operate on selected CD-ROM formats. It is not
clear whether all of the formats now supported by the Company will be adopted as
industry standards. A change in hardware or software standards could lead to
significant expenditures by the Company to adapt existing products or develop
new products to support the new standards. The Company also faces the risk that
proprietary platforms that are designed to restrict the ability of independent
software developers, including the Company, to adapt their products to run on
such platforms will become widely accepted. For example, Nintendo of America,
Inc. ("Nintendo") and Sega of America, Inc. ("Sega") have each adopted such a
"closed" platform strategy in the video game console and cartridge market. If
closed platforms developed by these companies or others become widely accepted,
the Company's business and operating results could be materially and adversely
affected.
SEASONALITY; SUBSTANTIAL QUARTERLY FLUCTUATIONS
The Company's business is highly seasonal, with the highest level of net sales
and earnings typically occurring during the third fiscal quarter ending December
31, and substantially lower levels in the other fiscal quarters, particularly
the fourth fiscal quarter ending March 31 and the first fiscal quarter ending
June 30. This seasonal pattern is due primarily to increased demand for the
Company's products during the calendar year-end holiday season. If the Company's
European sales increase as a percentage of its total revenues, the Company
anticipates that this seasonality may become even more pronounced, as sales in
Europe exhibit an even stronger seasonal tendency than sales in the United
States. This seasonality can lead to overstocking by the Company's retail
customers and higher than normal returns following the holiday season. 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 new product
introductions by the Company or its competitors, 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
subsequent quarters. As a result, if net revenues are below expectations, the
Company's operating results are likely to be materially and adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends on the continued service of its key product
design, development, sales, marketing and management personnel and its ability
to continue to attract, motivate and retain highly qualified employees and
contractors. In order to introduce timely and successful sequels in its key
product lines, the Company must retain its key design and development personnel.
The Company does not have employment agreements with any employees. Competition
for skilled product designers, artists and technical personnel is intense. The
location of one of the Company's principal product development facilities in
Oakhurst, a relatively remote rural area of California, may adversely affect the
Company's ability to compete for skilled development personnel at that facility.
The inability of the Company to attract or retain key design and development
personnel could have a material and adverse effect on the Company's business and
operating results.
UNCERTAINTIES OF DISTRIBUTION CHANNELS
A substantial portion of the Company's revenues is derived from a limited number
of distributors and software specialty retail chains. Loss of any of the
Company's major customers, or a significant decrease in product shipments to, or
an inability to collect receivables from, any of these customers could have a
material adverse effect on the Company's operating results. Consistent with
industry practice, the Company may accept product returns from or provide price
protection to distributors and retailers. Although the Company provides reserves
for price protection and product returns that it believes to be adequate, there
can be no assurance that the Company will not be forced to offer greater price
protection or to accept substantially more product returns than anticipated in
order to maintain its relationships with retailers and its access to
distribution channels. The Company is currently developing methods to more
effectively monitor the sell-through activity and product inventory of its
retail and distribution channels. Until such methods have been developed and
implemented, the Company may have greater levels of inventory at particular
retailers or distributors, and be subject to greater amounts of potential
product returns, than currently anticipated. It is also possible that the
Company may have lower levels of inventory at particular retailers and
distributors than
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anticipated, thereby adversely affecting the sales of its products. Consumer
software distribution channels have been undergoing rapid change, including
consolidations and financial difficulties of certain retailers and distributors,
along with the emergence of new distribution channels, such as mass
merchandisers, for entertainment and education software. An increasing number of
companies and software products are competing for access to these distribution
channels, and there is intense competition for the limited amount of available
retail shelf space and promotional resources. There can be no assurance that
distributors or retailers will continue to purchase the Company's products or
provide the Company's products with adequate levels of shelf space and
promotional support. As ownership of platforms for entertainment and education
software products becomes more widespread, there may be further changes in the
principal distribution channels for reaching the broader consumer market for
these products. There can be no assurance that the Company will be able to
market its products successfully through these distribution channels.
COMPETITION
The entertainment and education software industry is intensely competitive. The
Company competes primarily with other developers of multimedia PC entertainment,
education and home productivity software. Significant companies that compete
with Sierra in the entertainment software market include Broderbund Software,
LucasArts, Virgin Interactive Entertainment, Electronic Arts and GT Interactive
Software. Manufacturers and developers of cartridge-based video games, such as
Nintendo and Sega and their licensees, also are indirect competitors of the
Company, but may become more direct competitors if technologies evolve in a
manner that encourages these companies and Sierra to develop products for
similar hardware platforms. The principal competitors in the education software
market are Davidson & Associates, Disney, SoftKey International (through its
acquisitions of The Learning Company and Minnesota Educational Computing
Corporation) and Broderbund Software, Inc. Products in the market compete
primarily on the basis of subjective factors such as entertainment value and
objective factors such as price, graphics and sound quality. Large diversified
entertainment, cable and telecommunications companies, in addition to large
software companies such as Microsoft Corporation, are increasing their focus on
the interactive entertainment and education software market, which will result
in even greater competition for the Company. Many of these companies have
substantially greater financial, marketing and technical resources than the
Company. As competition increases, significant price competition and reduced
profit margins may result. In response to increased competition for shelf space,
the Company may need to increase marketing expenditures. In addition,
competition from new technologies (such as new hardware platforms) may reduce
demand in markets in which the Company has traditionally competed. Prolonged
price competition or reduced demand as a result of competing technologies would
have a material adverse effect on the Company's business, financial condition
and operating results. There can be no assurance that the Company will be able
to compete successfully against current or future competitors or that
competitive pressures faced by the Company will not materially and adversely
affect its business, operating results or financial condition.
INTERNATIONAL SALES RISKS
The Company anticipates that international sales will continue to account for a
significant share of the Company's total revenues in the future. International
sales are subject to inherent risks, including changes in export controls,
tariffs and other regulatory requirements and fluctuating exchange rates.
European distribution channels are more decentralized and hence more difficult
to enter efficiently. International markets also require the Company to
translate and culturally adapt its products and documentation. This results in
higher levels of specialized inventory and a greater risk of inventory
obsolescence. Furthermore, the laws of certain foreign countries may not protect
the Company's intellectual property rights to the same extent as do the laws of
the United States.
RISK OF GOVERNMENTAL REGULATION; PRODUCT RATINGS SYSTEM
Legislation has been proposed to establish an independent agency to work with
the video game industry to create a system for providing parents and other
purchasers with information about graphic violence or sexually explicit material
contained in video games. The implementation of such a system may require
entertainment and education software publishers to communicate information
regarding the content of their products (particularly violent or sexually
explicit material) to consumers through appropriate package labeling,
advertising and marketing presentations. Similar developments are also taking
place outside the United States. The Company is unable to predict what effect,
if any, a rating system may have on the Company's business and there can be no
assurance that such a rating system would not adversely affect the Company's
results of operations.
LIMITED PROTECTION OF PROPRIETARY RIGHTS
The Company regards its software as proprietary and relies on a combination of
patent, trade secret, copyright and trademark laws, nondisclosure agreements and
certain technical measures to protect its proprietary rights. There can be no
assurance that these efforts will be successful. The Company is aware that
unauthorized copying occurs within the entertainment and education software
industry. It may be possible for third parties to copy the Company's products or
otherwise obtain and use information that the Company regards as proprietary.
Policing unauthorized use of the Company's products is difficult and costly, and
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software piracy and unauthorized copying can be expected to be a major
persistent problem. The laws of the United States provide only limited
protection of intellectual property rights, and the laws of certain other
countries in which the Company's products are or may be distributed provide less
protection. As the number of entertainment and education software products
increases and the functionality of these products overlaps, the Company believes
that software developers and publishers may increasingly become subject to
infringement claims. From time to time, the Company may receive communications
from third parties asserting that features or content of certain of its products
may infringe upon intellectual property rights of such parties. There can be no
assurance that claims against the Company will not result in costly litigation
and require the Company to license the intellectual property of others. There
can be no assurance that such licenses will be available on reasonable terms, or
at all.
PRODUCTION RISKS
Substantially all the Company's products are stored on CD-ROM media. As is
typical in the industry, the Company outsources the CD-ROM manufacturing and
replication function to third parties. In the future, it is possible that there
may be periodic shortages of CD-ROM media and potentially late deliveries of
CD-ROM products from outside duplicating sources. While the Company has not
experienced material problems in duplicating products on CD-ROM, its dependence
on third parties to perform the manufacturing function could result in material
problems if production were substantially delayed. The Company produces its
diskette-based products by duplicating master software diskettes onto blank
diskettes acquired in quantity from a number of sources. The Company
occasionally has difficulty in obtaining blank diskettes of appropriate quality.
In addition, the Company has occasionally incurred higher than normal production
expenses as a result of supplementing its internal production staff with outside
contractors to meet production deadlines.
ACQUISITIONS
The Company is in the process of beginning to integrate into its overall
operations the businesses and personnel acquired in the Acquisitions, as well as
in four additional acquisitions completed in calendar year 1995 and one
completed in April 1996. This process will present various management challenges
to the Company, and there can be no assurance that the Company will not
experience difficulties in completing this integration process, or that key
personnel of the acquired businesses will not determine to leave the Company's
employment. Any such departures could have a material adverse effect on the
value of one or more of the acquisitions to the Company. The Company, in the
ordinary course of its business, considers acquisitions of, and mergers and
other strategic transactions with, third parties on a regular basis, and it is
likely that the Company will engage in more such transactions in the future.
Such transactions often involve substantial risks, and, although the Company's
management will endeavor to mitigate these risks and to negotiate the best
possible terms for the Company and its stockholders, there can be no assurance
that any such transactions that are consummated will prove to be beneficial.
PRODUCTS
The Company currently offers entertainment, education and personal productivity
consumer software product lines targeted at the home consumer.
ENTERTAINMENT PRODUCTS
The Company's principal entertainment products consist of adventure, simulation,
strategy, sports and action categories, which are described in greater detail
below.
ADVENTURE PRODUCTS. The Company's most popular product category is adventure
products, which feature high-quality graphics, animation, music, sound
effects, art and text to create interactive stories similar to cartoons or
animated films. The player guides a major character, and thus the flow and
direction of the adventure, in order to solve problems and puzzles, escape
from perilous situations, experience different environments and interact with
other characters. These games are intricate and may take several weeks of
play to complete. In connection with these products, many customers call
Sierra's 900-number telephone hint line and purchase hint books to assist
them in playing the adventures. In fiscal 1994, 1995 and 1996, adventure
products accounted for 41%, 32% and 38% of the Company's net sales,
respectively. The Company's principal adventure products series are as
follows:
- PHANTASMAGORIA The first product of this series was released in the
second quarter of fiscal 1996. The product uses the
Company's high-quality proprietary video capture
process whereby the player assumes the role of the
main character in a "horror" environment. More than
600,000 copies of this product have been sold.
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- KING'S QUEST The player takes on a leading role in a world of
brave knights, noble kings, wicked wizards and evil
sorcerers. The Company has released seven titles
plus an anthology and sold more than 3.8 million
copies in this series.
- LEISURE SUIT LARRY This series parodies the singles bar scene. The
player guides a libidinous 40-year old through
awkward social encounters. The Company has released
five titles plus an anthology, and sold more than
1.4 million copies in this series.
- SPACE QUEST This series parodies popular outer space films and
television shows. The player is a sanitation
engineer turned space-age swashbuckler. The Company
has released six titles plus an anthology, and sold
more than 1.2 million copies in this series.
- POLICE QUEST A cop fights cunning and dangerous criminals and
solves intriguing cases while following correct
police procedures. The Company has released five
titles and sold more than 1.2 million copies in this
series.
SIMULATION AND SPORTS GAME PRODUCTS. Most of the Company's simulation
products are sports related, or simulation games set in historical combat
contexts. In Sierra's sports games, the user chooses the role of player,
coach or manager. Sports games challenge the user's ability to use strategy
in realistic situations. In fiscal 1994, 1995, and 1996, simulation and
sports products accounted for 25%, 33%, and 23%, respectively, of the
Company's net sales. These products include the following:
- ACES This series of historically accurate flight
simulations enable the player to fly warplanes from
different eras. The Company has released four
products, Red Baron, Aces of the Pacific, Aces Over
Europe, and Aces of the Deep, plus an anthology, and
sold more than 1 million copies in this series.
- FRONT PAGE SPORTS This series consists of numerous titles that
simulate football, baseball, golf, bass fishing,
flying and auto racing. Many of the titles use
advanced graphics and actual player statistical
data, with highly realistic results. The Company has
sold more than 500,000 copies in this series. The
Company intends to expand the series to include
other sports.
- A-10 TANK KILLER This series consists of two titles whereby the
player flies the 25-ton A-10 Thunderbolt II through
daring tank-killing missions to support ground
troops in various hostile locations. The Company has
sold more than 250,000 copies of this product.
STRATEGY AND ACTION GAME PRODUCTS. The Company's strategy products offer the
game player a combination of depth and detail whereby the user can set up the
game and enjoy playing without being buried in minuscule details. Action
titles generally have a broader appeal than strategy products. They are
characterized by their strong game play, 3D graphics and networking
capabilities. In fiscal 1994, 1995 and 1996, strategy and action game
products accounted for 13%, 20% and 19%, respectively, of the Company's net
sales. Strategy and action products include the following:
- OUTPOST In this simulation, the Earth has been destroyed by
a catastrophic event providing the challenge of
rebuilding civilization on another planet. The
Company has sold more than 200,000 copies of this
series.
- CAESAR The player becomes the protege of the great Julius
Caesar and is taken back to the days of the Roman
Empire. Creativity and realism are two of the
attractive characteristics of this series. The
Company has sold more than 400,000 copies of this
product series.
- 3D ULTRA PINBALL This product combines authentic 3D graphics,
realistic ball motion and the arcade-table feel of
real pinball. Released in fiscal 1996, this title
has sold more than 250,000 copies.
EDUCATION AND FAMILY PRODUCTS. The Company's education and family products
provide education and fun to children and adults in an animated, interactive
environment. Several of the Company's education products promote learning
through adventure stories or by providing an amusing, playground environment.
Others deliver personal instruction through animated characters whose mouths
move realistically in synchronization with their spoken words. In fiscal 1994,
1995, and 1996, education and family products accounted for approximately 12%,
12%, and 13%, respectively, of the Company's net sales. The Company's education
products include:
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- DR. BRAIN This series has been among the most successful of
its kind at presenting children with pure
problem-solving skills. The child is presented with
multiple puzzles in an attempt to help Dr. Brain.
The Company has sold more than 350,000 copies in
this series.
- ADI The Adi series offers academic subjects for students
at different age levels based on the national school
curricula of several European countries. Adi
products use a specialized core user environment for
which subjects can be purchased as modular add-on
disks. The series includes Adi Jr. for preschool
children, Adi for elementary students and Adi Senior
for high school students.
PRODUCTIVITY PRODUCTS. The Company's productivity line provides consumers with a
broad array of general interest products, ranging from home graphics to home
design. In fiscal 1994, 1995, and 1996, productivity products accounted for
approximately 2%, 1%, and 5%, respectively, of the Company's net sales. The
Company's productivity products include:
- PRINT ARTIST The Print Artist series allows the user to create
their own custom projects, such as greeting cards,
signs, business cards, letterhead, calendars, labels
and many others. The product is designed to make all
such products easy and fast, with touches of
multimedia fun. The Company has sold more than
200,000 copies in this series.
- MASTERCOOK The Company's cooking series provides the consumer a
means to organize and locate all their favorite
recipes and print out attractive custom-made
cookbooks of their own. Built-in special functions,
such as health guides and automatic shopping lists,
give the series a user-friendly touch. The Company
has sold more than 90,000 copies in this series.
All of the Company's titles are available for IBM PCs and PC-compatibles. Many
titles also are available for Apple Macintosh computers. The Company has also
developed certain of its products for emerging platforms.
THE IMAGINATION NETWORK, INC.
The Company is a party to a multi-year publishing agreement with AT&T to provide
content for its subsidiary, The ImagiNation Network ("INN"), a multi-player
interactive on-line entertainment service that enables subscribers at different
geographic locations, using modem-equipped personal computers, to communicate
and play interactive games in real time. The publishing agreement provides for
AT&T to fund up to $23 million of Sierra's development expenditures, subject to
certain limitations, through non-refundable royalty advances. The agreement
provides that Sierra will not own a network that competes with INN for a period
of two years following expiration of the funding term. INN is free to provide
products on the INN network that are developed by third parties other than the
Company, and it can be anticipated that INN will do so. AT&T has announced that
it plans to sell INN, and the Company expects that the publishing agreement will
be revised in connection with any such sale.
PRODUCT DEVELOPMENT
The creation of the Company's products takes place in two stages: design and
development. Products are designed by the Company's internal staff and
independent designers working under contract with the Company. In recent years,
the Company has increased the number of employees engaged in product design
relative to the number of independent designers. Once a design is selected for
production by the Company's senior management, a production team, budget and
production schedule are established. The development of a product, which
consists of implementing the design through artwork, animation, script, music,
sound effects, voice and computer programming, is done almost entirely by the
Company's internal development staff. In certain instances, the Company hires
independent contractors to assist with product development. Prior to release,
each product undergoes careful quality assurance testing that involves a
technical review of each component of the final product and testing on the
applicable hardware platform. Typically, nine to fifteen months or more are
required to complete a new title and one to two months are required to convert
existing titles to new hardware platforms or foreign languages.
Since its inception, the Company has recognized that a strong technical base is
essential to its long-term success and has made a substantial investment in
research and development. As of March 31, 1996, the Company had approximately
519 employees and several independent contractors engaged in product design and
development.
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MARKETING AND SUPPORT
The Company's marketing activities include print advertising in consumer and
trade periodicals, retail-supported print advertising, targeted direct mail
programs, retail in-store promotions, trade shows and product publicity
programs. In addition, the Company communicates with its existing customer base
by direct mail, primarily through the Company's full-color quarterly news
magazine called INTERAction!. The Company's marketing expenses will likely
increase in fiscal 1997, as the Company continues to direct more marketing
spending towards the consumer and increase the distribution of its INTERAction!
magazine.
The Company supports its products directly through its customer support
department, which can be contacted by mail, by telephone during ordinary
business hours, or through various on-line services. The Company's support
personnel also sell upgraded and replacement software, inform customers about
new products and conduct spot market surveys.
SALES
In the United States, the Company sells its products primarily to large computer
superstores, software specialty retail chains, wholesale clubs and mass
merchandisers through a domestic field sales force. The Company reaches smaller
computer and software specialty stores through independent distributors and also
sells its products direct to its customers. In fiscal 1996, sales to the top
four customers were 28% of gross sales, compared to 26% and 30% of gross sales
for fiscal 1995 and 1994, respectively.
The Company's international sales are primarily to customers in Europe and Asia.
The Company sells its products internationally through various local
distributors for specified territories and, in the United Kingdom, also directly
to software retailers. During fiscal 1996 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. Large
software specialty chains are uncommon in foreign markets, and, consequently,
the Company's distributors sell primarily to small software retailers. To
generate additional international revenues, the Company sells foreign language
versions of some of its more popular products. The Company expects that the
level of its international sales may fluctuate, particularly as the Company
seeks to become more established in international markets. See also Note 12 of
Notes to the Consolidated Financial Statements included in Item 8 below, which
includes a table setting forth information on the Company's international sales
for fiscal years 1994, 1995 and 1996. The Company anticipates that international
sales will continue to account for a significant share of the Company's revenues
in the future. International sales are subject to inherent risks, including
changes in export controls, tariffs and other regulatory requirements and
fluctuating exchange rates. European distribution channels are more
decentralized and hence more difficult to enter efficiently. International sales
also require the Company to translate and culturally adapt its products and
documentation. This results in higher levels of specialized inventory and a
greater risk of inventory obsolescence. Furthermore, the laws of certain foreign
countries may not protect the Company's intellectual property rights to the same
extent as do the laws of the United States.
The Company may accept product returns or provide price protection to
distributors and retailers. Under price protection arrangements, the Company
allows its customers a credit against future purchases equal to the difference
between the price at which the customer bought a certain product from the
Company and the Company's reduced price for that product.
PRODUCTION
The Company performs its own disk duplicating and packaging for diskette-based
products at its Oakhurst, California and Paris, France facilities. The Company
does not internally replicate CD-ROM-based products but rather subcontracts that
work to third parties. To date the Company has not experienced difficulties in
procuring CD-ROMs or in having its CD-ROM programs replicated, but in the
future, it is possible that there may be periodic shortages of CD-ROM media and
potentially late deliveries of CD-ROM products from outside replication sources.
Printing of user manuals and manufacturing of packaging and related materials
are performed to the Company's specifications by outside sources. Generally,
complete packages are assembled by the Company at its two production facilities,
although the Company has used external companies to assemble packages during
times of peak demand. The Company has occasionally incurred higher than normal
production expenses as a result of supplementing its internal production staff
with outside contractors to meet product introduction deadlines.
Shipments are generally made within one week of receiving an order. In light of
the short time between order and shipment of the Company's products, the Company
has relatively little backlog at any given date, and its backlog is not
indicative of potential sales for any future period.
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PROPRIETARY PROTECTION
The Company relies upon a combination of patent, copyright, trade secret and
trademark laws, as well as nondisclosure agreements and certain technical
measures, to protect its rights in its software products. The Company has filed
seventeen patent applications to protect certain of its technology and has been
issued eight United States patents and has registered trademarks in the United
States and foreign jurisdictions. However, the Company does not believe that the
ownership of patents is presently a significant factor in its business. The
Company believes that intellectual property rights protection is less
significant to the Company's success than factors such as the ability to
cost-effectively release timely and innovative products with consumer appeal.
Sierra does not impose license agreements on its end-user customers and does not
copy-protect its software. Sierra believes that copyright laws provide only
limited protection for its products. The Company is aware that unauthorized
copying occurs within the consumer software industry. It may be possible for
third parties to copy the Company's products or otherwise obtain and use
information that the Company regards as proprietary. Policing unauthorized use
or copying of the Company's products is difficult and costly, and software
piracy can be expected to be a major and persistent problem. The Company does,
however, take certain practical precautions in addition to relying on legal
protections, such as including in its software coded references to materials
shipped with the products that are required to complete play of the game. In
addition, the Company has adopted various methods to confirm that persons
seeking customer support have purchased a copy of the product.
As the number of consumer software products increases and the functionality of
these products overlaps, the Company believes that software developers and
publishers may increasingly become subject to infringement claims. From time to
time, the Company may receive communications from third parties asserting that
features or content of certain of its products may infringe upon intellectual
property rights of such parties. There can be no assurance that existing or
future claims against the Company will not result in costly litigation and
require the Company to license the intellectual property of others. There can be
no assurance that such licenses will be available on reasonable terms, or at
all.
EMPLOYEES
As of March 31, 1996, the Company and its subsidiaries employed approximately
888 persons, including 113 in operations, 90 in marketing and sales, 519 in
product development and 166 in customer service, administration, and finance.
None of the employees are represented by a labor union. Competition for
employees in the software industry is intense. The Company believes that its
future success will depend in part on its continued ability to recruit and
retain highly skilled management, marketing and technical personnel.
ITEM 2. PROPERTIES
The Company maintains facilities, including its headquarters in Bellevue,
Washington, where the Company leases approximately 45,000 square feet of office
space. The Company owns a 56,200 square foot building on 6-1/2 acres in
Oakhurst, California. The Company also leases approximately 48,000 square feet
of office space in Eugene, Oregon, approximately 2,400 square feet of office
space in Austin, Texas, approximately 37,000 square feet of office space in
Boston, Massachusetts, approximately 21,000 square feet of office space near
Paris, France, and office space near Reading, England and Dreieich, Germany. The
Company believes that these facilities are adequate for its current needs and
that suitable additional or substitute space will be available as needed to
accommodate its future needs.
ITEM 3. LEGAL PROCEEDINGS
On February 20, 1996, a lawsuit captioned: Meridian Capital Funding, Inc. v.
Sierra On-Line, Inc. et al. (Civil Action No. 14848) was filed in the Court of
Chancery for the State of Delaware. The lawsuit was brought on behalf of the
public shareholders of the Company and names the Company, each of the Company's
individual directors and CUC International as party defendants. The lawsuit
alleges certain violations of such directors' fiduciary duties to the Company's
shareholders in connection with the Merger and other alleged improper conduct.
The plaintiffs, among other things are seeking to enjoin consummation of the
Merger and, in the event of such consummation, rescission of the Merger and
monetary damages in an unspecified amount. There have been no material
developments in this litigation since the filing of the complaint, and no
discovery or other proceedings have occurred.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of fiscal 1996 to a vote of
security holders.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the Nasdaq National Market under the
Symbol SIER. According to the records of the Company's transfer agent, the
Company had approximately 900 stockholders of record, in addition to shares held
in street name, with 20,869,369 shares outstanding as of June 17, 1996. The
Company has never paid cash dividends on its stock and anticipates that, for the
foreseeable future, it will continue to retain any earnings for use in the
operation of its business.
The high and low closing prices during each quarter for the Company's last two
fiscal years were (all prices are adjusted to reflect the two-for-one stock
split effective February 17, 1995):
<TABLE>
<CAPTION>
TRANSACTION PRICES
-------------------
Quarter Ended: High Low
-------------- ---- ---
<S> <C> <C>
June 30, 1994 13-3/8 7-1/8
September 30, 1994 12-1/8 7-5/8
December 31, 1994 18-1/8 10
March 31, 1995 23-1/4 14-5/8
June 30, 1995 25-3/8 16-1/2
September 30, 1995 48-3/4 24
December 31, 1995 39-1/2 22-3/4
March 31, 1996 40 17-1/2
</TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The financial data included in the following table should be read in conjunction
with Item 8 (Financial Statements and Supplementary Data) and with Item 7
(Management's Discussion and Analysis of Financial Condition and Results of
Operations) below. The selected financial data as of and for each of the five
years in the period ended March 31, 1996 have been derived from the Consolidated
Financial Statements of the Company. The financial statements of the Company for
the three years ended March 31, 1996, have been audited by Deloitte & Touche
LLP, independent auditors, whose report is included herein.
<TABLE>
<CAPTION>
Year Ended March 31
------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- -----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Revenues ............................... $ 158,177 $ 97,879 $ 73,101 $ 56,320 $ 47,887
Net income (loss) ...................... 16,170 12,992 (7,872) (9,611) 3,856
Net income (loss) per share:
Primary .............................. 0.77 0.70 (0.46) (0.57) 0.28
Fully diluted(1) ..................... 0.76 0.68 --- --- ---
Total assets............................ 178,897 145,354 68,905 65,194 70,346
Long-term liabilities................... 24,419 40,541 634 236 6
</TABLE>
(1) The difference between primary and fully diluted net income (loss) per share
is not significant for fiscal years 1994, 1993, and 1992.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
This following discussion and analysis should be read in conjunction
with the audited financial statements and related notes. The discussion of
results, causes or trends should not be construed to imply that such results,
causes or trends will necessarily continue in the future. Each statement made in
this discussion and analysis containing any form of the words "anticipate" or
"expect" or words of similar prospective nature is a forward looking statement
that may involve a number or risk factors and uncertainties. Among other factors
that would cause actual results to differ materially are the following: business
conditions and other changes in the Company's industry; competitive factors,
such as rival products and price pressures both domestically and
internationally; availability of adequate CD-ROM media and CD replication
services on reasonable terms and at reasonable prices; significant delays or
excessive costs associated with product research, development and/or
introduction; the loss of any large single customer; and fluctuations in U.S.
Dollar exchange rates for non-U.S. currencies. In addition, readers should
review the discussion of factors affecting future results and forward-looking
statements appearing in Part I of this report.
The Company has entered into the Merger Agreement with CUC pursuant to
which the Company has agreed, upon the terms and subject to the conditions set
forth in the Merger Agreement, including without limitation approval of the
Company's stockholders, to be acquired by CUC. In the Merger, each share of
common stock of the Company outstanding immediately prior to the effective time
of the Merger will be converted into 1.225 shares of common stock of CUC. CUC's
common stock is traded on the New York Stock Exchange, and CUC is subject to the
informational requirements of the Exchange Act, and, in accordance therewith,
files reports, proxy statements and other information with the Commission. The
Merger is subject to numerous conditions precedent, and the Merger Agreement may
be terminated under certain circumstances. A special meeting of the Company's
stockholders to vote upon the merger has been scheduled for July 24, 1996.
Attention is directed to the Company's definitive Proxy Statement/Prospectus
dated June 21, 1996 for a complete description of the Merger, the Merger
Agreement, the special meeting and other matters related thereto. Although the
Company's Board of Directors has approved the Merger and recommended that the
Company's stockholders approve the Merger, there can be no assurance that the
Merger will be approved or consummated.
During the year, the Company completed several acquisitions. The
companies acquired include The Pixellite Group ("Pixellite"), Software
Inspiration Limited ("Inspiration"), Papyrus Design Group, Inc. ("Papyrus"),
Arion Software, Inc. ("Arion"), and Green Thumb Software, Inc. ("Green Thumb").
These companies were instrumental in broadening the Company's product line.
Each transaction was accounted for as a pooling-of-interests. A total of
2,293,493 shares of Sierra Common Stock were issued in these transactions. The
historical financial statements of the Company have been restated for the
Pixellite, Inspiration, and Papyrus mergers. The financial statements have not
been restated for the Arion and Green Thumb mergers as these companies did not
impact the Company's operations significantly.
The Company derives its revenues primarily from the sale of
entertainment and education software products. During fiscal 1996 the Company
introduced a budget product category, consisting of repackaged Sierra products
designed to wholesale at $9 per unit, as well as variety packs consisting of
assortments of six different Sierra titles. Introduction of Sierra titles under
the budget line has had the effect of increasing product lives by creating an
intermediate category in a product's life cycle. However, the Company has also
experienced increased pricing pressure in this category as it targets these
products to the mass consumer.
Substantially all of net sales, ninety-five percent in both fiscal 1995
and fiscal 1996, represent products 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. Although no one single customer accounted
for over ten percent of gross revenues in fiscal years 1996 and 1995, the
Company estimates that its top ten customers accounted for approximately 40% of
revenues in fiscal 1995 and 50% of revenues in fiscal 1996.
The estimated market for consumer software was $4.8 billion in 1994 and
$5.6 billion in 1995 and is estimated to increase to $9.5 - $10 billion by 2000.
Approximately 40% of the market consists of entertainment, educational and
productivity software while the remainder of the market represents business,
finance and reference software. The market growth is fueled by an increasing
installed base of multimedia PCs. CD-ROM titles have continued to represent the
bulk of entertainment, educational and productivity software unit sales,
representing nearly 80% of units shipped of these products in 1995.
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 fiscal
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1996, the Company increased direct distribution sales to wholesale clubs and
mass merchandisers which have higher levels of returns and exchanges than the
Company's other distribution channels. This change has 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 increasing technological sophistication of the
Company's products has resulted in increased product development costs and
increased the likelihood of product release delays. The Company has been unable
to pass along these increased development costs by way of price increases due to
increasing competition. In prior periods, the Company has been able to mitigate
the adverse impact of increased development costs on operating profit through
increased unit sales and improved manufacturing margins. There can be no
assurances, however, that the Company will be able to continue to do so in
future periods.
The Company estimates that product life cycles for entertainment
software products are continuing to decrease. Education software continues to
have a somewhat longer shelf life. Due to the compression of product life
cycles, increasing competition, and the increasing technological sophistication
of its products, the Company has focused its development resources on fewer
titles. This has increased the risk of revenue volatility which the Company is
seeking to minimize through a broadening of its product offerings into home
productivity and strategy categories.
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 6%, 8% and 8% in fiscal 1994, 1995
and 1996, respectively.
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 1994, 1995, and 1996, sales of new titles represented
55%, 69%, and 64% 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 home productivity 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.
The entertainment and education software industry is intensely
competitive. Products in the market compete primarily on the basis of subjective
factors such as entertainment value and objective factors such as price,
graphics and sound quality. Large diversified entertainment, cable and
telecommunications companies, in addition to large software companies such as
Microsoft Corporation, are increasing their focus on the interactive
entertainment and education software market, which will result in even greater
competition for the Company. Many of these companies have substantially greater
financial, marketing and technical resources than the Company. If the Merger
with CUC is completed, the Company believes that its ability to compete
effectively in its marketplace will be improved. As competition increases,
significant price competition and reduced profit margins may result. In
response to increased competition for shelf space, the Company may need to
increase marketing expenditures. In addition, competition from new
technologies (such as new hardware platforms) may reduce demand in markets in
which the Company has traditionally competed. Prolonged price competition or
reduced demand as a result of competing technologies would have a material
adverse effect on the Company's business, financial condition and operating
results.
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, 1996, there was a strengthening of
the U.S. Dollar in Europe which had the effect of decreasing the dollar value of
net revenues denominated in these non-U.S. currencies. The Company estimates
that the strengthening of the U.S. Dollar reduced consolidated net revenues by
approximately $0.5 million and reduced consolidated net income by approximately
$50,000 for the fiscal year ended March 31, 1996. In fiscal 1995 the weakening
of the U.S. Dollar
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accounted for approximately $1.1 million of the Company's consolidated net
revenues and approximately $70,000 of the consolidated net income. Foreign
currency denominated transactions and the respective fluctuations in foreign
currency in fiscal 1994 did not have a significant impact on results of
operations.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995
REVENUES
Net sales of $156.1 million and total revenues of $158.2 million for
fiscal year 1996 represented increases of 63% and 62%, respectively, over the
prior fiscal year. European net sales were $37.1 million for fiscal 1996
compared to $19.5 million in the prior year, an increase of 90%. Sales outside
of the United States and Europe increased $2.8 million primarily due to growth
in Asia.
During fiscal 1996, 40 internally developed new products were released
and an additional 18 were acquired compared to 23 new products released in the
prior year. In fiscal 1996, 64% of gross software sales were derived from titles
released in that fiscal year while 69% of gross software sales were derived from
current releases in fiscal 1995.
The following table provides a comparison of net sales by category:
<TABLE>
<CAPTION>
Fiscal Year Ended March 31
--------------------------
1996 1995
---- ----
<S> <C> <C>
Category:
Adventure ................... 38% 32%
Simulation/Sports ........... 23% 33%
Strategy/Action ............. 19% 20%
Education/Family ............ 13% 12%
Productivity................. 5% 1%
Other ....................... 2% 2%
------------ -----------
100% 100%
============ ===========
Net Sales ........................ $156,123,000 $95,821,000
</TABLE>
Adventure titles increased from 32% to 38% of net sales, or $28.7
million, due principally to the strength of the Company's hit title
Phantasmagoria which sold over 600,000 copies worldwide during fiscal 1996.
Simulation and sports titles increased $4.3 million due principally to the
strength of the Company's car racing products acquired in the Papyrus merger.
However, simulation/sports titles decreased from 33% to 23% of net sales due in
part to the fact that the Company did not release any new titles in its Aces
series of simulation games. Lastly, sales of productivity titles increased $6.8
million due to the Company's entrance into the home productivity market via the
acquisitions of Pixellite, Green Thumb and Arion resulting in increased sales of
Print Artist, Land Designer and the Master Cook series.
The provision for customer returns and price protection reduced sales
by $29.5 million in fiscal 1996 and $17.6 million in fiscal 1995, an increase of
68%. This increase in the provision for sales returns was disproportionate
relative to the 63% increase in net sales due to increased sales to wholesale
clubs and mass merchandisers. The Company has experienced higher rates of
product returns with these two distribution channels due to experimental
promotion efforts and higher levels of inventory required to support these new
classes of trade.
Other revenues include income from the Company's telephone hint line
and advertising in its INTERAction magazine. These revenues remained constant at
approximately $2.1 million.
OPERATING EXPENSES
Manufacturing costs, which include material costs and manufacturing
labor and overhead, increased $11.2 million, but decreased from 23% to 21% of
net sales over the prior fiscal year. This decrease was due primarily to
improvements in product procurement practices through such means as negotiated
prices for boxes and disks, the shift from disk-based to CD-based products, and
decreases in material costs for CDs. Decreases in material costs were the result
of an increased availability of CD-
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ROMs resulting in lower costs to the Company. CD costs decreased approximately
15% from fiscal 1995 and had the effect of decreasing manufacturing costs
approximately $0.5 million in fiscal 1996.
Amortization of software development costs decreased $8.8 million as
the result of a decrease in costs qualifying for capitalization under the
criteria set forth in SFAS No. 86, Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed ("SFAS 86"). A number of significant
changes in product development, including the use of more sophisticated
development tools, the development of serial titles, and development for the
Windows 95 operating system, have resulted in less cost meeting the definition
of technological feasibility and accordingly not eligible for capitalization
pursuant to SFAS 86.
Royalty costs increased $4.4 million, but remained constant at 8% of
net sales, due in part to the Company's efforts at standardizing its royalty
agreements. The Company pays royalties to independent product developers with
rates ranging from approximately 1% to 20% of gross revenue.
Selling, general and administrative expense, which includes sales,
marketing, technical support and administrative expense, increased $19.4
million, but remained constant at 33% of total revenues. The Company increased
sales and marketing expense by $12.0 million in order to promote its products.
After accounting for $2.3 million in merger and acquisition costs and an
additional $0.7 million in administrative expenses for the Company's joint
venture with Pioneer Electronic Corporation, general and administrative expenses
increased $4.4 million but decreased from 13% to 11% of total revenues. The
decrease in the growth rate of administrative expenses was largely attributable
to the substantial increase in revenues.
Research and development expense, which reflects total research and
development expenditures less capitalized software development costs, increased
$13.9 million, or 63%, from 22% to 23% of total revenues. After excluding
deferred software development costs of $5.0 million in fiscal 1995, development
costs actually increased only $8.9 million, or 33%. Of this increase,
approximately $0.9 million was attributable to the acquisitions of Arion and
Green Thumb. Prior year financial statements do not include information for
these companies since they were considered insignificant to the results of
operations and financial position of the Company. The remaining $8.0 million
increase was attributable to the increased number of products under development
as reflected in the increase in the number of new products released from 23 to
40.
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 $97.9 million for
fiscal year 1995 represented increases of 36% and 34%, respectively, over the
prior fiscal year. European net sales were $19.5 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 provision for customer returns and price protection reduced sales
by $17.6 million in fiscal 1995 and $11.3 million in fiscal 1994, an increase of
56%. This increase in the provision for sales returns was disproportionate
relative to the 36% increase in net sales due to increased sales to superstores
and wholesale clubs.
Other revenues include income from the Company's telephone hint line
and advertising. These revenues decreased from $2.4 million to $2.1 million.
OPERATING EXPENSES
Manufacturing costs, which include material costs and manufacturing
labor and overhead, increased $1.6 million, but decreased from 28% to 23% of net
sales over the prior fiscal year. This decrease was due primarily to increased
manufacturing efficiencies, the shift from disk-based to CD-based products, and
decreases in material costs, primarily disks and CDs. Increased manufacturing
efficiencies resulted from a decrease in the total amount spent on manufacturing
labor and overhead costs from $5.0 million, or 7% of net sales, in fiscal 1994,
to $3.9 million, or 4% of net sales, in fiscal 1995. These savings were achieved
through a restructuring of the Company's manufacturing operations and
implementation of various cost cutting measures. Decreases in material costs
were the result of an increased availability of CD-ROMs and disks resulting in
lower costs to the Company. CD costs decreased approximately 19% and disk costs
decreased approximately 23% from fiscal 1994 to fiscal 1995. These cost
reductions had the effect of decreasing manufacturing costs approximately $1.0
million in fiscal
Page 16
<PAGE> 17
1995 from fiscal 1994. In addition to the decrease in cost of disks and CDs, the
Company has reduced its overall material cost by shifting to CD-based products.
A single CD can hold significantly more information than a single disk.
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.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996, the Company had cash, cash equivalents and
marketable investment securities aggregating approximately $89 million, a
decrease of $12 million from March 31, 1995. The majority of this decrease was
attributable to an increase in accounts receivable of $31.9 million offset by an
increase in accounts payable and by net income. The increase in receivables was
due in part to a $13.4 million increase in revenues during the fourth quarter of
fiscal 1996 over the comparable prior year quarter and to a slowdown of domestic
customer receivable payments.
The Company's working capital requirements are seasonal and are
primarily for accounts receivable. In addition, the Company has a $10.0 million
line of credit available. There was no outstanding balance under this line at
March 31, 1996.
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 expected requirements for the
next several years.
Page 17
<PAGE> 18
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, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1996. 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 as of
March 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended March 31, 1996 in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Seattle, Washington
June 24, 1996
Page 18
<PAGE> 19
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND 1995
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
- ------
1996 1995
-------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 40,220 $ 50,186
Marketable investment securities ................................................ 48,741 50,573
Accounts receivable, net of allowances of $14,022 and $7,265........................ 43,677 12,984
Inventories ........................................................................ 8,054 4,903
Deferred income taxes .............................................................. 8,159 1,777
Other current assets (including $792 note receivable from related
parties at March 31, 1995) .................................................. 5,945 4,932
---------- ----------
Total Current Assets ..................................................... 154,796 125,355
PROPERTY, PLANT AND EQUIPMENT, net ................................................. 11,490 9,068
GOODWILL, net of accumulated amortization of $4,635 and $2,871...................... 9,785 6,498
DEFERRED INCOME TAXES .............................................................. 1,241 1,522
OTHER ASSETS ...................................................................... 1,585 2,911
---------- ----------
$ 178,897 $ 145,354
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 15,536 $ 6,127
Accrued compensation and related benefits ...................................... 7,012 4,118
Accrued incentive payments ..................................................... 538 1,562
Royalties payable (including $10 and $633 payable to a related party)............ 2,327 2,938
Deferred revenue ............................................................... 3,906 1,261
Accrued interest ................................................................ 33 1,160
Other accrued expenses (including $1,954 and $247 payable to related parties).... 7,268 5,028
---------- ----------
Total Current Liabilities .................................................. 36,620 22,194
ADVANCES UNDER PUBLISHING AGREEMENT AND
OTHER LIABILITIES .............................................................. 1,030 5,907
MINORITY INTEREST IN JOINT VENTURE ................................................. 1,233 ---
CONVERTIBLE DEBT, net of unamortized discount and issuance costs
of $586 and $1,066.............................................................. 23,389 34,634
COMMITMENTS AND CONTINGENCIES (Note 9) ........................................... --- ---
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; 20,518,871 and 18,726,519 shares issued and outstanding..... 93,018 70,052
Retained earnings ............................................................... 24,728 12,696
Net unrealized holding gains (losses)............................................ (67) 101
Cumulative translation adjustment .............................................. (705) 119
---------- ----------
116,974 82,968
Less common stock in treasury, 94,154 shares, at cost .......................... 349 349
---------- ----------
Total Stockholders' Equity ............................................... 116,625 82,619
---------- ----------
$ 178,897 $ 145,354
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 19
<PAGE> 20
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- -------
<S> <C> <C> <C>
REVENUES:
Net sales.............................................. $ 156,123 $ 95,821 $ 70,712
Other ................................................. 2,054 2,058 2,389
---------- ---------- ----------
158,177 97,879 73,101
---------- ---------- ----------
OPERATING EXPENSES:
Manufacturing costs ................................... 32,821 21,663 20,058
Amortization of software development costs ............ 865 9,689 8,379
Royalties (including $1,294, $819, and $256 earned
by related party)................................... 11,777 7,370 4,005
Selling, general and administrative ................... 52,135 32,777 25,685
Research and development .............................. 35,899 21,967 17,686
Purchased in-process research and development ......... --- --- 1,102
Amortization .......................................... 2,075 1,212 722
---------- ---------- ----------
135,572 94,678 77,637
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS .............................. 22,605 3,201 (4,536)
---------- ---------- ----------
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) ---
Contract termination and consulting fees .............. (2,302)
Interest income (including $12, $84 and $152
earned from related parties)........................ 5,022 3,713 1,331
Interest expense ...................................... (2,690) (4,306) (280)
---------- ---------- ----------
30 15,656 (4,015)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES .......................... 22,635 18,857 (8,551)
INCOME TAX PROVISION (BENEFIT) ............................. 7,680 5,865 (679)
CHANGE IN VALUATION ALLOWANCE .............................. (1,215) --- ---
---------- ---------- ----------
NET INCOME (LOSS) .......................................... $ 16,170 $ 12,992 $ (7,872)
========== ========== ==========
NET INCOME (LOSS) PER SHARE:
Primary ............................................... $ 0.77 $ 0.70 $ (0.46)
Fully diluted ......................................... 0.76 0.68 (0.46)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary ............................................... 21,007 18,513 17,143
Fully diluted ......................................... 23,009 22,216 17,143
</TABLE>
See Notes to Consolidated Financial Statements.
Page 20
<PAGE> 21
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Common Stock Net Total
and Paid-in Capital Retained Unrealized Cumulative Treasury Stock Stock-
------------------- Earnings Holding Translation -------------- holders'
Shares Amount (Deficit) Gains Adjustment Shares Amount Equity
------------ -------- ---------- ---------- ----------- ---------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, APRIL 1, 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
S Corporation 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
S Corporation distributions (27) (27)
Net unrealized holding gains
on marketable investment
securities available-for-sale 101 101
Foreign currency translation
adjustment 338 338
---------- ------- ------- --------- --------- ------- ------- --------
BALANCE, MARCH 31, 1995 18,726,519 70,052 12,696 101 119 94,154 (349) 82,619
Net income 16,170 16,170
Stock options exercised
and stock purchased under
the Employee Stock
Purchase Plan 624,611 3,758 3,758
Tax benefit of stock option
transactions 3,624 3,624
Conversion of convertible debt 837,498 11,379 11,379
S Corporation distributions (4,138) (4,138)
Stock issued for bonuses and
an amendment to an incentive
payment plan 182,285 4,107 4,107
Stock issued in business
acquisitions 147,958 98 98
Net unrealized holding gains
on marketable investment
securities available-for-sale (168) (168)
Foreign currency translation
adjustment (824) (824)
---------- ------- ------- --------- --------- ------- ------- ---------
BALANCE, MARCH 31, 1996 20,518,871 $93,018 $24,728 $ (67) $ (705) 94,154 $ (349) $ 116,625
========== ======= ======= ========= ========= ======= ======= =========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 21
<PAGE> 22
SIERRA ON-LINE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 16,170 $ 12,992 $ (7,872)
Reconciliation to net cash provided by (used for) operating activities:
Depreciation ....................................................... 4,187 3,298 3,085
Amortization of intangible assets and issuance costs ............... 2,763 11,153 9,102
Gain on sale of The ImagiNation Network ............................ --- (19,739) ---
Equity loss from The ImagiNation Network ........................... --- 1,990 5,066
Sierra Pioneer Joint Venture minority interest...................... 1,233 --- ---
Purchased in-process research
and development ......................................................... --- --- 1,102
Provision for doubtful accounts ................................... 1,205 829 650
Deferred income taxes ............................................. (2,476) (2,840) (1,394)
Other ............................................................. --- 1,880 (661)
Cash provided (used) by changes in assets and liabilities:
Accounts receivable ............................................... (32,370) (2,670) (5,020)
Inventories ....................................................... (3,151) 127 (898)
Other current assets .............................................. (1,013) 2,937 1,880
Software development costs ........................................ --- (5,037) (6,060)
Research and development acquired ................................. --- --- (2,452)
Other assets ...................................................... 461 (1,090) (225)
Accounts payable .................................................. 9,125 1,498 (219)
Accrued compensation and
related benefits ........................................................ 2,894 2,067 212
Royalties payable ................................................. (611) 1,583 570
Deferred revenue......................................................... 2,645 268 993
Accrued interest ................................................... (1,127) 1,160 ---
Other accrued expenses ............................................ 218 1,093 489
Advances under publishing
agreement and other liabilities.......................................... (4,877) 4,692 (14)
----------- ----------- -----------
Net cash provided by (used for) operating activities ............ (4,724) 16,191 (1,666)
INVESTING ACTIVITIES:
Proceeds from sale of The ImagiNation Network ........................ --- 19,739 ---
Proceeds from matured marketable investment securities................ 93,556 40,319 67,865
Purchases of marketable investment
securities ............................................................. (91,724) (69,880) (65,550)
Net purchases of property, plant and
equipment .............................................................. (6,609) (4,901) (3,628)
Loan to The ImagiNation Network ......................................... --- (2,895) ---
Payment for purchase of subsidiaries, net of cash acquired
and research and development ....................................... (1,987) (1,620) (2,797)
Net repayment of advances to The ImagiNation Network ................. --- --- 1,646
----------- ----------- -----------
Net cash used by investing activities ............................. (6,764) (19,238) (2,464)
FINANCING ACTIVITIES:
Net proceeds from convertible debt offering .......................... --- 48,250 ---
Proceeds from exercise of options and warrants ...................... 3,758 2,131 3,255
S Corporation distributions .......................................... (2,184) (27) (295)
Other ................................................................ (312) (780) 40
----------- ----------- -----------
Net cash provided by (used for) financing activities .............. 1,262 49,574 3,000
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................................... (10,226) 46,527 (1,130)
EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................ 260 96 ---
CASH AND CASH EQUIVALENTS:
BEGINNING OF YEAR................................................... 50,186 3,563 4,693
----------- ----------- -----------
END OF YEAR ....................................................... $ 40,220 $ 50,186 $ 3,563
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
Page 22
<PAGE> 23
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>
1996 1995 1994
------- ------ ----
<S> <C> <C> <C>
Cash paid (received) during the year for:
Income taxes, net ...................... $ 9,584 $ 7,181 $ (739)
Interest ............................... $ 3,817 $ 4,578 $ ---
</TABLE>
During fiscal 1996 and 1995, the Company converted $11,725,000 and
$14,300,000 of convertible debt into 837,500 and 1,021,421 shares of
common stock, respectively.
In fiscal 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>
See Notes to Consolidated Financial Statements.
Page 23
<PAGE> 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
NOTE 1: BASIS OF PRESENTATION AND ACCOUNTING POLICIES
PENDING SALE OF THE COMPANY TO CUC INTERNATIONAL, INC.
On February 17, 1996, the Board of Directors approved the sale of the Company
to CUC International Inc. (CUC). Under the terms of the merger agreement, the
shareholders of the Company will receive 1.225 shares of CUC common stock for
each share of the Company's common stock. The sale is subject to shareholder
approval.
Consulting fees related to the merger have been expensed as incurred and
approximate $0.6 million. Upon shareholder approval of the merger, the
Company will be obligated to pay approximately $7.7 million in additional
consulting fees.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Sierra On-Line,
Inc. (Sierra), a Delaware corporation, its wholly-owned subsidiaries, and its
51% interest in a corporate joint venture (collectively referred to as the
Company). Significant subsidiaries include Sierra On-Line Limited (Sierra
U.K.), Dynamix, Inc. (Dynamix), Bright Star Technology, Inc. (Bright Star),
Coktel Vision, S.A. (Coktel), Software Inspiration, Ltd. (Inspiration), PXL
Acquisition Corp. (Pixellite), Papyrus Design Group, Inc. (Papyrus), and
Sierra/Pioneer Joint Venture (Pioneer). 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 from July 1993 to December
1994 when the Company sold its remaining interest in INN to AT&T Corp.
All significant intercompany balances and transactions are eliminated.
NATURE OF OPERATIONS
The Company designs, develops, publishes, markets and distributes interactive
entertainment and education software for personal computers, CD-ROM-based PC
systems and selected emerging platforms. Using its design and development
capabilities, the Company creates branded product series for existing and
emerging hardware platforms. The Company's products are distributed in North
America, Europe, and Asia. Sales are generated through a domestic field sales
organization and electronic superstores, software specialty stores, mass
merchants, direct mail, and bundling arrangements. The Company performs its
own disk duplicating and packaging for diskette-based products at its
Oakhurst, California and Paris, France facilities. The Company does not
internally replicate CD-ROM-based products but rather subcontracts that work
to several third parties.
The Company is subject to certain business risks which could affect future
operations and financial performance. These risks include changing computing
environments, rapid technological change, development of new products,
concentrations in manufacturing facilities, competitive pricing, and reliance
on distribution channels.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect amounts reported in the consolidated financial statements.
Changes in these estimates and assumptions may have a material impact on the
financial statements. The Company has used estimates in determining certain
provisions including sales returns, uncollectible trade accounts receivable,
useful lives for fixed assets and intangible assets, and tax liabilities.
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 corporate bonds, U.S. Treasury
notes, and commercial paper. All securities are classified as
available-for-sale and 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.
Page 24
<PAGE> 25
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 two 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 basis over the
estimated useful lives of the products (six 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 discounted 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. Revenue from royalty and
service arrangements is insignificant.
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.
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 of
three months. Advertising expense for fiscal 1996, 1995 and 1994 was
$7,530,000, $8,750,000 and $7,850,000, respectively. Amounts capitalized at
March 31, 1996 and 1995 approximated $561,000 and $598,000, respectively.
Page 25
<PAGE> 26
INCOME TAXES (BENEFIT)
The Company computes income taxes using an 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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of
common shares outstanding during the period 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.
As a result of applying the if-converted method, net income for the purposes
of computing fully diluted net income per share amounts has been adjusted for
the assumed decrease in interest expense, net of income taxes, as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Net income.................................. $ 16,170 $ 12,992
Adjustment.................................. 1,205 2,115
--------- ---------
$ 17,375 $ 15,107
========= =========
</TABLE>
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 1994 and 1995 balances to
conform with the 1996 presentation.
