ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
Notice of Annual and Special Meeting of Stockholders
To Be Held on November 24, 1997
The Annual and Special Meeting of Stockholders of Encore Computer
Corporation, a Delaware corporation (the "Company"), will be held at the
Company's offices, Building No. 7 Auditorium, 1800 N.W. 69th Avenue, Fort
Lauderdale, Florida 33313-4499 on November 24, 1997, at 10:00 a.m. (local
time) to consider and act on the following matters:
1. To approve the proposed sale of substantially all of the assets
associated with the storage products business of the Company to Sun
Microsystems, Inc., a Delaware corporation and Sun Microsystems
International, B.V., a Netherlands corporation (collectively, "Sun")
pursuant to the terms and conditions of the Asset Purchase Agreement dated
as of July 17, 1997 among the Company, Encore Computer U.S., Inc., a
Delaware corporation, Encore International, Inc., a Delaware corporation and
Sun, a copy of which agreement is attached to the accompanying Proxy
Statement as Exhibit A (the "Asset Purchase Agreement"), and to authorize
such further action by the Company's Board of Directors and proper officers
as may in their discretion be necessary or desirable to carry out the
intents and purposes of the Asset Purchase Agreement (the "Sun
Transaction").
2. To elect six (6) directors.
3. To approve the selection by the Board of Directors of Coopers & Lybrand
L.L.P. as the Company's independent auditors for the fiscal year ending
December 31, 1997.
4. To transact such other business as may properly come before the meeting
or any adjournment or postponements of the meeting.
Stockholders of record at the close of business on October 31, 1997 will be
entitled to notice of, and to vote at, the meeting. The stock transfer books
of the Company will remain open. All stockholders are cordially invited to
attend the meeting.
By order of the Board of Directors,
Edward J. Baker, Secretary
October 31, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE AND
SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE ENCLOSED ENVELOPE IN
ORDER TO ASSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE AFFIXED
IF MAILED IN THE UNITED STATES.
TABLE OF CONTENTS
Introduction 3
Principal Stockholders 4
APPROVAL OF SUN TRANSACTION 5
General 5
Background and Reasons for the Sun Transaction 6
Liquidation Analysis 11
Opinion of Financial Adviser 12
Use of Proceeds; Gould Agreement 13
Business of Encore after the Sun Transaction 15
Accounting Treatment 17
Tax Consequences 17
The Asset Purchase Agreement 17
Vote Required; No Appraisal Rights 22
Market Prices for the Company's Common Stock 22
Selected Historical Financial Data 23
Selected Pro Forma Financial Data 24
Unaudited Pro Forma Consolidated Financial Statements 24
Incorporation of Certain Documents by Reference 29
ELECTION OF DIRECTORS 30
Compensation Committee Interlocks and Insider Participation 32
Executive Compensation 33
Director Compensation 38
Certain Relationships and Related Transactions 38
APPROVAL OF AUDITORS 42
OTHER MATTERS 42
PROPOSALS FOR 1998 ANNUAL MEETING 43
EXHIBITS
A. Asset Purchase Agreement among the Company, Encore US, Encore
International and Sun dated as of July 17, 1997, without exhibits except for
the Technology License Agreement to be entered into between the Company and
Sun upon consummation of the Sun Transaction and the respective Inducement
Agreements entered into between Gould Electronics Inc. and EFI
International, Inc., on the one hand, and Japan Energy Corporation, on the
other hand, with Sun.
B. Opinion of Genesis Merchant Group Securities LLC.
C. Liquidation Analysis of Price Waterhouse LLP.
D. 1996 Encore Annual Report to Stockholders.
E. Encore Quarterly Report on Form 10-Q for the quarter ended June 29,1997.
ENCORE COMPUTER CORPORATION
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313-4499
PROXY STATEMENT FOR ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 24, 1997
Introduction
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Encore Computer Corporation, a Delaware
corporation (the "Company') for use at the Annual and Special Meeting of
Stockholders to be held on November 24, 1997, at 10:00 a.m. (local time) and
at any adjournment or postponement of that meeting. All proxies will be
voted in accordance with the instructions contained in the proxy, and if no
choice is specified, the proxies will be voted in favor of the proposals set
forth in the Notice of Meeting and for the director nominees named in this
Proxy Statement. A person giving the enclosed proxy has the power to revoke
it at any time before it is exercised at the meeting by written notice to
the Secretary of the Company, by sending a later-dated proxy, or by revoking
it in person at the meeting.
The Board of Directors has fixed October 31, 1997 as the record date for
determination of stockholders entitled to vote at the meeting. At the close
of business on October 31, 1997, there were outstanding and entitled to vote
67,346,291 shares of the Company's Common Stock. Each share of Common Stock
is entitled to one vote.
This Proxy Statement principally relates to the proposed sale of
substantially all of the assets associated with the storage products
business of the Company to Sun Microsystems, Inc., a Delaware corporation
("SMI"), and Sun Microsystems International, B.V., a Netherlands corporation
(collectively with SMI, "Sun") pursuant to the terms and conditions of the
Asset Purchase Agreement dated as of July 17, 1997 among the Company, Encore
Computer U.S., Inc., a Delaware corporation ("Encore US"), Encore
International, Inc., a Delaware corporation ("Encore International" and,
collectively with the Company and Encore US, "Encore"), and Sun, a copy of
which agreement is attached to this Proxy Statement as Exhibit A (the "Asset
Purchase Agreement"), and to authorize such further action by the Company's
Board of Directors and proper officers as may in their discretion be
necessary or desirable to carry out the intents and purposes of the Asset
Purchase Agreement (the "Sun Transaction"). Under the Company's Certificate
of Incorporation, the affirmative vote of the holders of at least 75% of the
shares of Common Stock represented at the meeting and voting on the Sun
Transaction is required to approve the Sun Transaction. In addition, under
Delaware law, the affirmative vote of the holders of a majority of the
shares of Common Stock outstanding on the record date is required to approve
the Sun Transaction.
The election of directors at the meeting shall be determined by a plurality
of the votes cast in person or by proxy at the meeting by the holders of the
Common Stock. With respect to the selection of Coopers & Lybrand L.L.P. as
the Company's independent auditors, the affirmative vote of the holders of a
majority of the Common Stock represented at the meeting and voting on such
matter is required for approval.
In accordance with a Voting Agreement dated as of October 30, 1997 (the
"Voting Agreement") among the Company, Gould Electronics Inc. ("Gould"),
Kenneth G. Fisher and Indian Creek Capital, Ltd., a limited partnership of
which Mr. Fisher is the managing general partner ("Indian Creek"), Gould,
Mr. Fisher and Indian Creek have agreed to vote all shares of Common Stock
owned by them in favor of the Sun Transaction, and for the election of
Messrs. Fedor, Ferguson, Rich and Veysey, each of whom is a an officer of
Gould, as directors of the Company. All material terms of the Voting
Agreement are summarized herein. See "Approval of Sun Transaction - Use of
Proceeds; Gould Agreement". Together, Gould, Mr. Fisher and Indian Creek
own approximately 55.9% of the outstanding Common Stock as of the record
date for the meeting.
For purposes of the matters before the meeting, under the Company's By-Laws
a quorum consists of a majority of the shares of Common Stock outstanding on
the record date. Shares as to which a nominee (such as a broker holding
shares in street name for a beneficial owner) has no voting authority in
respect of a matter will be deemed represented for quorum purposes but will
not be deemed to be voting on such matter, and therefore will not be counted
as negative votes as to such matter. Votes will be tabulated by the
Company's transfer agent subject to the supervision of persons designated by
the Board of Directors as inspectors.
This solicitation is being made by the Company. The Company will bear all
costs in connection with the solicitation of proxies, including the cost of
preparing, printing and mailing this Proxy Statement. In addition to the
use of the mails, proxies may be solicited by the Company's directors,
officers and employees by personal interview, telephone or facsimile. Such
directors, officers and employees will not be additionally compensated, but
may be reimbursed for out-of-pocket expenses in connection with such
solicitation. Employees of the Company who assist in such activities will
not receive additional compensation in connection with these soliciting
activities. The Company has also retained Morrow & Co., Inc. ("Morrow") to
assist in the solicitation of proxies. Morrow will receive a fee of
approximately $5,000 for its solicitation services. Arrangements will also
be made with brokerage houses, banks and other custodians, nominees and
fiduciaries for the forwarding of solicitation material to the beneficial
owners of the Common Stock held of record by such persons, and the Company
may reimburse such persons for their reasonable out-of-pocket expenses.
The delivery of this Proxy Statement shall not, under any circumstances,
create any implication that there has been no change in the information set
forth herein or in the affairs of the Company or the terms of the Sun
Transaction since the date hereof. If, however, any material change occurs
during the period that the Proxy Statement is required to be delivered, this
Proxy Statement will be amended or supplemented accordingly.
The date of mailing of this Proxy Statement and related form of proxy is
expected to be on or about November 1, 1997.
Principal Stockholders
The following table sets forth, to the knowledge of the Company, the
beneficial owners of 5% or more of the Company's outstanding Common Stock
and equivalents as of September 29, 1997:
Percentage of
Shares the Class and
Name and Address Beneficially Equivalents Percentage of the
of Beneficial Owner Owned Outstanding (1) Class Outstanding
Gould Electronics Inc. (2)(5) 128,651,444 66.4% 10.5%
34929 Curtis Boulevard
Eastlake, OH 44095
EFI International Inc. (3)(5) 30,497,969 15.7% 0.0%
12 East 49th Street, Suite 1710
N.Y., NY 10017
Japan Energy Corporation (2)(3)(5) 159,149,413 82.1% 10.5%
10-1, Toranomon 2-chome,
Minato-ko, Tokyo, JAPAN
Kenneth G. Fisher (4) 7,305,006 3.7% 15.7%
6901 West Sunrise Blvd.
Fort Lauderdale, FL 33313-4499
Paul S. Rosenblum (6) 2,729,900 1.4% 7.3%
5400 Jefferson Highway
Harahan, LA 70123
(1) For purposes of computing the percentage of Common Stock and
equivalents outstanding, the 7,364,100 shares of Common Stock issuable upon
conversion of the outstanding shares of Series A Convertible Preferred Stock
("Series A Stock"), the 22,422,215 shares of Common Stock issuable upon
conversion of the outstanding shares of Series B Convertible Preferred Stock
("Series B Stock"), the 34,309,969 shares of Common Stock issuable upon
conversion of the outstanding shares of Series D Convertible Preferred Stock
("Series D Stock"), the 35,070,215 shares of Common Stock issuable upon
conversion of the outstanding shares of Series E Convertible Preferred Stock
("Series E Stock"), the 16,410,246 shares of Common Stock issuable upon
conversion of the outstanding shares of Series F Convertible Preferred Stock
("Series F Stock"), the 17,608,892 shares of Common Stock issuable upon
conversion of the outstanding shares of Series G Convertible Preferred Stock
("Series G Stock"), the 10,769,230 shares of Common Stock issuable upon
conversion of the outstanding shares of Series H Convertible Preferred Stock
("Series H Stock") and the 12,307,692 shares of Common Stock issuable upon
conversion of the outstanding shares of Series I Convertible Preferred Stock
("Series I Stock") have been included as well as, in the case of Mr. Fisher,
the 2,301,062 shares issuable upon exercise of options exercisable within 60
days after September 29, 1997.
(2) Includes 124,715,544 shares of Common Stock issuable upon conversion of
the shares of Series A Stock, Series B Stock, Series D Stock, Series E
Stock, Series F Stock, Series G Stock, Series H Stock and Series I Stock
held by Gould. The Series D, Series E, Series F, Series G, Series H and
Series I Stock is convertible only by a United States citizen or a
corporation or other entity owned in the majority by a United States
stockholder or in connection with an underwritten public offering. Gould is
a wholly-owned subsidiary of Japan Energy Corporation ("JEC"), which is a
Japanese corporation.
(3) Consists of or includes Common Stock issuable upon conversion of Series
D Stock held by EFI International Inc. ("EFI"). Conversion of the Series D
Stock is restricted as described in (2) above. EFI is a wholly-owned
subsidiary of JEC.
(4) Includes: 53,764 shares owned by Mr. Fisher's wife, 2,301,062 shares
which may be acquired by Mr. Fisher within 60 days after September 29, 1997
by exercise of stock options and 3,901,134 shares of Common Stock and
1,049,046 shares of Common Stock issuable upon conversion of the shares of
Series B Stock, each held by Indian Creek Capital.
(5) JEC may be deemed to be the beneficial owner of the shares owned by
Gould and EFI.
(6) Includes 1,199,100 shares held by R & L Equity Partners, 350,000 shares
held by Levy Rosenblum Family Foundation, 300,000 shares held by R & L Fixed
Income Partners, 100,000 shares held by Wilshire Realty Company, LP, and
50,000 shares held by United Distributors, Inc., which shares are
beneficially owned and controlled by Mr. Rosenblum.
In accordance with an Agreement dated July 17, 1997 between the Company and
Gould (the "Gould Agreement"), on October 30, 1997, Gould converted all of
its Series A Stock and Series B Stock into Common Stock and Indian Creek
converted all of its Series B Stock into Common Stock. As a result, on the
record date Gould owned 32,673,169 shares of Common Stock, representing
48.5% of the outstanding shares on that date. All material terms of the
Gould Agreement are summarized herein. See "Approval of Sun Transaction -
Use of Proceeds; Gould Agreement". On the record date, Mr. Fisher, his wife
and Indian Creek owned a total of 5,003,944 shares of Common Stock,
representing 7.4% of the outstanding shares on that date.
APPROVAL OF SUN TRANSACTION
General
Pursuant to the terms of the Asset Purchase Agreement, Encore has agreed to
sell to Sun substantially all of the assets associated with Encore's storage
products business (the "Storage Products Business") for a purchase price of
$185 million in cash (the "Cash Payment"), of which $150 million is payable
at closing and $35 million is payable on July 1, 1998. Pursuant to the
terms of the Gould Agreement, the Company will use a portion of the proceeds
to be received at the closing to (a) pay the principal amount of, and the
accrued interest on, the Company's indebtedness to Gould (the "Gould Debt"),
which is estimated to be approximately $90 million at the time of closing,
and (b) redeem the Company's outstanding Preferred Stock, all of which is
held by Gould and EFI and which has an aggregate liquidation preference over
the Common Stock in excess of $400 million, for $60 million, of which $25
million will be paid in cash at the closing of the Sun Transaction and the
balance will be paid by assigning to Gould the Company's right to receive
the $35 million in proceeds from Sun on July 1, 1998, subject to certain set-
off rights of Sun. See "The Asset Purchase Agreement." In connection with
the Sun Transaction, (i) Gould has agreed to take all actions necessary to
ensure that Encore remains solvent for a one-year period following the
closing of the Sun Transaction and (ii) Gould, EFI and JEC have agreed,
among other things, that, if within two years after the closing of the Sun
Transaction the Company commences an insolvency proceeding and the Sun
Transaction is challenged in that proceeding, that Gould, EFI and JEC will
indemnify Sun for losses arising therefrom. See "The Asset Purchase
Agreement."
Encore operates in various market segments of the information technology
industry. Encore's business includes the design, manufacture, sale and
service of storage and computer systems, software and other related
equipment on a worldwide basis. Encore's primary markets include the
mainframe and open systems storage market and real-time computing market.
Within the storage market, Encore has introduced massively scalable,
symmetric multiprocessor-based open systems products into four information
processing markets: (i) cross platform enterprise data storage; (ii)
mainframe storage; (iii) network attached storage; and (iv) open systems
storage. The assets of Encore associated with these products for the
storage market constitute the Storage Products Business which is being sold
to Sun.
Encore's real-time computer systems, which are not being sold to Sun, are
used for the acquisition, processing and interpretation of data primarily in
three market niches: (i) simulation; (ii) energy; and (iii) transportation.
Sales of real-time products and services were approximately $41 million in
fiscal 1996, and accounted for approximately 86% of Encore's net sales in
fiscal 1996. However, sales of real-time products continue to decline as
certain of the Company's traditional products have reached the end of their
product life cycle. Additionally, real-time service sales continue to
decline as a result of (i) the Company's prolonged decline in equipment
sales, (ii) the price competitiveness of the marketplace, (iii) the
completion of long running government programs and (iv) subsequent
deinstallation of systems.
After payment of Sun Transaction costs, restructuring and severance costs
and certain other expenses and payments to Gould, Encore expects to have
approximately $10 million in working capital (including $7.2 million in
cash) for its operations following the Sun Transaction. In connection with
the Sun Transaction, Sun will grant to the Company a fully paid-up, royalty-
free, non-exclusive license to use all the technology sold to Sun in the
Company's real-time business, subject to certain limitations. See "Business
of Encore After the Sun Transaction."
Sun is a leading supplier of enterprise network computing products including
desktop systems, servers, storage subsystems, software, microprocessors, and
a full range of services and support. Sun's products command a significant
share of a rapidly growing segment of the computer industry: networked
computing environments. Sun's products are used for many demanding
commercial and technical applications in various industries. Sun has
differentiated itself from its competitors by its commitment to the network
computing model and the UNIX operating system, its rapid innovation and its
open systems architecture. As of June 30, 1997, Sun's cash and cash
equivalents were $660,170,000 and Sun's net revenue and net income for its
fiscal year then ended were $8,598,346,000 and $762,420,000, respectively.
SMI is a Delaware corporation with its principal executive offices at 901
San Antonio Road, Palo Alto, California 94303.
Background and Reasons for the Sun Transaction
Background
During the late 1980's, product demand in the computer marketplace began a
migration away from more traditional proprietary computing technologies and
towards an open systems technology. Encore anticipated this market trend
and focused its research and development investments toward the development
of a new generation of computer system based on a state of the art open
system architecture. From 1991 through 1993, Encore spent approximately $76
million in research and development activities directed toward programs
aimed at bringing new open system products to market. During 1993, many
data processing users were only beginning to define their strategies for
implementing such technology and, as a result, demand for Encore's products
was weak. The Company conducted negotiations with Amdahl Corporation
("Amdahl") during the summer and fall of 1993 whereby Amdahl would purchase
the Company's Infinity 90 computer systems for resale. These negotiations
ceased in December, 1993. However, the Company conceived and developed an
IBM-compatible storage system, the Infinity SP, and started negotiations
concerning an arrangement whereby Amdahl would become a distribution partner
for the product.
On March 29, 1994, the Company announced an agreement with Amdahl of a five
year reseller agreement. That agreement was further amended on September
30, 1994 (as amended, the "Reseller Agreement"). The Reseller Agreement
granted Amdahl the right to distribute the Company's storage products under
the Amdahl brand. It also provided that Amdahl would receive exclusive
marketing and distribution rights to Encore's storage products.
After delivery of initial shipments of storage product and related spares,
Amdahl informed the Company of its decision to postpone further deliveries
until Amdahl's testing confirmed that the product included all the
performance, features and functionality it believed were required under the
terms of the Reseller Agreement. In addition, Amdahl refused to pay for
products delivered in 1994. The Company believed the products delivered to
Amdahl conformed fully with the terms of the Reseller Agreement and
continued requesting payment of all past due invoices and the resumption of
deliveries. In February 1995, the Company notified Amdahl of its intent to
terminate the Reseller Agreement. On March 29, 1995, Amdahl filed suit in
the Delaware Chancery Court, seeking to prevent the Company from terminating
the Reseller Agreement. On March 30, 1995, the Company and Amdahl entered
into a "stand-still" agreement to preserve the status quo until the
companies could more thoroughly discuss the contractual issues. On April
24, 1995, the companies jointly announced that they had reached an agreement
in principle as to the existing issues and the stand-still agreement had
been extended to allow sufficient time to document this agreement in
principle. However, the companies were unable to reach a final agreement.
On June 8, 1995, the Company announced the termination of the Reseller
Agreement. On September 19, 1995, Amdahl and the Company executed a
Stipulation of Dismissal as to the suit filed by Amdahl on March 29, 1995.
From the time negotiations with Amdahl began in July, 1993 through the
termination of the agreement in June, 1995, the Company borrowed from Gould
under various credit agreements a total of $135 million. No direct and/or
distributor sales of storage products occurred during this time period and
the Company recorded an $16 million write down of inventories purchased for
the Reseller Agreement. Losses reported by Encore over this same period
totaled $125 million.
Shortly thereafter, Encore embarked on a program to attract a significant
OEM/distribution partner to fill the role which Amdahl would have provided
by offering an extensive installed base and large sales force to penetrate
the market quickly with Encore's storage products. Negotiations began in
early 1996 with a prospective OEM and talks continued for the next several
months. The parties negotiated an agreement that appeared to Encore to be
acceptable to both parties. Based on the level of interest expressed in
Encore's storage products by the prospective OEM, Encore anticipated that a
closing of the agreement would occur in late summer, or early fall of 1996.
In May 1996, the prospective OEM announced that it had entered into a
relationship with another storage product vendor, whose product would have
been complementary with Encore's storage systems. The U.S. Justice
Department began an investigation of the relationship with the storage
product vendor, and Encore's negotiations with the prospective OEM ceased
immediately thereafter in the fall of 1996. For the eighteen month period
from the termination of the Amdahl agreement through December 1996, the
Company borrowed from Gould under various credit agreements an additional
$94 million. Research and development spending over the same eighteen month
period was $48 million as Encore continued to improve storage product
features and functionality. Direct/distributor sales did not penetrate the
marketplace, generating only $6 million in storage product revenues and
Encore reported losses totaling $117 million over this period.
The Company believes that the weakness of direct/distributor sales was due
primarily to potential customers' concern over the financial viability of
Encore. The computer storage industry is intensely competitive and is
characterized by rapid technological advances, decreasing product life
cycles and price reductions. The principal competitive factors in this
market are total system performance and functionality, quality, reliability,
price, compatibility/connectivity to other vendor systems, and service and
support. While Encore believed and continues to believe that its software
solution to storage gives it a competitive advantage, its competitors, which
include EMC, International Business Machines and Hitachi Data Systems, had
and continue to have greater financial, technical, marketing and
distribution resources.
In September of 1996, discussions were initiated with Sun. Sun initially
investigated Encore's storage product capabilities with a view to entering
into an OEM arrangement with Encore for the resale by Sun of the storage
products. After considering various alternatives, Sun decided to terminate
the OEM discussions and instead offered to purchase the assets of the
Storage Products Business. Sun considered and rejected a proposal to acquire
Encore itself, rather than the assets of the Storage Products Business, for
various economic, financial and strategic reasons. Negotiations between Sun
and the Company resulted in the execution of a non-binding Memorandum of
Understanding on May 28, 1997 and subsequently, on July 17, 1997, the
execution of the Asset Purchase Agreement.
During the period in which Sun was performing a technical evaluation of
Encore's storage products, the Board of Directors decided to engage an
investment banking firm to assist the Company in finding an alternative OEM
partner, a buyer for all of Encore or new investors in the Company. The
Company solicited at least five investment banking firms and engaged The
Blackstone Group LLP ("Blackstone") in the winter of 1996. The Company,
with the assistance of Blackstone, prepared a Confidential Investor
Memorandum which described Encore's products, technologies, capabilities,
markets, management and human resources. In early January 1997, Blackstone
contacted a list of companies which Blackstone believed could have potential
interest in the Company and distributed the Investor Memorandum to those
companies which indicated interest. Follow-up interest was indicated by
three companies, all of which had previous extensive discussions with Encore
about its storage products. One of these three companies made a repeat
visit to the Company's corporate headquarters in Ft. Lauderdale for detailed
presentations, discussions and evaluations. This resulted in an initial
proposal from that company of a potential business arrangement, which
included the contribution by Encore of its Storage Products Business, along
with its research and development and certain marketing capabilities, to a
joint venture entity in exchange for an equity interest in such entity. The
other company proposed that it would contribute management, procurement
requirements for the Storage Products Business and certain marketing and
overhead functions, also in exchange for an equity interest in such entity.
This proposal was determined by Encore's Board of Directors to be less
attractive than the potential arrangement being pursued with Sun due to,
among other things, the fact that no up-front consideration was proposed by
such other company to be paid to Encore or to Encore's stockholders in
connection with that transaction. Sun's interest in Encore was initiated and
developed by the Company independent of Blackstone's efforts.
Gould and its affiliates have for many years provided the funds which the
Company has used to finance its business. The Gould Debt is secured by a
first priority security interest in all of Encore's assets, including the
assets associated with the Storage Products Business (the "Gould
Collateral"). From 1989 through June 1997, the Company borrowed a total of
$399 million from Japan Energy Group (consisting of JEC, EFI and Gould)
through a series of credit agreements. In connection with its 1991
recapitalization, the Company licensed substantially all of its intellectual
property (including the intellectual property associated with the Storage
Products Business) to Gould on a royalty-free basis (the "Gould License").
Although the Company retained the exclusive use of the Encore intellectual
property subject to the Gould License through 1995, both Gould and the
Company currently have the right to use the Encore intellectual property
subject to the Gould License. Encore has the right to terminate the Gould
License upon, inter alia, (i) the repayment of the Gould Debt and
termination of the credit facility relating thereto and (ii) the conversion
by Gould of its Series B Stock into Series A Stock or Common Stock. Since
the events described in clause (i) and (ii) above will both occur upon the
consummation of the Sun Transaction, and Sun has separately elected to
require termination of the Gould License at closing of the Sun Transaction
(rather than assuming the same) per its rights under the Inducement
Agreement with Gould, the Gould License will terminate at closing of the Sun
Transaction. See "APPROVAL OF SUN TRANSACTION -- The Asset Purchase
Agreement." Since late 1996, the credit agreements have not provided
committed financing to the Company and all financing has been solely within
Gould's discretion. From early 1991 through June 1997, Encore recorded
losses totaling $394 million. As a result, the Company has not been able to
fund operations on its own, nor had the ability to pay back any debt owed to
Gould. Pursuant to the terms of the loan and security documents relating to
the Gould Debt, an event of default by the Company under such documents
(including, but not limited to, a payment default) creates a risk to Encore
that Gould will attempt to foreclose on the Gould Collateral, including the
assets associated with the Storage Product Business, and/or to exercise its
rights under the Gould License, either of which would, in the Company's
view, materially and adversely impair the value of, and the Company's
ability to conduct, the Storage Products Business. In addition, there
remains an ongoing risk that, if the Sun Transaction does not close, Gould
may attempt to seek to liquidate the Company, in which case (i) the Gould
Debt would be required to be repaid before any distribution to stockholders,
(ii) the Preferred Stock, by its terms, that is held by Gould is entitled to
priority above the Common Stock with respect to any remaining proceeds in a
liquidation of the Company and (iii) the Company does not believe any funds
would be available for holders of Preferred or Common Stock upon a
liquidation. See "Liquidation Analysis." In a letter to the Company dated
July 17, 1997, Gould confirmed that it was not obligated to provide any
additional financing to the Company but that so long as Gould was convinced
that the Sun Transaction would take place, it was likely that Gould would
continue to provide financing to the Company but only to the extent
absolutely necessary to enable the Sun Transaction to be consummated.
However, the letter stated that if either (i) a meeting of the Company's
stockholders for the purpose of voting upon the Sun Transaction is held, but
the vote required to approve the transaction is not obtained, or (ii) a
meeting of the Company's stockholders for the purpose of voting upon the Sun
Transaction is not held by November 30, 1997, then Gould would not provide
any further financing to the Company after the day of the meeting of the
Company's stockholders (or after November 30, 1997, if the meeting is not
held by that date). In addition, Sun has indicated to the Company that if
the vote of the Company's stockholders required to approve the Sun
Transaction is not obtained, Sun will explore alternative business
strategies and courses of action presently available to it and will not
engage in any further negotiations with the Company concerning the purchase
of the assets of the Storage Products Business.
In January 1997, the Company's independent auditors expressed substantial
doubt about the Company's ability to continue as a going concern in light of
(i) recurring operating losses and net capital and working capital
deficiencies, (ii) the Company's inability to generate cash flows sufficient
to make the required repayment of the Gould Debt and (iii) the lack of a
committed source of financing to meet expected future requirements. The
Company will use the proceeds from the Sun Transaction to eliminate the
Gould Debt and improve working capital and shareholders' equity, and will
also restructure the organization and operations of the Company following
the Sun Transaction. See "Use of Proceeds; Gould Agreement".
Reasons for the Sun Transaction
The Company's Board of Directors has unanimously concluded that the Sun
Transaction is in the best interests of the Company and its stockholders.
Accordingly, the Board of Directors unanimously approved the Sun Transaction
at a special meeting held on July 16, 1997. In arriving at such conclusion,
the Board considered a number of factors, including the fairness of the
terms of the transaction to the Company from an economic standpoint, the
alternatives to the Sun Transaction, including the liquidation of the
Company, the use of the proceeds of the Sun Transaction and the future
prospects of the Company. The Board of Directors is composed of Mr. Fisher
and Messrs. Thomas, Fedor and Ferguson. Messrs. Fedor and Ferguson are
representatives of Gould. See "Election of Directors."
Specific factors which the Board of Directors considered include the
following:
The demonstrated inability of the Company to successfully penetrate the
storage marketplace utilizing its direct sales and distributor sales
approach.
The history of the Company's inability to successfully attract OEM
partners to provide the necessary distribution channels required to
penetrate the storage marketplace.
The unwillingness of Gould to continue financing operating losses, as
subsequently confirmed by Gould's letter to the Company dated July 17, 1997.
The inability of the Company to obtain alternative financing sources,
other potential buyers and/or investors as evidenced by the lack of interest
generated from the efforts of Blackstone.
Based upon the opinion of Genesis Merchant Group Securities LLC
("Genesis") dated July 14, 1997 that, as of such date, the Cash Payment to
be paid for the Storage Products Business in the Sun Transaction is fair to
the Company from a financial point of view (a copy of the Genesis opinion is
attached as Exhibit B hereto, and the Company's stockholders are urged to
carefully read such opinion). See "Opinion of Financial Adviser."
The proceeds from the Sun Transaction will significantly improve the
Company's balance sheet. All Gould Debt will be repaid, and all outstanding
Preferred Stock, with an aggregate liquidation preference over the Common
Stock of $411 million, will be redeemed for $60 million. These balance
sheet improvements will significantly enhance the Company's ability to be
successful in its on-going real-time business and, alternatively, enhance
the value of the business in the event of a potential sale.
A determination by the Board of Directors that the proceeds from the
Sun Transaction would exceed the proceeds from a liquidation of the Company,
which determination was subsequently confirmed by the liquidation analysis
of Price Waterhouse LLP ("Price Waterhouse"). Price Waterhouse determined
that, as of June 29, 1997, the estimated liquidation value for the Company's
assets is $24.4 million (a copy of the Price Waterhouse liquidation analysis
is attached as Exhibit C hereto, and the Company's stockholders are urged to
carefully read such analysis). See "Liquidation Analysis."
The improbability of the Company becoming a profitable, cash generating
business on a sustained basis if it were to continue in the Storage Products
Business.
Upon completion of the Sun Transaction, (a) the Company will be required to
repay all its borrowings from Gould and related interest and (b) the Company
will redeem all the Series D through I Preferred Stock owned by Gould for
$60 million, of which $25 million will be paid at the closing and the
remainder will be by assignment to Gould of the $35 million payment Sun is
required to make on July 1, 1998 (but against which Sun is entitled to
offset any amounts to which it may be entitled from the Company because of
breaches of warranty or other claims).
When the Asset Purchase Agreement was signed on July 17, 1997, the Company's
borrowings from Gould were approximately $59.5 million plus unpaid interest
of approximately $14.7 million. Between that date and September 30, 1997,
Gould has had to lend the Company another $8.9 million to enable it to
continue its business, and it is anticipated that, between October 1, 1997
and the expected November 24, 1997 closing date of the Sun Transaction,
Gould will have to lend the Company approximately $9.7 million, increasing
the Company's total outstanding borrowings from Gould to approximately $76.1
million. Also, because the Company is not making any interest payments to
Gould, by November 24, 1997 the total unpaid interest will be approximately
$17.6 million. To the extent the Company's borrowings prior to completion
of the Sun Transaction are less or more than anticipated, the amount of Sun
Transaction proceeds the Company will retain will increase or decrease
accordingly.
Gould received Series B Preferred Stock with a liquidation preference of
$50.0 million in 1991 in exchange for cancellation of $25.0 million of
secured debt of the Company. Gould and an affiliated company received
Series C through Series I Preferred Stock with a total liquidation
preference of $370.0 million between 1991 and 1997 in exchange for
cancellation of a total of $365.0 million of secured debt from the Company,
and Gould exchanged the Series C Preferred Stock (which was mandatorily
redeemable by the Company) for an equal number of shares of Series D
Preferred Stock (which is not mandatorily redeemable). The remainder of the
shares of Series B Preferred Stock held by Gould (which has a liquidation
preference of $19.5 million) and of the Series D through I Preferred Stock
held by Gould or its affiliate (which has a liquidation preference of $41.1
million) was issued in lieu of cash dividends on the already outstanding
Series B and D through I Preferred Stock. In addition, Gould is entitled to
dividends totalling $29.5 million as to which the Company has been unable
even to issue additional Preferred Stock, because it has no surplus. Gould
will waive the right to these dividends if it receives the full $60 million
in redemption of its Series D through I Preferred Stock.
Even though the Sun Transaction will result in Gould and its affiliates'
Series D through I Preferred Stock being redeemed for less than 15% of its
liquidation preference (and less than 14% of the liquidation preference and
unpaid dividends of all the Encore Preferred stock owned by them when the
Asset Purchase Agreement was signed), Gould has taken a number of steps to
help facilitate the Sun Transaction. These include (i) agreeing to convert
its 73,641 shares of Series A Preferred Stock (each share of which has the
same rights upon liquidation as 100 shares of Common Stock) and all its
Series B Preferred Stock (with a total liquidation preference of
$69,462,800) into a total of 28,737,269 shares of Common Stock and to vote
those shares of Common Stock, together with 3,935,900 shares of Common Stock
Gould already owns, in favor of the Sun Transaction, (ii) agreeing with Sun,
among other things, to (x) indemnify Sun against losses due to breaches by
the Company of representations and warranties or covenants in the Asset
Purchase Agreement or losses relating to liabilities of the Company which
are not assumed by Sun, (y) indemnify Sun against losses due to any claim by
a shareholder, a creditor or a trustee in bankruptcy of the Company or an
affiliate that the sale of the assets of the Storage Products Business to
Sun constitutes a fraudulent conveyance, a fraudulent transfer or a
preference under any applicable state or federal law, including the United
States Bankruptcy Code, and (z) take all actions (including infusing
additional capital into the Company) required to ensure that the Company
remains solvent, and does not become the subject of an insolvency
proceeding, for one year after completion of the Sun Transaction, (iii)
agreeing to assign to Sun, at Sun's request, a license to use all the
Company's technology, which the Company issued to Gould in 1991 in exchange
for cancellation of $30.0 million of secured debt; and (iv) agreeing that if
the Company is liquidated within two years after the Sun Transaction is
completed, Gould will not receive any portion of the first $30 million of
liquidating distributions to the holders of the Common Stock (even though it
would then own approximately 49% of the outstanding Common Stock). Absent
fraud or wilful misconduct on the part of Gould and subject to certain
additional exceptions, Gould's liability for its indemnifications to Sun is
limited to $185 million in the aggregate, $185 million as to losses from
claims arising in the first year after completion of the Sun Transaction and
$110 million as to losses from claims arising in the second year after
completion of the Sun Transaction. Sun is not entitled to indemnification
for losses regarding matters which (i) arise more than two years after
completion of the Sun Transaction, (ii) are first asserted after the fourth
anniversary of the closing of the Sun Transaction (with respect to claims of
Gould fraud or wilful misconduct) or (iii) are first asserted after the
third such anniversary (as to any other claims). There is no limit on
Gould's agreement to ensure that the Company remains solvent and is not the
subject of an insolvency proceeding within a year after completion of the
Sun Transaction.
Because of Gould's very substantial exposure if the Company becomes
insolvent within one year, and possibly within two years, after completion
of the Sun Transaction (that two years being the period with regard to which
Gould indemnified Sun), (A) Gould requested, and Kenneth Fisher, the
Company's chief executive officer, and entities he controls (which own
approximately 17.9 % of the outstanding Common Stock), agreed, that until
the third anniversary of completion of the Sun Transaction or such earlier
time as Gould ceases to own at least 35% to the outstanding Common Stock,
Mr. Fisher and the entities he controls will vote for election of persons
designated by Gould to two-thirds of the places on the Company's Board of
Directors, and (B) Gould requested, and the Company agreed, that the
Company's by-laws would provide that at least until the second anniversary
of completion of the Sun Transaction, (i) a majority of the members of the
Audit Committee of the Company's Board of Directors, including its chairman,
will be directors designated by Gould, (ii) the Audit Committee will be able
to veto the Company's expense and capital expenditure budgets, and must
approve expenditures which exceed budgeted amounts by more than 5%, (iii)
the Company's chief financial officer cannot be dismissed, and a new chief
financial officer cannot be hired, without Audit Committee approval, and
(iv) the Company's Board of Directors cannot consider a proposal that the
Company commence bankruptcy proceedings unless the Audit Committee has
recommended the proposal. See "Use of Proceeds; Gould Agreement".
Benefits of the Sun Transaction to Affiliates
Certain affiliates of Encore may benefit from the consummation of the Sun
Transaction. The consummation of the Sun Transaction will result in, among
other things, Encore paying off the Gould Debt (estimated to be
approximately $90 million at the time of the closing) which is owed to
Gould, as a wholly-owned subsidiary of JEC. In addition, Gould and its
affiliates' Series D through I Preferred Stock will then be redeemed by the
Company (for less than 15% of its liquidation preference). Of the $185
million Cash Payment to be made by Sun, $90 million will be paid to Gould to
pay off the Gould Debt and $60 million (of which $25 million will be paid at
the closing and the balance will be paid by assigning to Gould the Company's
right to receive the $35 million proceeds in July 1998) will be paid to
Gould to redeem Encore Preferred Stock held by Gould. Thus, $35 million is
expected to be left for the Company after making such payments to Gould.
Pursuant to the Gould Agreement, and in exchange for Gould agreeing to take
only $60 million for Preferred Stock having a liquidation preference over
Common Stock of approximately $411 million, Mr. Fisher and Indian Creek are
required to enter into the Voting Agreement so as to require Mr. Fisher and
Indian Creek to vote their shares in favor of the Sun Transaction and in
favor of the election of persons designated by Gould to two-thirds of the
places on Encore's board of directors until the third anniversary of the Sun
Transaction closing or such time as Gould ceases to own at least 35% of the
outstanding Common Stock, whichever is earlier. The Company's by-laws are
also required by the Gould Agreement to be amended with the result that (i)
Gould would control the Company's Audit Committee which, in turn, controls
the Company's expenditures, (ii) the Company's chief financial officer can
not be dismissed, nor may a new chief financial officer be appointed without
the approval of the Audit Committee and (iii) the Company's Board may not
consider any proposal to commence voluntary bankruptcy proceedings unless
the proposal has been recommended by the Audit Committee. The Gould
Agreement also creates certain indemnification rights that Gould has against
Encore. In addition, Gould will continue to have substantially the same
demand and piggy-back registration rights under the Securities Act of 1933,
as amended, with respect to its Common Stock which it had prior to the
consummation of the Sun Transaction. See "APPROVAL OF SUN TRANSACTION --
Background and Reasons for the Sun Transaction" and "-- Use of Proceeds;
Gould Agreement."
The consummation of the Sun Transaction will also trigger payments to be
made to officers who are party to the Retention Agreements provided that
such officers satisfy certain conditions set forth therein. The purpose of
the Retention Agreements (and the primary condition that triggers such
payment) is to provide incentive to the officers party thereto to remain
with the Company through the later of (i) the closing of the Sun Transaction
and (ii) January 1, 1998. The stockholders should be aware of the possible
conflicts of interest that Kenneth G. Fisher and Roland H. Thomas, Jr. had
when they voted in favor of the Sun Transaction in their capacities as
directors of the Company. See "ELECTION OF DIRECTORS -- Executive
Compensation."
Liquidation Analysis
Among the specific factors considered, the Board of Directors placed great
weight on its concern as to the possible liquidation of the Company if the
proposed Sun Transaction is not consummated. The Board of Directors
believes that the Company has no alternative to liquidation if the proposed
Sun Transaction is not consummated. This belief is based upon, among other
things, Sun's stated unwillingness to enter into an OEM arrangement, Gould's
stated unwillingness to provide additional funding to the Company and the
Company's inability to secure alternative financing. For purposes of its
analysis of a possible liquidation of the Company, the Board of Directors
has assumed that if the Sun Transaction is not consummated the Company would
seek relief under Chapter 7 of the United States Bankruptcy Code and the
liquidation would be carried out by a court-appointed Chapter 7 Trustee.
The Company believes that without a committed funding source, a Chapter 7
bankruptcy may be the only alternative left to the Company.
On July 15, 1997, after soliciting proposals from two independent "Big-6"
public accounting firms, the Company retained Price Waterhouse to assist
management in the preparation of a liquidation analysis. The Company's
selection of Price Waterhouse was based on, among other factors, its ability
to assess the Company's technology and intellectual property from a
valuation perspective and its experience and expertise in advising similar
companies in similar situations. No relationship of any kind existed during
the past two years between Encore or Encore's affiliates and Price
Waterhouse (except for certain minor tax work undertaken by Price Waterhouse
on behalf of JEC).
The Company and Price Waterhouse mutually agreed on the scope of the
engagement, which included (i) a detailed review of the Company's assets and
liabilities as reflected in the books and records of the Company, (ii)
analysis of unrecorded and/or contingent assets and liabilities, (iii) an
assessment of Encore's technology and intellectual property and (iv) any
other analyses which may be required or helpful in evaluating Encore's
liquidation value. No limitation was imposed on the scope of this effort by
either party.
The Company's assessment of (i) values which could be realized upon
liquidation of its assets and (ii) claims and expenses to be paid by the
Company in the event of liquidation, was based on certain assumptions and
estimates, each of which the Company believes to be reasonable under the
circumstances outlined below. The liquidation analysis prepared by Price
Waterhouse is attached as Exhibit C to this Proxy Statement and includes a
list of the Company's key assumptions and a description of the valuation
methodology. The Company's stockholders are urged to read the liquidation
analysis in its entirety.
In all likelihood, however, if the Company were forced to liquidate its
assets the actual amounts realized from liquidation and paid by the Company
would vary from management's analysis as a result of differences in
external and internal factors such as: the actual time period over which
the liquidation occurred, the results of the Company's operations between
the estimation date and the liquidation date, and changes in values which
may occur based on overall economic factors, market conditions and/or
competitive pressures. The actual amounts realized and payments required
could be higher or lower than those presented in the liquidation analysis
contained herein.
The liquidation analysis was prepared using financial information contained
in the Company's books and records as of June 29, 1997, and its unaudited
financial statements for the quarter then ended. This information is
believed to be accurate but has not been audited by any third party and no
independent accounting firm has expressed an opinion on such information or
financial statements. Each asset and liability account was analyzed in
sufficient detail to determine reasonable estimated realizable values.
Inquiry was made of Company personnel and documents were reviewed in order
to ascertain what, if any, off-balance sheet, unrecorded or contingent
assets or liabilities might exist. Independent third parties were contacted
to assist in the assessment of realizable values for certain assets such as
inventory, land and buildings, machinery and equipment, furniture and
fixtures, and intellectual property. Price Waterhouse also advised the
Company on certain realizable values based on its experience with the
liquidation of similar assets in similar situations.
Each subsidiary was analyzed separately and generally was assumed to be
liquidated under applicable laws in each jurisdiction although it was not
assumed that any foreign subsidiary would actually enter into a formal,
court-supervised liquidation in its respective jurisdiction. The
incremental costs associated with the liquidation, including Chapter 7
Trustee fees, professional expenses and other administrative expenses, were
estimated and assumed to be paid prior to any distribution to secured or
unsecured creditors and Preferred and Common stockholders. In general, the
Company assumed that claims would be paid pursuant to the priorities and
provisions of the United States Bankruptcy Code, consistent with how the
Company has recorded such amounts historically, and without regard to any
disputes which could arise as to claims classification, preferences,
equitable subordination or administrative insolvency.
The liquidation analysis delivered by Price Waterhouse to the Company's
Board of Directors provides that, as of June 29, 1997, the estimated
liquidation value for the Company's assets is $24.4 million. The
liquidation analysis further estimates that, from this liquidation value,
$1.5 million would be paid as Chapter 7 Trustee fees and other professional
fees and $22.6 million would be available for distribution to the Company's
secured and unsecured creditors and Preferred and Common stockholders.
However, since the liquidation analysis assumed that the Company has, as of
June 29, 1997, $72.0 million in secured claims (which includes $71.4 million
of Gould Debt), all remaining proceeds would be applied to these secured
claims. Thus, according to this liquidation analysis, no funds would be
available in a liquidation of Company assets to satisfy priority claims
(such as employee claims), unsecured claims (such as trade payables) or
Preferred and Common stockholder equity claims.
Opinion of Financial Adviser
Genesis was retained by the Company to render an opinion as to the fairness,
from a financial point of view, to the Company of the Cash Payment to be
paid for the Storage Products Business in the Sun Transaction. Except as
noted below, the Company did not impose any limitations upon Genesis with
respect to the investigations made, the procedures followed or the opinion
to be delivered by Genesis. Genesis was selected by the Board of Directors
based upon the Board's view of Genesis' qualifications, expertise,
experience and its commitment to provide timely service. When reviewing the
factors considered by, discussions held by, and bases for the opinion of,
genesis that are discussed below, stockholders should be aware that the
extraordinary circumstances of the company (including the liquidity crisis
caused by gould's stated intention to provide no additional capital and the
lack of alternative financing sources, unsuccessful recent efforts to
solicit third party indications of interest in either entering into an oem
relationship with the company or acquiring the companY or the storage
products business and the company's historical inability to run the storage
products business profitably) caused many of the traditional valuation
methodologies utilized by financial advisors to be of limited value. The
opinion rendered by genesis therefore was based to an unusually large extent
on qualitative factors relating to the company's and the storage products
business' distressed financial condition and lack of prospects.
Genesis has delivered to the Board of Directors of the Company its written
opinion dated July 14, 1997, that, as of such date, the Cash Payment to be
paid for the Storage Products Business in the Sun Transaction is fair to the
Company from a financial point of view. In rendering its opinion, Genesis
considered a number of factors, as described therein, including (i) a review
of the financial terms and conditions of the Asset Purchase Agreement, (ii)
its analysis of certain historical business and financial information of the
Company and the Storage Products Business, (iii) its review of certain
forecasts and financial and other data relating to the Company's business
and the Storage Products Business, and (iv) its review of public information
with respect to certain other companies Genesis believed to be generally
comparable to the Storage Products Business. Genesis also conducted
discussions with senior management of the Company and Gould with respect to
(i) the Company's and the Storage Products Business' business and prospects,
(ii) recent efforts to solicit third party indications of interest in either
entering into an OEM relationship with the Company or acquiring the Company
or the Storage Products Business, (iii) the unwillingness of Gould to
continue to provide financial support to the Company and (iv) the strategic
rationale for the Sun Transaction and reasonably available alternatives.
Further, Genesis compared the financial terms of certain business
combinations and acquisitions involving lines of business that Genesis
believed to be generally comparable to the Storage Products Business.
Genesis' opinion was necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made available to it
as of, the date of such opinion.
Genesis did not independently verify any of the foregoing information, and
relied upon the accuracy and completeness of all information made available
to Genesis by the Company or Gould, or otherwise reviewed by Genesis.
The following is a summary of the bases (in addition to the factors and
discussions noted above) for the Genesis opinion as discussed by Genesis at
the July 16, 1997 special meeting of the Board of Directors.
Financial Condition and Prospects. In rendering its opinion, Genesis
reviewed and analyzed the historical and current financial condition of the
Company and the Storage Products Business which included (i) an assessment
of the Company's recent financial statements; and (ii) an assessment of the
Company's liquidity and cash position, particularly in light of Gould's
stated view that it would not provide additional funding to the Company and
the lack of available alternative financing sources. This review indicated
that the failure to enter into the Sun Transaction would most likely result
in the bankruptcy of the Company.
Comparable Company Analysis. Genesis compared certain financial information
relating to the Storage Products Business to certain corresponding
information for a group of seven publicly-traded companies competing in the
data storage marketplace (Amdahl Corporation, Cambex Corporation, Dataram
Corporation, EMC Corporation, International Business Machines, DPL Systems,
Inc. and Storage Technology Corporation and Cambex, Dataram and IPL Systems
were deemed to be most relevant). Genesis observed that the ratio of the
Cash Payment to the latest twelve months revenue of the Storage Products
Business represented a significant premium to the analogous multiples for
these comparable companies (30.4x as compared to 0.5x, 0.7x, 0.4x, 4.3x,
1.3x, 0.2x and 1.2x, respectively). Genesis also observed that multiples of
earnings-related indicators were not meaningful due to the Storage Products
Business's historical losses and that multiples of forward-looking financial
indicators were not meaningful because no reliable projections of the
Company's or the Storage Products Business' financial performance existed as
a result of their liquidity crisis and lack of access to alternative sources
of capital.
Discounted Cash Flow Analysis. Genesis advised the Board of Directors that a
discounted cash flow analysis was not a meaningful indication of value for
the Storage Products Business because of the tremendous uncertainty of the
Storage Products Business's future cash flows in light of the stated
intention of Gould not to provide additional funding and the complete lack
of alternative sources of capital for the Company.
Historical Stock Price Performance. Genesis reviewed the daily closing per
share market prices for the Company's Common Stock from July 5, 1996 to July
7, 1997. This information was presented only to give the Board of Directors
background information regarding the stock price of the Company over the
indicated period.
In rendering its opinion, Genesis was not requested to, nor did it, solicit
third party indications of interest in acquiring the Company or the Storage
Products Business. In addition, Genesis did not participate in the
negotiation of the Asset Purchase Agreement or the Memorandum of
Understanding dated May 27, 1997 between the Company and Sun. AS NOTED
ABOVE, IN RENDERING ITS OPINION GENESIS RELIED TO AN UNUSUALLY HEAVY EXTENT
ON QUALITATIVE FACTORS RELATING TO THE COMPANY'S AND THE STORAGE PRODUCTS
BUSINESS' DISTRESSED FINANCIAL CONDITION AND LACK OF PROSPECTS. THE OTHER
PRINCIPAL FACTOR THAT GENESIS WEIGHED HEAVILY WAS THE EXTENT TO WHICH THE
MULTIPLE OF THE CASH PAYMENT TO THE STORAGE PRODUCTS BUSINESS LATEST TWELVE
MONTHS' REVENUE EXCEEDED SUCH MULTIPLES FOR THE COMPARABLE COMPANIES
DESCRIBED ABOVE. The opinion does not constitute a recommendation to any
stockholder as to how such stockholder should vote at the stockholders'
meeting held in connection with the Sun Transaction. The opinion assumes
that the full amount of the Cash Payment for the Storage Products Business
is paid by Sun when due. Genesis did not opine as to the Company's plans to
use the proceeds from the sale of the Storage Products Business to pay
Gould. The foregoing summary of the opinion summarizes all material
information contained in the opinion, which is attached hereto as Exhibit B.
The stockholders of the Company are urged to read the opinion in its
entirety. Genesis has consented to the use of the opinion in this Proxy
Statement.
Pursuant to an engagement letter, dated July 7, 1997, the Company has agreed
to (a) pay Genesis a fee of $250,000, (i) $90,000 of which was paid upon the
execution of such engagement letter, (ii) $80,000 of which was paid upon
delivery of the Genesis opinion and (iii) $80,000 of which was payable upon
the mailing of this Proxy Statement, (b) reimburse Genesis for its out-of-
pocket expenses, including expenses of counsel, and (c) indemnify Genesis
against certain liabilities, including liabilities arising out of applicable
securities laws for the delivery of its written opinion with respect to the
sale of the Storage Products Business. Genesis is a nationally recognized
banking firm and, as part of its business, it is regularly engaged in the
valuation of businesses in connection with mergers and acquisitions.
Use of Proceeds; Gould Agreement
At the closing of the Sun Transaction, the Company will receive $150 million
in cash. Pursuant to the Asset Purchase Agreement, these proceeds will be
deposited into an escrow account and used to pay the Gould Debt and Encore's
indebtedness to its trade and other creditors as of the closing date. As of
September 29, 1997, the Gould Debt was $84.7 million. Assuming a closing
date of November 24, 1997, based upon the Company's anticipated cash
requirements and borrowing needs until the closing it is expected that the
Gould Debt will be approximately $93.7 million as of the closing date.
Gould has no contractual obligation to continue to provide financing to the
Company until the closing but has informed the Company it is likely it will
do so to the extent absolutely necessary to enable the Sun Transaction to
close so long as Gould is convinced that the Sun Transaction will close. If
at any time it appears to Gould that the Sun Transaction will not close,
Gould has informed the Company that it will not provide financing for
further operations of the Company. In addition, Gould has informed the
Company that if the stockholders fail to approve the Sun Transaction, or if
the stockholders meeting to approve the Sun Transaction is not held by
November 30, 1997, Gould will not provide any financing to the Company after
the date of the meeting, or after November 30, 1997 if the meeting is not
held by that date. Gould has also indicated to the Company that it is not
willing to modify the terms of the Gould Agreement or accept less than full
satisfaction of the Gould Debt in connection with the Sun Transaction.
The Company anticipates that its indebtedness to trade and other creditors
will be approximately $8.6 million as of the closing of the Sun Transaction.
In addition, the Company expects to incur approximately $1.8 million in
legal, accounting and other fees and expenses associated with the Sun
Transaction and approximately $22.0 million in restructuring costs in
connection with the Sun Transaction and the organization and operation of
the Company following the Sun Transaction. These restructuring costs
include approximately $11.4 million in employee severance and outplacement
costs, $5.6 million in retention and incentive bonuses payable to employees
of the Company (including $4.6 million pursuant to written agreements
between the Company and each of approximately 49 employees and $1.0 million
to be paid to certain key employees in the discretion of management),
approximately $4.5 million in connection with the termination of certain
office and equipment leases and approximately $500,000 in leasehold
improvements at the Company's Fort Lauderdale facility to be leased from
Sun. See "Business of Encore After the Sun Transaction".
Pursuant to the Gould Agreement, the Company has agreed to redeem all of the
Preferred Stock held by Gould and EFI at the closing of the Sun Transaction
for $60 million in cash, of which $25 million will be paid from the proceeds
of the Sun Transaction to be paid into escrow at closing and the balance
will be paid by assigning to Gould the right to receive the $35 million
payment from Sun which is payable on July 1, 1998. The Preferred Stock to
be redeemed from Gould has an aggregate liquidation preference over the
Common Stock of approximately $411 million. An aggregate amount of $390
million of debt was cancelled by Gould in exchange for the issuance by
Encore to Gould of Preferred Stock, and additional shares of Series B and
Series D through I Preferred Stock were issued in lieu of cash dividends on
such shares. The Gould Agreement was approved by the Company's Board of
Directors at a special meeting held on July 16, 1997 attended by Messrs.
Fisher, Thomas and Ferguson. Messrs. Fisher and Thomas voted in favor of
the Gould Agreement. Mr. Ferguson, a representative of Gould, left the
meeting before the vote was taken.
Under the Asset Purchase Agreement, Sun has the right to set off against the
$35 million payment due on July 1, 1998, any amounts owed to Sun by Encore
pursuant to its indemnification obligations under the Asset Purchase
Agreement (see "The Asset Purchase Agreement"). If the amount paid to Gould
by Sun on July 1, 1998 is less than $35 million due to the inaccuracy of any
representation or warranty of Encore in the Asset Purchase Agreement, the
failure by Encore to fulfill any obligation under the Asset Purchase
Agreement, or any other act or omission of Encore, under the Gould Agreement
Encore will be indebted to Gould for the amount by which such payment is
less than $35 million. In addition, if the full $35 million is not paid to
Gould by July 31, 1998, Gould will be entitled to receive from Encore shares
of Series B, D, E, F, G, H and I Stock which represent accrued but unpaid
dividends on Gould's Preferred Stock as of the date of closing of the Sun
Transaction. As of the date of the Gould Agreement, the aggregate amount of
these unpaid dividends was 349,471 shares of Series B through I Stock with
an aggregate liquidation preference over the Common Stock of approximately
$35 million. Assuming the Sun Transaction closes on October 31, 1997, these
unpaid dividends will aggregate 426,784 shares as of the closing date with a
liquidation preference of approximately $43 million. If the full $35
million is paid to Gould by July 31, 1998, Gould will waive its right to
receive these accrued but unpaid dividends.
After payment of the Gould Debt, indebtedness to trade and other creditors,
Sun Transaction costs, restructuring costs and the portion of the redemption
price of the Gould Preferred Stock which is payable in cash at the closing,
approximately $7.1 million (including $4.3 million in cash) are expected by
Encore to constitute net proceeds from the Sun Transaction, which will be
available to Encore as working capital to fund its operations following the
Sun Transaction.
The Gould Agreement required the Company, Mr. Fisher and Indian Creek to
enter into the Voting Agreement which, in addition to requiring Mr. Fisher
and Indian Creek to vote their shares of Common Stock in favor of the Sun
Transaction, requires them to vote in favor of the election of persons
designated by Gould to two-thirds of the places on Encore's Board of
Directors until the earlier of (x) the third anniversary of the closing of
the Sun Transaction or (y) such time as Gould ceases to own at least 35% of
the outstanding Common Stock. Pursuant to a Registration Rights Agreement
entered into between Gould and the Company at the same time as the Voting
Agreement (the "Registration Rights Agreement"), Gould continues to have
substantially the same demand and piggy-back registration rights under the
Securities Act of 1933, as amended, with respect to its shares of Common
Stock which it had under a similar agreement with the Company which was
superseded by the Registration Rights Agreement.
The Gould Agreement also required the Company to amend its By-Laws to
provide that, at least until the second anniversary of the closing of the
Sun Transaction: (i) a majority of the members of the Audit Committee of the
Board, including the Chairman of the Audit Committee, will be directors
nominated by Gould; (ii) the Audit Committee will have veto power over items
in the Company's expense and capital expenditure budget, and actual
expenditures may not exceed budgeted expenditures by more than 5% without
prior Audit Committee approval; (iii) the Company's chief financial officer
cannot be dismissed, nor may a new chief financial officer be appointed,
without Audit Committee approval; and (iv) the Company's Board of Directors
will not consider any proposal that the Company commence voluntary
bankruptcy proceedings unless the proposal has been recommended by the Audit
Committee. The Company's By-Laws have not yet been so amended. The Company
intends to amend its Bylaws prior to, and contingent upon, the consummation
of the Sun Transaction. Such amendment will be effected by a vote of a
majority of the Company's Board of Directors, in accordance with Section 6.1
of such By-Laws. No stockholder vote will be obtained (nor is such a vote
required) in connection therewith.
The Gould Agreement provides that Encore will indemnify Gould against any
obligation Gould or JEC may have to make payments to Sun under either of the
Inducement Agreements entered into by Gould and JEC pursuant to the Asset
Purchase Agreement as a result of any act or omission of Encore including,
but not limited to, the commencement by Encore of any insolvency proceeding
or because Encore is or at any time becomes insolvent. See "The Asset
Purchase Agreement."
In the Gould Agreement, Gould waived any right it may have as a holder of
Common Stock to participate in the first $30 million which the Company may
distribute to its stockholders as a liquidating dividend within two years
after the date of the Gould Agreement. The Company also agreed to reimburse
Gould for its out-of-pocket expenses incurred in connection with the
preparation, negotiation, execution and delivery of the Gould Agreement, the
Asset Purchase Agreement and all related documents.
The consummation of the transactions contemplated by the Gould Agreement
(other than the conversion of shares referred to below) are contingent upon
the consummation of the Sun Transaction. Thus, if the stockholders of
Encore do not vote in favor of the Sun Transaction, or if the Sun
Transaction fails to close for any other reason, the transactions
contemplated by the Gould Agreement (other than the conversion of shares
referred to below) shall not be consummated. In the event of the foregoing,
Gould would retain its shares of Preferred Stock (other than shares of
Series A and Series B Preferred which were converted into shares of Common
Stock by Gould prior to the Record Date) and Encore would continue to be
obligated to repay the Gould Debt. Under such circumstances, the Company
believes that it would not be able to continue as a going concern. See
"Approval of Sun Transaction -- Background and Reasons for the Sun
Transaction."
Business of Encore after the Sun Transaction
Following the Sun Transaction, Encore's only active business will be its
real-time business. However, Encore believes there are opportunities for it
to use experience gained in developing its real-time products and its
storage products to create software which will enable various types of
standard computer hardware to be operated in clusters to create large
capacity, high reliability versions of the computer hardware. As is
discussed below, its Board of Directors will be considering whether Encore
should (i) continue, and attempt to expand, its real-time business, (ii)
attempt to develop and market clustering software for various types of
computer hardware, or (iii) attempt to sell its real-time business and
distribute the proceeds of that sale, together with the remaining proceeds
of the Sun Transaction, to its stockholders as a liquidating distribution.
Encore's Real-Time Business
Encore's real-time business consists of reselling Digital Equipment
Corporation/Alpha and Intel/Pentium-based systems, which run UNIX with real-
time enhancements or Windows NT software with hardware interconnect
clustering technologies (e.g., Reflective Memory, Memory Channel). Encore
sells these systems to customers in the aerospace, telecommunications,
energy, utilities, process control, industrial automation and transportation
industries. Over the last few years, Encore has sold a number of real-time
enhancements and clustering interconnects in conjunction with high
performance Digital Equipment Corporation ("DEC") UNIX Alpha systems
characterized by either high performance Versa Module Europa ("VME"), VME
high end Symmetrical Multi-Processor or 64-bit floating point intensive
technical computing systems). Encore believes it can continue to resell DEC
systems and provide integration systems with real-time enhancements to DEC
customers, and that it may be able to partner with DEC on key opportunities.
During 1996, Encore had total revenues of $41 million from its real-time
business, of which $21 million was from sales of systems and $20 million was
from sales of services, primarily of systems sold before that year. During
the first six months of 1997, Encore had total revenues from its real-time
business of $13.3 million, of which $5.3 million was from sales of systems
and the remaining $8 million was from sales of services. Sales of real-time
systems in 1996 and 1997 were substantially below the peak rate of 1990,
when sales of real-time systems totaled $133 million, in addition to sales
of services of $82 million. Further, sales of real-time systems in the
first six months of 1997 were 46% lower than during the same period of 1996.
Because of the decline in sales of real-time systems, and the retirement by
users of older Encore real-time systems, Encore's revenues from servicing
real-time systems have been declining during the last several years.
In connection with the Sun Transaction, Sun has granted a license to Encore
to create real-time products based upon the technology and intellectual
property to be sold to Sun as part of the Storage Products Business;
provided, however, that Encore is required to conduct its real-time business
within the ambit of such license to the extent that any of the real-time
business draws on such license. See "The Asset Purchase Agreement."
Specifically, the license agreement provides that Sun will grant to the
Company a non-exclusive, non-transferable, royalty free, worldwide license,
under intellectual property rights in the technology sold to Sun as part of
the Storage Products Business ("Licensed Materials"), to create and
distribute real-time products based on the Licensed Materials for use by the
Company in its real-time business, subject to certain limitations specified
therein, but not for any other purpose. The license agreement also allows
the Company to sublicense third parties to distribute such real-time
products of the Company or incorporate such products into the third party's
real-time products, subject to certain limitations. The Company also agrees
not to use the Licensed Materials in any storage products or to compete with
Sun's Storage Products Business, and to grant to Sun a non-exclusive,
royalty-free, paid up, non-terminable, worldwide license under intellectual
property rights in any derivative works created by Encore derived from the
Licensed Materials, so long as Sun does not use this grant back license to
create or distribute real-time products.
Historically, the Company has been dependent on the U.S. Government for more
than 20% of the Company's sales. Following the consummation of the Sun
Transaction, the Company will be even more dependent on the U.S. Government
for sales due to the fact that most sales to the U.S. Government relate to
the Company's real-time business. In recent years, the U.S. Government has
been reducing its expenditures on the type of real-time products that the
Company sells.
Clustering Software
A significant element of Encore's storage products technology that it is
selling to Sun and of Encore's real-time technology involves the clustering
of large numbers of standard, readily available, computer products. For
example, Encore's storage technology makes large numbers of standard
computer memories operate in tandem to provide vast amounts of storage
capacity with exceptional reliability (including the ability to avoid system
downtime by having the system replace malfunctioning individual memory units
with other units in the cluster).
The same clustering techniques which Encore used in developing its storage
products can be applied to many other types of computer hardware. The
Company believes that there are significant opportunities in the areas of
server clustering, true high availability systems and server-to-server
networking. Of particular interest to Encore is the importance of
clustering in the current effort by Microsoft Corp. ("Microsoft") to
supplant UNIX/RISC-based systems with systems based on Microsoft's Windows
NT.
Although Encore expects that Windows NT will outsell similar products
offered by Microsoft's competitors, Encore considers current clustering
initiatives for Windows NT to be inadequate. By leveraging the Company's
clustering expertise, the Company believes it has a unique expertise to
develop commercially-viable clustering software for Windows NT which could
meet mission-critical enterprise class applications. Once developed, this
software would be commercialized to replace proprietary hardware and
configurations with standard commodity hardware and standard NT software
interfaces combined with clustering software feature enhancements. The
Company believes that this alternative will extend Windows NT's capabilities
in clustering, true high availability and server-to-server networking.
Encore would not expect to manufacture computer hardware. However, it
believes that by using the skills of some of the people who helped develop
its real-time systems, but who are not joining Sun, Encore can develop
clustering software which can be incorporated in, and marketed in connection
with, Windows NT-based systems.
The Decision as to Encore's Future Course
The Company's Board of Directors has begun to study the options which will
be available to Encore following the Sun Transaction. As noted above, those
options will include (i) continuing, and attempting to expand, its real-time
business, (ii) entering into the business of developing software for
clustering various types of computer hardware using Microsoft's Windows NT,
or (iii) selling the real-time business and distributing to the Company's
common stockholders both the net proceeds of the sale of the real-time
business and the proceeds of the Sun Transaction which remain after the
restructuring costs and payments to Gould described above. Factors the
Board of Directors will consider in deciding what the Company should do will
include, among other things, (a) the actual and projected revenues and cash
flows from continuing and expanding its real-time business, (b) the
anticipated costs of developing clustering software, (c) the likelihood
Encore would be able to distribute clustering software in a manner which
would generate significant revenues and profits, (d) the amount of the
proceeds of the Sun Transaction which are likely to be available to support
future Encore activities, (e) the Company's ability to obtain debt or equity
financing for future activities, (f) the price for which Encore's real-time
business, and possibly other technology owned by Encore, could be sold and
(g) any other factors which, in the judgment of the Company's Board of
Directors, may bear upon what future course is likely to be most beneficial
to the Company and its stockholders.
Following the Sun Transaction, a majority of the members of the Company's
Board of Directors will be designees of Gould. See "ELECTION OF DIRECTORS."
While they will be obligated to make decisions in what they believe to be
the best interests of all of the Company's stockholders, Gould may have
interests which differ from those of many other stockholders, and those
interests could affect the views of its designees on the Company's Board.
In particular, Gould has agreed (i) to maintain Encore's solvency for a one-
year period following the closing of the Sun Transaction and (ii) if within
two years after the closing of the Sun Transaction the Company or any of its
affiliates or, under certain circumstances, their respective assigns
commences an insolvency proceeding regarding Encore and the Sun Transaction
is challenged in that proceeding, to indemnify Sun against any loss Sun may
suffer as a consequence thereof. See "The Asset Purchase Agreement." This
might lead Gould to oppose any activities by the Company which expose it to
a significant risk of not being able to meet its liabilities, at least
during the initial two years after completion of the Sun Transaction. On
the other hand, Gould has agreed that if the Company is liquidated within
two years after completion of the Sun Transaction, Gould, which will own
approximately 49% of the outstanding Common Stock of the Company, will not
participate in the first $30 million of liquidation proceeds which are
distributed to the Company's stockholders. This would significantly favor
other Common stockholders over Gould if the Company were liquidated in the
near future.
Stockholders of the Company should also consider the following risk factors,
among others, relating to the business of Encore after the Sun Transaction:
(i) the Company will be left with only the real-time business (unless and
until it determines to enter the clustering software market), resulting in a
change in the Company's primary business activities from the Storage
Products Business to the real-time business; (ii) there is no assurance that
the real-time business will operate profitably; (iii) there can be no
assurance that Encore will be able to retain employees that would be
critical to a clustering software initiative; (iv) there can be no assurance
that any clustering software initiative would have access to sufficient
amounts of funds; (v) there can be no assurance that any clustering software
initiative would be successful; and (vi) none of the alternatives available
to the Company (including a retention of the Storage Products Business or
conducting the real-time business by itself or conducting the real-time
business in combination with a clustering software initiative) is without
substantial risk.
Accounting Treatment
For financial statement purposes, the Sun Transaction will be accounted for
as an asset sale in which the Company will receive $185 million in return
for transferring ownership of certain assets of the Storage Product Business
and record a gain on the sale of such assets of approximately $150 million.
Tax Consequences
The Sun Transaction will be a taxable transaction requiring recognition by
the Company of a taxable gain or loss measured by the difference between the
amount realized on the sale of the assets of the Storage Products Business
and the Company's adjusted basis in the assets. The Company currently
anticipates that the Sun Transaction will result in a gain of approximately
$150 million for federal income tax purposes. The Company intends to elect
to recognize the entire gain in the year of disposition under Section 453(d)
of the Internal Revenue Code. However, the Company expects that such gain
will be almost entirely offset by existing net operating loss carry forwards
of the Company. The Company may incur a minimum federal income tax
liability as a result of the Sun Transaction, the amount of which the
Company does not expect to exceed $1 million.
Under current law, the Sun Transaction will have no federal income tax
consequences to the stockholders of the Company.
The Asset Purchase Agreement
This discussion of the Asset Purchase Agreement and of certain other
agreements which are exhibits to the Asset Purchase Agreement and the
following description of the principal terms of the Asset Purchase Agreement
summarize all material information contained in the Asset Purchase
Agreement. Copies of the Asset Purchase Agreement and such other
agreements are attached to this Proxy Statement as Exhibit A and are
incorporated herein by reference.
Assets to Be Sold
Pursuant to the terms of the Asset Purchase Agreement, Encore will transfer
to Sun substantially all of the assets of the Storage Products Business,
including, without limitation all of the following to the extent associated
with, related to or used in connection with the Storage Products Business:
Encore's product line of storage devices, products, systems and subsystems;
hardware; software; components; services; technology; utilities, tools and
diagnostics; manufacturing rights; know how; vendor, supplier, prospect and
customer lists; training materials, user guides and documentation;
trademarks; intellectual property rights; rights under certain assigned
contracts; inventory; real property (including Encore's facilities in
Melbourne and Fort Lauderdale, Florida and two condominiums in Florida);
equipment; licenses; permits; and goodwill associated with the Storage
Products Business (collectively, the "Purchased Assets"). The Purchased
Assets shall include such non-U.S. assets as Sun, in its sole discretion,
elects to include. Encore's operations and assets located in France and
related contracts (the "French Assets") are specifically excluded from the
Asset Purchase Agreement but are being negotiated as a separate transaction
(for no net additional consideration) in order to comply with certain notice
requirements under French law. The Purchased Assets also do not include
certain other assets, including without limitation all of Encore's cash,
bank accounts and securities; accounts receivable; unbilled receivables;
notes; insurance policies; claims for refunds of taxes; minute books; stock
ledgers; assets of, or held by or with respect to any employee benefit plan;
and all rights under the Asset Purchase Agreement and under any of the other
agreements entered into in connection with the Sun Transaction; and
contracts which Sun, in its sole discretion, elects not to assume.
The acquisition of the assets described above is subject to SMI's assumption
of certain liabilities, including without limitation all of Encore's
liabilities under those contracts assigned to Sun, but only to the extent
that such liabilities arise, are incurred or require performance, subsequent
to the closing date, and only to the extent that such liabilities do not
arise as a result of Encore's breach of any such contract; and all of
Encore's liabilities that are expressly assumed under any real property
purchase agreements (collectively, the "Assumed Liabilities"). The Assumed
Liabilities do not include any liability for payment of money, or taking of
actions, after the closing with respect to obligations arising prior to the
closing. SMI will assume no liabilities other than the Assumed Liabilities
and Encore will remain responsible for any and all liabilities not assumed
by Sun.
Purchase Price
Subject to Sun's set off rights, described below, the aggregate purchase
price will be the sum of (i) the Cash Payment plus (ii) SMI's assumption of
the Assumed Liabilities less (iii) in the event that the French Assets are
transferred pursuant to a separate written agreement which may be
denominated on a French Franc basis, the U.S. dollar equivalent of such
French Franc sum. The Cash Payment will consist of (x) a payment at the
closing of $150,000,000 (the "Closing Payment") to an escrow agent under an
escrow arrangement pursuant to which the escrow agent will pay all of
Encore's liabilities, debts, monetary obligations, and accounts or trade
payables (collectively, the "Closing Debts") identified by Encore as of the
closing date. Upon the receipt by the escrow agent of receipts executed by
each creditor party stating that each Closing Debt has been paid in full,
the escrow agent shall remit the remaining balance of the Closing Payment to
the Company in cash by wire transfer of immediately available funds; and (y)
the sum of $35,000,000 which shall be paid on July 1, 1998 (the "Second
Payment") in cash by wire transfer of immediately available funds. The
right to receive the Second Payment will be assigned by the Company to
Gould. See "Use of Proceeds; Gould Agreement." Sun has indicated to the
Company that it is not willing to increase the purchase price payable to
Encore under the Asset Purchase Agreement.
Separate from the Closing Payment, in exchange for certain storage product
units in the Company's inventory, Sun will pay to the Company at closing the
sum of $3,000,000, less $200,000 for each unit sold by or for Encore prior
to the closing date, and less certain specified types of losses or
liabilities incurred, or estimated in good faith by Sun to be incurred, at
any time prior to or after closing. In addition, Sun will pay to the
Company a commission upon any sale of any of the thirteen storage product
units that are at customer sites as of the closing date pursuant to the
Company's "try and buy" program, which units are sold by or for Sun during
the 180 day period starting the day after the closing date. Such commission
shall equal 50% of the revenue actually collected by or for Sun with respect
to any such units sold by or for Sun during the 180 day period.
Certain Representations and Warranties
Encore has made certain representations and warranties regarding Encore and
the Storage Products Business which are customary in transactions such as
the Sun Transaction, including, without limitation: the accuracy and
completeness of its financial statements; the absence of certain changes in
its business; its satisfaction and payment of all tax liabilities; its title
to, and the condition of, the Purchased Assets; its compliance with certain
government regulations; the validity and enforceability of the contracts to
be assigned to Sun; Encore's relationship with its customers and suppliers;
its compliance with the various laws governing pension and employee benefit
matters; the Company's continued solvency; its intellectual property rights;
and compliance with various environmental laws. To the extent that any of
the representations and warranties prove to be inaccurate or untrue as of
the date of the Asset Purchase Agreement and as of the closing date, Encore
has agreed, subject to certain limitations and conditions contained in the
Asset Purchase Agreement, to indemnify Sun against all resulting loss.
Certain Covenants
The Asset Purchase Agreement contains various covenants of Encore. Encore
has agreed, among other things, that between the date of the Asset Purchase
Agreement and the closing date of the Sun Transaction, Encore will: conduct
the Storage Products Business in the ordinary course and consistent with
Encore's past practices; not sell, transfer or otherwise dispose of any of
the Purchased Assets except for sales of inventory in the ordinary course
and in a manner consistent with past practices; use its best efforts to
obtain all regulatory authorizations and consents to the performance of
Encore's obligations under the Asset Purchase Agreement and any related
agreements; and take such further actions as may be reasonably required to
carry out the provisions of the Asset Purchase Agreement and any related
agreements. Encore has also agreed to maintain the confidentiality of
proprietary or confidential information constituting part of the Purchased
Assets. Encore and Sun both agree to make all appropriate filings and to
promptly provide such supplemental information as may be required pursuant
to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act").
Encore has further agreed to be and remain solvent through the closing date
of the Sun Transaction and to use its best efforts to remain solvent
thereafter and to discourage and avoid, and to promptly dismiss and set
aside, any involuntary petition by creditors or others to place Encore in
any bankruptcy case or proceeding. Similarly, Encore has represented to Sun
that Encore does not intend or expect to file or seek relief under the
bankruptcy laws for a period of four years after the Closing Date.
Separately, in the Gould/EFI Inducement Agreement among Sun, EFI and Gould,
Gould has agreed to take any actions required to keep Encore solvent and out
of bankruptcy proceedings, and to avoid taking any actions that would cause
Encore to become insolvent or the subject of bankruptcy proceedings, in each
case during the one year period following closing of the Sun Transaction.
Encore and Gould have also separately agreed to indemnify Sun, subject to
certain limitations, for breaches of these covenants and for damages
resulting from certain other claims relating to the Sun Transaction that may
be asserted in connection with a bankruptcy proceeding involving Encore.
The cumulative effect of these provisions may be to reduce the chances that
Encore becomes subject to a bankruptcy proceeding, particularly during the
first year following the closing of the Sun Transaction.
Non-competition
The Asset Purchase Agreement contains a non-competition covenant pursuant to
which Encore agrees that it will not, for a period of five years after the
closing of the Sun Transaction, within the United States or any other
country or territory within which Sun, directly or indirectly, carries on or
engages in business, operate, advise, lend funds to, invest in, or otherwise
assist any entity to compete in any material respect with the Storage
Products Business. In addition, for a period of three years after the
closing date, Encore will not directly or indirectly solicit for employment
any employee of Encore hired by Sun.
Manufacturing Commitment
Sun and Encore have agreed that, prior to the closing, Encore will
manufacture units of storage products and source spares, to the extent
requested by Sun so as to meet Sun's post-closing forecasted inventory and
sales requirements. Sun will pay for parts needed by Encore to comply with
this manufacturing commitment. If the Asset Purchase Agreement is
terminated due to a material willful breach by Encore of its obligations
thereunder or a failure by Gould, EFI, Indian Creek or Mr. Fisher to timely
approve the Asset Purchase Agreement in their capacity as stockholders, then
Sun will have no obligation to purchase from Encore or pay Encore for any
such units or spares manufactured or sourced in accordance with this
manufacturing commitment other than such number of units and/or spares as
are required to ensure that the total demonstrated actual manufacturing
costs to Encore relating to this commitment do not exceed $10,000,000. If
the Asset Purchase Agreement is terminated for any other reason, Sun will
purchase from Encore, at a mutually agreed purchase price, all such units
and spares manufactured by Encore at Sun's request.
Employee Matters
Effective on the closing date, Sun shall offer to employ on an "at will"
basis, subject to Sun's standard terms and policies of employment, those
employees to whom Sun in its sole discretion elects to extend offers of
employment. However, Sun is not obligated to offer employment to any
employee. Such offers of employment as may be extended by Sun will be on
the same basis of time commitment (full or part time) as such employee was
employed by Encore immediately prior to the closing date. Encore will
remain responsible for any employer or employment related obligations
including without limitation, accrued personal time off, sick leave, bonuses
and any obligations pursuant to Encore's employee benefit plans or
government-mandated employee or employment-related payments. Encore intends
to restructure the Company following the consummation of the Sun Transaction
and, as a result, employee terminations will be necessary.
Conditions to the Sun Transaction
Consummation of the Sun Transaction is subject to satisfaction (or waiver by
the party entitled to do so) of certain conditions as of the closing date,
including, without limitation the following: the accuracy of the
representations and warranties; the absence of any material adverse changes
with respect to the Storage Products Business or with respect to the
financial condition of Encore or Gould; the expiration of any waiting period
and extensions thereof under the HSR Act; the absence of litigation which
would adversely affect the Sun Transaction; the receipt of all required
third party consents, including consents to the assignment of the
intellectual property rights and the contracts to be assigned to Sun; the
completion by Sun, to its satisfaction, of its due diligence review in
connection with the Sun Transaction; the acceptance of employment with Sun
by (i) at least seventy-five percent of the Encore employees to whom Sun
extends offers of employment and (ii) 100% of the Encore employees on a list
of key employees provided by Sun to Encore; and the approval of the Sun
Transaction by the Company's stockholders.
Indemnification
The Asset Purchase Agreement contains indemnities for all losses arising out
of the breach of any of Encore's representations and warranties, for
breaches or violations of Encore's covenants under the Asset Purchase
Agreement and for certain other matters. Encore is also required to
indemnify Sun for all losses arising out of certain third party demands,
claims, debts, suits and causes of action. Encore is not required to
provide indemnification to Sun unless and until Sun's aggregate losses
exceed $500,000 (the "Basket"), in which event Encore shall be liable for
all losses, including all losses within the Basket; and the aggregate loss
recoverable by Sun shall not exceed the Cash Payment (the "Cap").
Notwithstanding the foregoing, Sun shall be allowed to recover any loss
arising from (i) the fraud or willful misconduct on the part of Encore, (ii)
the failure of any representation or warranty of Encore under Article VII of
the Agreement (relating to sales and use taxes arising from the Sun
Transaction) to be true and correct as of the closing date of the Sun
Transaction or (iii) the rescission of or injunction against any transaction
contemplated by the Asset Purchase Agreement, and the Basket and Cap
provisions will not be applicable in any such event. No claims for
indemnification may be brought after the expiration of the legal statute of
limitations applicable to the subject matter of the claim underlying the
claim of indemnification. However, claims for indemnification arising out
of certain of the representations and warranties of the Asset Purchase
Agreement may not be brought after the fourth anniversary of the closing
date.
Sun's Set-off Rights
Sun may offset any loss for which Sun is entitled to indemnification as a
credit against its obligation to pay the Second Payment. In such case, Sun
may withhold the applicable amount from the Second Payment. Sun may
exercise its set-off right as described above even if the Basket is not yet
exceeded, except in that case the Basket will be reset to $0. Sun is
required to give written notice to Encore of its intent to withhold and set
off any part of the Second Payment, following which Encore then has 30 days
to object. If the parties cannot resolve a dispute as to whether the set-
off is proper, the disputed amount, to the extent that it exceeds $500,000,
will be placed in escrow for up to one year pending resolution of the
dispute.
Termination
The Asset Purchase Agreement may be terminated, in certain specified
circumstances, including (i) at any time prior to closing of the Sun
Transaction by the mutual consent of Encore and Sun or (ii) by either Encore
or Sun any time prior to closing if the other party commits a material
breach of the Asset Purchase Agreement which is not cured within 30 days
after notice thereof. The Asset Purchase Agreement may also be terminated
by either Encore or SMI if the closing shall not have occurred prior to
November 30, 1997; provided however, the right to terminate the Asset
Purchase Agreement for this reason shall not be available to any party whose
failure to fulfill any obligation under the Asset Purchase Agreement shall
have been the cause of, or shall have resulted in, the failure of the
closing to occur prior to such date. In the event of termination, the Asset
Purchase Agreement will become void and there will be no liability on the
part of any of the parties except liability for any willful breach.
Expenses
The Asset Purchase Agreement provides that each party will pay all of the
fees and expenses incurred by it in connection with the Asset Purchase
Agreement, whether or not the closing occurs.
Transitional Support
SMI and Encore have agreed to negotiate, in good faith using all
commercially reasonable efforts, an informal business arrangement between
themselves, pursuant to which SMI would provide Encore with certain agreed
upon support services such as MIS, telephone, telecommunications,
manufacturing, engineering and other mutually agreed upon services for a
period not to exceed one year following the closing of the Sun Transaction.
A portion of Encore's Fort Lauderdale facility will be leased back to Encore
by Sun following the closing for its ongoing operations. See "Business of
Encore After the Sun Transaction."
SMI as Interim Sales Representative
Encore has authorized SMI to act as a sales representative for Encore
storage products between the date of the Asset Purchase Agreement and the
earlier of its termination or the closing date of the Sun Transaction. In
this capacity, SMI is authorized, on behalf of Encore, to perform certain
agreed upon activities. Upon the closing of the Sun Transaction, all such
agreements entered into by Encore at the request of SMI, in its capacity as
interim sales representative, will be assigned to SMI. If the closing fails
to occur for any reason, then all such agreements and all liabilities and
obligations thereunder will remain with Encore. To the extent that Sun
determines in good faith that the foregoing right of SMI would be contrary
to the requirements of the HSR Act, such right will not be enforceable until
such HSR Act requirements have been satisfied.
Customer Service and Support
The Company and Sun have agreed to negotiate in good faith using
commercially reasonable efforts an arrangement whereby Sun would provide
customer service and support for customers of Encore's Storage Products
Business following the closing of the Sun Transaction.
Technology License Agreement
At the closing of the Sun Transaction, Sun and the Company will enter a
Technology License Agreement pursuant to which Sun will grant to the Company
a non-exclusive, non-transferable, royalty free, worldwide license in the
Licensed Materials sold to Sun as part of the Storage Products Business to
create and distribute real-time products based on the Licensed Materials for
use by the Company in its real-time business, subject to certain limitations
specified therein, but not for any other purpose. The license agreement
also allows the Company to sublicense third parties to distribute such real-
time products of the Company or incorporate such products into the third
party's real-time products, subject to certain limitations. The Company
also agrees not to use the Licensed Materials in any storage products or to
compete with Sun's Storage Products Business, and to grant to Sun a non-
exclusive, royalty-free, paid up, non-terminable, worldwide license under
intellectual property rights in any derivative works created by Encore
derived from the Licensed Materials, so long as Sun does not use this grant
back license to create or distribute real-time products. See "Business of
Encore After the Sun Transaction." A copy of the Technology License
Agreement is included as a part of Exhibit A to this Proxy Statement.
Inducement Agreements
As a material inducement and consideration for Sun to enter into the Asset
Purchase Agreement and to pay the purchase price provided therein, and as a
material condition precedent to Sun's obligations to consummate the Sun
Transaction, Gould and EFI, on the one hand, and JEC, on the other hand,
have respectively entered into inducement agreements with Sun (each, an
"Inducement Agreement"), the principal terms of which are summarized below.
Gould, EFI and JEC are collectively referred to as "Seller Parties." Sun,
its affiliates, subsidiaries, successors, and assigns are collectively
referred to as "Released Parties."
The Inducement Agreements contains provisions pursuant to which the Seller
Parties forever release and absolutely discharge the Released Parties from,
among other things, all claims, demands, liens, damages, actions and causes
of action of every kind, whether known or unknown that the Seller Parties
now have, or ever will have, in connection with the facts, circumstances and
events relating to the Purchased Assets, or to any of the transactions
contemplated by the Asset Purchase Agreement or any of the related
agreements.
The Inducement Agreement entered into by Gould provides that Gould will take
all actions (including without limitation, making continued capital
infusions) as required to ensure that Encore remains solvent for a one-year
period following the closing of the Sun Transaction. In connection
therewith, Gould has agreed to indemnify the Released Parties for any loss
the Released Parties may suffer if, within two years after the closing of
the Sun Transaction, an insolvency proceeding regarding Encore is commenced
by Encore, any of its affiliates or, under certain circumstances, their
respective assigns and someone asserts in that proceeding that the Sun
Transaction may be voided.
The Inducement Agreements contain provisions pursuant to which the Seller
Parties waive any of the rights and benefits they may have under the
statutory or nonstatutory laws of any jurisdiction which may tend to limit
the effectiveness or enforceability of a general release as it relates to
unknown claims. The Seller Parties have agreed not to sue or otherwise
bring a claim against any of the Released Parties with respect to any of the
released matters or with respect to any of the Purchased Assets.
In the Inducement Agreements, Gould, EFI and (except as to clauses (iv), (v)
and (vi) below) JEC make a number of representations and warranties
including, without limitation, that (i) each has all necessary power and
authority to enter into, execute, and deliver the Inducement Agreement to
which it is a party, (ii) the execution and delivery of the Inducement
Agreement to which it is a party does not violate its certificate of
incorporation, (iii) the execution, delivery and performance of the
Inducement Agreement to which it is a party does not require any third party
consent, (iv) its financial statements which were delivered to Sun are
accurate, (v) Gould is solvent and reasonably expects to remain solvent for
at least the four-year period commencing on the closing date of the Sun
Transaction and (vi) to Gould's knowledge, all of the Company's
representations and warranties contained in the Asset Purchase Agreement are
true and correct as of the date of the Asset Purchase Agreement and will be
true as of the closing of the Sun Transaction.
The Gould/EFI Inducement Agreement contains customary indemnities for
misrepresentations and breaches thereof and for liabilities arising out of
various events occurring prior to or after the date thereof. In addition,
Gould agrees to indemnify Sun for any and all losses arising out the failure
of any of Encore's representations and warranties under the Asset Purchase
Agreement to be true and correct as of the date of the agreement and on the
closing date of the Sun Transaction. Gould also agrees to indemnify Sun for
the breach or violation of any of Encore's covenants under the Asset
Purchase Agreement. Subject to certain limitations set forth in the
Inducement Agreement, the aggregate loss recoverable against Gould by Sun
under the indemnification provisions of the Inducement Agreement shall not
exceed (i) $185,000,000 in the aggregate, (ii) $185,000,000 in the year
ending on the first anniversary of the closing date of the Sun Transaction,
and (iii) $110,000,000 in the year ending on the second anniversary of the
closing date of the Sun Transaction. The Inducement Agreement sets forth
certain other amplifications on liability for fraud and willful misconduct
on the part of Gould. The Gould/EFI Inducement Agreement also provides
that Sun will have the right to have assigned to it, as of the closing of
the Sun Transaction, Gould's rights under the Gould License.
Each of Gould and JEC have agreed to a non-competition covenant pursuant to
which, for a period of five years from the closing date of the Sun
Transaction, it will not carry on, or facilitate any other entity's efforts
to carry on or engage in, the Storage Products Business within the United
States or within any other country or territory within which Sun carries on
in the Storage Products Business. Gould covenants further that it will not,
for a period of three years following the closing date, solicit for
employment any employee of Encore hired by Sun.
Vote Required; No Appraisal Rights
Under the Company's Certificate of Incorporation, the affirmative vote of
the holders of at least 75% of the Common Stock represented at the meeting
and voting on the Sun Transaction is required to approve the Sun
Transaction. In addition, under Delaware law, the affirmative vote of the
holders of a majority of the shares of Common Stock outstanding on the
record date is required to approve the Sun Transaction. As of the record
date, Gould, Mr. Fisher and Indian Creek owned an aggregate of 55.9% of the
outstanding Common Stock and, pursuant to a Voting Agreement dated as of
October 30, 1997, have agreed to vote in favor of the Sun Transaction.
Under Delaware law, the stockholders of the Company are not entitled to any
rights of appraisal in connection with the approval or the consummation of
the Sun Transaction.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE SUN TRANSACTION AND
RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR THE SUN TRANSACTION.
Market Prices for the Company's Common Stock
The Company's Common Stock is traded over-the-counter. On May 27, 1997, the
trading day immediately preceding announcement of the signing of a non-
binding Memorandum of Understanding with respect to the Sun Transaction, the
high and low bid prices for the Common Stock were $1.8125 and $1.687 per
share, respectively. On July 17, 1997, the trading day immediately
preceding announcement of the signing of the Asset Purchase Agreement, the
high and low bid prices for the Common Stock were $.7813 and $.7188 per
share, respectively. On October 30, 1997, the most recent practicable date
prior to the printing of this Proxy Statement, the high and low bid prices
for the Common Stock were $.5000 and $.4062 per share, respectively.
Selected Historical Financial Data
The following table sets forth certain selected historical consolidated
financial data for the Company. The selected financial data for the five
years ended December 31, 1996 are derived from audited consolidated
financial statements of the Company for such periods. The financial data
for the six months ended June 30, 1996 and June 29, 1997 are derived from
unaudited financial statements and are not necessarily indicative of the
results for the remainder of the year or any future period. This table
should be read in conjunction with the financial statements and other
information included in the documents incorporated herein by reference (see
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE") and the Pro Forma
Consolidated Financial Statements included elsewhere herein (see "PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS"). All amounts are in thousands, except
for per share data.
Six Months Ended For the years ended December 31,
6/29/97 6/30/96 1996 1995 1994 1993 1992
(Unaudited)
Net sales$ 15,687 $ 23,313 $ 47,627 $ 49,328 $ 76,550 $ 93,532 $ 130,893
Operating
loss $(35,804) $(29,188) $(67,218) $ (77,796) $(50,848) $(62,085) $ (22,544)
Net loss $(39,827) $(30,608) $(70,732) $ (81,354) $(54,556) $(69,565) $ (32,522)
Preferred stock
dividends
$ 14,122 $ 11,996 $ 25,413 $ 19,062 $ 13,987 $ 9,185 $ 4,471
Net loss applicable to common stockholders
$(53,949) $(42,604) $(96,145) $(100,416) $(68,543) $(78,750) $ (36,993)
Net loss per common
share $ (1.44) $ (1.17) $ (2.61) $ (2.88) $ (2.05) $ (2.47) $ (1.21)
Weighted average shares of common stock outstanding
37,347 36,552 36,810 34,923 33,391 31,909 30,535
Working capital(1)
$(63,679) $(29,937) $(67,295) $ 5,490 $ 20,237 $ 3,499 $ 14,270
Total
assets $ 53,826 $ 79,974 $ 69,256 $ 72,537 $ 99,021 $ 84,070 $ 105,686
Short term debt (1)
$ 57,213 $ 41,508 $ 72,841 $ 171 $ 171 $ 197 $ 193
Long term debt (1)
$ 414 $ 566 $ 476 $ 40,812 $ 89,249 $112,919 $ 66,413
Stockholders' equity
(capital deficiency) (1)
$(33,671) $ 5,224 $(34,010) $ 2,514 $(22,040) $(66,560) $ 508
(1) During the six months ended June 29, 1997 and June 30, 1996 and the
fiscal years 1996, 1995, 1994, 1993 and 1992, the Company exchanged
indebtedness of $40,000,000, $35,000,000, $35,000,000, $105,000,000,
$100,000,000, $ 0 and $80,000,000, respectively, for Preferred Stock.
Selected Pro Forma Financial Data
Unaudited selected pro forma consolidated financial information for the six
months ended June 29, 1997 and the year ended December 31, 1996 is set forth
below. The pro forma amounts reflect the estimated effects of the Sun
Transaction and the Gould Agreement described under "PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS." All amounts are in thousands except for per share
data.
Six Months Year
Ended Ended
6/29/97 12/31/96
(Unaudited) (Unaudited)
Net sales $ 13,442 $ 41,024
Operating loss $ (11,190) $ (13,923)
Net loss $ (12,482) $ (13,987)
Net loss per common share $ (0.19) $ (0.21)
Weighted average shares of common
stock outstanding 67,133 66,596
Working capital(1) $ 31,990
Total assets(2) $ 105,464
Short term debt -
Long term debt -
Stockholders' equity $ 34,079
(1) Excludes the use of approximately $18,500,000 for repayment of
additional funding under the Gould Debt for the period from June 29, 1997
through the date of closing.
(2) Excludes the use of $41,700,000 associated with the following items:
(i) approximately $18,500,000 for repayment of additional funding under the
Gould Debt for the period of June 30, 1997 through the date of closing; and
(ii) approximately $23,200,000 in restructuring costs in connection with the
Sun Transaction and organization and operation of the Company following the
Sun Transaction.
Unaudited Pro Forma Consolidated Financial Statements
The following unaudited Pro Forma Consolidated Financial Statements for the
year ended December 31, 1996 and the six months ended June 29, 1997 give
effect to the Sun Transaction and the Gould Agreement. The pro forma
adjustments are based on available information and upon certain assumptions
that the Company's management believes are reasonable under the
circumstances. The unaudited pro forma financial information should be read
in conjunction with the December 31, 1996 audited Consolidated Financial
Statements and the June 29, 1997 unaudited Consolidated Financial Statements
of the Company incorporated herein by reference.
The unaudited Pro Forma Consolidated Balance Sheet and Pro Forma
Consolidated Statement of Operations are necessarily based upon allocations,
assumptions and approximations and, therefore, do not reflect in precise
numerical terms the impact of the transaction on the historical financial
statements. In addition, such pro forma statements should not be used as a
basis for forecasting the future operations of the Company.
The pro forma adjustments made in the preparation of the unaudited Pro Forma
Consolidated Balance Sheet assume that the Sun Transaction and the Gould
Agreement had been consummated on June 29, 1997. The pro forma adjustments
related to the unaudited Pro Forma Consolidated Statement of Operations
assume that the Sun Transaction and the Gould Agreement had been consummated
as of January 1, 1996.