Page 26
<PAGE> 27
NOTE 2: BUSINESS COMBINATIONS
PIXELLITE, INSPIRATION AND PAPYRUS
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. On
November 30, 1995 the Company merged with Papyrus, developers of NASCAR
Racing and Indy Car Racing, in exchange for 1,169,404 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 historical financial statements for the periods
prior to the mergers are restated as though the companies had been combined.
The following summarizes amounts previously reported by Sierra prior to the
transaction for the years ended March 31, 1995 and 1994 (in thousands, except
per share data):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
REVENUES:
Sierra............................................................ $ 83,440 $ 62,745
Pixellite, Inspiration and Papyrus .............................. 14,439 10,356
---------- ----------
Combined ......................................................... $ 97,879 $ 73,101
========== ==========
NET INCOME (LOSS)
Sierra............................................................ $ 11,938 $ (8,676)
Pixellite, Inspiration and Papyrus ............................... 1,054 804
---------- ----------
Combined ......................................................... $ 12,992 $ (7,872)
========== ==========
PRIMARY NET INCOME (LOSS) PER SHARE:
Sierra ........................................................... $ 0.74 $ (0.59)
Pixellite, Inspiration and Papyrus ............................... (0.04) 0.13
---------- ----------
Combined ......................................................... $ 0.70 $ (0.46)
========== ==========
FULLY DILUTED NET INCOME (LOSS) PER SHARE:
Sierra ........................................................... $ 0.71 $ (0.59)
Pixellite, Inspiration and Papyrus................................ (0.03) 0.13
---------- ---------
Combined ......................................................... $ 0.68 $ (0.46)
========== =========
</TABLE>
GREEN THUMB AND ARION
The Company also merged with Green Thumb in July 1995 and with Arion in
September 1995 in exchange for 87,762 and 60,196 shares of Sierra Common
Stock, respectively. 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 Pixellite, Inspiration, Papyrus, Green
Thumb and Arion mergers have been expensed as required under the
pooling-of-interests accounting method. Such fees and expenses approximated
$2.3 million and include legal, accounting and finders fees.
COKTEL
On October 29, 1993, the Company acquired Coktel Vision S.A. ("Coktel"), a
French 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 have been included in the Company's
consolidated financial statements since 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.
Goodwill is being amortized over an estimated useful life of seven years on a
straight-line basis.
Contingent purchase payments were due under an incentive payment plan. During
fiscal years 1995 and 1994, approximately $1,562,000 and $1,313,000 was
earned and paid under this plan. At March 31, 1995, incentive payments due
approximated $1,562,000. 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 amendment, the
Company recorded goodwill of approximately $4.1 million which is being
amortized over its remaining useful life of approximately five years on a
straight-line basis. The Company could be obligated
Page 27
<PAGE> 28
to make additional payments as provided in the agreement, however, management
believes that the likelihood of additional payments is remote.
NOTE 3: 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>
1996:
U.S. Government obligations $ 15,471 $ 15,481 $ --- $ 10
Corporate debt securities 27,438 27,521 24 107
Commercial paper 5,832 5,832 --- ---
----------- ----------- ----------- -----------
$ 48,741 $ 48,834 $ 24 $ 117
=========== =========== =========== ===========
1995:
U.S. Government obligations $ 10,394 $ 10,357 $ 39 $ 2
Corporate debt securities 23,050 22,996 80 26
Commercial paper 17,129 17,067 64 2
----------- ----------- ----------- -----------
$ 50,573 $ 50,420 $ 183 $ 30
=========== =========== =========== ===========
</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,
1996 will mature within one year.
NOTE 4: INVENTORIES
Inventories consist of the following at March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Raw materials ............................. $ 3,207 $ 2,841
Work in progress .......................... --- 65
Finished goods ............................ 4,847 1,997
--------- ---------
$ 8,054 $ 4,903
========= =========
</TABLE>
NOTE 5: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at March 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land ...................................... $ 142 $ 203
Buildings and improvements ................ 3,858 3,591
Computers and equipment ................... 20,669 16,703
Furniture and fixtures .................... 1,936 1,312
---------- ----------
26,605 21,809
Less accumulated depreciation and
amortization.............................. (15,115) (12,741)
---------- ----------
$ 11,490 $ 9,068
========== ==========
</TABLE>
Page 28
<PAGE> 29
NOTE 6: FINANCING ARRANGEMENTS
LINE OF CREDIT
In fiscal 1996, 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 150 basis points, at the Company'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, 1996.
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. 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 are being amortized on a straight-line
basis over seven years. The fair value of these notes at March 31, 1996 was
$58.3 million as determined by the Private Offerings, Resales and Trading
through Automated Linkages Market.
During fiscal 1996 and 1995 the Company paid $0.9 million and $1.0 million,
included in interest expense, to induce conversion of $11,725,000 and
$14,300,000 of convertible debt into 837,500 and 1,021,421 shares of common
stock.
Page 29
<PAGE> 30
NOTE 7: 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>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory rate .............................................. 35.0% 35.0% (35.0)%
State income taxes, net of federal income tax benefit ....... 3.0 3.0 ---
Utilization of net operating losses ......................... --- (3.9) ---
Non-consolidated losses ..................................... --- (4.5) 18.3
Foreign subsidiaries ........................................ --- (2.2) 3.4
Non-deductible expenses ..................................... 8.9 4.5 2.1
Subchapter S Corporation earnings ........................... (5.5) (1.3) (0.6)
Reduction in valuation allowance ............................ (14.3) --- ---
Other ....................................................... 1.4 0.5 3.9
----- ---- -----
Effective rate ............................................. 28.5% 31.1% (7.9)%
===== ==== =====
</TABLE>
The provision for income taxes (benefit) consists of the following for the years
ended March 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal .................................................. $ 6,095 $ 7,772 $ 540
State .................................................... 516 922 32
Foreign .................................................. 1,207 (55) 143
---------- ---------- ----------
7,818 8,639 715
Deferred:
Federal .................................................. (1,179) (2,298) (1,003)
State .................................................... (183) (268) (391)
Foreign ................................................... --- (208) ---
---------- ---------- ----------
(1,362) (2,774) (1,394)
---------- ---------- ----------
$ 6,456 $ 5,865 $ (679)
========== ========== ==========
</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>
1996 1995
---------- ---------
<S> <C> <C>
Deferred Assets:
Inventory overhead allocation ...................... $ (327) $ (398)
Accrued expenses ................................... (7,012) (5,638)
Tax credits ......................................... --- (77)
Stock Option Benefit ................................ (1,509) ---
Net operating losses ................................ --- (334)
Other ............................................... (651) (187)
--------- ---------
Subtotal ........................................... (9,499) (6,634)
Valuation allowance.................................. --- 3,230
--------- ---------
(9,499) (3,404)
Deferred Liabilities:
Software development costs ......................... 99 105
--------- ---------
$ (9,400) $ (3,299)
========= =========
</TABLE>
Page 30
<PAGE> 31
NOTE 8: STOCK OPTION AND STOCK PURCHASE PLANS
STOCK OPTION PLANS
The Company has reserved 6,170,000 shares of common stock for issuance under
its 1995 Stock Option and Award Plan and the 1987 Stock Option Plan for
officers, employees, directors, vendors, consultants and independent
contractors. Options granted under these plans 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. A summary of stock option transactions under all
plans follows:
<TABLE>
<CAPTION>
Range of Price
Shares Per Share
----------- -----------------
<S> <C> <C>
Options outstanding, April 1, 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................. 1,877,132 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
Granted ........................................ 754,613 0.80 - 41.75
Exercised ...................................... (616,592) 0.09 - 17.69
Canceled ....................................... (229,161) 4.92 - 35.13
--------- -----------------
Options outstanding, March 31, 1996 ................ 2,199,920 $0.09 - $41.75
========= =================
</TABLE>
Of the options outstanding at March 31, 1996, 501,888 options are currently
exercisable at prices ranging from $0.09 to $22.00 per share, and 1,770,873
options remain available for future grants.
EMPLOYEE STOCK PURCHASE PLAN
The Company has reserved 200,000 shares of common stock for issuance under
the Employee Stock Purchase Plan for officers and full-time employees with
six months of service. Under the Plan, stock may be purchased at the
completion of the semi-annual purchase periods at a price equal to 85% of the
lowest fair market value of either the first or last day of the purchase
period. During fiscal 1996, 8,019 shares of common stock was purchased under
the Plan. The Board of Directors has approved the termination of the Plan
effective June 30, 1996, subject to completion of the merger with CUC
International Inc.
NEW ACCOUNTING STANDARD
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards, Accounting for Stock-Based Compensation (SFAS
123), which will be effective for the Company beginning April 1, 1996. SFAS
123 requires expanded disclosures of stock-based compensation arrangements
with employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instrument awarded. Companies
are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to
its stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share.
Page 31
<PAGE> 32
NOTE 9: 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, 1996, 1995 and 1994 were $2,774,000, $2,062,000, and $1,356,000,
respectively.
Future minimum annual lease payments on these obligations are as follows for
the years ended March 31 (in thousands):
<TABLE>
<CAPTION>
Payments
--------
<S> <C>
1997 .................................... $ 2,852
1998 .................................... 2,672
1999 .................................... 2,190
2000 .................................... 2,071
2001 .................................... 1,537
Thereafter .............................. 1,192
----------
Total ................................ $ 12,514
==========
</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.
NOTE 10: 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 years ended March 31, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------- -------
<S> <C> <C>
Research and development expense $ 39,685 $23,552
Non-refundable royalty advances (3,786) (1,585)
--------- -------
$ 35,899 $21,967
========= =======
</TABLE>
Page 32
<PAGE> 33
NOTE 11: 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 $1,294,000, $819,000, and $256,000 during the years ended March
31, 1996, 1995 and 1994, respectively. Royalties payable to the director at
March 31, 1996 and 1995 were $10,000 and $633,000, 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.
The Company held certain notes receivable from officers of a subsidiary. Amounts
receivable from those officers at March 31, 1995 was $792,000. Interest earned
under these agreements was $12,000, $84,000, and $152,000 for the years ended
March 31, 1996, 1995 and 1994, respectively. The notes were paid in full in May
1995.
During fiscal years 1996, 1995 and 1994, the Company has reported distributions
which represent dividends for undistributed S Corporation earnings to the
shareholders of Pixellite and Papyrus. At March 31, 1996 and 1995, notes payable
associated with these dividends approximated $2.0 million and $247,000,
respectively.
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 ELIMINATIONS CONSOLIDATED
------ ------ ------------ ------------
<S> <C> <C> <C> <C>
1996
Sales to unaffiliated customers $ 119,014 $ 37,109 $ --- $ 156,123
=========== =========== =========== ===========
Income from operations $ 17,914 $ 4,691 $ --- $ 22,605
=========== =========== =========== ===========
Identifiable assets $ 161,788 $ 17,109 $ --- $ 178,897
=========== =========== =========== ===========
1995
Sales to unaffiliated customers $ 76,305 $ 19,516 $ --- $ 95,821
Intercompany transfers 880 --- (880) ---
----------- ----------- ----------- -----------
$ 77,185 $ 19,516 $ (880) $ 95,821
=========== =========== =========== ===========
Income from operations $ 1,291 $ 1,910 $ --- $ 3,201
=========== =========== =========== ===========
Identifiable assets $ 137,116 $ 8,238 $ --- $ 145,354
=========== =========== =========== ===========
1994
Sales to unaffiliated customers $ 61,606 $ 9,106 $ --- $ 70,712
Intercompany transfers 3,901 720 (4,621) ---
----------- ----------- ----------- -----------
$ 65,507 $ 9,826 $ (4,621) $ 70,712
=========== =========== =========== ===========
Income (loss) from operations $ (4,962) $ 514 $ (88) $ (4,536)
=========== =========== =========== ===========
Identifiable assets $ 63,003 $ 5,902 $ --- $ 68,905
=========== =========== =========== ===========
</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, 1996, 1995
and 1994, the majority of the Company's sales in Europe were conducted by
Coktel, a French corporation, and Papyrus and Sierra U.K., both U.K.
corporations.
Page 33
<PAGE> 34
NOTE 13: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Summarized quarterly financial information for fiscal 1996 and fiscal 1995 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, 1995 $ 24,872 $ 852 $ 0.04 $ 0.04
September 30, 1995 34,522 3,609 0.17 0.15
December 31, 1995 63,220 12,284 0.58 0.55
March 31, 1996 35,563 (575) (0.03) (0.03)
---------- ----------
$ 158,177 $ 16,170
========== ==========
Quarter ended:
June 30, 1994 $ 13,550 $ (4,304) $ (0.25) $ (0.25)
September 30, 1994 20,966 (1,220) (0.07) (0.07)
December 31, 1994(1) 41,213 17,796 0.97 0.83
March 31, 1995 22,150 720 0.05 0.05
---------- ----------
$ 97,879 $ 12,992
========== ==========
</TABLE>
- ------------
(1) Includes $19,739,000 gain on sale of the Company's 58% interest in The
ImagiNation Network to AT&T.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable
Page 34
<PAGE> 35
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Company's directors and executive officers is
incorporated by reference from the Company's definitive proxy statement for its
1996 Annual Meeting of Stockholders (the "1996 Proxy Statement") under the
caption "Proposal No. 1 - Election of Directors."
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference from
the Company's 1996 Proxy Statement under the caption "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information known to Sierra, as of June
17, 1996, with respect to the beneficial ownership of Sierra's Common Stock as
of that date by (i) each stockholder known by Sierra to be a beneficial owner of
more than 5% of Sierra's Common Stock, (ii) each director and nominee, (iii)
each executive officer, and (iv) all current executive officers and
directors as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER (1) BENEFICIAL OWNERSHIP OF CLASS
- ----------------------- -------------------- --------
<S> <C> <C>
Kenneth A. and Roberta L. Williams (2) 1,803,918 8.64%
3380 146th Place SE, Suite 300, Bellevue, Washington 98007
The Equitable Companies Incorporated (3) 1,677,100 8.04%
787 Seventh Avenue, New York, New York 10019
FMR Corp. (4) 997,010 4.78%
82 Devonshire Street, Boston, Massachusetts 02109
Fidelity Management & Research Company (4) 739,210 3.54%
82 Devonshire Street, Boston, Massachusetts 02109
Roland Oskian (2) 100,104 *
Thomas L. Beckmen (2) 73,120 *
David C. Hodgson (2)(5) 52,620 *
Walter A. Forbes (2) 39,620 *
Michael A. Brochu (2) 21,549 *
Dennis Cloutier (2) 18,210 *
Jarold W. Bowerman (2) 7,000 *
Michael G. Berolzheimer (2) 6,620 *
Richard K. Thumann (2) 2,313 *
Marvin H. Green, Jr. (2) 3,620 *
Executive officers and directors as a group (12 persons) (2) 2,128,694 10.2%
</TABLE>
- ------------
* less than 1%
(1) Except as otherwise noted, the Company believes that each director,
executive officer and 5% or greater stockholder has sole voting and sole
investment power, subject to community property laws where applicable, with
respect to all shares shown in the table as beneficially owned by such
person. Each beneficial owner's percentage ownership is determined by
assuming that options beneficially owned by such person (but not those
owned by any other person) that are exercisable within 60 days have been
exercised. The number of shares outstanding at the close of business on
June 17, 1996 was 20,869,369.
Page 35
<PAGE> 36
(2) Includes, as indicated in note (1) above, shares subject to options
exercisable within 60 days after June 17, 1996 in the following amounts:
23,200 shares for Mr. and Mrs. Williams; 8,000 shares for Mr. Oskian;
3,600 shares for Mr. Beckmen; 3,600 shares for Mr. Hodgson; 33,600 shares
for Mr. Forbes; 14,000 shares for Mr. Brochu; 18,000 shares for Mr.
Cloutier; 7,000 for Mr. Bowerman; 6,600 for Mr. Berolzheimer; 2,100 for
Mr. Thumann; and 3,600 shares for Mr. Green.
(3) Based on the Schedule 13G filed with the SEC by AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle, Alpha Assurances I.A.R.D. Mutuelle,
Alpha Assurances Vie Mutuelle and Uni Europe Assurance Mutuelle
(collectively, the "Mutuelles AXA"), as a group, AXA, The Equitable
Companies Incorporated and their subsidiaries pursuant to a joint filing
agreement and dated February 9, 1996. The Equitable Companies Incorporated
are considered to beneficially own 1,677,100 shares, or 8.6% of shares
outstanding of the Company's Common Stock, to which the Mutuelles AXA and
AXA disclaim beneficial ownership.
(4) Based on the Schedule 13D/A filed by FMR with the SEC and dated June 3,
1996, FMR Corp. ("FMR") beneficially owns (1) through its wholly-owned
subsidiary, Fidelity Management & Research Company ("Fidelity"), as adviser
to certain investment companies, 739,210 shares of the Company's Common
Stock, as to which FMR, through its control of Fidelity, has the power to
dispose of the shares but not voting power, and (b) through FMTC, the
managing agents for the Accounts, 257,800 shares of the Company's Common
Stock, as to which FMR has voting and dispositive power.
(5) Includes 4,000 shares owned beneficially by Mr. Hodgson's children.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions is
incorporated by reference from the Company's 1996 Proxy Statement under the
caption "Certain Transactions."
Page 36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1 Financial Statements
The following consolidated Financial Statements are filed in Part II,
Item 8 of this Form 10-K:
- Independent Auditors' Report
- Consolidated Financial Statements
Balance Sheets as of March 31, 1996 and 1995
Statements of Operations for the years ended March 31,
1996, 1995 and 1994 Statements of Stockholders' Equity for
the years ended March 31, 1996, 1995 and 1994 Statements
of Cash Flows for the years ended March 31, 1996, 1995 and
1994 Notes to Financial Statements
(a)2 Financial Statement Schedules
- The following financial statement schedule is included in
Item 14(d) below.
Schedule II - Valuation and Qualifying Reserves
All other schedules are omitted because they are not required or the
required information is shown in the Consolidated Financial Statements
or notes thereto.
(a)3 Exhibits
2.01 Agreement and Plan of Merger dated as of May 31, 1995 among
the Registrant, Pixel Acquisition Corp., Pixellite Group,
Pixellite Software, Ken Grant, Inc., Ken Grant, Sherrill
Grant, Martin Kahn, Inc., Martin Kahn, David Balsam, Inc.,
and David Balsam. (12)
2.02 Share Exchange Agreement dated as of June 20, 1995 among the
Registrant, Software Inspiration, Ltd., and the Shareholders
of Software Inspiration, Ltd. (12)
2.03 Agreement and Plan of Merger dated as of July 17, 1995 among
the Registrant, Green Thumb Acquisition Corp., Green Thumb
Software, Inc., and the Shareholders of Green Thumb
Software, Inc. (12)
2.04 Agreement and Plan of Merger dated as of September 12, 1995
among the Registrant, Arion Acquisition Corp., Arion
Software, Inc. and the Shareholders of Arion Software, Inc.
(12)
2.05 Agreement and Plan of Merger dated as of November 30, 1995
among the Registrant, PDG Acquisition Corp., Papyrus Design
Group, Inc. and the Shareholders of Papyrus Design Group,
Inc. (9)
2.06 Amended and Restated Agreement and Plan of Merger dated as
of February 19, 1996 among the Registrant, Larry Acquisition
Corp, and CUC International, Inc. (11)
2.07 Agreement and Plan of Merger dated as of April 12, 1996
among the Registrant, Birdie Acquisition Corp., Headgate,
Inc., and the Shareholders of Headgate, Inc. (12)
3.01 Registrant's Restated Certificate of Incorporation as filed
with the Secretary of State of the State of Delaware on
March 3, 1995. (7)
3.02 Registrant's Bylaws. (4)
4.01 Indenture dated April 15, 1994 between the Registrant and
The First National Bank of Boston, as Trustee. (5)
Page 37
<PAGE> 38
10.01 Registrant's 1987 Stock Option Plan as amended through
August 26, 1993. (6)
10.02 Registrant's 1995 Stock Option and Award Plan. (7)
10.03 Registrant's 1995 Employee Stock Purchase Plan. (7)
10.04 Key Man Renewable Term Life Insurance Policy on
Kenneth A. Williams with Delaware American Life Insurance
Policy. (1)
10.05 The Old Line Life Insurance Policy on the Life of
Roberta L. Williams. (2)
10.06 Personal Services and Assignment Agreement between the
Registrant and Roberta L. Williams dated October 1, 1989
for King's Quest V. (3)
10.07 Form of Indemnity Agreement between the Registrant and
each of its directors. (3)
10.08 Product Development Agreement between the Registrant and
Roberta L. Williams dated July 19, 1991 for King's Quest VI.
(3)
10.09 Product Design Agreement between the Registrant and Al Lowe
Associates, Inc. dated November 1, 1992 for Leisure Suit
Larry 6, Freddy Pharkas: Frontier Pharmacist and other
products. (4)
10.10 Lease Agreement between the Registrant and Lincoln
Executive Center Bellevue III Limited Partnership dated
October 7, 1993. (6)
10.11 Amendments to Lease Agreement between the Registrant
and Lincoln Executive Center Bellevue III Limited
Partnership. (7)
10.12 Product Design Agreement between Roberta L. Williams and
the Registrant dated July 5, 1994 for Phantasmagoria, King's
Quest VII, and King's Quest Anthology. (7)
10.13 Addendum to 1994 Product Design Agreement between the
Registrant and Roberta L. Williams. (7)
10.14 Publishing Agreement dated November 16, 1994 between the
Registrant and AT&T Corp. (8)
10.15 Limited Liability Company Agreement of Collier Sierra
L.L.C. dated October 31, 1995. (10)
10.16 Amendment to Acquisition Agreement between the Registrant
and Roland Oskian, Arnaud Delrue and Manuelle
Chapoullie-Mauger. (10)
10.17 Joint Venture Agreement between the Registrant and Pioneer
Electronic Corporation dated July 12, 1995. (12)
11.01 Statement re Computation of Per Share Earnings. (12)
21.01 Subsidiaries of the Registrant. (12)
23.01 Consent of Deloitte & Touche LLP. (12)
24.01 Power of Attorney (see page 41). (12)
----------
(1) Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-1 (No.
33-23904) filed on August 22, 1988.
(2) Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1991.
(3) Incorporated by reference to exhibit filed with the
Registrant's Registration Statement on Form S-2 (No.
33-45411) filed on March 16, 1992.
(4) Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended
March 31, 1993.
Page 38
<PAGE> 39
(5) Incorporated by reference to exhibit filed with the
Registrant's Current Report on Form 8-K filed April 19,
1994.
(6) Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K. for the year ended
March 31, 1994.
(7) Incorporated by reference to exhibit filed with the
Registrant's Annual Report on Form 10-K. for the year ended
March 31, 1995.
(8) Incorporated by reference to exhibit filed with the
Registrant's Amended Annual Report on Form 10-K/A filed
August 17, 1995.
(9) Incorporated by reference to exhibit filed with the
Registrant's Current Report on Form 8-K filed December 6,
1995.
(10) Incorporated by reference to exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1995.
(11) Incorporated by reference to exhibit filed with the
Registrant's Current Report on Form 8-K filed on March 1,
1996.
(12) Filed herewith as exhibits to this Annual Report on Form 10-K.
(b) Reports on Form 8-K
During the quarter ended March 31, 1996, the Registrant filed on March 1, 1996 a
Current Report on Form 8-K dated February 19, 1996.
Page 39
<PAGE> 40
SIERRA ON-LINE, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING RESERVES
YEARS ENDED MARCH 31, 1996, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance
beginning of costs and at end
Description period expenses Deductions of period
----------- ------ -------- ---------- ---------
1996
----
<S> <C> <C> <C> <C>
Reserve for sales returns and
allowances ................................. $ 5,835 $ 29,473 $ 23,023 (1) $ 12,285
Reserve for doubtful
accounts ................................... 1,430 1,205 898 (2) 1,737
----------- ----------- ----------- -----------
$ 7,265 $ 30,678 $ 23,921 $ 14,022
=========== =========== =========== ===========
1995
----
Reserve for sales returns and
allowances ................................. $ 2,902 $ 17,621 $ 14,688 (1) $ 5,835
Reserve for doubtful
accounts ................................... 1,306 829 705 (2) 1,430
----------- ----------- ----------- -----------
$ 4,208 $ 18,450 $ 15,393 $ 7,265
=========== =========== =========== ===========
1994
----
Reserve for sales returns and
allowances ................................. $ 2,541 $ 11,338 $ 10,977 (1) $ 2,902
Reserve for doubtful
accounts ................................... 1,028 817 539 (2) 1,306
----------- ----------- ----------- -----------
$ 3,569 $ 12,155 $ 11,516 $ 4,208
=========== =========== =========== ===========
</TABLE>
- -----------------
(1) Represents products returned primarily because of stock balancing by
customer, defective items, as well as special allowances.
(2) Represents write-off of accounts deemed to be uncollectible.
Page 40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIERRA ON-LINE, INC.
By: /s/ Kenneth A. Williams Date: June 28, 1996
- -------------------------------------------- -------------------
Kenneth A. Williams, Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints Kenneth A. Williams, and Michael A. Brochu, and
each of them, his or her true and lawful attorneys-in-fact and agents, with full
power of substitution, for him or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Form 10-K, and
to file the same, with all exhibits thereto and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or his or her substitute
or substitutes, may lawfully do or cause to be done or by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
- ---------- ----- ----
<S> <C> <C>
/s/ Kenneth A. Williams Chairman of the Board and June 28, 1996
- -------------------------------------------- Chief Executive Officer ---------------
Kenneth A. Williams (Principal Executive Officer)
/s/ Michael A. Brochu President and June 28, 1996
- -------------------------------------------- Chief Operating Officer ---------------
Michael A. Brochu (Principal Financial Officer)
/s/ Fred Schapelhouman Chief Accounting Officer June 28, 1996
- -------------------------------------------- (Principal Accounting Officer) ---------------
Fred Schapelhouman
/s/ Thomas L. Beckmen Director June 28, 1996
- -------------------------------------------- ---------------
Thomas L. Beckmen
/s/ Michael G. Berolzheimer Director June 28, 1996
- -------------------------------------------- ---------------
Michael G. Berolzheimer
/s/ Walter A. Forbes Director June 28, 1996
- -------------------------------------------- ---------------
Walter A. Forbes
/s/ Marvin H. Green, Jr. Director June 28, 1996
- -------------------------------------------- ---------------
Marvin H. Green, Jr.
/s/ David C. Hodgson Director June 28, 1996
- -------------------------------------------- ---------------
David C. Hodgson
/s/ Roberta L. Williams Director June 28, 1996
- -------------------------------------------- ---------------
Roberta L. Williams
</TABLE>
Page 41
<PAGE> 42
SIERRA ON-LINE, INC., AND SUBSIDIARIES
LIST OF EXHIBITS FILED WITH THIS REPORT
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C>
2.01 Agreement and Plan of Merger dated as of May 31, 1995 among the Registrant,
Pixel Acquisition Corp., Pixellite Group, Pixellite Software, Ken Grant, Inc.,
Ken Grant, Sherrill Grant, Martin Kahn, Inc., Martin Kahn, David Balsam, Inc.,
and David Balsam.
2.02 Share Exchange Agreement dated as of June 20, 1995 among the Registrant,
Software Inspiration, Ltd., and the Shareholders of Software Inspiration, Ltd.
2.03 Agreement and Plan of Merger dated as of July 17, 1995 among the Registrant,
Green Thumb Acquisition Corp., Green Thumb Software, Inc.,
and the Shareholders of Green Thumb Software, Inc.
2.04 Agreement and Plan of Merger dated as of September 12, 1995 among the Registrant,
Arion Acquisition Corp., Arion Software, Inc. and the Shareholders of Arion
Software, Inc.
2.07 Agreement and Plan of Merger dated as of April 12, 1996
among the Registrant, Birdie Acquisition Corp., Headgate,
Inc., and the Shareholders of Headgate, Inc.
10.17 Joint Venture Agreement between the Registrant and Pioneer Electronic Corporation
dated July 12, 1995
11.01 Statement re Computation of Per Share Earnings.
21.01 Subsidiaries of the Registrant.
23.01 Consent of Deloitte & Touche LLP.
24.01 Power of Attorney.
</TABLE>
Page 42
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA ON-LINE, INC.,
PIXEL ACQUISITION CORP.
AND
PIXELLITE GROUP
PIXELLITE SOFTWARE
KEN GRANT, INC.
KEN GRANT
SHERRILL GRANT
MARTIN KAHN, INC.
MARTIN KAHN
DAVID BALSAM, INC.
DAVID BALSAM
MAY 31, 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 Incorporation of the Surviving Corporation .......................... 2
1.5 Bylaws of the Surviving Corporation ............................................. 2
1.6 Conversion of Shares ............................................................ 3
1.6.1 Exchange Ratios ...................................................... 3
1.6.2 Special Definitions .................................................. 3
1.6.3 Exchange of Certificates ............................................. 4
1.6.4 No Fractional Shares ................................................. 4
1.6.5 No Further Transfers ................................................. 4
1.7 Pooling Restrictions on Transfer of the Securities .............................. 5
1.8 Tax Treatment ................................................................... 5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS, THE
PARTNERSHIPS AND THE SHAREHOLDERS ............................................... 5
2.1 Title and Other Shareholder Matters ............................................. 5
2.2 Organization .................................................................... 6
2.3 Enforceability .................................................................. 7
2.4 Capitalization .................................................................. 7
2.5 Subsidiaries and Affiliates ..................................................... 8
2.6 No Approvals or Notices Required; No Conflicts With Instruments ................. 8
2.7 Financial Statements ............................................................ 9
2.8 Absence of Certain Changes or Events ............................................ 10
2.9 Taxes ........................................................................... 12
2.10 Property ........................................................................ 14
2.11 Contracts ....................................................................... 14
2.12 Customers and Suppliers ......................................................... 16
2.13 Orders, Commitments and Returns ................................................. 16
</TABLE>
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page i
<PAGE> 3
<TABLE>
<S> <C>
2.14 Claims and Legal Proceedings .................................................... 16
2.15 Labor Matters ................................................................... 17
2.16 Employee Benefit Plans .......................................................... 17
2.17 Intellectual Property ........................................................... 18
2.18 Accounts Receivable ............................................................. 21
2.19 Inventory ....................................................................... 21
2.20 Books and Records ............................................................... 22
2.21 Licenses, Permits, Authorizations, etc. ......................................... 22
2.22 Compliance With Laws ............................................................ 22
2.23 Brokers or Finders .............................................................. 24
2.24 Absence of Questionable Payments ................................................ 24
2.25 Personnel ....................................................................... 24
2.26 Bank Accounts ................................................................... 25
2.27 Insider Interests ............................................................... 25
2.28 Securities Act Matters .......................................................... 26
2.29 Pooling Matters ................................................................. 28
2.30 Full Disclosure ................................................................. 28
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF SIERRA .................................. 29
3.1 Organization .................................................................... 29
3.2 Enforceability .................................................................. 29
3.3 No Approvals or Notices Required; No Conflicts With Instruments ................. 29
3.4 Capitalization .................................................................. 30
3.5 SEC Documents ................................................................... 30
3.6 Claims and Legal Proceedings .................................................... 30
3.7 Brokers or Finders .............................................................. 30
3.8 Full Disclosure ................................................................. 31
ARTICLE IV - DELIVERIES BY THE CORPORATIONS, THE PARTNERSHIPS AND THE
SHAREHOLDERS .................................................................... 31
4.1 Opinion of Counsel for the Corporations, the Partnerships and the
Shareholders .................................................................... 31
</TABLE>
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page ii
<PAGE> 4
<TABLE>
<S> <C>
4.2 Resignations .................................................................... 31
4.3 Consents to Merger .............................................................. 31
4.4 Approvals and Consents .......................................................... 31
4.5 Secretaries' Certificates ....................................................... 32
4.6 Amendments of Consultant Agreements ............................................. 32
4.7 Operative Documents ............................................................. 32
4.8 Termination of Employee Benefit Plans ........................................... 32
ARTICLE V - DELIVERIES BY SIERRA ........................................................ 32
5.1 Opinion of Counsel .............................................................. 32
5.2 Operative Documents ............................................................. 32
ARTICLE VI - COVENANTS .................................................................. 33
6.1 Confidentiality ................................................................. 33
6.2 Further Action .................................................................. 33
6.3 Publicity ....................................................................... 33
ARTICLE VII - TERMINATION, AMENDMENT AND WAIVER ......................................... 34
7.1 Termination ..................................................................... 34
7.2 Effect of Termination ........................................................... 34
7.3 Amendment ....................................................................... 35
7.4 Waiver .......................................................................... 35
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ............................................. 35
8.1 Survival ........................................................................ 35
8.2 Indemnification by the Shareholders ............................................. 35
8.3 Indemnification by Sierra ....................................................... 36
8.4 Deductible and Limitations ...................................................... 36
8.5 Procedure for Indemnification ................................................... 36
ARTICLE IX - GENERAL .................................................................... 38
9.1 Expenses ........................................................................ 38
9.2 Notices ......................................................................... 38
9.3 Severability .................................................................... 39
9.4 Entire Agreement ................................................................ 39
</TABLE>
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page iii
<PAGE> 5
<TABLE>
<S> <C>
9.5 Assignment ...................................................................... 39
9.6 Parties in Interest ............................................................. 40
9.7 Specific Performance ............................................................ 40
9.8 Governing Law ................................................................... 40
9.9 Headings ........................................................................ 40
9.10 Waiver of Jury Trial ............................................................ 40
9.11 Counterparts .................................................................... 40
</TABLE>
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page iv
<PAGE> 6
EXHIBITS
Exhibit A - Articles of Merger
Exhibit B - Disclosure Memorandum
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Form of Noncompetition Agreement
Exhibit E - Form of Designer Bonus Agreement
Exhibit F - Opinion of Cooley Godward Castro Huddleson & Tatum
Exhibit G - Opinion of Perkins Coie
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into as of May 31, 1995 by and among Sierra On-Line, Inc., a Delaware
corporation ("Sierra"), Pixel Acquisition Corp., a Washington corporation and
indirect wholly owned subsidiary of Sierra (the "Purchaser"), Pixellite Group, a
California general partnership whose partners are Ken Grant, Inc. and Pixellite
Software ("Pixellite Group"), Pixellite Software, a California general
partnership whose partners are Martin Kahn, Inc. and David Balsam, Inc.
("Pixellite Software"), Ken Grant, Inc., a California corporation, Martin Kahn,
Inc., a California corporation, David Balsam, Inc., a California corporation,
Ken Grant, Sherrill Grant, Martin Kahn and David Balsam. Ken Grant, Inc., Martin
Kahn, Inc. and David Balsam, Inc. are collectively referred to herein as the
"Corporations," Pixellite Group and Pixellite Software are collectively referred
to herein as the "Partnerships," and Ken Grant, Sherrill Grant, Martin Kahn and
David Balsam are collectively referred to herein as the "Shareholders").
RECITALS
A. The Corporations, the Partnerships, the Purchaser and Sierra believe
it advisable and in the best interests of such corporations to effect the merger
of the Corporations with and into the Purchaser (the "Merger") pursuant to this
Agreement.
B. The Boards of Directors and the Shareholders of the Corporations
have approved the Merger.
C. The Boards of Directors of Sierra and the Purchaser, and the sole
shareholder of the Purchaser, have approved the Merger.
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
Corporations shall cease and each of the Corporations shall be merged with and
into the Purchaser (the Purchaser 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 State of California and other applicable law. The separate
existence of the Partnerships shall cease upon the Effective Time and the
business of the Partnerships shall be merged with and into the Purchaser.
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 1
<PAGE> 8
1.2 THE CLOSING
The closing of the Merger pursuant to this Agreement (the "Closing")
shall take place on May 31, 1995 (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 Shareholders 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 and related documents (collectively, the "Articles of
Merger") complying with the applicable provisions of the Washington Business
Corporations Act ("Washington Law") and the California Corporations Code
("California Law"), substantially in the form or forms attached hereto as
Exhibit A, and in such form as required by, and executed in duplicate in
accordance with, Washington Law and California 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 State of California (the
"California Secretary of State"), respectively. The Merger shall become
effective on the date (the "Effective Date") and at the time (the "Effective
Time") specified in the Articles of Merger as so filed. If the Washington
Secretary of State or the California Secretary of State requires any changes in
the Articles of Merger as a condition to filing the Articles of Merger or
issuing its certificate to the effect that the Merger is effective, Sierra, the
Purchaser, the Corporations 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 INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Articles of Incorporation of the Purchaser
shall be the Articles of Incorporation of the Surviving Corporation. Thereafter,
the Articles of Incorporation 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 Purchaser shall be the Bylaws
of the Surviving Corporation. Thereafter, the Bylaws of the Surviving
Corporation may be amended or repealed in accordance with their terms, the
Articles of Incorporation of the Surviving Corporation, and applicable law.
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 2
<PAGE> 9
1.6 CONVERSION OF SHARES
1.6.1 EXCHANGE RATIOS
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
Corporations held by the Corporations as treasury shares shall be canceled;
(b) Each issued and outstanding share of capital stock of Ken
Grant, Inc. shall be converted into the right to receive directly from Sierra a
number of shares of common stock of Sierra, $.01 par value per share ("Sierra
Common Stock"), determined by dividing the Grant Closing Shares (as defined
below) by the total number of shares of capital stock of Ken Grant, Inc.
outstanding immediately prior to the Effective Time;
(c) Each issued and outstanding share of capital stock of
Martin Kahn, Inc. shall be converted into the right to receive directly from
Sierra a number of shares of Sierra Common Stock determined by dividing the Kahn
Closing Shares (as defined below) by the total number of shares of capital stock
of Martin Kahn, Inc. outstanding immediately prior to the Effective Time;
(d) Each issued and outstanding share of capital stock of
David Balsam, Inc. shall be converted into the right to receive directly from
Sierra a number of shares of Sierra Common Stock determined by dividing the
Balsam Closing Shares (as defined below) by the total number of shares of
capital stock of David Balsam, Inc. outstanding immediately prior to the
Effective Time; and
(e) Each issued and outstanding share of capital stock of the
Purchaser shall be converted into one share of common stock of the Surviving
Corporation.
1.6.2 SPECIAL DEFINITIONS
(a) The term "Grant Closing Shares" shall mean a number of
whole shares of Sierra Common Stock determined by dividing $1,186,009 by the
Closing Average (as defined below).
(b) The term "Kahn Closing Shares" shall mean a number of
whole shares of Sierra Common Stock determined by dividing $1,675,558 by the
Closing Average (as defined below).
(c) The term "Balsam Closing Shares" shall mean a number of
whole shares of Sierra Common Stock determined by dividing $1,675,558 by the
Closing Average (as defined below).
(d) The term "Closing Average" shall mean $18.46.
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 3
<PAGE> 10
(e) The term "Securities" shall mean the aggregate number
of shares of Sierra Common Stock constituting the Grant Closing Shares, the Kahn
Closing Shares and the Balsam Closing Shares, and the term "Merger
Consideration" shall mean an amount in cash equal to the number of shares of
Sierra Common Stock constituting the Securities multiplied by the Closing
Average.
1.6.3 EXCHANGE OF CERTIFICATES
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 the capital stock of the
Corporation owned by such Shareholder for cancellation, certificates
representing the number of shares of Sierra Common Stock that such Shareholder
is entitled to receive at Closing pursuant to Section 1.6.1 hereof. The shares
of Sierra Common Stock that each Shareholder shall be entitled to receive at the
Closing pursuant to the Merger shall be deemed to have been issued by Sierra 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 capital stock of each Corporation 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 capital stock of the Corporations for any
Merger Consideration delivered to a public official pursuant to applicable
abandoned property, escheat and similar laws.
1.6.4 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 capital stock of the Corporations 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 any such fractional shares, each holder of capital stock of a
Corporation who otherwise would have been entitled to a fraction of a share of
Sierra Common Stock upon surrender of certificates representing such capital
stock for exchange pursuant to the Merger will be paid cash upon such surrender
in an amount equal to such fraction multiplied by the Closing Average.
1.6.5 NO FURTHER TRANSFERS
After the Effective Time, there shall be no transfers of any shares of
capital stock of the Corporations on the stock transfer books of the Surviving
Corporation. If, after the Effective Time, certificates formerly representing
shares of capital stock of any of the
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 4
<PAGE> 11
Corporations 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 Sierra Common Stock received
pursuant to the Merger until at least 30 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 TAX TREATMENT
The parties agree that the Merger will be treated for tax purposes by
all parties to this Agreement as a taxable transaction for federal income tax
purposes and to take no reporting position inconsistent with this position. The
parties will agree to an allocation of the Merger Consideration for tax purposes
as soon as practicable after the Closing.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE CORPORATIONS, THE PARTNERSHIPS AND THE SHAREHOLDERS
To induce Sierra 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 B
(the "Disclosure Memorandum"), which exceptions shall specifically identify the
paragraph or paragraphs of this Article II to which such exceptions relate, and
which shall constitute in its entirety a representation and warranty under this
Article II, the Corporations, the Partnerships and the Shareholders jointly and
severally represent and warrant to Sierra as of the date of this Agreement and
as of the Closing as follows in this Article II.
2.1 TITLE AND OTHER SHAREHOLDER MATTERS
Each Shareholder represents with respect to itself only that (a) such
Shareholder owns the shares of capital stock of his Corporation listed opposite
such Shareholder's name on Schedule 2.1 to the Disclosure Memorandum; (b) such
shares of capital 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 C to be entered
into as of the Closing among Sierra and the Shareholders, the Noncompetition
Agreements in substantially the form attached hereto as Exhibit D to be entered
into as of the Closing among Sierra and the Shareholders, and the Designer Bonus
Agreements in substantially the form attached hereto as Exhibit E to be entered
into as of the
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 5
<PAGE> 12
Closing among Sierra and each of the Shareholders and Vince Mills (collectively,
and including this Agreement, the "Operative Documents"), to consummate the
transactions contemplated hereby and thereby, and to sell and transfer the
shares of capital stock of his Corporation 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
(a) Each Corporation is a corporation duly organized, validly
existing and in good standing under the laws of the State of California. The
Corporations have all requisite power and authority (corporate and otherwise) to
own, operate and lease their properties and assets, to carry on their respective
businesses as now conducted and as proposed to be conducted, and in the case of
each of the Corporations to enter into and perform its obligations under this
Agreement, and to consummate the transactions contemplated hereby. The
Corporations are duly qualified and licensed as foreign corporations to do
business and are in good standing in each jurisdiction listed on Schedule 2.2 to
the Disclosure Memorandum, which jurisdictions constitute all jurisdictions
where the character of the Corporations' properties occupied, owned or held
under lease or the nature of the business conducted by the Corporations makes
such qualification necessary, except as set forth on Schedule 2.2 or Schedule
2.5, as the case may be, to the Disclosure Memorandum and except where the
failure to be so qualified or in good standing would not have a material adverse
effect on the business, business prospects, assets, operations or condition
(financial or other) of the Corporations or such Subsidiary.
(b) Each Partnership is a general partnership validly existing
under the laws of the State of California. The Partnerships have all requisite
power and authority to own, operate and lease their properties and assets, to
carry on their respective businesses as now conducted and as proposed to be
conducted, and in the case of each of the Partnerships to enter into and perform
its obligations under this Agreement and the Operative Documents, and to
consummate the transactions contemplated hereby and thereby. The Partnerships
are duly qualified and licensed as foreign partnerships to do business in each
jurisdiction listed on Schedule 2.2 to the Disclosure Memorandum, which
jurisdictions constitute all jurisdictions where the character of the
Partnerships' properties occupied, owned or held under lease or the nature of
the business conducted by the Partnerships makes such qualification necessary,
except as set forth on Schedule 2.2 to the Disclosure Memorandum and except
where the failure to be so qualified or in good standing would not have a
material adverse effect on the business, business prospects, assets, operations
or condition (financial or other) of the Partnerships.
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<PAGE> 13
2.3 ENFORCEABILITY
All corporate action on the part of the Corporations and its officers,
directors and Shareholders, and all requisite action on the part of the
Partnerships and their partners, necessary for the authorization, execution,
delivery and performance of this Agreement, the consummation of the Merger, and
the performance of all of the Corporations' and the Partnerships' obligations
under this Agreement have been taken or will be taken prior to the Closing. This
Agreement has been, and each of the Operative Documents at the Closing will have
been, duly executed and delivered by each of the Corporations, the Partnerships
and the Shareholders, as the case may be, and this Agreement is, and each of the
Operative Documents to which any of Corporations, the Partnerships or the
Shareholders is a party will be at the Closing, a legal, valid and binding
obligation of each party thereto other than Sierra and the Purchaser,
enforceable against each such party (other than Sierra and the Purchaser) in
accordance with its terms.
2.4 CAPITALIZATION
(a) The authorized capital stock of Ken Grant, Inc. consists
of 307,785 shares of common stock; the authorized capital stock of Martin Kahn,
Inc. consists of 10,000 shares of common stock; and the authorized capital stock
of David Balsam, Inc. consists of 10,000 shares of common stock.
(b) (i) The issued and outstanding capital stock of Ken Grant,
Inc. consists solely of 307,785 shares of common stock, which are and as of the
Closing will be held of record by Ken Grant and Sherrill Grant. The issued and
outstanding capital stock of Martin Kahn, Inc. consists solely of 5,000 shares
of common stock, which are and as of the Closing will be held of record by
Martin Kahn. The issued and outstanding capital stock of David Balsam, Inc.
consists solely of 5,000 shares of common stock, which are and as of the Closing
will be held of record and beneficially by David Balsam. The outstanding shares
of each of the Corporations 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 of the Corporations.
(ii) The only partners of Pixellite Group are
Pixellite Software and Ken Grant, Inc. The only partners of Pixellite Software
are Martin Kahn, Inc. and David Balsam, Inc. No other Person holds any interest
in any of the partnership interests of the Partnerships. The partnership
agreements relating to the Partnerships were entered into and the partnership
interests therein were acquired in compliance with all applicable federal, state
and foreign securities laws.
(c) 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
Corporations or any Shareholder of the Corporations of any
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AGREEMENT AND PLAN OF MERGER Page 7
<PAGE> 14
shares of the Corporations' capital stock or from the Partnerships or any
partner of the Partnerships of any interest in either of the Partnerships.
(d) None of the Corporations or the Partnerships is a party or
subject to any agreement or understanding, and there is no agreement or
understanding between any Persons, that affects or relates to the voting or
giving of written consents with respect to any securities of any of the
Corporations or interests in the Partnerships or the voting by any director of
any of the Corporations or any partner of any of the Partnerships. Except as set
forth on Schedule 2.4(d) to the Disclosure Memorandum, no Shareholder of any of
the Corporations or any affiliate thereof, and no partner of either of the
Partnerships, is indebted to any of the Corporations or Partnerships, and none
of the Corporations or Partnerships is indebted to any Shareholder or any
affiliate of any of the Corporations or any partner of either Partnership. None
of the Corporations or the Partnerships is 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
Each of the Corporations and the Partnerships 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, other than the ownership
interest of the Corporations in the Partnerships.
2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
(a) Except as set forth on Schedule 2.6(a) to the Disclosure
Memorandum, the execution, delivery and performance of this Agreement by the
Corporations and the Partnerships and the consummation of the transactions
contemplated hereby 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 any of the Corporations or the Partnerships, (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 California Secretary of State (the consent of all
such Persons to be duly obtained by the Corporations and the Partnerships 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 any of the Corporations or the Partnerships is a party or by
which any of them is bound or to which any of their assets are subject, (iv)
result in the creation of any lien or encumbrance upon the assets of any of the
Corporations or the Partnerships or upon any outstanding shares or other
securities of any of the Corporations or the Partnerships, (v) conflict with or
result in a breach of or constitute a default under any
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AGREEMENT AND PLAN OF MERGER Page 8
<PAGE> 15
provision of the Articles of Incorporation or Bylaws of any of the Corporations
or the partnership agreements of either of the Partnerships, or (vi) invalidate
or adversely affect any permit, license, authorization or status used in the
conduct of the business of the Corporations or the Partnerships.
(b) Except as set forth on Schedule 2.6(b) to the Disclosure
Memorandum, the execution, delivery and performance of this Agreement and the
Operative Documents by each Shareholder and the consummation of the transactions
contemplated hereby and thereby 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 California Secretary of
State (the consent of all such Persons to be duly obtained by the Corporations,
the Partnerships or the Shareholder at or prior to the Closing), (iii) result in
the creation of any lien or encumbrance upon the shares of the Corporations'
capital stock or the Partnership interests 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 Incorporation or Bylaws of the Corporations or the
partnership agreements of the Partnerships.
2.7 FINANCIAL STATEMENTS
The Shareholders have delivered to Sierra (a) balance sheets and income
statements of each of the Corporations as of and for the fiscal years ended
December 31, 1993, in the case of Martin Kahn, Inc. and David Balsam, Inc. only,
and 1994, in the case of all the Corporations, and as of and for the four-month
period ended April 30, 1995, and (b) balance sheets and income statements of
Pixellite Software as of and for the fiscal years ended December 31, 1993 and
1994, and as of and for the four-month period ended April 30, 1995. The balance
sheets of Pixellite Software and the Corporations as of April 30, 1995 are
referred to herein as the "Balance Sheets." All of the foregoing financial
statements are herein referred to as the "Financial Statements." The Financial
Statements present fairly the financial position and revenues and expenses of
the Corporations and the Partnerships as of the dates and for the periods
indicated. The Corporations and the Partnerships have no liabilities or
obligations of any nature (absolute, contingent or otherwise) which are not
fully reflected or reserved against in the Balance Sheets, except (a)
liabilities or obligations incurred since the date of the Balance Sheets in the
ordinary course of business and consistent with past practice which are
disclosed to Sierra and are not in excess of $15,000 in the aggregate or (b) as
specifically set forth on Schedule 2.7 to the Disclosure Memorandum. Except as
set forth on Schedule 2.7 to the Disclosure Memorandum, each of the Corporations
and the Partnerships is not a guarantor, indemnitor, surety or other obligor of
any indebtedness of any other Person. The Corporations' and the Partnerships'
practices with respect to capitalizing software development costs, as reflected
in the Financial Statements, are reasonable and in accordance with industry
standards.
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<PAGE> 16
2.8 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth on Schedule 2.8 to the Disclosure
Memorandum, since the date of the Balance Sheets, none of the Corporations, the
Partnerships nor any of their officers, directors. partners, employees or agents
in their representative capacities on behalf of any of the Corporations or the
Partnerships 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 partner or any officer, director, employee or
affiliate of any of the Corporations or the Partnerships);
(c) granted, other than in the ordinary course of business and
consistent with past practice, any increase in the compensation of partners,
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 partner, director, officer, employee or consultant;
(d) suffered any material adverse change in its working
capital, assets, liabilities (absolute, accrued, contingent or otherwise),
earnings, reserves, financial condition, business, prospects or operations;
(e) borrowed or agreed to borrow any funds, assumed or become
subject to, whether directly or by way of guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise), or
incurred any liabilities or obligations (absolute, accrued, contingent or
otherwise), which individually or in the aggregate exceed $10,000, except
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice not to exceed $25,000 in the aggregate, or
increased, or experienced any change in any assumptions underlying or methods of
calculating, any bad debt, contingency or other reserves;
(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 Balance Sheets or incurred in the ordinary course of business and
consistent with past practice since the date of the Balance Sheets, 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,
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AGREEMENT AND PLAN OF MERGER Page 10
<PAGE> 17
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 is in the aggregate less than $5,000,
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 or markdown) or written off as uncollectible
any notes or accounts receivable, except for write-downs and write-offs that are
in the aggregate less than $5,000, incurred 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, copyright or license, or disposed of or
disclosed to any Person other than representatives of Sierra 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 $5,000 for additions to property, plant, equipment or intangible
capital assets or made aggregate capital expenditures in excess of $20,000 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, partnership interest or other
securities, or declared, paid or set aside for payment any dividend or other
distribution in respect of its capital stock or partnership interests (other
than distributions by the Corporations of undistributed S Corporation profits
consisting of the assets listed on Schedule 2.8 to the Disclosure Memorandum),
or redeemed, purchased or otherwise acquired, directly or indirectly, any shares
of capital stock, partnership interest or other securities, or otherwise
permitted the withdrawal by any of the holders of capital stock of the
Corporations or partnership interests of the Partnerships of any cash or other
assets (real, personal or mixed, tangible or intangible), in compensation,
indebtedness or otherwise, other than payments of salaries 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 partner, officer, director or employee or any affiliate
of any Shareholder or any partner, officer, director or employee;
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<PAGE> 18
(o) entered into or agreed to enter into, or otherwise
suffered to be outstanding, any power of attorney of any of the Corporations or
the Partnerships or any obligations or liabilities (absolute, accrued,
contingent or otherwise) of any of the Corporations or the Partnerships, as
guarantor, surety, co-signer, endorser, co-maker, 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 any of the Corporations or the
Partnerships or any employee, officer, director or partner of any of the
Corporations or the Partnerships 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 any of the Corporations or the Partnerships or any
employee, officer, director or partner of any of the Corporations or the
Partnerships before or by any Person; or (iii) any outstanding or unsatisfied
judgments, orders, decrees or stipulations to which any of the Corporations or
the Partnerships or any employee, officer, director or partner of any of the
Corporations or the Partnerships is a party which relate directly to the
transactions contemplated herein or which would have any material adverse effect
upon the business, business prospects, assets, liabilities or financial
condition of any of the Corporations or the Partnerships;
(q) entered into or agreed to any sale, assignment, transfer
or license of any patents, trademarks, copyrights, trade secrets or other
intangible assets of, or used by, the Corporations or the Partnerships or any
amendment or change to any existing license or other agreement relating to
intellectual property;
(r) received notice that there has been a loss of, or contract
cancellation by, any current or prospective customer, licensor or distributor of
the Corporations or the Partnerships;
(s) taken any action, or become aware of any action taken by
any Shareholder or partner, 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 generally accepted accounting
principles in the United States consistently applied ("GAAP"); 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, (a)
each of the Corporations and the Partnerships has 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 by
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AGREEMENT AND PLAN OF MERGER Page 12
<PAGE> 19
such Corporation or Partnership, (b) all such Returns are true, correct and
complete, and (c) except as set forth on Schedule 2.9 to the Disclosure
Memorandum, each Corporation and Partnership has paid in full or provided for
all Taxes that are due or claimed to be due by any governmental agency, after
giving effect to any extensions. "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 applicable to
the Corporations or the Partnerships that are 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, if any, 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 and of the Corporations or the
Partnerships, and no audit or investigation by any governmental authority is
under way with respect to Taxes, interest or other governmental charges; (iii)
no circumstances exist or have existed which would constitute grounds for
assessment against any of the Corporations or the Partnerships 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 Corporations for any such period; (iv) each
of the Corporations and the Partnerships 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 any of the
Corporations or the Partnerships or accrued by any of them since the date of the
Balance Sheets have arisen in the ordinary course of business; and (vi) none of
the Corporations has filed any consent to the application of Section 341(f)(2)
of the Internal Revenue Code of 1986, as amended (the "Code"), to any assets
held, acquired or to be acquired by it. The Corporations and the Partnerships
have furnished Sierra with complete and correct copies of Returns for the fiscal
years ended December 31, 1994, 1993, 1992, 1991 and 1990, if applicable. There
are no tax liens on any property or assets of any of the Corporations or the
Partnerships other than liens for current property taxes not yet payable. The
Partnerships have always been and are taxable as partnerships and not as
associations for federal income tax purposes. No claim has been made by an
authority in any jurisdiction where any of the Corporations or the Partnerships
does not file Returns that any of the Corporations or the Partnerships is or may
be subject to taxation by that jurisdiction. Each of the Corporations and the
Partnerships 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. None of the
Corporations or the Partnerships is or has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code during
the applicable period specified in Section 897(c)(1)(A)(2)(i) of the Code. Each
of the Corporations and the Partnerships is not a party to any Tax allocation or
sharing agreement, and (A) has not been a member of an affiliated group filing a
consolidated income Tax Return and (B) does not have any liability for
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AGREEMENT AND PLAN OF MERGER Page 13
<PAGE> 20
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.