Unaudited Pro Forma Consolidated Balance Sheet
As of June 29, 1997
Pro Forma Adjustments
Increase/(Decrease)
Sun Gould Pro
Historical Transaction Agreement Forma
ASSETS
Current assets:
Cash and cash equivalents $ 3,155 $ 153,000 (A) $ (71,439)(F) $ 55,116(H)
(4,600)(B) (25,000)(E)
Accounts receivable, less
allowance 8,009 8,009
Inventories 9,475 (6,990)(A) 2,485
Prepaid expenses and other
current assets 1,351 1,351(I)
Total current assets 21,990 141,410 (96,439) 66,961
Due from Sun Microsystems - 35,000 (A) 35,000
Property and equipment, net 30,409 (27,995)(A) 2,414
Other assets 1,427 (338)(A) 1,089
Total assets $ 53,826 $ 148,077 $ (96,439) $ 105,464
LIABILITIES AND SHAREHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Current liabilities:
Current portion of long term
debt-related parties $ 57,061 $ $ (57,061)(F)$ 0 (H)
Current portion of long term
debt-other 152 (152)(B) 0
Accounts payable and accrued
liabilities 28,456 (933)(A) (14,378)(F) 34,971
(4,034)(B)
3,860 (C)
Restructuring and other charges 22,000 (D)
Total current liabilities 85,669 20,741 (71,439) 34,971
Long term debt-other 414 (414)(B) 0
Other liabilities 1,414 35,000(E) 36,414
Total liabilities 87,497 20,327 (36,439) 71,385
Shareholders' equity (capital deficiency):
Preferred stock, $.01 par value;
authorized 10,000,000 shares:
Series A Convertible Participating Preferred,
issued 73,641 shares in 1997 and 1996
1 (1)(G) 0
6% Cumulative Series B Convertible Preferred,
issued 728,722 with an aggregate liquidation
preference of $72,872,200
7 (7)(G) 0
6% Cumulative Series D through I Convertible
Preferred, issued 4,110,478 with an aggregate
liquidation preference of $411,047,800
41 (41)(E) 0
Common stock, $.01 par value; authorized
200,000,000 shares; issued 37,559,976,
pro forma 67,346,291
376 298 (G) 674
Additional paid-in capital 487,227 (59,959)(E) 426,978
(290)(G)
Accumulated deficit (521,323) 153,610 (A) (393,573)
(3,860)(C)
(22,000)(D)
Total shareholders' equity
(capital deficiency) (33,671) 127,750 (60,000) 34,079
Total liabilities and
shareholders' equity
(capital deficiency) $ 53,826 $ 148,077 $ (96,439) $ 105,464
See accompanying notes to Unaudited Pro Forma Consolidated Balance Sheet.
Unaudited Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
(in thousands, except per share data)
Pro Forma Adjustments
Increase/(Decrease)
Sun Gould
Historical Transaction Agreement Pro Forma
Net Sales:
Equipment $ 27,600 $ (6,603)(a) $ $ 20,997
Service 20,027 20,027
Total 47,627 (6,603) 0 41,024
Costs and expenses:
Cost of equipment
sales 35,786 (23,025)(a) 12,761
Cost of service sales 17,822 (5,979)(a) 11,843
Research and development 30,260 (16,946)(b) 13,314
Sales, general and
administrative 30,977 (13,948)(b) 17,029
Total 114,845 (59,898) 0 54,947
Operating loss (67,218) 53,295 (13,923)
Interest expense,
related parties (3,370) 3,370(c) 0
Interest expense,
mortgages (80) 80 (d) 0
Interest expense, other (70) (70)
Interest Income 196 196
Other expense, net (554) (554)
Loss before income taxes(71,096) 53,375 3,370 (14,351)
Income tax benefit (364) (364)
Net loss $ (70,732) $ 53,375 $ 3,370 $ (13,987)(g)
Loss per common share:
Net loss $ (70,732) $ 53,375 $ 3,370 $ (13,987)
Preferred Stock dividends
(25,413) - 25,413(e)
- -
Net loss attributable
to common
shareholders $ (96,145) $ 53,375 $ 28,783 $ (13,987)
Net loss per common
share $ (2.61) $ (0.21)
Weighted average
shares of common stck 36,810 22,422(f) 66,596
See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations.
Unaudited Pro Forma Consolidated Statement of Operations
Six Months Ended June 29, 1997
(in thousands, except per share data)
Pro Forma Adjustments
Increase/(Decrease)
Sun Gould
Historical Transaction Agreement Pro Forma
Net Sales:
Equipment $ 7,594 $ (2,245)(a) $ $ 5,349
Service 8,093 8,093
Total 15,687 (2,245) 0 13,442
Costs and expenses:
Cost of equipment sales 13,298 (8,397)(a) 4,901
Cost of service sales 8,554 (3,311)(a) 5,243
Research and developmt 14,421 (8,076)(b) 6,345
Sales, general and
administrative 15,218 (7,075)(b) 8,143
Total 51,491 (26,859) 0 24,632
Operating loss (35,804) 24,614 (11,190)
Interest expense,
related parties (2,697) 2,697(c) 0
Interest expense,
mortgages (34) 34 (d) 0
Interest expense, other (23) (23)
Interest Income 61 61
Other expense, net (1,163) (1,163)
Loss before inc taxes (39,660) 24,648 2,697 (12,315)
Provision for income
taxes 167 167
Net loss $ (39,827) $ 24,648 $ 2,697 $ (12,482)
Loss per common share:
Net loss $ (39,827) $ 24,648 $ 2,697 $ (12,482)
Preferred Stock
dividends (16,842) - 16,842(e) -
Net loss attributable
to common
shareholders $ (56,669) $ 24,648 $ 19,539 $ (12,482)
Net loss per common
share $ (1.52) $ (0.19)
Weighted average shares
of common stock 37,347 22,422(f) 67,133
See accompanying notes to Unaudited Pro Forma Consolidated Statement of
Operations.
Note: The results of operations for the six months of Fiscal 1997 are not
necessarily indicative of the results to be expected for the full year.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(A) Represents $153,000,000 cash payment at the date of closing (consisting
of a closing payment of $150,000,000 and $3,000,000 for certain storage
product investments) and a $35,000,000 receivable from Sun Microsystems due
July 1, 1998 as part of the Sun Transaction in consideration for
substantially all of the assets associated with the Storage Products
Business, detailed as follows (and shown at historical book values):
Storage product inventory $ 6,990,000
Property, plant and equipment including land and buildings 27,995,000
located in Fort Lauderdale and Melbourne, Florida
Capitalized software purchased for internal use 338,000
35,323,000
Reversal of warranty reserves associated with the storage
product inventory (933,000)
$ 34,390,000
Gain on the sale of assets excluding Sun Transaction costs $ 153,610,000
(B) Represents the payment of all trade accounts payable and the balance of
the mortgages on the buildings being sold as part of the Sun Transaction.
Certain other liabilities may be required to be paid at the closing date.
(C) Represents reserve established for the payment of transaction costs
associated with Sun Transaction.
(D) Represents estimated restructuring and other charges directly related
to the Sun Transaction as follows:
Employee severance and outplacement costs $ 11,400,000
Employee retention bonuses 4,600,000
Employee incentive bonuses 1,000,000
Costs associated with termination of European facility leases 4,400,000
Costs associated with termination of European automobile leases 100,000
Building rearrangement costs 500,000
$ 22,000,000
The above was calculated as follows:
Severance and outplacement --Employee severance and outplacement costs are
based on the assumption that of the 685 employees of the Company, 250 will
be hired by Sun, 125 will be contracted by Sun, 56 will be retained by the
Company and 254 will be terminated. The Company has agreed to pay the
difference between the amount the contractors will receive from Sun at the
end of their contract and the amount of severance they would be entitled to
if they had been terminated, approximately $412,000. International
severance ($3,155,000) is based on one year's salary and benefits for an
estimated 40 employees. Domestic severance ($7,576,000) is based on average
salary and benefits as well as length of service for 214 employees.
Outplacement costs are estimated to be approximately $257,000 ($1,200 for
each of the 214 domestic employees).
Employee retention -- Pursuant to written agreements between the Company and
each of approximately 49 employees.
Employee incentive -- Payment to certain key employees at the discretion of
management.
Termination of European facility leases -- Based on remaining lease terms
and buy-out clauses associated with leased facilities at the Company's
European offices.
Termination of European automobile leases -- Based on remaining lease terms
on automobiles leased by the Company for European employees.
Building rearrangement -- Leasehold improvements to be made at one of the
Company's Fort Lauderdale facilities which will be leased from Sun.
(E) Represents payment of $25,000,000 at the closing of the Sun Transaction
and $35,000,000 payable due July 1, 1998 required by the Gould Agreement to
retire the 6% Cumulative Series D, E, F, G, H and I Convertible Preferred
Stock.
(F) Represents cash payment of $71,439,000 to retire the Gould Debt.
(G) Represents the conversion of 73,641 shares of Series A Convertible
Participating Preferred Stock and 728,722 shares of 6% Cumulative Series B
Convertible Preferred Stock held by Gould into 29,786,315 shares of Common
Stock pursuant to the Gould Agreement.
(H) Excludes the use of $41,700,000 associated with the following items:
(i) approximately $18,500,000 for repayment of additional Gould Debt
for the period from June 29, 1997 through the date of closing; and
(ii) approximately $22,000,000 in restructuring costs in connection
with the Sun Transaction and organization and operation of the Company
following the Sun Transaction.
(I) Excludes valuation of the royalty-free license agreement because the
Company believes that future product revenues resulting from such license
agreement will be immaterial in value relative to the projected product
revenues, and short-term in duration. Also, the utilization of the license
granted thereunder is dependent upon the Company's future course of
operations, which is not yet determined.
Notes to Unaudited Pro Forma Consolidated Statement of Operations
(a) Represents the reversal of storage product revenue and all cost of
sales associated with the storage product including customer service
support, which was provided to the customer at no charge.
(b) Represents the estimated portion of expenses incurred for the
development of the storage product lines, based in part on the number of
former Encore employees expected to be employed by Sun upon the consummation
of the Sun Transaction, and actual sales expenses related to storage
products. It is estimated that Sun will hire 132 development employees, 56%
of those now employed by the Company. Development spending was reduced by
this percentage. No amounts have been deducted for general and
administrative expenses as none relate directly to the assets to be sold.
(c) Represents interest expense included in the Gould Debt, which will be
retired with the proceeds of the Sun Transaction.
(d) Represents interest expense on the mortgages, which will be terminated
as part of the Sun Transaction.
(e) Represents the reversal of dividends on preferred stock retired or
converted to common stock pursuant to the Gould Agreement.
(f) Represents the Common Stock issued in the conversion of Series A and B
Preferred Stock pursuant to the Gould Agreement.
(g) Excludes the gain on the sale of assets of $149,750,000 in connection
with the Sun Transaction (including Sun Transaction costs).
Incorporation of Certain Documents by Reference
The following documents previously filed by the Company with the Securities
and Exchange Commission are hereby incorporated by reference into this Proxy
Statement:
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
the Company's 1996 Annual Report to Stockholders.
the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 29, 1997 and June 29, 1997.
The Company's 1996 Annual Report to Stockholders and Quarterly Report on
Form 10-Q for the quarter ended June 29, 1997, are included with this Proxy
Statement as Exhibits D and E, respectively. Any documents subsequently
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this Proxy Statement and prior to the date of
the Company's Annual and Special Meeting of Stockholders shall also be
deemed to be incorporated herein by reference and to be a part hereof from
the date of filing such documents.
ELECTION OF DIRECTORS
Pursuant to the By-Laws of the Company, the Board of Directors has fixed the
number of directors at six (6). The persons named in the proxy will vote,
as permitted by the By-Laws of the Company, to elect as directors Messrs.
Fisher, Thomas, Ferguson and Fedor, each of whom is currently a director and
Messrs. Rich and Veysey, unless authority to vote for the election of
directors is withheld by marking the proxy to that effect or unless the
proxy is marked with the names of directors as to whom authority to vote is
withheld. Pursuant to the Voting Agreement, Gould, Mr. Fisher and Indian
Creek which hold, in the aggregate, 55.9% of the outstanding shares of
Common Stock, have agreed to vote their shares for the election of Messrs.
Fedor, Ferguson, Rich and Veysey, each of whom is a nominee of Gould.
Each director will be elected to hold office until the next annual meeting
of stockholders and until his successor is elected and qualified. If one of
the nominees becomes unavailable, the person acting under the proxy may vote
the proxy for the election of a substitute. It is not presently
contemplated that any of the nominees will be unavailable.
The following table sets forth the name of each nominee and the positions
and offices held by him, his age, the year in which he became a director of
the Company, his principal occupation and business experience for at least
the last five years, the names of other publicly-held companies in which he
serves as a director, the number of shares of Common Stock and equivalents
of the Company, including shares which may be acquired within sixty days
after September 29, 1997 by exercise of outstanding stock options, which he
reported were beneficially owned by him as of September 29, 1997, and the
percentage of all outstanding shares of Common Stock and equivalents owned
by him on such date.
Common Stock Percentage of
Name, Age, Principal and Equivalents Common Stock
Occupation, Business Beneficially and Equivalents
Experience and Directorships Owned Outstanding
Kenneth G. Fisher, age 66 7,305,006 (1) 17.9% (1)
Mr. Fisher is a founder of the Company and has served as a Director,
Chairman and Chief Executive Officer of the Company since the Company's
inception in May 1983. He was the Company's President from its inception
until December 1985 and also served in that capacity from December 1987 to
January 1991. From January 1982 until May 1983, Mr. Fisher was engaged in
private venture transactions. From 1975 to 1981, Mr. Fisher was President
and Chief Executive Officer of Computervision (formerly Prime Computer,
Inc.). Before joining Computervision, Mr. Fisher was Vice President of
Central Operations for Honeywell Information Systems, Inc.
Rowland H. Thomas, Jr., age 61 1,750,750 (2) 4.5% (2)
Mr. Thomas has been a member of the Board of Directors since December 1987
and Chief Operating Officer since June 1989. He presently also serves as
President of the Company, a position to which he was appointed in January
1991. From June 1989 to January 1991, Mr. Thomas served as Executive Vice
President of the Company. In February 1988, he was named President and Chief
Executive Officer of Netlink Inc. Prior to joining Netlink, Mr. Thomas was
Senior Executive Vice President of National Data Corporation ("NDC"), a
transaction processing company, a position he held from June 1985 to
February 1988. From May 1983 through June 1985, Mr. Thomas was Executive
Vice President and Senior Vice President at NDC.
Robert J. Fedor, age 56 0 (3) * (3)
Dr. Fedor has been a member of the Board of Directors since July 1992. He is
presently Senior Vice President Corporate Development at Gould, a position
he has held since July 1992. From December 1989 to July 1992 he was Vice
President, Corporate Business Development at Gould. Prior to assuming that
position, Dr. Fedor was General Manager of Gould's U.S. and Far East Foil
Business since 1985. Since joining Gould in 1964, he has served in various
senior marketing and research positions. Dr. Fedor holds a Ph.D. in
Metallurgical Engineering from Case Western Reserve University.
C. David Ferguson, age 55 12,304 (3) * (3)
Mr. Ferguson has been a member of the Board of Directors since April 1989.
He is presently the President and Chief Executive Officer and a director of
Gould, a position he has held since October 1988. Prior to such time, he
served as Executive Vice President, Materials and Components, at Gould's
Foil Division from 1986 until October 1988. He transferred to the Foil
Division in 1967 from the Gould Engine Parts Division where he began his
career in 1963.
Thomas N. Rich, age 45 0 (3) * (3)
Mr. Rich is presently Vice President-Finance and Corporate Controller at
Gould, a position he has held since July 1994. From December 1991 to July
1994, he was Vice President-Corporate Controller at Gould. Prior to
assuming that position, Mr. Rich was Vice President-Financial Controller
since joining Gould in July 1990. From 1973 through June 1990, Mr. Rich was
employed at Ernst & Young, an international professional services firm. He
holds a B.A. degree in Accounting from Duke University.
Michael C. Veysey, age 53 300 * (3)
Mr. Veysey has been a member of Gould's Board of Directors since July 1992.
He is presently Senior Vice President, General Counsel and Secretary at
Gould, a position he has held since July 1992. From January 1989 to July
1992, he was Vice President, General Counsel and Secretary at Gould. Prior
to assuming that position, Mr. Veysey had various positions in Gould's Law
Department since 1980. Mr. Veysey holds a J.D. degree from Boston College
Law School.
______________
*Less than 0.1%.
(1) Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii) 2,301,062
shares which may be acquired by Mr. Fisher within 60 days after September
29, 1997 by exercise of stock options and (iii) 3,901,134 shares of Common
Stock and 1,049,046 shares of Common Stock issuable upon conversion of the
shares of Series B Stock each held by Indian Creek.
(2) Includes 500 shares owned by Mr. Thomas' wife and 1,656,000 shares
which may be acquired by Mr. Thomas within 60 days after September 29, 1997,
by exercise of stock options.
(3) Mr. Ferguson and Mr. Veysey are officers and directors, and Dr. Fedor
and Mr. Rich are officers, of Gould which beneficially owns 128,651,444
shares or 66.4% of the Company's outstanding Common Stock and equivalents.
Mr. Veysey is also an officer and director of EFI, which beneficially owns
30,497,969 shares or 15.7% of the outstanding Common Stock and equivalents.
During the fiscal year ended December 31, 1996, the Board of Directors held
four meetings. All directors attended 100% of the meetings of the Board of
Directors and the committees of which they were members.
The Board of Directors has a standing Audit Committee, the membership of
which in 1996 consisted of Mr. Anderson and Dr. Fedor. The principal
functions of the Audit Committee are to make recommendations to the Board of
Directors as to the selection of the Company's independent auditors, to act
as liaison between the Board of Directors and the firm so selected and, on
advice of such firm or otherwise, to recommend institution or modification
of accounting procedures employed by the Company. The members of the Audit
Committee are not employees of the Company and are, in the opinion of the
Board of Directors, free from any relationship that would interfere with
their exercise of independent judgment as Audit Committee members. The Audit
Committee met on January 15, 1997 in connection with the Company's audit for
the fiscal year ended December 31, 1996. During the fiscal year ended
December 31, 1996, the Audit Committee held four meetings. See "Approval of
Sun Transaction - Use of Proceeds; Gould Agreement") for a discussion of
certain changes to the Company's By-Laws relating to the composition and
authority of the Audit Committee effected pursuant to the Gould Agreement.
The Board of Directors also has a Compensation Committee, which in 1996
consisted of Messrs. Fisher, Anderson and Ferguson. The principal
responsibilities of the Compensation Committee are to (i) function as a
stock option committee with respect to the Company's stock option and stock
purchase plans, except for the granting of options to officers who are also
Directors, which is administered by the Directors Options Committee
(consisting of Messrs. Anderson and Ferguson), and (ii) make recommendations
with respect to implementation of present compensation programs and adoption
of future compensation programs. During the fiscal year ended December 31,
1996, the Compensation Committee held four meetings. The Board of Directors
does not have a Nominating Committee.
Mr. Daniel O. Anderson was a member of the Board of Directors from May 1987
through April 25, 1997. During the fiscal year ended December 31, 1996, Mr.
Anderson was a member of the Audit Committee and Chairman of the
Compensation Committee. Effective April 25, 1997, Mr. Anderson resigned as
a member of the Board of Directors.
Compensation Committee Interlocks and Insider Participation
As discussed above, Mr. Fisher, Mr. Anderson and Mr. Ferguson served as
members of the Compensation Committee during 1996. Mr. Fisher, in addition
to his position as Chairman of the Board, is the Company's Chief Executive
Officer. Mr. Ferguson, in addition to being a director of the Company, is a
director and President and Chief Executive Officer of Gould, the beneficial
owner of 63.7% of the Company's Common Stock and equivalents.
Mr. Fisher's base salary was not increased, and no incentive payments were
made to him, in 1996, but he was granted 152,200 stock options in 1996 in
accordance with the Board's established guidelines. In May 1997, the
Company entered into Retention Agreements with 49 key employees, including
Mr. Fisher, to provide additional incentives for these employees to remain
employed by the Company and to assist the Company in its efforts to seek a
sale or merger of the Company, a joint venture with a strategic partner or
substantial new investment in the Company. Mr. Fisher is entitled to
receive $566,525 under this Retention Agreement provided that the conditions
for payment are satisfied. In July 1997, the Company's Board approved a one-
year employment contract with Mr. Fisher, as Chief Executive Officer of the
Company, to take effect upon the closing of the Sun Transaction. Under that
contract, Mr. Fisher's base salary will be equal to his current base salary.
In April 1996, Gould, the company for which Mr. Ferguson serves as a
director and President and Chief Executive Officer, cancelled $35 million of
indebtedness owed to it by the Company in exchange for 350,000 shares of the
Company's Series H Stock with a liquidation preference of $35,000,000. In
March 1997, Gould exchanged $40,000,000 of indebtedness owed to it by the
Company for 400,000 shares of the Company's Series I Stock. Also in March
1997, the maximum amount of the borrowing facility between Gould and Encore
was increased to $80 million.
Encore has agreed to pay off the Gould Debt with proceeds from the Sun
Transaction. In addition, all of the Preferred Stock held by Gould and EFI
will be redeemed by the Company upon the closing of the Sun Transaction for
$60 million in cash, of which $25 million will be paid from the proceeds of
the Sun Transaction at the closing and the balance will be paid by assigning
to Gould the right to receive the $35 million payment from Sun which is
payable on July 1, 1998. The Preferred Stock to be redeemed from Gould has
an aggregate liquidation preference over the Common Stock of approximately
$411 million.
Executive Compensation
Total compensation paid or accrued for services rendered during the three
most recent fiscal years for the Chief Executive Officer and the four other
most highly compensated executive officers of the Company for the year ended
December 31, 1996 was as follows:
Summary Compensation Table
Annual Compensation
Long Term
Compensation
Awards:
Number All
Name and Other Other of Shares Other
Principal Annual Annual Underlying Compen-
Postitions Year Salary Bonus Compensation Options(3) sation(2)
(1)
Kenneth G. Fisher 1996 $ 340,000 $ 0 $ 0 952,200 $ 0
Chairman of the 1995 340,000 0 0 196,900 0
Board and Chief 1994 340,000 0 0 103,300 1,234
Executive Officer
Rowland H. Thomas 1996 $ 265,000 $ 26,095 $ 0 302,800 $ 0
President and 1995 265,000 26,850 0 113,600 0
Chief Operating 1994 264,617 36,833 0 59,600 728
Officer
Robert A. DiNanno 1996 $ 187,500 $ 25,835 $ 0 75,800 $ 0
Vice President and 1995 175,000 25,075 0 46,300 0
General Manager, 1994 175,000 39,644 0 20,000 676
Global Customer
Operations
Charles S. Namias 1996 $ 151,107 $ 19,830 $ 2,000 39,800 $ 0
Vice President, 1995 150,000 19,825 4,800 46,300 0
Corporate Alliances1994 136,154 70,844 4,800 105,000 608
Ziya Aral 1996 $ 150,000 $ 19,830 $ 0 35,800 $ 80,000
Vice President, 1995 150,000 19,700 0 46,300 0
Chief
Technical Officer 1994 149,229 35,145 0 290,000 0
(1) Amounts paid to Mr. Namias consist entirely of an allowance for
business-related automobile expenses.
(2) All Other Compensation for 1994 consists of earnings associated with
the individual's participation in a company-paid sales award trip. Mr. Aral
received an $80,000 loan from the Company on September 23, 1996. The note
carries an annual interest rate of 6% and is due and payable on September
22, 1999.
(3) Includes 800,000 shares for Mr. Fisher, 215,000 shares for Mr. Thomas,
40,000 shares for Mr. DiNanno and 4,000 shares for Mr. Namias which were
originally granted in 1991 and were scheduled to expire in 1996 if not
exercised. However, at the time the options were scheduled to expire the
Company's policy on insider trading effectively prevented each from
exercising their options. Accordingly, the Board of Directors approved an
extension of the expiration date to year 2000. The extensions has been
treated as a cancellation of the old options and a grant of new options in
the same amount at the same exercise price.
The following table sets forth the number of shares of Common Stock and
equivalents of the Company, including shares which may be acquired within
sixty days after September 29, 1997 by exercise of outstanding stock
options, which are beneficially owned by executive officers of the Company
named in the Summary Compensation Table and all directors and executive
officers of the Company as a group as of September 29, 1997 along with the
percentage of all outstanding shares of Common Stock and equivalents owned
by each executive officer and director on such date.
Common Stock Percentage of
and Equivalents Common Stock
Beneficially and Equivalents
Name Owned Outstanding(1)
Kenneth G. Fisher 7,305,006(1) 17.9%
Chairman of the Board and Chief Executive Officer
Rowland H. Thomas 1,750,750(2) 4.5%
President and Chief Operating Officer
Robert A. DiNanno 405,389(3) 1.1%
Vice President and General Manager Global Customer Operations
Charles S. Namias 351,638(4) .9%
Vice President Corporate Alliances
Ziya Aral 496,593(5) 1.3%
Vice President and Chief Technical Officer
Total directors & executive officers as a group (9 people)
11,461,037(6) 26.2%
(1) Includes: (i) 53,764 shares owned by Mr. Fisher's wife, (ii) 2,301,062
shares which may be acquired by Mr. Fisher within 60 days after September
29, 1997 by exercise of stock options and (iii) 3,901,134 shares of Common
Stock and 1,049,046 shares of Common Stock issuable upon conversion of the
shares of Series B Stock each held by Indian Creek.
(2) Includes 500 shares owned by Mr. Thomas' wife and 1,656,000 shares
which may be acquired by Mr. Thomas within 60 days after September 29, 1997,
by exercise of stock options.
(3) Includes 402,799 shares which may be acquired within 60 days after
September 29, 1997, by exercise of stock options.
(4) Includes 266,724 shares which may be acquired within 60 days after
September 29, 1997, by exercise of stock options.
(5) Includes 458,349 shares which may be acquired within 60 days after
September 29, 1997, by exercise of stock options.
(6) Includes 6,191,930 shares which may be acquired within 60 days after
September 29, 1997, by exercise of stock options and 1,049,046 shares of
Common Stock issuable upon conversion of the shares of Series B Stock held
beneficially by Mr. Fisher.
During May 1997, the Company entered into retention agreements ("Retention
Agreements") with 49 key employees in order to provide additional incentives
for those employees to remain employed by the Company and to assist the
Company in its efforts, together with its investment bankers, to seek a sale
or merger of the Company, a joint venture with a strategic partner or
substantial new investment in the Company. See "APPROVAL OF SUN TRANSACTION
- - Background and Reasons for the Sun Transaction." The amounts payable
pursuant to the Retention Agreements range from 50% to 100% of the
employee's annual compensation. Such amounts are payable 50% on the closing
of the Sun Transaction and 50% on the later of 90 days thereafter or January
1, 1998 if the employee is, on the later of the closing of the Sun
Transaction or January 1, 1998, then employed by the Company or has been
terminated prior thereto without cause or resigned prior thereto with good
reason. Messrs. Fisher, Thomas, DiNanno, Namias and Aral are entitled to
receive $566,525, $398,750, $275,000, $218,835 and $217,685, respectively,
under their Retention Agreements assuming the conditions for payment are
satisfied.
On July 17, 1997, the Board of Directors approved a one-year employment
contract with Mr. Fisher as Chief Executive Officer of the Company to take
effect upon the closing of the Sun Transaction. Under the contract, Mr.
Fisher's base salary will be equal to his current base salary. The Board of
Directors shall have the right to terminate the contract at any time if the
Company requests any funding from Gould or if the Company is sold. If Mr.
Fisher resigns voluntarily during the term of the contract, he will be
obligated to reimburse the Company for all base salary and other
compensation paid to him under the contract.
The following table shows, as to those executive officers named in the
Summary Compensation Table above, the number, exercise price and expiration
date of options to acquire Common Stock granted under the Company's Long-
Term Performance Plan during fiscal 1996, and the potential realizable value
of those shares assuming certain annual rates of appreciation in the price
of the Company's Common Stock.
Option Grants for the year ended December 31, 1996
Individual Grants Potential Realizable
Value at Assumed Annual
Number % of Total Rates of Stock Price
of Shares Options Appreciation for
Underlying Granted Option Term
Options in Fiscal Exercise Expiration
Name Granted Year Price/Share Date 5% 10%
Kenneth G. Fisher 152,200 8.5% $2.8750 6/24/2006 $275,191 $697,363
800,000 44.8% 2.0000 1/21/2000 344,800 742,560
Rowland H. Thomas 87,800 4.9% 2.8750 6/24/2006 158,750 402,290
215,000 12.0% .8125 1/21/2000 37,645 81,072
Robert A. DiNanno 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
40,000 2.2% .8125 1/21/2000 7,004 15,083
Charles S. Namias 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
4,000 .2% .8125 1/21/2000 700 1,508
Ziya Aral 35,800 2.0% 2.8750 6/24/2006 64,730 164,032
As required by the rules of the Securities and Exchange Commission,
potential values are stated based on the prescribed assumption that the
Common Stock of the Company will appreciate in value from the date of grant
to the end of the option term at rates (compounded annually) of 5% and 10%,
respectively, and therefore do not reflect past results and are not intended
to forecast possible future appreciation, if any, in the price of the Common
Stock.
The following table provides information on option exercises in 1996 by the
named executive officers and the value of such officers' unexercised options
as of December 31, 1996.
Aggregate Option Exercises in the year ended December 31, 1996
and Option Values as of December 31, 1996
Number of Value of
Shares Underlying
Unexercised In-the-Money
Options at Options at
Number of 12/31/96 12/31/96
Shares Acquired Value Exercisable/ Exercisable/
Name on Exercise Realized Unexercisable Unexercisable
Kenneth G. Fisher 0 $ 0 2,213,788/338,612 $325,000/$0
Rowland H. Thomas 0 0 1,619,850/181,150 $405,625/$0
Robert A. DiNanno 229,790 466,611 388,062/ 72,238 $113,300/$0
Charles S. Namias 12,000 21,000 235,737/120,363 $32,750/$0
Ziya Aral 0 0 423,612/193,488 $56,250/$0
Report of the Compensation Committee on Executive Compensation
Executive Compensation Philosophy
It is the goal of the Compensation Committee of the Board of Directors to
provide compensation to executives of the Company in accordance with the
following considerations:
to provide compensation that is competitive with other high technology
companies that are of similar size to Encore with similar products and
markets;
to provide compensation that will attract, retain and reward superior,
industry-knowledgeable executives who can manage the stockholders' short and
long-term interest; and
to provide total compensation wherein the majority of value to be
delivered is based on the financial performance of the Company and the
appreciation of the Company's stock.
To meet these goals, the Committee establishes, administers and reviews
several programs for the Company. These programs are designed to address
the above considerations and consist of three major components.
Base Salary
For executives of the Company, base salary is determined by the level of job
responsibility and overall competitive practices in the labor market for the
Company's executive talent. The Committee recognizes that there is a
scarcity of executive talent with the technical capabilities that are
critical to the Company's long-term success. The Committee also considers
the Company's location outside of traditional labor markets for technical
talent to be a considerable factor for base salary positioning. As such,
the Committee positions the Company's executives' base salaries at the 75th
percentile of the competitive market and generally believes that this base
salary posture is an essential factor in maintaining a highly skilled
executive team. The Committee derives competitive data representing the
high technology and computer products sectors from an independent
compensation consultant, Towers Perrin. The Committee believes that most of
the companies in the S & P Computer Systems Index, which is used as the
Company's industry comparison line in the performance graph appearing below,
are represented in the various surveys used by the compensation consultant.
1996 executive base salaries were below the above policy. None of the named
executives' base salaries or incentive bonus targets were increased in 1996,
with the exception of R. DiNanno. Mr. DiNanno's base salary and bonus were
increased in conjunction with a significant increase in his
responsibilities.
Annual Incentives
All executive officers are eligible to receive incentives which are based on
the short-term performance of the Company. The program is intended to
highlight critical business goals and reward the achievement of these goals
through individual and team contributions. Target incentive opportunities
typically range from 15% to 45% (or, with respect to the Retention
Agreements, from 15% to 55%) of executives' base salaries and are based on
median bonus levels observed in other high technology and computer-related
companies. Target award levels are structured so that at those levels,
executives' total cash compensation (base salary plus annual incentive)
would be comparable to the 75th percentile total cash compensation of the
competitive market as discussed earlier.
The specific performance criteria used for incentive compensation goals
include the attainment of profit before tax objectives, achievement of
quarterly financial plans and subjective functional and teamwork goals as
determined by management. Functional goals include activities aimed at
achieving revenue, bookings, expenses, schedule targets, etc. Teamwork
goals include joint, cross-functional activities and projects. The
relative weighting of each factor depends on the executive's position within
the Company's organizational structure. Typically, profit before tax
objectives and quarterly financial plan targets account for 60% to 100% of
the named executives' incentives; functional and teamwork goals account for
25% to 40% of the total incentive. In 1996 the Company did not achieve its
profit before tax objective and therefore no incentive payments were made
that were based on the Company's profit performance. Incentive payments
that were made to certain named executives in 1996 reflect the attainment of
individual functional and teamwork goals.
Long-Term Incentives
The Committee believes that stock-based incentives provide the strongest
link between the rewards earned by executives and the returns generated for
stockholders. The Committee also believes that providing the potential for
significant share ownership helps focus executive behavior on the long-term
growth and strength of the organization. As such, the Committee has made
significant stock option grants throughout the Company to focus all
recipients on long-term growth and the enhancement of stockholder value.
The Committee has generally observed that stock option grants comprise a
significant portion of executive compensation in the high technology and
computer-related industries. Stock options represent the right to purchase
the Company's stock at the fair market value of the Company's stock on the
date of grant. Since the value ultimately realized from the option depends
entirely on the future success of the Company and the growth of the stock
price, an option serves to provide an incentive to the executive for years
after it has been awarded.
The Committee has adopted formal stock option grant guidelines which will
base annual option grants on the executive's base salary grade and
individual performance factors. This practice will ensure that executives
at similar organizational levels will have equal long-term incentive
opportunities while allowing the Committee some discretion to augment awards
as it feels appropriate to recognize significant individual accomplishments.
In 1996, the Board granted 347,400 options to the named executives in accord
with the pre-established guidelines.
The Committee feels that it is quite important that executives have a
significant personal investment in the Company. As such, the Committee has
also adopted formal stock ownership guidelines for the CEO and other
executive officers who report directly to the CEO. The Committee believes
that requiring executives to maintain a certain ownership interest in the
Company complements the existing long-term incentive program in that once
stock options are exercised, there is an added emphasis on retaining
exercised shares and further enhancing stockholder value. The specific
guidelines require that, by April, 1997, the CEO acquire and maintain
ownership of Company stock with a value equal to two times his current base
salary; direct reports to the CEO are required to acquire and maintain
ownership of Company stock with a value equal to at least one-half their
current base salaries. The Committee is pleased to report that at the end
of 1996 the CEO had far exceeded his ownership requirement, and three of the
other named executives have met the requirement.
Compensation for Mr. Fisher
Mr. Fisher's base salary was not increased in 1996. Mr. Fisher's base
salary is positioned below the market average of other high technology and
computer-related companies of similar size to the Company. The Committee
intends to deliver most of Mr. Fisher's compensation in the form of annual
cash-based incentives and long-term stock-based incentives that will deliver
significant value to Mr. Fisher if, and only if, the Company achieves
positive returns and the stock price appreciates over time.
To focus Mr. Fisher on the attainment of short-term financial results, the
Committee awards a bonus equal to 5% of the Company's profit before taxes to
Mr. Fisher as an incentive award on a quarterly basis. This formula
approach ensures stockholders that an incentive payment will be made to Mr.
Fisher only if the Company is profitable. In addition, this approach
provides a consistent incentive to maximize profit each quarter. No
incentive payments were made to Mr. Fisher in 1996.
The Committee granted 152,200 stock options to Mr. Fisher in 1996 in accord
with the Board's established annual guidelines. Mr. Fisher continues to
have a significant personal investment in the Company and he is well
motivated to increase the overall value of the Company and to generate
returns on behalf of all stockholders.
Other Compensation Matters
The Committee continues to evaluate the potential impact of the $1 million
dollar deduction limitation on executive pay for the top five executives
which was implemented as part of the Omnibus Budget Reconciliation Act of
1993. The 1995 Stock Option Plan, approved by the stockholders at the 1995
annual meeting, is a performance-based plan, and therefore, any gains on
stock options will not be subject to the $1 million dollar limit. The
Committee believes this action adequately protects the deduction for
executive compensation at the current time. The Committee will continue to
evaluate the Company's potential exposure to the deduction limitation on an
annual basis.
In conclusion, the Committee feels that all pay programs are reasonable and
appropriate given the Company's industry, size and organizational structure.
Base salary and incentive programs provide attractive features to attract,
retain and motivate executives to enhance the performance of the Company
from year to year. The stock option grants provide a significant incentive
to executives to undertake policies and actions to enhance the overall value
of the organization well into the future.
The Compensation Committee
of the Board of Directors
C.D. Ferguson
K.G. Fisher
Comparison of Five Year Cumulative Total Stockholder Return Among
Encore Computer Corporation, the NASDAQ Market Index and the
NASDAQ Computer Index
The following chart depicts the Company's performance for the five year
period ending December 31, 1996, as measured by total stockholder return on
the Company's Common Stock compared with the total return of the NASDAQ
Market Stock Index and the NASDAQ Computer Stock Index.
This chart assumes an investment on December 31, 1991 of $100 in the
Company's Common Stock, the NASDAQ Market Stock Index and the NASDAQ
Computer Stock Index. See table below:
Year 1991 1992 1993 1994 1995 1996
The Company $100 $162 $446 $385 $238 $146
NASDAQ Market Index $100 $116 $134 $131 $185 $227
NASDAQ Computer Index $100 $108 $114 $138 $211 $260
The Report of the Compensation Committee on Executive Compensation and
Comparison of Five Year Cumulative Total Stockholder Return above shall not
be deemed to be "soliciting material" or be incorporated by reference into
any of the Company's filings with the Securities and Exchange Commission.
Director Compensation
The Board of Directors has fixed the compensation of non-officer directors
at $2,500 per regular board meeting attended. No compensation is paid for
special meetings held by telephone conference. A total of $10,000 was paid
to Mr. Anderson for meetings attended during fiscal 1996. Mr. Ferguson and
Dr. Fedor have waived payment to them of fees for attendance at board
meetings. Directors who are also officers of the Company receive no
compensation for serving as directors. During the past fiscal year, the
Company has also reimbursed certain of its directors for reasonable out-of-
pocket expenses relating to attendance at Board and Committee meetings.
Certain Relationships and Related Transactions
Financing by Gould
During 1996, the Company recorded significant quarterly operating losses.
Additionally, due to the operating losses incurred, the Company was unable
to generate sufficient levels of cash through operating activities to fund
the business. Cash requirements were provided by additional borrowings made
under a credit facility with Gould. Gould has provided the Company with its
loan facility since 1989.
On April 16, 1996, Gould canceled $35,000,000 of indebtedness owed to it by
the Company under the Credit Agreement in exchange for 350,000 shares of the
Company's Series H Stock with a liquidation preference of $35,000,000. The
Series H Stock carries a 6% cumulative annual dividend requirement payable
quarterly which the Company can accumulate or pay in additional shares of
preferred stock (valued at its liquidation preference) until the Company's
stockholders' equity exceeds $50,000,000. The Series H Stock is
convertible, at the holder's option, into the Company's Common Stock at
$3.25 per share only (a) if the stockholder is a United States citizen or a
corporation or other entity owned in the majority by United States citizens
or (b) in connection with an underwritten public offering. The Series H
Stock is convertible, at the Company's option, if the price of the Common
Stock exceeds $3.90 per share for twenty consecutive days and (a) a buyer is
contractually committed to purchase for at least $3.90 per share at least
50% of the shares into which all outstanding Preferred Stock would be
converted or (b) a buyer is contractually committed to purchase for at least
$3.50 per share at least 75% of the shares into which all outstanding
Preferred Stock would be converted. The Series H Stock is senior in
liquidation priority to all other classes of the Company's Preferred and
Common Stock and is redeemable by the Company at any time for cash equal to
the liquidation preference plus accumulated dividends.
In conjunction with the above described exchange, the Company and Gould also
entered into an Amended and Restated Credit Agreement (the "Amended
Agreement"). The Amended Agreement provided the Company with a committed
borrowing facility of $65,000,000. On October 31, 1996, the Company's
borrowings under the Amended Agreement exceeded the maximum allowed by the
terms of the Amended Agreement. Subsequent to October 31, 1996, Gould
allowed the Company to borrow funds in excess of the Amended Agreement's
maximum limit to fund its daily operations and during the fiscal fourth
quarter the Company began negotiations with Gould to significantly
recapitalize the Company. As of December 31, 1996 the Company had incurred
borrowings under the Amended Agreement of $72,659,000.
On January 9, 1997, the Company and Gould agreed to further amend the credit
agreement to increase the maximum amount of the borrowing facility to
$80,000,000. On March 19, 1997, Gould exchanged $40,000,000 of indebtedness
owed to it by the Company (the "Canceled Debt") for 400,000 newly-issued
shares of the Company's Series I Stock. The Canceled Debt had, prior to
the closing date, represented a portion of the indebtedness owed by the
Company to Gould under the Amended Agreement.
The principal terms of the Series I Stock are as follows:
(a) holders of such shares are entitled to receive, when, as and if
declared by the Company's board of directors, an annual dividend per share
equal to $6.00; provided, however, that if the number of authorized shares
of Common Stock of Company is not increased to at least 300,000,000 on or
prior to July 15, 1997, extended to November 30, 1997 by agreement with
Gould then such dividend per share is increased to $10.00; and, further
provided, that if the number of shares of authorized Common Stock of the
Company is increased to at least 300,000,000 at any time after July 15,
1997, extended to November 30, 1997 by agreement with Gould then such
dividend per share is decreased from $10.00 to $6.00;
(b) dividends on such shares are payable in cash; provided, however, that
under certain specified circumstances such dividends may be paid in
additional shares of Series I Stock;
(c) such shares are entitled to a liquidation preference of $100 per share
plus an amount equal to accrued and unpaid dividends on such share, which
liquidation preference is senior in priority to the Company's Common Stock
and to all other shares of Preferred Stock currently outstanding;
(d) subject to certain specified restrictions, such shares are convertible,
at the holder's option, at any time, into that number of shares of the
Company's Common Stock equal to (i) the liquidation preference divided by
$3.25, which amount is subject to adjustment under certain specified
circumstances;
(e) such shares are convertible, at the Company's option, in accordance
with the conversion methodology summarized in paragraph (d) above, if (i)
the last sale price of the Company's Common Stock exceeded $3.90 for twenty
consecutive trading days and (ii) a buyer is contractually committed to
purchase (x) for at least $3.90 per share, at least 50% of the shares of
Common Stock into which the outstanding Series I Stock are then convertible,
or (y) for at least $3.50 per share, at least 75% of the shares of Common
Stock into which the outstanding shares of Series I Stock are then
convertible;
(f) such shares are non-voting shares except as to matters that would
adversely affect the Series I Stock and except as to any other matters
which, pursuant to applicable law, holders of such shares may be entitled to
vote; and
(g) to the extent that there are not a sufficient number of authorized
shares of the Company's Common Stock to allow for a conversion of Series I
Stock into shares of Common Stock as described above (after taking into
account, among other things, (i) the number of options, warrants and other
similar rights outstanding and (ii) 135% of the maximum number of shares of
Common Stock the Company may be required to issue on conversion of all the
shares of each series of preferred stock then outstanding), then, to that
extent, the Series I Stock is convertible into shares of Series J
Convertible Participating Preferred Stock of the Company (the "Series J
Stock") at the rate of one share of Series J Stock for each 100 shares of
Common Stock.
The principal terms of the Series J Stock are as follows:
(a) holders of such shares are entitled to receive a dividend per share
equal to 100 times the dividend that is paid by the Company with regard to a
share of Common Stock of the Company;
(b) such shares are entitled to a liquidation preference of $1 per share
plus an amount equal to accrued and unpaid dividends on such share, which
liquidation preference is senior in priority to the Company's Common Stock,
and, after the holders of Common Stock have received $0.01 per share, such
shares of Series I Stock are further entitled to receive an amount equal to
100 times the amount per shares in excess of that $0.01 received by the
holders of the Common Stock;
(c) subject to certain specified restrictions, such shares are convertible,
at the holder's option, at any time, in that number of shares of the
Company's Common Stock equal to (i) 100 shares of Common Stock, which amount
is subject to adjustment under certain specified circumstances;
(d) such shares are voting shares and holders thereof shall be entitled to
vote together with the holders of Common Stock, voting as a single class, on
all matters presented for a vote of the holders of Common Stock, which each
share of Series J Stock being entitled to 100 times the number of votes to
which a share of Common Stock is entitled; and
(e) the Series J Stock (i) ranks prior to the shares of Common Stock to the
extent specifically provided in the Certificate of Designations, Powers,
Rights and Preferences of the Series J Stock, and in all other respects,
ranks on parity with the Common Stock, (ii) is on parity with the shares of
Series A Convertible Participating Preferred Stock of the Company and (iii)
is, and will be, junior to the shares of all other series of Preferred Stock
of the Company, other than series which are expressly designated as ranking
on a parity with, or being junior to, the Series J Stock.
In conjunction with the exchange of the Canceled Debt for Series I Stock,
Second Amendment to the Credit Agreement was executed between the Company
and Gould which (i) reduced the maximum amount which can be borrowed by the
Company from $80,000,000 to $50,000,000 and (ii) provided that any
borrowings in excess of $41,915,869 (the principal amount outstanding on
March 19, 1997 after giving effect to the exchange of indebtedness for
shares of Series I Stock) may be made only at the discretion of Gould. On
May 12, 1997, June 25, 1997 and July 12, 1997 Gould agreed to amend the
Credit Agreement to increase the maximum amount which can be borrowed by the
Company to $55 million, then to $60 million and then to $65 million,
respectively, and all borrowings after those respective dates in excess of
amounts of indebtedness then outstanding ($49,641,927, $57,060,822 and
$58,979,927, respectively) may be made only at the discretion of Gould.
The Credit Agreement matures on September 30, 1997; provided, however, that
Gould has indicated to the Company that the Credit Agreement is likely to be
extended to November 30, 1997 so long as Gould remains convinced that the
Sun Transaction will close. See "APPROVAL OF SUN TRANSACTION -Use of
Proceeds; Gould Agreement." Borrowings under the Credit Agreement are
collateralized by substantially all of the Company's tangible and intangible
assets and the agreement contains various covenants including the
maintenance of ratios or limitations, as applicable, regarding (i) total
liabilities to tangible net worth and subordinated debt (not to exceed 1.5
to 1), (ii) the aggregate amount of tangible net worth and subordinated debt
at the end of any fiscal quarter (not to be less than $75,000,000), (iii)
cash flow to required debt service at the end of any fiscal quarter (not to
be less than 1.2 to 1), (iv) the aggregate capital expenditures in any
fiscal year (not to exceed $25,000,000) and (v) current assets to current
liabilities (not to be less than 2.0 to 1), as well as other covenants
restricting, inter alia, dividend payments (other than (i) dividends on
Series B Preferred owned by the Company's management, (ii) any dividends on
shares of the Company's stock owned by Gould or (iii) cash dividends of any
wholly-owned subsidiary of the Company) and additional indebtedness (other
than indebtedness to Gould and certain inter-company indebtedness).
Interest on the loans equals the prime rate plus 2%.
The following tables display the beneficial ownership of JEC through its
wholly owned subsidiaries Gould and EFI in the Company before the March 19,
1997 transaction as of December 31, 1996 and on a pro forma basis after the
transaction as of December 31, 1996:
Before the Exchange of Indebtedness for Series I Stock
as of December 31, 1996
Debt (1) Beneficial Ownership (2)
($000's) % of total Shares % of total
Gould $ 72,659 99.1% 116,343,752 61.7%
EFI - - 30,497,969 16.2
Other 658 0.9 41,798,152 22.1
Total $ 73,317 100.0% 188,639,873 100.0%
After the Exchange of Indebtedness for Series I Stock
Pro Forma as of December 31, 1996
Debt (1) Beneficial Ownership (3)
($000's) % of total Shares % of total
Gould $ 32,659 98.0% 128,651,444 64.0%
EFI - - 30,497,969 15.2
Other 658 2.0 41,798,152 20.8
Total $ 33,317 100.0% 200,947,565 100.0%
(1) Includes both current and long-term portion of debt.
(2) Includes 143,954,867 shares of Common Stock issuable upon full
conversion of all outstanding Series A Stock, Series B Stock, Series D
Stock, Series E Stock , Series F Stock, Series G Stock and Series H Stock as
of December 31, 1996 as well as shares which may be acquired within sixty
days after December 31, 1996 by exercise of outstanding stock options.
(3) Includes 156,262,559 shares of Common Stock issuable upon full
conversion of all outstanding Series A Stock, Series B Stock, Series D
Stock, Series E Stock, Series F Stock, Series G Stock, Series H Stock and
Series I Stock as well as shares which may be acquired within sixty days
after December 31, 1996 by exercise of outstanding stock options. The
Series D Stock, Series E Stock, Series F Stock, Series G Stock, Series H and
Series I Stock is convertible by a United States citizen or a corporation or
other entity owned in the majority by a United States stockholder or in
connection with an underwritten public offering.
In connection with the various exchanges of indebtedness for preferred stock
discussed herein, the United States Defense Investigative Service ("DIS")
has reviewed the relationship between the Company and JEC and its affiliates
under revised government requirements relating to foreign ownership, control
and influence. Given the current requirements in the National Industrial
Security Program Operating Manual ("NISPOM"), DIS has decided to replace the
previous method of negation of Foreign Ownership Control and Influence,
accomplished by Board Resolution, with a more detailed Security Control
Agreement as prescribed by DIS in the NISPOM, which is currently being
drafted by the Company's counsel.
Because the Company requires facility security clearances in order to be
able to service equipment it sold to the government or others which is being
used in classified facilities, the Company must comply with limitations
promulgated by the Defense Intelligence Service of the Department of Defense
upon control by foreign persons of holders of facility security clearances.
Because Gould is owned by JEC, there have been limitations on Gould's
ownership of voting securities of the Company. This is the principal
reason the Preferred Stock the Company has issued to Gould has had no, or
very limited, voting rights and Gould has waived, or has not exercised,
rights it has had to elect persons to a majority of the positions on the
Company's Board of Directors. Gould has been advised by the Defense
Intelligence Service that it has no objection to Gould's converting its
Series A and Series B Preferred Stock into the Common Stock and voting that
Common Stock in favor of the Sun Transaction and for the election of Gould
designees to two-thirds of the places on the Company's Board of Directors.
Gould and the Defense Intelligence Service have agreed to discuss whether,
when Gould designees occupy two-thirds of the positions on the Company's
Board of Directors, there will have to be limitations on their involvement
in any decisions regarding contracts relating to classified government
facilities.
Since 1989, JEC and its wholly owned subsidiaries, Gould and EFI, have been
the principal source of the Company's financing by either directly providing
or guaranteeing the Company's loans. Each of the Company's debt agreements
with JEC and its wholly owned subsidiaries have contained various covenants
including maintenance of cash flow, leverage, and tangible net worth ratios
and limitations on capital expenditures, dividend payments and additional
indebtedness. Currently and at various times in the past, the Company has
been in default of certain covenants contained in the debt agreements but
waivers of compliance with those covenants have been obtained and,
generally, the Company has been able to successfully renegotiate favorable
terms with its creditor.
In each of the various exchanges of indebtedness for Preferred Stock
discussed herein (other than for the exchanges of indebtedness for Series B
Stock and Series C Stock in 1991), each share of Preferred Stock was issued
to Gould on the basis of $1 liquidation preference for $1 of secured debt.
In the exchanges of indebtedness for Series B Stock and Series C Stock
discussed herein, Gould and Encore agreed that the value of what Gould
received in such exchange should be equal to the value of the debt being
cancelled. In view of Encore's financial condition at the time, it was
estimated that the Series B and Series C Stock had a value equal to
approximately 50% of its liquidation preference. Therefore, in cancellation
of a total of $30 million of secured debt, Gould received Series B Stock
with a liquidation preference of $50 million and Series C Stock with a
liquidation preference of $10 million. In exchange for cancelling an
additional $30 million of secured debt, Gould received the Intellectual
Property License which Gould will be assigning to Sun in connection with the
Sun Transaction. The determination as to when to make each of the various
exchanges of indebtedness for preferred stock discussed herein was made by
agreement between the Company's Board of Directors, on the one hand, and
Gould's Board of Directors, on the other hand.
APPROVAL OF AUDITORS
The Board of Directors has selected the firm of Coopers & Lybrand L.L.P.,
independent public accountants, as auditors of the Company for the year
ending December 31, 1997, and is submitting the selection to the
stockholders for approval. The Board of Directors recommends a vote "FOR"
this proposal. It is intended that the shares represented by the enclosed
proxy will be voted (unless the proxy indicates to the contrary) to approve
such selection.
Representatives of Coopers & Lybrand L.L.P. are expected to be present at
the meeting. They will have an opportunity to make a statement if they
desire to do so and will also be available to respond to appropriate
questions from stockholders.
OTHER MATTERS
The Board of Directors does not know of any other matters that may come
before the meeting. However, if any other matters are properly presented at
the meeting; (or any adjournments or postponements thereof) (including,
among other things, consideration of or motion to adjourn or postpone the
meeting to another time and/or place (including, without limitation, for the
purpose of soliciting additional proxies)) it is the intention of the
persons named in the accompanying proxy to vote, or otherwise to act, in
accordance with their judgment on such matters.
PROPOSALS FOR 1998 ANNUAL MEETING
Proposals of stockholders intended to be presented at the 1998 Annual
Meeting of Stockholders must be received by the Company at its principal
office in Fort Lauderdale, Florida, Attention: Edward J. Baker, Secretary,
not later than February 25, 1998, for inclusion in the proxy statement for
that meeting.
By order of the Board of Directors,
Edward J. Baker, Secretary
October 31, 1997
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING, AND YOUR COOPERATION WILL
BE APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK
PERSONALLY EVEN THOUGH THEY HAVE RETURNED THEIR PROXIES.
Exhibit A
_________________________________________________
ASSET PURCHASE AGREEMENT
__________________________________________________
dated as of July 17, 1997
among
ENCORE COMPUTER CORPORATION
ENCORE COMPUTER U.S., INC.
ENCORE COMPUTER INTERNATIONAL, INC.
AS "SELLER"
and
SUN MICROSYSTEMS, INC.
and
SUN MICROSYSTEMS INTERNATIONAL, B.V.
TABLE OF CONTENTS
Page
ARTICLE I
SECTION 1.01. Certain Defined Terms. (1)
ARTICLE II
PURCHASE AND SALE OF PURCHASED ASSETS
SECTION 2.01. Assets to Be Sold and Purchased. (10)
SECTION 2.02. Assumption and Exclusion of Liabilities. (12)
SECTION 2.03. Purchase Price; Allocation of Purchase Price. (16)
SECTION 2.04. Real Property (18)
SECTION 2.05. Closing. (18)
SECTION 2.06. Closing Deliveries by Seller. (19)
SECTION 2.07. Closing Deliveries by Purchaser. (19)
SECTION 2.08. Unassignable Assets. (19)
SECTION 2.09. SMIBV. (20)
SECTION 2.10. Non-U.S. Assets (20)
SECTION 2.11 Further Assurances (21)
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
SECTION 3.01. Organization and Good Standing of Seller. (21)
SECTION 3.02. Authorization and Validity (22)
SECTION 3.03. Subsidiaries or Affiliates (22)
SECTION 3.04. Capitalization; Required Stockholder Approval;
Stockholders Meeting (22)
SECTION 3.05. No Conflict. (23)
SECTION 3.06. Consents (23)
SECTION 3.07. Financial Statements. (23)
SECTION 3.08. Absence of Undisclosed Liabilities (24)
SECTION 3.09. Absence of Certain Changes or Events (24)
SECTION 3.10. Tax Matters (26)
SECTION 3.11. Title to and Condition of Purchased Assets;
Sufficiency of Purchased Assets (27)
SECTION 3.12. Real Property Assets (28)
SECTION 3.13. Lists of Certain Assets (28)
SECTION 3.14. No Restrictive Agreements (29)
SECTION 3.15. Full Force and Effect. (29)
SECTION 3.16. Litigation. (29)
SECTION 3.17. Compliance with Laws. (30)
SECTION 3.18. No Representation to Employees. (30)
SECTION 3.19. Employees. (30)
SECTION 3.20. Pension and Employee Benefit Matters. (31)
SECTION 3.21. Supplier and Customer Relationships. (32)
SECTION 3.22. Product and Inventory Status. (33)
SECTION 3.23. Intellectual Property Rights. (33)
SECTION 3.24. Brokers (36)
SECTION 3.25. Environmental Matters (36)
SECTION 3.26. Insurance (38)
SECTION 3.27. Disclosure (38)
SECTION 3.28. Solvency; No Bankruptcy or Insolvency Proceedings (39)
SECTION 3.29. Fairness of Consideration (40)
SECTION 3.30. Bulk Sales (40)
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASER
SECTION 4.01. Incorporation and Authority of Purchaser and SMIBV. (40)
SECTION 4.02. No Conflict. (41)
SECTION 4.03. Consents and Approvals. (41)
SECTION 4.04. Brokers (41)
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Conduct of Business Prior to the Closing. (41)
SECTION 5.02. Books and Records. (42)
SECTION 5.03. Seller's Stockholders' Approval (42)
SECTION 5.04. Confidentiality. (43)
SECTION 5.05. Regulatory and Other Authorizations; Consents. (44)
SECTION 5.06. Further Actions. (44)
SECTION 5.07. Covenant Not to Compete. (45)
SECTION 5.08. Payroll Information. (45)
SECTION 5.09. Solvency; No Bankruptcy (46)
SECTION 5.10. Manufacturing Commitment. (46)
SECTION 5.11. Customer Transition (46)
SECTION 5.12 Support and Service Negotiations (46)
SECTION 5.13 Transitional Support (47)
SECTION 5.14 Interim Sales Representation and Marketing Cooperation (47)
SECTION 5.15 Diagnostic, Test and QA Software (49)
SECTION 5.16 Execution of the Inducement and Non-competition Agreements (49)
ARTICLE VI
EMPLOYEE MATTERS
SECTION 6.01. Right to Offer Employment. (49)
SECTION 6.02. Termination of Employment. (51)
SECTION 6.03. General Matters. (51)
SECTION 6.04. Employee Withholding Taxes. (51)
ARTICLE VII
TAX MATTERS
SECTION 7.01. Transaction Taxes; Representation; Indemnity. (52)
SECTION 7.02. Representation and Indemnity. (52)
SECTION 7.03. No Limitation. (52)
SECTION 7.04. Treatment of Indemnity Payments. (52)
ARTICLE VIII
CONDITIONS TO THE CLOSING
SECTION 8.01. Conditions to Obligations of Seller. (53)
SECTION 8.02. Conditions to Obligations of Purchaser. (54)
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. Loss Defined; Indemnitees (58)
SECTION 9.02. Indemnification by Seller. (58)
SECTION 9.03. Procedures for Indemnification. (60)
SECTION 9.04. Limitations on Indemnification (61)
SECTION 9.05. Setoff Rights (62)
SECTION 9.06. No Limitation on Other Rights (62)
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.01. Termination. (62)
SECTION 10.02. Effect of Termination. (63)
SECTION 10.03. Waiver. (63)
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01. Expenses. (63)
SECTION 11.02. Notices. (63)
SECTION 11.03. Public Announcements. (64)
SECTION 11.04. Headings. (64)
SECTION 11.05. Severability. (64)
SECTION 11.06. Entire Agreement. (65)
SECTION 11.07. Assignment. (65)
SECTION 11.08. No Third-Party Beneficiaries. (65)
SECTION 11.09. Amendment; Waiver. (65)
SECTION 11.10. Governing Law; Jurisdiction and Venue. (65)
SECTION 11.11. Construction of "Seller". (66)
SECTION 11.12. Counterparts. (66)
EXHIBITS
Exhibit A List of Assigned Contracts
Exhibit B Form of Assumption Agreement
Exhibit C-1 Form of Bill of Sale and Assignment Agreement
Exhibit C-2 Form of Offshore Tangible Asset Bill of Sale and Assignment
Agreement
Exhibit D Form of Technology License Agreement
Exhibit E Form of Non-Competition Agreement
Exhibit F Form of Real Property Lease Agreement
Exhibit G Fort Lauderdale Facility Purchase Agreement
Exhibit H Melbourne Facility Purchase Agreement
Exhibit I Condominium Purchase Agreement
Exhibit J-1 Gould/EFI Inducement Agreement
Exhibit J-2 Form of JEC Inducement Agreement
Exhibit K Form of Patent Assignment
Exhibit L Form of Copyright Assignment
Exhibit M Form of Trademark Assignment
Exhibit N Matters to be Opined Upon by Choate, Hall & Stewart
Exhibit O Form of Solvency Certificate
Exhibit P Nonexclusive List of Additional Excluded Assets
Exhibit Q Certified Tangible Asset Schedule
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into as
of July 17, 1997 (the "Effective Date"), by and among, on the one hand, ENCORE
COMPUTER CORPORATION, a Delaware corporation ("Encore") and its undersigned
wholly owned subsidiaries ENCORE COMPUTER U.S., INC., a Delaware corporation
and ENCORE COMPUTER INTERNATIONAL, INC., a Delaware corporation (individually
and collectively (subject to Section 11.11 hereof), "Seller"), on the one
hand, and, on the other hand, SUN MICROSYSTEMS, INC., a Delaware corporation
("Purchaser") and SUN MICROSYSTEMS INTERNATIONAL, B.V., a Netherlands
corporation ("SMIBV").
W I T N E S S E T H:
WHEREAS, Seller desires to sell to Purchaser and SMIBV, and Purchaser and
SMIBV desire to purchase from Seller, certain assets associated with Seller's
Storage Products Business (as defined in Section 1.01 below), not including
the Excluded Assets (as defined Section 1.01 below), and in connection
therewith, Purchaser is willing to assume certain specified liabilities of
Seller associated with the Storage Products Business, not including the
Excluded Liabilities (as defined in Section 1.01 below), all upon the terms
and subject to the conditions set forth in this Agreement; and
WHEREAS, in connection with the sale of assets described above, Seller will
permit Purchaser to interview and make offers of employment to certain
employees of Seller who work in the Storage Products Business in accordance
with this Agreement;
NOW, THEREFORE, in consideration of the facts stated in the above recitals and
of the mutual agreements and covenants hereinafter set forth, and for good and
valuable consideration, the receipt, sufficiency and adequacy of which is
hereby acknowledged, the parties hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.01. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings:
"affiliate" means, with respect to a specified person, any other person that
directly or indirectly controls, is controlled by, or is under common control
with, such specified person.
"Ancillary Agreements" means, collectively, the Assumption Agreement, the Bill
of Sale, the Offshore Tangible Asset Bills of Sale, the Non-competition
Agreements, the Real Property Lease Agreement, the License Agreement, the Real
Property Purchase Agreements, the Patent Assignment, the Copyright Assignment
and the Trademark Assignment (as such terms are defined herein).
"Applicable Purchaser Subsidiaries" will have the meaning specified in Section
2.10(c).
"Assigned Contracts" has the meaning specified in Section 2.01(a).
"Assumption Agreement" means the Assumption Agreement to be executed and
delivered by Purchaser and Seller at the Closing substantially in the form of
Exhibit B.
"Bill of Sale" means the Bill of Sale and Assignment Agreement to be executed
and delivered by Seller at the Closing substantially in the form of Exhibit
C-1.
"Business Day" means a day of the year on which banks are not required or
authorized to be closed in the City of San Francisco, California.
"Closing" and "Closing Date" have the meanings specified for such terms in
Section 2.05.
"Condominiums" means that certain real property commonly collectively known as
275 Jacaranda Drive Unit #10-2, Plantation, Florida 33324 and 233 Jacaranda
Drive Unit #42-6, Plantation, Florida 33324, that are more fully described in
Schedule 3-A to Seller's Disclosure Letter including, without limitation, all
buildings and other structures, facilities or improvements located on such
real property, all fixtures attached or appurtenant thereto, and all
easements, licenses, rights and appurtenances relating to the foregoing.
"control" (including the terms "controlled by" and "under common control
with") means the possession, directly or indirectly, or as trustee or
executor, of the power to direct or cause the direction of the management
policies of a person, whether through the ownership of stock, as trustee or
executor, by contract or otherwise.
"Dollars" or "$" means U.S. dollars.
"EFI" has the meaning specified in Section 2.03(b).
"Employee" has the meaning specified in Section 6.01.
"Employee Assets" means all personal property assets owned (or leased) by
Seller, wherever located, that are utilized by Employees (as defined in
Section 6.01 below) in the normal course of the performance of their duties
and services for Seller at any time during the time period beginning on the
Effective Date and ending on the Closing Date, other than any such assets that
are consumed prior to the Closing Date in the ordinary course of Seller's
business, consistent with Seller's past practice. By way of example and not
limitation, Employee Assets will include work-stations, personal computers,
personal digital assistants and all associated licenses to use third-party
software applications used thereon, cellular telephones, pagers, furniture,
office supplies and other similar assets, as well as all furniture, fixtures
and other tangible items located in the Condominiums.
"Encumbrance" means any pledge, lien, collateral assignment, security
interest, mortgage, deed of trust, title retention, conditional sale or other
security arrangement, or any charge, adverse claim of title, ownership or use,
or any other encumbrance of any kind.
"Environmental Damage" means any actual or alleged Liability (including
without limitation Liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries or penalties) arising out of, based on or relating to (i)
the presence, discharge, emission or release into the environment of any
Hazardous Substance or (ii) facts or circumstances forming the basis of any
violation, or alleged violation, of any Environmental Law.
"Environmental Laws" means all federal, state, local and non-U.S. laws and
regulations relating to pollution, the protection of human health or the
environment (including without limitation ambient air, surface water, ground
water, land surface or subsurface strata), including without limitation laws
and regulations relating to emissions, discharges, releases or threatened
releases of Hazardous Substances, or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of Hazardous Substances, or relating to occupational health and
safety.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended,
and the rulings and regulations promulgated thereunder.
"Excluded Assets" shall have the meaning defined for it in Section 2.01(b).
"Excluded Contracts" means all Seller Contracts other than the Assigned
Contracts.
"Excluded Liabilities" shall have the meaning defined for it in Section
2.02(b).
"Finished Products" means those finished Storage Product units in Seller's
inventory at the Closing Date, including both (i) the units thereof utilized
for Seller's day to day business for demonstration, development, benchmarking
and/or test purposes at Seller's facilities ("Demo Units"), and (ii) the units
thereof in the possession of Seller customers as of the Closing Date under
Seller's "try and buy" program ("Customer Units").
"Fort Lauderdale Facility" means, collectively, those certain real properties
commonly known as 6901 West Sunrise Blvd., Fort Lauderdale, Florida 33313,
1801 NW 66th Avenue, Fort Lauderdale, Florida 33313, and 1800 NW 69th Avenue,
Fort Lauderdale, Florida 33313, that are more fully described in Schedule 3-B
to Seller's Disclosure Letter including, without limitation, all buildings and
other structures, facilities or improvements located on such real property,
all fixtures attached or appurtenant thereto, and all easements, licenses,
rights and appurtenances relating to the foregoing.
"GAAP" means United States generally accepted accounting principles and
practices as in effect from time to time and applied consistently throughout
the periods involved.
"Gould" means Gould Electronics Inc., an Ohio corporation.
"Governmental Antitrust Authority" means any non-U.S., federal, state or local
governmental or quasi-governmental authority charged with the administration
or enforcement of antitrust laws.
"Hazardous Substances" means: (i) any pollutant, contaminant, toxic,
hazardous or noxious substance or waste which is regulated by the laws of any
state, local, federal or other governmental authority or jurisdiction,
including but not limited to the State of Florida and the United States
Government, and includes but is not limited to (a) any oil or petroleum
compounds, flammable substances, explosives, radioactive materials, or any
other materials or pollutants which pose a hazard to persons or cause any real
property to be in violation of any Environmental Laws, (b) to the extent so
regulated, asbestos or any asbestos-containing material of any kind or
character, (c) polychlorinated biphenyls, as regulated by the Toxic Substances
Control Act, 15 U.S.C. Section 2601 et seq., (d) any materials or substances
designated as "hazardous substances" pursuant to (1) Section 311 of the Clean
Water Act, 33 U.S.C. Section 1251 et seq., or (2) Section 101 of the
Comprehensive Environmental Response, Compensation, and Liability Act, 42
U.S.C. Section 9601 et seq.,(e) "chemical substance," "new chemical substance,
" or "hazardous chemical substance or mixture" pursuant to Sections 3, 6 and 7
of the Toxic Substances Control Act, 15 U.S.C. Section 2601 et seq., and (f) any
"hazardous waste" pursuant to Section 1004 of the Resource Conservation and
Recovery Act, 42 U.S.C. Section 6901 et seq.; and (ii) as of any date of
determination, any additional substances or materials which now or hereafter
may be incorporated in or added to the definition of "chemical substance," "new
chemical substance," "hazardous chemical substance or mixture," "hazardous
waste," "hazardous substance" or "toxic substance" or similar substance for
purposes of any Environmental Law.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder.
"Included Products" shall mean (i) the Demo Units and (ii) ten (10) additional
units of Finished Products.
"Inducement Agreements" shall have the meaning specified in Section 8.02(i).
"Industrial Property" means, collectively, the following (whether or not
patentable, copyrightable, registrable as a mask work, protectable as a trade
secret or otherwise protectable as, or by, any other Intellectual Property
Right): designs, plans, schematics, drawings, blueprints, technical
information, specifications, manufacturing plans or instructions, parts lists,
ideas, concepts, inventions, discoveries, processes, procedures,
methodologies, know-how and other technologies, including without limitation
any of the foregoing related to software or computer hardware of any kind.
"Insolvency Action" means, with respect to a person, any or all of the
following: (i) the voluntary or involuntary filing, with respect to such
person, of a petition for relief, or any other effort to seek relief, under
any Insolvency Proceeding; (ii) such person or any of its assets otherwise
becoming the subject of an Insolvency Proceeding; (iii) the formal or informal
dissolution, liquidation or winding up of such person, or any efforts to
initiate or carry out such dissolution, liquidation or winding up; (iv) the
appointment of (or efforts or attempts to appoint) a receiver, liquidator,
sequestrator, trustee, custodian or other similar officer with respect to such
person or any part of its assets or properties; (v) any composition of the
indebtedness of such person or any assignment for the benefit of such person's
creditors; or (vi) such person's ceasing to conduct business for any reason
other than such person's being merged or consolidated with another entity.
"Insolvency Proceeding" means any or all of the following actions, events or
proceedings: (i) any voluntary or involuntary case, contested matter or other
proceeding under the United States Bankruptcy Code, as amended, and any
successor law or laws thereto; (ii) any case, action or other proceeding under
any bankruptcy, insolvency, debt reorganization or similar law (whether now or
hereafter in effect) of any state, country or other jurisdiction.
"Intangible Assets" means, collectively, all intangible assets, properties and
rights associated with, related to or used in connection with, the Storage
Products Business or any of the Storage Products, including without
limitation, all of the following assets and all rights therein (whether or not
protectable under any Intellectual Property Rights): all software (in both
source code and binary code form) (including without limitation the Seller's
license rights with respect to the Minx manufacturing information system
software, the Cyborg payroll software and all software operating on those
Seller servers with the logical names "BSS" and "Quantum" and the Intellectual
Property Rights related to each thereof), Industrial Property, technology,
works of authorship, manuals, logbooks, notebooks, user's guides, programmers'
notes, documentation, manufacturing rights, know-how, trade secrets, vendor,
supplier, customer and prospect lists and all associated information, sales
proposals, sales and marketing materials, product literature, training
materials (for both training of customers and of service personnel), and other
collateral related to the Storage Products Business or any of the Storage
Products, including without limitation any of the foregoing related to: (a)
the development, integration and testing of open systems connectivity,
mainframe connectivity, mainframe DASD emulation, data sharing, remote
mirroring, reflective memory, diagnostics and caching; and/or (b)
installation, training (for both customers and service personnel), product
support or maintenance.
"Intellectual Property Rights" means, collectively, all of the following
worldwide intangible legal rights, including those existing or acquired by
ownership, license or other legal operation, whether or not filed, perfected,
registered or recorded and whether now or hereafter existing, filed, issued or
acquired: (i) patents, patent applications, and patent rights, including any
and all continuations, continuations-in-part, divisions, reissues,
reexaminations or extensions thereof; (ii) rights associated with works of
authorship (including without limitation audiovisual works), including without
limitation copyrights, copyright applications and copyright registrations,
moral rights, mask work rights, mask work applications and mask work
registrations; (iii) rights in trade secrets (including without limitation
rights in Industrial Property, customer, vendor and prospect lists and all
associated information or databases and other confidential or proprietary
information), and all rights relating to the protection of the same; (iv) any
rights analogous to those set forth in the preceding clauses and any other
proprietary rights relating to intangible property, including without
limitation brand names, trademarks, service marks, trademark and service mark
registrations and applications therefor, trade names, rights in trade dress
and packaging and all goodwill associated with the same; and (v) all rights to
sue or make any claims for any past, present or future infringement,
misappropriation or unauthorized use of any of the foregoing rights and the
right to all income, royalties, damages and other payments that are now or may
hereafter become due or payable with respect to any of the foregoing rights,
including without limitation damages for past, present or future infringement,
misappropriation or unauthorized use thereof.
"Internal Revenue Code" means the Internal Revenue Code of 1986, as amended,
and the rulings and regulations promulgated thereunder.
"Inventory Assets" means, collectively, all inventory (including the Customer
Units, Demo Units and all other Finished Products), raw materials, works in
progress and finished goods, spare parts and supplies relating to any of the
Storage Products or otherwise relating to the Storage Products Business that
exist as of the Closing Date.
"JEC" means Japan Energy Corporation, a Japanese corporation.
"Leased Assets" means (i) all personal property assets, wherever located, that
are used in connection with, or are related to, the Storage Products Business
and are leased to Seller, any Seller Subsidiary or any other affiliate of
Seller by any third party under any Seller Contract, and (ii) all rights of
Seller, any Seller Subsidiary or any other affiliate of Seller to any such
third-party assets under any Seller Contract pursuant to which such assets are
leased.
"Leased Real Property" means (i) all real property, wherever located, that is
used in connection with the Storage Products Business and is leased to Seller,
any Seller Subsidiary or any other affiliate of Seller by any third party
under Seller Contract, and (ii) all rights of Seller, any Seller Subsidiary or
any other affiliate of Seller to any such leased real property under any
Seller Contract pursuant to which such real property is leased.
"Liabilities" (or when used with reference to a single item described below,
"Liability") means debts, liabilities and obligations (whether pecuniary or
not, including without limitation obligations to perform or forbear from
performing acts or services), fines or penalties, whether accrued or fixed,
absolute or contingent, matured or unmatured, determined or determinable,
known or unknown, including without limitation those arising under any law,
action or governmental order, liabilities for Taxes and those arising under
any contract, agreement, arrangement, commitment or undertaking of any kind
whatsoever (whether written or oral, express or implied), including those
arising under any Seller Contract.
"License Agreement" means the Technology License Agreement to be executed and
delivered by Purchaser and Seller at the Closing substantially in the form of
Exhibit D.
"Licensed Assets" means (i) all personal property assets, wherever located,
whether tangible or intangible (including but not limited to third party
software and documentation) that are used in connection with, or are related
to, the Storage Products Business or any Storage Product and are licensed to
Seller, any Seller Subsidiary or any other affiliate of Seller by a third
party under any Seller Contract (including any such assets that are used or
integrated with any Employee Assets, Intangible Assets or Tangible Assets),
and (ii) all Seller's license or other rights to such third-party assets under
any Seller Contract pursuant to which such assets are licensed to Seller any
Seller Subsidiary or any other affiliate of Seller.
"material" means any fact, event, action or failure to act, or other
circumstance with respect to, involving or affecting Seller, any Seller
Subsidiary or any other affiliate of Seller that: (i) involves in excess of
$50,000 or that results or is reasonably likely to result in a financial loss
of at least $50,000, (ii) involves exclusivity or non-competition covenants or
arrangements, (iii) involves Intellectual Property Rights or (iv) is otherwise
material.
"Melbourne Facility" means that certain real property commonly known as 100 N.
Babcock St., Melbourne, Florida 32901 that is more fully described in Schedule
4 to Seller's Disclosure Letter, including, without limitation, all buildings
and other structures, facilities or improvements located on such real
property, all fixtures attached or appurtenant thereto, and all easements,
licenses, rights and appurtenances relating to the foregoing.
"Non-competition Agreements" means the Non-competition Agreements
substantially in the form of Exhibit E to be executed by certain Employees
prior to the earlier of the tenth day prior to the Closing Date or the
thirtieth (30th) day after the Effective Date as provided in Section 8.02(t).
"person" means any individual, partnership, limited liability company, firm,
corporation, association, trust, unincorporated organization or other entity,
as well as any syndicate or group that would be deemed to be a person under
Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Purchased Assets" shall have the meaning set forth in Section 2.01.
"Real Property Assets" means, collectively, the Fort Lauderdale Facility, the
Melbourne Facility and the Condominiums.
"Real Property Lease Agreement" means the Real Property Lease Agreement to be
executed and delivered by Purchaser and Seller at the Closing substantially in
the form of Exhibit F, pursuant to which Purchaser shall lease back to Seller
the Fort Lauderdale Facility located at 6901 West Sunrise (excluding the X
telephone hub, which will be used for Purchaser and which Seller will be
permitted to use during the lease term), which lease shall be for an initial
term of one (1) year (the "First Year") after the Closing Date (during which
First Year Seller will pay all lease expenses on a "triple net" basis
(including without limitation tax, insurance and operating expenses) but base
rent shall be waived) and shall include an option to renew the lease for an
additional three (3) year term in exchange for fair market base rental (which
rent will not be waived during this option term) and payment by Seller of all
lease expenses on a "triple net" basis as described above.
"Real Property Leases" means all leases relating to Leased Real Property.
"Real Property Purchase Agreements" means, collectively, (i) the Real Property
Purchase Agreement dated as of the Effective Date and executed and delivered
by Seller and Purchaser on the Effective Date for the sale of the Fort
Lauderdale Facility by Seller to Purchaser, a copy of which is attached hereto
as Exhibit G (the "Fort Lauderdale Facility Purchase Agreement"), (ii) the
Real Property Purchase Agreement dated as of the Effective Date and executed
and delivered by Seller and Purchaser on the Effective Date for the sale of
the Melbourne Facility by Seller to Purchaser, a copy of which is attached
hereto as Exhibit H (the "Melbourne Facility Purchase Agreement") and (iii)
the Real Property Purchase Agreement dated as of the Effective Date and
executed and delivered by Seller and Purchaser on the Effective Date for the
sale of the Condominiums by Seller to Purchaser, a copy of which is attached
hereto as Exhibit I (the "Condominium Purchase Agreement").
"Restrictive Agreement" has the meaning specified in Section 3.14.
"Seller" will have the meaning set forth in the first paragraph of this
Agreement, and will be construed as provided in Section 11.11 hereof.
"Seller Contracts" means all agreements, contracts, understandings,
arrangements, commitments, mortgages, indentures, leases, licenses, permits,
franchises, instruments, notes, bonds, indemnities, guarantees, loan
agreements, credit agreements, representations, warranties, deeds,
assignments, powers of attorney, certificates, purchase orders, work orders,
insurance policies, benefit plans, covenants, assurances or undertakings of
any nature to which Seller, any Seller Subsidiary or any other affiliate of
Seller is or may be bound, subject or affected or under which Seller, any
Seller Subsidiary or any other affiliate of Seller is or may become liable or
obligated or pursuant to which Seller, any Seller Subsidiary or any other
affiliate of Seller has agreed to take any action or under which the business,
property or assets of Seller, any Seller Subsidiary or any other affiliate of
Seller receives or is or may become entitled to any benefit, right or
interest, or that relate to, affect, bind or relate to an Encumbrance on or
with respect to, any of the Purchased Assets, including without limitation the
Assigned Contracts. The Seller Contracts include, without limitation, all
Storage Products Leases, all Real Property Leases and all Storage Products
Licenses.
"Seller's Disclosure Letter" means Seller's Disclosure Letter dated as of the
Effective Date which is being delivered to Purchaser concurrently with the
execution of this Agreement.
"Seller's knowledge." A particular fact or other matter shall be deemed to be
within "Seller's knowledge" if any officer or, with respect to the particular
matters they are responsible for, any employee, consultant, agent, auditor,
attorney or other representative of Seller, any Seller Subsidiary or any other
affiliate of Seller, including without limitation Gould, has knowledge (as
defined in the following sentence) of such fact or other matter. An
individual shall be deemed to have "knowledge" of a particular fact or other
matter if (a) such individual is actually aware of such fact or other matter,
or (b) a prudent individual could be expected to discover or otherwise become
aware of such fact or other matter in the course of conducting a diligent and
comprehensive investigation concerning the truth or existence of such fact or
other matter.
"Seller Subsidiary" shall mean any past or present subsidiary of Seller,
including without limitation Seller (excluding Encore).
"Solvent" shall mean, with respect to any person on a particular date, that on
such date (a) the fair value of the property of such person is greater than
the total amount of liabilities, including contingent liabilities, of such
person; (b) the present fair saleable value of the assets of such person is
not less than the amount that will be required to pay the probable liability
of such person on its debts as they become absolute and matured; (c) such
person does not intend to, and does not believe that it will, incur debts or
liabilities beyond such person's ability to pay as such debts and liabilities
mature; and (d) such person is not engaged in a business or transaction, and
is not about to engage in a business or transaction, for which such person's
property would constitute an unreasonably small capital. The amount of
contingent liabilities (such as litigation, guarantees and pension plan
liabilities) at any time shall be computed as the amount that, in light of all
the facts and circumstances existing at the time, represents the amount that
can reasonably be expected to become an actual or matured liability.
"Storage Products" means Seller's product line of devices, products, systems
and subsystems, including without limitation all hardware and software
elements thereof, that behave as storage devices (i.e., that function as a
device into which data can be placed and retained and from which data can be
retrieved), such as a disk, tape, CD or any other data or information storage
medium for use with another machine or system, or a device that stores data
for another machine or system, including, but not limited to, normal data
files, metadata, media objects, multimedia, video, audio or the like, all as
previously, currently or hereafter proposed to be developed, marketed or sold,
or in fact developed, marketed or sold, by Seller, any Seller Subsidiary or
any other affiliate of Seller and all proposed or contemplated devices and
products of any such type currently under development by or for Seller, any
Seller Subsidiary or any other affiliate of Seller and all related software,
hardware, components, services and technology, and all related utilities and
tools and diagnostics and the Seller's Remote Service and Support System (RSS)
(in each case including without limitation all of the products, devices,
software, tools, utilities, hardware, services and components listed on
Seller's Storage Products price list attached as Schedule 6 to Seller's
Disclosure Letter and all of the items included or proposed to be included in
Seller's line of Infinity Series of SP Products having the specifications set
forth on Schedule 5 to Seller's Disclosure Letter (or any improved
specifications thereof) or in Seller's Gateway line of products and all
customized configurations of any of the foregoing, and all derivative works,
upgrades, modifications, enhancements and configurations of any of the
foregoing and all software and components included in any configuration of any
of the foregoing, in each case whether or not ever commercially offered or
price-listed, and whether or not in development.
"Storage Products Business" means Seller's business of developing,
manufacturing, marketing, licensing, distributing, using, operating,
installing, servicing, supporting, maintaining, repairing or otherwise using
or commercially exploiting all or any aspect of any or all of the Storage
Products or of any Intangible Assets or Intellectual Property Rights related
to any of the Storage Products.
"Storage Products Leases" means all leases and lease agreements pursuant to
which any Leased Assets are leased to Seller, any Seller Subsidiary or any
other affiliate of Seller.
"Storage Products Licenses" means all licenses and license agreements pursuant
to which any Licensed Assets are licensed to Seller, any Seller Subsidiary or
any other affiliate of Seller.
"Tangible Assets" means, collectively, all tangible personal property assets,
wherever located, that are used in connection with, or are related to, the
Storage Products Business or any of the Storage Products, other than the
Inventory Assets and the Employee Assets. The Tangible Assets include,
without limitation, the following assets and properties: (i) all tangible
assets, properties and equipment used by Seller, any Seller Subsidiary or any
other affiliate of Seller in the development, manufacture, integration,
testing, sale, installation, service, maintenance, repair or support of any
Storage Products, including, but not limited to, all mainframe computers,
workstations, servers (including those bearing the logical names "BSS" and
"Quantum"), personal computers, hardware, telecommunications equipment,
switches, routers and all related software used by Seller, any Seller
Subsidiary or any other affiliate of Seller in connection with the Storage
Products Business; (ii) all service tools, diagnostic and test equipment;
(iii) all vehicles, furniture, other equipment and tangible personal property
used by Seller, any Seller Subsidiary or any other affiliate of Seller in
connection with the Storage Products Business; (iv) all media and all hardware
or other systems on which any copy of software related to the Storage Products
Business is resident, including media containing copies of the Minx
manufacturing information system software and the Cyborg payroll software and
all related user manuals and other tangible items associated therewith; and
(v) all other items listed on Seller's list of tangible assets as delivered
to, and evaluated by Coopers & Lybrand, as updated to reflect Seller's
tangible assets on hand as of the Closing Date ("Certified Tangible Asset
Schedule") (which schedule is (or will within ten days of the Effective Date
be) attached hereto as Exhibit Q and which schedule will be updated and
delivered to Purchaser at least ten days prior to the Closing).
"Tax" or "Taxes" means all taxes of any kind whatsoever (whether payable
directly or by withholding), including without limitation franchise, income,
gross receipts, personal property, real property, ad valorem, value added,
sales, use, documentary, stamp, intangible personal property, withholding or
other taxes, together with any interest and penalties, additions to tax or
additional amounts with respect thereto imposed by any taxing authority.
"Trademark Assets" means all those trademarks, service marks, trade names and
trade dress assets that are or have ever been associated or used in connection
with the Storage Products Business or any of the Storage Products, including
all worldwide registrations or recordations thereof and all applications for
any such registration or recordation and all goodwill associated with the
foregoing. The Trademark Assets are listed on Schedule 7 of Seller's
Disclosure Letter.
ARTICLE II
PURCHASE AND SALE OF PURCHASED ASSETS
SECTION 2.01. Assets to Be Sold and Purchased.
(a) Purchased Assets. Subject to the terms and conditions of this Agreement
(including without limitation the allocation provisions of Section 2.09),
Seller shall, on the Closing Date, sell, assign, transfer, convey and deliver
to Purchaser and SMIBV or cause to be sold, assigned, transferred, conveyed
and delivered to Purchaser and SMIBV, and on the Closing Date Purchaser and
SMIBV shall purchase and acquire from Seller, all right, title and interest in
and to all of the following assets and properties, free and clear of any and
all Encumbrances whatsoever (all such assets, other than the Excluded Assets
described in Section 2.01(b), being collectively referred to herein as the
"Purchased Assets") (with Purchaser having the right to expand or modify the
definition of Purchased Assets to include any additional assets associated
with the Storage Products Business at any time prior to the Closing Date):
(i) the Storage Products;
(ii) all of the Intangible Assets;
(iii) all of the Trademark Assets;
(iv) all of Seller's rights under the Assigned Contracts (as defined below).
(v) all of the Tangible Assets;
(vi) all of the Employee Assets (other than such Employee Assets that are
both (i) associated with Employees not offered employment by Purchaser, and
(ii) agreed in writing by Purchaser, in response to the prior written request
of Seller, to be Excluded Assets ("Excluded Employee Assets"));
(vii) all of the Inventory Assets;
(viii) all of the Real Property Assets;
(ix) all copies in a tangible medium, and all other tangible embodiments, of
the Storage Products and the Intangible Assets (collectively, the "Technology
Deliverables");
(x) all worldwide Intellectual Property Rights and all Industrial Property
related to or associated with, any or all of the assets described above in the
preceding subparagraphs of this Section 2.01(a) (collectively, the
"Intellectual Property Assets");
(xi) true, accurate and complete copies of all Seller's general and financial
records, financial information, marketing and sales information, pricing,
marketing plans, business plans, financial and business projections and other
files and records pertaining to the Storage Products Business (including but
not limited to any such records, information, plans and files relating to any
Purchased Assets), but excluding any personnel files of any past or present
employee of Seller (collectively, the "Business Records");
(xii) all municipal, state, local, federal and other governmental franchises,
permits, licenses, agreements, waivers and authorizations from, issued or
granted by, any jurisdiction (collectively, "Governmental Permits"), or the
portion thereof, held or used by Seller in connection with the Storage
Products Business, or necessary for the use or operation of any of the
Purchased Assets (including without limitation the Real Property Assets), to
the extent legally transferable by Seller;
(xiii) all claims, security or similar deposits, rights to refunds,
choses in action, causes of action, rights of recovery or rights to damages,
rights of set-off and other rights of recoupment (including without limitation
any of the foregoing related to the payment of Taxes, but excluding any of the
foregoing related to any Excluded Asset) that are associated with or related
to the Storage Products Business or any of the assets listed or described in
this Section 2.01(a) (collectively, the "Claim Assets"); and
(xiv) all goodwill associated with any of the assets described in the
foregoing subparagraphs of this Section 2.01(a) (the "Goodwill").
The term "Assigned Contracts", used in clause (iv) above and
elsewhere in this Agreement, means that subset of the Seller Contracts that
Purchaser elects in its sole discretion to have assigned by Seller to
Purchaser and/or SMIBV or their respective designees at the Closing. A
preliminary list of those Seller Contracts that Purchaser anticipates will be
Assigned Contracts will be attached by Purchaser as Exhibit A as promptly as
possible after the Effective Date. Prior to the Closing, Purchaser may in its
sole discretion amend Exhibit A to add Seller Contracts thereto or delete
Seller Contracts therefrom, and only those Seller Contracts specifically
listed in Exhibit A, as amended pursuant to this paragraph at any time prior
to the Closing, will be the Assigned Contracts.
(b) Excluded Assets. The Purchased Assets shall exclude all assets and
properties owned by Seller that are not included within the description of the
Purchased Assets in Section 2.01(a) above (collectively, the "Excluded
Assets"). The Excluded Assets shall include, without limitation, the
following:
(i) all Seller's cash, bank accounts and securities (including treasury
stock of Encore and all capital stock (or rights to acquire capital stock) of
Seller or any Seller Subsidiary or other affiliate of Seller);
(ii) all Seller's accounts receivable, unbilled receivables, accounts
payable, notes and other amounts receivable or payable from or to third
parties;
(iii) all insurance policies of Seller and all rights of Seller of every
nature and description under or arising out of such insurance policies;
(iv) claims for refunds of Taxes actually paid by Seller prior to the Closing
Date;
(v) Seller's minute books, stock ledgers and Tax records;
(vi) all assets of, or held by or with respect to, any employee benefit plan
(whether or not governed by ERISA) or any trust, fund or account that is
related to any such employee benefit plan or that is similar in purpose or
function thereto;
(vii) all rights of Seller under this Agreement and under any of the Ancillary
Agreements;
(viii) the Excluded Contracts and all of Seller's rights and obligations
arising thereunder;
(ix) all items listed in Exhibit P (which Purchaser may its sole discretion
amend at any time or from time to time prior to the Closing), as amended
pursuant to this subparagraph prior to the Closing;
(x) all Excluded Employee Assets; and
(xi) all French Assets (as defined in Section 2.10(b)).
SECTION 2.02. Assumption and Exclusion of Liabilities.
(a) Assumed Liabilities. Subject to the terms and conditions of this
Agreement, Purchaser shall, effective upon the consummation of the Closing on
the Closing Date, assume, pay, perform and discharge when due those (and only
those) Liabilities of Seller that are expressly listed in the following
subparagraphs of this Section 2.02(a) (collectively, the "Assumed
Liabilities") and no other Liabilities of Seller whatsoever:
(i) all Liabilities of Seller under those Assigned Contracts that are duly
and effectively assigned to Purchaser at the Closing without breach by Seller
of any such Assigned Contracts, but only to the extent that such Liabilities
(A) arise, are incurred or require performance of an action subsequent to the
Closing Date (but in no event shall Assumed Liabilities include any Liability
for payment of money, or taking of actions, post-Closing with respect to
obligations arising pre-Closing) and (B) do not arise or result from any
breach, default or violation by Seller, any Seller Subsidiary or any other
affiliate of Seller of any provision of any Assigned Contract or from any
other act or omission of Seller, any Seller Subsidiary or any other affiliate
of Seller that occurred prior to, on or after the Closing Date; and
(ii) all liabilities of Seller that are expressly assumed by Purchaser under
the Real Property Purchase Agreements, if any.
The parties acknowledge and agree that SMIBV is not assuming, and has not
agreed to assume, pay, perform or discharge, any of Seller's Liabilities
whatsoever and that SMIBV will not be liable or otherwise responsible for, any
of the Assumed Liabilities or any of the Excluded Liabilities.
(b) Excluded Liabilities Not Assumed. As a material inducement and
consideration to Purchaser to enter into this Agreement and perform its
obligations hereunder, the parties agree that, except for the Assumed
Liabilities of Seller expressly described above in Section 2.02(a), Purchaser
shall not assume, pay, perform or discharge or otherwise have any obligation,
responsibility or liability whatsoever for, any and all Liabilities of Seller,
any Seller Subsidiary or any other affiliate of Seller (whether now existing
or hereafter arising), and Seller, all Seller Subsidiaries and all Seller's
other affiliates shall retain, and shall be solely responsible and liable for
paying, performing and discharging when due, all Liabilities of Seller, any
Seller Subsidiary and of any other affiliate of Seller other than the Assumed
Liabilities (collectively, the "Excluded Liabilities"). By way of example and
not by way of limitation, the Excluded Liabilities not being assumed by
Purchaser include, without limitation:
(i) any and all Liabilities incurred in connection with the Storage Products
Business or any other business or activities of Seller or that arose or arise
from any act or omission of Seller, any Seller Subsidiary or any other
affiliate of Seller that occurs prior to, on or after the Closing Date (except
for the Assumed Liabilities expressly assumed by Purchaser pursuant to Section
2.02(a));
(ii) any and all Liabilities, whether now existing or hereafter arising, with
respect to the sale, lease, license or other provision of any products,
software or services of, by or for Seller, any Seller Subsidiary or any other
affiliate of Seller (except for the Assumed Liabilities expressly assumed by
Purchaser under Section 2.02(a));
(iii) any and all Liabilities for any Taxes (including without limitation any
and all Transaction Taxes as defined in Section 7.01) that are now or
hereafter due and payable by Seller, any Seller Subsidiary or any other
affiliate of Seller, whether or not attributable to the Purchased Assets,
Employees, the Storage Products Business or any transaction contemplated by
this Agreement or any Ancillary Agreement, including without limitation any
Liability for the unpaid Taxes of any other Person under Treasury Regulation
1.1502-6 (or any similar provision of state, local or non-U.S. law), as a
transferee or successor by contract or otherwise;
(iv) any and all Liabilities arising from any failure by Seller, any Seller
Subsidiaries or any other affiliate of Seller to file a tax return or to
withhold Taxes (including without limitation any Liabilities arising from a
failure to properly withhold taxes from Employees or a failure to file
required tax returns or reports with respect to Employees and/or consultants);
(v) all Liabilities with respect to any Environmental Damage or the
violation of any Environmental Law relating to Seller, any Seller Subsidiary
or any other affiliate of Seller or any of their respective businesses
(including but not limited to the Storage Products Business) or any of their
respective assets (including but not limited to the Purchased Assets) to the
extent such Environmental Damage or violation of such Environmental Law is
based upon (i) facts, events or circumstances that occurred or began on or
prior to the Closing Date or (ii) any acts or omissions of Seller, any Seller
Subsidiary or any other affiliate of Seller or any invitee, customer, guest,
employee, contractor, consultant or agent of Seller, any Seller Subsidiary or
any other affiliate of Seller, regardless of when such acts or omissions began
or occurred;
(vi) any and all Liabilities to Employees, including without limitation any
Liabilities related to any acts or omissions of Seller, any Seller Subsidiary
or any other affiliate of Seller, or arising from any facts, events or
circumstances occurring prior to, on or after the Closing Date, including
without limitation any liability to any Employee for the payment of any and
all accrued and unused vacation time, sick pay or severance pay;
(vii) any Liability of Seller to indemnify any person by reason of the fact
that such person was a director, officer, employee or agent of Seller, any
Seller Subsidiary or any other affiliate of Seller or was serving at the
request of Seller, any Seller Subsidiary or any other affiliate of Seller as a
partner, trustee, director, officer, employee or agent of another entity;
(viii) any and all Liabilities arising from the termination by Seller,
any Seller Subsidiary or any other affiliate of Seller of, or relating to, the
employment or services of any current or future employees, consultants or
contractors of Seller, any Seller Subsidiary or any other affiliates of
Seller, any other claims brought against Seller arising from Seller's
employment of any person or arising from any duties or obligations under any
existing or future employee benefit plans of Seller, any Seller Subsidiary or
any other affiliate of Seller (including without limitation any claim for
stock, stock options, or for participation in benefits under any medical,
health, dental, disability or life insurance plan, pension or savings plan or
other employee benefit plan of any kind);
(ix) any and all Liabilities arising from (A) any failure by Purchaser to
hire any employee or consultant of Seller, any Seller Subsidiary or any other
affiliate of Seller; (B) any relocation, change of title or assignment or
demotion of any employee of Seller, any Seller Subsidiary or any other
affiliate of Seller, whether or not such employee is hired by Purchaser, or
any claim of constructive termination, wrongful demotion or similar claim by
any such employee or consultant;
(x) any and all present or future Liabilities of Seller, any Seller
Subsidiary or any other affiliate of Seller to any existing or future
employees of Seller, any Seller Subsidiary or any other affiliate of Seller
under ERISA, the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended, meaning Section 4980B of the Internal Revenue Code and the
regulations thereunder ("COBRA"), the Federal Worker Adjustment and Retraining
Act (the "WARN Act"), the Equal Pay Act or any severance pay or similar
obligations of Seller, any Seller Subsidiary or any other affiliate of Seller;
(xi) any and all Liabilities arising from any breach, default or violation by
Seller, any Seller Subsidiary or any other affiliate of Seller of any
contract, agreement or commitment (whether or not written), including but not
limited to any breach, default or violation of this Agreement, any Ancillary
Agreement or any Assigned Contract;
(xii) any and all Liabilities arising from or based on any tortious,
fraudulent, unlawful or criminal conduct of Seller, any Seller Subsidiary, any
other affiliate of Seller or any of their respective officers, directors,
shareholders, employees, contractors or agents, including without limitation
Liabilities based upon theories of strict liability, product liability, breach
of warranty, negligence, misrepresentation or fraud;
(xiii) any and all Liabilities relating to or arising from or out of any
or all of the Excluded Assets (including without limitation any Liability
under any contract or agreement as to which Purchaser has not assumed any
Assumed Liabilities thereunder);
(xiv) any and all Liabilities under any product or service warranty,
guarantee, performance, specification, misrepresentation or other claims
relating to any products or services (including without limitation Storage
Products) previously sold, licensed or provided by Seller, any of Seller's
Subsidiaries or any other affiliate of Seller prior to the Closing;
(xv) any and all Liabilities relating to any and all Intracompany Agreements
(as defined in the Inducement Agreements) or other intercompany agreements
(meaning agreements between Seller and any Seller Subsidiary and/or other
affiliate of Seller) (including but not limited to any cost or overhead
sharing or allocation agreement) or any and all intercompany payables incurred
by Seller, any Seller Subsidiary or any other affiliate of Seller relating to
the Storage Products Business accrued or arising prior to, on or after the
Closing Date; and
(xvi) all obligations and Liabilities of Seller, any Seller Subsidiary or any
Seller affiliate arising under or related to any of the Excluded Contracts,
including without limitation obligations or Liabilities arising as a result of
the performance, non-performance or breach thereof.