2.10 PROPERTY
The Corporations and the Partnerships own or lease no real property.
Schedule 2.10 to the Disclosure Memorandum contains a complete and accurate list
of each item of personal property having a value in excess of $1,000 which is
owned, leased, rented or used by any of the Corporations or the Partnerships
(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 Corporations or the Partnerships own all the Personal
Property. The Personal Property includes all properties and assets (whether
real, personal or mixed, tangible or intangible) (other than property rights
with an individual value of less than $1,000, the Listed Intellectual Property
and the Intellectual Property Licenses) reflected in the Balance Sheets and all
the properties and assets purchased by any of the Corporations or the
Partnerships since the date of the Balance Sheets (except for such properties or
assets sold since the date of the Balance Sheets in the ordinary course of
business and consistent with past practice). The Personal Property includes all
property used in the business of the Corporations and the Partnerships. Except
as described on Schedule 2.10 to the Disclosure Memorandum, the items of
Personal Property used in the business of the Corporations or the Partnerships
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. Except as set forth on Schedule 2.10 to
the Disclosure Memorandum, and except for (i) assessments for current taxes not
yet due and payable and (ii) mechanics', materialmen's, carriers' and other
similar statutory liens securing indebtedness that is in the aggregate less than
$2,000, was incurred in the ordinary course of business and is not yet due and
payable, the Personal Property is owned by the Corporations or the Partnerships
free and clear of all liens, third party interests and encumbrances. None of the
Corporations or the Partnerships is a party to any lease, license, rental
agreement, contract of sale or other agreement relating to the Personal Property
Neither the whole nor any portion of the assets or property of any of the
Corporations or the Partnerships 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 of all contracts, agreements and understandings, oral or written,
to which any of the Corporations or the Partnerships is a party or by which any
of them is bound which involve rights or obligations of the Partnerships or the
Corporations, actual or contingent, in excess of $5,000 (excluding agreements
listed as required on Schedule 2.17 to the Disclosure Memorandum), including,
without limitation, security agreements, license agreements, software
development agreements, credit agreements, conditional sales agreements,
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AGREEMENT AND PLAN OF MERGER Page 14
<PAGE> 21
instruments relating to the borrowing of money, and distributorship agreements.
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
Corporations and the Partnerships have performed in all materials respects all
obligations thereunder, and neither the Corporations nor the Partnerships, nor
to their best knowledge any other party thereto, is in material default
thereunder, nor is there any event which with notice or lapse of time, or both,
would constitute a material default thereunder. True and complete copies of each
such contract have been heretofore delivered to Sierra. Except as specifically
set forth on Schedule 2.11 to the Disclosure Memorandum, none of the
Corporations or the Partnerships has any:
(a) agreements, contracts, commitments or restrictions
requiring it to make any charitable contribution;
(b) purchase contracts or commitments that continue for a
period of more than 12 months or are in excess of the normal, ordinary and usual
requirements of its business or that are at an excessive price to the extent
that such excess would be material to its business;
(c) outstanding sales or service contracts, commitments or
proposals which are expected to result in any loss or the realization of less
than the usual and customary margins upon completion or performance thereof, in
excess of the reserves provided in the Balance Sheets, or any outstanding
contracts, bids, or sales or service proposals quoting prices which, based upon
current operations, are not expected to result in a profit;
(d) contracts with partners, 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, or 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 Corporations;
(e) employment agreement, whether express or implied, or any
other agreement for services that contains any severance or termination pay
liabilities or obligations;
(f) collective bargaining or union contracts or agreements;
(g) employee to whom it paid in fiscal 1994, or expects to pay
in fiscal 1995, total compensation at the annual rate of more than $50,000;
(h) restriction by agreement from carrying on its business
anywhere in the world;
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(i) 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;
(j) debt obligation for borrowed money, including guarantees
of or agreements to acquire any such debt obligation of others;
(k) loans outstanding to any Person;
(l) power of attorney outstanding or any obligations or
liabilities (whether absolute, accrued, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any Person;
(m) notice that any party to a contract intends to
cancel, terminate or refuse to renew such contract or to exercise or decline to
exercise any option or right thereunder; or
(n) material disagreement with any of its suppliers or
customers.
2.12 CUSTOMERS AND SUPPLIERS
Schedule 2.12 to the Disclosure Memorandum sets forth: (a) a complete
and accurate list of the customers of each of the Corporations and the
Partnerships accounting for 5% or more of their aggregate sales during the
fiscal year last ended and (b) a complete and accurate list of the suppliers
from whom they have purchased an aggregate of 5% or more of the goods or
services they purchased in the fiscal year last ended. Each of the Corporations
and the Partnerships has no 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 Corporations' and the Partnerships' total backlog of orders (including
all accepted and unfulfilled sales orders) and the aggregate of all outstanding
purchase orders in excess of $5,000 issued by them (which include all contracts
or commitments for the purchase by any of them of materials or other supplies).
All such sale and purchase commitments were made in the ordinary course of
business. There are no outstanding claims against any of the Corporations or the
Partnerships to return merchandise with an aggregate retail value in excess of
$5,000 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 any of their best knowledge, threatened
against any of the Corporations, the
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AGREEMENT AND PLAN OF MERGER Page 16
<PAGE> 23
Partnerships or the Shareholders before or by any court or governmental or
nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person. To the best knowledge of the Corporations,
the Partnerships and the Shareholders, there is no valid basis for any claim,
action, suit, arbitration, proceeding or investigation (other than as noted on
Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be
expected to be materially adverse to the business, business prospects, assets,
operations or condition (financial or other) of any of the Corporations or the
Partnerships taken as a whole before or by any Person. There are no outstanding
or unsatisfied judgments, orders, decrees or stipulations to which any of the
Corporations, the Partnerships or the Shareholders is a party which involve the
transactions contemplated herein or which would have a material adverse effect
upon its business, business prospects, assets, operations or condition
(financial or other) taken as a whole.
2.15 LABOR MATTERS
There are no material labor disputes, employee grievances or
disciplinary actions pending or, to any of their best knowledge, threatened
against or involving any of the Corporations, the Partnerships or the
Shareholders or any of their present or former employees. Each of the
Corporations and the Partnerships has complied with all provisions of law
relating to employment and employment practices, terms and conditions of
employment, wages and hours, the failure to comply with which could have a
material adverse effect upon its business, business prospects, assets,
operations or conditions (financial or other) taken as a whole. Each of the
Corporations and the Partnerships is not engaged in any unfair labor 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 any of their best knowledge, threatened
against or affecting any of the Corporations or the Partnerships, and none of
them has ever experienced any work stoppage or other labor difficulty. Each of
the Corporations and the Partnerships has no knowledge of any organizational
efforts presently being made or threatened by or on behalf of any labor union
with respect to its employees, and none of the Corporations or the Partnerships
have 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. To the best knowledge of the Corporations, the
Partnerships and the Shareholders, no employee (or person performing similar
functions) of any of the Corporations or the Partnerships is in violation of 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 any of
the Corporations or the Partnerships or any other party.
2.16 EMPLOYEE BENEFIT PLANS
Except as set forth on Schedule 2.16 to the Disclosure Memorandum, each
of the Corporations and the Partnerships has no bonus, deferred compensation,
incentive, severance pay, pension, profit-sharing, retirement, stock purchase,
stock option or any other employee benefit plan, employee fringe benefit plan,
arrangement or practice with regard to present or
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AGREEMENT AND PLAN OF MERGER Page 17
<PAGE> 24
former employees or partners as to which any of the Corporations or the
Partnerships has any liability ("Employee Benefit Plan"), whether formal or
informal. Schedule 2.16 to the Disclosure Memorandum contains an accurate and
complete description of, and sets forth the annual amount expected to be payable
for the current fiscal year pursuant to, each Employee Benefit Plan, whether
formal or informal. The Balance Sheets reflect in the aggregate all amounts
accrued but unpaid under the aforesaid plans and arrangements as of the date
thereof. Each of the Corporations and the Partnerships has no agreement,
arrangement or commitment, whether formal or informal and whether legally
binding or not, to create any additional plan or arrangement or to modify or
amend any existing Employee Benefit Plan. The Corporations and the Partnerships
have delivered to Sierra true, correct and complete copies of all written
Employee Benefit Plans, all contracts related thereto and the most recently
available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C
or 5500-R) and favorable determination letters for such plans. Each of the
Corporations and the Partnerships is in compliance in all material respects with
the terms of its Employee Benefit Plans and with all applicable laws and
regulations, including, but not limited to, the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and the Code. Each of the
Corporations and the Partnerships has extinguished any liabilities to
participants, beneficiaries and the Pension Benefit Guaranty Corporation which
may have arisen under any such plans previously maintained by it and expects to
incur no future liabilities with regard to such plans. Neither the Corporations,
the Partnerships nor any of their "affiliates" is a party to or has ever made
any contributions to, or is subject to any liability with respect to, any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any
defined benefit plan within the meaning of Section 3(35) of ERISA. The term
"affiliate" means any company, trade or business which is a member of the same
control group, as defined in Code Section 414(b) or 414(c), with any of the
Corporations or the Partnerships, or any company, trade or business which is a
member of an affiliated service group, as defined in Code Section 414(m) or
414(o) with any of the Corporations or the Partnerships. No prohibited
transaction (within the meaning of ERISA Section 406 or Code Section 4975) or
failure to meet the requirements of Code Section 4980B(f) has occurred with
respect to any Employee Benefit Plan which could subject any of the Corporations
or the Partnerships to any liability. There are no actions, suits or claims
pending (other than routine claims for benefits) or which could reasonably be
expected to be asserted against any Employee Benefit Plan or the assets of any
such plan. The Corporations, the Partnerships and the Shareholders have taken
all action necessary to terminate each Employee Benefit Plan as of or as soon as
possible after the Closing without any liability relating thereto on the part of
the Corporations or the Partnerships.
2.17 INTELLECTUAL PROPERTY
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
(collectively, the "Listed Intellectual Property") of any kind now used or
anticipated to be used in the business of any of the Corporations or the
Partnerships. Schedule 2.17 contains a complete and accurate list of all
licenses or agreements, oral or written, which in any way affect the rights of
any of the Corporations or the Partnerships to any of the Listed Intellectual
Property (the "Intellectual
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AGREEMENT AND PLAN OF MERGER Page 18
<PAGE> 25
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 operations of any of the
Corporations or the Partnerships nor any Listed Intellectual Property or
Intellectual Property License infringes upon any validly issued or pending
trademark, trade name, service mark, copyright or, to the best knowledge of any
of the Corporations or the Partnerships, any issued or pending patent or other
right of any other Person, nor, to the best knowledge of any of the Corporations
or the Partnerships, 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 alter or
impair the rights of any of the Corporations or the Partnerships or the
Purchaser as the Surviving Corporation to any of the Listed Intellectual
Property or under any Intellectual Property License.
Except as set forth on Schedule 2.17 of the Disclosure Memorandum, one
or more of the Corporations or the Partnerships is the sole and exclusive owner
or licensee of:
(a) the Listed Intellectual Property, the Intellectual
Property Licenses 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 Products"). Without limiting the generality
of the above, the Software Products shall also include all of the related
programs, trade secrets, algorithms and processes relating to the Software
Products or such programs, the copyright in and to each of the Software Products
and all works derivative therefrom existing as of the Closing Date (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, each of the Corporations
and the Partnerships has performed in all material respects all obligations
imposed upon it thereunder, and none of the Corporations nor the Partnerships,
nor to their knowledge any other party thereto, is in material default
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AGREEMENT AND PLAN OF MERGER Page 19
<PAGE> 26
thereunder, nor is there any event which with notice or lapse of time, or both,
would constitute a material default thereunder. Except as set forth on Schedule
2.17 to the Disclosure Memorandum, none of the Corporations or the Partnerships
or the Shareholders has 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. No licenses, sublicenses, covenants or agreements have been granted
or entered into by any of the Corporations or the Partnerships or the
Shareholders in respect of any of the Listed Intellectual Property except the
Intellectual Property Licenses. No director, officer, partner, Shareholder or
employee of any of the Corporations or the Partnerships owns, directly or
indirectly, in whole or in part, any of the Listed Intellectual Property. None
of the officers or partners of any of the Corporations or the Partnerships and
none of their employees, consultants, distributors, agents, representatives or
advisers has entered into any agreement 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 Corporations
and the Partnerships which relates to any of the Software, the Software
Products, the Listed Intellectual Property or the Intellectual Property
Licenses.
Except as set forth in the Disclosure Memorandum, to each of the
Corporations', the Partnerships' and the Shareholders' best 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) each of the Corporations, the
Partnerships and the Shareholders has not disclosed any source code regarding
the Software Products to any person other than an employee or consultant
(provided such consultant has signed an appropriate confidentiality or
nondisclosure agreement relating thereto) of the Corporations or the
Partnerships or to Sierra or the Purchaser, except for any disclosure that would
not have a material adverse effect on the business, business prospects, assets,
operations or conditions (financial or other) of any of the Corporations or the
Partnerships taken as a whole; (ii) the Corporations and the Partnerships have
at all times maintained reasonable procedures to protect all their trade
secrets; (iii) none of the Corporations, the Partnerships 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 any of the Corporations, the Partnerships and the
Shareholders, 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 any of the Corporations or the Partnerships, to any person
or entity and no event has taken place, including the execution of this
Agreement or any related change in any of the Corporations' or the Partnerships'
business activities, which would give rise to such obligation; and (iv) each of
the Corporations, the Partnerships and the Shareholders has not deposited any
source code regarding the Software Products into any source code escrows or
similar arrangements. If Schedule 2.17 to the Disclosure Memorandum discloses
that any of the Corporations, the Partnerships or the Shareholders has deposited
any source code to Software Products into source code escrows or similar
arrangements, no event has occurred that has or
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AGREEMENT AND PLAN OF MERGER Page 20
<PAGE> 27
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 customers and Sierra.
All agreements of the Corporations or the Partnerships with Maxis,
Inc., including without limitation the Affiliate Partner Agreement dated as of
November 30, 1993, as amended by that certain Software Licensing Amendment dated
as of September 23, 1994 and that certain Software Development Amendment dated
as of April 28, 1995 (collectively the "Maxis Agreement"), are terminable by the
Surviving Corporation immediately after the Closing, effective December 31,
1995, without any continuing liability or obligation, whether absolute,
contingent or otherwise, on the part of the Surviving Corporation, except as set
forth in the Maxis Agreement or on Schedule 2.17 to the Disclosure Memorandum. A
true and correct copy of the Maxis Agreement has been provided to Sierra. Except
as set forth on Schedule 2.17 to the Disclosure Memorandum, all advances by
Maxis to the Corporations, the Partnerships or the Shareholders under the Maxis
Agreement have been recouped in full by Maxis. There are no sublicense,
sub-distribution or similar arrangements relating to the Maxis Agreement, other
than the sublicense arrangement between Maxis and Compaq (the "Compaq
Sublicense"). The terms of the Compaq Sublicense are not materially adverse to
the business or prospects of the Corporations and the Partnerships taken as a
whole. No sublicense, sub-distribution or similar arrangements or agreements
relating to the Maxis Agreement may be entered into between the date on which
any notice of termination may be provided to Maxis and the effective date of
such termination.
All Consultant Agreements between the Partnerships or the Corporations,
or any of them, and each of Presage, a California partnership, and Christopher
Schardt have been duly and validly amended to provide that the Surviving
Corporation may terminate such Consultant Agreements at any time for any reason
without any continuing payment liability or obligation, whether absolute,
contingent or otherwise, on the part of any of the Partnerships, the
Corporations or the Surviving Corporation (as a result of the Merger) other than
to make the lump sum payments, consisting of an aggregate of $1,318,750, as set
forth in such amendments.
2.18 ACCOUNTS RECEIVABLE
Any accounts receivable of each of the Corporations and the
Partnerships reflected in the Balance Sheets represent sales actually made in
the ordinary course of business.
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 Balance Sheets
or as currently owned by the Corporations or the Partnerships are of a quality
and quantity usable and salable in the
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AGREEMENT AND PLAN OF MERGER Page 21
<PAGE> 28
ordinary course of business. Such inventory consists of materials and supplies
used or sold in the business of the Corporations and the Partnerships.
2.20 BOOKS AND RECORDS
Each Corporations has furnished to Sierra or its representatives for
their examination true and complete copies of (a) the Articles of Incorporation
and Bylaws of the Corporations as currently in effect, including all amendments
thereto, (b) the minute books of the Corporations and (c) the stock transfer
books of the Corporations. 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 Corporations since its inception. Each Partnership has furnished to
Sierra or its representative for their examination true and complete of its
partnership agreements, all amendments thereto and all other documents which
govern or affect the right and obligations of its partners.
2.21 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in Schedules 2.2 and 2.6 to the Disclosure
Memorandum, each of the Corporations and the Partnerships has received all
currently required governmental approvals, authorizations, consents, licenses,
orders, registrations and permits of all agencies, whether federal, state, local
or foreign, the failure to obtain which would have a material adverse effect on
its business, business prospects, assets, operations or condition (financial or
other) taken as a whole. Each of the Corporations and the Partnerships 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, the
failure to obtain which would have a material adverse effect on its business,
business prospects, assets, operations or condition (financial or other) taken
as a whole.
2.22 COMPLIANCE WITH LAWS
(a) Except as described on Schedule 2.22 to the Disclosure
Memorandum, each of the Corporations and the Partnerships has complied, and is
in compliance, with all federal, state, local and foreign laws, rules,
regulations, ordinances, decrees and orders applicable to the operation of its
business, to its employees, or to the Personal Property, the failure to comply
with which would, individually or in the aggregate, have a material adverse
effect on its business, assets or operations, including, without limitation, all
such laws, rules, ordinances, decrees and orders relating to antitrust, consumer
protection, currency exchange, environmental protection, equal opportunity,
health, occupational safety, pension, securities and trading-with-the-enemy
matters. Each of the Corporations and the Partnerships has not received any
notification of any asserted present or past unremedied failure to comply with
any of such laws, rules, ordinances, decrees or orders.
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AGREEMENT AND PLAN OF MERGER Page 22
<PAGE> 29
(b) Each of the Corporations and the Partnerships is not
currently in violation of any applicable building, zoning, environmental or
other law, ordinance or regulation.
(c) Each of the Corporations and the Partnerships is not in
violation of, and has not violated, in connection with the conduct of their
businesses, any applicable federal, state, county or local statutes, laws,
regulations, guidances, rules, ordinances, codes, licenses, permits, judgments,
writs, decrees, injunctions or orders of any governmental entity relating to
environmental (air, water, groundwater, soil, noise and odor) matters,
including, by way of illustration and not by way of limitation, the Clean Air
Act, the Federal Water Pollution Control Act, the Resources Conservation and
Recovery Act and the regulations issued thereunder, the Comprehensive
Environmental, Response, Compensation, and Liability Act, the Clean Water Act,
the Hazardous Materials Transportation Act, the Toxic Substances Control Act,
the Hazardous Waste Control Act, comparable California laws, and the regulations
issued thereunder, and all other applicable federal, state, county, local and
foreign environmental requirements where such violation might have a material
adverse impact on its business, business prospects, assets, operations or
condition (financial or other) taken as a whole.
(d) Except as set forth on Schedule 2.22 to the Disclosure
Memorandum, none of the Corporations or the Partnerships has transported,
stored, treated, recycled, handled or disposed of, or allowed or arranged for
any third party to transport, store, treat, recycle, handle or dispose of (i)
any flammable substances, explosives, radioactive materials, hazardous
substances, hazardous wastes, toxic substances, pollutants, contaminants or any
wastes, materials or substances identified in or regulated by any Environmental
Laws; (ii) asbestos, polychlorinated biphenyls, urea formaldehyde, nuclear fuel
or material, chemical waste, carcinogens and radon, all to the extent regulated
by any Environmental Laws; and (iii) gasoline, oil and other petroleum products
(collectively, "Regulated Substances"), to or at any location other than a
location lawfully permitted to receive such material for such purposes at such
time. Set forth on such Schedule 2.22 is a complete and accurate list of all
locations to which any of the Corporations or the Partnerships has ever
transported, or caused to be transported or allowed or arranged for any third
party to transport, any type of Regulated Substances for storage, treatment,
handling, processing, burning, recycling or disposal.
(e) Except as set forth on such Schedule 2.22, no real
property ever owned by any of the Corporations or the Partnerships (the "Real
Property"), including, but not limited to, all surface and subsurface soil,
sediments, groundwater and surface water located on, in or under such Real
Property, was during the period of use by any of the Corporations or the
Partnerships being contaminated with any Regulated Substances or constituents
thereof, which contamination has given or may give rise to any material
obligation under any Environmental Laws, the common law or otherwise. To the
knowledge of each of the Corporations and the Partnerships, except as set forth
on such Schedule 2.22, no real property adjacent to or adjoining the Real
Property has been so contaminated. To the best knowledge of each of the
Corporations and the Partnerships, except as set forth on such Schedule 2.22,
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AGREEMENT AND PLAN OF MERGER Page 23
<PAGE> 30
no polychlorinated biphenyls, lead-based materials or asbestos are present in or
on the Real Property or in any equipment located therein.
(f) Except as set forth on such Schedule 2.22, to their best
knowledge the Corporations and the Partnerships have recorded or filed and have
provided to Sierra true, accurate and complete copies of all reports with
respect to any spilling, leaking, pumping, pouring, emitting, emptying,
discharging, injecting, escaping, leaching, dumping or disposing into the
environment (including the abandonment or discarding of drums, barrels,
containers or other closed receptacles) (any of the foregoing, a "Release"),
required by any Environmental Laws to be filed by the any of the Corporations or
the Partnerships with any government authority. Except as disclosed on such
Schedule 2.22, to their best knowledge each of the Corporations and the
Partnerships has maintained all environmental and operating documents and
records substantially in the manner and for the time periods required by any
Environmental Laws.
(g) Except as disclosed on such Schedule 2.22, none of the
Corporations or the Partnerships has caused or permitted the Release of any
Regulated Substances or constituents thereof on, from or off-site of its
property, or of any Release from any facility owned or operated by third parties
but with respect to which any of them is alleged to have liability.
2.23 BROKERS OR FINDERS
Each of the Corporations and the Partnerships has not incurred, and
will not incur, directly or indirectly, as a result of any action taken by or on
behalf of any of them, 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.
2.24 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Corporations, the Partnerships, nor any partner, director,
officer, agent, employee or other Person acting on behalf of any of them, has
used any Corporation or Partnership funds for improper or unlawful
contributions, payments, gifts or entertainment, or made any improper or
unlawful expenditures relating to political activity to government officials or
others. Each of the Corporations and the Partnerships has adequate financial
controls to present such improper or unlawful contributions, payments, gifts,
entertainment or expenditures. Neither the Corporations, the Partnerships, nor
any partner, director, officer, agent, employee or other Person acting on behalf
of any of them, has accepted or received any improper or unlawful contributions,
payments, gifts or expenditures.
2.25 PERSONNEL
Schedule 2.25 to the Disclosure Memorandum sets forth a true and
complete list of:
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<PAGE> 31
(a) the names and current compensation amounts of all
directors and elected and appointed officers of the Corporations and the
Partnerships and the family relationships, if any, among such persons;
(b) the wage rates for nonsalaried and nonexecutive salaried
employees of the Corporations and the Partnerships by classification, and all
labor union contracts (if any);
(c) all group insurance programs in effect for employees of
each of the Corporations and the Partnerships; and
(d) the names and current compensation packages of all
independent contractors and consultants of each of the Corporations and the
Partnerships whose compensation in calendar 1995 to date equals or exceeds an
annualized rate of $5,000 per year.
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 each of the Corporations and the Partnerships
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, partner, officer, director, employee or other representative of any
of the Corporations or the Partnerships, and no Persons related to or affiliated
with any of them, has any interest (other than in such Person's capacity as a
Shareholder of the Corporations or a partner of the Partnerships) (a) in any
property, real or personal, tangible or intangible, used in or directly
pertaining to the business of any of the Corporations or the Partnerships,
including, without limitation, inventions, patents, trademarks or trade names,
or (b) in any agreement, contract, arrangement or obligation relating to any of
the Corporations or the Partnerships, 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 any of
the Corporations or the Partnerships and any of its officers, directors,
Shareholders, partners, affiliates or any affiliate thereof. Each of the
Corporations and the Partnerships and its partners, Shareholders, 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 any of the Corporations or the Partnerships is now engaged or proposes to
engage; (b) is a supplier, customer, creditor, or has an existing
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<PAGE> 32
contractual relationship with any of the Corporations' or the Partnerships'
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 any of the Corporations or the Partnerships or any property, real
or personal, tangible or intangible, that is necessary or desirable for the
present or anticipated future conduct of the business of any of the Corporations
or the Partnerships.
2.28 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and warrants
to the Purchaser and Sierra as follows:
(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 its investment in the
Securities.
(b) SEC Documents. Such Shareholder acknowledges that it has
had the opportunity to review to its satisfaction all publicly available filings
and reports of Sierra with the Securities and Exchange Commission (the "SEC").
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 it deems necessary, its 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 its financial
condition and investment needs.
(d) Sophistication. Such Shareholder, either alone or with the
assistance of its professional advisors, is a sophisticated investor, is able to
fend for itself in the transactions contemplated by this Agreement relating to
the Securities and has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of the prospective
investment in the Securities.
(e) Access to Information. Such Shareholder has been given
access to full and complete information regarding Sierra and has utilized such
access to its satisfaction for the purpose of obtaining information about
Sierra.
(f) Acquisition Entirely for Own Account. The Securities are
being acquired by such Shareholder for investment for its own 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> 33
(g) Due Diligence. Such Shareholder has conducted its own due
diligence investigation of Sierra and its business, and its own 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 it to
assist it.
(h) 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 it is familiar with Rule 144 and Rule 145 under the 1933 Act as
presently in effect, and understands the resale limitations imposed thereby and
by the 1933 Act.
(i) Exemption Reliance. Such Shareholder has been advised that
the Securities have not been registered under the 1933 Act or any applicable
state securities laws, but are being issued under this Agreement pursuant to
exemptions from such laws, and that Sierra's reliance upon such exemptions is
predicated in part upon the Shareholder's representations contained herein.
(j) Further Limitations on Disposition. Without in any way
limiting the representations set forth it, 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 otherwise shall be satisfied that such
proposed disposition complies in all respects with Rule 144 and Rule
145 under the 1933 Act or any successor rules providing a safe harbor
for such disposition without registration.
(k) 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.
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AGREEMENT AND PLAN OF MERGER Page 27
<PAGE> 34
(l) Legend. It is understood that the certificates evidencing
the Securities may bear the following 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
Each of the Corporations and the Partnerships has not taken and will
not take, and the Shareholders of the Corporation have not taken and will not
take, directly or indirectly, and the Corporations, the Partnerships and the
Shareholders will use their respective best efforts to prevent any other Person
from taking, any actions, including without limitation any recapitalization or
repurchase or redemption of any securities of the Corporations or any interest
in the Partnerships, or any grant or acceleration of any options to acquire
securities of the Corporations or any interest in the Partnership, or any
purchase or sale of securities of Sierra, and none of the Corporations, the
Partnerships or the Shareholders is aware of any facts which otherwise could
prevent Sierra from accounting for the transactions contemplated by this
Agreement as a "pooling of interests" in accordance with GAAP.
2.30 FULL DISCLOSURE
No information furnished by the Corporations, the Partnerships or the
Shareholders to Sierra or the Purchaser 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 Corporations to the Shareholders in connection with their
approval of the Merger and execution and delivery of this Agreement, is false or
misleading in any material respect. None of the Corporations, the Partnerships
nor any Shareholder has made any untrue statement of a material fact or omitted
to state a material fact necessary in order to make not misleading the
statements made or information delivered in or pursuant to this Agreement,
including, but not limited to, all Schedules to the Disclosure Memorandum and
Exhibits hereto, or in or pursuant to the other Operative Documents, or in or
pursuant to closing certificates executed or delivered by the Shareholders, the
Partnerships or the Corporations. In connection with their consideration and
approval of the Merger and the other transactions contemplated hereby, the
Corporations have furnished to their Shareholders all information required to be
disclosed under all applicable laws (including without limitation applicable
securities laws). Such information
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AGREEMENT AND PLAN OF MERGER Page 28
<PAGE> 35
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
To induce the Corporations, the Partnerships and the Shareholders to
enter into and perform this Agreement and the Operative Documents, Sierra
represents and warrants to the Corporations, the Partnerships and the
Shareholders as follows in this Article III.
3.1 ORGANIZATION
Sierra is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Sierra 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
it is a party, and to carry out the transactions contemplated hereby and
thereby. Sierra is qualified to do business and is in good standing in each
jurisdiction in which the properties owned, leased or operated by it or the
nature of the business conducted by it makes such qualification necessary,
except where failure to be so qualified and in good standing would not have a
material adverse effect on Sierra's business.
3.2 ENFORCEABILITY
All corporate action on the part of Sierra 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 Sierra's obligations under this
Agreement and the Operative Documents has been taken or will be taken prior to
the Closing. 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.
3.3 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
Except as would not have a material adverse effect on Sierra, 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 California Secretary of State (the consent
of all such Persons to be duly obtained at or prior to the Closing),
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AGREEMENT AND PLAN OF MERGER Page 29
<PAGE> 36
(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) result in the creation of any lien
or encumbrance upon the assets of Sierra or the Purchaser or upon any
outstanding shares or other securities of Sierra or the Purchaser, (v) 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 (vi) invalidate or adversely affect
any permit, license, authorization or status used in the conduct of the business
of Sierra.
3.4 CAPITALIZATION
The authorized capital stock of Sierra consists of 40,000,000 shares of
common stock, $.01 par value per share, of which 16,580,984 shares were issued
and outstanding as of March 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 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.
3.5 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, 1994, its
Quarterly Reports on Form 10-Q for the fiscal quarters ending June 30, September
30 and December 31, 1994, its Proxy Statement relating to its 1994 Annual
Meeting of Stockholders in August 1994, and its Current Report on Form 8-K filed
with the SEC on December 30, 1994 (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.
3.6 CLAIMS AND LEGAL PROCEEDINGS
Except matters disclosed in the SEC Documents, there are no material
claims, actions, suits, arbitrations, investigations or proceedings pending or
involving or, to Sierra's best knowledge, threatened against Sierra before or by
any court or governmental or nongovernmental department, commission, board,
bureau, agency or instrumentality, or any other Person.
3.7 BROKERS OR FINDERS
Each of the Corporations and the Partnerships has not incurred, and
will not incur, directly or indirectly, as a result of any action taken by or on
behalf of any of them, any
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AGREEMENT AND PLAN OF MERGER Page 30
<PAGE> 37
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.
3.8 FULL DISCLOSURE
No information furnished by Sierra to the Shareholders in connection
with this Agreement or the other Operative Documents is false or misleading in
any material respect. Sierra has not made any untrue statement of a material
fact or omitted to state a material fact necessary in order to make not
misleading the statements made or information delivered in or pursuant to this
Agreement or in or pursuant to the other Operative Documents.
ARTICLE IV - DELIVERIES BY THE CORPORATIONS, THE PARTNERSHIPS
AND THE SHAREHOLDERS
The Corporations, the Partnerships and the Shareholders shall deliver
to Sierra at the Closing the following documents and materials; provided,
however, that any such materials or documents not so delivered shall be deemed
irrevocably waived by Sierra and the Purchaser.
4.1 OPINION OF COUNSEL FOR THE CORPORATIONS, THE PARTNERSHIPS AND
THE SHAREHOLDERS
There shall be delivered to Sierra at the Closing an opinion letter of
Cooley Godward Castro Huddleson & Tatum, counsel for the Corporations, the
Partnerships and the Shareholders, dated the Closing Date, in the form attached
hereto as Exhibit F.
4.2 RESIGNATIONS
There shall be delivered to Sierra at the Closing copies of
resignations effective as of the Closing Date of all the officers and directors
of the Corporations.
4.3 CONSENTS TO MERGER
The Corporations shall have received and shall have delivered to Sierra
written consents to the Merger from each of the parties (other than the
Corporations) to those agreements, leases, notes or other documents identified
on Schedules 2.6 and 2.17 to the Disclosure Memorandum.
4.4 APPROVALS AND CONSENTS
There shall be delivered to Sierra evidence of all transfers of permits
or licenses, all approvals, applications 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 Corporations.
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AGREEMENT AND PLAN OF MERGER Page 31
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4.5 SECRETARIES' CERTIFICATES
Sierra shall have received a certificate of the Secretary of each of
the Corporations as to the authenticity and effectiveness of (a) the actions of
the Board of Directors and Shareholders of the Corporations authorizing the
Merger and the transactions contemplated by this Agreement and the Operative
Documents and (b) the Articles of Incorporation and Bylaws of each of the
Corporations.
4.6 AMENDMENTS OF CONSULTANT AGREEMENTS
The Amendments to the Consultant Agreements referred to in the last
paragraph of Section 2.17 of this Agreement shall have been duly and validly
authorized, executed and delivered by all parties thereto, and an original,
fully executed copy of each such Amendment shall have been delivered to Sierra.
4.7 OPERATIVE DOCUMENTS
The Operative Documents, including without limitation the Inventions
Agreement and the Confidentiality Agreement required pursuant to the Designer
Bonus Agreements to be entered into by each of Martin Kahn, David Balsam, Ken
Grant and Vince Mills, shall have been executed and delivered by all parties
thereto other than Sierra and the Purchaser.
4.8 TERMINATION OF EMPLOYEE BENEFIT PLANS
There shall be delivered to Sierra at the Closing copies of the
documentation effecting the termination of all the Employee Benefit Plans of the
Corporations and the Partnerships referred to in Section 2.16 above.
ARTICLE V - DELIVERIES BY SIERRA
Sierra shall deliver to the Shareholders at the Closing the following
documents and materials; provided, however, that any such materials or documents
not so delivered shall be deemed irrevocably waived by the Shareholders
5.1 OPINION OF COUNSEL
There shall be delivered to the Shareholders at the Closing an opinion
letter of Perkins Coie, counsel for Sierra, dated the Closing Date, in the form
attached hereto as Exhibit G.
5.2 OPERATIVE DOCUMENTS
Sierra shall have executed and delivered to the Shareholders all the
Operative Documents to which Sierra is a party.
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AGREEMENT AND PLAN OF MERGER Page 32
<PAGE> 39
ARTICLE VI - COVENANTS
6.1 CONFIDENTIALITY
All information obtained by either party or its officers, directors,
employees, auditors or agents pursuant in connection with the transactions
contemplated by this Agreement shall be kept confidential in accordance with the
confidentiality agreement, dated May 16, 1995 (the "Confidentiality Agreement"),
between Sierra and Pixellite Group. No investigation in connection with the
transactions contemplated by this Agreement shall affect any representation or
warranty in this Agreement of any party hereto or any condition to the
obligations of the parties hereto. Upon the Effective Time, the Confidentiality
Agreement shall be deemed to have terminated without further action by the
parties thereto.
6.2 FURTHER ACTION
Upon the terms and subject to the conditions hereof, each of Sierra,
the Purchaser and the Corporations, the Partnerships and the Shareholders agrees
to use its 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 best
efforts to obtain all waivers, licenses, permits, consents, approvals,
authorizations, qualifications and orders of governmental authorities and
parties to contracts with the Corporations, the Partnerships or the Shareholders
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 of the Corporations, the Partnerships and the
Shareholders shall use its best efforts to take all such action. No Corporation,
Partnership or 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. 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 Corporations and to effect the issuance
of the Sierra Common Stock to the Shareholders pursuant to the terms and
conditions hereof.
6.3 PUBLICITY
The Shareholders, the Corporations and the Partnerships shall not issue
any press release or otherwise make any statements 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
prior to issuing any press release relating to the transactions contemplated
hereby and shall provide the Shareholders with a reasonable opportunity to
comment thereon.
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AGREEMENT AND PLAN OF MERGER Page 33
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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 Corporations):
(a) by mutual written consent of the Shareholders and Sierra;
(b) by either the Shareholders or Sierra, if the Merger has
not been consummated by June 15, 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 Shareholders 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
Corporations or Purchaser 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 Corporations, 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 sole discretion of Sierra, make it inadvisable
to consummate the Merger or the other transactions contemplated hereby;
(e) by the Shareholders, 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 within 10 days after written notice to Sierra
by the Shareholders; or
(f) by Sierra, in the event of a material breach by any of the
Corporations, the Partnerships or the Shareholders of any representation,
warranty or agreement contained herein which has not been cured or is not
curable within 10 days after written notice to the Shareholders by Sierra.
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 breach hereof.
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7.3 AMENDMENT
This Agreement may be amended by the parties hereto at any time prior
to the Effective Time. This Agreement may not be amended except by an instrument
in writing signed by all parties hereto.
7.4 WAIVER
At any time prior to the Effective Time, Sierra, on the one hand, and
the Shareholders, on the other hand, may (a) extend the time for the performance
of any obligation or other act of the other party, (b) waive any inaccuracy in
the representations and warranties of the other party contained herein or in any
document delivered pursuant hereto or (c) waive compliance with any agreement or
condition of the other party 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
any certificate delivered pursuant hereto 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. 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 BY THE SHAREHOLDERS
From and after the Closing Date, the Shareholders shall jointly and
severally indemnify and hold Sierra and its officers, directors, employees and
control persons (the "Sierra Indemnified Parties") harmless from and against,
and shall reimburse the Sierra 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 reasonable legal or accounting fees and expenses) ("Losses")
arising out of or in connection with:
(a) any inaccuracy in any representation or warranty made by
the Corporations, the Partnerships or the Shareholders in this Agreement or in
any certificate delivered pursuant hereto, and any inaccuracy in any disclosure
documents furnished to Shareholders of the Corporations in connection with their
approval of the Merger and this Agreement, or
(b) any failure by the Corporations, the Partnerships or any
Shareholder to perform or comply, in whole or in part, with any covenant or
agreement in this Agreement.
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8.3 INDEMNIFICATION BY SIERRA
From and after the Closing Date Sierra shall indemnify and hold
harmless each Shareholder and his successors, assigns, heirs and legatees (the
"Shareholder Indemnified Parties"; together with the Sierra Indemnified Parties,
the "Indemnified Parties") from and against, and shall reimburse the Shareholder
Indemnified Parties for, any and all Losses arising out of or in connection
with:
(a) any inaccuracy in any representation or warranty made by
the Purchaser or Sierra in this Agreement or in any certificate delivered
pursuant hereto, or
(b) any failure by the Purchaser or Sierra to perform or
comply, in whole or in part, with any covenant or agreement in this Agreement.
8.4 DEDUCTIBLE AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any Losses until the aggregate Losses
which the Sierra Indemnified Parties or the Shareholder Indemnified Parties, as
the case may be, would be otherwise entitled to receive as indemnification with
respect to any Claims exceed $25,000 (the "Threshold").
(b) In no event shall the liability of the Shareholders
hereunder for Losses incurred by Sierra Indemnified Parties exceed an amount
equal to the total number of shares of Sierra Common Stock issued to the
Shareholders pursuant to the Merger multiplied by the Closing Average.
(c) The remedies set forth in this Article VIII shall be the
exclusive remedies of the parties to this Agreement with respect to matters
arising out of this Agreement; provided, however, that the foregoing clause of
this sentence shall not be deemed a waiver by any party to this Agreement of any
of its rights or remedies arising by way of fraud in the inducement or similar
matters.
8.5 PROCEDURE FOR INDEMNIFICATION
(a) Any 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) 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,
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AGREEMENT AND PLAN OF MERGER Page 36
<PAGE> 43
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. The
Indemnified Party shall cooperate with the indemnifying 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.
(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, 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 within six months 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.
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ARTICLE IX - GENERAL
9.1 EXPENSES
Whether or not the transactions contemplated by this Agreement are
consummated, the Shareholders shall pay the fees and expenses of the
Corporations, the Partnerships and the Shareholders, and Sierra shall pay the
fees and expenses of Sierra and the Purchaser, incident to the negotiation,
preparation and carrying out of this Agreement and the other Operative Documents
(including legal and accounting fees and expenses); provided, however, that at
the Closing Sierra shall pay the fees and expenses of Cooley Godward Castro
Huddleson & Tatum, not to exceed $69,125; provided further, 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.
9.2 NOTICES
Any notice or demand 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 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 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.
TO THE PURCHASER AND TO SIERRA:
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
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TO THE CORPORATIONS AND
THE PARTNERSHIPS:
c/o Pixellite Group
P.O. Box 151
21800 Moscow Road
Villa Grande, CA 95486-0151
Fax: (707) 865-9042
Attention: Martin Kahn
with a copy to:
Cooley Godward Castro Huddleson & Tatum
Five Palo Alto Square
3000 El Camino Real
Palo Alto, CA 94306-2155
Fax: (415) 857-0663
Attention: Gregory C. Smith
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 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 and the other Operative Documents constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede, except as set forth in Section 6.1 hereof, 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.
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AGREEMENT AND PLAN OF MERGER Page 39
<PAGE> 46
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 SPECIFIC PERFORMANCE
The parties hereto agree that irreparable damage would occur in the
event any provision of this Agreement was not performed in accordance with the
terms hereof and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity.
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. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined in any Washington state
or federal court situated therein.
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 WAIVER OF JURY TRIAL
Each of the Shareholders, the Corporations, the Partnerships, Sierra
and the Purchaser hereby irrevocably waives all right to trial by jury in any
action, proceeding or counterclaim (whether based on contract, tort or
otherwise) arising out of or relating to this Agreement or the actions of such
parties in the negotiation, administration, performance and enforcement thereof.
9.11 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.
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AGREEMENT AND PLAN OF MERGER Page 40
<PAGE> 47
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
---------------------------------------------
Title: President & Chief Executive Officer
------------------------------------------
PIXEL ACQUISITION CORP.
By: /s/ Michael A. Brochu
---------------------------------------------
Title: President
-------------------------------------------------
PIXELLITE GROUP
By: /s/ Pixellite Software
---------------------------------------------
By: /s/ Martin Kahn, Inc.
---------------------------------------------
By: /s/ Martin Kahn
---------------------------------------------
President
---------------------------------------------
PIXELLITE SOFTWARE
By: /s/ Martin Kahn, Inc.
---------------------------------------------
By: /s/ Martin Kahn
---------------------------------------------
President
---------------------------------------------
KEN GRANT, INC.
By: /s/ Ken Grant
---------------------------------------------
Title: President
------------------------------------------
MARTIN KAHN, INC.
By: /s/ Martin Kahn
---------------------------------------------
Title: President
------------------------------------------
DAVID BALSAM, INC.
By: /s/ Dick B. Balsam
---------------------------------------------
Title: President
------------------------------------------
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AGREEMENT AND PLAN OF MERGER
<PAGE> 48
STOCKHOLDERS:
/s/ Ken Grant
---------------------------------------------
KEN GRANT
/s/ Martin Kahn
---------------------------------------------
MARTIN KAHN
/s/ David B Balsam
---------------------------------------------
DAVID BALSAM
/s/ Sherrill Grant
---------------------------------------------
SHERRILL GRANT
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
<PAGE> 1
SHARE EXCHANGE AGREEMENT
AMONG
SIERRA ON-LINE, INC.,
SOFTWARE INSPIRATION LTD.,
AND
THE SHAREHOLDERS OF SOFTWARE INSPIRATION LTD.
DATED AS OF JUNE 20, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I - SHARE EXCHANGE .............................................................. 1
1.1 Exchange of Shares .............................................................. 1
1.2 Consideration for Company Shares ................................................ 1
1.2.1 Closing Consideration ................................................ 1
1.2.2 Escrow ............................................................... 2
1.2.3 Special Definitions .................................................. 2
1.3 The Closing ..................................................................... 2
1.4 No Fractional Shares ............................................................ 3
1.5 Pooling Restrictions on Transfer of Sierra Shares ............................... 3
1.6 U.S. Tax Treatment .............................................................. 3
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS ........................ 3
2.1 Good Title, etc. ................................................................ 3
2.2 No Approvals or Notices Required; No Conflicts With Instruments ................. 4
2.3 Pooling Matters ................................................................. 4
2.4 Insider Interests ............................................................... 4
2.5 Securities Act Matters .......................................................... 5
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE MAJOR SHAREHOLDER .................. 7
3.1 Organization .................................................................... 7
3.2 Enforceability .................................................................. 8
3.3 Capitalization .................................................................. 8
3.4 Subsidiaries and Affiliates ..................................................... 9
3.5 No Approvals or Notices Required; No Conflicts With Instruments ................. 9
3.6 Financial Statements ............................................................ 10
3.7 Absence of Certain Changes or Events ............................................ 10
3.8 Taxes ........................................................................... 13
3.9 Property ........................................................................ 14
</TABLE>
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SHARE EXCHANGE AGREEMENT Page i
<PAGE> 3
<TABLE>
<S> <C>
3.10 Contracts ....................................................................... 16
3.11 Customers and Suppliers ......................................................... 18
3.12 Orders, Commitments and Returns ................................................. 18
3.13 Claims and Legal Proceedings .................................................... 18
3.14 Labor Matters ................................................................... 18
3.15 Employee Benefit Plans .......................................................... 19
3.16 Intellectual Property ........................................................... 20
3.17 Accounts Receivable ............................................................. 22
3.18 Inventory ....................................................................... 23
3.19 Corporate Books and Records ..................................................... 23
3.20 Licenses, Permits, Authorizations, etc. ......................................... 23
3.21 Compliance With Laws ............................................................ 23
3.22 Insurance ....................................................................... 24
3.23 Brokers or Finders .............................................................. 24
3.24 Government Contracts ............................................................ 25
3.25 Absence of Questionable Payments ................................................ 25
3.26 Personnel ....................................................................... 25
3.27 Insider Interests ............................................................... 26
3.28 Pooling Matters ................................................................. 26
3.29 Full Disclosure ................................................................. 27
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA ................................... 27
4.1 Organization .................................................................... 27
4.2 Enforceability .................................................................. 27
4.3 No Approvals or Notices Required; No Conflicts With Instruments ................. 28
4.4 Litigation ...................................................................... 28
4.5 SEC Filings ..................................................................... 28
4.6 Good Title ...................................................................... 28
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA ............................... 29
5.1 Accuracy of Representations and Warranties ...................................... 29
</TABLE>
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SHARE EXCHANGE AGREEMENT Page ii
<PAGE> 4
<TABLE>
<S> <C>
5.2 Performance of Agreements ....................................................... 29
5.3 Opinions of Counsel for the Company ............................................. 29
5.4 Resignations .................................................................... 29
5.5 Consents to Share Exchange ...................................................... 29
5.6 Major Shareholder's Certificate ................................................. 30
5.7 Material Adverse Change ......................................................... 30
5.8 Due Diligence ................................................................... 30
5.9 Approvals and Consents .......................................................... 30
5.10 Proceedings and Documents; Secretary's Certificate .............................. 30
5.11 Nonforeign Affidavit ............................................................ 30
5.12 Compliance With Laws ............................................................ 31
5.13 Pooling of Interests ............................................................ 31
5.14 Other Agreements ................................................................ 31
5.15 Legal Proceedings ............................................................... 31
5.16 Operative Documents ............................................................. 31
ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE
COMPANY ......................................................................... 31
6.1 Accuracy of Representations and Warranties ...................................... 31
6.2 Performance of Agreements ....................................................... 32
6.3 Opinion of Counsel .............................................................. 32
6.4 Officers' Certificate ........................................................... 32
6.5 Legal Proceedings ............................................................... 32
6.6 Operative Documents ............................................................. 32
ARTICLE VII - COVENANTS ................................................................. 32
7.1 Conduct of Business by the Company Pending the Closing .......................... 32
7.2 Access to Information; Confidentiality .......................................... 34
7.3 No Solicitation of Transactions ................................................. 35
7.4 Notification of Certain Matters ................................................. 35
7.5 Further Action; Reasonable Best Efforts ......................................... 35
7.6 Publicity ....................................................................... 36
</TABLE>
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SHARE EXCHANGE AGREEMENT Page iii
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER ........................................ 36
8.1 Termination ..................................................................... 36
8.2 Effect of Termination ........................................................... 37
8.3 Amendment ....................................................................... 37
8.4 Waiver .......................................................................... 37
ARTICLE IX - SURVIVAL AND INDEMNIFICATION ............................................... 37
9.1 Survival ........................................................................ 37
9.2 Indemnification by the Shareholders ............................................. 38
9.3 Indemnification by Sierra ....................................................... 38
9.4 Threshold and Limitations ....................................................... 38
9.5 Procedure for Indemnification ................................................... 39
9.6 Offset .......................................................................... 40
ARTICLE X - GENERAL ..................................................................... 40
10.1 Expenses ........................................................................ 40
10.2 Notices ......................................................................... 40
10.3 Severability .................................................................... 41
10.4 Entire Agreement ................................................................ 42
10.5 Assignment ...................................................................... 42
10.6 Parties in Interest ............................................................. 42
10.7 Specific Performance ............................................................ 42
10.8 Governing Law ................................................................... 42
10.9 Headings ........................................................................ 43
10.10 Counterparts .................................................................... 43
10.11 Waiver of Jury Trial ............................................................ 43
10.12 Waiver of Preemptive and Other Rights ........................................... 43
</TABLE>
EXHIBITS
Exhibit A - Form of Escrow Agreement
Exhibit B - Shareholder Disclosure Memorandum
Exhibit C - Form of Registration Rights Agreement
Exhibit D - Form of Noncompetition Agreement
Exhibit E - Company Disclosure Memorandum
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SHARE EXCHANGE AGREEMENT Page iv
<PAGE> 6
Exhibit F - List of Agreements to be Amended or Terminated
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SHARE EXCHANGE AGREEMENT Page v
<PAGE> 7
SHARE EXCHANGE AGREEMENT
This Share Exchange Agreement (this "Agreement") is made and entered
into as of June 20, 1995 by and among Sierra On-Line, Inc., a Delaware
corporation ("Sierra"), Software Inspiration Ltd., a corporation organized under
the laws of England (the "Company"), David Lester (the "Majority Shareholder")
and all the shareholders of the Company other than the Major Shareholder
(together with the Major Shareholder, the "Shareholders").
RECITALS
A. The parties hereto believe it advisable and in their respective best
interests to effect the exchange of all issued and outstanding shares of capital
stock of the Company (the "Company Shares"), all of which are owned as of the
date hereof by the Shareholders, for shares of common stock, $.01 par value per
share, of Sierra ("Sierra Common Stock") as contemplated herein (the "Share
Exchange").
B. The parties hereto also contemplate entering into certain other
agreements ancillary to this Agreement at the Closing (as defined below).