SECTION 2.03. Purchase Price; Allocation of Allocable Purchase Price.
(a) Purchase Price. Subject to Purchaser's and SMIBV's rights of
offset under Section 9.05, the aggregate purchase price for the Purchased
Assets shall be: (i) the sum of One Hundred Eighty-Five Million Dollars
($185,000,000) (the "Cash Payment") plus (ii) Purchaser's assumption of the
Assumed Liabilities (the Cash Payment, plus Purchaser's assumption of the
Assumed Liabilities, less the amount specified in Section 2.10(b), being
hereinafter together referred to as the "Purchase Price").
(b) Creditor List. Schedule 2.03(b) to Seller's Disclosure Letter
shall list (and be updated by Seller up to the Closing Date to list) all of
Seller's liabilities, debts, monetary obligations, accounts or trade payables
(including without limitation all contingent, unliquidated and disputed
liabilities) as of the Closing Date (collectively the "Closing Debts"),
specifying the creditor party (each a "Closing Creditor"), the amount owed to
each such Closing Creditor at the Closing Date (and if such Closing Creditor
will be entitled to ongoing future payments, such as royalties or rent under a
lease, then Schedule 2.03(b) shall set forth, and the Closing Debts will
include, an amount equal to the estimated aggregate amount of the total
projected payments due from Seller to such Closing Creditor) and all other
pertinent information (e.g., creditor address) with respect to each Closing
Debt. The Closing Debts shall include without limitation any Tax owed to
federal, state or local taxing authorities, any debts owed to Gould, EFI
International, Inc., a Delaware corporation ("EFI"), JEC, employees of Seller
and Seller's trade creditors and any other liabilities disclosed on the Latest
Balance Sheet (as defined in Section 3.07) which have not been satisfied as of
the Closing Date.
(c) Payment Procedure. The Cash Payment shall be paid by Purchaser
and SMIBV to Seller as follows, subject to Purchaser's and SMIBV's rights of
offset under Section 9.05:
(i) The sum of One Hundred Fifty Million Dollars ($150,000,000)
shall be transferred at the Closing (such payment being hereinafter referred
to as the "Closing Payment") to an escrow agent, being a national bank or
other national financial institution mutually agreeable to Purchaser and
Seller, which has been provided with a copy of Schedule 2.03(b) to Seller's
Disclosure Letter by Seller. Seller shall direct the escrow agent to pay all
of the Closing Debts in full, with monies being released from escrow directly
to each Closing Creditor to pay in full the Closing Debt owed to such Closing
Creditor, unless Purchaser has consented in advance in writing to the
non-payment of any particular Closing Debt (or any portion thereof) by the
escrow agent. Seller shall obtain from each Closing Creditor and deliver to
Purchaser a receipt executed by such Closing Creditor stating that each
Closing Debt (except for any Closing Debt (or any portion thereof) that
Purchaser has consented to the non-payment of as provided above) owed to it as
of the Closing Date has been satisfied in full (collectively the "Closing
Receipts"). Upon the receipt by the escrow agent of Closing Receipts from
each Closing Creditor (except with respect to any Closing Debt (or any portion
thereof) that Purchaser has consented to the non-payment of as provided
above), the escrow agent shall remit the remaining balance of the Closing
Payment (if any) to Seller in cash by wire transfer of immediately available
funds to a United States-based account of Seller designated by Seller upon at
least five (5) Business Days' prior written notice ("Seller's Account")
(Seller and Purchaser will execute any standard form indemnity and escrow
provisions and agreements required by such escrow agent with escrow fees to be
paid equally by Seller and Purchaser); and
(ii) The sum of Thirty-Five Million Dollars ($35,000,000) shall
be paid to Seller on July 1, 1998 (such payment being hereinafter referred to
as the "Second Payment"). The Second Payment shall be paid by Purchaser and
SMIBV in cash by wire transfer of immediately available funds to Seller's
Account.
(d) Allocation of Allocable Purchase Price. Purchaser and Seller
shall use their reasonable efforts to agree prior to the Closing Date, to
allocate, among the Purchased Assets, in accordance with the allocation
requirements of Section 1060 of the Internal Revenue Code of 1986, as amended
(the "Code"), the aggregate dollar amount of the sum of the Closing Payment,
the Second Payment, all amounts paid to Seller under Sections 2.03(g) and (h)
(collectively, the "Finished Product Payment") and that remaining portion of
the Purchase Price that is treated as Purchaser's and SMIBV's cost of the
Purchased Assets for federal income tax purposes (collectively, the "Allocable
Purchase Price"). The allocation of the Allocable Purchase Price agreed on by
the parties pursuant to this Section shall be reduced to a writing executed by
Seller and Purchaser that shall be delivered by Seller and Purchaser to each
other at the Closing (the "Purchase Price Allocation Agreement"). Any
subsequent adjustments to the Allocable Purchase Price shall be reflected in
the Purchase Price Allocation Agreement in a manner consistent with Treasury
Regulation Section 1.1060-lT(f). For all purposes Purchaser and Seller agree
to report the transactions contemplated in this Agreement in a manner
consistent with the Purchase Price Allocation Agreement, and will not take any
position inconsistent therewith in any financial statement, Tax return, in any
refund claim, in any litigation or otherwise, unless required to do so by a
governmental authority. Seller and Purchaser shall each be responsible for
the preparation of their own Internal Revenue Code Section 1060 statements and
forms in accordance with applicable Tax laws, and each shall execute and
deliver to each other such statements and forms as are reasonably requested.
(e) Fair and Equivalent Consideration. The parties agree that the
Purchase Price constitutes full and fair equivalent consideration for the
Purchased Assets and the covenants, agreements and performances of Seller
under this Agreement and the Ancillary Agreements.
(f) Exclusive Remedy. Notwithstanding anything in this Agreement to
the contrary, if (i) Purchaser or SMIBV fails to pay the Second Payment to
Seller when due under this Section 2.03 ("Case 1") or (ii) Purchaser fails to
pay, perform or discharge any Assumed Liabilities when the same become due
("Case 2"), then Seller's sole and exclusive remedy for such failure will be
the recovery of in Case 1, money damages equal to the amount of the unpaid
Second Payment not rightfully setoff or withheld by Purchaser and in Case 2
such unperformed Assumed Liabilities, plus in each Case 1 and Case 2 interest
accrued on such unpaid amount (not rightfully setoff or withheld) from and
after the date that the Second Payment was due and payable to Seller under
this Section 2.03 (in Case 1) or the Assumed Liability was not paid, performed
or discharged (in Case 2), at the lower of (i) the prime rate charged from
time to time by the Bank of America, N.T.&S.A. or (ii) the highest rate of
interest permitted under applicable law. Seller will not, under any
circumstances, have the right to rescind or otherwise terminate or alter this
Agreement, the sale or transfer of any Purchased Assets, to reacquire any
Purchased Assets or to terminate this Agreement or any Ancillary Agreement or
any rights of Purchaser or SMIBV hereunder or thereunder due to any failure of
Purchaser or SMIBV to timely pay the Second Payment or due to any failure of
Purchaser to timely pay, perform or discharge any Assumed Liability.
(g) Additional Payment for Finished Products. As additional
consideration for the Finished Products (other than the Included Products),
Purchaser shall pay to Seller at Closing, in addition to the Cash Payment and
amounts due under Section 2.03(h) below with respect to Customer Units, Three
Million Dollars ($3,000,000), less Two Hundred Thousand Dollars ($200,000) for
each Storage Product sold by or for Seller prior to the Closing Date, and less
any Loss or Liability of the type described in Section 9.02(k) incurred, or
estimated in good faith by Purchaser to be incurred, at any time prior to or
after Closing.
(h) Commission on Sale of Customer Units. Purchaser shall pay to
Seller, in addition to the Cash Payment and amounts due under Section 2.03(g)
above with respect to all Finished Products (other than the Included
Products), a commission upon any sale by or for Purchaser of any Customer Unit
during the 180 day period starting with the day after the Closing Date
("Collection Period"). The commission shall equal one-half (50%) of any
revenues actually collected by or for Purchaser with respect to Customer Units
sold by or for Purchaser during the Collection Period. The commission as to
any particular collected revenue amount shall be paid 30 days after the end of
the calendar quarter in which such revenues were collected and shall be
accompanied by a quarterly report as to each such sale during such calendar
quarter.
SECTION 2.04. Real Property. The purchase and sale of the Real Property
Assets from Seller to Purchaser shall, in addition to the terms and conditions
of this Agreement, be governed by and carried out pursuant to the terms and
conditions of the Real Property Purchase Agreements, each of which shall be
executed and delivered by Seller and Purchaser concurrently with the execution
of this Agreement and which shall provide for the closing of the sale and
purchase of the Real Property Assets from Seller to Purchaser concurrent with
the Closing of the sale and purchase of the other Purchased Assets in
accordance with this Agreement.
SECTION 2.05. Closing. Subject to the terms and conditions of this
Agreement, the sale and purchase of the Purchased Assets and the assumption of
the Assumed Liabilities contemplated hereby shall take place at a closing at
the offices of Fenwick & West LLP, Two Palo Alto Square, Suite 800, Palo Alto,
California (the "Closing") at 10:00 a.m., local time, on the second Business
Day after the satisfaction or waiver of the conditions to Closing set forth in
Article VIII or at such other time or on such other date or at such other
place as Seller and Purchaser may mutually agree in writing (the day on which
the Closing takes place being the "Closing Date ").
SECTION 2.06. Closing Deliveries by Seller. At the Closing, Seller shall
deliver or cause to be delivered to Purchaser:
(a) executed counterparts of all of the Ancillary Agreements to be
executed and entered into by Seller;
(b) the Purchase Price Allocation Agreement and all other agreements,
tangibles, documents and certificates to be delivered by Seller at the Closing
under Section 8.02 of this Agreement;
(c) a receipt for the Closing Payment; and
(d) all other items required to be delivered pursuant to Section 8.02
or any other provision hereof.
SECTION 2.07. Closing Deliveries by Purchaser. At the Closing, Purchaser
shall deliver to Seller:
(a) the Closing Payment of $150,000,000 in cash in accordance with
Section 2.03 against receipt thereof from Seller;
(b) executed counterparts of all of the Ancillary Agreements to be
executed and entered into by Purchaser; and
(c) the Purchase Price Allocation Agreement and all other agreements,
tangibles, documents and certificates to be delivered by Purchaser at the
Closing under Section 8.01 of this Agreement; and
(d) the amount, if any, due under Section 2.03(g) hereof.
SECTION 2.08. Unassignable Assets. Notwithstanding any other provision of
this Agreement or any of the Ancillary Agreements, but subject to Section
8.02(o) hereof, to the extent that any of the Assigned Contracts or
Governmental Permits constituting part of the Purchased Assets are not
assignable or otherwise transferable to Purchaser and SMIBV without the
consent, approval or waiver of another party thereto or any third party
(including any governmental agency), or if such assignment or transfer would
constitute a breach thereof or a violation of any applicable law, then neither
this Agreement nor such Ancillary Agreements shall constitute an assignment or
transfer (or an attempted assignment or transfer) thereof until such consent,
approval or waiver of such party or parties has been duly obtained. With
respect to each Assigned Contract or Governmental Permit whose assignment or
transfer to Purchaser or SMIBV requires the consent, approval or waiver of
another party thereto or any third party, Seller shall use its best efforts to
obtain such consent, approval or waiver of such other party or parties or such
third party to such assignment or transfer as promptly as practicable, but in
any event prior to the Closing Date. Purchaser and SMIBV agree to cooperate
with Seller and supply relevant information to such party or parties or such
third party in order to assist Seller in its obligations under this Section.
Notwithstanding the foregoing, nothing contained herein shall obligate
Purchaser to expend or pay any amount to third parties to obtain any consents,
approvals or waivers.
SECTION 2.09. SMIBV. The Purchased Assets purchased hereunder shall be sold
and assigned to Purchaser and SMIBV and allocated between Purchaser and SMIBV
as determined by Purchaser and SMIBV in their sole discretion and as reflected
in an agreement or memorandum executed by them, except that (as between
Purchaser and SMIBV) SMIBV shall have no rights to exploit such Purchased
Assets within the United States of America.
SECTION 2.10. Non-U.S. Assets.
(a) Non-U.S. Operations of Seller. From the Effective Date until the
Closing Date, Seller will, and will cause all Seller Subsidiaries and all
affiliates of Seller to, cooperate and assist Purchaser with (i) the
evaluation and identification of Purchased Assets or assets which could
properly be Purchased Assets, Seller Contracts and Employees of Seller or
Seller Subsidiaries located in or related to countries other than the United
States and (ii) if Purchaser in its sole discretion so elects in writing, the
transfer to, assignment to, or employment by (as the case may be) Purchaser
(in Purchaser's sole discretion) of any or all of such assets, Seller
Contracts or Employees; and upon such transfer or assignment, such assets will
be considered "Purchased Assets" and such Seller Contracts will be considered
"Assigned Contracts". Purchaser will not be required to make any additional
payment to Seller or any of the Seller Subsidiaries or any affiliate of Seller
(other than the Purchase Price) with respect to any such assets or Seller
Contracts.
(b) French Operations; No Announcement; Price Adjustment.
Notwithstanding any other provision of this Agreement, all assets of Seller or
any Seller Subsidiary located in France and all Seller Contracts pertaining to
France ("French Assets") shall be Excluded Assets and shall not be included in
the Purchased Assets, and any press release or other public statements by
Seller concerning the transactions contemplated hereby shall so state;
provided, however, that if Seller and Purchaser, SMIBV or an Applicable
Purchaser Subsidiary enter into a separate written agreement with respect to
the purchase and/or assignment of French Assets on a French Franc denominated
basis, the Purchase Price shall be reduced by the U.S. dollar equivalent of
the such French Franc sum.
(c) Cooperation on Assignment of Offshore Tangible Assets. As used
herein, the term "Offshore Tangible Assets" means the Tangible Assets,
Inventory Assets and/or Employee Assets included in the Purchased Assets
that, as of immediately prior to the Closing, are physically located in a
jurisdiction other than the United States of America (a "Non-U.S.
Jurisdiction"). Notwithstanding anything in this Agreement to the contrary,
it is the intention of the parties that, at the Closing, the Offshore Tangible
Assets that, as of immediately prior to the Closing, are located in any
Non-U.S. Jurisdiction shall not be sold to Purchaser, but instead shall be
sold, assigned, transferred, conveyed and delivered by Seller directly to the
Applicable Purchaser Subsidiary (as defined below) for such Non-U.S.
Jurisdiction. An "Applicable Purchaser Subsidiary" with respect to a
particular Non-U.S. Jurisdiction means a corporate subsidiary of Purchaser
that, as of immediately prior to the Closing, has been formed and exists
under, or whose principal offices are located in, such Non-U.S. Jurisdiction
(or, if no such subsidiary of Purchaser exists, or if Purchaser otherwise
determines, such other corporate subsidiary of Purchaser as Purchaser may
designate to Seller). Notwithstanding the foregoing provisions of this
Section 2.10(c) and except as otherwise provided in Section 2.10(b), no
subsidiary of Purchaser shall pay to Seller any portion of the Purchase Price,
which shall be paid only by the Purchaser and SMIBV (subject to any
re-allocation of the Purchase Price among Purchaser and SMIBV and their
respective subsidiaries and affiliates as Purchaser and SMIBV may deem
advisable), subject to the terms and conditions of this Agreement. At the
Closing, separate bills of sale and assignment agreements (which shall be
substantially identical to the Bill of Sale in form and substance) shall be
prepared, executed and delivered by Seller and each of the Applicable
Purchaser Subsidiaries to document the sale, assignment and transfer of title
of the appropriate Offshore Tangible Assets to each Applicable Purchaser
Subsidiary as contemplated by this Section 2.10(c) (such bills of sale are
hereinafter referred to as the "Offshore Tangible Asset Bills of Sale").
Between the date of this Agreement and the Closing Date, the parties will
cooperate to complete their investigation as to the physical location of all
Offshore Tangible Assets so as to effectuate the purposes and intent of this
Section 2.10(c). In addition to the above, Purchaser may elect to have any
Seller Contracts relating to any Non-U.S. Jurisdiction assigned directly by
Seller to the Applicable Purchaser Subsidiary for such Non-U.S. Jurisdiction
or to any other subsidiary of Purchaser, in which case Seller shall obtain all
consents required to permit such assignment to such Applicable Purchaser
Subsidiary or such other subsidiary of Purchaser.
SECTION 2.11. Further Assurances. In case at any time after the Closing
Date any further action is necessary or desirable to carry out the purposes of
this Agreement, each of the parties will take such further action (including
the execution and delivery of such further instruments and documents) as any
other party reasonably may request, all at the sole cost and expense of the
requesting party (unless the requesting party is entitled to indemnification
therefor under Article IX). Seller will sign and deliver any and all
instruments and documents necessary or appropriate to fully effect and perfect
the transfer to Purchaser and SMIBV (or if Purchaser so elects, any Applicable
Purchaser Subsidiary) of any and all of the Purchased Assets.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller hereby represents and warrants to Purchaser and SMIBV that, except as
expressly set forth in the Seller's Disclosure Letter, all of the following
statements, representations and warranties are true and correct:
SECTION 3.01. Organization and Good Standing of Seller. Seller is a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation, has the corporate power and
authority to own, operate and lease its properties and to carry on its
business as now conducted and as proposed to be conducted by Seller through
the Closing, and is qualified to transact business as a non-U.S. corporation
in each jurisdiction in which its failure to be so qualified could reasonably
be expected to have a Material Adverse Effect. As used in this Agreement, the
term "Material Adverse Effect" when used with reference to Seller, means any
event, change or effect that is (or could reasonably be expected to be)
materially adverse to Seller's financial condition, properties, assets,
liabilities, business, operations, results of operations or prospects. The
copies of the certificate of incorporation (certified by the Secretary of
State of the jurisdiction of Seller's incorporation) and the bylaws of Seller,
each as amended to date, which have been delivered to Purchaser, are complete
and correct, and Seller is not in default under or in violation of any
provision of its certificate of incorporation or bylaws.
SECTION 3.02. Authorization and Validity. Seller has all necessary right,
corporate power, legal capacity and authority to enter into, execute and
deliver this Agreement and, subject to obtaining the Seller's Stockholder
Approval (as defined below), to consummate the sale to Purchaser and SMIBV of
the Purchased Assets contemplated hereby and the other transactions
contemplated by this Agreement and the Ancillary Agreements. This Agreement
has been, and at the Closing the Ancillary Agreements will be, duly executed
and delivered by Seller, and (assuming due authorization, execution and
delivery by Purchaser and SMIBV) this Agreement constitutes, and, upon
Seller's execution of each of the Ancillary Agreements, each of the Ancillary
Agreements will constitute, a legal, valid and binding obligation of Seller
enforceable against Seller in accordance with its terms. The execution,
delivery and performance by Seller of this Agreement and each of the Ancillary
Agreements have been duly and validly approved and authorized by all necessary
corporate action on the part of Seller's Board of Directors.
SECTION 3.03. Subsidiaries or Affiliates. Seller has no subsidiaries
except as set forth in Section 3.03 of Seller's Disclosure Letter (each of
which subsidiaries is 100% owned by Seller) and Seller has no interest in any
other corporation, partnership, limited partnership, limited liability company,
association or joint venture. None of the Purchased Assets are owned,
licensed to, leased to or otherwise held or used by any Seller Subsidiary
(other than Seller) or by any other affiliate of Seller (other than Seller).
SECTION 3.04. Capitalization; Required Stockholder Approval; Stockholders
Meeting.
(a) Capitalization. Encore's authorized and issued and outstanding capital
stock consists of (i) 200,000,000 shares of Common Stock, $0.01 par value per
share, of which 37,559,976 shares are issued and outstanding; and (ii)
10,000,000 shares of Preferred Stock, $0.01 par value per share, of which (A)
73,641 shares are designated Series A Convertible Participating Preferred
Stock, 73,641 shares of which are issued and outstanding; (B) 1,000,000 shares
are designated Series B Convertible Preferred Stock, 785,035 shares of which
are issued and outstanding; (C) 1,500,000 shares are designated Series D
Convertible Preferred Stock, 1,201,247 shares of which are issued and
outstanding; (D) 1,500,000 shares are designated Series E Convertible Stock,
1,227,866 shares of which are issued and outstanding; (E) 1,000,000 shares are
designated Series F Convertible Preferred Stock, 574,547 shares of which are
issued and outstanding; (F) 1,000,000 shares are designated Series G
Convertible Preferred Stock, 616,516 shares of which are issued and
outstanding; (G) 700,000 shares are designated Series H Convertible Preferred
Stock, 377,047 shares of which are issued and outstanding; (H) 800,000 shares
are designated Series I Convertible Preferred Stock, 409,045 shares of which
are issued and outstanding; and (I) 246,154 shares are designated Series J
Convertible Participating Preferred Stock, none of which are issued and
outstanding.
(b) Required Vote. The consummation of the sale and transfer of the
Purchased Assets to Purchaser and SMIBV pursuant to this Agreement and the
transactions contemplated by this Agreement and the Ancillary Agreements have
been approved by the respective Boards of Directors of Seller and by Encore as
sole shareholder of each of Encore Computer U.S., Inc. and Encore
International, Inc. and must, in compliance with applicable law and Encore's
certificate of incorporation and bylaws, both as amended, be approved by: (i)
a majority of the outstanding stock of Encore entitled to vote thereon and
(ii) the holders of 75% of the stock of Encore (or if there are two or more
classes of stock entitled to vote as separate classes, then in the case of
each such class, the holders of 75% of the stock of that class) present in
person or represented by proxy and voting thereon at a meeting of the
stockholders of Encore (such affirmative vote and approval of the foregoing
matters by the stockholders of Encore is hereinafter referred to as the
"Seller's Stockholder Approval"). Seller's stockholders are not and will not
be entitled to any dissenting stockholders' appraisal rights or similar rights
under any applicable law or under any certificate of incorporation, bylaws or
other charter document (in each case as amended to date) of Seller with
respect to the transactions contemplated by this Agreement.
SECTION 3.05. No Conflict. The execution, delivery and performance of this
Agreement and the Ancillary Agreements by Seller do not and will not (a)
breach, violate or conflict with the certificate of incorporation or bylaws of
Seller, both as amended to date, (b) conflict with or violate any law, rule,
regulation, order, writ, judgment, injunction, decree, determination or award
applicable to Seller or to any of the Purchased Assets, (c) result in any
breach or violation of, or constitute a default (or event which with the
giving of notice or lapse of time, or both, would become a breach, violation
or default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any Governmental Permit or any of the Seller
Contracts, or (d) result in the creation of any Encumbrance on any of the
Purchased Assets.
SECTION 3.06. Consents.
(a) Consents and Approvals. The execution and delivery of this Agreement
and the Ancillary Agreements by Seller and the execution and delivery of the
Inducement Agreements by Gould, EFI and JEC do not, and the performance of
this Agreement and the Ancillary Agreements by Seller and the performance of
the Inducement Agreements by Gould, EFI and JEC will not, require any consent,
approval, authorization or other action by, or filing with or notification to,
any court or governmental or regulatory authority, except for (a) filings and
approvals required under the HSR Act, and (b) the filing by Seller with the
U.S. Securities and Exchange Commission, and the distribution to the Company's
stockholders of, a proxy statement seeking the Seller's Stockholder Approval
and complying with the requirements of the Securities Exchange Act of 1934, as
amended, and other applicable laws.
(b) Consents to Assign. Schedule 3.06(b) to Seller's Disclosure Letter sets
forth a true and complete list of each and every Assigned Contract or
Governmental Permit with respect to which the consent or approval of any third
party or governmental authority is required in order for Seller or any of
Seller's Subsidiaries or other affiliates to assign or transfer to Purchaser
or SMIBV any rights or obligations under such Assigned Contract or
Governmental Permit.
SECTION 3.07. Financial Statements. Encore's consolidated audited Balance
Sheets at December 31, 1995 and 1996 and the related consolidated audited
statement of income, shareholders' equity and cash flows for the fiscal years
ended December 31, 1995 and 1996, the unaudited consolidated balance sheet of
the Encore as of March 31, 1997 (the latter balance sheet being hereinafter
referred to as the "Latest Balance Sheet"), and the related consolidated
unaudited statements of income, shareholders' equity and cash flows for the
three-month period ended March 31, 1997, including the related schedules and
notes (collectively, "Seller's Financial Statements"), have been prepared in
accordance with GAAP on a basis consistent with those of prior years, are in
accordance with the books and records of Seller and the Seller Subsidiaries
(which books and records are complete and correct) and fairly present the
consolidated financial position and results of operations of Seller as of said
dates and for each of the periods indicated. Copies of the financial
statements described in this Section 3.07 have been delivered to Purchaser.
Encore's December 31, 1995 and 1996 Balance Sheets and the Latest Balance
Sheet make full and adequate provision for all consolidated Liabilities of
Seller as of their respective dates as required by GAAP and on a basis
consistent with those of prior years. Seller has no material debt, liability
or obligation of any nature, whether accrued, absolute, contingent or
otherwise, and whether due or to become due, except for (i) those shown on the
Latest Balance Sheet, and (ii) those that may have been incurred after March
31, 1997, the date of the Latest Balance Sheet (the "Seller Balance Sheet
Date") in the ordinary course of Seller's business consistent with past
practice, and that are not material in amount, either individually or
collectively. All reserves established by Seller and reflected in the Latest
Balance Sheet are reasonably adequate. At the Seller Balance Sheet Date,
there were no material loss contingencies (as such term is used in Statement
of Financial Accounting Standards No. 5 ("Statement No. 5") issued by the
Financial Accounting Standards Board in March 1975) which are not adequately
provided for in the Latest Balance Sheet as required by Statement No. 5.
SECTION 3.08. Absence of Undisclosed Liabilities. All Liabilities of Seller
have been paid when due or have been accrued properly. Seller has no
Liability (and there is no basis for the assertion of any Liability), arising
out of any transactions entered into at or prior to the Effective Date, or any
action or inaction at or prior to the Effective Date or any state of facts
existing at or prior to the Effective Date, except for (i) Liabilities
reflected on the Latest Balance Sheet or (ii) current Liabilities which have
arisen after the date of the Latest Balance Sheet in the ordinary course of
business, consistent with Seller's past practices and which are not material
in amount.
SECTION 3.09. Absence of Certain Changes or Events. Since December 31,
1996, Seller has not:
(a) incurred or agreed to incur any material Liability, except current
Liabilities incurred in the ordinary course of business;
(b) delayed or postponed the payment of accounts payable or other
Liabilities with respect to which payment was due;
(c) subjected any Purchased Assets to any Encumbrance or agreed to take any
such action;
(d) transferred or leased any of its assets or properties related to the
Storage Products Business, or agreed to take any such action, other than
transfers or leases in the ordinary course of business consistent with
Seller's past practice;
(e) canceled, compromised, waived or released any material right, debt or
claim, or agreed to take any such action;
(f) transferred or granted any rights under any leases, licenses or
agreements or with respect to any Intangible Assets, Trademark Assets or
Intellectual Property Assets or agreed to take any such action;
(g) made or granted any individual wage or salary increase in excess of 10%
or any general wage or salary increase, or entered into any employment
contract with any shareholder, officer, employee or consultant or any
affiliate of Seller, changed or increased the rates of compensation payable
through bonus, pension, contract or other commitment to any shareholder,
officer, director, employee or consultant or any affiliate thereof for any
period before or after the Effective Date of this Agreement or made any other
change in employment terms for any of such persons, or agreed to take any such
action;
(h) adopted, amended, modified or terminated any bonus, profit-sharing
incentive, severance or other plan, contract or commitment for the benefit of
any of its officers, directors, employees or consultants (or taken any such
action with respect to any other employee benefit plan), or agreed to take any
such action except to the extent that such changes are not material or are
required by any regulatory agency such as the Department of Labor or the
Internal Revenue Service;
(i) entered into, or agreed to enter into, any contracts or agreements
involving more than $50,000 individually or $250,000 in the aggregate, other
than purchase orders entered into in the ordinary course of business;
(j) suffered any Material Adverse Effect;
(k) made any loan to, or received any loan from, any person or entered into
any transaction with any shareholder, officer or director or any affiliate of
Seller (including, without limitation, any agreement or other arrangement
providing for employment of, furnishing of services by, rental or license of
real or personal property from, or otherwise requiring payment to any
shareholder, officer, director or affiliate of Seller), or agreed to take any
such action;
(l) permitted any Person, including, without limitation, any shareholder,
officer or director or any affiliate of Seller, to withdraw assets from
Seller, or agreed to permit any such action;
(m) made any payment or transfer to or for the benefit of any shareholder,
officer or director or any affiliate thereof, or agreed to take any such
action;
(n) accelerated, terminated, modified or canceled any agreement, contract,
lease, or license (or series of related agreements, contracts, leases or
licenses) involving more than $50,000 individually or more than $250,000 in
the aggregate, to which Seller is a party or by which it is bound, or agreed
to take any such action; or
(o) made a bulk sale of inventory at below normal margins for the inventory
sold or declared, set aside or paid any dividend or made any payment or
distribution to its shareholders (whether in cash or in kind), or agreed to
take any such action.
SECTION 3.10. Tax Matters.
(a) Tax Returns. Seller and each Seller Subsidiary has prepared and timely
filed all required federal, state, local and non-U.S. returns, estimates,
information statements and reports ("Returns") relating to any and all Taxes
attributable to Seller or any Seller Subsidiary and such Returns were true and
correct and completed in accordance with applicable law.
(b) Payments. Seller and each Seller Subsidiary (i) has paid all Taxes that
Seller or such Seller Subsidiary is required to pay and has withheld with
respect to its Employees all federal and state income taxes, FICA, FUTA and
other Taxes required to be withheld and paid such withheld amounts to the
appropriate governmental body within the time prescribed by law, and (ii)
Seller has accrued on Seller's Financial Statements all Taxes attributable to
the periods covered by Seller's Financial Statements and has not incurred any
liability for Taxes for the period since the Seller Balance Sheet Date other
than in the ordinary course of business, consistent with Seller's past
practices.
(c) No Delinquencies. Neither Seller nor any Seller Subsidiary has been
delinquent in the payment of any Tax nor has there been any Tax deficiency
outstanding, proposed or assessed against Seller or any Seller Subsidiary, as
the case may be, nor has Seller or any Seller Subsidiary executed any waiver
of any statute of limitations on, or extended the period for assessment or
collection of, any Tax.
(d) No Audit. No audit or other examination of any Return of Seller or any
Seller Subsidiary is presently in progress, nor has Seller or any Seller
Subsidiary been notified of any request for such an audit or other
examination.
(e) No Unpaid Liabilities. Neither Seller nor any Seller Subsidiary has any
liability for any unpaid federal, state, local and non-U.S. Taxes which have
not been accrued or reserved against on Seller's Financial Statements, whether
asserted or unasserted, contingent or otherwise.
(f) Copies Made Available. Seller has made available to Purchaser copies of
all federal and state income tax returns and all state sales and use tax
returns for Seller for all periods ending after December 31, 1994.
(g) No Tax Liens. There are (and as of immediately following the Closing
there will be) no Encumbrances or charges of any sort on any of the assets of
Seller relating to or attributable to Taxes, other than liens for personal
property, sales and payroll taxes not yet due and payable.
(h) Tax Exempt Use Property. None of Seller's assets related to the Storage
Products Business are treated as "tax-exempt use property" within the meaning
of Section 168(h) of the Code.
(i) No Parachute Payments. There are no contracts, agreements, plans or
arrangements, including but not limited to the provisions of this Agreement,
covering any past or present employee of Seller or any Seller Subsidiary that,
individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to Section 280G of the Code.
(j) No Tax Sharing Agreement. Neither Seller nor any Seller Subsidiary is a
party to a third-party tax sharing or allocation agreement with any third
party nor does Seller or any Seller Subsidiary owe any amount under any such
agreement, other than this Agreement.
SECTION 3.11. Title to and Condition of Purchased Assets; Sufficiency of
Purchased Assets. Seller owns all the Purchased Assets and has good and
marketable title in and to all of the Purchased Assets, free and clear of all
Encumbrances whatsoever, except for licensed and leased assets specifically
listed as such, and Encumbrances listed, in Section 3.11 of Seller's
Disclosure Letter. No Seller Subsidiary other than Seller owns any of the
Purchased Assets. All of the tangible personal property included in the
Purchased Assets is in good working condition and repair, ordinary wear and
tear excepted, and is suitable for the purposes for which it is presently
used. The Purchased Assets constitute all assets, properties, rights and
Intellectual Property Rights that are necessary or required to enable
Purchaser, following the Closing, to own, conduct, operate and maintain the
Storage Products Business as historically conducted or as proposed to be
conducted by Seller through the Closing Date without: (i) the need for
Purchaser to acquire or license any other asset, property or Intellectual
Property Right, (ii) the breach or violation of any contract or commitment;
and (iii) infringement of any Intellectual Property Right of any party other
than Purchaser. Without limiting the preceding sentence, the Assigned
Contracts include, without limitation, all Storage Products Leases, all Real
Property Leases and all Storage Products Licenses. Title to all the Purchased
Assets is freely transferable from Seller to Purchaser and SMIBV free and
clear of all Encumbrances without obtaining the consent or approval of any
person. None of the Purchased Assets (whether tangible or intangible) that
were used in the Storage Products Business have been removed from use in such
business since December 31, 1996. The current location of all tangible
Purchased Assets is set forth in Schedule 3.11 to Seller's Disclosure Letter,
and Seller will not re-locate any material Purchased Assets from the
location(s) shown for such Purchased Assets on Schedule 3.11 to Seller's
Disclosure Letter without Purchaser's prior written consent. Seller has paid
in full all royalties, fees and any other payments that have ever become due
and payable under all license agreements included among the Assigned Contracts
or related to any of the Purchased Assets and no further royalties, license
fees, maintenance and support fees or any other payments whatsoever are due
and payable, nor will any further royalties, license fees, maintenance and
support fees or any other payments whatsoever become due and payable in the
future, under any license agreements included among the Assigned Contracts or
with respect to any Purchased Assets under any circumstances. Except as may
be set forth in the Disclosure Letter or any schedule to this Agreement, none
of the Purchased Assets is licensed from any third party and no royalties,
license fees or similar payments are due or payable (or may become due or
payable) to any third party under any license or other agreement. None of the
Purchased Assets is licensed to any third party, including any Seller
Subsidiary or any other affiliate of Seller. The Certified Tangible Asset
Schedule was prepared in the ordinary course, in a manner consistent with
Seller's past practice and in accordance with Seller's business records and in
accordance with GAAP and all other applicable professional standards and is
true, accurate and complete.
SECTION 3.12. Real Property Assets. Seller's title in the Real Property
Assets is free and clear of all Encumbrances created by or through Seller,
except: (a) liens for Taxes and assessments not yet due and payable (which
are summarized in Section 3.12 of Seller's Disclosure Letter); and (b)
immaterial imperfections of title set forth in the title report attached as
Exhibit 3.12A to Seller's Disclosure Letter (for the Fort Lauderdale Facility)
and in the title report attached as Exhibit 3.12B to Seller's Disclosure
Letter (for the Melbourne Facility) and in the title report attached as
Exhibit 3.12C to Seller's Disclosure Letter (for the Condominiums),
respectively, each of which title reports is dated within thirty days of the
Effective Date; provided, however, that nothing herein shall release or
discharge Seller from any of Seller's obligations under the Real Property
Purchase Agreements. The Real Property Assets are in good condition and
repair and are supplied with utilities and other services reasonably necessary
for the operation of such facilities. Seller does not sublease any of the
Real Property Assets. No portion of any of the Real Property Assets is leased
by Seller to any person or leased to Seller by any person. Seller's current
use of the Real Property Assets is permitted by all applicable laws and
regulations (including without limitation zoning laws) and Seller has all
permits and licenses necessary to use and occupy (and permit Purchaser to use
and occupy) the Real Property Assets.
SECTION 3.13. Lists of Certain Assets. Schedule 3.13 to Seller's
Disclosure Letter contains a true, correct and complete list of:
(a) all of the Tangible Assets (including without limitation equipment,
machinery and vehicles), including original cost, depreciation and current
book value of each of such Tangible Assets;
(b) all of the following items that relate in any manner to the Storage
Products Business, any or all of the Storage Products or any of the Purchased
Assets:
(i) all contracts or agreements for the purchase or sale of raw
materials, supplies, products or other personal property or for the furnishing
or receipt of services;
(ii) all license arrangements or agreements, including distribution,
sublicense, marketing, development or resale agreements of any kind;
(iii) all business licenses, franchises, approvals, Governmental
Permits, registrations and similar rights;
(iv) all other Seller Contracts, except for Seller Contracts that
either (A) are Excluded Contracts; or (B) are (w) unrelated to Intellectual
Property Rights or to any Encumbrance binding on Seller, any Seller
Subsidiary, any Seller affiliate or any of the Purchased Assets, and (x) not a
Restrictive Agreement (as defined below), and (y) not material, individually
or in the aggregate, and (z) terminable on 30 days or less notice without
liability; and
(c) all offices or locations in, or from which, the Storage Products
Business is conducted, wherever located.
True and complete copies of the documents referred to in such list have been
made available to Purchaser. All Seller Contracts are valid, in full force
and effect, and enforceable in accordance with their respective terms, and no
party has repudiated or claimed a breach of any provision thereof and no
breach or default thereunder will result from this Agreement, any of the
Ancillary Agreements, or any of the transactions contemplated hereby or
thereby. Neither Seller nor any other party to any Seller Contract is in
material breach or default in performance of any of their respective
obligations thereunder, and no event exists which, with the giving of notice
or lapse of time or both, would constitute a material breach, default or event
of default on the part of Seller or, to Seller's knowledge, on the part of any
other party, to any Seller Contract that is continuing unremedied. Those
Seller Contracts not listed pursuant to this Section 3.13 do not in the
aggregate represent a material portion of the liabilities of the Company.
SECTION 3.14. No Restrictive Agreements. Neither Seller nor any Seller
Subsidiary is a party to, and no Purchased Asset is bound or affected by, any
judgment, injunction, order, decree, contract, covenant or agreement
(noncompete or otherwise) that restricts or prohibits (or purports to restrict
or prohibit) Seller from freely engaging in its business (including without
limitation the Storage Products Business) as now conducted or proposed to be
conducted by Seller through the Closing Date or from competing anywhere in the
world (including without limitation any contracts, covenants or agreements
restricting the geographic area in which Seller may sell, license, market,
distribute or support any products or technology or provide services, or
restricting the markets, customers or industries that Seller may address in
operating its business) (collectively, "Restrictive Agreements") other than
this Agreement.
SECTION 3.15. Full Force and Effect. Each Assigned Contract and
Governmental Permit assigned to Purchaser or SMIBV or assumed by Purchaser
pursuant to this Agreement or any of the Ancillary Agreements is in full force
and effect and is not subject to any breach or default thereunder by Seller or
any other party thereto.
SECTION 3.16. Litigation. There is no claim, action, suit, arbitration,
mediation, investigation or other proceeding of any nature pending or, to the
best of Seller's knowledge, threatened, at law or in equity, by way of
arbitration or before any court, governmental department, commission, board or
agency that: (i) may adversely affect, contest or challenge Seller's
authority, right or ability to sell or convey any of the Purchased Assets to
Purchaser or SMIBV hereunder or otherwise perform Seller's obligations under
this Agreement or any of the Ancillary Agreements; (ii) challenges or contests
Seller's right, title or ownership of any of the Purchased Assets or seeks to
impose an Encumbrance on, or a transfer of title or ownership of, any
Purchased Asset; (iii) asserts that any Purchased Asset, or any action taken
by any employee, consultant or contractor of Seller, any Seller Subsidiary or
any other affiliate of Seller with respect to any Purchased Asset, infringes
or misappropriates any Intellectual Property Rights of any third party; (iv)
seeks to enjoin, prevent or hinder operation of the Storage Products Business,
the sale, license, marketing or distribution of any Storage Product or the
consummation of any of the transactions contemplated by this Agreement or any
of the Ancillary Agreements; (v) would impair or have an adverse affect on
Purchaser's or SMIBV's right or ability to use or exploit any of the Purchased
Assets or impair or have an adverse effect on the value of any Purchased
Asset; (vi) involves a wrongful termination, harassment or other
employment-related claim by any applicant for employment or any present or
former employee, consultant or contractor of Seller, any Seller Subsidiary or
any other affiliate of Seller or that would adversely affect or prevent
Purchaser from hiring or employing any Employee; (vii) involves or relates to
any potentially material claim against Seller by any creditor of Seller or
involves any claim of fraudulent conveyance or any similar claim; or (viii)
may adversely affect, contest or challenge Gould's or EFI's or JEC's authority
to enter into, and perform its respective obligations under, the respective
Inducement Agreement to which it is a party. There are no judgments, decrees,
injunctions or orders of any court, governmental department, commission,
agency, instrumentality or arbitrator pending or binding against Seller which
affect any of the Purchased Assets or Purchaser's ability to hire any
Employee.
SECTION 3.17. Compliance with Laws.
(a) General. Seller has complied with and has not received any notices of
violation with respect to, any non-U.S., federal, state or local statute, law
or regulation (including any Environmental Law), domestic or non-U.S.,
applicable to the Storage Products Business or any of the Purchased Assets.
Without limitation of the foregoing, the Real Property Assets conform to and
comply with all applicable legal requirements, laws, rules and regulations,
including without limitation, all Environmental Laws, zoning laws or building
codes, the Occupational Safety and Health Act ("OSHA") and the Americans With
Disabilities Act. Seller has no knowledge of any pending or proposed OSHA
regulations or amendments to OSHA regulations (including toxic chemical
regulations) that would require any change in any of Seller's facilities,
equipment, operations or procedures or affect Seller's business or its costs
of conducting its business as now conducted. Seller has never made any
bribes, kickback payments or other illegal contributions. Seller holds all
necessary Governmental Permits for the conduct of the Storage Products
Business and all such Governmental Permits are freely transferable to
Purchaser.
(b) Proxy Statement. Seller's Proxy Statement (as defined in Section 5.03)
in the form sent to Encore's stockholders, shall fully comply with the
Securities Exchange Act of 1934, as amended, and all rules and regulations
promulgated thereunder, and with all other applicable laws, including without
limitation all applicable securities laws.
SECTION 3.18. No Representation to Employees. Seller has made no
representations to any employee of Seller, any Seller Subsidiary or any other
affiliate of Seller or to any consultant or contractor of Seller, any Seller
Subsidiary or any other affiliate of Seller concerning whether Purchaser will
offer to hire or will hire such employee, consultant or contractor, the length
of time the employee's, consultant's or contractor's work, employment or
service may continue with Purchaser (if at all) or, to the extent inconsistent
with the terms hereof, the compensation or benefits to be paid to the
employees or any consultant or contractor by Purchaser or other terms or
conditions of employment with Purchaser. Seller has made no representation to
any employee, consultant or contractor of Seller, any Seller Subsidiary or any
other affiliate of Seller that Purchaser can or will terminate the employment
of its employees only upon certain terms or conditions or only on certain
grounds or that such employment is anything other than "at will".
SECTION 3.19. Employees.
(a) Employee List. Set forth in Schedule 3.19 to Seller's Disclosure Letter
is a complete and accurate list of all the Employees (as defined in Section
6.01). Schedule 3.19 to Seller's Disclosure Letter also contains a complete
and accurate list of all consultants and contractors currently hired, retained
or engaged (or that were hired, retained or engaged at any time on or after
January 1, 1996) by Seller or by any Seller Subsidiary or any other affiliate
of Seller to perform any work or services related to the Storage Products
Business (collectively "Consultants" and each individually a "Consultant").
Such Schedule 3.19 also contains a true and accurate list of all locations at
which Employees and/or Consultants are working as of the date hereof, together
with the date of hire, location of employment, years of employment or service,
current annual base salary and (in the case of Consultants) current
compensation arrangement for each Employee and Consultant.
(b) Employment and Consulting Agreements. Schedule 3.19 to Seller's
Disclosure Letter includes a complete and accurate list of (i) all employment
contracts related to any Employee (if any) that are (or will prior to the
Closing be) in effect and (ii) all consulting or similar agreements related to
any Consultant that are (or will prior to the Closing be) in effect.
(c) No Terminations Planned; No Restrictions. Seller has not received any
notice, nor, to Seller's knowledge is there any reason to believe, that any
executive or key employee of Seller or any group of employees of Seller has
any plans to terminate his, her or their employment with Seller. To Seller's
knowledge, no executive or key employee is subject to any agreement,
obligation, order or other legal hindrance that impedes or might impede such
executive or key employee from devoting his or her full business time to the
affairs of Seller prior to the Closing Date and, if such person becomes an
employee of Purchaser, to the affairs of Purchaser after the Closing Date.
(d) Compliance. Seller has complied with all laws, rules and regulations
relating to the employment of labor, including provisions thereof relating to
wages, hours, equal opportunity, collective bargaining and the payment of
social security and other Taxes. Seller will not be required to give any
notice under the WARN Act or any plant closing or similar law as a result of
this Agreement, the sale to Purchaser and SMIBV of the Purchased Assets or any
of the other transactions contemplated by this Agreement.
(e) Labor Matters. Seller does not have any labor relations problems or
disputes, nor has it experienced, nor is there threatened, any strike,
grievance, claim of unfair labor practices, other collective bargaining
dispute or any other material labor difficulty. Seller is not a party to or
bound by any collective bargaining agreement or union contract there is no
union or collective bargaining unit at Seller's facilities. No union
organization effort is threatened, initiated or is in progress with respect to
any employees of Seller and no such union organization effort has been
threatened or initiated at any time since June 1, 1996.
(f) No Debt. Seller is not indebted to any officer, director, employee,
consultant or shareholder, whether by loan, advance or otherwise, other than
for salaries accrued but not yet payable and reimbursable out-of-pocket
expenses incurred in the ordinary course of business consistent with Seller's
past practice and not yet payable, nor is any officer, director, employee or
shareholder so indebted to Seller.
SECTION 3.20. Pension and Employee Benefit Matters.
(a) Employee Benefit Plans. Schedule 3.20 to Seller's Disclosure Letter
sets forth a true and complete list of each worldwide employment, severance or
other similar contract, arrangement or policy, each "employee benefit plan" as
defined in Section 3(3) of ERISA and each savings or pension plan or similar
arrangement, each plan or arrangement (written or oral) providing for
insurance coverage (including any self-insurance arrangements), workers'
compensation benefits, vacation benefits, severance benefits, disability
benefits, death benefits, hospitalization benefits, retirement or pension
benefits, deferred compensation, profit-sharing, bonuses, stock options, stock
purchases, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement insurance, compensation or benefits for
employees, consultants or directors which is entered into, maintained or
contributed to by Seller, any Seller Subsidiary or any other affiliate of
Seller and covers any employee or former employee of Seller, any Seller
Subsidiary or any other affiliate of Seller in any jurisdiction of the world
(collectively, the "Seller Employee Benefit Plans"). Each Seller Employee
Benefit Plan has been maintained in compliance in all material respects with
its terms and with the requirements prescribed by any and all statutes,
orders, rules and regulations that are applicable to such Seller Employee
Benefit Plan, including without limitation ERISA. Seller has delivered to
Purchaser or its counsel a complete and correct copy or description of each
Seller Employee Benefit Plan.
(b) COBRA Compliance. The group health plans (as defined in Section
4980B(g) of the Code) that benefit employees of Seller, any Seller
Subsidiaries or any other affiliates of Seller are in compliance, in all
material respects, with the continuation coverage requirements of Section
4980B of the Code. As of the Closing Date, there will be no material
outstanding, uncorrected violations under COBRA, with respect to any of the
Seller Employee Benefit Plans, covered employees, or qualified beneficiaries
that could result in a Material Adverse Effect on Seller, or for which
Purchaser or SMIBV may become liable by virtue of their acquisition of the
Purchased Assets or the hiring by Purchaser of any Employee.
(c) No Liability. Neither Purchaser nor SMIBV will suffer any Liability or
adverse consequence from the administration, termination or continuation of
any of the Seller's Employee Benefit Plans or from any failure of any
post-Closing distribution of benefits to employees of Seller to be made by
Seller in compliance with all applicable legal requirements. Seller will
remain liable for all costs of employee compensation, including without
limitation: (i) all employee benefits and claims for periods prior to the
Closing Date, (ii) Taxes relating to employment and employees attributable to
periods through the Closing Date, whether reported by the Closing Date or
thereafter and (iii) all group health plan continuation coverage to which any
employee, former employee or dependent is entitled because of a qualifying
event (as defined in Section 4980B(f)(3) of the Code) occurring through the
Closing Date or as a result of termination of employment with Seller, any
Seller Subsidiary or any other affiliate of Seller because of the transactions
contemplated by this Agreement and any benefit or excise tax liability or
other costs arising from any failure by Seller, any Seller Subsidiary or any
other affiliate of Seller to provide group health plan continuation coverage.
All Seller Employee Benefit Plans (including without limitation any of such
plans related to savings, pension or retirement or similar benefits) are fully
funded and neither Purchaser nor SMIBV are now, nor will they, as a result of
the consummation of any of the transactions contemplated by this Agreement,
become, liable under the laws of any country or jurisdiction, to pay into,
contribute or otherwise fund any amounts that may be payable into or due to
any Seller Employee Benefit Plan.
SECTION 3.21. Supplier and Customer Relationships. Seller has good
commercial working relationships with its customers for the Storage Products
Business and since January 1, 1997, no customer or supplier, accounting for
two percent (2%) or more of Seller's gross sales revenues or purchases of
supplies related to the Storage Products Business, has canceled or otherwise
terminated its relationship with Seller, decreased or limited materially its
purchases or materials supplied to Seller from the corresponding period in
1996, or, to Seller's knowledge, threatened to take any such action.
SECTION 3.22. Product and Inventory Status.
(a) Product Quality, Warranty Claims. All products manufactured, sold,
licensed, leased or delivered by Seller and all services provided by Seller,
to customers on or prior to the Closing Date (including all Storage Products)
conform to applicable contractual commitments, express and implied warranties,
product specifications and quality standards, and Seller has no material
Liability (and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand against
Seller giving rise to any Liability) for replacement or repair thereof or
other damages in connection therewith. No product manufactured, sold, leased
or delivered by Seller, and no service provided by Seller, to customers on or
prior to the Closing Date is subject to any express guaranty, express warranty
or other indemnity except as expressly set forth in Section 3.22 of Seller's
Disclosure Letter.
(b) Product Liability. Neither Seller nor any Seller Subsidiary has any
Liability (and to Seller's knowledge there is no basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim or demand against Seller or any Seller Subsidiary or any affiliate of
Seller giving rise to any Liability) arising out of any injury to individuals
or property as a result of the ownership, possession or use of any product
(including any Storage Product) manufactured, sold, leased or delivered by
Seller or any Seller Subsidiary or any affiliate of Seller prior to the
Closing Date. All such personal injury or property damage product liability
claims that have been asserted against Seller since December 31, 1996, whether
covered by insurance or not and whether litigation has resulted therefrom or
not, are listed and summarized in Section 3.22 of Seller's Disclosure Letter.
(c) Inventory. To Seller's knowledge, the Inventory Assets consist of raw
materials and supplies, manufactured and purchased parts, goods in process and
finished goods, all of which is merchantable, fit for the purpose for which it
was procured or manufactured, and in a condition and quantity usable in the
ordinary course of business. To Seller's knowledge, none of the Inventory
Assets is obsolete, damaged or defective.
SECTION 3.23. Intellectual Property Rights.
(a) Ownership. Seller owns or has the right to use pursuant to license,
sublicense, agreement, or other valid permission, all Intellectual Property
Rights necessary or desirable for the operation of the business of Seller
(including without limitation the Storage Products Business) as presently
conducted and as presently proposed to be conducted. Each Intellectual
Property Right owned, licensed to or used by Seller in the Storage Products
Business immediately prior to the Closing Date hereunder will be owned,
licensed to or available for use by Purchaser and SMIBV on identical terms and
conditions immediately subsequent to the Closing Date. Seller has taken all
reasonable steps to maintain and protect all Intellectual Property Rights that
it owns, has licensed or uses.
(b) No Infringement. The Purchased Assets include all assets, properties
and Intellectual Property Rights necessary to enable Purchaser and SMIBV to
conduct the Storage Products Business in the manner in which such business was
conducted by Seller on the Effective Date and as such business is currently
being conducted (assuming such business was or is being actively conducted)
and as such business is proposed to be conducted through the Closing Date, in
each case without the need for any license from any person. The Purchased
Assets, including but not limited to the Storage Products, the Intangible
Assets, the Inventory Assets, the Intellectual Property Assets, the Trademark
Assets and the Technology Deliverables do not infringe upon, misappropriate or
otherwise conflict with, any Intellectual Property Rights of any third party
and no third party has asserted or threatened to assert against Seller any
claim of infringement or misappropriation of any Intellectual Property Rights.
The transfer of the Purchased Assets to Purchaser and SMIBV will not infringe
upon any Intellectual Property Right of any third party. To the best
knowledge of Seller, no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual
Property Rights of Seller.
(c) Recorded Intellectual Property Rights and Licenses. Schedule 3.23(c) to
Seller's Disclosure Letter identifies: (i) each patent, copyright, mask work,
trademark or service mark (or registration thereof) which has been granted or
registered and issued to Seller in any jurisdiction, (ii) each pending patent
application or application for registration of a copyright, mask work,
trademark, service mark or similar right which Seller has made in any
jurisdiction, (iii) all unregistered copyrights and (iv) each license,
agreement, or other permission which Seller has granted to any third party
with respect to any of its Intellectual Property Rights or any of the
Purchased Assets. Seller has delivered to Purchaser correct and complete
copies of all such patents, patent applications, copyrights and mask work
registrations and all applications, licenses, agreements and permissions (as
amended to date) and has made available to Purchaser correct and complete
copies of all other written documentation evidencing ownership of each such
item. Schedule 7 to Seller's Disclosure Letter identifies each trademark,
service mark, trade name and logo used in connection with the Storage Products
Business.
(d) Ownership. With respect to each Intellectual Property Right, license,
agreement or other permission required to be identified in Schedule 3.23(c) to
Seller's Disclosure Letter: (i) Seller possesses all right, title and
interest in and to such Intellectual Property Right, license, agreement or
permission free and clear of any Encumbrance, license or other restriction;
(ii) such Intellectual Property Right, license, agreement or permission is not
subject to any outstanding order or charge; and (iii) no action, suit,
proceeding, hearing, investigation, charge, complaint, claim or demand is
pending or, to Seller's knowledge, is threatened, which challenges the
legality, validity, enforceability, use or ownership of such Intellectual
Property Rights, license, agreement or permission.
(e) Licenses. Schedule 3.23(e) to Seller's Disclosure Letter sets forth and
summarizes each license Seller has granted to any third party with respect to
any Intangible Asset or Intellectual Property Asset. Such Schedule 3.23(e)
sets forth and summarizes each Intellectual Property Right that a third party
owns and that Seller uses pursuant to a license, sublicense, agreement or
other permission. Seller has delivered to Purchaser correct and complete
copies of all such licenses, sublicenses, agreements, and permissions (as
amended to date). With respect to each Intellectual Property Right required
to be identified in such Schedule 3.23(e): (i) the license, sublicense,
agreement or permission covering the item is legal, valid, binding,
enforceable and in full force and effect; (ii) the license, sublicense,
agreement or permission will continue to be legal, valid, binding, enforceable
and in full force and effect on identical terms to Purchaser's and SMIBV's
benefit immediately following the Closing and all consents to the assignment
of each Seller Contract (including without limitation each Seller Contract
that is a license, sublicense, agreement, permission or covenant not to
compete together with all Intellectual Property Rights relating thereto)
needed to assign any such Seller Contract to Purchaser and/or SMIBV or any
other subsidiary of Purchaser designated by Purchaser have been obtained;
(iii) the license, sublicense, agreement or permission does not restrict
Seller's ability to do business in any jurisdiction or with respect to any
market or industry; (iv) Seller is not in breach or default of, and to
Seller's knowledge, no other party to any such license, sublicense, agreement
or permission is in breach or default of, and no event has occurred which,
with notice or lapse of time or both, would constitute a breach or default of,
or permit termination, modification or acceleration of, any such license,
sublicense agreement or permission; (v) to Seller's knowledge, no party to the
license, sublicense, agreement or permission has repudiated or contested any
provision thereof; (vi) with respect to each sublicense, to Seller's
knowledge, the representations and warranties set forth in clauses (i) through
(v) above are true and correct with respect to the underlying license; (vii)
to Seller's knowledge, the underlying Intellectual Property Rights are not
subject to any outstanding order or charge; (viii) no action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or demand is
pending or, to Seller's knowledge, is threatened which challenges the
legality, validity or enforceability of any such license, sublicense,
agreement or permission or any Intellectual Property Right governed thereby;
and (ix) Seller has not granted any sublicense or similar right with respect
to the license, sublicense, agreement or permission. Neither Seller, nor any
Seller Subsidiary nor any affiliate of Seller is liable for, or has made any
contract or arrangement whereby it may become liable to, any person for any
royalty, fee or other compensation for the ownership, use, license, sale,
distribution, manufacture, reproduction or disposition of any Purchased Asset.
No person other than Seller holds any license or other right to manufacture,
modify, distribute or market any of the Storage Products or other Purchased
Assets. No person (other than Purchaser and SMIBV) will be or become entitled
to receive a copy of source code of any software included among the Purchased
Assets as a result of this Agreement, any Ancillary Agreement or any other
agreement or transaction contemplated by this Agreement. To Seller's
knowledge, no person holds or has been granted access to any copy of source
code of any software included among the Purchased Assets unless such person
has agreed in writing (i) to hold such source code in confidence and take
reasonable steps to preserve the secrecy of such source code; and (ii) not to
use such source code for any purpose except to support such person's internal
use of such source code or to modify such source code solely for the purpose
of internally using such modifications.
(f) Employee Invention Agreements. All employees, contractors and
consultants of Seller, any Seller Subsidiary or any other affiliate of Seller
(including but not limited to all the Employees and all the Consultants) and
any other third parties who have been involved in the development of Seller's
Storage Products Business, any Storage Product or any Purchased Asset, have
executed invention assignment and confidentiality agreements in the form
delivered to Purchaser's counsel, and all employees and consultants of Seller
who have access to confidential information or trade secrets related to the
Storage Products Business and/or the Purchased Assets have executed
appropriate nondisclosure agreements in the form delivered to Purchaser's
counsel. Seller has taken reasonable steps, consistent with industry
standards, to protect the secrecy and confidentiality of all Storage Products,
Intangible Assets and Intellectual Property Assets.
(g) Assigned Contracts. The Assigned Contracts include all Storage Products
Licenses and other licenses that are or may be necessary for Purchaser and
SMIBV to hold in order to operate the Storage Products Business after the
Closing and/or to manufacture, have manufactured, use, sell, lease, license,
market, distribute, install, service, support or otherwise commercially
exploit any or all of the Storage Products or Purchased Assets without: (i)
the need to purchase, license or acquire any other asset or property; (ii)
violating any contractual rights of any third party; or (iii) infringing,
misappropriating or misusing any software, technology, Industrial Property or
Intellectual Property Rights of any third party. The Assigned Contracts
include, without limitation, all Storage Products Leases.
(h) Product Development and Customer Complaints. Seller has made a full,
complete and accurate disclosure to Purchaser regarding the state of
development of the Storage Products and other Purchased Assets, including all
known deficiencies and all customer complaints known to Seller. Each of the
Storage Products complies with the specifications set out in any disclosure
materials provided by Seller to Purchaser and conforms in all material
respects to express representations made and express warranties given by
Seller to its customers.
(i) Product Compliance. All of the Storage Products, as such are currently
marketed, and all other Purchased Assets, are capable of fully performing in
accordance with their current specifications, documentation and warranties, at
any and all chronological dates (including, but not limited to, dates after
the Year 2000), both currently and in the future without any adverse change or
effect, and without the need to modify or alter any of such Storage Products
or Purchased Assets in any respect.
(j) Nondisclosure Agreements. To Seller's knowledge, no third party is in
possession of any confidential information pertaining to any of the Purchased
Assets, except pursuant to a written confidentiality agreement in a form
disclosed in writing to Purchaser. Seller has not knowingly taken or
knowingly failed to take any action that, directly or indirectly, has caused
any of the Purchased Assets or any of Seller's Intellectual Property Rights to
enter the public domain, or has in any way affected its absolute and
unconditional ownership thereof.
SECTION 3.24. Brokers. No broker, finder or investment banker (other than
Genesis Merchant Group Securities LLC ("Genesis"), which shall be paid a fee
of $250,000 for rendering the opinion contemplated by Section 8.02(z) is
entitled to any brokerage, finder's or other fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of Seller.
SECTION 3.25. Environmental Matters.
(a) Environmental Obligations. The Fort Lauderdale Facility, the Melbourne
Facility, the Condominiums and any other facilities or sites at which the
Storage Products Business or any other business of Seller, any Seller
Subsidiary or any other affiliate of Seller is now or has previously been
conducted by Seller, any Seller Subsidiary or any other affiliate of Seller,
or any of their predecessors-in-interest (collectively, the "Facilities") are
not (and with respect to each such previously owned, used or operated Facility
was not, when Seller, any Seller Subsidiary or any other affiliate of Seller
or any of their respective predecessors left such Facility) in violation of
any Environmental Laws, including any laws or regulations relating to
industrial hygiene, disposal of Hazardous Substances or the environmental
conditions on or under such properties or facilities, including but not
limited to, soil and ground water conditions. During the time that Seller,
any Seller Subsidiary, any other affiliate of Seller or any of their
respective predecessors-in-interest owned, leased, operated or occupied any
Facility, Seller, each Seller Subsidiary, each other affiliate of Seller and
each of their respective predecessors-in-interest did not use, generate,
manufacture or store on or under any part of any such Facility, or transport
to or from any part of any Facility, any Hazardous Substances in violation of
any Environmental Laws. There has been no presence, disposal, release or
threatened release of any Hazardous Substances on, from or under any part of
any Facility and no Hazardous Substances are currently present in, on, under
or about any of the Facilities or their groundwater or soil.
(b) Environmental Obligations. Seller, each Seller Subsidiary and each
other affiliate of Seller is conducting, and at all times has conducted, its
business and operations, and has occupied and used the Facilities, in
accordance with and in compliance with all Environmental Laws so as not to
give rise to liability under any Environmental Laws. To Seller's knowledge
(including, without limiting the definition of "Seller's knowledge" herein,
the knowledge of any officer or manager of Seller responsible for
environmental compliance issues), there is no reasonable basis to believe or
suspect that Seller's business, or the business of any Seller Subsidiary or
any other affiliate of Seller, has been conducted or is being conducted in
violation of any Environmental Laws, and Seller does not have any knowledge of
pending or proposed changes to any Environmental Laws that would require any
changes in any of Seller's Facilities, equipment, operations or procedures or
affect such business or the cost of conducting such business as now conducted.
(c) Compliance, Disclosure of Environmental Conditions. No conditions,
circumstances or activities have existed or currently exist with respect to
the Facilities or the business or property of Seller, each Seller Subsidiary
or any other affiliate of Seller, which could reasonably be expected to result
in recovery by any governmental authority or other person of any remedial or
removal costs, response costs, natural resource damages or other costs,
expenses or damages arising from or relating to any alleged injury or threat
of injury or harm to public health, or safety or the environment. No
conditions, circumstances or activities have existed or currently exist with
respect to Seller's business or any properties or assets of Seller (including
without limitation the Facilities) that could reasonably be expected to
subject Seller or Purchaser to any administrative, civil or criminal
liability, injunctive relief, penalty or obligation or Environmental Damages,
whether under common law or equitable theory or pursuant to Environmental
Laws, or which in the future could reasonably be expected to result in or may
have in the past resulted in actual or threatened damage, harm, or impairment
of, or a threat to, public health or safety or the environment.
(d) No Outstanding Orders or Actions. There are no outstanding orders,
injunctions or decrees against Seller, nor are there any pending or threatened
investigations of any kind against Seller, concerning any environmental,
public health, safety or land use matters or other Environmental Laws,
including, but not limited to, the emission, discharge or release of hazardous
or toxic substances or wastes, pollutants, or contaminants into the
environment or work place, or the management of hazardous or toxic substances
or wastes, pollutants or contaminants. There are no actions, suits or
administrative, arbitral or other proceedings alleged, claimed, pending,
affecting or, to Seller's knowledge, threatened against Seller, any Seller
Subsidiary or any other affiliate of Seller at law or in equity with respect
to any environmental, public health, safety or land use matters or other
Environmental Laws, and to Seller's knowledge, there are no existing grounds
on which any such action, suit or proceeding could reasonably be expected to
be commenced.
(e) No Waste Disposal. Any chemicals and chemical products which are
included among the Purchased Assets are integral to and required for the
conduct of Seller's business, have not been and are not intended to be
discarded, and are not waste or waste materials. All Hazardous Substances and
waste materials generated, used, transported, treated, stored or disposed of
in connection with Seller's business are handled, stored, treated and disposed
of in accordance with applicable Environmental Laws. Section 3.25 of the
Disclosure Letter describes all Hazardous Materials present on properties
(including without limitation the Facilities) leased or owned by Seller, any
Seller Subsidiary or any other affiliate of Seller or which has been treated,
stored or disposed of in connection with the business of Seller, any Seller
Subsidiary or any affiliate of Seller on such properties. At no time has any
radioactive waste been treated on any properties leased or owned by Seller.
(f) No Limitation. Nothing herein is intended to limit or modify any
representations or warranties regarding the subject matter of this Section
3.25 that are made or set forth in any of the Real Property Purchase
Agreements.
SECTION 3.26. Insurance. Seller has policies of insurance (i) covering
risk of loss on the Purchased Assets, (ii) covering products liability and
liability for fire, property damage, personal injury and workers' compensation
coverage and (iii) for business interruption, all with responsible and
financially sound insurance carriers in adequate amounts and, to Seller's
knowledge, in compliance with governmental requirements and in accordance with
good industry practice. To Seller's knowledge, all such insurance policies
are valid, in full force and effect and enforceable in accordance with their
respective terms and no party has repudiated any provision thereof. All such
policies will remain in full force and effect following the Closing Date and
Seller's workers' compensation policy will be kept in force after the Closing
at Purchaser's expense until such time as Purchaser is able to arrange for
replacement coverage. Neither Seller nor, to Seller's knowledge, any other
party to any such policy is in breach or default (including without limitation
with respect to the payment of premiums or the giving of notices) in the
performance of any of their respective obligations thereunder, and no event
exists which, with the giving of notice or the lapse of time or both, would
constitute such a breach, default or event of default, or permit termination,
modification or acceleration under any such policy by Seller, or to Seller's
knowledge, by any other party. There are no claims, actions, proceedings or
suits arising out of or based upon any of such policies nor, to the best
knowledge of Seller, does any basis for any such claim, action, suit or
proceeding exist. All premiums have been paid on such policies as of the date
of this Agreement and will be paid on such policies through the Closing Date,
and Seller has not received notice of any increase in any such premium. All
material claims made during the three-year period ending on the Closing Date
with respect to any insurance coverage of Seller listed in the first sentence
of this Section, are set forth on Schedule 3.26 to Seller's Disclosure Letter.
Seller does not engage in any self-insurance activities.
SECTION 3.27. Disclosure. No representation, warranty or statement by
Seller in this Article III, or in any Ancillary Agreement or in any written
statement or certificate furnished to Purchaser or SMIBV by or on behalf of
Seller pursuant to this Agreement or the transactions contemplated hereby, or
in any report filed by Seller with the U.S. Securities Exchange Commission
pursuant to the Securities Exchange Act of 1934, as amended, since December 31,
1994, contains any untrue statement of a material fact or, when taken together,
omits to state a material fact necessary to make the statements made herein or
therein, in light of the circumstances under which they were made, not
misleading. To Seller's knowledge, there is no fact which can reasonably be
expected to have a Material Adverse Effect on (i) the business, condition,
affairs or operations of Seller, (ii) any of Seller's properties or assets or,
(iii) to Seller's knowledge, any of Seller's prospects, which has not been set
forth in this Agreement or Seller's Disclosure Letter. Nothing in Seller's
Disclosure Letter shall be deemed adequate to disclose an exception to a
representation or warranty made herein unless the disclosure identifies the
exception with particularity and describes the relevant facts in reasonable
detail; provided that a particular matter need only be disclosed once in the
manner described in the immediately preceding clause so long as it is
cross-referenced wherever else applicable in Seller's Disclosure Letter in a
manner sufficiently clear to identify which representation or warranty an
exception is being made to. No disclosure made to Purchaser, discovery made
by Purchaser or knowledge of Purchaser, including without limitation (i) any
disclosure made by Seller, Seller Subsidiaries, affiliates of Seller or Gould
to Purchaser during the course of Purchaser's due diligence inquiry into
Seller, Gould, the Purchased Assets, the arrangements, assets, financial
condition and other affairs of Seller, Seller Subsidiaries, affiliates of
Seller and Gould and any other transaction contemplated by this Agreement,
(ii) any discovery made by Purchaser during the course of such due diligence
inquiry or (iii) any knowledge of Purchaser resulting from such due diligence
inquiry, shall be deemed adequate or sufficient to constitute an exception to
a representation or warranty made herein unless such exception is expressly
included and described in Seller's Disclosure Letter in the manner required by
the preceding sentence. The representations and warranties of Seller shall
not be limited or otherwise affected by or as a result of any information
furnished to, or any investigation made by, or knowledge of Purchaser. For
purposes of this Agreement, each statement or other item of information set
forth in Seller's Disclosure Letter shall be deemed a representation and
warranty made by Seller to Purchaser in this Agreement. The Seller's
Disclosure Letter may not be amended, modified or corrected in any way, except
with Purchaser's prior written consent, which may be withheld in Purchaser's
sole discretion.
SECTION 3.28. Solvency; No Bankruptcy or Insolvency Proceedings. Seller,
each Seller Subsidiary and each of Seller's other affiliates, taken either
individually or together as a group, are each currently Solvent (as defined in
Article I) and will continue to be Solvent following the Closing of the
transactions contemplated by this Agreement. None of Seller, any Seller
Subsidiary or any other affiliate of Seller, or any of their respective assets
or properties, is subject to, or the subject of, any Insolvency Proceeding.
None of Seller, any Seller Subsidiary or any other affiliate of Seller has
initiated, taken or attempted to initiate or take, or been the subject of, any
Insolvency Action and no assets or properties of Seller, any Seller Subsidiary
or any other affiliate of Seller are subject to any Insolvency Proceeding or
Insolvency Action. No writ of attachment, execution or similar process has
been ordered, executed or filed against Seller or any of its assets or
properties. Seller has no any reason to expect that any of the aforementioned
actions, or any similar action, will take place or be taken, and Seller is not
aware of any grounds for any of the aforementioned actions or like action.
Neither Seller nor any of its affiliates intends to file for protection under
any bankruptcy or insolvency law.
SECTION 3.29. Fairness of Consideration. The consideration paid and
agreements made by Purchaser and SMIBV under this Agreement for the Purchased
Assets represents fair and reasonably equivalent consideration for the
Purchased Assets, and all other assignments and agreements made by Seller
under this Agreement and the Ancillary Agreements. Seller is not entering
into this Agreement or any Ancillary Agreement with the intent to defraud,
delay or hinder its creditors and the consummation of the transactions
contemplated by this Agreement, and the Ancillary Agreements referenced in
this Agreement will not have any such effect. The transactions contemplated
by this Agreement or any Ancillary Agreement will not give rise to any right
of any creditor of Seller, any Seller Subsidiary or any other affiliate of
Seller to assert any claim whatsoever against Purchaser or SMIBV or any of the
Purchased Assets in the hands of Purchaser, SMIBV or any of their respective
successors and assigns following the Closing.
SECTION 3.30. Bulk Sales. Seller has no Purchased Assets in any
jurisdiction that has applicable bulk sales or similar laws.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser represents and warrants to Seller as follows:
SECTION 4.01. Incorporation and Authority of Purchaser and SMIBV.
(a) Purchaser. Purchaser is a corporation duly incorporated, validly
existing and in good standing under the laws of Delaware and has all necessary
corporate power and authority to enter into this Agreement and the Ancillary
Agreements to which it is or is to be a signatory, to carry out its
obligations hereunder and thereunder and to consummate the transactions
contemplated hereby and thereby. This Agreement has been, and the Ancillary
Agreements to which Purchaser is a signatory or is to be a signatory at the
Closing have been or will be, duly executed and delivered by Purchaser, and
(assuming due authorization, execution and delivery by Seller) this Agreement
and the Ancillary Agreements to which Purchaser is a signatory as of the date
hereof constitute legal, valid and binding obligations of Purchaser
enforceable against Purchaser in accordance with its terms and the Ancillary
Agreements to which Purchaser is to be a signatory, upon their execution by
Purchaser, will constitute legal, valid and binding obligations of Purchaser,
enforceable against it in accordance with their respective terms.
(b) SMIBV. SMIBV is a corporation duly incorporated, validly existing and
in good standing under the laws of the Netherlands and has all necessary
corporate power and authority to enter into this Agreement and the Ancillary
Agreements to which it is to be a signatory, to carry out its obligations
hereunder and thereunder and to consummate the transactions contemplated
hereby and thereby. This Agreement has been, and the Ancillary Agreements to
which SMIBV is to be a signatory at the Closing will be, duly executed and
delivered by SMIBV, and (assuming due authorization, execution and delivery by
Seller) this Agreement constitutes a legal, valid and binding obligation of
SMIBV enforceable against SMIBV in accordance with its terms and the Ancillary
Agreements to which SMIBV is to be a signatory, upon their execution by SMIBV,
will constitute legal, valid and binding obligations of SMIBV, enforceable
against it in accordance with their respective terms.
SECTION 4.02. No Conflict. Except as may result from any facts or
circumstances relating solely to Seller, the execution, delivery and
performance of this Agreement and the Ancillary Agreements by Purchaser and
SMIBV do not and will not (a) violate or conflict with the certificate of
incorporation or bylaws of Purchaser or similar charter documents of SMIBV,
(b) conflict with or violate any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award applicable to Purchaser or SMIBV or
(c) result in any breach of, or constitute a default (or event which with the
giving of notice or lapse of time, or both, would become a breach or default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any indenture, contract, agreement, lease, license, permit,
franchise or other instrument relating to any material assets or properties to
which Purchaser, SMIBV or any of their respective subsidiaries is a party or
by which any of such material assets or properties is bound or affected.
SECTION 4.03. Consents and Approvals. The execution and delivery of this
Agreement and the Ancillary Agreements by Purchaser and SMIBV do not, and the
performance of this Agreement and the Ancillary Agreements by Purchaser and
SMIBV will not, require any consent, approval, authorization or other action
by, or filing with or notification to, any governmental or regulatory
authority with respect to Purchaser or SMIBV, except (a) under the HSR Act,
(b) where failure to obtain such consent, approval, authorization or action,
or to make such filing or notification, would not prevent or delay Purchaser
or SMIBV from performing any of its material obligations under this Agreement
or any of the Ancillary Agreements, and (c) as may be necessary as a result of
any facts or circumstances relating solely to Seller.
SECTION 4.04. Brokers. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
transactions contemplated by this Agreement based upon arrangements made by or
on behalf of Purchaser.
ARTICLE V
ADDITIONAL AGREEMENTS
SECTION 5.01. Conduct of Business Prior to the Closing. Seller covenants
and agrees that, between the date hereof and the Closing Date, it will
(except as Purchaser otherwise agrees in its sole discretion which as to clause
(d) below will not unreasonably be withheld):
(a) not sell, transfer, assign, convey, license, move, relocate or otherwise
dispose of any of the Purchased Assets or permit any Seller Subsidiary or any
other affiliate of Seller to do so (except that Finished Products (other than
the Included Products) may be sold by Seller in the ordinary course and
consistent with Seller Practice (as defined in Section 5.14(a)));
(b) conduct the Storage Products Business in the ordinary course and
consistent with Seller's past practice (taking into account the sale of the
Purchased Assets contemplated hereby and Seller's other agreements hereunder)
except for such actions of Seller as may be contemplated by this Agreement or
agreed to by Purchaser in a writing signed by Purchaser;
(c) not transfer any Employees of the Storage Products Business to any other
division or position of employment within Seller or any of Seller's
Subsidiaries or any other affiliates of Seller;
(d) not terminate the employment of any Employee;
(e) not encourage or otherwise act to cause any Employee not to accept any
offer of employment by Purchaser made pursuant to Section 6.01 hereof;
(f) not change the base salaries or bonus programs of any of the Employees
or establish a bonus plan or any new employee benefits for any Employee
without Purchaser's prior written approval;
(g) provide Purchaser with reasonable access to and the opportunity to meet
and interview each of the Employees for the purpose of negotiating offers of
employment contingent upon the consummation of the sale and transfer of the
Purchased Assets to Purchaser and SMIBV and the other transactions
contemplated hereby;
(h) use Seller's best efforts to secure and preserve good and marketable
title in Seller's name in and to all of the Purchased Assets, free of all
Encumbrances, and to cause the conditions to Closing set forth in Article VIII
to be fulfilled as promptly as possible;
(i) terminate any license rights held by any Seller Subsidiary or any other
affiliate of Seller (including Gould) with respect to any of the Purchased
Assets (except under the Gould License Agreement (as defined in the Inducement
Agreements), provided that the Gould License Agreement is assigned to
Purchaser and SMIBV under the Inducement Agreements);
(j) terminate or cause to be released or expunged all Encumbrances on any
Purchased Assets; and
(k) not configure any of the Finished Products without Purchaser's prior
written consent.
SECTION 5.02. Books and Records. If, in order properly to prepare
documents required to be filed with governmental authorities (including taxing
authorities) or its financial statements, it is necessary that any party
hereto or any successors be furnished with additional information relating to
the Purchased Assets, the Assumed Liabilities or the Storage Products
Business, and such information is in the possession of any other party hereto,
such party agrees to use its good faith efforts to promptly furnish such
information to the party needing such information, at the cost and expense of
the party being furnished such information.
SECTION 5.03. Seller's Stockholders' Approval. Encore shall promptly call
and provide notice of a special meeting of Encore's stockholders for the
purpose of approving the sale to Purchaser and SMIBV of the Purchased Assets
under this Agreement and the related transactions contemplated by this
Agreement and the Ancillary Agreements (the "Special Stockholders' Meeting").
Encore shall use its best efforts to hold the Special Stockholders' Meeting by
no later than September 20, 1997. Encore shall use its best efforts to
promptly prepare and file with the U.S. Securities and Exchange Commission
("SEC") a proxy statement for the Special Stockholders' Meeting describing the
transactions contemplated by this Agreement and the Ancillary Agreements and
seeking Encore's stockholders' approval of such transactions (the "Seller's
Proxy Statement"), which proxy statement shall comply with the Securities
Exchange Act of 1934, as amended, and all rules and regulations promulgated
thereunder, and will comply with all other applicable laws, including without
limitation all applicable securities laws. Subject to the fiduciary duties of
Encore's Board of Directors under applicable law, Encore shall, through its
Board of Directors, recommend approval of this Agreement, the sale of the
Purchased Assets pursuant hereto, all other actions and Ancillary Agreements
contemplated hereby, and all other matters relating to this Agreement and the
transactions contemplated hereby that are required (by this Agreement or
applicable law) to be submitted to a vote of Encore's stockholders at the
Special Stockholders' Meeting; Encore shall use its best efforts to obtain the
aforementioned approval by a disinterested majority of its stockholders
entitled to vote at the Special Stockholders' Meeting as well.
SECTION 5.04. Confidentiality.
(a) Existing Agreement. The terms of the Confidentiality Agreement dated as
of November 14, 1996 (the "Existing Confidentiality Agreement") between Encore
and Purchaser are hereby incorporated by reference and shall continue in full
force and effect until the Closing, at which time the Existing Confidentiality
Agreement shall terminate. If this Agreement is, for any reason, terminated
prior to the Closing, then the Existing Confidentiality Agreement and (ii) the
provisions of that certain Sun/Encore Memorandum of Understanding executed by
Purchaser, SMIBV and Encore with respect to the transactions contemplated by
this Agreement (the "MOU") regarding the rights of Purchaser, SMIBV and their
respective employees to freely use "Residuals" (as defined therein), shall
each continue in full force and effect in respect of all information subject
to the MOU.
(b) Seller's Confidential Information. Except for marketing and sales
information which has been publicly disseminated to Seller's end-user
customers prior to the Effective Date in the ordinary course of business
consistent with past business practice, all copies of financial information,
marketing and sales information, pricing, marketing plans, business plans,
financial and business projections, customer lists, methodologies, inventions,
software, know-how, product designs, product specifications and drawings, and
other confidential and/or proprietary information of the Seller related to the
Storage Products Business or any of the Purchased Assets, including but not
limited to the Storage Products, the Intangible Assets, the Intellectual
Property Assets and the Technology Deliverables (collectively, "Seller's
Confidential Information") will be held by Seller in strict confidence at all
times after the Effective Date of this Agreement unless and until this
Agreement is terminated in accordance with the provisions of Article X hereof.
At all times following the Closing, Seller will: (i) continue to hold all
Seller's Confidential Information in strict confidence, (ii) will not use or
disclose any of Seller's Confidential Information to any third party, and
(iii) upon Purchaser's or SMIBV's request, promptly destroy or deliver to
Purchaser and/or SMIBV any Seller's Confidential Information in Seller's
possession or control; except that Seller may internally use the original
copies of all Business Records solely to prepare and file Tax returns and
prepare Seller's financial statements, and Seller may disclose any Seller
Confidential Information (except source code or other trade secrets) as may be
required to comply with requests from all governmental agencies, including
without limitation the SEC; provided that Seller must provide Purchaser with
prior written notice of any proposed disclosure to government agencies and
with respect to the SEC, an opportunity to seek confidential treatment of such
proposed disclosure. It is agreed that Sellers' Confidential Information will
not include information that is now, or later becomes, part of the general
public knowledge or literature in the art, other than as a result of a breach
of this Agreement by Seller.
SECTION 5.05. Regulatory and Other Authorizations; Consents.
(a) Efforts. Each party hereto will use its best efforts to obtain all
authorizations, consents, orders and approvals of all non-U.S., Federal, state
and local regulatory bodies and officials that may be or become necessary for
the execution and delivery of, and the performance of its obligations pursuant
to, this Agreement and the Ancillary Agreements and will cooperate fully with
the other party in promptly seeking to obtain all such authorizations,
consents, orders and approvals. Each party hereto agrees to make an
appropriate filing of a Notification and Report Form pursuant to the HSR Act
with respect to the transactions contemplated hereby as promptly as is
practicable after the date hereof and to supply promptly any additional
information and documentary material that may be requested by any governmental
authority pursuant to the HSR Act. The parties hereto will not take any
action that will have the effect of delaying, impairing or impeding the
receipt of any required approvals. Without limiting the generality of the
parties' undertakings pursuant to this Section 5.05(a), the parties shall use
their best efforts to prevent the entry in a judicial or administrative
proceeding brought under any antitrust law by any Government Antitrust
Authority or any other party of any permanent or preliminary injunction or
other order that would make consummation of the acquisition of the Purchased
Assets in accordance with the terms of this Agreement unlawful or that would
prevent or delay such consummation.
(b) Communications. Each party hereto shall promptly inform the other of
any material communication between such party and the Federal Trade
Commission, the Department of Justice or any other federal, state or non-U.S.
government or governmental authority regarding any of the transactions
contemplated hereby. If any party or any affiliate of such party receives a
request for additional information or for documents or any material from any
such government or governmental authority with respect to the transactions
contemplated hereby, then such party shall endeavor in good faith to make or
cause to be made, as soon as reasonably practicable and after consultation
with the other parties, an appropriate response in compliance with such
request. Further, no written materials shall be submitted by any party to the
Federal Trade Commission, the Department of Justice or any other federal,
state or non-U.S. governmental agency in connection with HSR Act compliance or
the merger control regulations of any other country, nor shall any oral
communications be initiated with such governmental entities by any party,
without prior disclosure to and coordination with the other parties and their
counsel. Each party hereto will cooperate in connection with reaching any
understandings, undertakings or agreements (oral or written) involving the
Federal Trade Commission, the Department of Justice or any other federal,
state or non-U.S. governmental authority in connection with the transactions
contemplated hereby.
SECTION 5.06. Further Actions. Each of the parties hereto shall, at its
own expense, execute and deliver such documents and other papers and take such
further actions as may be reasonably required to carry out the provisions of
this Agreement and the Ancillary Agreements and to give effect to the
transactions contemplated by this Agreement and the Ancillary Agreements,
including without limitation causing each Seller Subsidiary and each other
affiliate of Seller to assign any Purchased Assets held by it and any Assigned
Contracts to which it is a party to Purchaser, SMIBV or any one or more
affiliates of Purchaser or of SMIBV, as applicable, and take all such actions
as may be necessary to affect such assignments.
SECTION 5.07. Covenant Not to Compete.
(a) Non-Competition Covenant. Subject to the following provisions of this
Section 5.07, as a material inducement and consideration for Purchaser to
enter into this Agreement, for a period of five (5) years from and after the
Closing Date (such five (5) year period of time being hereinafter called the
"Restricted Period"), Seller will not, within the Restricted Area (as defined
below) carry on any business, or own (in whole or in part), operate, advise,
assist or lend funds to or invest funds in, any person, firm, partnership,
business, corporation or other entity in any manner that would aid or assist
any person, firm, partnership, business, corporation or other entity to
compete, in any material respect, with the Storage Products Business (the
"Restricted Business"). As used herein, the term "Restricted Area" means any
state of the United States of America or any geographic area within any other
country in which Purchaser or SMIBV or their respective affiliates, directly
or indirectly, carries on or engages in business. During the Restricted
Period, Seller further agrees not to interfere with, disrupt or attempt to
disrupt the relationship between Purchaser or SMIBV and any third party,
including without limitation any customer, supplier or employee of Purchaser
or SMIBV, with respect to the Restricted Business.
(b) Non-Solicitation. For a period of three (3) years after the Closing
Date, Seller shall not, directly or indirectly, solicit any Employee hired by
Purchaser to (i) become employed by Seller, any Seller Subsidiary or any other
affiliate of Seller or (ii) terminate such hired Employee's employment with or
services to Purchaser or any affiliate of Purchaser.
(c) Injunctive Relief; Interpretation. In the event of a breach of any of
the covenants set forth in this Section 5.07, Purchaser and SMIBV will each be
entitled to an injunction against Seller restraining such breach in addition
to any other remedies provided by law or equity. In the event that any
covenant in this Section 5.07 is held to be invalid, illegal or unenforceable
by any court of competent jurisdiction or any other governmental authority, it
is agreed and understood that such covenant will not be voided but rather will
be construed to impose limitations upon Seller's activities no greater than
allowable under then applicable law.
(d) Seller. As used in this Section 5.07, the term "Seller" includes (i)
Seller; (ii) all Seller Subsidiaries; (iii) and all entities under the control
of, or of which more than 5% of the capital stock is beneficially owned
(within the meaning of the Securities Act of 1933 ("Securities Act") by,
Seller or any Seller Subsidiary (any entity described by this clause (iii)
being referred to as a "Controlled Entity"); and (iv) all directors, officers,
employees, stockholders, agents or representatives of Seller, any Seller
Subsidiary or any Controlled Entity that are acting, directly or indirectly,
at the direction of, or for the benefit of, or with the financial, technical
or other assistance of Seller, any Seller Subsidiary or any Controlled Entity.
SECTION 5.08. Payroll Information. Following execution of this Agreement,
Seller will notify Purchaser of the name, telephone, fax and electronic mail
address of the Seller employee who is principally responsible for
administering payroll for the Employees. Seller shall use its best efforts
(to the extent practicable) to provide to Purchaser, at least thirty (30) days
prior to the Closing Date, all W-2 information for calendar 1997 with respect
to each Employee and all information regarding Seller's payments for
unemployment insurance (including FUTA and SDU), paid by Seller in respect of
each Employee.
SECTION 5.09. Solvency; No Bankruptcy. Seller shall be and remain Solvent
(as defined in Article I hereof) at all times through the Closing Date and
shall use its best efforts to be and remain Solvent thereafter. Neither
Seller nor any of Seller's Subsidiaries intends or expects to file or seek
relief under the United States Bankruptcy Code or any other insolvency or
similar law for a period of four (4) years after the Closing Date. Seller
will at all times use its best efforts to discourage and avoid, and to
promptly dismiss and set aside, any involuntary petition by creditors or
others to place Seller in any bankruptcy case or proceeding under the United
States Bankruptcy Code or any other insolvency law or similar law.
SECTION 5.10. Manufacturing Commitment. Prior to the Closing, Seller will
manufacture units of such Storage Products and will source spares, if and as
designated by Purchaser to Seller in writing, and in such quantities and at
such times as are necessary to meet Purchaser's proposed post-Closing
forecasted inventory and sales requirements. Seller will make commitments to
Seller's suppliers for long lead time items as may be reasonably necessary in
order to enable Seller to timely comply with its obligations under the
preceding sentence. Purchaser shall pay for the parts needed by Seller to
comply with its obligations under the first sentence of this Section 5.10;
provided that Purchaser may in its sole discretion elect to pay Seller's
suppliers directly for such parts. In the event of a termination of this
Agreement, all such parts paid for by Purchaser shall be delivered by Seller
to Purchaser and Purchaser will purchase from Seller any such units of Storage
Products and spares as are manufactured by Seller in good faith in accordance
with the preceding sentence at a mutually agreed price reflecting a credit for
the aggregate amount paid by Purchaser for parts included in such Storage
Products and spares ("Aggregate Credit"); provided, however, that
notwithstanding the foregoing, Purchaser shall have no obligation whatsoever
to purchase from Seller or pay Seller for any of such units of Storage
Products or spares if this Agreement is terminated due to: (i) a material
willful breach by Seller of its obligations under this Agreement, (ii) a
failure by Encore's Board of Directors to timely recommend this Agreement for
approval by Encore's stockholders; or (iii) a failure by any of Gould, EFI or
Kenneth G. Fisher to timely approve this Agreement by the vote required under
Section 8.02(f); provided, further, however, that even if the immediately
foregoing proviso applies, Purchaser shall purchase from Seller and pay Seller
said mutually agreed price net of the Aggregate Credit for such number of
units of Storage Products and/or spares as is required to ensure that Seller's
total demonstrated actual manufacturing cost of producing Storage Products
and/or spares not so purchased by Purchaser (net of the Aggregate Credit) does
not exceed $10 million.
SECTION 5.11 Customer Transition. Following the Closing, Seller shall, at
its own expense, reasonably cooperate with Purchaser, and assist Purchaser, as
Purchaser may reasonably request, to transition Seller's installed customer
base for Storage Products to Purchaser.
SECTION 5.12 Support and Service Negotiations. The parties acknowledge and
agree that Purchaser shall not assume or otherwise take responsibility or
liability for any contractual or other Liabilities or obligations of Seller
relating to product or service warranties or any maintenance, support or
warranty service obligations or Liabilities (including but not limited to
those Excluded Liabilities described in Section 2.02(b)(xiv) of this
Agreement). Nevertheless, between the Effective Date and the earlier of (i)
the Closing Date or (ii) the termination of this Agreement in accordance with
its terms, Seller and Purchaser shall use good faith commercially reasonable
efforts to negotiate an arrangement between themselves under which Purchaser
(without thereby assuming any of the Liabilities described in the first
sentence of this Section) would provide to existing end-user customers of
Seller certain agreed-upon service and support with respect to Seller's
Infinity line of SP Products (which will include such services by Purchaser
pursuant to standard Purchaser terms and conditions and at no additional
charge for a limited period of time (and Purchaser will not seek reimbursement
from Seller for such non-charged services)); provided, however, that Purchaser
shall not (i) be obligated to agree to or bind itself to any such agreement or
arrangement; (ii) be or become liable to Seller with respect thereto; or (iii)
be deemed to have, nor be required to, assume any Excluded Liabilities
(including without limitation those set forth in Section 2.02(b)(xiv)).
SECTION 5.13 Transitional Support. Between the Effective Date and the
earlier of the Closing Date or the termination of this Agreement in accordance
with its terms, Seller and Purchaser shall use good faith, commercially
reasonable efforts to negotiate an informal business arrangement between
themselves under which Purchaser would provide to Seller, for a mutually
agreed time period not to exceed one (1) year, certain agreed upon MIS,
telephone, telecommunications, manufacturing, engineering support and other
similar mutually agreed upon services in support of Seller's continued conduct
of its existing real time business as permitted under the License Agreement;
with such services to be provided, if Purchaser so elects, on customary arm's
length commercial terms and prices (at least sufficient to provide a
commercially reasonable level of profit to Purchaser) and any such agreement
to include maximum resource burdens on Purchaser (e.g., maximum Purchaser man
month obligations, maximum impact on Purchaser's manufacturing capacities and
operations, etc.). Purchaser shall have no liability whatsoever under any
such arrangement and in no event will Seller make any claims against Purchaser
with respect to Purchaser's performance or non-performance thereunder.
SECTION 5.14 Interim Sales Representation and Marketing Cooperation.
(a) Appointment as Interim Period Sales Representative. Seller hereby
authorizes Purchaser, between the Effective Date and the earlier of (i) the
Closing Date or (ii) the termination of this Agreement in accordance with its
terms ("Interim Period"), to act as a sales representative for Storage
Products. As such, Purchaser shall be authorized, on behalf of Seller, to
identify (by written notice to Seller) sales prospects for Storage Products
(which may include sales prospects previously identified by, and existing
customers of, Seller) (collectively, "Prospects"), to negotiate and bind
Seller and (with their consent) Prospects to the terms of Storage Products
sales and support agreements approved in writing by Purchaser ("Sales
Agreements"), and to negotiate and bind Seller and (with their consent)
Prospects to the terms of Storage Products "try and buy" evaluation agreements
approved in writing by Purchaser and with evaluation periods in each case
ending after the Closing Date ("Evaluation Agreements"). Promptly following
Seller's receipt of notice that any Prospect has agreed to enter into an
Evaluation Agreement or a Sales Agreement, Seller will immediately execute the
Evaluation Agreement or Sales Agreement and deliver to the Prospect possession
of the Storage Product and an executed copy of such signed agreement. Seller
will be required to execute and will be bound by the terms of Sales Agreements
and Evaluation Agreements even if they materially deviate (e.g., by having an
evaluation period longer than thirty days) from Seller's standard forms
thereof and/or past practice and/or ordinary course of business and/or
standard de facto pricing (collectively, "Seller Practice"); provided,
however, that if the proposed Storage Product pricing for a Sales Agreement or
Evaluation Agreement represents a significant discount from Seller's de facto
pricing in the field for the Storage Product then Purchaser shall give Seller
a ten (10) day notice and opportunity to suggest a smaller discount, and if
Seller so suggests Purchaser shall seek to negotiate such smaller discount;
provided further, that if the Prospect in question does not agree to such
smaller discount, Seller shall nevertheless be required to execute and will be
bound by the terms of the Sales Agreements and Evaluation Agreements in
accordance with the first clause of this sentence.