AGREEMENT
In consideration of the terms hereof, the parties hereto agree as
follows:
ARTICLE I - SHARE EXCHANGE
1.1 EXCHANGE OF SHARES
On the terms and subject to the conditions of this Agreement, Sierra
agrees to purchase the Company Shares from the Shareholders, and the
Shareholders agree to sell the Company Shares to Sierra. The names of the
Shareholders and the number of Company Shares held by each are set forth on
Schedule 2.1 to the Company Disclosure Memorandum (as hereinafter defined).
1.2 CONSIDERATION FOR COMPANY SHARES
The aggregate purchase price for the Company Shares shall be (a) a
number of shares of Sierra Common Stock which, when multiplied by the Closing
Average (as defined below), and excluding any fractional shares, equals
US$13,870,000 less the amount of the Adjustment (as defined below), plus (b)
US$90.00 in cash all as set forth below in this Section 1.2.
1.2.1 CLOSING CONSIDERATION
Each Shareholder shall be entitled to receive at or as soon as
practicable after the Closing, upon surrender to Sierra at the Closing of a
certificate or certificates, duly endorsed
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SHARE EXCHANGE AGREEMENT Page 1
<PAGE> 8
for transfer, representing the total number of Company Shares owned by such
Shareholder (or affidavits concerning the loss of such certificates), (a) a
number of shares of Sierra Common Stock (excluding any fractional shares) equal
to the total number of Closing Shares (as defined below) multiplied by a
fraction, the numerator of which is the total number of such Company Shares so
surrendered by such Shareholder and the denominator of which is the total number
of Company Shares outstanding, and (b) US$10.00 payable to each Shareholder in
cash.
1.2.2 ESCROW
As soon as practicable after the Closing, Sierra shall deposit into
escrow, in accordance with the terms of an Escrow Agreement in substantially the
form attached hereto as Exhibit A (the "Escrow Agreement") to be entered into at
the Closing among the Shareholders and Sierra, a number of shares of Sierra
Common Stock (excluding any fractional shares) equal to the total number of
Escrow Shares (as defined below). The Escrow Shares, or the proceeds from any
disposition thereof in accordance with the Escrow Agreement, shall be
distributed from escrow in accordance with the Escrow Agreement.
1.2.3 SPECIAL DEFINITIONS
(a) The term "Closing Average" shall mean the average of the
last reported sale prices of Sierra Common Stock on the Nasdaq National Market
over the 20 consecutive trading days ending with the third trading day prior to
the date on which the Closing occurs.
(b) The term "Closing Shares" shall mean a number of shares of
Sierra Common Stock (rounded to the nearest whole share) which, when multiplied
by the Closing Average, equals U.S.$12,483,000.
(c) The term "Escrow Shares" shall mean a number of shares of
Sierra Common Stock (rounded to the nearest whole share) which, when multiplied
by the Closing Average, equals U.S.$1,387,000.
1.3 THE CLOSING
The closing of the Share Exchange pursuant to this Agreement (the
"Closing") shall take place on the earliest practicable business day after the
conditions to the Closing of the Share Exchange set forth in Articles V and VI
hereof are satisfied or waived (the "Closing Date") at 2:00 p.m. local time at
the offices of Perkins Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington,
U.S.A., or at 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.
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SHARE EXCHANGE AGREEMENT Page 2
<PAGE> 9
1.4 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 Shares pursuant to the Share Exchange, 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 any such fractional shares, each holder of Company Shares who otherwise
would have been entitled to a fraction of a share of Sierra Common Stock
pursuant to the Share Exchange will be paid cash upon such surrender in an
amount equal to such fraction multiplied by the Closing Average.
1.5 POOLING RESTRICTIONS ON TRANSFER OF SIERRA SHARES
No Shareholder shall transfer any Closing Shares or Escrow Shares until
at least three (3) business days after the issuance by Sierra of a press release
announcing 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 Company.
1.6 U.S. TAX TREATMENT
The parties agree that the purchase and sale of the Company Shares in
the Share Exchange shall be treated as a taxable transaction for U.S. federal
income tax purposes.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
To induce Sierra 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 Shareholder Disclosure Memorandum attached hereto as
Exhibit B (the "Shareholder Disclosure Memorandum"), which exceptions shall
specifically identify the paragraph or paragraphs of this Article II to which
such exceptions relate, and which shall constitute in its entirety a
representation and warranty under this Article II, the Shareholders jointly and
severally represent and warrant to Sierra 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 that (a) such
Shareholder owns the Company Shares listed opposite such Shareholder's name on
Schedule 2.1 to the Shareholder Disclosure Memorandum; (b) such Company Shares
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,
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SHARE EXCHANGE AGREEMENT Page 3
<PAGE> 10
the Registration Rights Agreement in substantially the form attached hereto as
Exhibit C to be entered into as of the Closing among Sierra and the
Shareholders, the Noncompetition Agreements in substantially the form attached
hereto as Exhibit D, to be entered into as of the Closing among Sierra and the
Major Shareholder and the Escrow Agreement (collectively, and including this
Agreement, the "Operative Documents"), to consummate the transactions
contemplated hereby and thereby, and to sell and transfer the Company Shares
held by such Shareholder hereunder without the consent or approval of any other
Person (as defined in Section 3.5 hereof), other than as set forth on Schedule
2.1 to the Shareholder 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 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
Except as set forth on Schedule 2.2 to the Shareholder Disclosure
Memorandum, the execution, delivery and performance of this Agreement by each
Shareholder and the consummation of the transactions contemplated hereby will
not (a) 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, (b) 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 Share Exchange with applicable government
authorities (the consent of all such Persons to be duly obtained by the Company
or the Shareholder at or prior to the Closing), (c) result in the creation of
any lien or encumbrance upon the Company Shares owned by such Shareholder, or
(d) conflict with or result in a breach of or constitute a default under any
provision of the Certificate of Incorporation or By-Laws (or comparable charter
documents) of the Company.
2.3 POOLING MATTERS
No Shareholder has taken any action, or become aware of any action
taken by the Company, any Subsidiary (as defined in Section 3.1 hereof) or any
officer or director of the Company or any Subsidiary which, alone or together
with other facts or circumstances, could affect the ability of Sierra to account
for the Share Exchange as a "pooling of interests" transaction consistent with
GAAP (as defined in Section 3.6 hereof).
2.4 INSIDER INTERESTS
Except as set forth on Schedule 2.4 to the Shareholder Disclosure
Memorandum, no Shareholder 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, copyrights, trademarks or trade names, or (b)
in any agreement, contract, arrangement or obligation relating to the Company,
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SHARE EXCHANGE AGREEMENT Page 3
<PAGE> 11
its present or prospective business or its operations. Except as set forth on
Schedule 2.4 to the Shareholder Disclosure Memorandum, there are no agreements,
understandings or proposed transactions between the Company and any of its
Shareholders or any affiliate thereof. Except as set forth on Schedule 2.4 to
the Shareholder Disclosure Memorandum, no Shareholder has any 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 (x) 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; (y) is a supplier, customer, creditor, or has an
existing contractual relationship with any of the Company's employees (or
persons performing similar functions); or (z) 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.
2.5 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and warrants
to Sierra as follows:
(a) Ability to Bear Risk. Such Shareholder is in a financial
position to hold the shares of Sierra Common Stock to be issued to such
Shareholder hereunder for an indefinite period of time and is able to bear the
economic risk and withstand a complete loss of its investment in such shares.
(b) SEC Documents. Such Shareholder acknowledges that it has
had the opportunity to review to its satisfaction all publicly available filings
and reports of Sierra with the Securities and Exchange Commission. Such
Shareholder acknowledges that an investment in the shares of Sierra Common Stock
to be issued to such Shareholder hereunder involves a high degree of risk.
(c) Professional Advice. Such Shareholder has obtained, to the
extent that it deems necessary, its own professional advice with respect to the
risks inherent in acquiring the shares of Sierra Common Stock to be issued to
such Shareholder hereunder, the condition of Sierra and the suitability of its
investment in such shares in light of its financial condition and investment
needs.
(d) Sophistication. Such Shareholder, either alone or with the
assistance of its professional advisors, is a sophisticated investor, is able to
fend for itself in the transactions contemplated by this Agreement relating to
the shares of Sierra Common Stock to be issued to such Shareholder hereunder and
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the prospective investment in such
shares.
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SHARE EXCHANGE AGREEMENT Page 5
<PAGE> 12
(e) 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 its satisfaction for the purpose of obtaining information about Sierra.
(f) Acquisition Entirely for Own Account. The shares of Sierra
Common Stock to be issued to such Shareholder hereunder 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 such shares in a manner contrary to the
Securities Act of 1933, as amended (the "1933 Act"), or to any applicable state
or foreign 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 such shares.
(g) Due Diligence. Such Shareholder has conducted its own due
diligence investigation of Sierra and its business and analysis of the merits
and risks of an investment in the shares of Sierra Common Stock to be issued to
such Shareholder hereunder 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
such shares, other than professionals, if any, employed specifically by it to
assist it.
(h) Restricted Securities. Such Shareholder acknowledges that
the shares of Sierra Common Stock to be issued to such Shareholder hereunder
have not been and will not prior to issuance be registered under the 1933 Act
and that such shares 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 such shares in the
foreseeable future. In this connection, such Shareholder represents that it 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.
(i) Exemption Reliance. Such Shareholder has been advised that
the shares of Sierra Common Stock to be issued to such Shareholder hereunder
have not been registered under the 1933 Act or any applicable state or foreign
securities laws, but are being issued under this Agreement pursuant to
exemptions from such laws, and that Sierra's reliance upon such exemptions is
predicated in part upon the Shareholder's representations contained herein.
(j) 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 shares of Sierra Common
Stock to be issued to such Shareholder hereunder unless and until:
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SHARE EXCHANGE AGREEMENT Page 6
<PAGE> 13
(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; or
(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 under the 1933 Act
or any successor rule providing a safe harbor for such disposition
without registration.
(k) Residency. For purposes of the application of state
securities laws, each Shareholder is a resident of the jurisdiction specified on
Schedule 2.5 to the Shareholder Disclosure Memorandum.
(l) Legend. It is understood that the certificates evidencing
the shares of Sierra Common Stock to be issued to such Shareholder hereunder
will bear a legend as set forth in the Registration Rights Agreement:
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF
THE MAJOR SHAREHOLDER
To induce Sierra to enter into and perform this Agreement and the other
Operative Documents, and except as is otherwise set forth in the Company
Disclosure Memorandum attached hereto as Exhibit E (the "Company Disclosure
Memorandum"), which exceptions shall specifically identify the paragraph or
paragraphs of this Article III to which such exceptions relate, and which shall
constitute in its entirety a representation and warranty under this Article III,
the Major Shareholder represents and warrants to Sierra as of the date of this
Agreement and as of the Closing as follows in this Article III. Except as to
Sections 3.1, 3.3, 3.4, 3.5(e) and 3.19(a) hereof, all references to the
"Company" in this Article III shall include the Company's Subsidiaries (as
defined in Section 3.1 below).
3.1 ORGANIZATION
The Company is a corporation duly organized, validly existing and in
good standing under the laws of England. Each subsidiary of the Company listed
on Schedule 3.4 to the Company Disclosure Memorandum (individually a
"Subsidiary" and together the "Subsidiaries") is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, which jurisdictions are set forth in Schedule 3.4 to the Company
Disclosure Memorandum. The Company and each Subsidiary have all requisite
corporate power and authority to own, operate and lease their properties and
assets, to carry
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SHARE EXCHANGE AGREEMENT Page 7
<PAGE> 14
on their respective businesses as now conducted and as proposed to be conducted,
and in the case of the Company 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 and each Subsidiary are duly
qualified and licensed as foreign corporations to do business and are in good
standing in each jurisdiction listed on Schedule 3.1, in the case of the
Company, and Schedule 3.4, in the case of the Subsidiaries, to the Company
Disclosure Memorandum, which jurisdictions constitute all jurisdictions where
the character of the Company's or such Subsidiary's properties occupied, owned
or held under lease or the nature of the business conducted by the Company or
such Subsidiary makes such qualification necessary, except as set forth on
Schedule 3.1 or Schedule 3.4, as the case may be, to the Company Disclosure
Memorandum and except where the failure to be so qualified or in good standing
would not have a material adverse effect on the business, business prospects,
assets, operations or condition (financial or other) of the Company or such
Subsidiary.
3.2 ENFORCEABILITY
All corporate action on the part of the Company and its officers,
directors and stockholders necessary for the authorization, execution, delivery
and performance of this Agreement and the Operative Documents, the consummation
of the Share Exchange, and the performance of all of the Company's obligations
under this Agreement and the Operative Documents has been taken or will be taken
prior to the Closing. 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.
3.3 CAPITALIZATION
(a) The authorized capital stock of the Company consists of
37,500 Ordinary Class A Shares and 12,500 Ordinary Class B Shares.
(b) The issued and outstanding capital stock of the Company
consists solely of 11,340 Ordinary Class A Shares and 2,250 Ordinary Class B
Shares, together constituting the Company Shares, which are and as of the
Closing will be held of record and beneficially by the Shareholders as set forth
on Schedule 2.1 to the Shareholder Disclosure Memorandum. The Company 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 party other than the
Shareholders holds any interest in any of the Company Shares.
(c) 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 or the capital
stock of any Subsidiary.
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<PAGE> 15
(d) Except as set forth on Schedule 3.3(d) to the Company
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 3.5 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. Except as set forth on Schedule 3.3(d) to
the Company Disclosure Memorandum, 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.
3.4 SUBSIDIARIES AND AFFILIATES
The name, jurisdiction of incorporation and jurisdictions of foreign
qualification of each of the Company's Subsidiaries are as set forth on Schedule
3.4 to the Company Disclosure Memorandum. Except as set forth on Schedule 3.4 to
the Company 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. The Company owns 100% of
the issued and outstanding shares of capital stock, or other ownership
interests, of each of the Subsidiaries, free and clear of any lien, encumbrance,
preemptive right, right of first offer or refusal, or other prior claim, and all
the issued and outstanding shares of capital stock, or other ownership
interests, of the Subsidiaries are duly authorized and validly issued, fully
paid and nonassessable, and were issued and acquired in compliance with all
applicable federal, state and foreign securities and other laws.
3.5 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
Except as set forth on Schedule 3.5(a) to the Company 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 (a) 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, (b) 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 Share Exchange with applicable government
authorities (the consent of all such Persons to be duly obtained by the Company
at or prior to the Closing), (c) 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, (d) result in the creation of any lien or
encumbrance upon the assets of the Company or upon any Company Shares or other
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SHARE EXCHANGE AGREEMENT Page 9
<PAGE> 16
securities of the Company, (e) conflict with or result in a breach of or
constitute a default under any provision of the Certificate of Incorporation or
By-laws of each Subsidiary or the Memorandum and Articles of Association of the
Company, or (f) invalidate or adversely affect any permit, license,
authorization or status used in the conduct of the business of the Company.
3.6 FINANCIAL STATEMENTS
The Company has delivered to Sierra (a) consolidated balance sheets and
consolidated statements of operations, stockholders' equity and cash flows of
the Company as of or for the fiscal years ended June 30, 1994 and 1993, and
accompanying notes, certified without qualification by Alliotts, chartered
accountants and registered auditors (the consolidated balance sheet of the
Company as of June 30, 1994 being herein referred to as the "Company Balance
Sheet"), and (b) an unaudited consolidated balance sheet and unaudited
consolidated statements of operations, shareholders' equity and cash flows of
the Company as of and for the ten-month period ended April 30, 1995. All of the
foregoing financial statements are herein referred to as the "Financial
Statements." The Financial Statements have been prepared in conformity with
generally accepted accounting practices in England consistently applied
throughout the periods covered therein ("GAAP") and present fairly in all
respects 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 the unaudited financial statements as of and for the ten-month
period ended April 30, 1995, to normal recurring period-end audit adjustments
which will not exceed $10,000 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 (a)
liabilities or obligations incurred since the date of the Company Balance Sheet
in the ordinary course of business and consistent with past practice which are
disclosed to Sierra or (b) as specifically set forth on Schedule 3.6 to the
Company Disclosure Memorandum. The Company maintains and will continue to
maintain standard systems of accounting established and administered in
accordance with GAAP. Except as set forth on Schedule 3.6 to the Company
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 GAAP and industry
standards, and consistent with the advice of the Company's independent auditors.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Except as specifically set forth on Schedule 3.7 to the Company
Disclosure Memorandum, 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;
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SHARE EXCHANGE AGREEMENT Page 10
<PAGE> 17
(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 working
capital, assets, liabilities (absolute, accrued, contingent or otherwise),
earnings, reserves, financial condition, business, prospects or operations;
(e) borrowed or agreed to borrow any funds, assumed or become
subject to, whether directly or by way of guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise), or
incurred any liabilities or obligations (absolute, accrued, contingent or
otherwise), 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;
(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 is in the
aggregate less than $5,000, was incurred in the ordinary course of business and
is not yet due and payable;
(h) between April 30, 1995 and the Closing, written down the
value of any inventory (including write-downs by reason of shrinkage or
markdown) or written off as uncollectible any notes or accounts receivable in
excess of reserves reflected in the balance sheet of the Company as of April 30,
1995, except for write-downs and write-offs that are in the aggregate less than
$10,000, incurred in the ordinary course of business and consistent with past
practice;
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SHARE EXCHANGE AGREEMENT Page 11
<PAGE> 18
(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 other than representatives of Sierra any trade secret, formula,
process or know-how not theretofore a matter of public knowledge;
(k) made aggregate capital expenditures in excess of $100,000
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 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 directors' fees and compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year ended June 30, 1994;
(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, co-signer, endorser, co-maker, 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 which relate directly to the
transactions contemplated herein or which
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SHARE EXCHANGE AGREEMENT Page 12
<PAGE> 19
would have any adverse effect upon the business, business prospects, assets,
liabilities or financial condition of the Company;
(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;
(r) received notice that there has been a loss of, or contract
cancellation by, any current or prospective customer, licensor or distributor of
the Company;
(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 Share Exchange as a "pooling of
interests" transaction consistent with GAAP; or
(t) agreed, whether in writing or otherwise, to take any
action described in this Section 3.7.
3.8 TAXES
Except as described on Schedule 3.8 to the Company Disclosure
Memorandum, the Company has (a) duly and timely filed, including valid
extensions, with the appropriate governmental agencies (domestic (U.S.) 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 in all
respects, and (c) except as set forth on Schedule 3.8 to the Company 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, unemployment, capital gains, corporation,
VAT, inheritance or other taxes imposed by the United States or any agency or
instrumentality thereof, any state, county, local or foreign government
(including without limitation the United Kingdom or any agency or
instrumentality thereof), 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 3.8 to the Company 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, as determined in accordance with GAAP
consistently applied; (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) 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
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<PAGE> 20
circumstances relating to the existence of a valid subchapter 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 Internal Revenue Code of
1986, as amended (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, except for Returns for periods as to which all applicable statutes of
limitations have expired. There are no tax liens on any property or assets of
the Company other than liens for current property 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 has not been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party
to any Tax allocation or sharing agreement, and, except as set forth on Schedule
3.8 to the Company 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. Software Inspiration Ltd. is a
"resident of the United Kingdom" as that phrase is defined in the income tax
treaty between the United Kingdom and the United States currently in force (the
"Tax Treaty"), and has never carried on business in the United States through a
permanent establishment in the United States such that it would be subject to
U.S. federal income taxes pursuant to Article 7 of the Tax Treaty.
Notwithstanding any other provision of this Agreement, the Company and the
Shareholders make no representations or warranties with respect to transfer
pricing between the Company and any Subsidiary of the Company.
3.9 PROPERTY
(a) The Company owns no real property other than the leasehold
interests described herein. Schedule 3.9(a) to the Company Disclosure Memorandum
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 leases, subleases, rental
agreements, contracts of sale, tenancies or licenses relating to the Real
Property.
(b) The Schedule 3.9(b) to the Company Disclosure Memorandum
contains a complete and accurate list of each item of personal property having a
value in excess of $2,000 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 3.16 hereof). The Company has delivered to Sierra true and complete
copies of all leases, subleases, rental agreements,
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SHARE EXCHANGE AGREEMENT Page 14
<PAGE> 21
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 $2,000, 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 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 property used in the
business of the Company.
(c) The Company's leasehold interest in each parcel of the
Real Property is free and clear of all 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 3.9(c) to the Company
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 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 3.5 to the Company 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 3.9(d) to the Company
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 3.9(e) to the Company
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 is in the aggregate less than $5,000,
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 3.9, the Company owns such Personal Property.
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<PAGE> 22
(f) Except as set forth on Schedule 3.9(f) to the Company
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 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 3.9(f) to the Company
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.
(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.
3.10 CONTRACTS
Schedule 3.10 to the Company Disclosure Memorandum contains a complete
and accurate list of all contracts, agreements and understandings, oral or
written, to which the Company is a party or by which the Company is bound,
including, without limitation, security agreements, license agreements, software
development agreements, credit agreements, conditional sales agreements,
instruments relating to the borrowing of money, and distributorship agreements.
Except as set forth on Schedule 3.10 to the Company 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 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. True and complete copies of each such contract
have been heretofore delivered to Sierra. Except as specifically set forth on
Schedule 3.10 to the Company Disclosure Memorandum, the Company has no:
(a) agreements, contracts, commitments or restrictions
requiring the Company to make any charitable contribution;
(b) purchase contracts or commitments of the Company that
continue for a period of more than 12 months or are in excess of the normal,
ordinary and usual requirements of its business or that are at an excessive
price to the extent that such excess would be material to the Company's business
as a whole;
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<PAGE> 23
(c) 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;
(d) contracts with directors, officers, stockholders,
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, cancellable 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;
(e) employment agreement, whether express or implied, or any
other agreement for services that contains any severance or termination pay
liabilities or obligations;
(f) collective bargaining or union contracts or agreements;
(g) employee to whom it paid in fiscal 1994, or expects to pay
in fiscal 1995, total compensation at the annual rate of more than $65,000;
(h) restriction by agreement from carrying on its business
anywhere in the world;
(i) 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;
(j) debt obligation for borrowed money, including guarantees
of or agreements to acquire any such debt obligation of others;
(k) loans outstanding to any Person;
(l) power of attorney outstanding or any obligations or
liabilities (whether absolute, accrued, contingent or otherwise) as guarantor,
surety, co-signer, endorser, co-maker, indemnitor or otherwise in respect of the
obligation of any Person;
(m) notice that any party to a contract intends to cancel,
terminate or refuse to renew such contract or to exercise or decline to exercise
any option or right thereunder;
(n) material disagreement with any of its suppliers or
customers; or
(o) equipment leases.
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<PAGE> 24
3.11 CUSTOMERS AND SUPPLIERS
Schedule 3.11 to the Company Disclosure Memorandum sets forth: (a) a
complete and accurate list of the customers of the Company accounting for 2% 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 complete and accurate list of the five largest
suppliers of the Company. The Company has no basis to expect any material
modification to its relationship with any customer or supplier named on Schedule
3.11 to the Company Disclosure Memorandum.
3.12 ORDERS, COMMITMENTS AND RETURNS
Schedule 3.12 to the Company 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. There are no
known outstanding claims against the Company to return merchandise, in excess of
amounts provided for on the balance sheet of the Company dated April 30, 1995,
with an aggregate retail value in excess of $7,500 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.
3.13 CLAIMS AND LEGAL PROCEEDINGS
Except as set forth on Schedules 3.13 and 3.16 to the Company
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. There is no valid basis for any claim,
action, suit, arbitration, proceeding or investigation (other than as noted on
Schedule 3.13 or 3.16 to the Company Disclosure Memorandum) which could
reasonably be expected to be materially adverse to the business, business
prospects, assets, operations or condition (financial or other) of 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 or which would have a material adverse
effect upon the business, business prospects, assets, operations or condition
(financial or other) of the Company.
3.14 LABOR MATTERS
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
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SHARE EXCHANGE AGREEMENT Page 18
<PAGE> 25
law relating to employment and employment practices, terms and conditions of
employment, wages and hours, the failure to comply with which could have a
material adverse effect upon the business, business prospects, assets,
operations or conditions (financial or other) of the Company. The Company is not
engaged in any unfair labor 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 Proprietary Information and Inventions
Agreement in the form provided to Sierra. 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.
3.15 EMPLOYEE BENEFIT PLANS
Except as set forth on Schedule 3.15 to the Company Disclosure
Memorandum, the Company has no bonus, deferred compensation, incentive,
severance pay, pension, profit-sharing, retirement, stock purchase, stock option
or any other employee benefit plan, employee fringe benefit plan, arrangement or
practice with regard to present or former employees as to which the Company has
any liability ("Employee Benefit Plan"), whether formal or informal. Schedule
3.15 to the Company Disclosure Memorandum contains an accurate and complete
description of, and sets forth the annual amount expected to be payable for the
fiscal year last ended pursuant to, each Employee Benefit Plan, whether formal
or informal. The Company Balance Sheet reflects in the aggregate all amounts
accrued but unpaid under the aforesaid plans and arrangements as of the date
thereof. The Company has no agreement, arrangement or commitment, whether formal
or informal and whether legally binding or not, to create any additional plan or
arrangement or to modify or amend any existing Employee Benefit Plan. The
Company has delivered to Sierra true, correct and complete copies of all written
Employee Benefit Plans of the Company, all contracts related thereto and the
most recently available annual reports, summary plan descriptions, IRS Form
5500s (or 5500-C or 5500-R) (or comparable English government materials) and
favorable determination letters for such plans. The Company is in compliance in
all respects with the terms of its Employee Benefit Plans and with all
applicable laws and regulations relating thereto, including, but not limited to,
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and
the Code. The Company has extinguished any liabilities to participants,
beneficiaries and the Pension Benefit Guaranty Corporation (or comparable
English authority) which may have arisen under any such plans previously
maintained by them
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<PAGE> 26
and expects to incur no future liabilities with regard to such plans. Neither
the Company nor any "affiliate" of the Company is a party to or has ever made
any contributions to, or is subject to any liability with respect to, any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA or any
defined benefit plan within the meaning of Section 3(35) of ERISA. The term
"affiliate" means any company, trade or business which is a member of the same
control group, as defined in Code Section 414(b) or 414(c), with the Company, or
any company, trade or business which is a member of an affiliated service group,
as defined in Code Section 414(m) or 414(o) with the Company. No prohibited
transaction (within the meaning of ERISA Section 406 or Code Section 4975) or
failure to meet the requirements of Code Section 4980B(f) has occurred with
respect to any Employee Benefit Plan which could subject the Company to any
liability. There are no actions, suits or claims pending (other than routine
claims for benefits) or which could reasonably be expected to be asserted
against any Employee Benefit Plan or the assets of any such plan.
3.16 INTELLECTUAL PROPERTY
Set forth on Schedule 3.16 to the Company 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 (collectively, the "Listed Intellectual Property") of any kind now used
or anticipated to be used in the business of the Company. Schedule 3.16 contains
a complete and accurate list of all licenses or agreements, oral or written,
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 and includes a description of all material terms of any
oral Intellectual Property Licenses, including without limitation payment
obligations, termination provisions and ownership rights. Except as set forth on
Schedule 3.16 to the Company Disclosure Memorandum, neither the Company's
operations nor any Listed Intellectual Property or Intellectual Property License
infringes or 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 or pending patent or other
right 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 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 with all applicable laws and regulations
pertaining thereto.
Except as set forth on Schedule 3.16 of the Company Disclosure
Memorandum, the Company is the sole and exclusive owner or licensee of:
(a) the Listed Intellectual Property, the Intellectual
Property Licenses and the technology, know-how and processes now used by it, or
used in connection with any
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SHARE EXCHANGE AGREEMENT Page 20
<PAGE> 27
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 3.16 to the Company 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 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 3.16 to the Company 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 3.16 to the Company 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 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 3.16 to the Company
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. No licenses, sublicenses, covenants or agreements have been granted
or entered into by the Company in respect of any of the Listed Intellectual
Property except the Intellectual Property Licenses. No director, officer,
shareholder or employee of the Company owns, directly or indirectly, in whole or
in part, any of the Listed Intellectual Property. The Company does not know and
does not have any reasonable basis to believe that there exist any new
developments in the manufacture or marketing of the products of the Company or
any new or improved products or processes useful in connection with the business
of the Company as now conducted or as presently anticipated to be conducted that
would have a material adverse effect upon the business, business prospects,
assets, operations or condition (financial or other) of the Company. None of the
officers of the Company and none of the Company's employees, consultants,
distributors, agents, representatives or advisers has entered into any agreement
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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SHARE EXCHANGE AGREEMENT Page 21
<PAGE> 28
Except as set forth in the Company 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 3.16 to the Company 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, except for any disclosure that would not have a material adverse effect
on the business, business prospects, assets, operations or conditions (financial
or other) of the Company; (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 3.16 to the Company 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 3.16 to the Company 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.
The Software Distribution Agreement between the Company and Davidson &
Associates, Inc. dated April 29, 1994 and the Fulfillment Agreement between the
Company and Davidson & Associates, Inc. dated June 24, 1994 are both terminable
by the Company on no more than 90 day's notice without liability, penalty,
premium or continuing obligation on the part of the Company.
3.17 ACCOUNTS RECEIVABLE
All accounts receivable of the Company reflected in the Company Balance
Sheet, or existing at the Closing, represent sales actually made in the ordinary
course of business and properly represent the amounts of such sales, net of all
appropriate credits. Except as described on Schedule 3.17 to the Company
Disclosure Memorandum, the bad debt reserves and sales return allowances
reflected in the Company Balance Sheet are adequate, and such accounts will be
collectible in full by Sierra prior to March 31, 1996. Set forth on Schedule
3.17 to the Company Disclosure Memorandum is a full and complete list of all
consolidated accounts receivable of the Company existing as of May 31, 1995.
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<PAGE> 29
3.18 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 saleable in the ordinary course of business. Such inventory consists
of materials and supplies used or sold in the business of the Company.
3.19 CORPORATE BOOKS AND RECORDS
The Company has furnished to Sierra or its representatives true and
complete copies of (a) the Certificate of Incorporation and By-laws of each
Subsidiary and the Memorandum and Articles of Association of the Company as
currently in effect, including all amendments thereto, (b) the minute books of
the Company and (c) the statutory registers (including register of members) 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 share transfer registers accurately reflect
all issuances and transfers of shares of the authorized capital stock of the
Company since its inception.
3.20 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
Except as identified in Schedules 3.1 and 3.5 to the Company 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 failure to obtain
which would have a material adverse effect on its business, business prospects,
assets, operations or condition (financial or other). 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.
3.21 COMPLIANCE WITH LAWS
(a) Except as described on Schedule 3.21 to the Company
Disclosure Memorandum, the Company has complied, and is in compliance, with all
federal, state, local and foreign laws, rules, regulations, ordinances, decrees
and orders applicable to the operation of its business, to its employees, or to
the Real Property and the Personal Property, the failure to comply with which
would, individually or in the aggregate, have a material adverse effect on the
business, assets or operations of the Company, including, without limitation,
all such laws, rules, ordinances, decrees and orders relating to antitrust,
consumer protection, currency exchange, environmental protection, equal
opportunity, health, occupational safety, pension, securities and
trading-with-the-enemy matters. The Company has not received any notification of
any asserted present or past unremedied failure by the Company to comply with
any of such laws, rules, ordinances, decrees or orders.
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SHARE EXCHANGE AGREEMENT Page 23
<PAGE> 30
(b) The Company is not currently in violation of any
applicable building, zoning, environmental or other law, ordinance or regulation
in respect of the Real Property or its plant, structures or operations. No such
law, ordinance or regulation would reasonably be expected to prevent the use of
substantially all of the Real Property for the conduct thereon of the business
of the Company.
(c) The Company is not in violation of, and has not violated,
in connection with the ownership, use, maintenance or operation of the Real
Property or the Personal Property or the conduct of their businesses, any
applicable federal, state, county or local statutes, laws, regulations,
guidances, rules, ordinances, codes, licenses, permits, judgments, writs,
decrees, injunctions or orders of any governmental entity relating to
environmental (air, water, groundwater, soil, noise and odor) matters,
including, by way of illustration and not by way of limitation, the Clean Air
Act, the Federal Water Pollution Control Act, the Resources Conservation and
Recovery Act and the regulations issued thereunder, the Comprehensive
Environmental, Response, Compensation, and Liability Act, the Clean Water Act,
the Hazardous Materials Transportation Act, the Toxic Substances Control Act,
the Hazardous Waste Control Act, comparable English laws, and the regulations
issued thereunder, and all other applicable federal, state, county, local and
foreign environmental requirements where such violation might have a material
adverse impact on the Company's business, business prospects, assets, operations
or condition (financial or other).
3.22 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. 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.
3.23 BROKERS OR FINDERS
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 this Agreement or any transaction contemplated
hereby.
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<PAGE> 31
3.24 GOVERNMENT CONTRACTS
The Company has never been, nor as a result of the consummation of the
transactions contemplated by this Agreement (without giving any consideration to
the identity or conduct of Sierra) will it be, suspended or debarred from
bidding on contracts or subcontracts for any agency of the United States
government, nor has such suspension or debarment been threatened or action for
suspension or debarment been commenced. The Company has not been nor is it now
being audited or, to the knowledge of the Company, investigated by the United
States Government Accounting Office, the United States Department of Justice,
the United States Department of Defense or any of its agencies, the Defense
Contract Audit Agency or the inspector general of any agency of the United
States government, nor, to the knowledge of the Company, has such audit or
investigation been threatened. There is no valid basis for the Company's
suspension or debarment from bidding on contracts or subcontracts for any agency
of the United States government and there is no valid basis for a claim pursuant
to an audit or investigation by the United States Government Accounting Office,
the United States Department of Justice, the United States Department of Defense
or any of its agencies, the Defense Contract Audit Agency or the inspector
general of any agency of the United States government, or any prime contractor.
The Company has never had a contract or subcontract terminated for default or
has ever been determined to be nonresponsible by any agency of the United States
government. Except as set forth on Schedule 3.24 to the Company Disclosure
Memorandum, the Company has no outstanding agreements, contracts or commitments
which require it to obtain or maintain a government security clearance.
3.25 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 currently in
compliance, in all respects with the Foreign Corrupt Practices Act and all
foreign laws and regulations relating to corrupt practices and similar matters.
3.26 PERSONNEL
Schedule 3.26 to the Company Disclosure Memorandum sets forth a true
and complete list of:
(a) the names and current compensation amounts of all
directors and elected and appointed officers of the Company (which for purposes
of this Section 3.26 shall include its Subsidiaries) and the family
relationships, if any, among such persons;
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SHARE EXCHANGE AGREEMENT Page 25
<PAGE> 32
(b) the wage rates for nonsalaried and nonexecutive 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.
3.27 INSIDER INTERESTS
Except as set forth on Schedule 3.27 to the Company Disclosure
Memorandum, no officer, director, key employee 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, copyrights, trademarks or tradenames, 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 3.27 to the Company Disclosure Memorandum, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, key employees or affiliates. The Company and its officers,
directors, key employees and affiliates 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 (x) 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; (y) is a supplier, customer, creditor, or has an existing
contractual relationship with any of the Company's employees (or persons
performing similar functions); or (z) 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.
3.28 POOLING MATTERS
The Company has not taken and will not take, and the Shareholders have
not taken and will not take, directly or indirectly, and the Company and the
Shareholders will use their respective best efforts to prevent any other Person
from taking, any actions, including without limitation 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 Sierra Common Stock, and there have occurred no other events
with respect to or involving the Company or its Shareholders, which taken
individually or together
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SHARE EXCHANGE AGREEMENT Page 26
<PAGE> 33
would affect the ability of Sierra to account for the transactions contemplated
by this Agreement as a "pooling of interests" transaction in accordance with
generally accepted accounting principles, and neither the Company nor any of the
Shareholders is aware of any facts which otherwise could prevent such accounting
treatment.
3.29 FULL DISCLOSURE
No information furnished by the Company or the Shareholders to Sierra
in connection with this Agreement (including, but not limited to, the Financial
Statements and all information in the Company Disclosure Memorandum and the
other Exhibits hereto) or the other Operative Documents, or by the Company to
the Shareholders in connection with their execution and delivery of this
Agreement, is false or misleading in any material respect. Neither the Company
nor any Shareholder has made any untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements made or
information delivered in or pursuant to this Agreement, including, but not
limited to, all Schedules to the Company Disclosure Memorandum and Exhibits
hereto, or in or pursuant to the other Operative Documents, or in or pursuant to
closing certificates executed or delivered by the Shareholders or the Company,
not misleading. The Company has provided to Sierra an 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
transactions contemplated hereby. The Shareholder Disclosure Statement contains
all information required to be set forth therein under all applicable laws
(including without limitation applicable federal, state and foreign securities
laws). 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 IV - REPRESENTATIONS AND WARRANTIES OF SIERRA
To induce the Company and the Shareholders to enter into and perform
this Agreement and the Operative Documents, Sierra represents and warrants to
the Company and the Shareholders as follows in this Article IV:
4.1 ORGANIZATION
Sierra is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware. Sierra 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
it is a party, and to carry out the transactions contemplated hereby and
thereby.
4.2 ENFORCEABILITY
All corporate action on the part of Sierra and its officers, directors
and shareholders necessary for the authorization, execution, delivery and
performance of this Agreement and
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SHARE EXCHANGE AGREEMENT Page 27
<PAGE> 34
the Operative Documents, the consummation of the Share Exchange, and the
performance of all of Sierra's obligations under this Agreement and the
Operative Documents has been taken or will be taken prior to the Closing. 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.
4.3 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
The execution, delivery and performance of this Agreement and the other
Operative Documents by Sierra, the issuance of the Issuable Sierra Shares to the
Shareholders, and the consummation of the transactions contemplated hereby and
by the other Operative Documents will not (a) 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, agency or other
governmental authority applicable to Sierra, (b) require Sierra to obtain any
consent, approval or authorization of, or make any declaration, filing, or
registration with, any Person, except for compliance with applicable securities
laws and the filing of all documents necessary to consummate the Share Exchange
with Applicable government authorities, (c) 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 is a party or by which it
is bound or to which any of their assets are subject, (d) result in the creation
of any lien or encumbrance upon the assets of Sierra, (e) conflict with or
result in a breach of or constitute a default under any provision of the charter
documents or bylaws of Sierra, or (f) invalidate or adversely affect any permit,
license, authorization or status used in the conduct of the business of Sierra.
4.4 LITIGATION
There is no litigation or governmental or administrative proceeding or
investigation pending or, to Sierra's knowledge, threatened against Sierra which
would prevent or hinder the consummation of the transactions contemplated by
this Agreement.
4.5 SEC FILINGS
In its fiscal year last ended and since the beginning of its current
fiscal year, Sierra has filed with the SEC all reports required to be filed by
Sierra with the SEC.
4.6 GOOD TITLE
Upon issuance at the Closing in accordance with this Agreement and
payment to Sierra therefor as provided herein, the Shareholders shall receive
good and valid title to the shares of Sierra Common Stock issuable hereunder,
free and clear of any and all security interests, liens, claims, charges,
encumbrances, preemptive rights or opinions of any nature
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SHARE EXCHANGE AGREEMENT Page 28
<PAGE> 35
whatsoever, except for (a) any restrictions contained herein or in the Operative
Documents or the By-laws or the Certificate of Incorporation of Sierra, (b) the
security interest of Sierra in the shares held in escrow pursuant to the Escrow
Agreement and (c) any security interests, liens, claims, charges, encumbrances,
preemptive rights or opinions of any nature which existed as to the Company
Shares prior to the Closing.
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA
The obligations of Sierra to perform and observe the covenants,
agreements and conditions hereof to be performed and observed by it 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:
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company and each Shareholder
contained herein (including applicable Exhibits or Schedules to the Company
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.
5.2 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.
5.3 OPINIONS OF COUNSEL FOR THE COMPANY
Sierra shall have received opinion letters of Glovsky, Tarlow &
Milberg, Shipman & Goodwin, and Glenisters Solicitors, counsel for the Company
and the Shareholders in the United States and the United Kingdom, dated the
Closing Date, in form and substance satisfactory to Sierra's counsel.
5.4 RESIGNATIONS
Sierra shall have received copies of resignations effective as of the
Closing Date of all the officers and directors of the Company and the
Subsidiaries.
5.5 CONSENTS TO SHARE EXCHANGE
The Company shall have received and shall have delivered to Sierra
written consents to the Share Exchange from each of the parties (other than the
Company) to those agreements, leases, notes or other documents identified on
Schedules 3.5 and 3.16 to the Company Disclosure Memorandum, which consents
shall be satisfactory in all respects to Sierra in its sole and absolute
discretion.
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<PAGE> 36
5.6 MAJOR SHAREHOLDER'S CERTIFICATE
Sierra shall have received a certificate from the Major Shareholder,
dated the Closing Date, in a form acceptable to Sierra, certifying as to the
fulfillment of the conditions to the obligations of Sierra set forth herein.
5.7 MATERIAL ADVERSE CHANGE
Since the date of the Company Balance Sheet and through the Closing,
there shall not have occurred any material adverse change in the business,
operations, assets, liabilities, earnings, condition (financial or other), or
prospects of the Company and its Subsidiaries, and no material adverse change
shall have occurred in any domestic or foreign laws or regulations affecting the
Company and its Subsidiaries or in any third party contractual or other business
relationships of the Company and its Subsidiaries.
5.8 DUE DILIGENCE
The results of Sierra's due diligence investigation of the Company and
its Subsidiaries shall be satisfactory in all respects to Sierra in its sole and
absolute discretion.
5.9 APPROVALS AND CONSENTS
All transfers of permits or licenses, all approvals, applications 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 and its
Subsidiaries, 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.
5.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and by the 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 a form acceptable to Sierra, as to the authenticity and
effectiveness of the actions of the Board of Directors and Shareholders of the
Company relating to the transactions contemplated by this Agreement and the
Operative Documents and such other documents as are specified by Sierra's
counsel.
5.11 NONFOREIGN AFFIDAVIT
Sierra shall have received from the Company and each Subsidiary,
pursuant to Section 1445 of the Code, a Foreign Investment in Real Property Tax
Act Affidavit in a form acceptable to Sierra.
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5.12 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 and its Subsidiaries is subject.
5.13 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 transactions contemplated herein as a "pooling of
interests" transaction.
5.14 OTHER AGREEMENTS
The agreements listed in Exhibit F to this Agreement shall have been
amended or terminated in a manner satisfactory to Sierra.
5.15 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.
5.16 OPERATIVE DOCUMENTS
The Operative Documents shall have been executed and delivered by all
parties thereto other than Sierra.
ARTICLE VI - 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 Shareholders and the Company.
6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Sierra 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.
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<PAGE> 38
6.2 PERFORMANCE OF AGREEMENTS
Sierra 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 it at or prior to the
Closing.
6.3 OPINION OF COUNSEL
The Shareholders shall have received the opinion letter of Perkins
Coie, counsel for Sierra, dated the Closing Date, in form and substance
satisfactory to the Company's counsel.
6.4 OFFICERS' CERTIFICATE
The Company shall have received a certificate of the Chief Financial
Officer and another officer of Sierra, dated the Closing Date, in a form
acceptable to the Company, certifying as to the fulfillment of the conditions to
the obligations of the Shareholders and the Company set forth herein.
6.5 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.
6.6 OPERATIVE DOCUMENTS
Sierra shall have executed and delivered to the Company all the
Operative Documents to which it is a party.
ARTICLE VII - COVENANTS
Between the date of this Agreement and the Closing, the parties
covenant and agree as set forth in this Article VII. Except as to Section
7.1(a), all references to the Company in this Article VII shall also include its
Subsidiaries.
7.1 CONDUCT OF BUSINESS BY THE COMPANY PENDING THE CLOSING
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, suppliers and other persons with
which the Company has significant
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<PAGE> 39
business relations. By way of amplification and not limitation, except as
otherwise set forth in the Company Disclosure Memorandum, neither the Company
nor any Shareholder shall, between the date of this Agreement and the Closing,
directly or indirectly do, or propose to do, any of the following without the
prior written consent of Sierra:
(a) amend or otherwise change, with respect to the Company,
its Memorandum and Articles of Association, and with respect to each Subsidiary,
its Certificate of Incorporation or By-laws;
(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;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(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 $25,000 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 consultants, 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;
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<PAGE> 40
(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 Share Exchange
specified in Article V hereof not being satisfied;
(k) take or agree to take any action specified in Section 3.7
hereof, or enter into any other material transaction other than those specified
above, or agree to do any of the foregoing.
7.2 ACCESS TO INFORMATION; CONFIDENTIALITY
From the date hereof to the Closing, 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 reasonably request. From the date hereof
until the Closing, 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 be prepared in conformity with
GAAP and shall fairly present the financial position and results of operations
of the Company as of the dates and for the periods therein specified. All
information obtained by either party or its officers, directors, employees,
auditors or agents pursuant to this Section 7.2 shall be kept confidential in
accordance with the confidentiality agreement, dated May 19, 1995 (the
"Confidentiality Agreement"), between Sierra and the Company. No investigation
pursuant to this Section 7.2 shall affect any representation or warranty in this
Agreement of any party hereto or any condition to the obligations of the parties
hereto. As of the Closing, the Confidentiality Agreement shall be deemed to have
terminated without further action by the parties thereto.
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<PAGE> 41
7.3 NO SOLICITATION OF TRANSACTIONS
The Company 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 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 all 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.
7.4 NOTIFICATION OF CERTAIN MATTERS
The Company shall give prompt notice to Sierra of (a) the occurrence or
nonoccurrence of any event the occurrence or nonoccurrence of which would be
likely to cause any representation or warranty contained in this Agreement to be
untrue or inaccurate and (b) any failure of the Company or any Shareholder 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 7.4 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
7.5 FURTHER ACTION; REASONABLE BEST EFFORTS
Upon the terms and subject to the conditions hereof, each of the
parties hereto shall (a) make promptly its respective filings, and thereafter
make any other required submissions, under the 1933 Act, the Securities and
Exchange Act of 1934 Act, as amended, or any foreign securities or other laws
with respect to the transactions contemplated hereby and shall cooperate with
the other party with respect to such filings and submissions and (b) 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
Closing. In case at any time after the Closing 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
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<PAGE> 42
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. 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 Sierra full title to all properties,
assets and rights of the Company and to effect the issuance of the Issuable
Sierra Shares to the Shareholders pursuant to the terms and conditions hereof.
7.6 PUBLICITY
Neither the Company nor any Shareholder shall issue any press release
or make any statement regarding the transactions contemplated hereby to any
third party without the prior written consent of Sierra.
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER
8.1 TERMINATION
This Agreement may be terminated and the Share Exchange may be
abandoned at any time prior to the Closing:
(a) by mutual written consent duly authorized by the Company
and Sierra;
(b) by either the Company or Sierra, if the Share Exchange has
not been consummated by June 30, 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 Closing 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 Share Exchange illegal or otherwise
prohibited or if any judgment, injunction, order or decree enjoining Sierra or
the Company from consummating the Share Exchange 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 material
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 Share Exchange or the other transactions
contemplated hereby;
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<PAGE> 43
(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 June 30, 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 June 30, 1995.
8.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement pursuant to Section
81 hereof, there shall be no further obligation on the part of any party hereto
except pursuant to the Confidentiality Agreement, except that nothing herein
shall relieve any party from liability for any breach hereof.
8.3 AMENDMENT
This Agreement may be amended by Sierra and the Company at any time
prior to the Closing. Any such amendment must be in writing and signed by the
Company and Sierra, but not by the Shareholders; provided, however, that no
amendment may be made which would reduce the amount or change the type of
consideration into which each Company Share shall be exchanged upon consummation
of the Share Exchange without the prior written consent of Shareholders owning a
majority of the Company Shares.
8.4 WAIVER
At any time prior to the Closing, 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 IX - SURVIVAL AND INDEMNIFICATION
9.1 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. 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.
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<PAGE> 44
9.2 INDEMNIFICATION BY THE SHAREHOLDERS
From and after the Closing Date, the Shareholders shall jointly and
severally indemnify and hold Sierra and its affiliates (the "Sierra Indemnified
Parties") harmless from and against, and shall reimburse the Sierra 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 reasonable legal or
accounting fees of 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 on the balance sheet of
the Company dated April 30, 1995 which are not collected prior to March 31,
1996; or
(d) any inventory reflected on the balance sheet of the
Company dated April 30, 1995 which is written down due to obsolescence or shrink
(which occurs prior to Closing), on or prior to March 31, 1996.
9.3 INDEMNIFICATION BY SIERRA
From and after the Closing Date Sierra shall indemnify and hold
harmless each Shareholder and his successors, assigns, heirs and legatees (the
"Company Indemnified Parties"; together with the Sierra Indemnified Parties, the
"Indemnified Parties") from and against, and shall reimburse the Company
Indemnified Parties for, any and all Losses arising out of or in connection
with:
(a) any inaccuracy in any representation or warranty made by
the Purchaser or Sierra in this Agreement or in any other Operative Document or
in any certificate delivered pursuant hereto or thereto; or
(b) any failure by Sierra to perform or comply, in whole or in
part, with any covenant or agreement in this Agreement or in any other Operative
Document.
9.4 THRESHOLD AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any Claims until the aggregate Losses
which the Sierra Indemnified Parties or the Company Indemnified Parties, as the
case may be, would be otherwise entitled to receive as indemnification with
respect to any Claims exceed $15,000 (the "Threshold"); provided, however, that
once such aggregate Losses exceed the Threshold, such Indemnified
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<PAGE> 45
Parties shall be entitled to indemnification for all Losses which they otherwise
would be entitled to receive without regard to the Threshold.
(b) In no event shall the liability of the Shareholders
hereunder for Losses incurred by Sierra Indemnified Parties exceed $12,000,000.
9.5 PROCEDURE FOR INDEMNIFICATION
(a) Any 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) 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 9.5(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. The
Indemnified Party shall cooperate with the indemnifying 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.
(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 9.5(c)(ii) below shall govern.
(ii) The Indemnified Party may, at the indemnifying
party's expense, 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
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<PAGE> 46
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 within six months 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.
9.6 OFFSET
If and to the extent that any Sierra Indemnified Party is entitled to
indemnification hereunder, Sierra may offset such indemnification amount against
any property held in escrow pursuant to the Escrow Agreement.
ARTICLE X - GENERAL
10.1 EXPENSES
If the transactions contemplated by this Agreement are consummated,
Sierra shall pay the fees and expenses of the Company and the Shareholders, up
to a maximum of $35,000, 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 this Agreement and the consummation of the
transactions contemplated hereby to the extent such fees and expenses exceed the
maximum amount referred to above.
10.2 NOTICES
Any notice or demand 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 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 three days from the
date it is sent by the addressor with charges prepaid so long as it
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<PAGE> 47
is in fact received within five days, or when successful transmission is
confirmed if sent by facsimile, or when personally delivered.
TO SIERRA:
Sierra On-Line, Inc.
3380 146th Place S.E., Suite 300
Bellevue, WA 98007
Fax: (206) 649-0340
Attention: Corporate 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 Company
Disclosure Memorandum.
TO THE COMPANY:
Impressions Software, Inc.
222 Third Street
Suite 0254
Cambridge, MA 02142
Fax: (617) 225-0993
Attention: President
with a copy to:
Glovsky, Tarlow & Milberg
31 Milk Street
Suite 810
Boston, MA 02109
Attn: Richard D. Glovsky
Fax: (617) 482-8034
10.3 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
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<PAGE> 48
Agreement shall nevertheless remain in full force and effect so long as the
economic or legal substance of the transactions contemplated hereby is not
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.
10.4 ENTIRE AGREEMENT
This Agreement and the other Operative Documents constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede, except as set forth in Section 7.2 hereof, 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.
10.5 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.
10.6 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.
10.7 SPECIFIC PERFORMANCE
The parties hereto agree that irreparable damage would occur in the
event any provision of this Agreement was not performed in accordance with the
terms hereof and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity.
10.8 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. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined in any Washington state
or federal court thereof.
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<PAGE> 49
10.9 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.
10.10 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.
10.11 WAIVER OF JURY TRIAL
Each of the Shareholders, Sierra and the Company hereby irrevocably
waives all right to trial by jury in any action, proceeding or counterclaim
(whether based on contract, tort or otherwise) arising out of or relating to
this Agreement or the actions of such parties in the negotiation,
administration, performance and enforcement thereof.
10.12 WAIVER OF PREEMPTIVE AND OTHER RIGHTS
Each of the Shareholders hereby irrevocably waives any pre-emptive
rights, rights of first offer, or other rights to purchase or receive any shares
of capital stock of the Company, including, without limitation, the rights
described in Sections 7 and 12 of the Company's Articles of Association.
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SHARE EXCHANGE AGREEMENT Page 43
<PAGE> 50
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 President and Chief Executive Officer
-------------------------------------------
SOFTWARE INSPIRATION LTD.
By /s/ David Lester
-----------------------------------------------
Its Managing Director
-------------------------------------------
SHAREHOLDERS:
/s/ David Lester
--------------------------------------------------
David Roger Lester
/s/ E. Grabowski
--------------------------------------------------
Edward Grabowski
EASTCOTE MOTOR SERVICES LIMITED
By /s/
-----------------------------------------------
Its Director
-------------------------------------------
/s/ Simon Lester
--------------------------------------------------
Simon Edmund George Lester
/s/ Pauline Lester
--------------------------------------------------
Pauline Lester
/s/ David Glover
--------------------------------------------------
David C. Glover
/s/ Emma Glover
--------------------------------------------------
Emma C. Glover
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SHARE EXCHANGE AGREEMENT Page 44
<PAGE> 51
/s/ Wolf Percival
--------------------------------------------------
Wolf Percival
/s/ Richard Colthurst
--------------------------------------------------
Richard Colthurst
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SHARE EXCHANGE AGREEMENT Page 45
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA ON-LINE, INC.,
GREEN THUMB ACQUISITION CORP.,
GREEN THUMB SOFTWARE, INC.
AND
THE SHAREHOLDERS OF GREEN THUMB SOFTWARE, INC.
DATED AS OF JULY 17, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I - THE MERGER.................................................................. 1
1.1 The Merger ............................................................... 1
1.2 The Closing .............................................................. 1
1.3 Effective Date and Time .................................................. 2
1.4 Certificate of Incorporation of the Surviving Corporation ................ 2
1.5 Bylaws of the Surviving Corporation ...................................... 2
1.6 Conversion of Shares ..................................................... 2
1.6.1 Exchange Ratio .................................................. 2
1.6.2 Escrow .......................................................... 3
1.6.3 Special Definitions ............................................. 3
1.6.4 Company Payments ................................................ 4
1.6.5 Exchange of Certificates ........................................ 4
1.6.6 No Fractional Shares ............................................ 5
1.6.7 Dissenting Shareholders ......................................... 5
1.6.8 No Further Transfers ............................................ 5
1.7 Pooling Restrictions on Transfer of the Securities ....................... 5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE SHAREHOLDERS ................................................... 6
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 or Notices Required; No Conflicts With Instruments .......... 8
2.7 Financial Statements ..................................................... 9
2.8 Absence of Certain Changes or Events ..................................... 10
2.9 Taxes .................................................................... 12
2.10 Property ................................................................. 14
2.11 Contracts ................................................................ 15
2.12 Customers and Suppliers .................................................. 17
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page i
<PAGE> 3
<TABLE>
<S> <C>
2.13 Orders, Commitments and Returns ...................................................... 17
2.14 Claims and Legal Proceedings ......................................................... 17
2.15 Labor Matters ........................................................................ 17
2.16 Employee Benefit Plans ............................................................... 18
2.17 Patents, Trademarks, etc. ............................................................ 19
2.18 Accounts Receivable .................................................................. 21
2.19 Inventory ............................................................................ 21
2.20 Corporate Books and Records .......................................................... 22
2.21 Licenses, Permits, Authorizations, etc. .............................................. 22
2.22 Compliance With Laws ................................................................. 22
2.23 Insurance ............................................................................ 24
2.24 Brokers or Finders ................................................................... 24
2.25 Government Contracts ................................................................. 25
2.26 Absence of Questionable Payments ..................................................... 25
2.27 Personnel ............................................................................ 25
2.28 Bank Accounts ........................................................................ 26
2.29 Insider Interests .................................................................... 26
2.30 Securities Act Matters ............................................................... 27
2.31 Pooling Matters ...................................................................... 29
2.32 Full Disclosure ...................................................................... 29
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER AND SIERRA .......................... 30
3.1 Organization ......................................................................... 30
3.2 Enforceability ....................................................................... 30
3.3 Legal Proceedings .................................................................... 30
3.4 Securities ........................................................................... 31
3.5 No Brokers ........................................................................... 31
3.6 Full Disclosure ...................................................................... 31
3.7 Tax Consequences ..................................................................... 31
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PURCHASER AND SIERRA ...................... 31
4.1 Accuracy of Representations and Warranties ........................................... 32
4.2 Performance of Agreements ............................................................ 32
4.3 Opinion of Counsel for the Company ................................................... 32
4.4 Shareholder Approval ................................................................. 32
4.5 Resignations ......................................................................... 32
4.6 Consents to Merger ................................................................... 32
4.7 Officers' Certificate ................................................................ 32
4.8 Principals' Certificates ............................................................. 33
4.9 Material Adverse Change .............................................................. 33
4.10 Due Diligence ........................................................................ 33
4.11 Opinion of Accountants ............................................................... 33
4.12 Approvals and Consents ............................................................... 33
4.13 Proceedings and Documents; Secretary's Certificate ................................... 33
4.14 Nonforeign Affidavit ................................................................. 34
4.15 Compliance With Laws ................................................................. 34
4.16 Pooling of Interests ................................................................. 34
4.17 Other Agreements ..................................................................... 34
4.18 Legal Proceedings .................................................................... 34
4.19 Operative Documents .................................................................. 34
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ............... 34
5.1 Accuracy of Representations and Warranties ........................................... 35
5.2 Performance of Agreements ............................................................ 35
5.3 Opinion of Counsel ................................................................... 35
5.4 Officers' Certificate ................................................................ 35
5.5 Legal Proceedings .................................................................... 35
5.6 Operative Documents .................................................................. 35
ARTICLE VI - COVENANTS.............................................................................. 35
6.1 Conduct of Business by the Company Pending the Merger ................................ 36
6.2 Access to Information; Confidentiality ............................................... 37
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iii
<PAGE> 5
<TABLE>
<S> <C>
6.3 No Solicitation of Transactions ...................................................... 38
6.4 Notification of Certain Matters ...................................................... 38
6.5 Further Action; Reasonable Best Efforts .............................................. 38
6.6 Publicity ............................................................................ 39
ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER ..................................................... 39
7.1 Termination .......................................................................... 39
7.2 Effect of Termination ................................................................ 40
7.3 Amendment ............................................................................ 40
7.4 Waiver ............................................................................... 40
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ........................................................ 40
8.1 Survival ............................................................................. 40
8.2 Indemnification by the Shareholders .................................................. 41
8.3 Indemnification by Sierra ............................................................ 41
8.4 Threshold and Limitations ............................................................ 41
8.5 Procedure for Indemnification ........................................................ 42
8.6 Offset ............................................................................... 43
ARTICLE IX - GENERAL................................................................................ 43
9.1 Expenses ............................................................................. 43
9.2 Bank Loans ........................................................................... 43
9.3 Employee Agreements .................................................................. 44
9.4 Notices .............................................................................. 44
9.5 Severability ......................................................................... 45
9.6 Entire Agreement ..................................................................... 45
9.7 Assignment ........................................................................... 45
9.8 Parties in Interest .................................................................. 45
9.9 Specific Performance ................................................................. 46
9.10 Governing Law ........................................................................ 46
9.11 Headings ............................................................................. 46
9.12 Counterparts ......................................................................... 46
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iv
<PAGE> 6
EXHIBITS
1.3 - Certificates of Merger
1.4 - Articles of Incorporation of the Surviving Corporation
1.5 - Bylaws of the Surviving Corporation
1.6 - Form of Escrow Agreement
2.1 - Disclosure Memorandum
2.2 - Form of Registration Rights Agreement
2.3 - Form of Noncompetition Agreement
4.3 - Form of Opinion of Counsel for the Company
4.14 - Foreign Investment in Real Property Tax Act Affidavit
5.3 - Form of Opinion of Counsel for Sierra
5.4 - Sierra Officer's Certificate
9.2 - Payoff Quotation
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AGREEMENT AND PLAN OF MERGER Page v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into as of July 17, 1995 by and among Sierra On-Line, Inc., a Delaware
corporation ("Sierra"), Green Thumb Acquisition Corp., a Washington corporation
(the "Purchaser"), Green Thumb Software, Inc., a Colorado corporation (the
"Company"), and the shareholders of the Company listed on the signature pages
hereto (the "Shareholders").
RECITALS
A. The Company and the Purchaser believe it advisable and in the
best interests of such corporations to effect the merger of the Company and the
Purchaser (the "Merger") pursuant to this Agreement.
B. The Board of Directors and the Shareholders of the Company
have approved the Merger.
C. The Board of Directors and the sole shareholder of the
Purchaser have approved the Merger. Sierra is the sole shareholder of the
Purchaser.
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
Company shall cease and the Company shall be merged with and into the Purchaser
(the Purchaser 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 State of Colorado and
other applicable law.
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 2:00 p.m. local time at the offices of Perkins
Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington,
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AGREEMENT AND PLAN OF MERGER Page 1
<PAGE> 8
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 Colorado Corporation Code ("Colorado Law), substantially in the
form or forms attached hereto as Exhibit 1.3, and in such form as required by,
and executed in duplicate in accordance with, Washington Law and Colorado 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 State of Colorado (the "Colorado Secretary of State"), respectively. The
Merger shall become effective on the date (the "Effective Date") and at the time
(the "Effective Time") specified in the Articles of Merger as so filed. If the
Washington Secretary of State or the Colorado Secretary of State requires any
changes in the Articles of Merger as a condition to filing the Articles of
Merger or 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 CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Certificate of Incorporation of the
Purchaser shall be in the form attached hereto as Exhibit 1.4 and shall be the
Certificate of Incorporation of the Surviving Corporation. Thereafter, the
Certificate of Incorporation of the Surviving Corporation may be amended in
accordance with its terms and as provided by law.
1.5 BYLAWS OF THE SURVIVING CORPORATION
At the Effective Time, the Bylaws of the Purchaser shall be in the form
attached hereto as Exhibit 1.5 and shall be the Bylaws of the Surviving
Corporation. Thereafter, the Bylaws may be amended or repealed in accordance
with their terms, the Certificate of Incorporation 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 cancelled.
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AGREEMENT AND PLAN OF MERGER Page 2
<PAGE> 9
(b) Each issued and outstanding share of Common Stock of
the Company, no par value ("Company Common Stock"), shall be converted into the
right to receive from Sierra a number of shares of common stock of Sierra, $.01
par value per share ("Sierra Common Stock"), determined as follows (such shares
being referred to herein as the "Merger Consideration" or the "Securities"):
(i) at or as soon as practicable after the
Closing, a number of shares of Sierra Common Stock determined by dividing the
Net Closing Shares (as defined below) by the total number of shares of Company
Common Stock outstanding immediately prior to the Effective Time (the "Closing
Consideration"); plus
(ii) on or before the earlier of one year after
the Closing Date and the date on which Sierra's independent auditors issue their
report with respect to the financial statements of Sierra for the first fiscal
year of Sierra ending after the Closing, and subject to adjustment in accordance
with the terms of an Escrow Agreement in substantially the form attached hereto
as Exhibit 1.6 (the "Escrow Agreement") to be entered into at the Closing among
the Shareholders and Sierra, a number of shares of Sierra Common Stock
determined by dividing the Escrow Shares (as defined below) by the total number
of shares of Company Common Stock outstanding immediately prior to the Effective
Time.
(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.
1.6.2 ESCROW
As soon as practicable after the Closing, Sierra shall deposit into
escrow, in accordance with the terms of the Escrow Agreement, a number of shares
of Sierra Common Stock (excluding any fractional shares) equal to the total
number of Escrow Shares. The Escrow Shares, or the proceeds from any disposition
thereof in accordance with the Escrow Agreement, shall be distributed from
escrow in accordance with the Escrow Agreement.
1.6.3 SPECIAL DEFINITIONS
(a) The term "Aggregate Closing Shares" shall mean a
number of shares (excluding any fractional share) of Sierra Common Stock
determined by dividing $2,450,000 by the Closing Average (as defined below).
(b) The term "Net Closing Shares" shall mean a number of
shares of Sierra Common Stock equal to the Aggregate Closing Shares, less (i)
the Deduction Shares (as defined below) and (ii) a number of shares of Sierra
Common Stock (excluding any fractional shares) equal to 10% of the number of
shares of Sierra Common Stock remaining after the application of the preceding
clause (i).
(c) The term "Deduction Shares" shall mean a number of
shares of Sierra Common Stock (excluding any fractional shares) equal to (i) the
aggregate dollar value of (A) all attorneys' fees, accounting fees and brokerage
or finders' fees and/or commissions
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AGREEMENT AND PLAN OF MERGER Page 3
<PAGE> 10
incurred by or on behalf of the Company or the Shareholders in connection with
the transactions contemplated by this Agreement and (B) all obligations or
liabilities of the Company for back pay owed to the Shareholders and to fund the
Company's profit sharing plan, if the Company determines such funding is
appropriate, through the Closing (the Company shall deliver to Sierra no later
than one business day before the Closing a Certificate stating the actual dollar
amounts of the items referred to in clauses (A) and (B) of this paragraph (c) as
of such date and a reasonable estimate of the total dollar amounts of such items
expected to be incurred), divided by (ii) the Closing Average.
(d) The term "Escrow Shares" shall mean a number of
shares of Sierra Common Stock equal to the number of shares of Sierra Common
Stock referred to in paragraph (b)(ii) of this Section 1.6.3.
(e) The term "Closing Average" shall mean the average of
the last reported sale prices of Sierra Common Stock over the ten consecutive
trading days ending three trading days prior to the Closing Date.
1.6.4 COMPANY PAYMENTS
At the Closing, the Company shall pay in full the fees and obligations
set forth in Section 1.6.3(c), which payments shall be reflected as expenses on
the books of the Company as of the Closing Date. Sierra shall provide to the
Company the funds necessary to make such payments as reflected in Section 9.1
hereof.
1.6.5 EXCHANGE OF CERTIFICATES
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 at Closing pursuant to
Section 1.6.1 hereof. The shares of Sierra Common Stock that each Shareholder
shall be entitled to receive at the Closing 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.
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AGREEMENT AND PLAN OF MERGER Page 4
<PAGE> 11
1.6.6 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 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 any such fractional shares, each holder of Company Common Stock who otherwise
would have been entitled to a fraction of a share of Sierra Common Stock upon
surrender of certificates representing Company Common Stock for exchange
pursuant to the Merger will be paid cash upon such surrender in an amount equal
to such fraction multiplied by the Closing Average.
1.6.7 DISSENTING SHAREHOLDERS
Any issued and outstanding shares of Company Common Stock held by any
Shareholder who, in accordance with Colorado law, dissents from the Merger (a
"Dissenting Shareholder") and requires appraisal of such Dissenting
Shareholder's shares ("Dissenting Shares") shall not be converted or cancelled
as described in Section 1.6.1 hereof but shall become the right to receive such
consideration as may be determined to be due to such Dissenting Shareholder
pursuant to Colorado Law; provided, however, that Dissenting Shares outstanding
at the Effective Time and held by a Dissenting Shareholder who shall after the
Effective Time withdraw such Dissenting Shareholder's demand for appraisal or
lose such Dissenting Shareholder's right of appraisal as provided by Colorado
Law shall be deemed to be converted as of the Effective Time into the right to
receive the Merger Consideration.
1.6.8 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 cancelled 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 30 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.
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AGREEMENT AND PLAN OF MERGER Page 5
<PAGE> 12
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS
To induce the Purchaser and Sierra 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 exceptions shall
specifically identify the paragraph or paragraphs of this Article II to which
such exceptions relate, and which shall constitute in its entirety a
representation and warranty under this Article II, the Company and the
Shareholders jointly and severally represent and warrant to the Purchaser and
Sierra as of the date of this Agreement and as of the Closing as follows in this
Article II. Except as to Sections 2.2, 2.4 and 2.5 hereof, all references to the
Company in this Article II shall include the Company's Subsidiaries (as defined
in Section 2.2).
2.1 GOOD TITLE, ETC.
Each Shareholder represents with respect to itself only that (a) such
Shareholder owns the shares of Company Common Stock listed opposite such
Shareholder's name on Schedule 2.1 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 the restriction on transfer
set forth in Article 5, Section 2, of the Company's Articles of Incorporation
(which restriction has been validly waived) and 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 Escrow Agreement, the
Registration Rights Agreement in substantially the form attached hereto as
Exhibit 2.2 to be entered into as of the Closing among Sierra and the
Shareholders, and the Noncompetition Agreements in substantially the form
attached hereto as Exhibit 2.3 to be entered into as of the Closing among
Sierra, the Surviving Corporation and each of Judy McNary and Beth Tatem
(together, the "Principals") (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 State of Colorado. Each subsidiary of the
Company listed on Schedule 2.5 to the Disclosure Memorandum (individually a
"Subsidiary" and together the
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AGREEMENT AND PLAN OF MERGER Page 6
<PAGE> 13
"Subsidiaries") is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation, which
jurisdictions are set forth in Schedule 2.5 to the Disclosure Memorandum. The
Company and each Subsidiary have all requisite corporate power and authority to
own, operate and lease their properties and assets, to carry on their respective
businesses as now conducted and as proposed to be conducted, and in the case of
the Company 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 and each Subsidiary are duly qualified and licensed as
foreign corporations to do business and are in good standing in each
jurisdiction listed on Schedule 2.2, in the case of the Company, and Schedule
2.5, in the case of the Subsidiaries, to the Disclosure Memorandum, which
jurisdictions constitute all jurisdictions where the character of the Company's
or such Subsidiary's properties occupied, owned or held under lease or the
nature of the business conducted by the Company or such Subsidiary makes such
qualification necessary, except as set forth on Schedule 2.2 or Schedule 2.5, as
the case may be, to the Disclosure Memorandum and except where the failure to be
so qualified or in good standing would not have a material adverse effect on the
business, business prospects, assets, operations or condition (financial or
other) of the Company or such Subsidiary.
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 prior
to the Closing. 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 48,000 shares of Company Common Stock.
(b) The issued and outstanding capital stock of the
Company consists solely of 9,421 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.
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AGREEMENT AND PLAN OF MERGER Page 7
<PAGE> 14
(c) 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 or the capital
stock of any Subsidiary, except for the restriction on the transfer of shares
set forth in Article 5, Section 2, of the Company's Articles of Incorporation
(which restriction has been validly waived).
(d) 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. Except as set forth on
Schedule 2.4(d) to the Disclosure Memorandum, 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
The name, jurisdiction of incorporation and jurisdictions of foreign
qualification of each of the Company's Subsidiaries are as set forth on Schedule
2.5 to the Disclosure Memorandum. 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. The Company owns 100% of the issued
and outstanding shares of capital stock, or other ownership interests, of each
of the Subsidiaries, free and clear of any lien, encumbrance, preemptive right,
right of first offer or refusal, or other prior claim, and all the issued and
outstanding shares of capital stock, or other ownership interests, of the
Subsidiaries are duly authorized and validly issued, fully paid and
nonassessable, and were issued and acquired in compliance with all applicable
federal, state and foreign securities and other laws.
2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH
INSTRUMENTS
(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 Colorado Secretary of State (the consent of all such Persons to be
duly obtained
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AGREEMENT AND PLAN OF MERGER Page 8
<PAGE> 15
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 constitute a default under any provision of the
Articles of Incorporation or Bylaws of the Company, or (vi) invalidate or
adversely affect any 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 Colorado 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
Incorporation or Bylaws of the Company.
2.7 FINANCIAL STATEMENTS
The Company has delivered to Sierra (a) unaudited consolidated balance
sheets and consolidated statements of operations, and retained earnings of the
Company as of or for the fiscal years ended December 31, 1993 and 1994 compiled
by Clifton, Gunderson & Co., independent certified public accountants, and (b)
an unaudited consolidated balance sheet and unaudited consolidated statement of
operations and retained earnings of the Company as of and for the six-month
period ended June 30, 1995, compiled by Clifton, Gunderson & Co., independent
certified public accountants. All of the foregoing financial statements are
herein referred to as the "Financial Statements." The consolidated balance sheet
of the Company as of June 30, 1995 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 consistently applied
throughout the periods covered therein ("GAAP") and present fairly 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 the
unaudited financial statements as of and for the six-month period ended June 30,
1995 to normal recurring period-end audit adjustments which will not exceed
$5,000 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,
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AGREEMENT AND PLAN OF MERGER Page 9
<PAGE> 16
except (a) liabilities or obligations incurred since the date of the Company
Balance Sheet in the ordinary course of business and consistent with past
practice which are not in excess of $10,000 in the aggregate or $2,000
individually or (b) as specifically set forth on Schedule 2.7 to the Disclosure
Memorandum. The Company maintains and will continue to maintain standard systems
of accounting established and administered in accordance with GAAP. 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 GAAP and 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, 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 working
capital, assets, liabilities (absolute, accrued, contingent or otherwise),
earnings, reserves, financial condition, business, prospects or operations;
(e) borrowed or agreed to borrow any funds, assumed or
become subject to, whether directly or by way of guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise), or
incurred any liabilities or obligations (absolute, accrued, contingent or
otherwise), which individually or in the aggregate exceed $10,000, except
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice not to exceed $25,000 in the aggregate, or
increased, or experienced any change in any assumptions underlying or methods of
calculating, any bad debt, contingency or other reserves;
(f) paid, discharged or satisfied any claims, liabilities
or obligations (absolute, accrued, contingent or otherwise) other than the
payment, discharge or satisfaction
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AGREEMENT AND PLAN OF MERGER Page 10
<PAGE> 17
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 is in the aggregate less than $5,000, 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 or markdown) or written off as uncollectible
any notes or accounts receivable, except for write-downs and write-offs that are
in the aggregate less than $5,000, incurred 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 other than representatives of Sierra 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 $5,000 for additions to property, plant, equipment or intangible
capital assets or made aggregate capital expenditures in excess of $20,000 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 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;
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AGREEMENT AND PLAN OF MERGER Page 11
<PAGE> 18
(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 directors' fees and compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year ended December 31, 1994; 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, co-signer, endorser, co-maker, 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 or which would have any adverse effect upon the business,
business prospects, assets, liabilities or financial condition of the Company;
(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;
(r) received notice that there has been a loss of, or
contract cancellation by, any current or prospective customer, licensor or
distributor of the Company;
(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; 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
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AGREEMENT AND PLAN OF MERGER Page 12
<PAGE> 19
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, as determined in accordance with GAAP
consistently applied; (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 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 has not
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in Section
897(c)(1)(A)(2)(i) 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.
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
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AGREEMENT AND PLAN OF MERGER Page 13
<PAGE> 20
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 $1,000 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 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.
(c) The Company's leasehold interest in each parcel of
the Real Property is free and clear of all 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
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
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AGREEMENT AND PLAN OF MERGER Page 14
<PAGE> 21
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 is in the aggregate less than $2,000,
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.
(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 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.
(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, to the best of the Company's knowledge, 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 of all contracts, agreements and understandings, oral or written,
to which the Company is a party or by which the Company is bound, including,
without limitation, security agreements, license agreements, software
development agreements, credit agreements, conditional sales agreements,
instruments relating to the borrowing of money, and distributorship agreements.
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 all obligations imposed
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AGREEMENT AND PLAN OF MERGER Page 15
<PAGE> 22
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 delivered
to Sierra. Except as specifically set forth on Schedule 2.11 to the Disclosure
Memorandum, the Company has no:
(a) agreements, contracts, commitments or restrictions
requiring the Company to make any charitable contribution;
(b) purchase contracts or commitments of the Company that
continue for a period of more than 12 months or are in excess of the normal,
ordinary and usual requirements of its business or that are at an excessive
price to the extent that such excess would be material to the Company's
business;
(c) outstanding sales or service contracts, commitments
or proposals of the Company which are expected by the Company to result in any
material loss or the realization of substantially 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;
(d) agreements, understandings, arrangements or contracts
that are not, except as provided by law to the contrary without regard to the
express terms of such contract, cancellable 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;
(e) employment agreement, whether express or implied, or
any other agreement for services that contains any severance or termination pay
liabilities or obligations;
(f) restriction by agreement from carrying on its
business anywhere in the world;
(g) notice that any party to a contract intends to
cancel, terminate or refuse to renew such contract or to exercise or decline to
exercise any option or right thereunder; or
(h) material disagreement with any of its suppliers or
customers.
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 2% or more of
the Company's sales during the fiscal year last ended showing the approximate
total sales by the Company to each
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AGREEMENT AND PLAN OF MERGER Page 16
<PAGE> 23
such customer during the fiscal year last ended and (b) a 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 with an aggregate retail value in excess of $5,000
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. To the Company's best knowledge, there is no valid basis for any claim,
action, suit, arbitration, proceeding or investigation (other than as noted on
Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be
expected to be materially adverse to the business, business prospects, assets,
operations or condition (financial or other) of 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 or which would have a material adverse effect upon the
business, business prospects, assets, operations or condition (financial or
other) of the Company.
2.15 LABOR MATTERS
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
failure to comply with which could have a material adverse effect upon the
business, business prospects, assets, operations or conditions (financial or
other) of the Company. The Company is not engaged in any unfair labor practice
and has no liability for any arrears of wages or Taxes or penalties for failure
to comply with any such provisions of
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AGREEMENT AND PLAN OF MERGER Page 17
<PAGE> 24
law, except for back pay to the Shareholders as referenced in Section 1.6.3(c)
hereof. 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 an Employee Non-Disclosure
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.
2.16 EMPLOYEE BENEFIT PLANS
Except as set forth on Schedule 2.16 to the Disclosure Memorandum, the
Company has no bonus, deferred compensation, incentive, severance pay, pension,
profit-sharing, retirement, stock purchase, stock option or any other employee
benefit plan, employee fringe benefit plan, arrangement or practice with regard
to present or former employees as to which the Company has any liability
("Employee Benefit Plan"), whether formal or informal. Schedule 2.16 to the
Disclosure Memorandum contains an accurate and complete description of, and sets
forth the annual amount expected to be payable for the fiscal year last ended
pursuant to, each Employee Benefit Plan, whether formal or informal. The Company
Balance Sheet reflects in the aggregate all amounts accrued but unpaid under the
aforesaid plans and arrangements as of the date thereof. The Company has no
agreement, arrangement or commitment, whether formal or informal and whether
legally binding or not, to create any additional plan or arrangement or to
modify or amend any existing Employee Benefit Plan. The Company has delivered to
Sierra true, correct and complete copies of all written Employee Benefit Plans
of the Company, all contracts related thereto and the most recently available
annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C or 5500-R)
and favorable determination letters for such plans. The Company is in compliance
in all material respects with the terms of its Employee Benefit Plans and with
all applicable laws and regulations, including, but not limited to, the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The
Company has extinguished any liabilities to participants, beneficiaries and the
Pension Benefit Guaranty Corporation which may have arisen under any such plans
previously, but not currently, maintained by them and expects to incur no future
liabilities with regard to such plans. Neither the Company nor any "affiliate"
of the Company is a party to or has ever made any contributions to, or is
subject to any liability with respect to, any multiemployer plan within the
meaning of Section 4001(a)(3) of ERISA or any defined benefit plan within the
meaning of Section 3(35) of ERISA. The term "affiliate" means any company, trade
or business which is a member of the same control
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AGREEMENT AND PLAN OF MERGER Page 18
<PAGE> 25
group, as defined in Code Section 414(b) or 414(c), with the Company, or any
company, trade or business which is a member of an affiliated service group, as
defined in Code Section 414(m) or 414(o) with the Company. No prohibited
transaction (within the meaning of ERISA Section 406 or Code Section 4975) or
failure to meet the requirements of Code Section 4980B(f) has occurred with
respect to any Employee Benefit Plan which could subject the Company to any
liability. There are no actions, suits or claims pending (other than routine
claims for benefits) or which could reasonably be expected to be asserted
against any Employee Benefit Plan or the assets of any such plan.
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
(collectively, the "Listed Intellectual Property") of any kind now used or
anticipated to be used in the business of the Company. 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 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 or pending patent or other
right 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 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 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, the Intellectual
Property Licenses 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
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AGREEMENT AND PLAN OF MERGER Page 19
<PAGE> 26
related materials thereof (collectively, the "Software 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. 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. No licenses, sublicenses, covenants or agreements have been
granted or entered into by the Company in respect of any of the Listed
Intellectual Property except the Intellectual Property Licenses. No director,
officer, shareholder or employee of the Company owns, directly or indirectly, in
whole or in part, any of the Listed Intellectual Property. The Company does not
know and does not have any reasonable basis to believe that there exist any new
developments in the manufacture or marketing of the products of the Company or
any new or improved products or processes useful in connection with the business
of the Company as now conducted or as presently anticipated to be conducted that
would have a material adverse effect upon the business, business prospects,
assets, operations or condition (financial or other) of the Company. None of the
officers of the Company and none of the Company's employees, consultants,
agents, representatives or advisers has entered into any agreement 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 which would have an adverse effect upon the Company's
business or products.
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,
except for any disclosure that would not have a material adverse effect on the
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AGREEMENT AND PLAN OF MERGER Page 20
<PAGE> 27
business, business prospects, assets, operations or conditions (financial or
other) of the Company; (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. 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 of all consolidated
accounts receivable of the Company existing as of June 30, 1995.
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 saleable 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 Incorporation 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
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AGREEMENT AND PLAN OF MERGER Page 21
<PAGE> 28
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 failure to obtain
which would have a material adverse effect on its business, business prospects,
assets, operations or condition (financial or other). 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
(a) Except as described on Schedule 2.22 to the
Disclosure Memorandum, the Company has complied, and is in compliance, with all
federal, state, local and foreign laws, rules, regulations, ordinances, decrees
and orders applicable to the operation of its business, to its employees, or to
the Real Property and the Personal Property, the failure to comply with which
would, individually or in the aggregate, have a material adverse effect on the
business, assets or operations of the Company, including, without limitation,
all such laws, rules, ordinances, decrees and orders relating to antitrust,
consumer protection, currency exchange, environmental protection, equal
opportunity, health, occupational safety, pension, securities and
trading-with-the-enemy matters. Except as described on Schedule 2.22 to the
Disclosure Memorandum, the Company has not received any notification of any
asserted present or past unremedied failure by the Company to comply with any of
such laws, rules, ordinances, decrees or orders.
(b) To the Company's best knowledge, the Company is not
currently in violation of any applicable building, zoning, environmental or
other law, ordinance or regulation in respect of the Real Property or its plant,
structures or operations. No such law, ordinance or regulation would reasonably
be expected to prevent the use of substantially all of the Real Property for the
conduct thereon of the business of the Company.
(c) To the Company's best knowledge, the Company is not
in violation of, and has not violated, in connection with the ownership, use,
maintenance or operation of the Real Property or the Personal Property or the
conduct of their businesses, any applicable federal, state, county or local
statutes, laws, regulations, guidances, rules, ordinances, codes, licenses,
permits, judgments, writs, decrees, injunctions or orders of any governmental
entity relating to environmental (air, water, groundwater, soil, noise and odor)
matters ("Environmental Laws"), including, by way of illustration and not by way
of limitation, the Clean Air Act, the Federal Water Pollution Control Act, the
Resources Conservation and
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AGREEMENT AND PLAN OF MERGER Page 22
<PAGE> 29
Recovery Act and the regulations issued thereunder, the Comprehensive
Environmental, Response, Compensation, and Liability Act, the Clean Water Act,
the Hazardous Materials Transportation Act, the Toxic Substances Control Act,
the Hazardous Waste Control Act, comparable Colorado laws, and the regulations
issued thereunder, and all other applicable federal, state, county, local and
foreign environmental requirements where such violation might have a material
adverse impact on the Company's business, business prospects, assets, operations
or condition (financial or other).
(d) Except as set forth on Schedule 2.22 to the
Disclosure Memorandum, to the Company's best knowledge, the Company has not, in
violation of any Environmental Laws, transported, stored, treated, recycled,
handled or disposed of, or allowed or arranged for any third party to transport,
store, treat, recycle, handle or dispose of (i) any flammable substances,
explosives, radioactive materials, hazardous substances, hazardous wastes, toxic
substances, pollutants, contaminants or any wastes, materials or substances
identified in or regulated by any Environmental Laws; (ii) asbestos,
polychlorinated biphenyls, urea formaldehyde, nuclear fuel or material, chemical
waste, carcinogens and radon, all to the extent regulated by any Environmental
Laws; and (iii) gasoline, oil and other petroleum products (collectively,
"Regulated Substances"), to or at any location other than a location lawfully
permitted to receive such material for such purposes at such time. Set forth on
such Schedule 2.22 is a complete and accurate list of all locations to which the
Company has ever transported, or caused to be transported or allowed or arranged
for any third party to transport, any type of Regulated Substances for storage,
treatment, handling, processing, burning, recycling or disposal, as required by
the Environmental Laws.
(e) Except as set forth on such Schedule 2.22, no real
property ever owned by the Company, including, but not limited to, all surface
and subsurface soil, sediments, groundwater and surface water located on, in or
under such real property, was during the period of use by the Company being
contaminated with any Regulated Substances or constituents thereof, which
contamination has given or may give rise to any material obligation under any
Environmental Laws, the common law or otherwise. To the present, actual
knowledge of the Company without investigation, except as set forth on such
Schedule 2.22, no real property adjacent to or adjoining the Real Property has
been so contaminated. To the knowledge of the Company without investigation,
except as set forth on such Schedule 2.22, no polychlorinated biphenyls,
lead-based materials or asbestos are present in or on the Real Property or in
any equipment located therein, in violation of any Environmental Laws.
(f) Except as set forth on such Schedule 2.22, the
Company has recorded or filed and has provided to Sierra true, accurate and
complete copies of all reports with respect to any spilling, leaking, pumping,
pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping
or disposing into the environment (including the abandonment or discarding of
drums, barrels, containers or other closed receptacles) (any of the foregoing, a
"Release"), caused by the Company and required by any Environmental Laws to be
filed by the Company with any government authority. Except as disclosed on such
Schedule 2.22, the
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AGREEMENT AND PLAN OF MERGER Page 23
<PAGE> 30
Company has maintained all environmental and operating documents and records
substantially in the manner and for the time periods required by any
Environmental Laws.
(g) Except as disclosed on such Schedule 2.22, to the
Company's knowledge, the Company has not caused the Release of any Regulated
Substances or constituents thereof on, from or off-site of its property, or of
any Release from any facility owned or operated by third parties but with
respect to which any of them is alleged to have liability.
(h) Except as set forth on such Schedule 2.22, to the
Company's knowledge, there are no tanks which, when considered with all
associated piping, are located either wholly or partially below the surface of
the ground, and, without regard to whether they are in contact with soil, within
a building or contamination structure or otherwise are located in, on or under
the Real Property, and, except as set forth on such Schedule 2.22, to the
Company's knowledge, the Real Property, or any portion thereof, is not a
"wetland" as defined by any law, environmental or otherwise, and is not subject
to regulation.
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. 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
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, except that the Company did engage Christopher Schember of
Business Development Advisors as a broker and finder, whose fee will be paid as
provided in Section 1.6.4 hereof.
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AGREEMENT AND PLAN OF MERGER Page 24
<PAGE> 31
2.25 GOVERNMENT CONTRACTS
The Company has never been, nor as a result of the consummation of the
transactions contemplated by this Agreement (without giving any consideration to
the identity or conduct of the Purchaser or Sierra) will it be, suspended or
debarred from bidding on contracts or subcontracts for any agency of the United
States government, nor has such suspension or debarment been threatened or
action for suspension or debarment been commenced. The Company has not been nor
is it now being audited or, to the knowledge of the Company, investigated by the
United States Government Accounting Office, the United States Department of
Justice, the United States Department of Defense or any of its agencies, the
Defense Contract Audit Agency or the inspector general of any agency of the
United States government, nor, to the knowledge of the Company, has such audit
or investigation been threatened. To the Company's knowledge, there is no valid
basis for the Company's suspension or debarment from bidding on contracts or
subcontracts for any agency of the United States government and there is no
valid basis for a claim pursuant to an audit or investigation by the United
States Government Accounting Office, the United States Department of Justice,
the United States Department of Defense or any of its agencies, the Defense
Contract Audit Agency or the inspector general of any agency of the United
States government, or any prime contractor. The Company has never had a contract
or subcontract terminated for default or has ever been determined to be
nonresponsible by any agency of the United States government. Except as set
forth on Schedule 2.25 to the Disclosure Memorandum, the Company has no
outstanding agreements, contracts or commitments which require it to obtain or
maintain a government security clearance.
2.26 ABSENCE OF QUESTIONABLE PAYMENTS
Neither the Company, nor any director or officer, nor, to the Company's
knowledge, any 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 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 or officer, nor, to the Company's knowledge, any agent,
employee or other Person acting on behalf of the Company, has accepted or
received any improper or unlawful contributions, payments, gifts or
expenditures.
2.27 PERSONNEL
Schedule 2.27 to the Disclosure Memorandum sets forth a true and
complete list of:
(a) the names and current compensation amounts of all
directors and elected and appointed officers of the Company and the family
relationships, if any, among such persons;
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AGREEMENT AND PLAN OF MERGER Page 25
<PAGE> 32
(b) the wage rates for nonsalaried and nonexecutive
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.
2.28 BANK ACCOUNTS
Schedule 2.28 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.
2.29 INSIDER INTERESTS
Except as set forth on Schedule 2.29 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 2.29 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.
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AGREEMENT AND PLAN OF MERGER Page 26
<PAGE> 33
2.30 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and warrants
to the Purchaser and Sierra as follows:
(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 its
investment in the Securities.
(b) SEC Documents. Such Shareholder acknowledges that she
has reviewed to her satisfaction the following publicly available filings and
reports of Sierra: the 1994 Annual Report to Shareholders, the Form 10-K for the
fiscal year ended March 31, 1994, the Form 10-K for the fiscal year ended March
31, 1995, Forms 10-Q for the fiscal quarters ended June 30, September 30 and
December 31, 1994, and the Form 8-K filed with the Securities and Exchange
Commission (the "SEC") on December 30, 1994 (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 it deems necessary, its 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 its financial
condition and investment needs.
(d) Sophistication. Such Shareholder, either alone or
with the assistance of its professional advisors, is a sophisticated investor,
is able to fend for itself in the transactions contemplated by this Agreement
relating to the Securities and has such knowledge and experience in financial
and business matters that it is capable of evaluating the merits and risks of
the prospective investment in the Securities.
(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 its 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.
(h) Due Diligence. Such Shareholder has conducted its own
due diligence investigation of Sierra and its business and analysis of the
merits and risks of an investment in
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AGREEMENT AND PLAN OF MERGER Page 27
<PAGE> 34
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 it to assist it.
(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 it 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 have not been registered under the 1933 Act or any
applicable state securities laws, but are being issued under this Agreement
pursuant to exemptions from such 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.
(l) Residency. For purposes of the application of state
securities laws, each Shareholder is a resident of the jurisdiction specified on
Schedule 2.30 to the Disclosure Memorandum.
(m) Legend. It is understood that the certificates
evidencing the Securities may bear the following legend:
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AGREEMENT AND PLAN OF MERGER Page 28
<PAGE> 35
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.
2.31 POOLING MATTERS
The Company has not taken and will not take, and the Shareholders have
not taken and will not take, directly or indirectly, and the Company and the
Shareholders will use their respective best efforts to prevent any other Person
from taking, any actions, including without limitation 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 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 generally accepted accounting principles, and
neither the Company nor the Shareholders is aware of any facts which otherwise
could prevent such accounting treatment.
2.32 FULL DISCLOSURE
No information furnished by the Company or the Shareholders to Sierra
or the Purchaser 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, is false or misleading in any material
respect. Neither the Company nor any Shareholder has made any untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements made or information delivered in or pursuant to this
Agreement, including, but not limited to, all Schedules to the Disclosure
Memorandum and Exhibits hereto, or in or pursuant to the other Operative
Documents, or in or pursuant to closing certificates executed or delivered by
the Shareholders or the Company, not misleading. The Company has provided to
Sierra an 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 contains all
information required to be set forth therein under the Colorado Corporation
Code. 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.
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<PAGE> 36
ARTICLE III - REPRESENTATIONS AND WARRANTIES
OF THE PURCHASER AND SIERRA
To induce the Company and the Shareholders to enter into and perform
this Agreement and the Operative Documents, the Purchaser and Sierra 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 duly organized, 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 the Purchaser and Sierra 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 the Purchaser and Sierra 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
Sierra's and the Purchaser's respective obligations under this Agreement and the
Operative Documents has been taken or will be taken prior to the Closing. 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. 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.
3.3 LEGAL PROCEEDINGS
There is no claim, action, suit, arbitration, proceeding or
investigation pending or, to the best knowledge of the Purchaser or Sierra,
threatened against the Purchaser or Sierra before or by any court or
governmental or nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person, which questions the validity of this
Agreement or any action taken or to be taken by the Purchaser or Sierra pursuant
to this Agreement or in connection with the transactions contemplated hereby.
There are no outstanding or unsatisfied judgments, orders, decrees or
stipulations to which the Company is a party which involve the transactions
contemplated herein or which would have a material
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adverse effect upon the business, business prospects, assets or operations or
conditions (financial or other) of the Purchaser or Sierra.
3.4 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.
3.5 NO BROKERS
Neither Sierra nor the Purchaser has incurred, and neither will incur,
directly or indirectly, as a result of any action taken by or on behalf of
Sierra or the Purchaser, 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.
3.6 FULL DISCLOSURE
Sierra has provided to the Shareholders accurate and complete copies of
the Public Filings. As of their respective dates, none of the Public Filings
contained any untrue statement of any material fact or omitted any material fact
required to be stated therein or necessary to make the statements therein not
misleading, except to the extent that any such statement or omission has been
modified or superseded in a filing subsequently made with the SEC or in a
subsequent public statement by Sierra.
3.7 TAX CONSEQUENCES
Neither Sierra nor Purchaser makes any representation or warranty with
respect to, and expressly disclaims any responsibility for, any Tax consequences
to the Shareholders arising out of the structure or terms of this Agreement, or
the negotiation or consummation hereof. Each Shareholder has consulted with his
own tax advisor in such matters and shall be solely responsible for any such tax
consequences.
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PURCHASER AND SIERRA
The obligations of the Purchaser and Sierra 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
Purchaser or 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
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AGREEMENT AND PLAN OF MERGER Page 31
<PAGE> 38
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
The Purchaser and Sierra shall have received the opinion letter of
Ireland, Stapleton, Pryer & Pascoe, counsel for the Company and the
Shareholders, in their capacities as 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 Colorado Law, and no Shareholders
holding, in the aggregate, more than 10% of the shares of Company Common Stock
shall have elected to claim dissenters' rights under Colorado Law.
4.5 RESIGNATIONS
The Purchaser and Sierra shall have received copies of resignations
effective as of the Closing Date of all the officers and 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, which consents shall be satisfactory
in all respects to Sierra in its sole and absolute discretion.
4.7 OFFICERS' CERTIFICATE
The Purchaser and Sierra shall have received a certificate of the
President and the Chief Financial Officer of the Company, dated the Closing
Date, in form and substance satisfactory to Sierra, certifying that the
conditions to the obligations of the Purchaser and Sierra have been fulfilled,
as required by Sections 4.1, 4.2, 4.4, 4.9 and 4.12 hereof.
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AGREEMENT AND PLAN OF MERGER Page 32
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4.8 PRINCIPALS' CERTIFICATES
The Purchaser and Sierra shall have received certificates from each of
the Principals, dated the Closing Date, in form and substance satisfactory to
Sierra, certifying that the conditions to the obligations of the Purchaser and
Sierra have been fulfilled, as required by Sections 4.1, 4.2, 4.4, 4.9 and 4.12.
4.9 MATERIAL ADVERSE CHANGE
Since December 31, 1994 and through the Closing, there shall not have
occurred any material adverse change in the business, operations, assets,
liabilities, earnings, 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 third party
contractual or other business relationships of the Company.
4.10 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.
4.11 OPINION OF ACCOUNTANTS
The Purchaser and Sierra shall have received an opinion of Clifton,
Gunderson & Co., independent certified public accountants, which shall be
satisfactory to Sierra in its sole and absolute discretion, to the effect that
the Merger contemplated pursuant to this Agreement qualifies for "pooling of
interests" accounting treatment.
4.12 APPROVALS AND CONSENTS
All transfers of permits or licenses, all approvals, applications 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.
4.13 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and by the 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 Operative Documents and such other documents as are specified
by Sierra's counsel.
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AGREEMENT AND PLAN OF MERGER Page 33
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4.14 NONFOREIGN AFFIDAVIT
Sierra and the Purchaser shall have received from the Company, pursuant
to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act
Affidavit in the form attached hereto as Exhibit 4.14.
4.15 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.
4.16 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.
4.17 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.
4.18 OPERATIVE DOCUMENTS
The Operative Documents shall have been executed and delivered by all
parties thereto other than Sierra and the Purchaser.
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.
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Purchaser and Sierra
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.
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AGREEMENT AND PLAN OF MERGER Page 34
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5.2 PERFORMANCE OF AGREEMENTS
The Purchaser and Sierra 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 OFFICERS' CERTIFICATE
The Company shall have received a certificate of the Chief Financial
Officer and another officer of Sierra, dated the Closing Date, substantially in
the form attached hereto as Exhibit 5.4, 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.
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.
ARTICLE VI - COVENANTS
Between the date of this Agreement and the Effective Time, the parties
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
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AGREEMENT AND PLAN OF MERGER Page 35
<PAGE> 42
Company with customers, 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
Incorporation 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;
(d) reclassify, combine, split, subdivide, redeem,
purchase or otherwise acquire, directly or indirectly, any of its capital stock;
(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 $5,000 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 consultants, 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;
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AGREEMENT AND PLAN OF MERGER Page 36
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(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 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 be prepared
in conformity with GAAP and shall fairly present the financial position and
results of operations of the Company as of the dates and for the periods therein
specified. All information obtained by either party or its officers, directors,
employees, auditors or agents pursuant to this Section 6.2 shall be kept
confidential in accordance with the confidentiality agreement, dated June 19,
1995 (the "Confidentiality Agreement"), between Sierra and the Company. 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. Upon the Effective Time, the Confidentiality
Agreement shall be deemed to have terminated without further action by the
parties thereto.
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AGREEMENT AND PLAN OF MERGER Page 37
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6.3 NO SOLICITATION OF TRANSACTIONS
The Company 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 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 all 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 hereunder to the
party receiving such notice.
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. After the Closing Date, each party
hereto, at the request of and without any further cost or expense to
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AGREEMENT AND PLAN OF MERGER Page 38
<PAGE> 45
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
The Company and the Shareholders shall not issue any press release or
otherwise make any statements to any third party with respect to this Agreement
or the transactions contemplated hereby without the prior written consent of
Sierra.
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 July 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 July 31, 1995; or
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AGREEMENT AND PLAN OF MERGER Page 39
<PAGE> 46
(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 July 31, 1995.
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 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 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. 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 BY THE SHAREHOLDERS
From and after the Closing Date, the Shareholders shall jointly and
severally indemnify and hold Sierra and its affiliates (the "Sierra Indemnified
Parties") harmless from and against, and shall reimburse the Sierra Indemnified
Parties for, any and all losses, damages, debts, liabilities, obligations,
judgments, orders, awards, writs, injunctions, decrees, fines, penalties,
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AGREEMENT AND PLAN OF MERGER Page 40
<PAGE> 47
taxes, costs or expenses (including but not limited to any legal or accounting
fees of 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; or
(c) any accounts receivable reflected on the balance
sheet of the Company dated May 31, 1995 which are not collected prior to
December 31, 1995; provided that Sierra shall use commercially reasonable
efforts to collect all such accounts receivable; and provided further, that
Sierra shall assign any such uncollected accounts to the Shareholders upon
payment by the Shareholders of all liabilities arising in connection with this
section 8.2(c).
8.3 INDEMNIFICATION BY SIERRA
From and after the Closing Date, Sierra shall indemnify and hold
harmless each Shareholder and her successors, assigns, heirs and legatees (the
"Company Indemnified Parties"; together with the Sierra Indemnified Parties, the
"Indemnified Parties") from and against, and shall reimburse the Company
Indemnified Parties for, any and all Losses arising out of or in connection
with:
(a) any inaccuracy in any representation or warranty made
by the Purchaser or Sierra in this Agreement or in any other Operative Document
or in any certificate delivered pursuant hereto or thereto,
(b) any failure by the Sierra to perform or comply, in
whole or in part, with any covenant or agreement in this Agreement or in any
other Operative Document
8.4 THRESHOLD AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any Claims until the aggregate Losses
for which such Indemnified Parties would be otherwise entitled to receive
indemnification exceed $25,000 (the "Threshold"); provided, however, that once
such aggregate Losses exceed the Threshold, such Indemnified Parties shall be
entitled to indemnification for the aggregate amount of all Losses without
regard to the Threshold.
(b) In no event shall the liability of the Shareholders
hereunder for Losses incurred by Indemnified Parties exceed an amount equal to
the number of shares of Sierra Common Stock issued to the Shareholders pursuant
to the Merger multiplied by the Closing Average.
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AGREEMENT AND PLAN OF MERGER Page 41
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8.5 PROCEDURE FOR INDEMNIFICATION
(a) Any 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) 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. The
Indemnified Party shall cooperate with the indemnifying 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.
(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, 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 within 90 days after its discovery of
facts upon which it intends to base its Claim for indemnification
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AGREEMENT AND PLAN OF MERGER Page 42
<PAGE> 49
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 OFFSET
If and to the extent that any Indemnified Party is entitled to
indemnification hereunder, Sierra may offset such indemnification amount against
the Escrow Shares as provided in the Escrow Agreement.
ARTICLE IX - GENERAL
9.1 EXPENSES
Whether or not the transactions contemplated by this Agreement are
consummated, each party shall pay its own fees and expenses incident to the
negotiation, preparation and carrying out of this Agreement and the other
Operative Documents (except that the reasonable legal, accounting and brokerage
fees and expenses of the Company and the Shareholders, to the extent such fees
and expenses are covered by paragraph (c) of Section 1.6.3 of this Agreement,
shall be paid by Sierra); 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.
9.2 BANK LOANS
At or within one day of Closing, Sierra shall pay to Eagle Bank all
outstanding principal and accrued interest owed by the Company to Eagle Bank as
of such date; provided however, that Sierra shall not be obligated to pay any
amount in excess of the total principal and interest as reflected in the letter
dated July 13, 1995 from Eagle Bank (the "Payoff Quotation"), attached hereto as
Exhibit 9.2. Sierra shall make commercially reasonable efforts to have Eagle
Bank release the personal obligations of Judith D. McNary and Mary Elizabeth
Tatem.
9.3 EMPLOYEE AGREEMENTS
At or as soon as practicable after the Closing, each employee of the
Company shall have executed and delivered Sierra's standard form Confidentiality
Agreement and Sierra's standard form Invention Assignment and Proprietary
Information Agreement.
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AGREEMENT AND PLAN OF MERGER Page 43
<PAGE> 50
9.4 NOTICES
Any notice or demand 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 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 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.
TO THE PURCHASER AND TO SIERRA:
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:
Green Thumb Software, Inc.
75 Manhattan Drive, Suite 100
Boulder, Colorado 80303
Fax: (303) 499-1389
Attention: President
with a copy to:
Ireland, Stapleton, Pryor & Pascoe
1675 Broadway, Suite 2600
Denver, CO 80202
Fax: (303) 623-2062
Attention: Susan L. Oakes, Esq.
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AGREEMENT AND PLAN OF MERGER Page 44
<PAGE> 51
9.5 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 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.
9.6 ENTIRE AGREEMENT
This Agreement and the other Operative Documents constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede, except as set forth in Section 6.2 hereof, 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.
9.7 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.
9.8 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.
9.9 SPECIFIC PERFORMANCE
The parties hereto agree that irreparable damage would occur in the
event any provision of this Agreement was not performed in accordance with the
terms hereof and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity.
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AGREEMENT AND PLAN OF MERGER Page 45
<PAGE> 52
9.10 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. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined in any Washington state
or federal court thereof.
9.11 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.
9.12 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.
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AGREEMENT AND PLAN OF MERGER Page 46
<PAGE> 53
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/ Michael A. Brochu
-----------------------------------
Its Executive Vice President & CFO
---------------------------------
GREEN THUMB ACQUISITION CORPORATION
By /s/ Michael A. Brochu
-----------------------------------
Its President
---------------------------------
GREEN THUMB SOFTWARE, INC.
By /s/Judith D. McNary
-----------------------------------
Its President
---------------------------------
SHAREHOLDERS:
/s/Judith D. McNary
-------------------------------------
Judith D. McNary
/s/Mary Elizabeth Tatem
-------------------------------------
Mary Elizabeth Tatem
/s/Carol Lynn Robertson
-------------------------------------
Carol Lynn Robertson
/s/Janet T. Koerner
-------------------------------------
Janet T. Koerner
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AGREEMENT AND PLAN OF MERGER Page 47
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA ON-LINE, INC.,
ARION ACQUISITION CORP.,
ARION SOFTWARE, INC.
AND
THE SHAREHOLDERS OF ARION SOFTWARE, INC.