(b) Recognition of Revenue Accruing Pre and Post Closing. Revenues accrued
per GAAP as a result of sales and deliveries prior to Closing of Storage
Products pursuant to Sales Agreements or pursuant to elections to purchase and
deemed deliveries prior to Closing under Evaluation Agreements will be for
Seller's account and Purchaser will not be entitled to any compensation or
offset against the Purchase Price with respect thereto, but Purchaser will be
entitled to make the adjustment provided for under Section 2.03(g). Revenues
accrued per GAAP as a result of deliveries after Closing of Storage Products
pursuant to Sales Agreements or Evaluation Agreements will be for Purchaser's
account, and Seller will not be entitled to any compensation with respect
thereto, except as expressly provided in Section 2.03(h) as to Customer Units.
(c) Seller Non-disturbance of Prospects. To avoid impairing negotiations
between Purchaser and any Prospect, neither Seller nor any Seller Subsidiary
nor any person or entity acting upon Seller's or any Seller Subsidiary's
instructions will, without Purchaser's prior written consent, contact any such
Prospects, or cause to be communicated to any such Prospect any proposal with
respect to any Storage Product, except that Seller will upon Purchaser's
request cooperate with Purchaser in dealing with each Prospect. If Purchaser
ceases to actively pursue any Prospect as a customer for Storage Products,
Purchaser will so notify Seller in which case the restrictions of this Section
5.14(c) will cease to apply as to the Prospect specified in such notice.
(d) Assumption and Disclaimer as to Obligations. All Liabilities and
obligations arising under any Evaluation Agreement and any Sales Agreement
will be Excluded Liabilities except as expressly provided in this clause (d).
If Closing never occurs, Purchaser will never have and will not assume any
Liabilities or obligations under any Evaluation Agreement or any Sales
Agreement, and all such Liabilities or obligations will remain Excluded
Liabilities. If Closing does occur, then, notwithstanding anything in Article
II hereof to the contrary: (i) each Evaluation Agreement and each Sales
Agreement shall become an Assigned Contract and all Liabilities and
obligations thereunder shall become Assumed Liabilities and (ii)
notwithstanding Section 5.10 hereof, Purchaser will pay Seller, on the Closing
Date, a mutually agreed amount for each Storage Product purchasable under any
Evaluation Agreement. In no event will Purchaser be liable or responsible for
paying any of Seller's sales personnel in connection with any transactions
contemplated by this Section 5.14.
(e) Seller Assumption of Risk/Liability. Seller understands and
acknowledges that if Evaluation Agreements or Sales Agreements are consummated
but the purchase of the Purchased Assets pursuant to this Agreement is not:
(i) there is an enhanced risk that the Prospects would elect to return Storage
Products provided to them under Evaluation Agreements and (ii) if a Prospect
does elect to purchase Storage Products provided to it under an Evaluation
Agreement or Sales Agreement, Seller would be forced to honor the Evaluation
Agreement or Sales Agreement, as the case may be, and the sales, support,
warranty and other terms negotiated by Purchaser on behalf of Seller.
Further, Purchaser has no obligation to take any action or to achieve any
quota or objective as sales representative of Seller under this Section 5.14,
and Purchaser shall have no liability if Purchaser shall fail to enter into
any Evaluation Agreements or Sales Agreements or to generate any revenue or
net income for Seller. Seller fully understands and accepts these and all
other risks and potential Liabilities associated with Purchaser's activities
in the Interim Period as respects Storage Products, Evaluation Agreements and
Sales Agreements and agrees to assume and to indemnify and hold harmless
Purchaser from all of such risks and Liabilities and further agrees that
Purchaser's activities pursuant to this Section shall not be deemed to cause
Purchaser to have assumed any Excluded Liabilities (including without
limitation those set forth in Section 2.02(b)(xiv)) except as expressly
provided in the third sentence of clause (d) of this Section.
SECTION 5.15 Diagnostic, Test and QA Software. On or before the Closing
Date, Seller shall cooperate as requested by Purchaser to ensure that Seller
has the right to use in Seller's business on any mainframe platform (including
to test third party storage subsystems) all copies of mainframe diagnostic,
test and QA software, utilities and tools currently used by Seller in Seller's
business (including but not limited to all such software used to test third
party storage subsystems).
SECTION 5.16 Execution of the Inducement and Non-competition Agreements.
Seller shall exercise best efforts to cause the JEC Inducement Agreement to be
executed by JEC no later than the earlier of the Closing Date and August 15,
1997 and to cause each of the Non-competition Agreements to be executed by the
respective parties thereof other than Purchaser and SMIBV no later than within
thirty (30) days after the Effective Date and in any event prior to the
Closing Date. Each Employee therein named as a party to a Non-competition
Agreement shall be an Employee of Seller at the time of execution of the
Non-competition Agreement to which he is a party.
ARTICLE VI
EMPLOYEE MATTERS
SECTION 6.01. Right to Offer Employment.
(a) Employees. Schedule 6.01 of Seller's Disclosure Letter contains a
preliminary list (the "Preliminary List") of each employee of Seller, of any
of Seller's Subsidiaries or of any other affiliates of Seller who works in, or
provides services in connection with, the Storage Products Business (each an
"Employee"). Within twenty (20) days prior to the Closing Date, Seller shall
deliver to Purchaser a final list of the Employees (the "Final List"), which
list shall be included in Schedule 3.19 of Seller's Disclosure Letter and
shall identify those Employees who are active Employees of the Storage
Products Business as of that date, including those on vacation, sick leave,
disability leave, family leave or personal leave of absence and which shall
separately identify those Employees who are on a workers' compensation-related
or disability leave. For purposes of this Agreement, "Employees" means only
those individuals included on such final list.
(b) Offers of Employment. Effective on the Closing Date, Purchaser shall
offer to employ, on an "at will" basis, for such salary and compensation as
Purchaser shall determine and subject to Purchaser's standard terms,
conditions and policies of employment and the terms of this Agreement, those
(and only those) Employees to whom Purchaser, in its sole and absolute
discretion, elects to extend offers of employment. Purchaser will attempt to
keep Seller apprised, prior to the Closing Date, of Purchaser's then-current
intentions as to which Employees Purchaser intends to extend offers of
employment to. Purchaser shall not, however, be obligated to offer employment
to any Employee. Such offers of employment as may be extended by Purchaser to
Employees will be on the same basis of time commitment (full or part time) as
such Employee was employed by Seller immediately prior to the Closing Date;
provided, however, that such offer of employment with respect to those
Employees who are on a workers' compensation-related or disability leave or a
Family Medical Leave Act leave shall be conditioned upon their return from
such leave in accordance with Seller's leave of absence policy.
(c) No Employment Obligations Assumed. Seller shall retain, and Purchaser
shall not assume, any employer or employment related obligations to any
Employees hired by Purchaser or to any other Employees including, without
limitation: (i) accrued personal time off (including sick leave); (ii) any
obligation to provide retiree health or life insurance benefits pursuant to
Seller Employee Benefit Plans; (iii) any government-mandated employee or
employment-related payments; (iv) workers' compensation and disability
insurance premiums paid by Seller on behalf of Employees who are on workers'
compensation or disability leave as of the Closing Date; and (v) any bonuses
at any time accrued or earned by any of the Employees. Unless the parties
otherwise agree, on the Closing Date, Seller shall notify each Employee who
accepts an offer of employment extended by Purchaser as of the Closing Date,
in a writing reasonably satisfactory to Purchaser, that such Employee's
employment with Seller has then terminated.
(d) Non-U.S. Employees. Without limiting any other provision hereof, Seller
acknowledges and agrees that if Purchaser elects to offer employment to some
but not all Employees located in particular non-U.S. jurisdictions, or if
requisite notice prior to the Effective Date or the Closing Date is not given
to certain non-U.S. Employees or non-U.S. governmental agencies regarding
possible employment transitions to Purchaser of certain Employees, certain
non-U.S. laws, rules or regulations may be violated or may not be complied
with, possibly resulting in Liability, possibly including without limitation a
need to pay or accrue severance, a need for Seller to continue employing
non-U.S. Employees for some mandated period, a need for Purchaser or an
Applicable Purchaser Subsidiary to commence employing non-U.S. Employees that
Purchaser does not wish to employ ("Mandated Employees"), a need for Purchaser
to pay salary to Mandated Employees and then severance to them upon
terminating them as soon as legally permissible, an obligation of Purchaser to
honor non-U.S. Employees' pension obligations, even though Purchaser is not
acquiring any of the assets described in Section 2.01(b)(vi), and fines,
sanctions and penalties imposed on Seller or Purchaser or related parties and
related Liabilities with respect thereto and Liabilities associated with
claims brought against Seller or Purchaser or related parties by non-U.S.
Employees or non-U.S. governmental agencies or Mandated Employees with respect
to any of the foregoing (collectively, "Foreign Employee Liabilities").
Nevertheless, without limiting any other provision hereof, Seller agrees to
indemnify, hold harmless and defend Purchaser, SMIBV and all subsidiaries of
any thereof from and against any and all such Foreign Employee Liabilities,
and to take all actions required to avoid (where possible) or minimize such
Foreign Employee Liabilities, including without limitation, paying or accruing
severance or other amounts and giving all notices and obtaining all approvals
and paying all fines required to do so. Purchaser agrees to exercise
commercially reasonable efforts to minimize Foreign Employee Liabilities, but
shall have no liability for failing to do so and no actual or alleged failure
to do so shall relieve Seller from any of Seller's obligations or Liabilities
under this Section 6.01(d).
SECTION 6.02. Termination of Employment. Seller agrees to comply with the
provisions of the WARN Act and any other federal, state or local statute or
regulation regarding termination of employment, plant closing or layoffs and
to perform all obligations required by Seller with respect to the cessation of
any operations of the Storage Products Business or any other business of
Seller or the termination, re-assignment, re-location or change in position of
any Employee (or other employee of Seller or of any of Seller's Subsidiaries
or any other affiliate of Seller) on or after the Closing Date. Seller shall
indemnify and hold Purchaser and SMIBV harmless with respect to any liability
under the WARN Act or other applicable state or local statute or regulation
affecting termination of employment arising in connection with the
transactions contemplated by this Agreement, without regard to the limitations
on indemnification provided in Article IX hereof.
SECTION 6.03. General Matters.
(a) Credit for Prior Service. Purchaser currently intends to credit each
United States based Employee hired by Purchaser on the Closing Date with all
prior continuous service time with Seller and its affiliates and with all
amounts paid to each such Employee to the extent that service or pay is
relevant under any employee benefit plan of Purchaser that is in effect on the
Closing Date for purposes of determining the amount of any such benefit, the
extent to which an individual is vested or otherwise eligible to receive or
elect to receive a benefit or the extent to which a benefit is vested or
nonforfeitable; provided, however, that notwithstanding the foregoing,
Purchaser does not intend to credit any United States based Employee hired by
Purchaser with more than seven (7) years of service. U.S. based Employees'
pre-existing medical conditions will be waived upon entrance into any
Purchaser employee benefit plan.
(b) Cooperation. Seller and Purchaser agree to cooperate fully with respect
to the actions which are necessary or reasonably desirable to accomplish the
transactions contemplated hereunder, including, without limitation, the
provision of records and information as each may reasonably request and the
making of all appropriate filings under ERISA and the Code.
(c) Indemnity. Seller shall defend and indemnify Purchaser and SMIBV and
hold Purchaser and SMIBV harmless from and against all liabilities and
damages, loss or liability to Purchaser or SMIBV to the extent that the same
arise as a result of any Employee's alleging that the sale of the Purchased
Assets hereunder and the hiring (or non-hiring) of Employees by Purchaser on
the Closing Date constitutes a termination entitling such Employee to
severance or any similar benefit or right. Notwithstanding anything to the
contrary herein, there shall be no monetary or time limitation on Seller's
liability to Purchaser and SMIBV under this Section 6.03(c).
SECTION 6.04. Employee Withholding Taxes. Seller shall prepare and furnish
to those employees of Purchaser who were employees of Seller prior to the
Closing Date and who became employees of Purchaser on the Closing Date
pursuant to employment offers made by Purchaser to them pursuant to this
Article VI ("Continuing Employees") a Form W-2 which shall reflect all wages
and compensation paid to continuing employees for that portion of the calendar
year in which the Closing Date occurs during which the continuing employees
were employed by Seller. Seller shall furnish to Purchaser the Forms W-4 and
W-5 of each Continuing Employee. Purchaser shall send to the appropriate
Social Security Administration office a duly completed Form W-3 and
accompanying copies of the duly completed Form W-2. It is the intent of the
parties hereunder that the obligations of Purchaser and Seller under this
Section 6.04 shall be carried out in accordance with Section 5 of Revenue
Procedure 84-77.
ARTICLE VII
TAX MATTERS
SECTION 7.01. Transaction Taxes; Representation; Indemnity. Seller shall
be responsible for, and shall defend, indemnify and hold Purchaser and SMIBV
harmless against and in respect of, any and all excise, value added,
registration, stamp, property, documentary, transfer and similar Taxes,
levies, charges and fees (including all real estate transfer taxes) incurred,
or that may be payable to any taxing authority, in connection with, the
transactions (including without limitation the sale, transfer, and delivery of
the Purchased Assets and the assumption of the Assumed Liabilities)
contemplated by this Agreement (collectively, "Transaction Taxes"). Purchaser
and Seller agree to cooperate in minimizing the amount of any such Taxes and
in the filing of all necessary documentation and all Tax returns, reports and
forms ("Returns") with respect to all such Taxes, including any available
pre-sale filing procedures.
SECTION 7.02. Representation and Indemnity. Seller hereby represents and
warrants to Purchaser and SMIBV (and their successors and assigns) that there
are no sales or use taxes payable in connection with the sale and purchase of
the Purchased Assets or any other transaction contemplated by this Agreement.
Seller shall be responsible for, and shall defend, indemnify and hold
Purchaser and SMIBV harmless against and in respect of, any and all taxes,
loss, liabilities, damages, fines, penalties, costs and expenses (including
without limitation reasonable attorney's fees) arising or resulting from any
breach of the foregoing representation and warranty of Seller in this Section
7.02, or from any failure of the foregoing representation and warranty of
Seller in this Section 7.02 to be true and correct in any respect.
SECTION 7.03. No Limitation. Notwithstanding anything to the contrary in
Article IX or elsewhere herein, there shall be no limitation on the amount of
Seller's liability with respect to its indemnification obligations under
Section 7.01 and/or Section 7.02 hereof, and Purchaser, SMIBV or their
successors and assigns may assert any such indemnity claim at any time prior
to expiration of the applicable legal statute of limitations applicable to the
subject matter of the claim underlying the claim for indemnification under
applicable law.
SECTION 7.04. Treatment of Indemnity Payments. All payments made by Seller
or Purchaser, as the case may be, to or for the benefit of the other party
pursuant to any indemnification obligations under this Agreement shall be
treated as adjustments to the Purchase Price for Tax purposes and such agreed
treatment shall govern for purposes of this Agreement, unless otherwise
required by law.
ARTICLE VIII
CONDITIONS TO THE CLOSING
SECTION 8.01. Conditions to Obligations of Seller. The obligations of
Seller to consummate the transactions contemplated by this Agreement shall be
subject to the fulfillment, at or prior to the Closing, of each of the
following conditions:
(a) Accuracy of Representations and Warranties; Covenants. The
representations and warranties of Purchaser contained in Article IV of this
Agreement shall be true and correct in all material respects as of the
Closing, with the same force and effect as if made as of the Closing, other
than such representations and warranties as are made as of another date, and
all the covenants contained in this Agreement to be complied with by Purchaser
on or before the Closing shall have been complied with in all material
respects.
(b) HSR Act. Any waiting period (and any extension thereof) under the HSR
Act applicable to the purchase of the Purchased Assets contemplated hereby
shall have expired or shall have been terminated.
(c) No Order. No non-U.S., United States or state governmental authority or
other agency or commission or United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and has the effect of making the
transactions contemplated by this Agreement illegal or otherwise restraining
or prohibiting consummation of such transactions; provided, however, that the
parties hereto shall use their best efforts to have any such order or
injunction vacated.
(d) No Litigation. No suit, claim, cause of action, arbitration, mediation,
investigation or other proceeding under which a third party is contesting,
challenging or seeking to alter, enjoin or adversely affect the sale and
purchase of the Purchased Assets contemplated by this Agreement or any other
transaction contemplated by this Agreement, will be pending or threatened.
(e) Ancillary Agreements. Purchaser shall have executed and delivered
counterparts of each of the Ancillary Agreements to which Purchaser is a
signatory.
(f) Purchase Price Allocation Agreement. Purchaser shall have executed and
delivered to Seller the Purchase Price Allocation Agreement.
(g) Closing Payment. Purchaser and SMIBV shall have made the Closing
Payment to Seller in the manner contemplated by Section 2.03 and shall have
delivered any amount due under Section 2.03(g).
(h) Stockholder Approval. Seller's Stockholder Approval shall have been
duly and validly obtained in accordance with applicable law and Seller's
certificate of incorporation and bylaws, each as amended through the Closing.
(i) License Agreement. Purchaser shall have executed the License Agreement.
SECTION 8.02. Conditions to Obligations of Purchaser. The obligations of
Purchaser and SMIBV to consummate the transactions contemplated by this
Agreement shall be subject to the fulfillment, at or prior to the Closing, of
each of the following conditions:
(a) Accuracy of Representations and Warranties; Covenants. The
representations and warranties of Seller contained in Article III of this
Agreement (as qualified by Seller's Disclosure Letter) and Article VII of this
Agreement shall be true and correct in all material respects as of the
Closing, with the same force and effect as if made as of the Closing, other
than such representations and warranties as are made as of another date, and
all the covenants contained in this Agreement to be complied with by Seller on
or before the Closing shall have been complied with in all material respects,
and Purchaser and SMIBV shall have received a certificate of Seller to such
effect signed by a duly authorized officer thereof.
(b) No Material Adverse Change. There shall have been no Material Adverse
Effect in or with respect to (i) the Storage Products Business or any of the
Purchased Assets or the economic value thereof; (ii) Seller's right, title or
interest in or to any of the Purchased Assets; or (iii) the financial
condition of Seller or of Gould; and no material Purchased Asset shall have
been subject to any damage, injury, loss, casualty or theft (whether or not
covered by insurance) and Purchaser and SMIBV will have received a certificate
to such effect, dated as of the Closing Date, executed by a duly authorized
officer of Seller.
(c) HSR Act. Any waiting period (and any extension thereof) under the HSR
Act applicable to the purchase of the Purchased Assets contemplated hereby
shall have expired or shall have been terminated.
(d) No Order. No non-U.S., United States or state governmental authority or
other agency or commission or United States or state court of competent
jurisdiction shall have enacted, issued, promulgated, enforced or entered any
statute, rule, regulation, injunction or other order (whether temporary,
preliminary or permanent) which is in effect and has the effect of making the
transactions contemplated by this Agreement illegal or otherwise restraining
or prohibiting consummation of such transactions; provided, however, that the
parties hereto shall use their best efforts to have any such order or
injunction vacated.
(e) No Litigation. No suit, claim, cause of action, arbitration, mediation,
investigation or other proceeding under which a third party is contesting,
challenging or seeking to alter, enjoin or adversely affect the sale and
purchase of the Purchased Assets contemplated by this Agreement or any other
transaction contemplated by this Agreement, will be pending or threatened.
(f) Seller Stockholder Approval. There shall have been obtained, at a
meeting of Encore's stockholders duly called, noticed and held in compliance
with all applicable laws (including but not limited to the Delaware General
Corporation Law and the Securities Exchange Act of 1934, both as amended),
Seller's Stockholder Approval (and, if Purchaser deems it advisable and so
notifies Encore, the approval, by vote of a disinterested majority of Encore's
stockholders entitled to vote at such meeting, of this Agreement, the sale and
purchase of the Purchased Assets and all other transactions contemplated by
this Agreement and the Ancillary Agreements).
(g) Ancillary Agreements. Seller shall have executed and delivered
counterparts of each of the Ancillary Agreements.
(h) Purchase Price Allocation Agreement. Seller shall have executed and
delivered to Purchaser the Purchase Price Allocation Agreement.
(i) Inducement Agreements. Gould and EFI shall have executed and delivered
to Purchaser on the Effective Date the Gould/EFI Inducement Agreement attached
as Exhibit J-1 and JEC shall have executed and delivered to Purchaser by the
earlier of the Closing Date and August 15, 1997, the JEC Inducement Agreement
in the form attached as Exhibit J-2 (said two exhibits are collectively
referred to herein as the "Inducement Agreements") and each of Gould, EFI and
JEC shall have performed all actions required to be performed by them
thereunder on or prior to the Closing Date.
(j) Delivery. Purchaser and its legal counsel shall be satisfied that all
Purchased Assets shall have been duly delivered by or for Seller to Purchaser
and SMIBV as required by this Agreement. All software included in the
Purchased Assets and all other Purchased Assets that can be delivered
electronically, will have been delivered to Purchaser electronically to
Purchaser's facilities at the Fort Lauderdale Facility or the Melbourne
Facility, at Purchaser's option, and all Purchased Assets that cannot be
delivered electronically will have been delivered to Purchaser at the Fort
Lauderdale Facility or the Melbourne Facility or at another location specified
by Purchaser, at Purchaser's option, and in such manner as Purchaser directs,
in each case at Seller's cost and expense.
(k) Intellectual Property Assignments. Purchaser shall have received from
Seller: (i) assignments substantially in the form of Exhibit K (the "Patent
Assignment"), by which Seller shall assign to Purchaser and SMIBV all patents
and patent applications (including any and all continuations,
continuations-in-part, divisions, reissues, reexaminations, or extensions
thereof, now existing or hereafter filed, issued or acquired and all rights to
sue for any past, present or future infringement of any of the foregoing
rights and the right to all income, royalties, damages and payments now or
hereafter due or payable with respect to any of the foregoing rights,
including without limitation damages for past, present or future infringement
thereof) included in the Purchased Assets, executed on Seller's behalf by the
Chief Executive Officer of Seller with his execution notarized, in a form
acceptable for recording with the United States Patent and Trademark Office
and otherwise satisfactory in form and substance to Purchaser and SMIBV; and
(ii) assignments from Seller to Purchaser and SMIBV of all registered and
unregistered copyrights, trademarks and service marks included in the
Purchased Assets, duly executed on behalf of Seller by Seller's Chief
Executive Officer and notarized, and in a form acceptable for recording with
the United States Copyright Office or the United States Patent and Trademark
Office, as applicable, and in substantially the form of Exhibit L attached
hereto (the "Copyright Assignment") or Exhibit M attached hereto (the
"Trademark Assignment"), as applicable.
(l) Vehicle Certificates. All certificates for the transfer of title to any
vehicle included among the Purchased Assets that are required by applicable
law shall have been obtained and delivered to Purchaser.
(m) Opinion. Purchaser and SMIBV will have received a favorable opinion of
Seller's counsel, Choate, Hall & Stewart, with respect to each of the matters
set forth in Exhibit N attached hereto.
(n) Solvency Certificate. Seller shall have executed and delivered to
Purchaser a solvency certificate substantially in the form of Exhibit O.
(o) Third Party Consents Obtained; Licenses Modified. Seller shall have
obtained all consents, waivers and approvals from third parties and
governmental entities necessary to effect the assignment and transfer to
Purchaser of all Assigned Contracts, Governmental Permits, Storage Products
Licenses and Storage Products Leases and other Purchased Assets for which such
consents, waivers and approvals are required to sell, assign or otherwise
transfer such Purchased Assets to Purchaser as contemplated by this Agreement.
The Software License Agreement dated December 1, 1993 between Fundamental
Software and Encore and the Distribution Agreement dated August 6, 1988
between Encore and Japan Encore Computer, Inc. ("JECI"), certain third party
support contracts and certain other Assigned Contracts identified by Purchaser
to Seller prior to the Closing Date as requiring modification, shall have been
modified in such manner as Purchaser, in its sole discretion, deems acceptable
(including without limitation by the termination of JECI's exclusive Japanese
distribution rights as to Storage Products).
(p) Receipt. A duly authorized officer of Seller shall have executed and
delivered to Purchaser a written receipt for the Closing Payment and for any
payment made under Section 2.03(g).
(q) Due Diligence Satisfactory. Purchaser shall, in its sole discretion, be
satisfied with the results of its due diligence inquiry into Seller, Gould,
the Purchased Assets and the agreements, assets, financial condition and other
affairs of Seller, Seller's Subsidiaries and other affiliates of Seller and
Gould.
(r) Conduct of Seller's Business in Ordinary Course. From the Effective
Date to the Closing Date, Seller will have conducted its business (including
without limitation the Storage Products Business) only in the ordinary course,
consistent with Seller's past practices, except for actions expressly
permitted or contemplated by this Agreement, matters incident to carrying out
this Agreement, or such further matters as may be consented to by Purchaser
and SMIBV in writing, and Purchaser and SMIBV will have received a certificate
to such effect, dated as of the Closing Date, executed by a duly authorized
officer of Seller.
(s) Acceptance by Employees of Offers of Employment. At least seventy-five
percent (75%) of the Employees to whom Purchaser extends offers of employment
in accordance with Section 6.01, and each of the Employees identified in a
letter of Purchaser to Seller dated as of July 14, 1997 referencing this
subsection 8.02(s) (which letter Purchaser can unilaterally modify at any time
prior to Closing and which letter Seller shall not copy, and shall retain in
confidence and shall not disclose the existence or contents thereof to anyone
other than its addressee and to Gould's in-house counsel), shall have accepted
Purchaser's offer of employment in a writing signed by them on the terms set
forth in Article VI hereof.
(t) Non-competition Agreements. Non-competition Agreements providing for
non-competition covenants for a term of three (3) years from the Closing Date
and in the form of Exhibit E shall have been executed, in accordance with the
requirements of Section 5.16 hereof by each of those Employees identified in a
letter of Purchaser to Seller dated as of July 14, 1997 referencing this
subsection 8.02(t) and delivered to Purchaser (which letter Purchaser can
unilaterally modify at any time prior to the thirtieth day after the Effective
Date and which letter Seller shall not copy, and shall retain in confidence
and shall not disclose the existence or contents thereof to anyone other than
its addressee and to Gould's in-house counsel).
(u) No Insolvency Proceeding. None of Seller, any Seller Subsidiary or any
other affiliate of Seller or Gould shall have: (i) become subject to any
Insolvency Proceeding or (ii) taken or attempted to take, any Insolvency
Action.
(v) Proceedings and Documents Satisfactory. All proceedings, corporate or
other, to be provided or undertaken by Seller in connection with the
transactions contemplated by this Agreement, and all documents incident
thereto, shall be reasonably satisfactory in form and substance to counsel to
Purchaser.
(w) No Violations. Consummation of the transactions contemplated by this
Agreement, the Ancillary Agreements and the Inducement Agreements will not
breach any of the Intracompany Agreements (as that term is defined in the
Inducement Agreements) and Gould, EFI and JEC shall have performed all of
their respective obligations under the Inducement Agreements required to be
performed by them thereunder prior to Closing, including assignment to
Purchaser and SMIBV of the Gould License Agreements if Purchaser has so
requested (as defined in the Inducement Agreements).
(x) Real Property Purchase Conditions. Each of the conditions precedent to
Purchaser's purchase from Seller of the Fort Lauderdale Facility and the
Melbourne Facility and the Condominiums contained in the Real Property
Purchase Agreements shall have been satisfied in full or waived in writing by
Purchaser. The Real Property Assets shall be free and clear of all
Encumbrances whatsoever, including without limitation any mortgages.
(y) Sales and Use Taxes. Purchaser shall have received satisfactory
evidence (including without limitation confirmation from the Florida
Department of Revenue) of Seller's payment of all sales and use taxes due on
or prior to the Closing.
(z) Fairness Opinion. Seller shall have received an opinion from Genesis
that, as of the date of such opinion, the Cash Payment to be paid for the
Storage Products Business is fair to Seller from a financial point of view
(the "Genesis Opinion") and concurrently with the signing of this Agreement
Seller shall have (i) delivered to Purchaser either a copy of the written
Genesis Opinion or a draft thereof and (ii) confirmed that Genesis has
delivered the Genesis Opinion to the Board of Directors of Seller in writing
or orally (followed by delivery in writing promptly thereafter and in any
event prior to Closing). Prior to the Closing, Purchaser shall have received
a signed copy of the Genesis Opinion.
(aa) Non-U.S. Assets. The Offshore Tangible Asset Bills of Sale
substantially in the form of Exhibit C-2 hereof shall have been executed and
delivered by Seller at the Closing, and all other obligations of Seller under
Section 2.10 hereof shall have been performed.
(bb) Diagnostic, Test and QA Software. Purchaser shall be satisfied in its
reasonable discretion that Purchaser shall have the right after Closing to
lawfully use (without violating the Intellectual Property Rights of any third
party) on any mainframe platform (including to test third party storage
subsystems) all copies of mainframe diagnostic, test and QA software utilities
and tools ("Test Software") currently used by Seller in Seller's business
(including but not limited to Test Software used to test third party storage
subsystems) or alternative Test Software that can be so lawfully used (without
violating the Intellectual Property Rights of any third party) for the same
purposes and with the same functional equivalency and efficiency (the
"Noninfringing Test Software Use Right").
(cc) Certified Tangible Asset Schedule. Purchaser shall have received and
shall be satisfied, in its sole discretion, with the Certified Tangible Asset
Schedule and the report and evaluation of Coopers & Lybrand with respect
thereto, including without limitation satisfied as to the details thereof and
as to the location of the Purchased Assets and as to the correlation between
said Schedule and the actual Tangible Assets delivered at Closing.
ARTICLE IX
INDEMNIFICATION
SECTION 9.01. Loss Defined; Indemnitees. For purposes of this Article IX,
the term "Loss" will mean and include any and all Liability, loss, damage,
claim, expense, cost, fine, fee, penalty, obligation, injury or amounts paid
in settlement, including, without limitation, those resulting from any and all
claims, actions, suits, demands, assessments, investigations, judgments,
orders, awards, arbitrations, settlements or other proceedings, together with
reasonable costs and expenses, including the reasonable attorneys' and
experts' fees, court costs, arbitration costs, filing fees and other legal
costs and expenses relating thereto, together with interest accrued on each of
the foregoing amounts from the date the same was incurred at the lower of (i)
the prime rate charged from time to time by the Bank of America, N.T.&S.A. or
(ii) the highest rate of interest permitted under applicable law. As used in
this Article IX, the term "Purchaser Indemnitees" means and includes
Purchaser, SMIBV and any present or future officer, director, employee,
affiliate, stockholder or agent of Purchaser or SMIBV and its or their
respective successors and assigns.
SECTION 9.02. Indemnification by Seller. Seller agrees, subject to the
other terms, conditions and limitations of this Agreement (including the
provisions of Section 9.05 hereof), to indemnify Purchaser, SMIBV and each of
the other Purchaser Indemnitees against, and to hold Purchaser, SMIBV and each
of the other Purchaser Indemnitees harmless from, all Loss arising out of:
(a) the failure of any representation or warranty of Seller contained in
Article III (as qualified by Seller's Disclosure Letter) or Article VII of
this Agreement to be true and correct as of the Effective Date and as of the
Closing Date;
(b) the breach or violation by Seller of any covenant of Seller made herein;
(c) any of the Excluded Assets or any of the Excluded Liabilities or any
other obligations or Liability of Seller not expressly assumed by Purchaser
under this Agreement;
(d) the operation or management of the Storage Products Business or the
Purchased Assets by Seller at any time or times on or prior to the Closing
Date (including without limitation any and all Taxes arising out of, or
payable with respect to, Seller's business operations through the Closing
Date);
(e) Liability for (or any Liability applicable to Purchaser, SMIBV or any
other Purchaser Indemnitee as a result of) noncompliance with any bulk sales,
bulk transfer or similar laws applicable to the transactions contemplated by
this Agreement or any claim asserting that any transactions contemplated by
this Agreement constitutes a fraudulent conveyance or any similar claim;
(f) any demand, claim, debt, suit, cause of action, arbitration or other
proceeding (including, but not limited to, a warranty claim, a product
liability claim or any other claim) that is made or asserted by any third
party that relates to any product or service that was sold, licensed or
otherwise provided by Seller (either prior to, on or after the Closing);
(g) any demand, claim, debt, suit, cause of action, arbitration,
investigation or other proceeding made or asserted by Seller or a shareholder
or creditor of Seller or by Gould, EFI, or JEC or any affiliate thereof or by
any other person or by any, receiver or trustee in bankruptcy of Seller or of
the property or assets of Seller, asserting that the transfer of the Purchased
Assets to Purchaser or SMIBV hereunder constitutes a fraudulent conveyance,
fraudulent transfer or a preference under any applicable state or federal law,
including but not limited to the United States Bankruptcy Code;
(h) any (A) Foreign Employee Liabilities; or (B) amount paid to or other
Liability incurred with respect to any Mandated Employee; or (C) demand,
claim, debt, suit, cause of action, arbitration, investigation or other
proceeding made or asserted by any Mandated Employee or any other employee or
independent contractor of Seller, any Seller Subsidiary or any affiliate of
Seller or any former employee or independent contractor of Seller, any Seller
Subsidiary or any affiliate of Seller, that relates in any manner to any
alleged, actual or constructive termination by Seller, any Seller Subsidiary
or any affiliate of Seller of such person's employment or the services of such
person, or that involves a claim of adverse employment action, relocation,
promotion, demotion, unequal pay or any other matter relating to the
employment of such person by Seller, any Seller Subsidiary or any affiliate of
Seller;
(i) termination by Seller, any Seller Subsidiary or any affiliate of Seller
of the employment of any of the Employees at any time prior to, on or after
the Closing Date, severance benefits related to any Employee's termination of
employment with Seller, any Seller Subsidiary or any Seller affiliate, and any
failure by Seller, any Seller Subsidiary or any Seller affiliate to pay or
withhold any Taxes payable with respect to the employment by Seller any Seller
Subsidiary or any Seller affiliate of any Employee or any failure by Purchaser
to hire such Employee;
(j) any Transaction Taxes payable on or with respect to the purchase, sale,
transfer or delivery of the Purchased Assets hereunder; and
(k) the failure of the closing condition set forth in Section 8.02(bb) to
have been satisfied (whether or not such condition was waived by Purchaser),
or any failure of Purchaser and SMIBV to have the Noninfringing Test Software
Use Right from and after Closing or any claim by any party that Purchaser's or
SMIBV'suse of the Test Software, or other exercise or attempted exercise of
the Noninfringing Test Software Right, infringes any third party's
Intellectual Property Rights or any Loss or Liabilities associated with
acquiring the Noninfringing Test Software Use Right and related licenses from
all parties whose Intellectual Property Rights might be infringed by
Purchaser's use of the Test Software in connection with the Storage Products
Business and, if such rights and licenses cannot be acquired, all Loss related
to developing or having developed new, noninfringing Test Software for use in
connection with the Storage Products Business in replacement of the Test
Software used by Seller or related to hiring third parties to provide services
equivalent to those Purchaser could provide itself if it had a Noninfringing
Test Software Use Right.
(l) any claim for fees or costs, or amounts payable pursuant to
indemnification obligations to, Genesis, including the $250,000 fee due
Genesis.
SECTION 9.03. Procedures for Indemnification.
(a) As used herein, an "Indemnified Party"
means a Purchaser Indemnitee seeking indemnification pursuant to Section 9.02
hereof. The Indemnified Party agrees to give Seller prompt written notice of
any event, or any claim, action, suit, demand, assessment, investigation,
arbitration or other proceeding by or in respect of a third party (a "Third
Party Claim") of which it has knowledge, for which such Indemnified Party is
entitled to indemnification under this Article IX. No delay on the part of an
Indemnified Party in giving Seller notice of a Third Party Claim shall relieve
Seller from any obligation hereunder unless (and then solely to the extent)
that Seller is prejudiced thereby.
(b) Seller will have the right, at its sole cost and expense, to defend the
Indemnified Party against the Third Party Claim with counsel of Seller's
choice that is reasonably satisfactory to the Indemnified Party so long as (i)
Seller notifies the Indemnified Party in writing within ten (10) days after
the Indemnified Party has given notice of the Third Party Claim that Seller
intends to undertake such defense, (ii) Seller provides each Indemnified Party
with evidence reasonably acceptable to the Indemnified Party that Seller will
have the financial resources to defend against the Third Party Claim and
fulfill its indemnification obligations hereunder, (iii) the Third Party Claim
involves only money damages and does not seek an injunction or other equitable
relief, (iv) settlement of, or an adverse judgment with respect to, the Third
Party Claim is not, in the good faith judgment of the Indemnified Party,
likely to establish a precedential custom or practice materially adverse to
the continuing business interests of the Indemnified Party, (v) Seller
conducts the defense of the Third Party Claim actively and diligently; and
(vi) the counsel chosen by Seller does not have any conflict of interest in
representing the interests of the Indemnified Party.
(c) So long as Seller is conducting the defense of the Third Party Claim in
accordance with Section 9.03(b) above, (i) the Indemnified Party may retain
separate co-counsel and participate in the defense of the Third Party Claim at
its own cost and expense (except as provided below) and shall have the right
to receive copies of all pleadings, notices and communications with respect to
the Third Party Claim to the extent no privilege is thereby waived, (ii) the
Indemnified Party may participate in settlement negotiations with respect to
the Third Party Claim, and (iii) Seller will not consent to the entry of any
judgment or enter into any settlement with respect to the Third Party Claim
unless (A) each affected Indemnified Party consents thereto in writing (which
consent will not unreasonably be withheld) or (B) the settlement, compromise
or consent includes an unconditional release from all liability with respect
to the claim in favor of each affected Indemnified Party.
(d) If Seller does not elect to assume control of or otherwise participate
in the defense or settlement of any Third Party Claim, or if Seller does so
elect but any of the conditions in Section 9.03(b) above is or becomes
unsatisfied, or if Seller ceases to any time to actively defend the Third
Party Claim, then, (i) the Indemnified Party may defend against and consent to
the entry of any judgment or enter into any settlement with respect to the
Third Party Claim, provided, however, that Seller (A) shall have the right to
receive copies of all pleadings, notices and communications with respect to
the Third Party Claim so long as the receipt of such documents by Seller does
not affect any attorney-client privilege relating to the Indemnified Party,
and (B) may participate in settlement negotiations with respect to the Third
Party Claim and the Indemnified Party shall not enter into any settlement
without the prior written consent of the Seller (which consent shall not be
unreasonably withheld), (ii) Seller will reimburse the Indemnified Party
promptly and periodically for all costs and expenses incurred in defending
against the Third Party Claim (including without limitation reasonable
attorneys' and experts' fees and expenses and court and arbitration costs),
and (iii) Seller will remain responsible for any Loss the Indemnified Party
may suffer resulting from, arising out of, relating to or caused by the Third
Party Claim to the fullest extent provided in this Article IX.
SECTION 9.04 Limitations on Indemnification.
(a) No Limitation Except Basket and Cap. Seller's liability to indemnify
Purchaser and other Indemnified Parties for Loss under this Article IX shall
not be subject to any limitation except as set forth below in clauses (i) and
(ii) of this Section 9.04(a):
(i) Seller shall not be required to provide indemnification under this
Article IX unless and until the aggregate Loss for which one or more
Indemnified Parties seeks indemnification hereunder exceeds an aggregate of
Five Hundred Thousand Dollars ($500,000) (the "Basket"), in which event Seller
shall be liable to indemnify the Indemnified Parties for all Loss, including
any Loss within the Basket.
(ii) The aggregate Loss recoverable by Indemnified Parties (considered
together as a group) against Seller under this Article IX shall not exceed the
Cash Payment (the "Cap").
Notwithstanding the foregoing, Purchaser and any other Indemnified Party
shall be entitled to recover any Loss arising from (i) fraud or willful
misconduct on the part of Seller, (ii) the failure of any representation or
warranty of Seller contained in Article VII to be true and correct as of the
Closing or (iii) the rescission of or injunction against any transaction
contemplated by this Agreement, in each case regardless of the Basket and/or
the Cap provisions contained in this Section 9.04(a).
(b) Time Limits. Notwithstanding anything herein to the contrary, no claim
for indemnification under this Article IX may be brought after the expiration
of the legal statute of limitations applicable to the subject matter of the
claim underlying the claim for indemnification; provided, however, that with
respect to the representations and warranties of Seller contained in Sections
3.07, 3.20, 3.21 and 3.26 of this Agreement, no claim for indemnification
under this Article IX may be brought after the fourth anniversary of the
Closing Date. To preserve a claim for indemnification under this Article IX,
an Indemnified Party need only provide written notice in reasonable detail of
such claim to Seller prior to the expiration of the applicable time limit (if
any) described in the preceding sentence; and if an Indemnified Party provides
such notice prior to the expiration of such time limit, such Indemnified Party
may pursue such claim for indemnification after the expiration of such time
limit.
SECTION 9.05 Setoff Rights. In addition to its foregoing rights under this
Article IX, Purchaser and SMIBV may offset the amount of any Loss for which
Purchaser and SMIBV are entitled to indemnification under this Article IX as a
credit against Purchaser's and SMIBV's obligations under Article II hereof to
pay Seller the Second Payment of Thirty-Five Million Dollars ($35,000,000),
and Purchaser and SMIBV may effect such offset by withholding payment to
Seller of the applicable amount of the Second Payment. Purchaser and SMIBV
may set off a Loss under the preceding sentence even if the Basket is not yet
exceeded, except in that case the Basket shall be reset to $0 for purposes of
Section 9.04(a)(i). Purchaser shall give Seller written notice of its intent
to withhold and set off any part of the Second Payment and an opportunity for
thirty (30) days to object thereto in writing, provided that the basis of the
objection is specified in detail (if the parties cannot resolve a dispute as
to whether setoff is proper, then if and to the extent that the proposed
setoff exceeds $500,000 the excess shall be placed in escrow for up to one
year pending resolution of the dispute). To ensure that Purchaser and SMIBV
will be able to exercise its rights under this Section 9.05, until July 1,
1998, Seller shall not, directly or indirectly, assign or transfer to any
other person any right to receive any portion of the Second Payment; provided
that Seller my assign such right to Gould provided that such assignment will
not in any way diminish Purchaser's and SMIBV's setoff rights under this
Section 9.05 or diminish or adversely affect any other rights of Purchaser or
SMIBV under this Agreement or give Gould any right to bring any claim against
Purchaser or SMIBV with respect to the Second Payment or any exercise of
setoff rights under this Section 9.05.
SECTION 9.06 No Limitation on Other Rights. The foregoing
indemnification provisions are in addition to, and not in derogation of, any
statutory, equitable or common law remedies that Purchaser, SMIBV or any other
Indemnified Party may have.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.01. Termination. This Agreement may be terminated at any time
prior to the Closing:
(a) by the mutual written consent of Seller and Purchaser; or
(b) by either Purchaser or Seller at any time prior to Closing, if the other
commits a material breach of this Agreement that is not cured within thirty
(30) days after notice thereof.
(c) by either Seller or Purchaser, if the Closing shall not have occurred
prior to November 30, 1997; provided, however, that the right to terminate
this Agreement under this Section 10.01(c) shall not be available to any party
whose failure to fulfill any obligation under this Agreement shall have been
the cause of, or shall have resulted in, the failure of the Closing to occur
prior to such date; or
(d) by either Seller or Purchaser if there shall have been instituted,
pending or threatened (and not withdrawn) any action or proceeding by any
governmental authority or administrative agency before any governmental
authority, administrative agency or court of competent jurisdiction, or there
shall be in effect any judgment, decree or order of any governmental
authority, administrative agency or court of competent jurisdiction, in either
case, seeking to prevent consummation of any of the transactions contemplated
by this Agreement, the Ancillary Agreements or the Inducement Agreements, or
seeking to prohibit or limit Purchaser or any of its subsidiaries from
exercising all material rights and privileges pertaining to ownership of the
Purchased Assets or the ownership or operation by Purchaser or any of its
subsidiaries of all or a material portion of the Purchased Assets, or seeking
to compel Purchaser or any of its subsidiaries to dispose of or hold separate
all or any material portion of the Purchased Assets.
SECTION 10.02. Effect of Termination. In the event of termination of this
Agreement as provided in Section 10.01, this Agreement shall forthwith become
void and there shall be no liability on the part of any party hereto; provided
that nothing herein shall relieve either party from liability for any willful
breach hereof.
SECTION 10.03. Waiver. At any time prior to the Closing, any party hereto
may (a) extend the time for the performance of any of the obligations or other
acts of the other parties hereto, (b) waive any inaccuracies in the
representations and warranties contained herein or in any document delivered
pursuant hereto or (c) waive compliance with any of the agreements or
conditions contained herein. Any such extension or waiver shall be valid if
set forth in an instrument in writing signed by the party to be bound thereby.
ARTICLE XI
GENERAL PROVISIONS
SECTION 11.01. Expenses. All costs and expenses, including, without
limitation, fees and disbursements of counsel, financial advisors and
accountants, incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and
expenses, whether or not the Closing shall have occurred.
SECTION 11.02. Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to
the parties at the following addresses (or at such other address for a party
as shall be specified by like notice):
(a) if to Seller:
Encore Computer Corporation
6901 W. Sunrise Boulevard
Fort Lauderdale, FL 33313-4499
Attention: Kenneth G. Fisher, Chairman and CEO
Telecopy: (954) 797-5618
with a copy to:
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109-2891
Attention: Cameron Read, Esq.
Telecopy: (617) 248-4000
(b) if to Purchaser or SMIBV:
Sun Microsystems, Inc.
901 San Antonio Road
Palo Alto, CA 94303
Attention: General Counsel
Telecopy: (415) 786-7947
with a copy to:
Fenwick & West LLP
Two Palo Alto Square, Suite 800
Palo Alto, CA 94306
Attention: David W. Healy, Esq.
Kenneth A. Linhares, Esq.
Telecopy: (415) 494-1417
SECTION 11.03. Public Announcements. Except as may otherwise be required
by law, Seller shall not make or cause to be made any public announcements in
respect of this Agreement or the transactions contemplated herein or otherwise
communicate with any news media without prior written consent of Purchaser.
SECTION 11.04. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
SECTION 11.05. Severability.
(a) 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 materially
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 greatest extent possible.
(b) Notwithstanding Section 11.05(a) above, the scope and effect of the
covenants contained in Section 5.07 hereof shall be as broad in time (but not
beyond the applicable time periods set forth therein), geography, scope of
business and in all other respects as is permitted by applicable law. The
covenant contained in Section 5.07(a) hereof shall be construed as a series of
separate covenants, one for each geographic area within the Restricted Area.
Each such separate covenant shall be construed to be a separate, independent
and concurrent covenant and obligation of Seller that is cumulative and in
addition to, and not in lieu of or in conflict with, any other of such
separate covenants, and the unenforceability of any such separate, independent
and concurrent covenant or covenants shall have no effect on the
enforceability of any other of such separate covenants. Should a court or
other body of competent jurisdiction determine that any term or provision of
the covenants contained in Section 5.07 is excessive in scope or duration or
is unenforceable in any respect, then the parties agree that such term or
provision shall not be voided or made unenforceable, but rather shall be
modified so as to be enforceable, in accordance with the purposes stated in
the preceding sentence and with applicable law, and all other terms and
provisions of the covenants contained in Section 5.07 shall remain valid and
fully enforceable.
(c) Notwithstanding any other provision in Section 5.14, to the extent that
Purchaser determines in good faith that any right or obligation under Section
5.14 would be contrary to the requirements of the HSR Act, such right or
obligation shall not be enforceable unless and until such time as the
requirements under the HSR Act have been satisfied.
SECTION 11.06. Entire Agreement. This Agreement, the Ancillary Agreements
and the Purchase Price Allocation Agreement constitute the entire agreement
and understanding of the parties hereto with respect to the subject matter
hereof and supersede all prior agreements and undertakings with respect to the
subject matter hereof, both written and oral. Upon the effectiveness of the
Closing, the Existing Confidentiality Agreement shall terminate.