DATED AS OF SEPTEMBER 12, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
ARTICLE I - THE MERGER ............................................................................. 1
1.1 The Merger ........................................................................... 1
1.2 The Closing .......................................................................... 1
1.3 Effective Date and Time .............................................................. 2
1.4 Articles of Incorporation of the Surviving Corporation ............................... 2
1.5 Bylaws of the Surviving Corporation .................................................. 2
1.6 Conversion of Shares ................................................................. 2
1.6.1 Exchange Ratio ................................................................ 2
1.6.2 Escrow ........................................................................ 3
1.6.3 Special Definitions ........................................................... 3
1.6.4 Exchange of Certificates ...................................................... 4
1.6.5 No Fractional Shares .......................................................... 4
1.6.6 Dissenting Shareholders ....................................................... 4
1.6.7 No Further Transfers .......................................................... 5
1.7 Pooling Restrictions on Transfer of the Securities ................................... 5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE
COMPANY AND THE SHAREHOLDERS ............................................................... 5
2.1 Good Title, etc. ..................................................................... 5
2.2 Organization ......................................................................... 6
2.3 Enforceability ....................................................................... 6
2.4 Capitalization ....................................................................... 7
2.5 Subsidiaries and Affiliates .......................................................... 7
2.6 No Approvals or Notices Required; No Conflicts With Instruments ...................... 8
2.7 Financial Statements ................................................................. 9
2.8 Absence of Certain Changes or Events ................................................. 9
2.9 Taxes ................................................................................ 12
2.10 Property ............................................................................. 13
2.11 Contracts ............................................................................ 15
2.12 Customers and Suppliers .............................................................. 16
2.13 Orders, Commitments and Returns ...................................................... 16
2.14 Claims and Legal Proceedings ......................................................... 16
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page i
<PAGE> 3
<TABLE>
<S> <C>
2.15 Labor Matters ........................................................................ 17
2.16 Employee Benefit Plans ............................................................... 17
2.17 Patents, Trademarks, etc. ............................................................ 18
2.18 Accounts Receivable .................................................................. 20
2.19 Inventory ............................................................................ 21
2.20 Corporate Books and Records .......................................................... 21
2.21 Licenses, Permits, Authorizations, etc. .............................................. 21
2.22 Compliance With Laws ................................................................. 21
2.23 Insurance ............................................................................ 23
2.24 Brokers or Finders ................................................................... 24
2.25 Government Contracts ................................................................. 24
2.26 Absence of Questionable Payments ..................................................... 24
2.27 Personnel ............................................................................ 25
2.28 Bank Accounts ........................................................................ 25
2.29 Insider Interests .................................................................... 25
2.30 Securities Act Matters ............................................................... 26
2.31 Pooling Matters ...................................................................... 28
2.32 Full Disclosure ...................................................................... 28
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE
PURCHASER AND SIERRA ....................................................................... 29
3.1 Organization ......................................................................... 29
3.2 Enforceability ....................................................................... 29
3.3 Legal Proceedings .................................................................... 30
3.4 Securities ........................................................................... 30
3.5 Tax Consequences ..................................................................... 30
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
PURCHASER AND SIERRA ....................................................................... 30
4.1 Accuracy of Representations and Warranties ........................................... 30
4.2 Performance of Agreements ............................................................ 30
4.3 Opinion of Counsel for the Company ................................................... 31
4.4 Shareholder Approval ................................................................. 31
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page ii
<PAGE> 4
<TABLE>
<S> <C>
4.5 Resignations ......................................................................... 31
4.6 Consents to Merger ................................................................... 31
4.7 Officers' Certificate ................................................................ 31
4.8 Principals' Certificates ............................................................. 31
4.9 Material Adverse Change .............................................................. 31
4.10 Due Diligence ........................................................................ 32
4.11 Approvals and Consents ............................................................... 32
4.12 Proceedings and Documents; Secretary's Certificate ................................... 32
4.13 Nonforeign Affidavit ................................................................. 32
4.14 Compliance With Laws ................................................................. 32
4.15 Pooling of Interests ................................................................. 32
4.16 Other Agreements ..................................................................... 33
4.17 Legal Proceedings .................................................................... 33
4.18 Operative Documents .................................................................. 33
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE
SHAREHOLDERS AND THE COMPANY ............................................................... 33
5.1 Accuracy of Representations and Warranties ........................................... 33
5.2 Performance of Agreements ............................................................ 33
5.3 Opinion of Counsel ................................................................... 33
5.4 Officers' Certificate ................................................................ 34
5.5 Legal Proceedings .................................................................... 34
5.6 Operative Documents .................................................................. 34
ARTICLE VI - COVENANTS ............................................................................. 34
6.1 Conduct of Business by the Company Pending the Merger ................................ 34
6.2 Access to Information; Confidentiality ............................................... 36
6.3 No Solicitation of Transactions ...................................................... 36
6.4 Notification of Certain Matters ...................................................... 37
6.5 Further Action; Reasonable Best Efforts .............................................. 37
6.6 Publicity ............................................................................ 37
ARTICLE VII--TERMINATION, AMENDMENT AND WAIVER ..................................................... 37
7.1 Termination .......................................................................... 37
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iii
<PAGE> 5
<TABLE>
<S> <C>
7.2 Effect of Termination ................................................................ 38
7.3 Amendment ............................................................................ 38
7.4 Waiver ............................................................................... 39
ARTICLE VIII - SURVIVAL AND INDEMNIFICATION ........................................................ 39
8.1 Survival ............................................................................. 39
8.2 Indemnification ...................................................................... 39
8.3 Threshold and Limitations ............................................................ 40
8.4 Procedure for Indemnification ........................................................ 40
8.6 Offset ............................................................................... 41
ARTICLE IX - GENERAL ............................................................................... 41
9.1 Expenses ............................................................................. 41
9.2 Employee Agreements .................................................................. 42
9.3 Notices .............................................................................. 42
9.4 Severability ......................................................................... 43
9.5 Entire Agreement ..................................................................... 43
9.6 Assignment ........................................................................... 43
9.7 Parties in Interest .................................................................. 43
9.8 Specific Performance ................................................................. 44
9.9 Governing Law ........................................................................ 44
9.10 Headings ............................................................................. 44
9.11 Counterparts ......................................................................... 44
9.12 Waiver of Jury Trial ................................................................. 44
9.13 Shareholders' Agreement .............................................................. 44
9.14 Arbitration .......................................................................... 44
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iv
<PAGE> 6
EXHIBITS
1.3 - Articles of Merger
1.4 - Articles of Incorporation of the Surviving Corporation
1.5 - Bylaws of the Surviving Corporation
1.6 - Form of Escrow Agreement
2.1 - Disclosure Memorandum
2.2 - Form of Registration Rights Agreement
2.3 - Form of Noncompetition Agreement
4.3 - Form of Opinion of Counsel for the Company
4.13 - Foreign Investment in Real Property Tax Act Affidavit
4.16 - Agreements to be Amended or Terminated
5.3 - Form of Opinion of Counsel for Sierra
5.4 - Form of Sierra Officer's Certificate
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AGREEMENT AND PLAN OF MERGER Page v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into as of September 12, 1995 by and among Sierra On-Line, Inc., a
Delaware corporation ("Sierra"), Arion Acquisition Corp., a Washington
corporation (the "Purchaser"), Arion Software, Inc., a Texas corporation (the
"Company"), and the shareholders of the Company listed on the signature pages
hereto (the "Shareholders").
RECITALS
A. The Company and the Purchaser believe it advisable and in the best
interests of such corporations to effect the merger of the Company and the
Purchaser (the "Merger") pursuant to this Agreement.
B. The Board of Directors and the Shareholders of the Company have
approved the Merger.
C. The Board of Directors and the sole shareholder of the Purchaser
have approved the Merger. Sierra is the sole shareholder of the Purchaser.
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 State
of Texas and other applicable law.
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 2:00 p.m. local time at the offices of Perkins
Coie, 1201 Third Avenue, 46th Floor, Seattle, Washington,
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AGREEMENT AND PLAN OF MERGER Page 1
<PAGE> 8
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 Texas Business Corporation Act ("Texas Law), substantially in the
form or forms attached hereto as Exhibit 1.3, and in such form as required by,
and executed in duplicate in accordance with, Washington Law and Texas 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 State of Texas (the "Texas 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 Texas Secretary of State requires any changes in the Articles of
Merger as a condition to filing the Articles of Merger or 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 INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Articles of Incorporation of the Company
shall be in the form attached hereto as Exhibit 1.4 and shall be the Articles of
Incorporation of the Surviving Corporation. Thereafter, the Articles of
Incorporation 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. Thereafter, the Bylaws may be amended or repealed in accordance
with their terms, the Articles of Incorporation 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:
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AGREEMENT AND PLAN OF MERGER Page 2
<PAGE> 9
(a) All shares of any class of capital stock of the Company held
by the Company as treasury shares shall be cancelled.
(b) Each issued and outstanding share of Common Stock of the
Company, $1.00 par value per share ("Company Common Stock"), shall be converted
into the right to receive from Sierra a number of shares of common stock of
Sierra, $.01 par value per share ("Sierra Common Stock"), determined as follows
(such shares being referred to herein as the "Merger Consideration" or the
"Securities"):
(i) at or as soon as practicable after the Closing, a number
of shares of Sierra Common Stock determined by dividing the Net Closing Shares
(as defined below) by the total number of shares of Company Common Stock
outstanding immediately prior to the Effective Time (the "Closing
Consideration"); plus
(ii) on or before the earlier of one year after the Closing
Date and the date on which Sierra's independent auditors issue their report with
respect to the financial statements of Sierra for the first fiscal year of
Sierra ending after the Closing, and subject to adjustment in accordance with
the terms of an Escrow Agreement in substantially the form attached hereto as
Exhibit 1.6 (the "Escrow Agreement") to be entered into at the Closing among the
Shareholders and Sierra, a number of shares of Sierra Common Stock determined by
dividing the Escrow Shares (as defined below) by the total number of shares of
Company Common Stock outstanding immediately prior to the Effective Time.
(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.
1.6.2 ESCROW
As soon as practicable after the Closing, Sierra shall deposit into
escrow, in accordance with the terms of the Escrow Agreement, a number of shares
of Sierra Common Stock (excluding any fractional shares) equal to the total
number of Escrow Shares. The Escrow Shares, or the proceeds from any disposition
thereof in accordance with the Escrow Agreement, shall be distributed from
escrow in accordance with the Escrow Agreement.
1.6.3 SPECIAL DEFINITIONS
(a) The term "Aggregate Closing Shares" shall mean a number of
shares (excluding any fractional share) of Sierra Common Stock determined by
dividing $2,250,000 by the Closing Average (as defined below).
(b) The term "Net Closing Shares" shall mean a number of shares of
Sierra Common Stock equal to 90% of the Aggregate Closing Shares.
(c) The term "Escrow Shares" shall mean a number of shares of
Sierra Common Stock equal to 10% of the Aggregate Closing Shares.
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AGREEMENT AND PLAN OF MERGER Page 3
<PAGE> 10
(d) The term "Closing Average" shall mean 37.375.
1.6.4 EXCHANGE OF CERTIFICATES
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 at Closing pursuant to
Section 1.6.1 hereof. The shares of Sierra Common Stock that each Shareholder
shall be entitled to receive at the Closing 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.
1.6.5 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 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 any such fractional shares, each holder of Company Common Stock who otherwise
would have been entitled to a fraction of a share of Sierra Common Stock upon
surrender of certificates representing Company Common Stock for exchange
pursuant to the Merger will be paid cash upon such surrender in an amount equal
to such fraction multiplied by the Closing Average.
1.6.6 DISSENTING SHAREHOLDERS
Any issued and outstanding shares of Company Common Stock held by any
Shareholder who, in accordance with Texas Law, dissents from the Merger (a
"Dissenting Shareholder") and requires appraisal of such Dissenting
Shareholder's shares ("Dissenting Shares") shall not be converted or cancelled
as described in Section 1.6.1 hereof but shall become the right to receive such
consideration as may be determined to be due to such Dissenting Shareholder
pursuant to Texas Law; provided, however, that Dissenting Shares outstanding at
the Effective Time and held by a Dissenting Shareholder who shall after the
Effective Time withdraw such Dissenting Shareholder's demand for appraisal or
lose such
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AGREEMENT AND PLAN OF MERGER Page 4
<PAGE> 11
Dissenting Shareholder's right of appraisal as provided by Texas Law shall be
deemed to be converted as of the Effective Time into the right to receive the
Merger Consideration.
1.6.7 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 cancelled 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 3 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.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE SHAREHOLDERS
To induce the Purchaser and Sierra 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 exceptions shall
specifically identify the paragraph or paragraphs of this Article II to which
such exceptions relate, and which shall constitute in its entirety a
representation and warranty under this Article II, the Company and the
Shareholders jointly and severally represent and warrant to the Purchaser and
Sierra as of the date of this Agreement and as of the Closing as follows in this
Article II. Except as to Sections 2.2, 2.4 and 2.5 hereof, all references to the
Company in this Article II shall include the Company's Subsidiaries (as defined
in Section 2.2). Notwithstanding the foregoing, Softways of California
represents and warrants only as provided in Section 2.1 and 2.30 of this Article
II.
2.1 GOOD TITLE, ETC.
Each Shareholder represents with respect to itself only that (a) such
Shareholder owns the shares of Company Common Stock listed opposite such
Shareholder's name on Schedule 2.1 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 Escrow Agreement, the
Registration Rights Agreement in substantially the
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AGREEMENT AND PLAN OF MERGER Page 5
<PAGE> 12
form attached hereto as Exhibit 2.2 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 2.3 to be entered into as of the Closing
among Sierra and each of David MacDonald, Alex Perelberg, Softways of
California, Steve Pederson, and Deborah Howitt (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 State of Texas. Each subsidiary of the
Company listed on Schedule 2.5 to the Disclosure Memorandum (individually a
"Subsidiary" and together the "Subsidiaries") is a corporation duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation, which jurisdictions are set forth in Schedule 2.5 to the
Disclosure Memorandum. The Company and each Subsidiary have all requisite
corporate power and authority to own, operate and lease their properties and
assets, to carry on their respective businesses as now conducted and as proposed
to be conducted, and in the case of the Company 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 and each
Subsidiary are duly qualified and licensed as foreign corporations to do
business and are in good standing in each jurisdiction listed on Schedule 2.2,
in the case of the Company, and Schedule 2.5, in the case of each Subsidiary, to
the Disclosure Memorandum, which jurisdictions constitute all jurisdictions
where the character of the Company's or such Subsidiary's properties occupied,
owned or held under lease or the nature of the business conducted by the Company
or such Subsidiary makes such qualification necessary, except as set forth on
Schedule 2.2 or Schedule 2.5, as the case may be, to the Disclosure Memorandum
and except where the failure to be so qualified or in good standing would not
have a material adverse effect on the business, business prospects, assets,
operations or condition (financial or other) of the Company or such Subsidiary.
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 prior
to the Closing. 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
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AGREEMENT AND PLAN OF MERGER Page 6
<PAGE> 13
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
1,000,000 shares of Company Common Stock.
(b) The issued and outstanding capital stock of the Company
consists solely of20,666 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.
(c) 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 or the capital stock of
any Subsidiary.
(d) 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. Except as set forth on Schedule 2.4(d) to
the Disclosure Memorandum, 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
The name, jurisdiction of incorporation and jurisdictions of foreign
qualification of each of the Company's Subsidiaries are as set forth on Schedule
2.5 to the Disclosure Memorandum. 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. The Company owns 100% of the issued
and outstanding shares of capital stock, or other ownership interests, of each
of the Subsidiaries, free and clear of any lien, encumbrance, preemptive right,
right of first offer or refusal, or other prior claim, and all the issued and
outstanding shares of capital stock, or other ownership interests, of the
Subsidiaries are duly authorized and validly issued, fully paid
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AGREEMENT AND PLAN OF MERGER Page 7
<PAGE> 14
and nonassessable, and were issued and acquired in compliance with all
applicable federal, state and foreign securities and other laws.
2.6 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICTS WITH INSTRUMENTS
(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 Texas 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 constitute a default under any
provision of the Articles of Incorporation or Bylaws of the Company, or (vi)
invalidate or adversely affect any 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 Texas 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
Incorporation or Bylaws of the Company.
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AGREEMENT AND PLAN OF MERGER Page 8
<PAGE> 15
2.7 FINANCIAL STATEMENTS
The Company has delivered to Sierra (a) consolidated balance sheets and
consolidated statements of operations, and retained earnings of the Company as
of or for the fiscal years endedMay 31, 1994 and 1995, as compiled by Arthur
Naman, independent certified public accountants, and (b) a consolidated balance
sheet and consolidated statement of operations and retained earnings of the
Company as of and for the three-month period ended August 31, 1995. All of the
foregoing financial statements are herein referred to as the "Financial
Statements." The consolidated balance sheet of the Company as of August 31, 1995
is herein referred to as the "Company Balance Sheet." The Financial Statements
present fairly the financial position, results of operations and changes in
financial position of the Company as of the dates and for the periods indicated.
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 (a) liabilities or obligations incurred since
the date of the Company Balance Sheet in the ordinary course of business and
consistent with past practice which are disclosed to Sierra and are not in
excess of $5,000 in the aggregate or $1,000 individually or (b) as specifically
set forth on Schedule 2.7 to the Disclosure Memorandum. The Company maintains
and will continue to maintain 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 and 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 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;
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AGREEMENT AND PLAN OF MERGER Page 9
<PAGE> 16
(d) suffered any material adverse change in its working capital,
assets, liabilities (absolute, accrued, contingent or otherwise), earnings,
reserves, financial condition, business, prospects or operations;
(e) borrowed or agreed to borrow any funds, assumed or become
subject to, whether directly or by way of guarantee or otherwise, any
obligations or liabilities (absolute, accrued, contingent or otherwise), or
incurred any liabilities or obligations (absolute, accrued, contingent or
otherwise), which individually or in the aggregate exceed $5,000, except
liabilities and obligations incurred in the ordinary course of business and
consistent with past practice not to exceed $15,000 in the aggregate, or
increased, or experienced any change in any assumptions underlying or methods of
calculating, any bad debt, contingency or other reserves;
(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 is in the
aggregate less than $5,000, 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 or markdown) or written off as uncollectible any notes or
accounts receivable, except for write-downs and write-offs that are in the
aggregate less than $5,000, incurred 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 other than representatives of Sierra 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
$5,000 for additions to property, plant, equipment or intangible capital assets
or made aggregate
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AGREEMENT AND PLAN OF MERGER Page 10
<PAGE> 17
capital expenditures in excess of $15,000 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 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 directors' fees and compensation paid to officers and
employees at rates not exceeding the rates of compensation paid during the
fiscal year ended December 31, 1994; 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, co-signer, endorser, co-maker, 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 or which would have any adverse effect upon the business, business
prospects, assets, liabilities or financial condition of the Company;
(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;
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AGREEMENT AND PLAN OF MERGER Page 11
<PAGE> 18
(r) received notice that there has been a loss of, or contract
cancellation by, any current or prospective customer, licensor or distributor of
the Company;
(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; 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 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
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AGREEMENT AND PLAN OF MERGER Page 12
<PAGE> 19
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 has not been a United States real property holding
corporation within the meaning of Section 897(c)(2) of the Code during the
applicable period specified in Section 897(c)(1)(A)(2)(i) 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.
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 $2,000 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 $2,000, 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 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.
(c) The Company's leasehold interest in each parcel of the Real
Property is free and clear of all 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
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,
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AGREEMENT AND PLAN OF MERGER Page 13
<PAGE> 20
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 is in the aggregate less than $2,000,
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.
(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 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.
(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
<PAGE> 21
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 of all 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, credit agreements, conditional sales
agreements, instruments relating to the borrowing of money, and distributorship
agreements. 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 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 delivered to Sierra. Except as
specifically set forth on Schedule 2.11 to the Disclosure Memorandum, the
Company has no:
(a) agreements, contracts, commitments or restrictions requiring
the Company to make any charitable contribution;
(b) purchase contracts or commitments of the Company that continue
for a period of more than 12 months or are in excess of the normal, ordinary and
usual requirements of its business or that are at an excessive price to the
extent that such excess would be material to the Company's business;
(c) 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;
(d) agreements, understandings, arrangements or contracts that are
not, except as provided by law to the contrary without regard to the express
terms of such contract, cancellable 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;
(e) employment agreement, whether express or implied, or any other
agreement for services that contains any severance or termination pay
liabilities or obligations;
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<PAGE> 22
(f) restriction by agreement from carrying on its business
anywhere in the world;
(g) notice that any party to a contract intends to cancel,
terminate or refuse to renew such contract or to exercise or decline to exercise
any option or right thereunder; or
(h) material disagreement with any of its suppliers or customers.
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 2% 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 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 with an aggregate retail value in excess of $5,000
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. To the Company's best knowledge, there is no valid basis for any claim,
action, suit, arbitration, proceeding or investigation (other than as noted on
Schedule 2.14 or 2.17 to the Disclosure Memorandum) which could reasonably be
expected to be materially adverse to the business, business prospects, assets,
operations or condition (financial or other) of 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 or which would have a material
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AGREEMENT AND PLAN OF MERGER Page 16
<PAGE> 23
adverse effect upon the business, business prospects, assets, operations or
condition (financial or other) of the Company.
2.15 LABOR MATTERS
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
failure to comply with which could have a material adverse effect upon the
business, business prospects, assets, operations or conditions (financial or
other) of the Company. The Company is not engaged in any unfair labor 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.
2.16 EMPLOYEE BENEFIT PLANS
Except as set forth on Schedule 2.16 to the Disclosure Memorandum, the
Company has no bonus, deferred compensation, incentive, severance pay, pension,
profit-sharing, retirement, stock purchase, stock option or any other employee
benefit plan, employee fringe benefit plan, arrangement or practice with regard
to present or former employees as to which the Company has any liability
("Employee Benefit Plan"), whether formal or informal. Schedule 2.16 to the
Disclosure Memorandum contains an accurate and complete description of, and sets
forth the annual amount expected to be payable for the fiscal year last ended
pursuant to, each Employee Benefit Plan, whether formal or informal. The Company
Balance Sheet reflects in the aggregate all amounts accrued but unpaid under the
aforesaid plans and arrangements as of the date thereof. The Company has no
agreement, arrangement or commitment, whether formal or informal and whether
legally binding or not, to create any additional plan or arrangement or to
modify or amend any existing Employee Benefit Plan. The Company has delivered to
Sierra true, correct and complete copies of all written Employee Benefit Plans
of the Company, all contracts related thereto and the most recently
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AGREEMENT AND PLAN OF MERGER Page 17
<PAGE> 24
available annual reports, summary plan descriptions, IRS Form 5500s (or 5500-C
or 5500-R) and favorable determination letters for such plans. The Company is in
compliance in all respects with the terms of its Employee Benefit Plans and with
all applicable laws and regulations, including, but not limited to, the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and the Code. The
Company has extinguished any liabilities to participants, beneficiaries and the
Pension Benefit Guaranty Corporation which may have arisen under any such plans
previously maintained by them and expects to incur no future liabilities with
regard to such plans. Neither the Company nor any "affiliate" of the Company is
a party to or has ever made any contributions to, or is subject to any liability
with respect to, any multiemployer plan within the meaning of Section 4001(a)(3)
of ERISA or any defined benefit plan within the meaning of Section 3(35) of
ERISA. The term "affiliate" means any company, trade or business which is a
member of the same control group, as defined in Code Section 414(b) or 414(c),
with the Company, or any company, trade or business which is a member of an
affiliated service group, as defined in Code Section 414(m) or 414(o) with the
Company. No prohibited transaction (within the meaning of ERISA Section 406 or
Code Section 4975) or failure to meet the requirements of Code Section 4980B(f)
has occurred with respect to any Employee Benefit Plan which could subject the
Company to any liability. There are no actions, suits or claims pending (other
than routine claims for benefits) or which could reasonably be expected to be
asserted against any Employee Benefit Plan or the assets of any such plan.
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
(collectively, the "Listed Intellectual Property") of any kind now used or
anticipated to be used in the business of the Company. 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 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 or pending patent or other
right 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 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 with all applicable laws and regulations
pertaining thereto.
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AGREEMENT AND PLAN OF MERGER Page 18
<PAGE> 25
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, the Intellectual Property
Licenses 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 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. 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. No licenses, sublicenses, covenants or agreements have been
granted or entered into by the Company in respect of any of the Listed
Intellectual Property except the Intellectual Property Licenses. No director,
officer, shareholder or employee of the Company owns, directly or indirectly, in
whole or in part, any of the Listed Intellectual Property. The Company does not
know and does not have any reasonable basis to believe that there exist any new
developments in the manufacture or marketing of the products of the Company or
any new or improved products or processes useful in connection with the business
of the Company as now conducted or as presently anticipated to be conducted that
would have a material adverse effect upon the business, business prospects,
assets, operations or condition (financial or other) of the Company. None
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AGREEMENT AND PLAN OF MERGER Page 19
<PAGE> 26
of the officers of the Company and none of the Company's employees, consultants,
distributors, agents, representatives or advisers has entered into any agreement
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.
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,
except for any disclosure that would not have a material adverse effect on the
business, business prospects, assets, operations or conditions (financial or
other) of the Company; (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. 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 of all consolidated
accounts receivable of the Company existing as of August 31, 1995.
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AGREEMENT AND PLAN OF MERGER Page 20
<PAGE> 27
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 saleable 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 Incorporation 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 failure to obtain
which would have a material adverse effect on its business, business prospects,
assets, operations or condition (financial or other). 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
(a) Except as described on Schedule 2.22 to the Disclosure
Memorandum, the Company has complied, and is in compliance, with all federal,
state, local and foreign laws, rules, regulations, ordinances, decrees and
orders applicable to the operation of its business, to its employees, or to the
Real Property and the Personal Property, the failure to comply with which would,
individually or in the aggregate, have a material adverse effect on the
business, assets or operations of the Company, including, without limitation,
all such laws, rules, ordinances, decrees and orders relating to antitrust,
consumer protection, currency exchange, environmental protection, equal
opportunity, health, occupational safety, pension, securities and
trading-with-the-enemy matters. The Company has not received any notification of
any asserted present or past unremedied failure by the Company to comply with
any of such laws, rules, ordinances, decrees or orders.
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AGREEMENT AND PLAN OF MERGER Page 21
<PAGE> 28
(b) The Company is not currently in violation of any applicable
building, zoning, environmental or other law, ordinance or regulation in respect
of the Real Property or its plant, structures or operations. No such law,
ordinance or regulation would reasonably be expected to prevent the use of
substantially all of the Real Property for the conduct thereon of the business
of the Company.
(c) The Company is not in violation of, and has not violated, in
connection with the ownership, use, maintenance or operation of the Real
Property or the Personal Property or the conduct of their businesses, any
applicable federal, state, county or local statutes, laws, regulations,
guidances, rules, ordinances, codes, licenses, permits, judgments, writs,
decrees, injunctions or orders of any governmental entity relating to
environmental (air, water, groundwater, soil, noise and odor) matters
("Environmental Laws"), including, by way of illustration and not by way of
limitation, the Clean Air Act, the Federal Water Pollution Control Act, the
Resources Conservation and Recovery Act and the regulations issued thereunder,
the Comprehensive Environmental, Response, Compensation, and Liability Act, the
Clean Water Act, the Hazardous Materials Transportation Act, the Toxic
Substances Control Act, the Hazardous Waste Control Act, comparable Texas laws,
and the regulations issued thereunder, and all other applicable federal, state,
county, local and foreign environmental requirements where such violation might
have a material adverse impact on the Company's business, business prospects,
assets, operations or condition (financial or other).
(d) Except as set forth on Schedule 2.22 to the Disclosure
Memorandum, the Company has not transported, stored, treated, recycled, handled
or disposed of, or allowed or arranged for any third party to transport, store,
treat, recycle, handle or dispose of (i) any flammable substances, explosives,
radioactive materials, hazardous substances, hazardous wastes, toxic substances,
pollutants, contaminants or any wastes, materials or substances identified in or
regulated by any Environmental Laws; (ii) asbestos, polychlorinated biphenyls,
urea formaldehyde, nuclear fuel or material, chemical waste, carcinogens and
radon, all to the extent regulated by any Environmental Laws; and (iii)
gasoline, oil and other petroleum products (collectively, "Regulated
Substances"), to or at any location other than a location lawfully permitted to
receive such material for such purposes at such time. Set forth on such Schedule
2.22 is a complete and accurate list of all locations to which the Company has
ever transported, or caused to be transported or allowed or arranged for any
third party to transport, any type of Regulated Substances for storage,
treatment, handling, processing, burning, recycling or disposal.
(e) Except as set forth on such Schedule 2.22, no real property
ever owned by the Company, including, but not limited to, all surface and
subsurface soil, sediments, groundwater and surface water located on, in or
under such real property, was during the period of use by the Company being
contaminated with any Regulated Substances or constituents thereof, which
contamination has given or may give rise to any material obligation under any
Environmental Laws, the common law or otherwise. To the present, actual
knowledge of the Company, except as set forth on such Schedule 2.22, no real
property adjacent to or adjoining the Real Property has been so contaminated. To
the knowledge of the Company, except as set forth on such Schedule 2.22, no
polychlorinated biphenyls, lead-
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AGREEMENT AND PLAN OF MERGER Page 22
<PAGE> 29
based materials or asbestos are present in or on the Real Property or in any
equipment located therein.
(f) Except as set forth on such Schedule 2.22, the Company has
recorded or filed and has provided to Sierra true, accurate and complete copies
of all reports with respect to any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the environment (including the abandonment or discarding of
drums, barrels, containers or other closed receptacles) (any of the foregoing, a
"Release"), required by any Environmental Laws to be filed by the Company with
any government authority. Except as disclosed on such Schedule 2.22, the Company
has maintained all environmental and operating documents and records
substantially in the manner and for the time periods required by any
Environmental Laws.
(g) Except as disclosed on such Schedule 2.22, the Company has not
caused or permitted the Release of any Regulated Substances or constituents
thereof on, from or off-site of its property, or of any Release from any
facility owned or operated by third parties but with respect to which any of
them is alleged to have liability.
(h) Except as set forth on such Schedule 2.22, there are no tanks
which, when considered with all associated piping, are located either wholly or
partially below the surface of the ground, and, without regard to whether they
are in contact with soil, within a building or contamination structure or
otherwise are located in, on or under the Real Property, and, except as set
forth on such Schedule 2.22, the Real Property, or any portion thereof, is not a
"wetland" as defined by any law, environmental or otherwise, and is not subject
to regulation.
(i) Schedule 2.22 to the Disclosure Memorandum contains a true,
complete and accurate list, with a description of the nature thereof, of all
reports, investigations, studies or environmental audits of any kind with regard
to the Real Property.
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. 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
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AGREEMENT AND PLAN OF MERGER Page 23
<PAGE> 30
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance.
2.24 BROKERS OR FINDERS
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 GOVERNMENT CONTRACTS
The Company has never been, nor as a result of the consummation of the
transactions contemplated by this Agreement (without giving any consideration to
the identity or conduct of the Purchaser or Sierra) will it be, suspended or
debarred from bidding on contracts or subcontracts for any agency of the United
States government, nor has such suspension or debarment been threatened or
action for suspension or debarment been commenced. The Company has not been nor
is it now being audited or, to the knowledge of the Company, investigated by the
United States Government Accounting Office, the United States Department of
Justice, the United States Department of Defense or any of its agencies, the
Defense Contract Audit Agency or the inspector general of any agency of the
United States government, nor, to the knowledge of the Company, has such audit
or investigation been threatened. There is no valid basis for the Company's
suspension or debarment from bidding on contracts or subcontracts for any agency
of the United States government and there is no valid basis for a claim pursuant
to an audit or investigation by the United States Government Accounting Office,
the United States Department of Justice, the United States Department of Defense
or any of its agencies, the Defense Contract Audit Agency or the inspector
general of any agency of the United States government, or any prime contractor.
The Company has never had a contract or subcontract terminated for default or
has ever been determined to be nonresponsible by any agency of the United States
government. Except as set forth on Schedule 2.25 to the Disclosure Memorandum,
the Company has no outstanding agreements, contracts or commitments which
require it to obtain or maintain a government security clearance.
2.26 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
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.
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AGREEMENT AND PLAN OF MERGER Page 24
<PAGE> 31
2.27 PERSONNEL
Schedule 2.27 to the Disclosure Memorandum sets forth a true and
complete list of:
(a) the names and current compensation amounts of all directors
and elected and appointed officers of the Company and the family relationships,
if any, among such persons;
(b) the wage rates for nonsalaried and nonexecutive 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. All employees of the
Company are employed on an "at will" basis.
2.28 BANK ACCOUNTS
Schedule 2.28 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.
2.29 INSIDER INTERESTS
Except as set forth on Schedule 2.29 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 2.29 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
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AGREEMENT AND PLAN OF MERGER Page 25
<PAGE> 32
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.
2.30 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and
warrants to the Purchaser and Sierra as follows:
(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 its investment in the
Securities.
(b) SEC Documents. Such Shareholder acknowledges that he or she
has had the opportunity to review to his or her 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 it deems necessary, its 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 its financial
condition and investment needs.
(d) Sophistication. Such Shareholder, either alone or with the
assistance of its professional advisors, is a sophisticated investor, is able to
fend for itself in the transactions contemplated by this Agreement relating to
the Securities and has such knowledge and experience in financial and business
matters that it 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 its
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
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AGREEMENT AND PLAN OF MERGER Page 26
<PAGE> 33
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.
(h) Due Diligence. Such Shareholder has conducted its 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 it to
assist it.
(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 it 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 have not been registered under the 1933 Act or any applicable
state securities laws, but are being issued under this Agreement pursuant to
exemptions from such 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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AGREEMENT AND PLAN OF MERGER Page 27
<PAGE> 34
(l) Residency. For purposes of the application of state
securities laws, each Shareholder is a resident of the jurisdiction specified on
Schedule 2.30 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.
2.31 POOLING MATTERS
The Company has not taken and will not take, and the Shareholders have
not taken and will not take, directly or indirectly, and the Company and the
Shareholders will use their respective best efforts to prevent any other Person
from taking, 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 generally accepted accounting principles, and
neither the Company nor the Shareholders is aware of any facts which otherwise
could prevent such accounting treatment.
2.32 FULL DISCLOSURE
No information furnished by the Company or the Shareholders to Sierra
or the Purchaser 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, is false or misleading in any material
respect. Neither the Company nor any Shareholder has made any untrue statement
of a material fact or omitted to state a material fact necessary in order to
make the statements made or information delivered in or pursuant to this
Agreement, including, but not limited to, all Schedules to the Disclosure
Memorandum and Exhibits hereto, or in or pursuant to the other Operative
Documents, or in or pursuant to closing certificates executed or delivered by
the Shareholders or the Company, not misleading. The
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AGREEMENT AND PLAN OF MERGER PAGE 28
<PAGE> 35
Company has provided to Sierra an 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 contains
all information required to be set forth therein under all applicable laws
(including without limitation applicable federal, state and foreign securities
laws). 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 THE PURCHASER AND SIERRA
To induce the Company and the Shareholders to enter into and perform
this Agreement and the Operative Documents, the Purchaser and Sierra 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 duly organized, 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 the Purchaser and Sierra 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 the Purchaser and Sierra 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
Sierra's and the Purchaser's respective obligations under this Agreement and the
Operative Documents has been taken or will be taken prior to the Closing. 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. 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.
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AGREEMENT AND PLAN OF MERGER PAGE 29
<PAGE> 36
3.3 LEGAL PROCEEDINGS
There is no claim, action, suit, arbitration, proceeding or
investigation pending or, to the best knowledge of the Purchaser or Sierra,
threatened against the Purchaser or Sierra before or by any court or
governmental or nongovernmental department, commission, board, bureau, agency or
instrumentality, or any other Person, which questions the validity of this
Agreement or any action taken or to be taken by the Purchaser or Sierra pursuant
to this Agreement or in connection with the transactions contemplated hereby.
3.4 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. Other than restrictions arising under any federal or state
securities law, rule, regulation or order, this Agreement or any other Operative
Document, the securities are not subject to restrictions on transfer.
3.5 TAX CONSEQUENCES
Neither Sierra nor Purchaser makes any representation or warranty with
respect to, and expressly disclaims any responsibility for, any Tax consequences
to the Shareholders arising out of the structure or terms of this Agreement, or
the negotiation or consummation hereof. Each Shareholder has consulted with his
own tax advisor in such matters and shall be solely responsible for any such tax
consequences.
ARTICLE IV - CONDITIONS PRECEDENT TO OBLIGATIONS
OF THE PURCHASER AND SIERRA
The obligations of the Purchaser and Sierra 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
Purchaser or 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.
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AGREEMENT AND PLAN OF MERGER PAGE 30
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4.3 OPINION OF COUNSEL FOR THE COMPANY
The Purchaser and Sierra shall have received the opinion letter of
Krause & Associates, 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 Texas Law, and no Shareholders
holding, in the aggregate, more than 10% of the shares of Company Common Stock
shall have elected to claim dissenters' rights under Texas Law.
4.5 RESIGNATIONS
The Purchaser and Sierra shall have received copies of resignations
effective as of the Closing Date of all the officers and 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, which consents shall be satisfactory
in all respects to Sierra in its sole and absolute discretion.
4.7 OFFICERS' CERTIFICATE
The Purchaser and Sierra shall have received a certificate of the
President and the Chief Financial Officer of the Company, dated the Closing
Date, in form and substance satisfactory to Sierra, certifying that the
conditions to the obligations of the Purchaser and Sierra have been fulfilled.
4.8 PRINCIPALS' CERTIFICATES
The Purchaser and Sierra shall have received certificates from each of
the David Macdonald and Alex Perelberg (together, the "Principals"), dated the
Closing Date, in form and substance satisfactory to Sierra, certifying that the
conditions to the obligations of the Purchaser and Sierra have been fulfilled.
4.9 MATERIAL ADVERSE CHANGE
Since December 31, 1994 and through the Closing, there shall not have
occurred any material adverse change in the business, operations, assets,
liabilities, earnings, condition (financial or other), or prospects of the
Company, and no material adverse change shall have
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AGREEMENT AND PLAN OF MERGER PAGE 31
<PAGE> 38
occurred in any domestic or foreign laws or regulations affecting the Company or
in any third party contractual or other business relationships of the Company.
4.10 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.
4.11 APPROVALS AND CONSENTS
All transfers of permits or licenses, all approvals, applications 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.
4.12 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and by the 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 Operative Documents and such other documents as are specified
by Sierra's counsel.
4.13 NONFOREIGN AFFIDAVIT
Sierra and the Purchaser shall have received from the Company, pursuant
to Section 1445 of the Code, a Foreign Investment in Real Property Tax Act
Affidavit in the form attached hereto as Exhibit 4.13.
4.14 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.
4.15 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.
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AGREEMENT AND PLAN OF MERGER PAGE 32
<PAGE> 39
4.16 OTHER AGREEMENTS
The Agreements listed in Exhibit 4.16 to this Agreement shall have been
amended or terminated in a manner satisfactory to Sierra.
4.17 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.
4.18 OPERATIVE DOCUMENTS
The Operative Documents shall have been executed and delivered by all
parties thereto other than Sierra and the Purchaser.
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.
5.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Purchaser and Sierra
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
The Purchaser and Sierra 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.
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AGREEMENT AND PLAN OF MERGER PAGE 33
<PAGE> 40
5.4 OFFICERS' CERTIFICATE
The Company shall have received a certificate of the Chief Financial
Officer and another officer of Sierra, dated the Closing Date, substantially in
the form attached hereto as Exhibit 5.4, 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.
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.
ARTICLE VI - COVENANTS
Between the date of this Agreement and the Effective Time, the parties
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, 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
Incorporation 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
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AGREEMENT AND PLAN OF MERGER PAGE 34
<PAGE> 41
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;
(d) reclassify, combine, split, subdivide, redeem,
purchase or otherwise acquire, directly or indirectly, any of its capital stock;
(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 $5,000 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 consultants, 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
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AGREEMENT AND PLAN OF MERGER PAGE 35
<PAGE> 42
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 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.
6.3 NO SOLICITATION OF TRANSACTIONS
The Company 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 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 all 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.
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AGREEMENT AND PLAN OF MERGER PAGE 36
<PAGE> 43
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 hereunder to the
party receiving such notice.
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. 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
The Company and the Shareholders shall not issue any press release or
otherwise make any statements to any third party with respect to this Agreement
or the transactions contemplated hereby without the prior written consent of
Sierra.
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):
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AGREEMENT AND PLAN OF MERGER PAGE 37
<PAGE> 44
(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 September 30, 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 September 30, 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 September 30, 1995.
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 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 and the
Company.
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AGREEMENT AND PLAN OF MERGER PAGE 38
<PAGE> 45
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. 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 affiliates (the " Indemnified
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 of 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 on the balance
sheet of the Company dated August 31, 1995 which are not collected prior to
February 28, 1996; or
(d) any inventory reflected on the balance sheet of the
Company dated August 31, 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.
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AGREEMENT AND PLAN OF MERGER PAGE 39
<PAGE> 46
8.3 THRESHOLD AND LIMITATIONS
(a) No Indemnified Party shall be entitled to receive any
indemnification payment with respect to any Claims until the aggregate Losses
for which such Indemnified Parties would be otherwise entitled to receive
indemnification exceed $10,000 (the "Threshold"); provided, however, that once
such aggregate Losses exceed the Threshold, such Indemnified Parties shall be
entitled to indemnification for the aggregate amount of all Losses without
regard to the Threshold.
(b) In no event shall the liability of the Shareholders
hereunder for Losses incurred by Indemnified Parties exceed an amount equal to
the number of shares of Sierra Common Stock issued to the Shareholders pursuant
to the Merger multiplied by the Closing Average.
8.4 PROCEDURE FOR INDEMNIFICATION
(a) Any 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) 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. The
Indemnified Party shall cooperate with the indemnifying 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.
(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.
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AGREEMENT AND PLAN OF MERGER PAGE 40
<PAGE> 47
(ii) The Indemnified Party may, at the
indemnifying party's expense, 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 within six months 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 OFFSET
If and to the extent that any Indemnified Party is entitled to
indemnification hereunder, Sierra may offset such indemnification amount against
the Escrow Shares as provided in the Escrow Agreement.
ARTICLE IX - GENERAL
9.1 EXPENSES
If the transactions contemplated by this Agreement are consummated,
Sierra shall pay the fees and expenses of the Company and the Shareholders, up
to a maximum of $25,000, 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 this Agreement and the consummation of the
transactions contemplated hereby to the extent such fees and expenses exceed the
maximum amount referred to above.
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AGREEMENT AND PLAN OF MERGER PAGE 41
<PAGE> 48
9.2 EMPLOYEE AGREEMENTS
At or as soon as practicable after the Closing, each employee of the
Company shall have executed and delivered Sierra's standard form Confidentiality
Agreement and Sierra's standard form Invention Assignment and Proprietary
Information Agreement.
9.3 NOTICES
Any notice or demand 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 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 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.
TO THE PURCHASER AND TO SIERRA:
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:
Arion Software, Inc.
3355 Bee Cave Road, Suite 507
Austin, Texas 78746
Fax: (512) 327-3786
Attention: President
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AGREEMENT AND PLAN OF MERGER PAGE 42
<PAGE> 49
with a copy to:
Krause & Associates
Barton Oaks Plaza Two, Suite 385
901 Mopac Expressway
Austin, Texas 78746
Fax: (512) 477-6708
Attention: Winston Krause
9.4 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 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.
9.5 ENTIRE AGREEMENT
This Agreement and the other Operative Documents constitute the entire
agreement among the parties with respect to the subject matter hereof and
thereof and supersede, except as set forth in Section 6.2 hereof, 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.
9.6 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.
9.7 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.
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AGREEMENT AND PLAN OF MERGER PAGE 43
<PAGE> 50
9.8 SPECIFIC PERFORMANCE
The parties hereto agree that irreparable damage would occur in the
event any provision of this Agreement was not performed in accordance with the
terms hereof and that the parties shall be entitled to specific performance of
the terms hereof, in addition to any other remedy at law or equity.
9.9 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. All actions and proceedings arising out of or
relating to this Agreement shall be heard and determined in any Washington state
or federal court thereof.
9.10 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.
9.11 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.
9.12 WAIVER OF JURY TRIAL
Each of the Shareholders, Sierra, the Company and the Purchaser hereby
irrevocably waives all right to trial by jury in any action, proceeding or
counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of such parties in the negotiation,
administration, performance and enforcement thereof.
9.13 SHAREHOLDERS' AGREEMENT
The Shareholders' Agreement dated November 15, 1991, by and among David
Macdonald, Alex Perelberg and the Company is hereby terminated, and all parties
thereto waive any restriction on sale or transfer, preemptive right or option,
right of first refusal, or any other right or obligation arising under such
agreement.
9.14 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
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AGREEMENT AND PLAN OF MERGER PAGE 44
<PAGE> 51
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
rendered by the arbitrator may be entered in any court of competent
jurisdiction. Arbitration proceedings shall be conducted in Austin, Texas if
commenced by Sierria and in Seattle, Washington if commenced by the
Shareholders.
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AGREEMENT AND PLAN OF MERGER PAGE 45
<PAGE> 52
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 President and Chief Executive Officer
ARION ACQUISITION CORPORATION
By /s/ Michael A. Brochu
-----------------------------------------
Its President
ARION SOFTWARE, INC.
By /s/ David Macdonald
-----------------------------------------
Its President
SHAREHOLDERS:
/s/ David Macdonald
--------------------------------------------
David Macdonald
/s/ Alex Perelberg
--------------------------------------------
Alex Perelberg
SOFTWAYS OF CALIFORNIA
By /s/ Steven W. illegible
-----------------------------------------
Its General Partner
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AGREEMENT AND PLAN OF MERGER PAGE 46
<PAGE> 1
AGREEMENT AND PLAN OF MERGER
AMONG
SIERRA ON-LINE, INC.,
BIRDIE ACQUISITION CORP.,
HEADGATE, INC.
AND
THE SHAREHOLDERS OF HEADGATE, INC.
DATED AS OF APRIL 12, 1996
<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 Incorporation 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 Special Definitions ......................................................... 3
1.6.3 Exchange of Certificates .................................................... 3
1.6.4 No Fractional Shares ........................................................ 4
1.6.5 No Further Transfers ........................................................ 4
1.7 Pooling Restrictions on Transfer of the Securities ................................... 4
1.8 Waiver of Rights Relating to Company Common Stock .................................... 5
ARTICLE II - REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS .......................................... 5
2.1 Good Title, etc. ..................................................................... 5
2.2 No Approvals; No Conflicts ........................................................... 6
2.3 Securities Act Matters ............................................................... 6
2.4 Pooling Matters ...................................................................... 9
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF THE COMPANY .............................................. 9
3.1 Organization ......................................................................... 9
3.2 Enforceability ....................................................................... 10
3.3 Capitalization ....................................................................... 10
3.4 Subsidiaries and Affiliates .......................................................... 11
3.5 No Approvals; No Conflicts ........................................................... 11
3.6 Financial Statements ................................................................. 12
3.7 Absence of Certain Changes or Events ................................................. 12
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page i
<PAGE> 3
<TABLE>
<S> <C>
3.8 Taxes ................................................................................ 15
3.9 Property ............................................................................. 16
3.10 Contracts ............................................................................ 17
3.11 Customers and Suppliers .............................................................. 18
3.12 Orders, Commitments and Returns ...................................................... 19
3.13 Claims and Legal Proceedings ......................................................... 19
3.14 Labor and Employment Matters ......................................................... 19
3.15 Employee Benefit Plans ............................................................... 20
3.16 Patents, Trademarks, etc. ............................................................ 22
3.17 Accounts Receivable .................................................................. 24
3.18 Inventory ............................................................................ 24
3.19 Corporate Books and Records .......................................................... 25
3.20 Licenses, Permits, Authorizations, etc. .............................................. 25
3.21 Compliance With Laws ................................................................. 25
3.22 Insurance ............................................................................ 25
3.23 Brokers or Finders ................................................................... 26
3.24 Absence of Questionable Payments ..................................................... 26
3.25 Bank Accounts ........................................................................ 26
3.26 Insider Interests .................................................................... 27
3.27 Pooling Matters ...................................................................... 27
3.28 Full Disclosure ...................................................................... 27
ARTICLE IV - REPRESENTATIONS AND WARRANTIES OF SIERRA AND ACQUISITION SUB ................................ 28
4.1 Organization ......................................................................... 28
4.2 Enforceability ....................................................................... 28
4.3 Securities ........................................................................... 29
4.4 SEC Documents ........................................................................ 29
4.5 No Approvals; No Conflicts ........................................................... 29
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS OF SIERRA AND ACQUISITION SUB ............................ 30
5.1 Accuracy of Representations and Warranties ........................................... 30
5.2 Performance of Agreements ............................................................ 30
5.3 Opinion of Counsel for the Company ................................................... 30
5.4 Shareholder Approval ................................................................. 30
5.5 Resignations ......................................................................... 31
5.6 Consents and Approvals ............................................................... 31
5.7 Compliance Certificate ............................................................... 31
5.8 Material Adverse Change .............................................................. 31
5.9 Due Diligence ........................................................................ 31
5.10 Proceedings and Documents; Secretary's Certificate ................................... 31
5.11 Compliance With Laws ................................................................. 32
5.12 Pooling of Interests ................................................................. 32
5.13 Legal Proceedings .................................................................... 32
5.14 Related Agreements and Stock Powers .................................................. 32
ARTICLE VI - CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SHAREHOLDERS AND THE COMPANY ..................... 32
6.1 Accuracy of Representations and Warranties ........................................... 33
6.2 Performance of Agreements ............................................................ 33
6.3 Compliance Certificate ............................................................... 33
6.4 Legal Proceedings .................................................................... 33
6.5 Related Agreements ................................................................... 33
ARTICLE VII - COVENANTS .................................................................................. 33
7.1 Conduct of Business by the Company Pending the Merger ................................ 33
7.2 Access to Information; Confidentiality ............................................... 35
7.3 No Alternative Transactions .......................................................... 36
7.4 Notification of Certain Matters ...................................................... 36
7.5 Further Action; Reasonable Best Efforts .............................................. 37
7.6 Publicity ............................................................................ 37
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iii
<PAGE> 5
<TABLE>
<S> <C>
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER ......................................................... 37
8.1 Termination .......................................................................... 37
8.2 Effect of Termination ................................................................ 38
8.3 Amendment ............................................................................ 38
8.4 Waiver ............................................................................... 39
ARTICLE IX - SURVIVAL AND INDEMNIFICATION ................................................................ 39
9.1 Survival ............................................................................. 39
9.2 Indemnification by Shareholders ...................................................... 39
9.3 Indemnification by Sierra ............................................................ 40
9.4 Threshold and Limitations ............................................................ 40
9.5 Procedure for Indemnification ........................................................ 40
9.6 Holdback ............................................................................. 42
9.6.1 Pledge ...................................................................... 42
9.6.2 Release of Holdback Shares .................................................. 42
9.6.3 Claims Procedure ............................................................ 43
9.6.4 Voting; Disposition ......................................................... 44
9.6.5 Merger or Recapitalization .................................................. 44
9.6.6 Taxation of Dividends ....................................................... 44
ARTICLE X - GENERAL ...................................................................................... 45
10.1 Expenses ............................................................................. 45
10.2 Notices .............................................................................. 45
10.3 Severability ......................................................................... 46
10.4 Entire Agreement ..................................................................... 46
10.5 Assignment ........................................................................... 47
10.6 Parties in Interest .................................................................. 47
10.7 Specific Performance ................................................................. 47
10.8 Governing Law ........................................................................ 47
10.9 Headings ............................................................................. 47
10.10 Counterparts ......................................................................... 47
10.11 Waiver of Jury Trial ................................................................. 48
10.12 Arbitration .......................................................................... 48
</TABLE>
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AGREEMENT AND PLAN OF MERGER Page iv
<PAGE> 6
<TABLE>
<S> <C>
10.13 Tax-Free Reorganization .............................................................. 48
</TABLE>
EXHIBITS
A - Articles of Incorporation of the Surviving Corporation
B - Disclosure Memorandum
C - Form of Registration Rights Agreement
D - Form of Noncompetition Agreement
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AGREEMENT AND PLAN OF MERGER Page v
<PAGE> 7
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger (this "Agreement") is made and
entered into as of April 12, 1996 by and among Sierra On-Line, Inc., a Delaware
corporation ("Sierra"), Birdie Acquisition Corp., a Utah corporation and
wholly-owned subsidiary of Sierra ("Acquisition Sub"), Headgate, Inc., a Utah
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 Acquisition Sub believe it
advisable and in their respective best interests to effect a merger of the
Company and Acquisition Sub 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 Acquisition Sub
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
Acquisition Sub shall cease and Acquisition Sub 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 Utah and other
applicable law.
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AGREEMENT AND PLAN OF MERGER Page 1
<PAGE> 8
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 V and VI 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 Related
Agreements (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 Utah Business Corporation Act ("Utah Law"), in such
form and executed in such manner as required by Utah Law, shall be delivered for
filing to the Utah Division of Corporations and Commercial Code (the "Utah
Division"). 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
Utah Division 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, Acquisition Sub, 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 INCORPORATION OF THE SURVIVING CORPORATION
At the Effective Time, the Articles of Incorporation of the Surviving
Corporation shall be deemed to be amended and restated in their entirety as set
forth in Exhibit A hereto. Thereafter, the Articles of Incorporation 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 Surviving Corporation shall be
amended and restated in their entirety to conform to the Bylaws of Acquisition
Sub. Thereafter, the Bylaws of the Surviving Corporation may be amended or
repealed in accordance with their terms, the Articles of Incorporation of the
Surviving Corporation and as provided by law.
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AGREEMENT AND PLAN OF MERGER Page 2
<PAGE> 9
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, $1.00 par value per share ("Company Common Stock"), shall be converted
into the right to receive from Sierra a number of shares of Sierra common stock,
$.01 par value per share ("Sierra Common Stock"), determined by dividing the
number of Closing Shares (as defined below) by the total number of shares of
Company Common Stock outstanding immediately prior to the Effective Time on a
fully diluted basis (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 9.6 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 1.6.4 below.
(c) Each issued and outstanding share of capital stock of
Acquisition Sub shall be converted into one share of common stock of the
Surviving Corporation.
1.6.2 SPECIAL DEFINITIONS
The term "Closing Shares" shall mean a number of shares (excluding any
fractional share) of Sierra Common Stock determined by dividing (a) $8,090,000
by (b) an amount equal to the average of the last reported sale prices of Sierra
Common Stock over the five consecutive trading days ending with the second
trading day prior to the Closing Date, which average the parties agree is $33.10
(the "Closing Average").
1.6.3 EXCHANGE OF CERTIFICATES
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
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AGREEMENT AND PLAN OF MERGER Page 3
<PAGE> 10
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 Section 9.6 of 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.
1.6.4 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 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 Average.
1.6.5 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
In addition to and without limitation of any restrictions on transfer
of the Securities contained in the Registration Rights Agreement referred to in
Section 2.1
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AGREEMENT AND PLAN OF MERGER Page 4
<PAGE> 11
below, the Shareholders shall not transfer any of the Securities received in the
Merger until after the public announcement or release 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 WAIVER OF RIGHTS RELATING TO COMPANY COMMON STOCK
Each Shareholder hereby irrevocably waives, effective immediately prior
to and contingent upon the Closing, all rights of first refusal, rights of first
offer, preemptive rights and any other rights of such Shareholder relating to
transfer or purchase of shares of Company Common Stock, whether or not such
rights are in writing, and whether set forth in the Bylaws of the Company or
elsewhere, including without limitation the rights contained in Section 2 of
Article VI of the Company's Bylaws. The Company hereby irrevocably waives,
effective immediately prior to and contingent upon the Closing, all rights of
first refusal, rights of first offer, preemptive rights and any other rights of
the Company relating to transfer or purchase of shares of Company Common Stock,
whether or not such rights are in writing, and whether set forth in the Bylaws
of the Company or elsewhere, including without limitation the rights contained
in Section 2 of Article VI of the Company's Bylaws.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
OF THE SHAREHOLDERS
To induce Sierra and Acquisition Sub to enter into and perform this
Agreement and the other Related Agreements (as defined in Section 2.1 hereof),
the Shareholders, severally but not jointly, represent and warrant to Sierra and
Acquisition Sub 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 3.3(b) to the Disclosure Memorandum attached
hereto as Exhibit B (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
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AGREEMENT AND PLAN OF MERGER Page 5
<PAGE> 12
substantially the form attached hereto as Exhibit C 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 D to be entered into as of the
Closing among Sierra and each of the Shareholders (collectively, the "Related
Agreements"), 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 2.2 hereof); and (d) this Agreement and the Related
Agreements 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 NO APPROVALS; NO CONFLICTS
The execution, delivery and performance of this Agreement and the
Related Agreements by each Shareholder and the consummation of the transactions
contemplated hereby and thereby will not (a) 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,
(b) 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 for compliance with applicable securities laws and the
filing of all documents necessary to consummate the Merger with the Utah
Division (the consent of all such Persons to be duly obtained by the Company or
the Shareholder at or prior to the Closing), (c) result in the creation of any
lien or encumbrance upon the shares of Company Common Stock owned by such
Shareholder, or (d) conflict with or result in a breach of or constitute a
default under any provision of the Articles of Incorporation or Bylaws of the
Company.
2.3 SECURITIES ACT MATTERS
Each of the Shareholders hereby acknowledges, represents and warrants
to Acquisition Sub and Sierra as follows:
(a) CUC Merger Agreement. Such Shareholder has read and is
familiar with the terms of this Agreement and Plan of Merger dated as of
February 19, 1996, as amended, among Sierra, CUC International Inc., a Delaware
corporation ("CUC"), and Larry Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of CUC, (the "CUC Merger Agreement") under which, among
other things, each share of Sierra Common Stock outstanding immediately prior to
the consummation of the merger therein contemplated (the "CUC Merger") would be
converted into 1.225 shares of common stock of CUC. Such Shareholder understands
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AGREEMENT AND PLAN OF MERGER Page 6
<PAGE> 13
that the CUC Merger may or may not be consummated, that an investment in the
Securities could result in such Shareholder holding CUC common stock if the CUC
Merger is consummated, and that such Shareholder is aware of the risks of both
the consummation and nonconsummation of the CUC Merger.
(b) 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.
(c) SEC Documents. Such Shareholder acknowledges that he has
had the opportunity to review to his satisfaction all publicly available filings
and reports of Sierra and CUC filed with the Securities and Exchange Commission,
including without limitation the SEC Documents (as defined in Section 4.4). Such
Shareholder acknowledges that an investment in the Securities as contemplated by
this Agreement involves a high degree of risk.
(d) 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 CUC and
the suitability of its investment in the Securities in light of his financial
condition and investment needs.
(e) 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.
(f) Access to Information. Such Shareholder has been given
access to full and complete information regarding Sierra, CUC and the Company,
including, in particular, the current respective financial conditions of Sierra,
CUC and the Company and the risks associated therewith, and has utilized such
access to his satisfaction for the purpose of obtaining information about Sierra
and CUC.
(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 Securities Act of 1933, as amended (the "1933 Act"), or to any
applicable state securities or Blue Sky law, nor does such Shareholder have any
contract, undertaking, agreement or
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AGREEMENT AND PLAN OF MERGER Page 7
<PAGE> 14
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.
(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 or the provisions of the
Registration Rights Agreement referred to in Section 2.1, 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
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AGREEMENT AND PLAN OF MERGER Page 8
<PAGE> 15
(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.
(l) Residency. For purposes of the application of state
securities laws, each Shareholder is a resident of Utah.
(m) Legend. It is understood that the certificates evidencing
the Securities may bear a legend as set forth in the Registration Rights
Agreement referred to in Section 2.1.
2.4 POOLING MATTERS
The Shareholders have not taken, directly or indirectly, 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
generally accepted accounting principles consistently applied ("GAAP"), and the
Shareholders are not aware of any facts which otherwise could prevent such
accounting treatment.
ARTICLE III - REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
To induce Sierra and Acquisition Sub to enter into and perform this
Agreement and the other Related Agreements, and except as otherwise set forth in
the Disclosure Memorandum, which exceptions shall specifically identify the
section or sections of this Article III to which such exceptions relate, and
which Disclosure Memorandum shall constitute in its entirety a representation
and warranty under this Article III, the Company represents and warrants to
Sierra and Acquisition Sub as of the date of this Agreement and as of the
Closing as follows in this Article III.
3.1 ORGANIZATION
The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Utah. 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 Related Agreements, and to consummate
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AGREEMENT AND PLAN OF MERGER Page 9
<PAGE> 16
the transactions contemplated hereby and thereby. The Company is not required to
be qualified or licensed as a foreign corporation to do business in any
jurisdiction, except where the failure to be so qualified or in good standing
would not have a material adverse effect on the business, operations, assets,
liabilities (absolute, accrued, contingent or otherwise), sales, margins,
profitability, condition (financial or other) or prospects of the Company (a
"Material Adverse Effect").
3.2 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 Related Agreements, the consummation
of the Merger, and the performance of all of the Company's obligations under
this Agreement and the Related Agreements has been taken or will be taken prior
to the Closing. This Agreement has been, and each of the Related Agreements at
the Closing will have been, duly executed and delivered by the Company, and this
Agreement is, and each of the Related Agreements 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.
3.3 CAPITALIZATION
(a) The authorized capital stock of the Company consists of
50,000 shares of Company Common Stock.
(b) The issued and outstanding capital stock of the Company
consists solely of 1,018 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 3.3(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. To the best of the Company's knowledge, 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) 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 or the capital
stock of any Subsidiary, except rights that have been validly waived in Section
1.8 of this Agreement.
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AGREEMENT AND PLAN OF MERGER Page 10
<PAGE> 17
(d) The Company is not a party or subject to any agreement or
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any Persons, 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.
3.4 SUBSIDIARIES AND AFFILIATES
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.
3.5 NO APPROVALS; NO CONFLICTS
The execution, delivery and performance of this Agreement and the
Related Agreements by the Company and the consummation of the transactions
contemplated hereby and thereby will not (a) 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, (b) 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 Utah Division (the consent
of all such Persons to be duly obtained by the Company at or prior to the
Closing), (c) except as noted in clause (b), require any consent or approval
under, or result in any 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, (d) 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, (e) conflict with or result in a breach of or constitute a default
under any provision of the Articles of Incorporation or Bylaws of the Company,
or (f) invalidate or adversely affect any permit, license, authorization or
status used in the conduct of the business of the Company.
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AGREEMENT AND PLAN OF MERGER Page 11
<PAGE> 18
3.6 FINANCIAL STATEMENTS
The Company has delivered to Sierra (a) consolidated balance sheets and
statements of income and expense of the Company as of or for the fiscal years
ended December 31, 1995 and 1994, and (b) a consolidated balance sheet and
statement of income and expense of the Company as of and for the three-month
period ended March 31, 1996. All of the foregoing financial statements are
herein referred to as the "Financial Statements." The consolidated balance sheet
of the Company as of March 31, 1996 is herein referred to as the "Company
Balance Sheet." The Financial Statements 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. 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 Sheet
in the ordinary course of business and consistent with past practice which are
not in excess of $10,000 in the aggregate or $2,000 individually. The Company
maintains standard systems of accounting which are adequate for its business.
The Company is not a guarantor, indemnitor, surety or other obligor of any
indebtedness of any other Person. The Company expenses software development
costs on a current basis as incurred.
3.7 ABSENCE OF CERTAIN CHANGES OR EVENTS
Since the date of the Company Balance Sheet and through the Closing
Date, 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;
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<PAGE> 19
(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),
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;
(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 other than representatives of Sierra any trade secret, formula,
process or know-how not theretofore a matter of public knowledge;
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AGREEMENT AND PLAN OF MERGER Page 13
<PAGE> 20
(k) made any single capital expenditure or commitment in
excess of $10,000 for additions to property, plant, equipment or intangible
capital assets or made aggregate capital expenditures in excess of $10,000 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 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
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<PAGE> 21
transactions contemplated herein or which would have a Material Adverse Effect
on the Company;
(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 current or prospective customer, licensor or distributor of
the Company;
(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 in accordance with GAAP consistently applied; or
(t) agreed, whether in writing or otherwise, to take any
action described in this Section 3.7.
3.8 TAXES
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 in all material respects,
and (c) 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. The reserves and provisions
for Taxes reflected in the Financial Statements are adequate for the payment of
Taxes not yet due and payable; 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; 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
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<PAGE> 22
relating to the existence of a valid S corporation election for the Company for
any such period; the Company has not filed or entered into any election, consent
or extension agreement or any waiver that extends any applicable statute of
limitations; 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
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 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 (including without limitation this Agreement) that could obligate it
to make any payments that will not be deductible under Section 280G of the Code;
the Company has not been a United States real property holding corporation
within the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(2)(i) of the Code; the Company is not a party
to any Tax allocation or sharing agreement, and 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 Tax by reason of being a "C Corporation" (as that term
is defined in the Code).
3.9 PROPERTY
(a) The Company owns no real property or leasehold interests
in real property. Schedule 3.9(a) to the Disclosure Memorandum contains a
complete and accurate list of all real property used by the Company (the "Real
Property"). There are no written leases, subleases, rental agreements, contracts
of sale, tenancies or licenses to which the Company is a party relating to the
Real Property.
(b) Schedule 3.9(b) to the Disclosure Memorandum contains a
complete and accurate list of each item of personal property having a value in
excess of $1,000 which is owned, leased, rented or used by the Company
(excluding the intellectual property covered by Section 3.16, the "Personal
Property"). There are no leases, subleases, rental agreements, contracts of
sale, tenancies or licenses to which the Company is a party 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
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AGREEMENT AND PLAN OF MERGER Page 16
<PAGE> 23
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 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
intellectual property matters addressed in Section 3.16 of this Agreement. The
Company has not granted any lease, sublease, tenancy or license of any portion
of the Personal Property.
(c) The Personal Property is of quality consistent with
industry standards and is in good operating condition and repair, normal wear
and tear excepted.
(d) Except for (i) assessments for current taxes not yet due
and payable and (ii) 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 the Company owns such Personal Property.
(e) Neither the whole nor any portion of the 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.
3.10 CONTRACTS
Schedule 3.10 to the Disclosure Memorandum contains a complete and
accurate list of all 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. 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
material default thereunder, nor is there any event which with notice or lapse
of time, or both, would constitute a material 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 (and written summaries of the
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AGREEMENT AND PLAN OF MERGER Page 17
<PAGE> 24
terms of any such oral contract) have been heretofore delivered to Sierra. 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 developers, designers, producers,
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 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.
3.11 CUSTOMERS AND SUPPLIERS
Schedule 3.11 to the Disclosure Memorandum sets forth a complete and
accurate list of the customers of the Company showing the approximate total
sales by the Company to each such customer during the fiscal year last ended.
The Company
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AGREEMENT AND PLAN OF MERGER Page 18
<PAGE> 25
has no reasonable basis to expect any material modification to its relationship
with any customer or supplier.
3.12 ORDERS, COMMITMENTS AND RETURNS
Schedule 3.12 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. 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.
3.13 CLAIMS AND LEGAL PROCEEDINGS
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. To the Company's best knowledge, there is no valid basis for any claim,
action, suit, arbitration, proceeding or investigation which could reasonably be
expected to be materially adverse to the business, operations, assets,
liabilities (absolute, accrued, contingent or otherwise), sales, margins,
profitability, condition (financial or other) or prospects of 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 or which would have a Material Adverse Effect
on the Company. No material disputes have been settled or resolved by litigation
or arbitration within the last five years.
3.14 LABOR AND EMPLOYMENT MATTERS
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
failure to comply with which could have a Material Adverse Effect on the
Company. The Company is not engaged in any unfair labor 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,
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AGREEMENT AND PLAN OF MERGER Page 19
<PAGE> 26
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 3.14 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. All employees of the Company are employed on an "at
will" basis.
3.15 EMPLOYEE BENEFIT PLANS
(a) Employee Benefit Plans. Schedule 3.15(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 reasonably be expected to 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") (such items are hereinafter referred to collectively
as "Employee Benefit Plans" and each individually as an "Employee Benefit
Plan").
(b) Compliance With Laws. With respect to each Employee
Benefit Plan: (i) the Company is, and at all times has been, in compliance with,
and such
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AGREEMENT AND PLAN OF MERGER Page 20
<PAGE> 27
Employee Benefit Plan is, and at all times has been, maintained and operated in
material 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 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.
(c) Welfare Plans. No Employee Benefit Plan is subject to 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.
(d) 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 payment or contribution obligation that is not yet due
has been properly reflected in the Company's Financial Statements.
(e) 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
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AGREEMENT AND PLAN OF MERGER Page 21
<PAGE> 28
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.
(f) 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 3.15(a) of
the Disclosure Memorandum or to modify or amend any of the existing Employee
Benefit Plans.
(g) Multiemployer and Qualified 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,
or any plan intended to be qualified under Section 401(a) or 403(d) of the Code.
For purposes of this Section 3.15, "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.
(h) 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.
(i) 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.
3.16 PATENTS, TRADEMARKS, ETC.
Set forth on Schedule 3.16 to the Disclosure Memorandum is a true and
complete list of: (a) all patents, patent applications, trademarks, trade names
and copyrights of the Company (collectively, the "Listed Intellectual
Property"), (b) the Company's Software Products (as defined below), and (c) all
intellectual property licenses held or granted by the Company as a licensee or
licensor (the "Intellectual Property Licenses"). Neither the Company's
operations nor any Listed Intellectual
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AGREEMENT AND PLAN OF MERGER Page 22
<PAGE> 29
Property nor any of the Company's Software Products infringes or provides any
basis to believe that its operations, Software Products or any Listed
Intellectual Property would infringe upon any validly issued, existing or
pending copyright, trade secret, right of publicity, right of privacy or trade
dress or, to the knowledge of the Company, any validly issued or pending patent,
trademark, trade name, service mark or other right 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 Related Agreements will not alter or impair
the Company's rights to any of the Listed Intellectual Property, Software
Products or under any Intellectual Property License. To the best of the
Company's knowledge, the manner in which the Company has manufactured, packaged,
shipped, advertised, labeled and sold its products complies with all applicable
laws and regulations pertaining thereto.
The Company is the sole and exclusive owner or licensee of:
(a) the Listed Intellectual Property, 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 3.16 to the Disclosure Memorandum (the
"Software"), with all modifications, enhancements and additions thereto,
including, without limitation, all rights in and to all versions (including work
in progress) thereof and all source code, object code, manuals and other
documentation and related materials thereof (collectively, the "Software
Products"). The Company owns or holds under the Intellectual Property Licenses
all intellectual property rights it reasonably requires to market, license,
distribute and otherwise exploit the Software Products.
Schedule 3.16 to the Disclosure Memorandum includes a true and complete
list of all trademark, service mark, and copyright registrations and
applications held by the Company.
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. 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. No licenses, sublicenses,
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AGREEMENT AND PLAN OF MERGER Page 23
<PAGE> 30
covenants or agreements have been granted or entered into by the Company in
respect of any of the Listed Intellectual Property except the Intellectual
Property Licenses. No director, officer, shareholder or employee of the Company
owns, directly or indirectly, in whole or in part, any of the Listed
Intellectual Property.
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. The Company has not disclosed any source code of
the Software Products to any person other than an employee of the Company or to
Sierra or Acquisition Sub, except for any disclosure that would not have a
Material Adverse Effect on the Company; 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 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 3.16 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.
3.17 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 consistent
with past practice. The bad debt reserves and sales return allowances reflected
in the Company Balance Sheet are adequate. Set forth on Schedule 3.17 to the
Disclosure Memorandum is a full and complete list and aging study of all
consolidated accounts receivable of the Company existing as of March 31, 1996.
3.18 INVENTORY
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.
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<PAGE> 31
3.19 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 Incorporation 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.
3.20 LICENSES, PERMITS, AUTHORIZATIONS, ETC.
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 failure to obtain which
would have a Material Adverse Effect on the Company. 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.
3.21 COMPLIANCE WITH LAWS
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, the failure to comply with which would, individually or in
the aggregate, have a Material Adverse Effect on the Company, 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 failure by the Company to comply with
any of such laws, rules, ordinances, decrees or orders.
3.22 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
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AGREEMENT AND PLAN OF MERGER Page 25
<PAGE> 32
industry. 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.
3.23 BROKERS OR FINDERS
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.
3.24 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 Practices Act and all foreign laws and
regulations relating to prevention of corrupt practices and similar matters.
3.25 BANK ACCOUNTS
Schedule 3.25 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.
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3.26 INSIDER INTERESTS
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. 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.
3.27 POOLING MATTERS
The Company has not taken, directly or indirectly, and the Company has
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 the
Company's 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 the Company is not aware of any facts which otherwise could prevent
such accounting treatment.
3.28 FULL DISCLOSURE
To the best knowledge of the Company after diligent inquiry, 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
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AGREEMENT AND PLAN OF MERGER Page 27
<PAGE> 34
Statements and all information in the Disclosure Memorandum and the other
Exhibits hereto) or the Related Agreements, 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, in light of the circumstances in which they were
made or delivered, not misleading.
ARTICLE IV - REPRESENTATIONS AND WARRANTIES
OF SIERRA AND ACQUISITION SUB
To induce the Company and the Shareholders to enter into and perform
this Agreement and the Related Agreements, Sierra and Acquisition Sub jointly
and severally represent and warrant to the Company and the Shareholders as
follows in this Article IV:
4.1 ORGANIZATION
Sierra is a corporation validly existing and in good standing under the
laws of the State of Delaware. Acquisition Sub is a corporation duly organized
and validly existing under the laws of the State of Utah. Each of Sierra and
Acquisition Sub 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
Related Agreements to which either is a party, and to carry out the transactions
contemplated hereby and thereby.
4.2 ENFORCEABILITY
All corporate action on the part of Sierra and Acquisition Sub and
their respective officers, directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Related Agreements, the consummation of the Merger, and the performance of all
of their respective obligations under this Agreement and the Related Agreements
has been taken or will be taken prior to the Effective Time. This Agreement has
been, and each of the Related Agreements 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 Related Agreements 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
Related Agreements to which Acquisition Sub is a party will have been at the
Closing, duly executed and delivered by Acquisition Sub, and this Agreement is,
and each of the Related Agreements to which Acquisition Sub is a party will be
at the Closing, a legal, valid and binding obligation of Acquisition Sub,
enforceable against Acquisition Sub in accordance with its terms.
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<PAGE> 35
4.3 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.
4.4 SEC DOCUMENTS
Sierra has furnished the Shareholders with true and complete copies of
its Annual Report on Form 10-K for the fiscal year ended March 31, 1995 (the
"10-K"), its Quarterly Reports on Form 10-Q for the fiscal quarters ended June
30, September 30 and December 31, 1995, its Proxy Statement relating to its 1995
Annual Meeting of Stockholders on August 17, 1995, and its Current Reports on
Form 8-K dated November 30, 1995 and February 19, 1996 (collectively, the "SEC
Documents"). As of their respective 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; provided, however, that the audited financial statements of Sierra
contained in the 10-K and in the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1995, and in each such document the related
footnotes and Management's Discussion and Analysis of Financial Condition and
Results of Operations, have been superseded and restated in their entireties by
the audited financial statements, and the related footnotes and Management's
Discussion and Analysis of Financial Condition and Results of Operations, set
forth in the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1995. Such superseded materials should not be relied on in
any respect.
4.5 NO APPROVALS; NO CONFLICTS
The execution, delivery and performance of this Agreement and the
Related Agreements by Sierra and Acquisition Sub and the consummation of the
transactions contemplated hereby and thereby will not (a) 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 Acquisition Sub, (b)
require any consent, approval or authorization of, or declaration, filing or
registration with, any Person, except (i) the written consent of CUC pursuant to
the CUC Merger Agreement and (ii) compliance with applicable securities laws and
the filing of all documents necessary to consummate the Merger with the Utah
Division (the consent of all such Persons to be duly obtained at or prior to the
Closing), (c) except as noted in clause (b), require any consent or approval
under, or result in any default (with or without the giving of
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<PAGE> 36
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 Acquisition Sub is a party or by which it is bound
or to which any assets of Sierra or Acquisition Sub are subject, (d) result in
the creation of any lien or encumbrance upon the assets of Sierra or Acquisition
Sub, (e) conflict with or result in a breach of or constitute a default under
any provision of the Certificate of Incorporation or Bylaws of Sierra or
Acquisition Sub, or (f) invalidate or adversely affect any permit, license,
authorization or status used in the conduct of the business of Sierra or
Acquisition Sub.
ARTICLE V - CONDITIONS PRECEDENT TO OBLIGATIONS
OF SIERRA AND ACQUISITION SUB
The obligations of Sierra and Acquisition Sub 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:
5.1 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 Related Agreements 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
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 Related Agreement to be performed and complied with by them at
or prior to the Closing.
5.3 OPINION OF COUNSEL FOR THE COMPANY
Sierra shall have received the opinion letter of Van Cott, Bagley,
Cornwall & McCarthy, counsel for the Company and the Shareholders, dated the
Closing Date, in form and substance satisfactory to Sierra.
5.4 SHAREHOLDER APPROVAL
The Shareholders shall have duly and validly approved the Merger by a
vote or written consent in accordance with Utah Law.
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5.5 RESIGNATIONS
Sierra shall have received copies of resignations effective as of the
Closing Date of all the directors of the Company.
5.6 CONSENTS AND APPROVALS
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 in the
Disclosure Memorandum as requiring consent in connection with the Merger, which
consents shall be satisfactory in all respects to Sierra in its sole discretion.
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.
5.7 COMPLIANCE CERTIFICATE
Sierra shall have received a certificate of the President and another
senior 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 Acquisition Sub set forth in this Article V have
been fulfilled.
5.8 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 third party
contractual or other business relationships of the Company.
5.9 DUE DILIGENCE
The results of Sierra's due diligence investigation of the Company
shall be satisfactory in all respects to Sierra in its sole discretion.
5.10 PROCEEDINGS AND DOCUMENTS; SECRETARY'S CERTIFICATE
All corporate and other proceedings in connection with the transactions
contemplated hereby and by the Related Agreements, and all documents and
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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 Related Agreements, and such other documents as are specified
by Sierra's counsel.
5.11 COMPLIANCE WITH LAWS
The consummation of the transactions contemplated by this Agreement and
the Related Agreements shall be legally permitted by all laws and regulations to
which Sierra or the Company is subject.
5.12 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, or prevent CUC from
accounting for the CUC Merger, as a "pooling of interests" transaction in
accordance with GAAP.
5.13 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 Related Agreement, 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 Related Agreement.
5.14 RELATED AGREEMENTS AND STOCK POWERS
The Related Agreements shall have been executed and delivered by all
parties thereto other than Sierra and Acquisition Sub and the Shareholders shall
have delivered to Sierra the executed stock powers contemplated by Section 9.6.1
of this Agreement.
ARTICLE VI - 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.
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AGREEMENT AND PLAN OF MERGER Page 32
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6.1 ACCURACY OF REPRESENTATIONS AND WARRANTIES
The representations and warranties of Sierra and Acquisition Sub
contained herein and in the Related Agreements 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.
6.2 PERFORMANCE OF AGREEMENTS
Sierra and Acquisition Sub shall have performed all obligations and
agreements and complied with all covenants and conditions contained in this
Agreement or any Related Agreement to be performed and complied with by them at
or prior to the Closing.
6.3 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 set forth in this Article VI have been fulfilled.
6.4 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 Related Agreement, 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 Related Agreement.
6.5 RELATED AGREEMENTS
Sierra and Acquisition Sub shall have executed and delivered to the
Company all the Related Agreements to which they are parties.
ARTICLE VII - COVENANTS
Between the date of this Agreement and the Effective Time, the parties
covenant and agree as set forth in this Article VII.
7.1 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
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AGREEMENT AND PLAN OF MERGER Page 33
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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,
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 Incorporation 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;
(d) reclassify, combine, split, subdivide, redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(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 consultants, except for increases in accordance with existing
agreements or past practices for employees of the Company who are not officers
of the Company, or
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AGREEMENT AND PLAN OF MERGER Page 34
<PAGE> 41
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 V hereof not being satisfied;
(k) take or agree to take any action specified in Section 3.7
hereof, or enter into any other material transaction other than those specified
above, or agree to do any of the foregoing.
7.2 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 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
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AGREEMENT AND PLAN OF MERGER Page 35
<PAGE> 42
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 7.2 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 February 6, 1996 (the "Confidentiality
Agreement"), which shall be deemed terminated without any further action by the
parties hereto at the Effective Time.
7.3 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.
7.4 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 7.4
shall not limit or otherwise affect the remedies available hereunder to the
party receiving such notice.
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AGREEMENT AND PLAN OF MERGER Page 36
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7.5 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 Related
Agreements untrue or any conditions precedent to this Agreement unable to be
satisfied at or prior to the Closing. The parties hereto will treat the Merger
as a reorganization under Section 368(a) of the Code for income tax purposes,
provided that no party hereto makes any representation or warranty to any other
party hereto regarding whether the Merger will qualify as a reorganization under
such Section. 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 Related Agreement, 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.
7.6 PUBLICITY
The Company and the Shareholders shall not issue any press release or
otherwise make any statements to any third party with respect to this Agreement
or the transactions contemplated hereby without the prior written consent of
Sierra.
ARTICLE VIII - TERMINATION, AMENDMENT AND WAIVER
8.1 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;
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AGREEMENT AND PLAN OF MERGER Page 37
<PAGE> 44
(b) by either the Company or Sierra, if the Merger has not
been consummated by April 15, 1996; 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,
Acquisition Sub 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 April 15, 1996; 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 April 15, 1996.
8.2 EFFECT OF TERMINATION
In the event of the termination of this Agreement pursuant to Section
8.1 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 breach hereof.
8.3 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
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AGREEMENT AND PLAN OF MERGER Page 38
<PAGE> 45
without the prior written consent of the Shareholders. This Agreement may not be
amended except by an instrument in writing signed by Sierra and the Company.
8.4 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 IX - SURVIVAL AND INDEMNIFICATION
9.1 SURVIVAL
All representations and warranties contained in this Agreement or in
the Related Agreements 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. The covenants and agreements contained in this
Agreement or in the Related Agreements 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.
9.2 INDEMNIFICATION BY SHAREHOLDERS
From and after the Closing Date, the Shareholders shall jointly and
severally (except as provided in Section 9.4(b) below) indemnify and hold Sierra
and its officers, directors and affiliates (the "Sierra Indemnified Parties")
harmless from and against, and shall reimburse the Sierra 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)
actually incurred (on an after-tax basis) ("Losses") and arising out of or in
connection with any inaccuracy in any representation or warranty made by the
Company or the Shareholders in this Agreement or in any certificate delivered
pursuant hereto or thereto, or 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.
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9.3 INDEMNIFICATION BY SIERRA
From and after the Closing Date, Sierra shall indemnify and hold the
Company and its officers, directors and affiliates (the "Company Indemnified
Parties" and, together with the Sierra Indemnified Parties, the "Indemnified
Parties") harmless from and against, and shall reimburse the Company Indemnified
Parties for, any and all Losses arising out of or in connection with any
inaccuracy in any representation or warranty made by Sierra or Acquisition Sub
in this Agreement or in any certificate delivered pursuant hereto, or any
failure by Sierra or Acquisition Sub to perform or comply, in whole or in part,
with any covenant or agreement in this Agreement.
9.4 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 IX ("Claims") until the aggregate Losses for which such Indemnified
Parties would be otherwise entitled to receive indemnification exceed $75,000
(the "Threshold"); provided, however, that once such aggregate Losses exceed the
Threshold, such Indemnified Parties shall be entitled to indemnification for the
aggregate amount of all Losses without regard to the Threshold.
(b) In no event shall the liability of the Shareholders
hereunder for Losses incurred by Indemnified Parties exceed $8,090,000.
9.5 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) 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 9.5(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
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AGREEMENT AND PLAN OF MERGER Page 40
<PAGE> 47
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 a material 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 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 9.5(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.
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(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.
9.6 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 IX. Any
liability of the Shareholders for indemnification under this Article IX shall be
satisfied, first, from Holdback Shares pursuant to a setoff under this Section
9.6 and, second, to the extent 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.
9.6.1 PLEDGE
The Holdback Shares (which shall include for purposes of this Section
9.6 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 or any successor
thereto pursuant to this Agreement. The Shareholders shall deliver to Sierra at
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 9.6. 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 IX. 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.
9.6.2 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 IX when, and
to the extent, authorized under paragraph 9.6.3 below.
(b) On the Holdback Termination Date (as defined below), any
Holdback Shares then remaining pledged to Sierra (which shall exclude shares
re-
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<PAGE> 49
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 3.3(b) to the
Disclosure Memorandum.
Except as otherwise set forth in Section 9.6.5 below, for purposes of
this Agreement, the "Holdback Termination Date" shall mean the date one year
after the Closing Date.
9.6.3 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 IX 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 IX, 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 10 business 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 a number of Holdback Shares
equal in value 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
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<PAGE> 50
on the Nasdaq National Market over the 10 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 monthly 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.
(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 9.6 shall be released to the Shareholders pro rata
in accordance with Schedule 3.3(b) to the Disclosure Memorandum, whether or not
all Open Claims have then been resolved.
9.6.4 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
9.6.2 of this Agreement.
9.6.5 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 9.6, 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.
9.6.6 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.
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 44
<PAGE> 51
ARTICLE X - GENERAL
10.1 EXPENSES
Regardless of whether the transactions contemplated by this Agreement
are consummated, each party shall pay its own fees and expenses incident to the
negotiation, preparation and execution of this Agreement and the other Related
Agreements (including legal and accounting fees and expenses). The Shareholders
shall pay any transfer or similar taxes which may be payable in connection with
the transactions contemplated by this Agreement.
10.2 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.
TO SIERRA OR ACQUISITION SUB:
Sierra On-Line, Inc.
3380 146th Place S.E., Suite 300
Bellevue, Washington 98007
Fax: (206) 644-7397
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 in the Disclosure Memorandum.
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AGREEMENT AND PLAN OF MERGER Page 45
<PAGE> 52
TO THE COMPANY:
Headgate, Inc.
78 West 2050 South
Bountiful, Utah 84010
Fax: (801) 298-9169
Attention: President
with a copy to:
Van Cott, Bagley, Cornwall & McCarthy
Suite 1600, 50 South Main Street
Salt Lake City, UT 84145
Fax: (801) 534-0058
Attention: Brent Christensen
10.3 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 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.
10.4 ENTIRE AGREEMENT
All prior or contemporaneous agreements, contracts, promises,
representations and statements among the parties to this Agreement as to the
subject matter hereof (other than the Related Agreements, the Exhibits and
Schedules to this Agreement and to the Related Agreements, and the certificates,
financial statements and other documents delivered pursuant to this Agreement or
to the Related Agreements (together with this Agreement, the "Transaction
Documents")) are merged into this Agreement. The Transaction Documents set forth
the entire understanding and agreement among the parties with respect to the
subject matter hereof and thereof, and there are no terms, conditions,
representations, warranties or covenants other than those contained in the
Transaction Documents or supplied by law.
- -------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER Page 46
<PAGE> 53
10.5 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.
10.6 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.
10.7 SPECIFIC PERFORMANCE
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.
10.8 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.
10.9 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.
10.10 COUNTERPARTS
This Agreement may be executed and delivered (including by facsimile
transmission) in one or more counterparts, and by the different parties hereto
in
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AGREEMENT AND PLAN OF MERGER Page 47
<PAGE> 54
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.
10.11 WAIVER OF JURY TRIAL
Each of the Shareholders, Sierra, the Company and Acquisition Sub
hereby irrevocably waives all right to trial by jury in any action, proceeding
or counterclaim (whether based on contract, tort or otherwise) arising out of or
relating to this Agreement or the actions of such parties in the negotiation,
administration, performance and enforcement thereof.
10.12 ARBITRATION
Any controversies or claims arising out of or relating to this
Agreement or the other Related Agreements 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 a panel of three
arbitrators 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 arbitrators 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 rendered by
the arbitrators may be entered in any court of competent jurisdiction.
Arbitration proceedings shall be conducted in Salt Lake City, Utah if commenced
by Sierra and in Seattle, Washington if commenced by the Shareholders.
10.13 TAX-FREE REORGANIZATION
The parties intend this Agreement to be a plan of reorganization under
Section 368 of the Code and intend the Merger to be a tax-free reorganization
under Section 368(a)(1)(A) of the Code by virtue of the provisions of Section
368(a)(2)(E) of the Code. The parties intend that no consideration that could
constitute "other property" within the meaning of Section 356(a) of the Code is
being transferred by Sierra for the Company Common Stock in the Merger. The
parties shall not take a position on any tax return or before any taxing
authority that is inconsistent with this Section 10.13 unless otherwise required
by a final and binding determination of a taxing authority with appropriate
jurisdiction, and each party agrees to promptly notify the other party of any
assertion by a taxing authority of a position that is inconsistent with this
Section 10.13.
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AGREEMENT AND PLAN OF MERGER Page 48
<PAGE> 55
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
----------------------------------------------
Name: Chief Executive Officer
----------------------------------------
BIRDIE ACQUISITION CORP.
By: /s/ Michael A. Brochu
----------------------------------------------
Name: President and Chief Operating Officer
----------------------------------------
HEADGATE, INC.
By: /s/ Vance L. Cook
----------------------------------------------
Name: Vance L. Cook, President
----------------------------------------
SHAREHOLDERS:
/s/ Vance L. Cook
--------------------------------------------------
Name: Vance Cook
/s/ Mark Merrill
--------------------------------------------------
Name: Mark Merrill
/s/ Michael V. Jones
--------------------------------------------------
Name: Mike Jones
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AGREEMENT AND PLAN OF MERGER Page 49
<PAGE> 1
JOINT VENTURE AGREEMENT
BETWEEN
SIERRA ON-LINE, INC.
AND
PIONEER ELECTRONIC CORPORATION
DATED AS OF JULY 12, 1995
<PAGE> 2
CONTENTS
<TABLE>
<S> <C>
Section 1. Organization of Company......................................... 1
1.1 Formation of Company............................................ 1
1.2 Name............................................................ 2
1.3 Principal Office of the Company................................. 2
1.4 Purposes and Nature of Business................................. 2
1.5 Term............................................................ 3
1.6 Liability of Parties to Third Parties; Reliance by Third-Party
Creditors....................................................... 3
1.6.1 Liability of Parties............................... 3
1.6.2 Reliance by Third Parties.......................... 3
Section 2. Contributions to the Company.................................... 3
2.1 Initial Capital Contributions................................... 3
2.2 Fund Contribution Commitment.................................... 4
2.3 Additional Contributions........................................ 4
2.4 Default in Monetary Obligations................................. 4
2.5 Contributions in Kind........................................... 5
2.5.1 Sierra Game Titles................................. 5
2.5.2 Enabling Technology................................ 5
2.5.3 Services........................................... 5
2.5.4 Operational Contacts............................... 5
2.6 Company Capital................................................. 6
2.7 Loans........................................................... 6
</TABLE>
TABLE OF CONTENTS PAGE i
<PAGE> 3
<TABLE>
<S> <C>
Section 3. Management...................................................... 6
3.1 The Board....................................................... 6
3.1.1 Appointment........................................ 6
3.1.2 Term............................................... 7
3.1.3 Removal............................................ 7
3.1.4 Board Meetings..................................... 7
3.1.5 Manner of Acting by the Board...................... 7
3.1.6 Voting of the Board................................ 8
3.1.7 Unanimous Voting of the Board...................... 8
3.2 President....................................................... 10
3.2.1 Appointment........................................ 10
3.2.2 Term............................................... 10
3.2.3 Removal............................................ 10
3.3 Auditors........................................................ 10
3.4 Rights of Parties............................................... 11
3.5 Compensation.................................................... 11
Section 4. Company's Dealings With Parties or Affiliates................... 11
4.1 Right of Company to Deal With Parties or Affiliates............. 11
4.2 Cross License of Sierra Titles and Company Titles............... 11
4.3 Distribution Agreement.......................................... 15
4.4 Other Business of Parties....................................... 17
4.5 Company-Developed Technology.................................... 17
Section 5. Distributions and Allocations................................... 18
5.1 Distributions................................................... 18
</TABLE>
TABLE OF CONTENTS PAGE ii
<PAGE> 4
<TABLE>
<S> <C>
5.2 Limitations on Distributions.................................... 18
Section 6. Indemnification................................................. 18
6.1 Indemnification................................................. 18
6.2 Nonexclusivity of Rights........................................ 18
6.3 Indemnification of Officers, Employees and Agents............... 18
Section 7. Dissolution of Company; Special Withdrawal Right................ 19
7.1 Events Causing Dissolution...................................... 19
7.2 Liquidation..................................................... 20
7.2.1 Payment............................................ 20
7.2.2 No Right to Assets................................. 20
7.2.3 Enabling Technology................................ 20
7.2.4 Rights to Company-Developed Products and Technology 21
7.2.5 Use of Other Party's Name.......................... 21
7.3 Buy-Out Option.................................................. 21
7.4 Termination Payment............................................. 21
Section 8. Books, Records and Accounting................................... 22
8.1 Books and Records............................................... 22
8.2 Fiscal Year..................................................... 22
8.3 Bank Accounts................................................... 22
8.4 Annual Budget................................................... 23
8.4.1 Annual Budget Planning............................. 23
8.4.2 Review of Annual Performance....................... 23
8.5 Annual Business Plan............................................ 23
</TABLE>
TABLE OF CONTENTS PAGE iii
<PAGE> 5
<TABLE>
<S> <C>
Section 9. Dispute Resolution.............................................. 24
9.1 General......................................................... 24
9.2 Unassisted Settlement........................................... 24
9.3 Arbitration and Costs........................................... 24
9.4 Costs........................................................... 24
Section 10. Miscellaneous................................................... 25
10.1 Confidentiality................................................. 25
10.2 Press Releases.................................................. 25
10.3 Governing Law................................................... 25
10.4 Assignment...................................................... 25
10.5 Construction.................................................... 26
10.6 Counterparts.................................................... 26
10.7 No Partnership.................................................. 26
10.8 Entire Agreement................................................ 26
10.9 Notices......................................................... 26
10.10 Waivers......................................................... 28
10.11 Attorney Fees................................................... 28
10.12 Choice of Language.............................................. 28
10.13 Exhibits........................................................ 28
</TABLE>
TABLE OF CONTENTS PAGE iv
<PAGE> 6
JOINT VENTURE AGREEMENT
This Joint Venture Agreement, dated as of July 12, 1995 (the "Effective
Date"), is made and entered into by and between Sierra On-Line, Inc., a
corporation organized under the laws of the State of Delaware, U.S.A.
("Sierra"), and Pioneer Electronic Corporation, a corporation organized under
the laws of Japan ("Pioneer"). Sierra and Pioneer are sometimes referred to
herein collectively as the "Parties" and individually as a "Party". The
definitions of certain terms used in this Agreement are set forth in Exhibit A.
RECITALS
A. Sierra is a developer, publisher and distributor of computer
games and other software products principally for use on personal computers.
B. Pioneer is engaged in various aspects of the consumer
electronic entertainment business worldwide.
C. Sierra and Pioneer want to enter into a joint business
arrangement under which they will jointly form a separate legal entity to
develop, produce, publish, distribute, localize and license computer games and
other software products in Japan and the rest of Asia.
AGREEMENT
For and in consideration of the mutual covenants contained in this
Agreement, the Parties agree as follows:
SECTION 1. ORGANIZATION OF COMPANY
1.1 FORMATION OF COMPANY
As soon as practicable following the Effective Date, the Parties shall
form a "Kabushiki-Kaisha" corporation under the Commercial Code and other
Applicable Laws of Japan (the "Company") to perform the activities of the
Company specified in this Agreement. The Company's organizational documents
("Company Organization Documents") shall provide for a single class of voting
common stock, include the provisions necessary to implement the terms and
conditions set forth in this Agreement and be in a form approved by both
Parties. Pioneer shall be responsible for taking all steps necessary to form the
Company including filing, registration and notification required by all
Applicable Laws in Japan. All costs reasonably incurred by Pioneer in forming
the Company shall be reimbursed to Pioneer by the Company as soon as possible
following the formation of the Company.
JOINT VENTURE AGREEMENT PAGE 1
<PAGE> 7
1.2 NAME
The name of the Company shall be either Sierra On-Line Pioneer Inc. or
Sierra Pioneer Inc.
1.3 PRINCIPAL OFFICE OF THE COMPANY
The principal office of the Company shall be located at Meguro-ku or
Shibuya-ku, Tokyo, Japan or such other location approved by the Parties from
time to time.
1.4 PURPOSES AND NATURE OF BUSINESS
The purposes of the Company shall be limited to:
(a) localize, publish, distribute and license in Japan and
Asia the computer games and other software products acquired under license from
Sierra pursuant to the License Agreement described in Section 4.2;
(b) develop, produce, publish, distribute and license new
computer game and software product titles for personal computers, arcade and
video game computers, 32-bit systems, super density discs and other emerging
platforms;
(c) adapt, convert and port the computer games and software
products described in clauses (a) and (b) above for use with different computer
platforms (e.g., from MS DOS platforms to arcade and video game machines and
32-bit systems) and publish, distribute and license such games and products in
Japan and Asia and, through Sierra, the remainder of the world;
(d) localize, publish, distribute and sublicense third-party
computer games and software products in Japan and Asia and, through Sierra, the
remainder of the world for personal computers, arcade and video game computers,
32-bit systems, super density discs and other emerging platforms;
(e) develop other lines of business related to the activities
described in clauses (a) through (d) above (e.g., develop, publish and sell hint
books for such games and products and develop and sell merchandise that uses
characters or other recognizable aspects of such games and products);
(f) sublicense to Sierra the right to localize, port, publish,
distribute and license outside Japan and Asia the games and products described
in clauses (b) through (e) above;
(g) engage in any other lawful business activity that is
approved in advance by the Board subject to the terms of this Agreement; and
(h) engage in all other acts and things necessary, proper or
advisable to effect and carry out such purposes of the Company and to operate
its business.
JOINT VENTURE AGREEMENT PAGE 2
<PAGE> 8
1.5 TERM
The Company shall commence upon formation after the Effective Date of
this Agreement and shall continue in perpetuity unless and until earlier
terminated and dissolved pursuant to Section 7.1 of this Agreement. This
Agreement shall terminate upon the earlier of (i) dissolution of the Company or
(ii) termination as provided in this Agreement.
1.6 LIABILITY OF PARTIES TO THIRD PARTIES; RELIANCE BY THIRD-PARTY
CREDITORS
1.6.1 LIABILITY OF PARTIES
Except as otherwise provided by Applicable Laws or in this Agreement,
no Party shall be personally liable for any debt, obligation or liability of the
Company, whether arising in contract or otherwise, solely by reason of being an
owner of Shares in the Company.
1.6.2 RELIANCE BY THIRD PARTIES
This Agreement is entered into between the Parties for the exclusive
benefit of the Parties and their permitted successors and assigns. Specifically
(but not by way of limitation), this Agreement is not intended for the benefit
of any creditor of the Company or any other person. Except to the extent
provided by Applicable Laws, and then only to that extent, no such creditor or
third party shall have any rights under this Agreement or under any other
agreement between the Company and either Party, either with respect to any
contribution to the Company or otherwise.
SECTION 2. CONTRIBUTIONS TO THE COMPANY
2.1 INITIAL CAPITAL CONTRIBUTIONS
Each Party shall contribute the following amounts to the Company
("Initial Capital Contribution") upon the formation of the Company and shall
receive the following percentage of the authorized and issued Shares:
<TABLE>
<CAPTION>
INITIAL CAPITAL
PARTY CONTRIBUTION SHARE PERCENTAGE
----- --------------- -----------------
<S> <C> <C>
Sierra 153,000,000 yen 51%
Pioneer 147,000,000 yen 49%
</TABLE>
2.2 FUND CONTRIBUTION COMMITMENT
In addition to the Initial Capital Contributions, the Parties shall
make additional Capital Contributions or Loans pro rata in accordance with their
respective number of Shares (i) in such amounts as shall be determined by the
President as provided in Section 3.2 or (ii) upon a majority vote of the Board
upon the occurrence of a Trigger Event or (iii) up to a maximum of 20 million
yen per Party in any fiscal year in the absence of a Trigger Event upon a
majority vote of the Board or
JOINT VENTURE AGREEMENT PAGE 3
<PAGE> 9
(iv) upon the unanimous vote of the Board, in each case subject to a maximum
aggregate contribution (whether by Loan or Capital Contribution and including
the Initial Capital Contribution) of Five Hundred Twenty Million Four Hundred
Eight Thousand One Hundred Japanese Yen (520,408,100 yen) in the case of Sierra
and Five Hundred Million Japanese Yen (500,000,000 yen) in the case of Pioneer.
The Trigger Events are the following:
(a) If the Company's working capital is insufficient to enable
the Company to operate and perform in the ordinary course of business in
accordance with the Annual Budget (or the Revised Annual Budget, if applicable)
for such fiscal year; or
(b) The Company has insufficient resources to fund any capital
expenditure identified in the Annual Budget (or the Revised Annual Budget, if
applicable) for such fiscal year.
2.3 ADDITIONAL CONTRIBUTIONS
Any call for Capital Contributions or Loans in excess of or in any
manner other than those specified in Sections 2.1 or 2.2 above shall be subject
to the approval of each contributing Party.
2.4 DEFAULT IN MONETARY OBLIGATIONS
In the event of any default by a Party in the performance of its
monetary obligations under Section 2.1 or 2.2 of this Agreement, the other Party
may demand in writing that such default be cured. If the defaulting Party shall
fail to cure the default within ten (10) days after receipt of such demand, the
other Party may, on behalf of the defaulting Party, advance to the Company the
amount remaining in default. Such advance shall be treated as a loan to the
defaulting Party bearing interest at the rate of fifteen percent (15%) or at the
maximum rate permitted by Applicable Laws, whichever is less, computed and
compounded daily. The loan shall be payable ten (10) days after demand for
payment is received by the defaulting Party from the advancing Party. The
advancing Party shall have a preferred right of distribution with respect to any
such amounts advanced and no distributions or payments in liquidation shall be
made by or on behalf of the Company to the defaulting Party until such amount
together with interest has been repaid in full. The rights of the advancing
Party set forth in this Section 2.4 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.
2.5 CONTRIBUTIONS IN KIND
2.5.1 SIERRA GAME TITLES
Sierra will license and provide to the Company the computer
games and software of Sierra and its Affiliates as provided in the License
Agreement described in Section 4.2 below.
2.5.2 ENABLING TECHNOLOGY
In addition to their respective Capital Contributions, Loans
and the licenses described in Section 4.2 below, each Party shall also license
and provide to the Company during the
JOINT VENTURE AGREEMENT PAGE 4
<PAGE> 10
term of this Agreement on a non-exclusive, non-transferable, non-sublicensable,
royalty-free basis and solely for the internal use by the Company in the
development of the Company's games and products all development tools and
enabling technology reasonably useful for the creation and development of the
software products in the areas of computer games, consumer education,
edutainment or other similar consumer software products for use on personal
computers, video game machines and any new or emerging platform, such as 32-bit
CD-ROM game machines, that such Party is now or hereafter legally and
contractually entitled to so license or sublicense to the Company. A list of
such tools and enabling technology that as of the Effective Date each Party is
entitled to license or sublicense to the Company is set forth in Exhibit C. The
Company shall be obligated to keep all such tools and technology confidential as
provided in Section 10.1 and limit access to such tools and technology to
persons who have a need to know. The Parties shall notify the Company of any and
all third party royalties that will arise out of the Company'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 Party for any and all third
party royalties due on the Company's use of the same.
2.5.3 SERVICES
In addition, each Party shall contribute development, marketing and
management support to the Company at no charge. Pioneer shall transfer
experienced and qualified administrative staff and content producers from
Pioneer or its Affiliates to the Company and shall provide the Company with
access to the third-party software developers with whom Pioneer and its
Affiliates have been working to perform work for the Company on the same terms
and conditions used with Pioneer. Each Party shall also provide the Company at
no charge access to and use of the facilities of such Party that are useful for
the Company's development and publication of products (e.g., Pioneer's or
Sierra's audiovisual digital recording studios).
2.5.4 OPERATIONAL CONTACTS
Sierra, at its own expense, shall appoint one or more of its employees
to be dedicated solely to the activity of acting as the liaison and coordinator
between Sierra and the Company regarding the conduct of the Company's business
and the Company's dealings with Sierra pursuant to Section 4.
2.6 COMPANY CAPITAL
(a) No Party shall be paid interest on any Capital
Contribution.
(b) No Party shall have the right to withdraw, or receive any
return of, its Capital Contributions or Loans, except as may be specifically
provided in this Agreement. No Party shall have priority over the other Party,
either as to the return of its Capital Contributions or Loans or as to profits,
losses or distributions, except as otherwise specifically provided in this
Agreement or under Applicable Laws.
JOINT VENTURE AGREEMENT PAGE 5
<PAGE> 11
(c) Under circumstances requiring a return of any Capital
Contribution or Loan, no Party shall have the right to receive property, other
than cash, except as may be specifically provided in this Agreement.
2.7 LOANS
After a request for an additional contribution to the Company (other
than the Initial Capital Contribution) is made as provided above, the Parties
shall discuss whether all or any portion of such contribution shall be made in
the form of a Loan. Upon the majority decision of the Board, each Party may
advance the approved portion in the form of a Loan, subject to such terms and
conditions as may be established by the Board with respect to such Loans (e.g.,
interest rate, liquidation preference and the like). In addition to such
contributions, the Company may borrow money from the Parties pro rata in
accordance with the number of Shares they own at such times and in such amounts
and upon such terms as shall be determined by a unanimous vote of the Parties or
the Board. No such Loan shall increase the interest of the Party making the Loan
in the capital of the Company, or affect any Party's Shares or share of the
profits, losses and distributions of the Company.
SECTION 3. MANAGEMENT
3.1 THE BOARD
The business of the Company shall be conducted in accordance with
policies, decisions, guidelines and budgets made or approved by the Board,
subject to the terms of this Agreement.
3.1.1 APPOINTMENT
The Board shall be composed of five (5) Directors. Sierra shall
designate three (3) Directors and Pioneer shall designate two (2) Directors.
Sierra and Pioneer shall each vote their Shares or otherwise cause the
appointment or election of the Directors designated by the other Party as
provided above. The initial Directors shall be:
Designated by Sierra: Mr. Michael Brochu
Mr. Al Higginson
Mr. Kenneth Williams
Designated by Pioneer: Mr. Kimihiko Sugano
Mr. Hajime Wada
3.1.2 TERM
Each Director shall hold office for a term expiring on his or her
death, resignation or removal from office or upon the expiration of such shorter
term as may be required under Applicable Laws.
JOINT VENTURE AGREEMENT PAGE 6
<PAGE> 12
3.1.3 REMOVAL
Any Party may at any time remove and replace any of the Directors
designated by it by giving written notice of the replacement to the other Party.
Sierra and Pioneer shall each vote their Shares or otherwise cause the removal
and replacement of a Director designated by the other Party as requested by that
Party.
3.1.4 BOARD MEETINGS
The Company shall hold regular quarterly Board meetings. In addition,
any Director may call a meeting of the Board by giving all other Directors
notice thereof at least ten (10) Business Days in advance of the meeting or such
shorter notice as agreed upon in writing by all Directors. All meetings of the
Board shall be held at the principal office of the Company or at such other
place as may be determined by the Board. To the extent permitted under
Applicable Laws, a meeting of the Board may be held by conference telephone or
similar communications equipment by means of which all Directors participating
in the meeting can hear each other at the same time; participation by such means
shall constitute presence at such meeting. There shall be a quorum if at least
one (1) Director designated by each Party is in attendance. Minutes shall be
kept of each Board meeting and provided to all Directors.
3.1.5 MANNER OF ACTING BY THE BOARD
To the extent permitted by Applicable Laws and subject to the terms of
this Agreement, the Board may act by consensus, by adoption pursuant to vote
taken at a meeting of the Board (any Director designated by a Party may vote by
proxy for any Director(s) designated by such Party who is absent), or by written
instrument signed by all Directors or signed by at least one (1) Director
designated by each Party.
3.1.6 VOTING OF THE BOARD
On each matter put to a vote of the Board, each Director present in
person or by proxy at the meeting shall be entitled to cast a vote. Except for
the matters described in Section 3.1.7 below, any matter put to a vote shall be
deemed adopted by the Board upon receiving the affirmative vote of three (3)
Directors including without limitation the following:
(a) approval of the Annual Business Plan and the Annual
Budget;
(b) approval of the Revised Annual Budget;
(c) the Company entering into contracts, borrowing from or
lending money, guarantee of any indebtedness or other obligation or acquisition,
sale, disposition or encumbrance (e.g., by easement, mortgage, deed of trust,
security agreement or otherwise) of any property, in each case (i) in the
ordinary course of business, (ii) involving amounts up to 30 million yen, and
(iii) which was not contemplated or authorized in the applicable Annual Budget
or Annual Business Plan;
JOINT VENTURE AGREEMENT PAGE 7
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(d) the authorization of any person or entity (other than the
President), or the delegation of any authority (e.g., by appointment of an agent
or otherwise), to enter into any contract on behalf of the Company not otherwise
in contravention of the terms of this Agreement,
(e) approval of the President and all other officers and key
management of the Company, and, if the Company has not achieved the anticipated
revenue and profit for two (2) successive fiscal years as set forth in the
Annual Budgets for such years, removal of the President and such officers and
key management;
(f) approval or changing the pricing of the Company's products
as proposed by the President from time to time;
(g) the establishment of Company bank accounts;
(h) calling for Capital Contributions or Loans pursuant to
Section 2.2 upon the occurrence of a Trigger Event; and
(i) calling for Capital Contributions or Loans pursuant to
Section 2.2 up to a maximum of 20 million yen per Party in any fiscal year in
the absence of a Trigger Event.
3.1.7 UNANIMOUS VOTING OF THE BOARD
The Company and its officers shall not have authority to do or take any
of the following actions without the unanimous approval of either the Board or
the Parties:
(a) sell, exchange or otherwise dispose of all or
substantially all of the assets of the Company;
(b) issue, sell or transfer any Shares or other equity or debt
interests in the Company to any third party;
(c) file for bankruptcy by or on behalf of the Company or
otherwise take action to dissolve the Company;
(d) consolidate or merge the Company with any other entity;
(e) except as expressly provided in this Agreement make calls
for Capital Contributions or Loans pursuant to Section 2.2 in the absence of a
Trigger Event or make any calls for Capital Contributions or Loans pursuant to
Section 2.3;
(f) any authorization of withdrawals from the capital of the
Company;
(g) any authorization of dividends, distributions or other
payments from the Company to any Party;
JOINT VENTURE AGREEMENT PAGE 8
<PAGE> 14
(h) the Company's borrowing or lending of money with either
Party or any Affiliate of a Party;
(i) entering into or amending any contract between the Company
and a Party or between the Company and any Affiliate of a Party;
(j) entering into any contracts granting a third party the
right to publish, distribute and license computer games and software products in
Japan or Asia;
(k) undertake any transaction out of the ordinary course of
business;
(l) the approval of any business or activity to be conducted
by the Company that is not permitted pursuant to subsection 3.1.6 above or that
is other than those specified in Section 1.4;
(m) the Company's entering into contracts, borrowing from or
lending money, guarantee of any indebtedness or other obligation or acquisition,
sale, disposition or encumbrance (e.g., by easement, mortgage, deed of trust,
security agreement or otherwise) of any property, that involve amounts greater
than 30 million yen and is either outside the ordinary course of business or not
contemplated or authorized in the applicable Annual Business Plan or Annual
Budget;
(n) amend, supplement or modify the Company Organization
Documents;
(o) removal of the President or any officer of the Company
except as authorized under Section 3.1.6(e); and
(p) sublicense or otherwise transfer any technology or
know-how of the Company or any rights therein, other than rights to reproduce,
use and distribute the Company's products, to any Party (except as expressly
provided in this Agreement) or any third party.
3.2 PRESIDENT
The President shall manage the day-to-day business and affairs of the
Company, recommend pricing for the Company's products and implement the
policies, decisions, guidelines, Annual Business Plans, Annual Budgets and other
acts of the Board; provided, however, the President shall not have the authority
to do or take any of the actions described in Sections 3.1.6 and 3.1.7 without
the advance approval of the Board or the Parties as provided therein. The
President 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
provided in this Agreement. In addition, the President 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 10 million yen (subject to an aggregate annual maximum amount of
10 million yen) 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
JOINT VENTURE AGREEMENT PAGE 9
<PAGE> 15
President shall also have the right to require additional Capital Contributions
or Loans in the above situations in amounts not greater than 10 million yen per
Party subject to a maximum of 20 million yen per Party in any fiscal year.
3.2.1 APPOINTMENT
The President shall be the individual nominated by Pioneer and approved
by the Board. The Parties agree that the initial President shall be Mr. Hajime
Wada.
3.2.2 TERM
The President 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.
3.2.3 REMOVAL
The President shall be removed upon the request of Pioneer or the
majority vote of the Board pursuant to Section 3.1.6(e) or the unanimous vote of
the Board. The replacement President shall be appointed as provided in Section
3.2.1.
3.3 AUDITORS
Each Party shall nominate one (1) individual to be a statutory auditor
(Kansayaku) to the Company. In the event Applicable Laws require the number of
statutory auditors to be increased, each Party shall nominate a second auditor.
Sierra and Pioneer shall each vote their Shares or cause the appointment or
election of the auditor(s) nominated by the other Party. The auditors shall have
the right to attend meetings of the Board and perform the other auditor
functions required under Applicable Laws, but such auditors shall not have any
voting rights.
3.4 RIGHTS OF PARTIES
Except as otherwise set forth in this Agreement, no Party 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 COMPENSATION
The President and the other officers and employees of the Company shall
be entitled to reasonable compensation as approved by the Board for services
rendered to the Company.
SECTION 4. COMPANY'S DEALINGS WITH PARTIES OR AFFILIATES
4.1 RIGHT OF COMPANY TO DEAL WITH PARTIES OR AFFILIATES
The Company may, upon the unanimous approval of the Board or the
Parties, enter into agreements, contracts or arrangements with one or more of
the Parties pursuant to which that Party
JOINT VENTURE AGREEMENT PAGE 10
<PAGE> 16
provides goods, technologies or services (including without limitation the
contributions identified in Section 2.5) 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 Party and shall be
embodied in a written agreement.
4.2 CROSS LICENSE OF SIERRA TITLES AND COMPANY TITLES
Within thirty (30) Business Days after the Effective Date, Sierra will
enter into and the Parties will cause the Company to enter into a written
license agreement in a form approved by the Parties ("License Agreement"), the
key terms of which are summarized below:
(a) Sierra will license to the Company the right to publish
and distribute for use on any platform and for use in Japan and Asia all
computer games and software products of Sierra and its Affiliates to the extent
that Sierra is now or hereafter legally and contractually entitled to license
the same to the Company;
(b) Sierra will license to the Company the right to adapt,
convert, localize, port and translate for use on any platforms and for use in
Japan and Asia all computer games and software products of Sierra and its
Affiliates to the extent that Sierra is now or hereafter legally and
contractually entitled to license the same to the Company and to publish and
distribute such games and products within Japan and Asia;
(c) Sierra will license to the Company the right to purchase
pre-packaged U.S. units of all Sierra computer games and software products to
the extent that Sierra is now or hereafter legally and contractually entitled to
license the same to the Company for distribution in Japan and Asia (a list of
the computer games and software products described in clauses (a) through (c)
that Sierra is legally and contractually entitled to license to the Company as
of the date of this Agreement are listed in the attached Exhibit D);
(d) the Company will pay Sierra on a quarterly basis a royalty
equal to ten percent (10%) of the gross revenue (minus credits and returns)
attributable to the Company's distribution and licensing of the computer games
and software products described in clauses (a) and (b) above;
(e) the Company will pay Sierra on a quarterly basis a
purchase price of approximately eighty percent (80%) of Sierra's then current
U.S. wholesale price F.O.B. (UCC terms) Sierra's shipping facility in the U.S.
(exclusive of duties, tariffs and freight) for the applicable product for the
computer games and software products described in clause (c) above;
(f) Sierra will license to the Company the rights necessary to
develop and engage in other lines of business in Japan and Asia related to the
activities described in clauses (a) through (c) above, including rights related
to music and merchandising (but not including hint books or strategy guides in
any form or media) and to use the trademarks and trade dress of Sierra in the
manner specified by Sierra with respect to such products and activities, each
only to the extent that Sierra is legally and contractually entitled to so offer
and license such rights to the Company.
JOINT VENTURE AGREEMENT PAGE 11
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Royalties for the Company's exercise of the license rights described in this
clause (f) shall be negotiated in good faith between Sierra and the Company.
(g) Except for rights and licenses that Sierra is legally or
contractually obligated to honor as of the Effective Date, the licenses
described in clauses (a) through (c) and clause (f) above will be exclusive with
respect to distribution of such products in Japan and nonexclusive with respect
to distribution of such games and products in the rest of Asia. The Company
shall have an option (the "Asia Option") during the twelve (12) month period
commencing January 1, 1996 to convert the Asia license from a nonexclusive basis
to an exclusive basis as described below, subject to any rights and licenses
that Sierra is legally or contractually obligated to honor as of such exercise,
provided the Parties have agreed upon a business plan for the relevant portion
of the Asia market. To exercise the Asia Option, the Company shall deliver a
proposed business plan to Sierra within such twelve (12) month period and the
Company and Sierra shall negotiate in good faith for a period of ninety (90)
days from such delivery regarding resolution of any objections that Sierra has
to such plan. The Company's exclusivity for the Asia market or any portion
thereof shall occur only if and when the Company and Sierra have agreed in their
respective sole discretion and in writing upon such business plan and the terms
of the exclusivity applicable to such arrangement. From the Effective Date
through the earlier of the end of such twelve (12) month period or the end of
the ninety (90) days negotiation period described above, Sierra will not enter
into any new exclusive distribution arrangement with any third party regarding
distribution rights of such Sierra products in Asia. Notwithstanding the
foregoing, until the beginning of the ninety (90) day negotiation period, Sierra
may enter into non-exclusive arrangements with third parties which have a term
not longer than twelve (12) months.During the ninety (90) day negotiation period
Sierra will not enter into any new arrangement with respect to distribution in
Asia. If the Company exercises the Asia Option and the parties reach agreement
as provided above, Sierra will assign to the Company and the Company will assume
and perform all distribution arrangements of Sierra in that portion of Asia
subject to such exclusivity to the extent such arrangements are assignable. If
the Company fails to exercise the Asia Option as provided above within such
twelve (12) month period or the Parties are unable to agree in writing for any
reason upon the business plan for Asia or the terms of exclusivity applicable to
such arrangements within the ninety (90) day negotiation period, Sierra may
enter into any exclusive or other arrangements it desires for all or any portion
of Asia and upon entering into such arrangements terminate the Company's right
to distribute within all or any portion of Asia;
(h) If Sierra or its successor obtains computer games and
software products through any major business combination including but not
limited to merger with or acquisition of or by a third party and such third
party has existing distribution arrangements in Japan or Asia with respect to
its games or products, Sierra or its successor will have the right to continue
any publication, distribution and other relationships in Japan and Asia that may
exist with respect to such existing and future games and products rather than
license the same to the Company as described above or to condition the licensing
of any such games and products to the Company upon the Company and the Parties
dedicating reasonably sufficient resources in Sierra's reasonable opinion
towards the promotion and marketing of such games and products in Japan and
Asia.
JOINT VENTURE AGREEMENT PAGE 12
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(i) The Company will exclusively license to Sierra the right
to publish and distribute outside Japan and Asia all computer games and software
products (and all rights necessary to develop and engage in other lines of
business related to such activities, including rights related to music,
merchandising and hint books) that the Company is legally and contractually
entitled to so offer and license to Sierra including without limitation the
games and products adapted, converted, developed, translated or ported by the
Company pursuant to clause (b) above;
(j) The Company will exclusively license to Sierra the right
to adapt, convert, localize, port and translate for use on different computer
platforms or for use outside Japan and Asia all computer games and software
products (and all rights necessary to develop and engage in other lines of
business related to such activities, including rights related to music,
merchandising and hint books) and to use the trademarks and trade dress of the
Company in the manner specified by the Company with respect to such products and
activities, each only to the extent that the Company is legally and
contractually entitled to so offer and license to Sierra and to publish and
distribute such games and products outside Japan and Asia;
(k) Sierra will pay the Company on a quarterly basis a royalty
equal to ten percent (10%) of the revenue attributable to Sierra's distribution
and licensing of the computer games and software products described in clauses
(i) and (j) above;
(l) Sierra and the Company ("licensee") shall each undertake
reasonable due diligence to identify any potential patent or copyright each may
infringe if it distributes the product of the other ("licensor") (or any
translation or other derivative work thereof) licensed under the License
Agreement in the licensee's permitted territory and shall promptly notify the
licensor of any such potential infringement. The licensee shall not distribute
or otherwise exercise its license rights with respect to such product in a
manner that would result in such infringement unless and until the licensor and
the licensee have determined and effected a commercially reasonable method of
avoiding or overcoming such infringement. If notwithstanding such due diligence
and efforts, a suit or proceeding is brought against the licensee based upon a
claim by a third party that the product of the licensor licensed by the licensee
under the License Agreement infringes a patent or copyright in the permitted
territory of the licensee, the licensor shall defend the licensee in such suit
or proceeding with regard to such claim and indemnify and hold the licensee
harmless from and with respect to any damages awarded against the licensee with
regard to such claim and reimburse the costs and expenses (including reasonable
attorneys' fees and costs) reasonably incurred by the licensee with the
licensor's consent with regard to such claim; provided that the licensee
promptly notifies the licensor of any such claim, tenders control over the
defense and settlement of such claim to the licensor and assists and cooperates
with the licensor regarding such claim. The licensee shall be responsible for
and reimburse to the licensor fifty percent (50%) of the costs incurred in
defending such claim (including reasonable attorneys' fees and costs) and the
amounts paid in settlement or awarded as damages with regard to such claim.
Notwithstanding the foregoing, the licensor shall have no obligation to defend
or indemnify the licensee hereunder to the extent such infringement occurs due
to (1) use of the product in combination with any product, equipment, software
or data not provided by the licensor under the License Agreement, (2) any
adaptation, alteration, modification or translation of the product not made by
the licensor or (3) any logo,
JOINT VENTURE AGREEMENT PAGE 13
<PAGE> 19
trademark, trade dress or name used with the product. The licensee shall be
obligated to defend, indemnify and hold harmless the licensor with respect to
any infringement claims based upon the matters identified in clauses (1), (2) or
(3) above, provided that the licensor promptly notifies the licensee of any such
claim, tenders control over the defense and settlement of such claim to the
licensor and assists and cooperates with the licensee regarding such claim;
(m) Within thirty (30) days of receipt of notice from either
the Company or Sierra about a particular product of such party that is subject
to the License Agreement, including those products identified in Exhibit D, the
receiving party shall notify the other about the platforms and language
translations of such product that the receiving party will publish, market and
distribute in its territory within nine (9) months after delivery of the
deliverables for such product. The notice commencing the thirty (30) day period
described above shall not be given before the receiving party has received a
copy of the product for evaluation. The licensing party shall have the right to
directly or indirectly publish and
JOINT VENTURE AGREEMENT PAGE 14
<PAGE> 20
distribute such product on all other platforms and languages not selected by the
other as provided above in the territory of the other on an exclusive or
nonexclusive basis as determined by the licensing party;
(n) In addition to its right of termination as a result of a
breach of the License Agreement by the Company, Sierra shall have the right, at
Sierra's option, to terminate the license granted to the Company under the
License Agreement if (i) the Company records a loss for any two (2) consecutive
fiscal years, commencing after the first fiscal year of the Company or (ii) the
Company's two consecutive fiscal year average pre-tax return on investment
(i.e., the Company's pre-tax net income for such fiscal year divided by the sum
of the aggregate Capital Contributions and Loans made in lieu of Capital
Contributions as of such fiscal year) does not equal or exceed fifteen percent
(15%), as calculated beginning at the end of the fourth fiscal year of the
Company, and for both of such years the Company fails to achieve the anticipated
revenue and net profit goals as set forth in the Annual Budgets;
(o) The License Agreement shall automatically terminate upon
the dissolution of the Company;
(p) In addition to the license fees and royalties described
above, the Company and Sierra shall each pay or reimburse the other for any and
all third party royalties due on products distributed by the Company or Sierra
that are licensed from the other as described above; and
(q) Sierra shall have the right to enter into OEM or other
similar bundling arrangements with regard to those Sierra products subject to
the License Agreement that are exclusive to the Company pursuant to clause (m)
above for world-wide or regional distribution that include distribution in
Japan, provided that Sierra notifies the Company about such arrangement and pays
to the Company that portion of the compensation received by Sierra from such
arrangement that is reasonably allocable to the distribution in Japan (and if
the Company has exercised the Asia Option that portion of Asia in which the
Company has exclusive rights as agreed with Sierra) less ten percent (10%) of
such amount as payment of the royalty to Sierra as described in clause (d)
above. Similarly, the Company have the right to enter into OEM or other similar
bundling arrangements with regard to those Company products subject to the
License Agreement that are exclusive to Sierra pursuant to clause (m) above
which are not based upon or derived from Sierra products for world-wide or
regional distribution that include distribution outside Japan and Asia, provided
that the Company notifies Sierra about such arrangement and pays to Sierra that
portion of the compensation received by the Company from such arrangement that
is reasonably allocable to the distribution outside Japan and Asia less ten
percent (10%) of such amount as payment of the royalty to the Company as
described in clause (k) above.
4.3 DISTRIBUTION AGREEMENT
Within thirty (30) Business Days after the Effective Date, Pioneer will
cause its Affiliate, Pioneer LDC, Inc. ("PLDC"), and the Parties will cause the
Company, to enter into a
JOINT VENTURE AGREEMENT PAGE 15
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written distribution agreement in a form approved by the Parties ("Distribution
Agreement"), the key terms of which are summarized below:
(a) PLDC will have the exclusive right to distribute in Japan
and, subject to the Company's exercise of the Asia Option, Asia all of the
products of the Company, provided, however, that such exclusivity or the
Distribution Agreement may be terminated by the Company upon an approval of a
majority of the Board if (i) the Company records a loss for any two (2)
consecutive fiscal years, commencing after the first fiscal year of the Company
or (ii) the Company's two consecutive fiscal year average pre-tax return on
investment (i.e., the Company's pre-tax net income for such fiscal year divided
by the sum of the aggregate Capital Contributions and Loans made in lieu of
Capital Contributions as of such fiscal year) does not equal or exceed fifteen
percent (15%), as calculated beginning at the end of the fourth fiscal year of
the Company, and for both such years the Company fails to achieve the
anticipated revenue and net profit goals as set forth in the Annual Budgets;
(b) PLDC will acquire the completed product units from the
Company at a price equal to forty-five percent (45%) of the Company's suggested
retail price for such product;
(c) PLDC will form a sales management team (comprised of at
least one person on an exclusive basis and other persons on a nonexclusive
basis) dedicated to the marketing, distribution and sale of the Company
products. The sales management team duties will include managing and working
with PLDC's field sales staff to effectively conduct product promotion,
merchandising (e.g., display and shelf arrangement) and sales campaign planning
for the Company's products. The sales management team will also participate in
the early stages of the Company's title planning and development to provide
information regarding customers;
(d) PLDC will use its sales, marketing and distribution
resources exclusively for the promotion, marketing, distribution and sale of the
Company's products and PLDC's own products in the area of computer games and
consumer education, edutainment or other similar consumer software products.
Without limiting the generality of the foregoing, PLDC will not distribute any
personal computer/game machine software product of a third party, unless the
Company is the licensee of such product. PLDC will use its best efforts to cause
third parties that approach PLDC about the distribution of such products to
enter into a license agreement with the Company;
(e) PLDC will have the right, with the approval of the
President or the Board, to appoint Pioneer or any third party as
sub-distributors of the Company's products in Japan and Asia;
(f) The Company reserves the right to distribute any or all of
its products in Japan and Asia if PLDC cannot or does not distribute such
product in accordance with the terms of the Distribution Agreement; and
(g) The Distribution Agreement shall automatically terminate
upon the dissolution of the Company, the termination of this Agreement or
Sierra's exercise of the Buyout Option pursuant to Section 7.3.
JOINT VENTURE AGREEMENT PAGE 16
<PAGE> 22
4.4 OTHER BUSINESS OF PARTIES
Except as expressly provided otherwise in this Agreement or the
agreements between the Company and any Party, the Parties may engage in business
ventures and activities of any nature and description, independently or with
others and whether or not in competition with the business of the Company.
Neither the Company nor any of the Parties shall have any rights in or to the
independent ventures and activities of other Parties, or the income or profits
derived therefrom, by reason of their acquisition of an interest in the Company
or their status as Parties.
4.5 COMPANY-DEVELOPED TECHNOLOGY
Each Party shall have a non-exclusive, royalty-free, perpetual license
to adapt, distribute, use, make, reproduce and sell all new technology developed
and owned by the Company (but not including any enabling technology provided to
the Company by the other Party or derived from or based upon the products or
technology provided to the Company by the other Party) for any purpose other
than those competitive with the Company's business. In addition, Sierra and its
Affiliates shall have a non-exclusive, royalty-free license to adapt and use the
enabling technology now or hereafter licensed to the Company by Pioneer as
provided in Section 2.5.2 above and all adaptations, additions, enhancements,
modifications and improvements thereto made by or for the Company (except for
any such enabling technology that Pioneer is now or hereafter legally or
contractually restricted from licensing or sublicensing to Sierra and its
Affiliates, such as any third party technology or technology developed by
Pioneer with a third party that Pioneer is not legally or contractually
permitted to license to Sierra) solely in connection with the creation,
development, manufacture and distribution of those products of Sierra and its
Affiliates that are related or similar to the products offered by Sierra to the
Company for license under the License Agreement, whether or not such product is
actually licensed by the Company; provided, however, that (i) Sierra and its
Affiliates shall not have the right to sublicense or authorize any third party
to use such enabling technology for any other purpose without the prior written
consent of the Company and Pioneer; (ii) Sierra and its Affiliates shall use
such enabling technology solely with respect to computer games and other
software products and not for hardware or other non-software use without the
prior written consent of the Company and Pioneer; and (iii) such enabling
technology shall be treated by Sierra and its Affiliates as the Confidential
Information of Pioneer in accordance with Section 10.1. Pioneer shall notify
Sierra of any and all third party royalties that will arise out of Sierra's use
of Pioneer's tools and technology and if Sierra proceeds to use such items,
Sierra shall pay or reimburse Pioneer for any and all third party royalties
arising out of Sierra's use of the same.
SECTION 5. DISTRIBUTIONS AND ALLOCATIONS
5.1 DISTRIBUTIONS
The Board will make distributions to the Parties as approved by a
majority vote of the Board in accordance with the terms of this Agreement. Any
such distribution shall be made among the Parties in proportion to the number of
Shares owned by each Party.
JOINT VENTURE AGREEMENT PAGE 17
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5.2 LIMITATIONS ON DISTRIBUTIONS
No distribution shall be made pursuant to Section 5.1 if, after the
distribution is made (a) the Company would be unable to pay its debts as they
become due or (b) liabilities of the Company (other than liabilities for which
recourse to creditors is limited to specific assets of the Company) would exceed
the fair market value of the Company's assets (net of any liabilities to which
those assets may be subject) or (c) the rights of Sierra or the Company under
Sections 4.2(n), 4.3(a) or 7.1 would be triggered or (d) the Company would be
unable to meet the then current Annual Business Plan or Annual Budget.
SECTION 6. INDEMNIFICATION
6.1 INDEMNIFICATION
To the fullest extent not prohibited by Applicable Laws, the Company
shall indemnify and hold harmless each Party from and against any and all
losses, claims, demands, costs, damages, liabilities (joint and several),
expenses of any nature (including attorneys' fees and disbursements), judgments,
fines, settlements, and other amounts arising from any and all claims, demands,
actions, suits, or proceedings, civil, criminal, administrative or
investigative, in which a Party may be involved, or threatened to be involved,
as a party or otherwise, arising out of or incidental to any business of the
Company transacted or occurring while that Party was a Party, as the case may
be, regardless of whether the Party continues to be a Party at the time any such
liability or expense is paid or incurred.
6.2 NONEXCLUSIVITY OF RIGHTS
The indemnification provided by this Section shall be in addition to
any other rights to which those indemnified may be entitled under any agreement
or vote of the Parties, as a matter of law or equity or otherwise, and shall
continue as to a Party who has ceased to be a Party, and shall inure to the
benefit of the heirs, successors, assigns and administrators of the Party so
indemnified.
6.3 INDEMNIFICATION OF OFFICERS, EMPLOYEES AND AGENTS
The Company shall indemnify and advance expenses to an officer,
director or employee of the Company to the same extent and subject to the same
conditions under which it may indemnify, and advance expenses, to Parties under
this Section 6, except to the extent arising out of the intentional misconduct
or knowing violation of Applicable Laws by such officer, director or employee.
SECTION 7. DISSOLUTION OF COMPANY; SPECIAL WITHDRAWAL RIGHT
7.1 EVENTS CAUSING DISSOLUTION
This Agreement shall terminate and the Company shall dissolve upon the
happening of any of the following events:
JOINT VENTURE AGREEMENT PAGE 18
<PAGE> 24
(a) the Bankruptcy of the Company unless the Parties, within
ninety (90) days of that event, unanimously agree to continue the Company;
(b) the sale or other disposition of all or substantially all
of the assets of the Company and the collection of all proceeds from that sale
or disposition;
(c) the vote of all Parties to dissolve the Company;
(d) either Party elects to dissolve the Company by written
notice to the other Party within sixty (60) Business Days after the end of the
Company's fiscal year if (i) the Company records a loss for any two (2)
consecutive fiscal years, commencing after the first fiscal year of the Company
or (ii) the Company's two consecutive fiscal year average pre-tax return on
investment (i.e., the Company's pre-tax net income for such fiscal year divided
by the sum of the aggregate Capital Contributions and Loans made in lieu of
Capital Contributions as of such fiscal year) does not equal or exceed fifteen
percent (15%), as calculated beginning at the end of the fourth fiscal year of
the Company, and for both such years the Company fails to achieve the
anticipated revenue and net profit goals as set forth in the Annual Budgets;
(e) either Party elects to terminate this Agreement after the
License Agreement described in Section 4.2 or the Distribution Agreement
described in Section 4.3 is terminated;
(f) upon the election of the nondefaulting Party, if the other
Party or the other Party's Affiliate is in default of its obligations under this
Agreement or the agreements described in Section 4 and fails to cure such
default within ninety (90) days of receipt of written notice of such default; or
(g) either Party elects to terminate this Agreement by giving
at least six (6) months' prior written notice of termination to the other Party
and makes the payment to the non-terminating Party as provided in Section 7.4
below; provided, however, that no termination under this clause (g) shall be
effective earlier than three (3) years after the date of this Agreement.
7.2 LIQUIDATION
7.2.1 PAYMENT
Upon a dissolution of the Company, the Parties or a
court-appointed trustee shall take full account of the Company's assets and
liabilities and the Company's property shall be liquidated as promptly as is
consistent with obtaining its fair value. The proceeds from the liquidation, to
the extent they are sufficient, shall be applied and distributed in the
following order and priority:
(i) First, to the payment and discharge of all of the
Company's debts and liabilities (other than those to the
Parties) including the establishment of any necessary
reserves;
JOINT VENTURE AGREEMENT PAGE 19
<PAGE> 25
(ii) Second, to the payment of any amounts advanced by a
Party pursuant to Section 2.4 above together with any interest
thereon as provided therein;
(iii) Third, to the payment of any and all Loans and the
Company's other debts and liabilities to the Parties; and
(iv) Finally, any remaining property and assets of the
Company shall be distributed among the Parties pro rata in
accordance with their Shares.
7.2.2 NO RIGHT TO ASSETS
Each Party shall look solely to the assets of the Company for
all distributions with respect to the Company, including the return of a Party's
Capital Contributions and a Party's share of cash, and shall have no recourse
therefor, upon dissolution or otherwise, against the other Party. Unless
otherwise agreed upon by both Parties and except as provided in Section 8.2.3
below, no Party shall have any right to demand or receive property other than
cash upon dissolution and termination of the Company.
7.2.3 ENABLING TECHNOLOGY
Upon dissolution of the Company or Sierra's exercise of the Buyout
Option: (i) the license to the enabling technology of each Party granted to the
Company under Section 2.5.2 and the license to Pioneer's enabling technology
granted to Sierra under Section 4.5 shall expire, (ii) the Company and Sierra
shall destroy or return the licensed enabling technology it received to the
licensing party and cease all subsequent use of such licensed enabling
technology except that the Company and Sierra may continue for a period of
eighteen (18) months after effective date of such dissolution or exercise to
distribute products incorporating such technology that were made before
dissolution or such exercise as provided in Section 7.2.4 below, and (iii) title
to all technology of the Company derived from or otherwise based upon the
enabling technology licensed to the Company by a Party and all associated
copyright, patent and other intellectual property rights shall be transferred
and distributed to that Party.
7.2.4 RIGHTS TO COMPANY-DEVELOPED PRODUCTS AND TECHNOLOGY
Upon dissolution of the Company, title to all technology and
products of the Company derived from or otherwise based upon technology or
products licensed to the Company under the License Agreement and all associated
copyright, patent and other intellectual property rights shall be transferred
and distributed to Sierra, provided, however, that Pioneer shall have a
nonexclusive royalty-bearing license to reproduce and distribute such products
in Japan and, if Pioneer has exercised the Asia Option, Asia for a period not
greater than two (2) years, subject to the payment to Sierra of a royalty of
five and one-tenth percent (5.1%) of the gross revenue (less returns and
refunds) realized by Pioneer from such activity. Upon dissolution of the
Company, title to all other technology and products developed and owned by the
Company and all associated copyright, patent and other intellectual property
rights shall be transferred and distributed to and owned by the Parties in equal
undivided shares. Sierra shall have the perpetual royalty-free right to
JOINT VENTURE AGREEMENT PAGE 20
<PAGE> 26
adapt, convert, localize, port, translate and reproduce such technology and
products and to use and distribute such products outside Japan and, if the Asia
Option has been exercised, Asia for the first year after dissolution and
world-wide thereafter. Pioneer shall have the perpetual, royalty-free right to
adapt, convert, localize, port, translate and reproduce such technology and
products and use and distribute such products within Japan and Asia for the
first year after dissolution and world-wide thereafter.
7.2.5 USE OF OTHER PARTY'S NAME
Except for Pioneer's continued use (in the same manner as used by the
Company) of the trademark and trade dress of Sierra on the products distributed
by Pioneer after the dissolution of the Company as provided in the first
sentence of Section 7.2.4 above, neither Party shall use the trademarks, trade
name or trade dress of the other Party without the prior written consent of the
other Party.
7.3 BUY-OUT OPTION
Upon the occurrence of any of the dissolution events described in
Section 7.1 above, Sierra shall have an option ("Buyout Option") before the
effective date of such dissolution to buy all of Pioneer's Shares at the then
current fair market value of the Shares (if the Parties cannot agree upon such
fair market value, either Party may elect to have such determination made
pursuant to the arbitration procedure described in Section 9).
7.4 TERMINATION PAYMENT
In the event this Agreement is terminated by a Party pursuant to
Section 7.1(g) above, the non-terminating Party shall be entitled to receive the
greater of (i) the liquidation proceeds of the Company payable to such Party
under Section 7.2 above, (ii) the payment determined under Section 7.3 above if
the Buyout Option has been exercised and Sierra is the terminating Party, (iii)
the amount of the non-terminating Party's aggregate investment in the Company
(both Capital Contributions and Loans) as of the date of termination plus
interest thereon from the date(s) such investments were made until the date
repaid at the prime commercial rate quoted by the Bank of America, N.A. or its
successor as of the effective date of termination or (iv) two times the revenue
of the Company for the twelve (12) months preceding such termination times the
fraction the denominator of which is the aggregate investment (both Capital
Contributions and Loans made in lieu of Capital Contributions) of both Parties
in the Company and the numerator of which is the aggregate investment (both
Capital Contributions and Loans made in lieu of Capital Contributions) of the
non-terminating Party in the Company. The terminating Party shall be responsible
for payment of any shortfall between the proceeds of the Company paid to the
non-terminating Party under Section 7.2 or, if applicable, Section 7.3 and the
amount payable to the non-terminating party as described above.
JOINT VENTURE AGREEMENT PAGE 21
<PAGE> 27
SECTION 8. BOOKS, RECORDS AND ACCOUNTING
8.1 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 both Parties, 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 Parties 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 both Parties. The
Company will provide each Party with unaudited English language 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 Party ), within ten (10
Business Days after the end of each calendar month and quarter and audited
English language annual financial statements of the Company within forty (40)
Business Days after the end of each fiscal year.
8.2 FISCAL YEAR
The Company's fiscal year shall be from April 1 through March 31.
8.3 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 President or an individual authorized by the Board.
8.4 ANNUAL BUDGET
8.4.1 ANNUAL BUDGET PLANNING
No later than thirty (30) Business Days prior to the first day of each
fiscal period of the Company (or within thirty (30) Business Days after the
Effective Date with respect to the 1995 budget), the President 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 President 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". If during the course
of a fiscal year (i) a significant change of any Annual Budget number is
expected or (ii) a loss from operation is expected at the end of such fiscal
year, the President shall immediately notify the Board
JOINT VENTURE AGREEMENT PAGE 22
<PAGE> 28
of a revised version of the Annual Budget (which may include reduced expenses)
to address the problem and avoid such loss. The revised Annual Budget approved
by the Board is referred to herein as the "Revised Annual Budget."
8.4.2 REVIEW OF ANNUAL PERFORMANCE
Within thirty (30) Business Days after the end of each fiscal year of
the Company, the President shall submit to the Board and each Party audited
financial information and a comparison analysis with the Annual Budget (or
Revised Annual Budget).
8.5 ANNUAL BUSINESS PLAN
No later than thirty (30) Business Days prior to the first day of each
fiscal year of the Company, the President 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 President 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 President 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 in Japan and Asia during 1995 and 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.
SECTION 9. DISPUTE RESOLUTION
9.1 GENERAL
If any dispute arises between the Parties relating to this Agreement or
the Company, the Parties will follow the procedures set forth in this Section 9,
unless otherwise agreed by the Parties at the time the dispute arises. However,
either Party may commence litigation within thirty (30) days prior to the date
after which the commencement of litigation would be prohibited by any statute of
limitations or other law, rule, regulation, or order of similar import or in
order to request injunctive or other equitable relief necessary to prevent
irreparable harm. In such event, the Parties will (except as may be prohibited
by judicial order) nevertheless continue to follow the procedures set forth in
this Section 9.
9.2 UNASSISTED SETTLEMENT
A Party seeking to initiate the procedures under this Section 9 will
give written notice thereof to the other Party. Such notice will state that it
is initiating the procedures under this Section 9, describe briefly the nature
of the dispute, describe briefly the notifying Party's claim or position in
connection with the dispute. The Parties will promptly make such investigation
of the dispute as they deem appropriate. The Parties will meet, with each Party
represented by an officer
JOINT VENTURE AGREEMENT PAGE 23
<PAGE> 29
at the level of Vice President or General Manager or higher, and will use good
faith efforts to resolve the dispute. If the dispute has not been resolved
within thirty (30) days after commencement of such discussions, then either
Party may submit the dispute to arbitration under Section 9.3.
9.3 ARBITRATION AND COSTS
If any dispute is not resolved after compliance with the procedures set
forth in Section 9.2, then either Party may submit the dispute to arbitration to
a single arbitrator (if the Parties can agree upon such arbitrator) or to a
panel of three (3) arbitrators, with each Party selecting one arbitrator and the
two arbitrators so selected choosing the third, in accordance with the
Conciliation and Arbitration Rules of the International Chamber of Commerce.
Unless otherwise agreed by the Parties, any arbitration hearing will be held at
a location convenient to both Parties in Tokyo, if Sierra initiates such
arbitration, and in Seattle, if Pioneer initiates such arbitration. Any award
made by the arbitrator(s) will be final and binding and may be entered as a
judgment in any court having jurisdiction. The arbitration proceedings shall be
conducted in the English language.
9.4 COSTS
Costs of the arbitrator(s), the court reporter, hearing rooms and other
common costs will be paid as determined by the arbitrator(s). If the
arbitrator(s) does not make such a determination, such costs will be divided
equally between the Parties. Each Party will bear the expense of preparing and
presenting its own case in connection with the arbitration and/or mediation
(including, but not limited to, its own attorneys' fees and costs of witnesses).
SECTION 10. MISCELLANEOUS
10.1 CONFIDENTIALITY
Each Party 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 Party or the Company as it uses to protect its own
Confidential Information of a like nature. Without limiting the generality of
the foregoing, each Party 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 Party 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 Party 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 Party or the other Party, 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.
JOINT VENTURE AGREEMENT PAGE 24
<PAGE> 30
10.2 PRESS RELEASES
Neither Party shall make any public announcements regarding this
Agreement, the formation of the Company or the other activities contemplated
hereunder without first providing the other Party the proposed text of such
announcement and obtaining the approval of the other Party, which approval shall
not be unreasonably withheld.
10.3 GOVERNING LAW
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED UNDER THE LAWS OF THE
STATE OF WASHINGTON, WITHOUT REFERENCE TO ITS CHOICE OF LAW RULES.
10.4 ASSIGNMENT
Neither Party shall assign its interests or rights under this
Agreement, by operation of law or otherwise, without the prior written consent
of the other Party; provided, however without relinquishment of its liability
under this Agreement either Party may assign this Agreement to an Affiliate who
agrees in writing to assume all of that Party's rights and obligations under
this Agreement. Subject to the foregoing restriction on assignment, this
Agreement shall be fully binding upon, inure to the benefit of and be
enforceable by each Party and its permitted successors and assigns.
10.5 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. 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. Both parties have had an
adequate opportunity to review this Agreement with their respective counsel and
negotiate the terms hereof and accordingly this Agreement shall not be construed
against either party as the drafter of this Agreement.
10.6 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.
10.7 NO PARTNERSHIP
Neither Party will represent or hold itself out as an employee, agent,
or franchisee of the other Party. Neither Party will be entitled to and will not
attempt to create or assume any obligation, express or implied, on behalf of the
other Party. This Agreement will not be interpreted or construed as creating or
evidencing any association, or partnership among the Parties or as imposing any
partnership or franchisor obligation or liability on either Party.
JOINT VENTURE AGREEMENT PAGE 25
<PAGE> 31
10.8 ENTIRE AGREEMENT
This Agreement, the License Agreement and the Distribution Agreement
set forth the entire agreement of the Parties regarding the subject matter
hereof and supersede all prior agreements and understandings between the
Parties. No amendment of any of the provisions of this Agreement will be valid
unless set forth in a written instrument signed by both Parties.
10.9 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):
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 Pioneer: Pioneer Electronic Corporation
4-1 Meguro 1-Chome
Meguro-ku, Tokyo 153
JAPAN
Attn: Mr. Kimihiko Sugano
General Manager, "LaserActive" Div.
Tel. 03-3495-9861
Fax 03-3495-9864
JOINT VENTURE AGREEMENT PAGE 26
<PAGE> 32
and with a copy to: Pioneer Electronic Corporation
4-1 Meguro 1-Chome
Meguro-ku, Tokyo 153
JAPAN
Attn: Mr. Masaaki Shishikura
General Manager, Legal Affairs
Tel. 03-3495-4927
Fax 03-3495-4428
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. Either Party may change its respective
addresses and facsimile number by giving notice to the other Party as provided
in this Section.
10.10 WAIVERS
No waiver of any right, obligation or default will be implied, but must
be in writing, signed by the Party against whom the waiver is sought to be
enforced. 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.
10.11 ATTORNEY FEES
In the event suit or arbitration is instituted to enforce any of the
terms of this Agreement, the prevailing Party shall be entitled to recover from
the other Party such sum as the court or arbitrator(s) may determine reasonable
as attorneys' fees, in addition to all other sums provided by law.
10.12 CHOICE OF LANGUAGE
The original of this Agreement has been written in English. The Parties
waive any right each may have under the laws of Japan or any other jurisdiction
to have this Agreement written in any other language.
10.13 EXHIBITS
Exhibits A, B, C and D are attached to and by this reference made a
part of this Agreement.
JOINT VENTURE AGREEMENT PAGE 27
<PAGE> 33
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
Sierra: Pioneer:
SIERRA ON-LINE, INC. PIONEER ELECTRONIC CORPORATION
By ___________________________ By ____________________________
Title ________________________ Title _________________________
JOINT VENTURE AGREEMENT PAGE 28
<PAGE> 34
EXHIBIT A
DEFINED TERMS
The defined terms used in the Agreement shall, unless the context
otherwise requires, have the meanings specified in this Exhibit A. The singular
shall include the plural and the masculine gender shall include the feminine and
neuter, and vice versa, as the context requires.
"AFFILIATE" means any Person that controls, is controlled by, or is
under common control with a Party. In the case of a corporation, a Person will
be deemed to control that corporation if such Person owns, or has the right to
vote, stock in the corporation sufficient to elect a majority of the members of
the corporation's board of directors.
"AGREEMENT" means the agreement of which this Exhibit A is a part.
"ANNUAL BUDGET" shall have the meaning set forth in Section 8.4 of the
Agreement.
"ANNUAL BUSINESS PLAN" shall have the meaning set forth in Section 8.5
of the Agreement.
"APPLICABLE LAWS" means all laws, statutes, rules and regulations of
any governmental authority having jurisdiction regarding the applicable matter.
"ASIA" means Peoples Republic of China, Hong Kong, Taiwan, South Korea,
Singapore, Thailand, Malaysia, Indonesia, Philippines and Vietnam.
"ASIA OPTION" shall have the meaning set forth in Section 4.2(g) 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
Applicable Laws or an admission by such person of such person's inability to pay
its debts as 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 Applicable Laws against such person.
"BOARD" means the board of directors or equivalent of the Company.
"BUSINESS DAY" means any Monday through Friday except for any such days
that are national holidays in the United States or Japan.
"BUYOUT OPTION" shall have the meaning set forth in Section 7.3 of the
Agreement.
EXHIBIT A TO JOINT VENTURE AGREEMENT PAGE 1
<PAGE> 35
"CAPITAL CONTRIBUTION" means, with respect to any Party, the amount of
money contributed or to be contributed as equity to the Company.
"COMPANY" shall have the meaning set forth in Section 1.1 of the
Agreement.
"COMPANY ORGANIZATION DOCUMENTS" shall have the meaning set forth in
Section 1.1 of the Agreement.
"CONFIDENTIAL INFORMATION" means any type of information or material of
one Party or the Company (the "Discloser") that is disclosed to the other Party
or the Company (the "Recipient") as a consequence of or through its
participation in the activities anticipated by this Agreement, the License
Agreement or the Distribution 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 or the License Agreement shall be
deemed to be the Confidential Information of the licensing Party 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 strategies, and information entrusted to a Party 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 Recipient; (c) is rightfully received by 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.
"DIRECTOR" means an individual who is a voting director or member of
the Board.
"DISCLOSER" shall have the meaning set forth in the definition of
Confidential Information.
"DISTRIBUTION AGREEMENT" shall have the meaning set forth in Section
4.3 of the Agreement.
"INITIAL CAPITAL CONTRIBUTION" shall have the meaning set forth in
Section 2.1 of the Agreement.
"LICENSE AGREEMENT" shall have the meaning set forth in Section 4.2 of
the Agreement.
"LOAN" means a loan made by a Party to the Company pursuant to Section
2.7 of the Agreement.
"PLDC" shall have the meaning set forth in Section 4.3 of the
Agreement.
EXHIBIT A TO JOINT VENTURE AGREEMENT PAGE 2
<PAGE> 36
"PRESIDENT" means the person designated or selected to manage the
affairs of the Company under Section 3.2 hereof.
"PARTY" means each of the parties who executes a counterpart of this
Agreement and any successors or assigns.
"RECIPIENT" shall have the meaning set forth in the definition of
Confidential Information.
"REVISED ANNUAL BUDGET" shall have the meaning set forth in Section 8.4
of the Agreement.
"SHARE" means a share of voting common stock of the Company.
"TRIGGER EVENT" shall mean any of the trigger events described in
Section 2.2 of the Agreement.
EXHIBIT A TO JOINT VENTURE AGREEMENT PAGE 3
<PAGE> 37
EXHIBIT B
TIME SCHEDULE FOR ADDITIONAL AGREEMENTS
<TABLE>
<CAPTION>
Agreement Section Reference Completion Date
- --------- ----------------- ---------------
<S> <C> <C>
Company Organization Documents Section 1.1 As reasonably practicable after
Effective Date
License Agreement Section 4.2 30 Business Days after Effective Date
Distribution Agreement Section 4.3 30 Business Days after Effective Date
1995 Annual Budget Section 8.4 30 Business Days after Effective Date
1995 Business Plan Section 8.5 30 Business Days after Effective Date
</TABLE>
EXHIBIT B TO JOINT VENTURE AGREEMENT PAGE 1
<PAGE> 38
EXHIBIT C
SOFTWARE DEVELOPMENT TOOLS AND ENABLING TECHNOLOGY
BEING LICENSED TO THE COMPANY
By Sierra:
Technology
1. Method & Means for Computer Synchronization of Actions & Sounds.
2. Method & Apparatus for Relating Messages & Actions in Interactive
Computer Games & Resulting Game.
3. Computer Simulation Playback Method & Simulation.
4. System & Methods for Intelligent Movement of Objects on Computer
Displays.
5. Speech Synchronized Animation.
6. Teaching Aid Having Tactile Feedback.
7. Authoring and Use Systems for Sound Synchronized Animation.
8. Voice Animation System.
9. Speech Animation and Inflection System.
10. Computerized Puzzle Gaming Method & Apparatus.
11. Camera Angle Management System ("CAMS").
12. "3-space" technology - 3-dimensional technology.
Development Tools & Other
1. "3-Space" library, header file, etc.
2. Sierra Compiler Interpreter ("SCI") - including Sierra's proprietary
SCI language.
3. Sierra Compiler ("SC") - builds interpretive code.
4. Picture View Editor - draws pictures.
C-1
<PAGE> 39
5. Tools for looking at wave samples (digital audio).
6. SMP - tool for creating midi files.
7. Font editors - creates proprietary fonts.
8. VMD - builds video, music and data from AVI files (AVI = audio visual
interleaved or mixed into one track).
9. Graphics Tools or Make PICS - loads formats of pictures.
10. ROBOT Tool Maker - creates ROBOTS from AVI (ROBOTS = AVI with
positioning).
By Pioneer:
1. Software Development Tools
Video editing tools (ex. Video Disc Recorder, TV Monitor)
Audio editing tools (ex. Digital Tape Recorder, Amplifier)
2. Access Free Equipment
Video editing digital studio (629 studio) Audio editing
digital studio (Media Garden Studio)
3. Access Free Technology
High quality audio technology
High quality video technology
Three dimension video technology
Virtual 3D video translation technology
3D video playback technology
Authoring system technology
Laser Active authoring system
Laser Active operating system
Computer Network Technology
Large capacity computer database technology
(ex. Recordable 500 CD-ROM changer technology)
Video database technology
(ex. Video Disc Recorder, Laser Disc, Digital Video Disc)
4. Others
Free access to Pioneer's marketing database
(ex. A trend of computer market)
Dispatching talented persons for software development,
marketing and management, etc.
C-2
<PAGE> 40
EXHIBIT D
LIST OF SIERRA COMPUTER GAMES AND PRODUCTS
LICENSABLE TO THE COMPANY AS OF THE EFFECTIVE DATE
The following comprises a preliminary list of Sierra software products expected
to be licensed to the Company subject to and in accordance with Section
4.2(a)-(c) of the Joint Venture Agreement:
Express - U.S. version of software from Sierra/Company to localize manual for
Japan.
Mother Goose Deluxe* Thexder II
Take a Break Pinball* Police Quest V**
Thexder* Gabriel Knight II**
Space Quest 6* Aces over Mountains*
Woodruff* Aces of the Deep II*
Kings Quest 7** Dr. Brain IV**
Trophy Bass** Torrin's Passage**
The Incredible Machine II** Last Dynasty*
3D Pinball** Metal Storm*
PlayToons** Earthsiege II*
Dr. Brain 3** Outpost 1.5*
Phantasmagoria**
Shivers**
Fully Localized - Company to fully localize title & manual for Japan (language
and culturally).
Woodruff*
Aces over Mountains*
Last Dynasty*
Metal Storm*
Earthsiege II*
Outpost 1.5*
KQ VII**
The Incredible Machine II**
PlayToons**
Phantasmagoria**
Torrin's Passage**
Shivers**
Talking Tutor: Reading**
Alphabet Blocks**
Trophy Bass**
D-1
<PAGE> 41
Set-Top Boxes - Company to redesign PC version for use with a Sega Saturn and/or
Sony Playstation.
Phantasmagoria
Baseball
Aces over Mountains
Earthsiege
As currently known. *Windows Only. **Windows & Mac
D-2
<PAGE> 1
EXHIBIT 11.01
SIERRA ON-LINE, INC. AND SUBSIDIARIES
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31, MARCH 31, MARCH 31,
1996 1995 1994
------------------- ---------------------- -------------
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Weighted average number of common
shares outstanding....................... 19,582 19,582 17,518 18,194 16,751 16,751
Common share equivalents:
Dilutive effect of stock options ........ 1,425 1,508 995 1,163 392 392
Dilutive effect of convertible debt ..... --- 1,919 --- 2,859 --- ---
--------- --------- --------- --------- --------- ---------
Total average common and common
equivalent shares.................... 21,007 23,009 18,513 22,216 17,143 17,143
========= ========= ========= ========= ========= =========
Net income ................................. $ 16,170 $ 17,375 $ 12,992 $ 15,107 $ (7,872) $ (7,872)
========= ========= ========= ========= ========= =========
Net income per common and common
equivalent share ........................ $ 0.77 $ 0.76 $ 0.70 $ 0.68 $ (0.46) $ (0.46)
========= ========= ========= ========= ========= =========
</TABLE>
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Juridsdiction of Incorporation
Name of Subsidiary or Organization
- ------------------ ---------------
<S> <C>
Dynamix, Inc. California
Bright Star Technology, Inc. Delaware
Interactive Associates, Inc. Delaware
Coktel Vision, S.A. France
Sierra On-Line, Limited United Kingdom
Sierra Dynamix International Sales Company, Inc. U.S. Virgin Islands
Arion Software, Inc. Texas
Green Thumb Acquisition Corp. Washington
Software Inspiration Limited England
Impressions Software, Inc.(1) Delaware
Papyrus Design Group, Inc. Massachusetts
PXL, Inc. Washington
Pixel Acquistion Corp.(2) Washington
Headgate, Inc. Utah
</TABLE>
__________________________
1 Impressions Software, Inc. is a wholly owned subsidiary of Software
Inspiration Limited.
2 Pixel Acquisition Corp. is a wholly owned subisidary of PXL, Inc.
<PAGE> 1
EXHIBIT 23.01
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
- ----------------------------------------------------
We consent to the incorporation by reference in Registration Statements No.
33-26637, 33-32998, 33-38236, 33-47013, 33-55586, 33-61187 and 333-01405 of
Sierra On-Line, Inc. on Form S-8, Registration Statements No. 33-61171 and
33-85122 of Sierra On-Line, Inc. on Form S-3 and the Registration Statements
No. 333-06559, 333-06627 and 333-07171 of CUC International Inc. on Form S-4
of our reports dated June 24, 1996, appearing in and incorporated by reference
in the Annual Report on Form 10-K of Sierra On-Line, Inc. and subsidiaries for
the year ended March 31, 1996.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of Sierra
On-Line, Inc. listed in Item 14(a)2. This financial statement schedule is the
responsibility of Sierra On-Line, Inc.'s management. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
DELOITTE & TOUCHE LLP
Seattle, Washington
July 1, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 40220
<SECURITIES> 48741
<RECEIVABLES> 57699
<ALLOWANCES> (14022)
<INVENTORY> 8054
<CURRENT-ASSETS> 154796
<PP&E> 26605
<DEPRECIATION> (15115)
<TOTAL-ASSETS> 178897
<CURRENT-LIABILITIES> 35947
<BONDS> 23389
0
0
<COMMON> 93018
<OTHER-SE> 24280
<TOTAL-LIABILITY-AND-EQUITY> 178897
<SALES> 156123
<TOTAL-REVENUES> 158177
<CGS> 32821
<TOTAL-COSTS> 135572
<OTHER-EXPENSES> (2720)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2690
<INCOME-PRETAX> 22635
<INCOME-TAX> 6465
<INCOME-CONTINUING> 16170
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16170
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.76
</TABLE>