SECTION 11.07. Assignment. This Agreement shall not be assigned by
Purchaser or SMIBV or Seller without the prior written consent of the
non-assigning parties; provided, however, that Purchaser may assign all or a
portion of its rights and obligations hereunder to one or more wholly-owned
subsidiaries of Purchaser.
SECTION 11.08. No Third-Party Beneficiaries. This Agreement is for the
sole benefit of the parties hereto and their permitted assigns and nothing
herein, express or implied, is intended to or shall confer upon any other person
or entity any legal or equitable right, benefit or remedy of any nature
whatsoever under or by reason of this Agreement.
SECTION 11.09. Amendment; Waiver. This Agreement may not be amended or
modified except by an instrument in writing signed by Seller and Purchaser
(which instrument will bind SMIBV). Waiver of any term or condition of this
Agreement shall only be effective if in writing and shall not be construed as
a waiver of any subsequent breach or waiver of the same term or condition, or
a waiver of any other term or condition of this Agreement.
SECTION 11.10. Governing Law; Jurisdiction and Venue. This Agreement shall
be governed by, and construed in accordance with, the internal laws of the
State of California applicable to contracts executed in and to be performed by
residents of California within that State. Seller consents to submit to the
jurisdiction of any federal or state court located in the State of California
and agrees not to object to venue in the federal or state courts located in
Santa Clara County, California.
SECTION 11.11. Construction of "Seller". The term "Seller", wherever used
in this Agreement, shall be deemed to refer to each, any and/or all of Encore,
Encore Computer U.S., Inc. and Encore Computer International, Inc., except
where Purchaser otherwise consents or unilaterally specifies in writing by
written notice to Encore. Collective references to Seller will be construed
as if all such entities are a single entity, so that, for example, verbs used
therewith can be as if "Seller" referred to a single entity, even though it
refers to multiple entities, and "Seller's" shall be construed to mean "each
Seller's".
SECTION 11.12 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
[Remainder of This Page Left Intentionally Blank]
IN WITNESS WHEREOF, Seller, SMIBV and Purchaser have caused this Agreement to
be executed as of the date first written above by their respective officers
thereunto duly authorized.
"SELLER" "PURCHASER"
ENCORE COMPUTER CORPORATION SUN MICROSYSTEMS, INC.
By: By:
Name: Name:
Title: Title:
"SMIBV"
ENCORE COMPUTER INTERNATIONAL,INC. SUN MICROSYSTEMS INTERNATIONAL, B.V.
By: By:
Name: Name:
Title: Title:
ENCORE COMPUTER U.S., INC.
By:
Name:
Title:
[SIGNATURE PAGE TO ASSET PURCHASE AGREEMENT]
Exhibit A
TECHNOLOGY LICENSE AGREEMENT
This Technology License Agreement (this "Agreement") is made and entered
into effective as of ____________, 1997 (the "Effective Date") between Sun
Microsystems, Inc., a Delaware corporation having its principal executive
offices located at 2550 Garcia Avenue, Mountain View, California 94043-1100
("Sun") and Encore Computer Corporation, a Delaware corporation having its
principal executive offices located at 6901 West Sunrise Boulevard, Ft.
Lauderdale, Florida 33313-4499 ("Encore").
RECITALS
A. Concurrently herewith the parties hereto are consummating the sale
from Encore to Sun and Sun Microsystems International, B.V. ("SMIBV") of
certain assets of Encore pursuant to an Asset Purchase Agreement dated July
___, 1997. In order to continue to conduct certain aspects of its business
related to real-time systems not being acquired by Sun and SMIBV under such
Asset Purchase Agreement, Encore requires a limited license back from Sun to
use, copy and modify certain intangible and intellectual property assets
acquired by Sun and SMIBV for certain limited purposes, subject to the terms,
conditions and restrictions contained herein.
B. It is a condition to Encore's obligation to consummate the sale of
the foregoing assets to Sun under the Asset Purchase Agreement that Sun enter
into this Agreement.
NOW, THEREFORE, in consideration of the facts recited above and the
mutual agreements set forth herein, the parties hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms will have the following
meanings:
1.1 "Asset Purchase Agreement" means the Asset Purchase Agreement
dated July ___, 1997 being executed among Sun, SMIBV, and Encore.
1.2 "Change of Control" means (a) a merger or consolidation of Encore
with or into any other corporation or entity; or (b) any other transaction in
which the shareholders of Encore immediately prior to such transaction cease
to own a majority of the voting power of Encore or of the surviving or
acquiring corporation or entity immediately after such transaction; or (c) a
sale, transfer or lease of all or substantially all of Encore's assets (other
than any of the foregoing effected with or to Sun or any of Sun's affiliates).
A Change of Control will be deemed to have occurred at such time as Encore
enters into any agreement with any person or entity requiring Encore to take
any steps to consummate or seek the consummation of a Change of Control.
1.3 "Confidential Information" means (a) the Licensed Materials, (b)
any and all information that is disclosed by Sun to Encore orally,
electronically, visually or in a document or other tangible form, which is
either identified as or should be reasonably understood to be confidential
and/or proprietary information of Sun or its licensors, (c) any notes,
extracts, analyses, or materials prepared by Encore that are copies of or
derived from the Confidential Information or from which the substance of the
Confidential Information can be inferred or otherwise perceived or understood;
provided however, that "Confidential Information" does not include information
Encore received from Sun that Encore can clearly establish by written evidence
(i) is or becomes known by Encore without any obligation to maintain its
confidentiality (except that no Licensed Materials shall be excluded from the
definition of Confidential Information by virtue of any of Encore's
pre-existing knowledge of such Licensed Materials that was gained prior to the
Effective Date of this Agreement); (ii) is or becomes generally known to the
public through no act or omission of Encore or of any person, firm or
corporation having authority to act for Encore or for any customer of Encore;
or (iii) is independently developed by Encore without use of or reference to
any Confidential Information.
1.4 "Derivative Work" means: (a) for copyrightable or copyrighted
material (including materials subject to mask work rights), a work which is
based upon one or more pre-existing works, such as a revision, modification,
translation, abridgement, condensation, expansion, collection, compilation or
any other form in which such pre-existing works may be recast, transformed or
adapted; (b) for patentable or patented materials, any adaptation, addition,
improvement, or combination thereof; and (c) for material subject to trade
secret protection, any new material, information or data relating to and
derived from such existing trade secret material, including new material which
may be protectable by copyright, patent or other proprietary rights.
1.5 "Encore Derivative Works" means Derivative Works based upon the
Licensed Materials created by or on behalf of Encore and which are owned by or
licensable by Encore.
1.6 "Intellectual Property Rights" means, collectively, all of the
following worldwide intangible legal rights, whether or not filed, perfected,
registered or recorded and whether now or hereafter existing, filed, issued or
acquired: (i) patents, patent applications, and patent rights, including any
and all continuations, continuations-in-part, divisions, reissues,
reexaminations or extensions thereof; (ii) rights associated with works of
authorship (including without limitation audiovisual works), including without
limitation copyrights, copyright applications and copyright registrations,
moral rights, mask work rights, mask work applications and mask work
registrations; (iii) rights in trade secrets (including without limitation
rights in industrial property, customer, vendor and prospect lists and all
associated information or databases and other confidential or proprietary
information), and all rights relating to the protection of the same; and and
(iv) any rights analogous to those set forth in the preceding clauses and any
other proprietary rights relating to intangible property; but specifically
excluding trademarks, service marks, trade dress, and trade names.
1.7 "Licensed Materials" means, collectively, any and all of the
following items associated with, related to or used in connection with
Encore's Storage Products Business which were sold, assigned, transfered,
conveyed and delivered to Sun and SMIBV pursuant to the Asset Purchase
Agreement as of the Effective Date: software (in both source code and binary
code form), designs, plans, schematics, drawings, blueprints, technical
information, specifications, manufacturing plans or instructions, ideas,
concepts, inventions, discoveries, processes, procedures, methodologies, and
know-how. Licensed Materials does not include any Derivative Works created by
or on behalf of Sun after the Effective Date of this Agreement.
1.8 "Real Time Products" means, collectively, Real Time Systems and
any software, hardware, or components which comprise or are designed for use
in or for the design and/or testing of Real Time Systems. Real Time Products
specifically excludes any Storage Products.
1.9 "Real Time Systems" means computer systems, which may include an
incidental amount of storage capacity, in which the computer is required to
perform its tasks within the time constraints of some process, or
simultaneously with a system it is assisting, so as to be capable of
intervening appropriately and in real time in such process or with respect to
the assisted system.
1.10 "Storage Products" means (i) mechanisms, devices or functional
units into which data can be placed and retained and from which data can be
retrieved, and (ii) any software, hardware or components which comprise or are
designed for use in or in conjunction with the operation of any of the items
listed in the preceding clause (i).
1.11 "Storage Products Business" means Sun's business of developing,
manufacturing, marketing, licensing, distributing, using, operating, servicing
or otherwise using or commercially exploiting all or any aspect of any or all
of the Storage Products.
1.12 "Sublicensee" means any third party customer of Encore who is the
recipient of a sublicense granted by Encore pursuant to the provisions of
clauses (i) or (ii) in Section 3.1(b) below.
1.13 "Sun Trademarks" means all names, marks, logos, designs, trade
dress and other brand designations used by Sun in connection with Sun products
and services.
ARTICLE II
OWNERSHIP
2.1 Ownership of Confidential Information. Encore acknowledges and
agrees that Sun is the sole and exclusive owner of all right, title and
interest in and to the Confidential Information and all associated
Intellectual Property Rights. Encore agrees that it will acquire no interests
under this Agreement in or to any Confidential Information or any Intellectual
Property Rights therein, other than the limited license interests specifically
granted to Encore under this Agreement.
2.2 No Limitations on Sun Use. Nothing in this Agreement shall be
construed to limit or restrict, in any way or manner, any right of Sun to
encumber, transfer, license, sublicense, assign, transfer, access, reference,
market, distribute, use, sell, commercially exploit or otherwise practice all
or any part of the Confidential Information in any way or for any purpose
whatsoever, including without limitation the use, licensing, and/or
registration of the Confidential Information anywhere in the world for any
purpose or use in connection with the development, manufacture, distribution,
marketing, promotion and/or sale of any product or service.
ARTICLE III
GRANT OF LICENSES
3.1 License Grant to Encore. Subject to all of the terms, limitations
and conditions of this Agreement, Sun hereby grants to Encore a non-exclusive,
non-transferable (except as otherwise permitted under Section 9.11 below),
royalty-free, paid-up license under any Intellectual Property Rights in the
Licensed Materials:
(a) To internally use, modify, copy, and create Encore
Derivative Works based upon the Licensed Materials solely for the purpose of
the design, manufacture, marketing, distribution, sale, licensing,
installation, support, repair, and maintenance of Real Time Products of Encore
and for no other purpose; and
(b) To sublicense Sublicensees of Encore (i) to manufacture,
market, distribute, sell, license, install, support, repair, and maintain Real
Time Products of Encore created within the scope of the license rights set
forth in Section 3.1(a) above, under either Encore's brand name(s) or under
the brand name(s) of such Sublicensees; (ii) to incorporate such Real Time
Products of Encore in unmodified form only into Real Time Products of such
Sublicensees ("Sublicensee Real Time Products"), and to manufacture, market,
distribute, sell, license, install, support, repair, and maintain such
Sublicensee Real Time Products under the brand name(s) of such Sublicensees;
and/or (iii) to further sublicense customers of such Sublicensees to do any of
the activities set forth in the preceding clauses (i) and (ii), provided,
however, that no such further sublicense shall grant any rights to use any
source code for any of the Licensed Materials, nor shall any Sublicensee
disclose such source code to any further sublicensee, without the advance
written permission of Sun, which Sun shall be free to grant or deny in its
sole discretion. Except as expressly set forth in clause (iii) of the
preceding sentence, Sublicensees of Encore shall have no right to further
sublicense any of the rights sublicensed to them pursuant to this Section
3.1(b), to create Derivative Works based upon the Licensed Materials or upon
any Real Time Products of Encore, or to sublicense others to create such
Derivative Works. As a condition to the right to grant sublicenses set forth
in this Section 3.1(b), Encore shall give Sun prompt written notice of any
such sublicense granted by Encore, identifying the name of the recipient of
such sublicense and summarizing the nature and scope of the sublicense
granted.
3.2 Restrictions on Licenses to Encore. Encore acknowledges and
agrees that it may not disclose any of the Licensed Materials to anyone except
to the extent necessary to exercise Encore's license rights hereunder. Encore
may not use the Licensed Materials or any portion thereof in any manner not
expressly authorized by this Agreement, including but not limited to use in
the design, manufacture, marketing, distribution, sale, licensing,
installation, support, repair, and maintenance of Storage Products or use in
any way competitive with Sun's Storage Products Business as it may exist as of
the Effective Date or at any time in the future.
3.3 No Other Rights to Encore. Encore acknowledges and agrees that
Sun and its licensors reserve and retain all rights in the Licensed Materials
and other Confidential Information not expressly granted to Encore under this
Agreement. Other than the limited license rights granted in this Agreement,
Encore acquires no right, title, interest or other right in or to any of the
Licensed Materials or any other Confidential Information.
3.4 Licenses Back to Sun for Derivative Works.
(a) License from Encore and Supply of Encore Derivative Works.
Encore hereby grants and agrees to grant to Sun a non-exclusive,
non-terminable, royalty-free, paid-up license under any Intellectual Property
Rights in any Encore Derivative Works to use, modify, copy, and create
Derivative Works based upon the Encore Derivative Works for any purpose
whatsoever other than the design, manufacture, marketing, distribution, sale,
licensing, installation, support, repair, and maintenance of Real Time
Products. Encore agrees to supply to Sun one (1) copy of each Encore
Derivative Work promptly upon its creation, together with accompanying
documentation for the same (including but not limited to commented source
code) sufficient to enable Sun to exercise the rights with respect to such
Encore Derivative Work set forth in the preceding sentence.
(b) Removal of Restrictions With Respect to Real Time Products.
In the event that this Agreement is terminated by Sun for breach or in the
event that Encore transfers ownership of any Encore Derivative Works to any
third party, then the restrictions on Sun's license rights set forth in
Sections 3.4(a) above shall automatically become null and void and Sun shall
be entitled to exercise such license rights without restriction of any kind.
3.5 No Obligation to Supply Enhancements or Support. Neither Sun,
SVIB, nor any of their licensors will have any obligation whatsoever to
provide any updates, upgrades, enhancements, or improvements to any of the
Licensed Materials, or to provide support or maintenance, including bug fixes
and training, with respect to any of the Licensed Materials. Encore will have
no obligation whatsoever to provide any support or maintenance, including bug
fixes and training, with respect to any Encore Derivative Works.
ARTICLE IV
CONFIDENTIALITY
4.1 Confidentiality Obligations. Encore agrees that it shall, and it
shall cause each Sublicensee to agree to, hold the Licensed Materials and any
other Confidential Information in confidence and not to use the Licensed
Materials except as expressly permitted under this Agreement. Encore and its
Sublicensees shall not disclose any Confidential Information to any third
party and shall protect and treat all Confidential Information so as to
maintain its confidential status with the same degree of care as each uses to
protect its own confidential information of like importance, but in no event
less than reasonable care. Except as expressly permitted in Article III or
for backup or archival purposes, Encore agrees, and shall cause its
Sublicensees to agree, not to use, make or have made any copies of
Confidential Information, in whole or in part, without the prior written
authorization of Sun. Encore agrees, and shall cause its Sublicensees to
agree, to disclose Confidential Information only to their respective employees
who require access to the same for purposes of exercising the license rights
granted under Article III of this Agreement. Encore agrees, and shall cause
its Sublicensees to agree, to notify and inform such employees of the
limitations, duties and obligations regarding use, access to and nondisclosure
of Confidential Information and to obtain or have obtained their employees'
agreements to comply with such limitations, duties and obligations. Encore
agrees, and shall cause its Sublicensees to agree, to provide notice to Sun
immediately after learning of or having reason to suspect a breach of any of
the proprietary restrictions set forth in this Article IV. In the event that
Encore or one of its Sublicensees is required to disclose any Confidential
Information pursuant to law, Encore agrees, and shall cause its Sublicensees
to agree, to first notify Sun of the required disclosure with sufficient time
to seek relief, to cooperate with Sun in taking appropriate protective
measures, and to make such disclosure in a fashion that maximizes protection
and minimizes disclosure of Confidential Information. This Article IV will
not affect any other confidential disclosure agreement between the parties.
4.2 Injunctive Relief. Encore acknowledges and agrees that the
Confidential Information constitutes a unique and proprietary asset of Sun and
Encore acknowledges that the unauthorized use or disclosure of the
Confidential Information would cause substantial harm and injury to Sun, the
extent of which cannot be readily ascertained and which cannot be remedied by
the payment of monetary damages alone. Accordingly, Encore agrees that Sun
will be entitled to preliminary and permanent injunctive relief and other
equitable relief for any breach of this Article IV or any other breach by
Encore of this Agreement.
ARTICLE V
TERM AND TERMINATION
5.1 Term. The licenses to the Licensed Materials granted herein shall
continue in effect until this Agreement is terminated in accordance with this
Article V.
5.2 Termination by Sun. Sun may immediately terminate this Agreement
and all licenses and rights granted to Encore hereunder in the event that: (a)
Encore or any of its Sublicensees materially breaches any of the obligations
or restrictions contained in this Agreement and fails to cure such breach
within thirty (30) days after Sun gives Encore or such Sublicensee written
notice of such breach; (b) Encore or any of its Sublicensees takes any action
in derogation of the rights of Sun to the Licensed Materials, (c) the Licensed
Materials, or any portion thereof, becomes, or in Sun's reasonable opinion is
likely to become, the subject of a claim of infringement of a patent, trade
secret, copyright, mask right or other Intellectual Property Right, or (d)
Encore undergoes or suffers a Change of Control (except in the case in which
Sun elects to permit assignment of this Agreement in connection with such
Change of Control pursuant to Section 9.11 below).
5.3 Insolvency. In the event that Encore becomes insolvent or the
subject of a voluntary or involuntary bankruptcy case or proceeding, then Sun
may at its sole option and in its sole discretion terminate the licenses
granted under Article III, and terminate this Agreement immediately upon
written notice to Encore.
5.4 Obligations on Termination. Upon termination of Encore's licenses
or this Agreement, Encore shall immediately discontinue all use of the
Licensed Materials and the licenses and rights granted hereunder shall
terminate. Within thirty (30) days after such termination, Encore shall
deliver and return to Sun, and shall cause all of its Sublicensees to deliver
and return to Sun, F.O.B. Sun's facilities, all Licensed Materials and all
Derivative Works based thereon, including any and all copies of any of the
foregoing.
5.5 Survival. The provisions of Article II, Article IV, Article V,
Article VI, Article VIII, Article IX, and Sections 3.4 and 3.5 hereof shall
survive termination of this Agreement for any reason.
ARTICLE VI
DISCLAIMER OF ALL WARRANTIES AND SUPPORT OBLIGATIONS
6.1 Disclaimer of All Warranties. ENCORE ACKNOWLEDGES AND AGREES THAT
ALL LICENSED MATERIALS LICENSED BY SUN UNDER THIS AGREEMENT ARE PROVIDED BY
SUN "AS IS" AND WITHOUT WARRANTY OF ANY KIND. SUN HEREBY DISCLAIMS ALL
WARRANTIES, WHETHER EXPRESS OR IMPLIED, WITH RESPECT TO ANY LICENSED
MATERIALS, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF DESIGN,
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT, OR
WARRANTIES ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE. IN
PARTICULAR, NOTHING IN THIS AGREEMENT SHALL BE CONSTRUED AS ANY WARRANTY OR
REPRESENTATION BY SUN THAT THE LICENSED MATERIALS WILL BE ERROR-FREE OR WILL
NOT INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES. SUN HEREBY
EXPRESSLY DISCLAIMS AND SHALL NOT BE RESPONSIBLE FOR ANY LIABILITY ARISING AS
A RESULT OF OR IN CONNECTION WITH ANY CLAIM, SUIT OR PROCEEDING ALLEGING: (A)
THAT THE LICENSED MATERIALS CONTAIN ANY BUGS OR ERRORS OF ANY KIND; OR (B)
THAT THE USE OF ANY LICENSED MATERIALS INFRINGES THE INTELLECTUAL PROPERTY
RIGHTS OF ANY THIRD PARTY. No agent of Sun is authorized to make or incur
any warranty obligations on behalf of Sun or to modify the limitations and
disclaimers set forth in this Section 6.1.
6.2 Restriction on Aircraft, Nuclear and Other Applications. None of
the Licensed Materials is designed or intended for use in the control of
aircraft or other aeronautic craft (including space flight), air traffic
control, aircraft navigation or aircraft communications; or in the design,
construction, operation or maintenance of any nuclear facility. Without
limiting or modifying the foregoing disclaimers of warranties, Sun disclaims
any express or implied warranty of fitness for such uses. As a condition of
being granted the license rights granted to it hereunder, Encore agrees and
represents that it will not use any Licensed Materials for any of the purposes
described in this Section.
6.3 Responsibility for Backup. Encore and its Sublicensees shall have
the sole responsibility for taking steps to protect and backup or archive
their data and/or equipment used with any of the Licensed Materials and Encore
agrees, and shall cause its Sublicensees to agree, not to make any claim of
any kind against Sun for lost data, re-run time, inaccurate output, work
delays, or lost profits resulting from the use of any of the Licensed
Materials or any portion thereof.
ARTICLE VII
COPYRIGHT AND PROPRIETARY NOTICES
7.1 Included Notices. In the exercise of the rights and licenses
granted in this Agreement Encore agrees, and shall cause its Sublicensees to
agree, to retain, reproduce and apply any copyright notices and/or other
proprietary rights notices included on or embedded in the Licensed Materials
by Sun on all copies, in whole or in part, in any form of the Licensed
Materials and in any Encore Derivative Works. In addition, Encore shall
comply, and shall cause its Sublicensees to comply, with all reasonable
requests by Sun to include copyright and/or other proprietary rights notices
on any part of the Licensed Materials.
7.2 Trademarks, Logos and Product Designs. Neither Encore nor any of
its Sublicensees is granted any right, title or license to, or interest in,
any Sun Trademarks. Encore acknowledges Sun's rights in Sun Trademarks and
acknowledges and agrees Encore is not being granted any license or other right
or interest in or to any Sun Trademark under this Agreement. Encore agrees,
and will cause its Sublicensees to agree, not to (a) challenge Sun's ownership
or use of, (b) register, or (c) infringe, any Sun Trademarks, nor shall Encore
incorporate any Sun Trademarks into Encore's trademarks, service marks,
company names, internet addresses, domain names, brand names or similar
designations. If Encore or any of its Sublicensees acquires any rights in any
Sun Trademarks by operation of law or otherwise, it will immediately and at no
expense to Sun assign, and cause its Sublicensees to assign, all such rights
to Sun along with any associated goodwill, applications and/or registrations.
ARTICLE VIII
LIMITATION OF LIABILITY; INDEMNITY
8.1 Limitation of Liability. INASMUCH AS ENCORE IS NOT BEING CHARGED
ANY LICENSE FEES FOR THE LICENSES AND OTHER RIGHTS GRANTED UNDER THIS
AGREEMENT, AND GIVEN ENCORE'S PRIOR FAMILIARITY WITH THE LICENSED MATERIALS,
ENCORE AGREES THAT SUN SHALL HAVE NO LIABILITY TO ENCORE WHATSOEVER UNDER THIS
AGREEMENT. IN NO EVENT SHALL SUN BE LIABLE FOR ANY INDIRECT, SPECIAL,
INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES IN CONNECTION WITH OR
ARISING OUT OF OR RELATING TO THIS AGREEMENT (INCLUDING WITHOUT LIMITATION
DAMAGES FOR LOSS OF BUSINESS, REVENUE, PROFITS, USE, DATA OR OTHER ECONOMIC
BENEFIT OR ADVANTAGE), HOWEVER ARISING, WHETHER FOR BREACH OF THIS CONTRACT OR
IN TORT (INCLUDING NEGLIGENCE), EVEN IF SUN HAS PREVIOUSLY BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGE. THE FOREGOING LIMITATION OF LIABILITY SHALL
BE EFFECTIVE AND SUCH DAMAGES SHALL BE EXCLUDED, EVEN IF ANY REMEDY PROVIDED
FOR HEREIN FAILS OF ITS ESSENTIAL PURPOSE.
8.2 Indemnity by Encore. Inasmuch as Encore is not being charged any
license fees for the licenses and other rights granted to it under this
Agreement, and given Encore's prior familiarity with the Licensed Materials,
Sun is unwilling to incur any liability with respect to any actions taken by
Encore or its Sublicensees pursuant to this Agreement or in connection with
the Licensed Materials. Accordingly, as a material inducement and
consideration for Sun to enter into this Agreement, Encore hereby agrees to
indemnify and hold Sun and all of its past, present or future affiliates,
subsidiaries, parents, officers, directors, shareholders, employees and agents
harmless from and against any and all loss, liabilities, damages, costs and
expenses whatsoever (including without limitation reasonable attorneys' fees)
arising in any manner and at any time from any use, modification or
reproduction by Encore and/or any of its affiliates, licensees or Sublicensees
of any Licensed Materials, whether or not such use, modification or
reproduction is authorized by this Agreement.
ARTICLE IX
GENERAL TERMS
9.1 Governing Law and Jurisdiction. This Agreement shall be governed
by the internal laws of the State of California without regard to or
application of choice of law rules or principles. Any disputes arising under
this Agreement will be brought in the federal or state courts of the Northern
District of California. Encore agrees to be subject to the jurisdiction and
venue of such courts.
9.2 Relationship of the Parties. The relationship of the parties to
this Agreement is solely that of independent contractors, and the parties
hereto are not partners, joint venturers or agents of the other.
9.3 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to
the parties at the addresses listed in Exhibit A (or at such other address for
a party as shall be specified by like notice).
9.4 Waiver; Modification. This Agreement may not be changed, amended
or modified in any manner without the written consent of each party hereto.
No party shall be deemed to have waived any of its rights under this Agreement
unless its waiver is signed by such party in writing. The waiver by any party
of any default or breach of this Agreement will not constitute a waiver of any
other or subsequent default or breach.
9.5 Compliance with Law. Encore agrees to comply fully with all
relevant laws in its exercise of any rights granted to it herein.
9.6 Government Rights. If Encore or any of its Sublicensees ever
provides any Licensed Materials in the form of software to the U.S.
Government, Encore will ensure that the U.S. Government's use, duplication or
disclosure of such software will be subject to restrictions of FAR
12.212(a)(1995), FAR 52.227-14 (ALT III) and FAR 52.227-19, or DFARS
252.227-7013(c)(1)(ii) (OCT 1988) and DFARS 227.7202-1(a) and 227.7202-3(a)
(1995), as applicable.
9.7 Third Party Beneficiaries. SMIBV shall be a third party
beneficiary of this Agreement and have the right to enforce this Agreement to
protect its rights in the Licensed Materials. Except as expressly stated
herein, this Agreement is made for the benefit of the parties hereto, and not
for the benefit of any third parties.
9.8 Headings. The headings used herein are for reference only and
shall not be considered as substantive parts of this Agreement.
9.9 Construction. This Agreement has been negotiated by the parties,
each of which has been represented by counsel. This Agreement will be fairly
interpreted in accordance with its terms, without any strict construction in
favor of or against either party.
9.10 Provisions Found Invalid. If any term or provision of this
Agreement is found to be invalid under any applicable statute or rule of law
then, that provision notwithstanding, this Agreement shall remain in full
force and effect and such provision shall be enforced to the greatest extent
possible.
9.11 Restriction on Assignment. The parties agree that Encore may not
assign this Agreement or any of the licenses granted to it under Article III
hereof, whether expressly, by operation of law or otherwise, without the
express advance written consent of Sun, and any attempt to assign this
Agreement or any of the rights or licenses hereunder without such advance
written consent shall be void; provided, however, that Sun will not
unreasonably withhold consent to the assignment of this Agreement by Encore to
a successor to Encore that succeeds to all of the business of Encore, by
merger, operation of law, assignment, purchase or otherwise. For purposes of
the preceding sentence, Sun shall not be deemed to have acted unreasonably in
withholding its consent to an assignment where Sun determines in its sole
discretion that the successor to whom Encore proposes to assign this Agreement
is a competitor or potential competitor of Sun.
9.12 Entire Agreement. This Agreement, together with its exhibits,
constitutes the complete agreement and understanding between the parties
regarding the subject matter hereof.
9.13 Taxes and Duties. Any tariffs, duties and/or local, state or
federal sales, excise, personal property or use tax, or any other similar tax
or duties imposed by any government shall be assumed and paid by Encore. Each
of Encore and Sun shall assume and be responsible for any tax or duty payable
with respect to its income. Encore or any Sublicensee shall assume and pay
any such taxes imposed in connection with any sublicense from Encore to a
Sublicensee.
9.14 Compliance with Export Regulations. Encore agrees that it will
not export or re-export, and that it shall cause its Sublicensees not to
export or re-export, the Licensed Materials and Encore Derivative Works, in
contravention of the Export Administration Act of 1979, as amended, of the
United States and any other statute or regulation promulgated by the United
States government or the government of any state regarding export and
re-export of products now in effect or hereafter adopted. Encore further
agrees that it will obtain, and it will cause its Sublicensees to obtain, all
export licenses required by said Act or laws and regulations, prior to such
export or re-export. Encore shall cooperate fully with any Sublicensees to
permit their compliance with the foregoing laws and regulations.
IN WITNESS WHEREOF, this Agreement has been executed and entered into by
the parties effective as of the Effective Date of this Agreement.
Sun Microsystems, Inc. Encore Computer Corporation
By: By:
Printed Name: Printed Name:
Title: Title:
Attachments:
Exhibit A: Addresses for Notice
EXHIBIT A
Addresses for Notice
(a) Encore:
Encore Corporation
6901 W. Sunrise Boulevard
Fort Lauderdale, FL 33313-4499
Attention: Kenneth G. Fischer, Chairman and CEO
Telecopy: (954) 797-5618
with a copy to:
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109-2891
Attention: Cameron Read, Esq.
Telecopy: (617) 248-4000
(b) Sun:
Sun Microsystems, Inc.
2550 Garcia Avenue
MS: MPK10-212
Mountain View, CA 94043-1100
Attention: ________________
Telecopy: ________________
with a copy to:
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Attention: David L. Hayes, Esq.
Telecopy: (415) 857-0361
Exhibit A
GOULD/EFI INDUCEMENT AGREEMENT
This Gould/EFI Inducement Agreement (this "Agreement") is made and entered
into effective as of July 17, 1997 (the "Effective Date") by and between Gould
Electronics Inc., an Ohio corporation ("Gould") and EFI International, Inc., a
Delaware corporation ("EFI"), on the one hand, and Sun Microsystems, Inc., a
Delaware corporation ("Purchaser") and Sun Microsystems International, B.V., a
Netherlands corporation ("SMIBV"), on the other hand. Purchaser and SMIBV are
hereinafter sometimes collectively referred to as "Purchaser Parties". Gould,
Japan Energy Corporation, a Japanese corporation ("JEC") and EFI, a wholly
owned subsidiary of JEC, are hereinafter sometimes collectively referred to as
"Seller Parties". The term "Affiliates" shall mean any and all "Affiliates"
(as defined for purposes of U.S. federal securities laws) of any of Seller
Parties, and all successors and assigns of any of the Seller Parties or any of
their respective Affiliates.
R E C I T A L S
A. Purchaser and SMIBV have, concurrently herewith, entered into a certain
Asset Purchase Agreement dated as of July 16, 1997 (the "Asset Purchase
Agreement") with Seller (as that term is defined in the Asset Purchase
Agreement) pursuant to which Seller has agreed to sell to Purchaser Parties,
and Purchaser Parties have agreed to purchase, certain assets associated with
Seller's Storage Products Business. Seller Parties have each reviewed, and
understand, the provisions of the Asset Purchase Agreement. All terms
(whether in upper or lower case text or any combination thereof) defined in
the Asset Purchase Agreement will have the same meanings assigned to such
terms in the Asset Purchase Agreement, except as otherwise expressly defined
herein; provided, however, that for purposes of this Agreement the term
"material", when used herein with reference to any of Seller Parties or any
Affiliate, shall mean any fact, event, action or failure to act, or other
circumstance with respect to, involving or affecting any of Seller Parties or
any Affiliate that: (i) involves in excess of $350,000 or that results or is
reasonably likely to result in a financial loss of at least $350,000, (ii)
involves any of the Purchased Assets or any Encumbrance on any of the
Purchased Assets or (iii) is otherwise material.
B. Gould and EFI are principal stockholders and/or debt holders of Seller
as of the Effective Date and no other Affiliate is a stockholder or debt
holder of Seller.
C. As a material inducement and consideration for Purchaser Parties to
enter into the Asset Purchase Agreement and to pay the Purchase Price provided
for therein, and as a material condition precedent to Purchaser Parties'
obligations to consummate the transactions contemplated by the Asset Purchase
Agreement, Gould and EFI have agreed to enter into and to perform their
respective obligations under this Agreement and to be bound by the terms of
this Agreement.
NOW THEREFORE, as a material inducement to Purchaser Parties to enter into, to
consummate the transactions contemplated by, the Asset Purchase Agreement, and
in consideration of the mutual agreements and promises made herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
1.0 Representations and Warranties. Gould hereby represents and warrants to
Purchaser Parties that all statements in the following subparagraphs of this
Section 1.0 are true and correct:
1.01 Organization and Good Standing. Gould is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Ohio and has the corporate power and authority to own, operate and lease
its properties and to carry on its business as now conducted and as proposed
to be conducted. Gould is qualified to transact business as a foreign
corporation in each jurisdiction in which its failure to be so qualified could
reasonably be expected to have a material adverse effect on Gould's condition
(financial or otherwise), properties, assets, liabilities, business,
operations, results of operations or prospects. Gould is not in default under
or in violation of any provision of its certificate of incorporation or
bylaws, both as amended to date.
1.02 Authorization and Validity. Seller Parties have all necessary
right, corporate power, legal capacity and authority to enter into, execute
and deliver this Agreement and to perform all of their respective covenants,
agreements and obligations under this Agreement. This Agreement has been duly
executed and delivered by Seller Parties and will constitute a legal, valid
and binding obligation of Seller Parties enforceable against Seller Parties in
accordance with its terms. The execution, delivery and performance by each of
Seller Parties of this Agreement have been duly and validly approved and
authorized by all necessary corporate action on the part of each of Seller
Parties, respectively.
1.03 No Conflict. The execution and delivery of this Agreement by
Seller Parties and the performance of this Agreement by Seller Parties and the
Affiliates do not and will not (a) breach, violate or conflict with the
respective certificates of incorporation or bylaws or other charter documents
of any of Seller Parties, in each case as amended to date, (b) conflict with
or violate any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award applicable to Seller Parties or, to Seller
Parties' knowledge, to any of the Purchased Assets, (c) result in any breach
or violation of, or constitute a default (or event which with the giving of
notice or lapse of time, or both, would become a breach, violation or default)
under, or give to others any rights of termination, amendment, acceleration or
cancellation of, any material note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument to which any
of Seller Parties or any Affiliate is a party or is bound or by which any
Purchased Assets are bound or affected or (d) result in the creation of any
Encumbrance on any of the Purchased Assets in favor of any of Seller Parties
or their respective Affiliates or, to Seller Parties' knowledge, in favor of
any other party or person. As of the Effective Date and as of the Closing, no
Affiliate, other than Gould and EFI, is or will be a stockholder and/or debt
holder of Seller or has or will have any other rights against Seller or any of
the Purchased Assets.
1.04 Consents and Approvals. The execution and delivery of this
Agreement by Seller Parties do not, and the performance of this Agreement by
Seller Parties and the Affiliates will not, require any consent, approval,
authorization or other action by, or filing with or notification to, any court
or governmental or regulatory authority or any other third party (except
notice to, and the possible need to obtain the consent of, the United States
Defense Investigative Service with respect to the transfer of the Purchased
Assets by Seller to Purchaser Parties).
1.05 Financial Statements. Gould has delivered to Purchaser: (i)
Gould's audited balance sheet as of December 31, 1996 and audited statement of
operations, statement of cash flows and statement of shareholder's equity for
the year ended December 31, 1996; (ii) Gould's unaudited balance sheet as of
March 31, 1997 (the "Gould Balance Sheet"), and (iii) Gould's unaudited
statement of operations for the three (3) month period ended March 31, 1997
(all such financial statements of Gould are hereinafter collectively referred
to as the "Gould Financial Statements"). The Gould Financial Statements (a)
are in accordance with the books and records of Gould, (b) fairly present the
financial condition of Gould at the dates therein indicated and the results of
operations for the periods therein specified and (c) have been prepared in
accordance with GAAP applied on a consistent basis with prior periods. Gould
has no material debt, liability or obligation of any nature, whether accrued,
absolute, contingent or otherwise, and whether due or to become due, except
for: (i) those reflected in the Gould Financial Statements or described in
accordance with GAAP in the notes thereto; (ii) those that may have been
incurred after March 31, 1997, the date of the Gould Balance Sheet (the
"Balance Sheet Date") in the ordinary course of Gould's business consistent
with past practice; and (iii) those not required by GAAP to be reflected on
the Gould Balance Sheet. All reserves established by Gould and reflected in
the Gould Balance Sheet are reasonably adequate. At the Gould Balance Sheet
Date, there were no material loss contingencies (as such term is used in
Statement of Financial Accounting Standards No. 5 issued by the Financial
Accounting Standards Board in March 1975) which are not adequately provided
for in the Gould Balance Sheet as required by said Statement No. 5. Since the
Balance Sheet Date, there has been no material adverse change in Gould's
assets, liabilities, financial condition or results of operations, except for
any write offs by Gould with respect to Gould's investment in Seller and
Seller payables to Gould and financial obligations of Seller to Gould on
Gould's books and/or the taking of related reserves.
1.06 Solvency. Gould is Solvent and Gould presently believes, based on
recent due inquiry and reasonable assumptions, that it will continue to be
Solvent for at least four (4) years after the Closing Date notwithstanding its
performance of this Agreement and the consummation by Seller of the
transactions contemplated by the Asset Purchase Agreement. During the four
(4) year period ending on the Closing Date, none of Seller, any Seller
Subsidiary, any other affiliate of Seller or any Seller Party has initiated,
taken or attempted to initiate or take, or been the subject of, any Insolvency
Action or Insolvency Proceeding and no assets or properties of Seller, any
Seller Subsidiary or any other affiliate of Seller or of any Seller Party are
subject to any Insolvency Proceeding or Insolvency Action; provided, however,
that prior to or after Closing, EFI may be liquidated (but if EFI is so
liquidated, EFI and Gould covenant that no Insolvency Proceeding will be
involved in connection with such liquidation and that in connection with such
liquidation Gould shall succeed to, assume and be bound by all assets, rights,
liabilities and obligations of EFI, including without limitation those
relating to, arising under or created by this Agreement and any and all Seller
stock and debt and related rights and obligations with respect to Seller held
by or binding upon EFI). No writ of attachment, execution or similar process
has been ordered, executed or filed against any Seller Party or any Seller
Party's assets or properties that has not been satisfied or, to the best
knowledge of Seller Parties, against Seller or any of its assets or properties
that has not been satisfied. Gould has no reason to expect that any of the
aforementioned actions, or any similar action, will take place or be taken,
and Gould is not aware of any grounds for any of the aforementioned actions
or any like action. Neither Gould, nor to Gould's knowledge (except as noted
above regarding EFI's possible liquidation not involving an Insolvency
Proceeding), any of Seller, any other Seller Party, or any Affiliate, intends
to become the subject of any Insolvency Proceeding or Insolvency Action or
otherwise to file for protection under any bankruptcy or insolvency law.
Without limiting the effect of the last sentence of Recital A above, for
purposes of this Article I, the terms "Solvent", "Insolvency Proceeding" and
"Insolvency Action" shall have the same respective meanings given to such
terms in the Asset Purchase Agreement.
1.07 No Bankruptcy Proceedings. None of Seller Parties is presently
the subject of any Insolvency Action or Insolvency Proceeding; no decree or
order for relief has been entered in respect of any Seller Party, voluntarily
or involuntarily, under any bankruptcy or insolvency law; and, no receiver,
liquidator, sequestrator, trustee, custodian or other officer has been
appointed with respect to any Seller Party or any Seller Party's assets and
liabilities pursuant to any bankruptcy or insolvency law. No Seller Party has
made arrangements for any composition of its indebtedness nor made any
assignment for the benefit of creditors, and Gould has no reason to expect
that any of the aforementioned actions, or any similar action, will take place
or be taken.
1.08 Intracompany Agreements; Absence of Unwaived Breach. The Seller's
Disclosure Letter contains an accurate and complete list and description of
each Seller Contract between, among or involving Seller on the one hand and
any Seller Party or any Affiliate on the other hand, or otherwise involving,
or which may upon default involve, any of the Purchased Assets, including in
each case without limitation, any (oral or written) security agreement, deed
of trust, mortgage, indenture, lien, UCC-1 Financing Statement, guarantee,
indemnity agreement, loan agreement, credit facility, loan commitment, debt
instrument or promissory note between or among any of such parties
(collectively, "Intracompany Agreements"). A true and complete copy of each
of the Intracompany Agreements, as amended to date, has been delivered to
Purchaser by Gould or Seller. The Purchased Assets are, or as of immediately
prior to the Closing the Purchased Assets will be, free of any and all
Encumbrances created by any of the Intracompany Agreements or otherwise
arising in favor of any of Seller Parties or any of their respective
Affiliates. Except for any rights assigned under Section 3.06 hereof, upon
Closing no event or right will exist that gives or would give any Seller Party
or any Affiliate any right as to any of the Purchased Assets (except for
rights that will have been either waived, released or terminated effective as
of the Closing). The sale and transfer of the Purchased Assets and the
consummation of the other transactions and actions contemplated by the Asset
Purchase Agreement will not violate, breach or cause any default, event of
default, or event which with the passage of time would constitute a default,
under any of the Intracompany Agreements. Except for breaches, defaults or
events of default that will be waived, released or terminated effective as of
the Closing expressly to permit the sale and transfer of the Purchased Assets
and the consummation of the other transactions and actions contemplated by the
Asset Purchase Agreement, and except as to continuing rights or claims of any
of the Seller Parties or any Affiliates ("Continuing Gould Claims") none of
which will in any way cause any Loss to or result in any Liability or
obligation of either of Purchaser Parties or in any way restrict Purchaser
Parties' use of, or apply to, any of the Purchased Assets, neither Seller nor
any Seller Party nor any Affiliate is in breach of any of the Intracompany
Agreements and no event exists which, with the giving of notice or lapse of
time or both, would constitute a material breach, default or event of default
on the part of Seller, any Seller Party or any Affiliate as to, or of, any of
the Intracompany Agreements.
1.09 Accuracy of Seller Representations. To Gould's knowledge, all of
Seller's representations and warranties contained in Article III (as qualified
by Seller's Disclosure Letter) and in Article VII of the Asset Purchase
Agreement are true and correct as of the date of the Asset Purchase Agreement
and will be true and correct as of the Closing Date. Without limiting the
preceding sentence (and except as qualified by Seller's Disclosure Letter),
all of Seller's representations and warranties contained in Sections 3.05(a)
and (d) (No Conflicts) and Section 3.29 (Fair Consideration) of the Asset
Purchase Agreement, and all of Seller's representations and warranties in the
Asset Purchase Agreement to the extent they relate or apply to any Seller
Parties or any right of or obligation to any Seller Party or to any
Intracompany Agreement, will be true and correct as of immediately preceding
the Closing.
ARTICLE II
2.0 Indemnification
2.01 Definitions. Without limiting the last sentence in Recital A, for
purposes of this Article II, the terms "Loss" and "Purchaser Indemnities"
shall have the respective meanings given to such terms in Section 9.01 of the
Asset Purchase Agreement.
2.02 Indemnification by Gould. Gould agrees, pursuant to the terms and
conditions of this Article II, to indemnify Purchaser, SMIBV and each of the
other Purchaser Indemnitees against, and to hold Purchaser, SMIBV and each of
the other Purchaser Indemnitees harmless from, any and all Loss arising out
of:
(a) the failure of any representation or warranty of Gould
contained in this Agreement to be true and correct, or any fraud or willful
misconduct on the part of Gould;
(b) any breach, violation of, or other failure by Gould or EFI
to perform any of their respective covenants or obligations under this
Agreement or any breach, violation of, or other failure by JEC to honor the
JEC Inducement Agreement between Purchaser Parties and JEC entered into
concurrently herewith;
(c) the failure of any representation or warranty of Seller in
Article III (as qualified by Seller's Disclosure Letter) or Article VII of the
Asset Purchase Agreement to be true and correct as of the date of the Asset
Purchase Agreement and as of the Closing Date;
(d) the breach or violation by Seller of any covenant of Seller
under the Asset Purchase Agreement;
(e) any of the Excluded Assets or any of the Excluded
Liabilities or any other obligation or Liability of Seller not expressly
assumed by Purchaser under the Asset Purchase Agreement;
(f) the operation or management of the Storage Products Business
or the Purchased Assets by Seller at any time or times on or prior to the
Closing Date (including without limitation any and all Taxes arising out of,
or payable with respect to, Seller's business operations through the Closing
Date);
(g) Liability for (or any Liability applicable to Purchaser,
SMIBV or any other Purchaser Indemnitee as a result of) noncompliance with any
bulk sales, bulk transfer or similar laws applicable to the transactions
contemplated by the Asset Purchase Agreement;
(h) any demand, claim, debt, suit, cause of action, arbitration,
investigation or other proceeding made or asserted by Seller or by a
shareholder or creditor of Seller or by any of Seller Parties or by any
Affiliate or by any other person or by any receiver or trustee in bankruptcy
of Seller or of the property or assets of Seller, asserting that the transfer
of the Purchased Assets to Purchaser under the Asset Purchase Agreement
constitutes a fraudulent conveyance, fraudulent transfer or a preference under
any applicable state or federal law, including, but not limited to, the United
States Bankruptcy Code;
(i) any (A) Foreign Employee Liabilities; or (B) any amount paid
to or other Liability incurred with respect to any Mandated Employee; or (C)
any demand, claim, debt, suit, cause of action, arbitration, investigation or
other proceeding made or asserted by any Mandated Employee or any other
employee or independent contractor of Seller, any Seller Subsidiary or any
affiliate of Seller or any former employee or independent contractor of
Seller, any Seller Subsidiary or any affiliate of Seller, that relates in any
manner to any alleged, actual or constructive termination by Seller, any
Seller Subsidiary or any affiliate of Seller of such person's employment or
the services of such person, or that involves a claim of adverse employment
action, relocation, promotion, demotion, unequal pay or any other matter
relating to the employment of such person by Seller, any Seller Subsidiary or
any affiliate of Seller;
(j) any Continuing Gould Claims or any pursuit, collection or
enforcement thereof by any of Seller Parties; and/or
(k) termination by Seller, any Seller Subsidiary or any
affiliate of Seller of the employment of any of the Employees at any time
prior to, on or after the Closing Date, severance benefits related to any
Employee's termination of employment with Seller, any Seller Subsidiary or any
Seller affiliate, and any failure by Seller, any Seller Subsidiary or any
Seller affiliate to pay or withhold any Taxes payable with respect to the
employment by Seller, any Seller Subsidiary or any Seller affiliate of any
Employee or any failure by Purchaser to hire such Employee.
(l) the failure of the closing condition set forth in Section
8.02(bb) of the Asset Purchase Agreement to have been satisfied (whether or
not such condition was waived by Purchaser), or any failure of Purchaser and
SMIBV to have the Noninfringing Test Software Use Right from and after Closing
or any claim by any party that Purchaser's or SMIBV's use of the Test
Software, or other exercise or attempted exercise of the Noninfringing Test
Software Right, infringes any third party's Intellectual Property Rights or
any Loss or Liabilities associated with acquiring the Noninfringing Test
Software Use Right and related licenses from all parties whose Intellectual
Property Rights might be infringed by Purchaser's use of the Test Software in
connection with the Storage Products Business and, if such rights and licenses
cannot be acquired, all Loss related to developing or having developed new,
noninfringing Test Software for use in connection with the Storage Product
Business in replacement of the Test Software used by Seller or related to
hiring third parties to provide services equivalent to those Purchaser could
provide itself if it had a Noninfringing Test Software Use Right.
(m) any claim for fees or costs of, or amounts payable pursuant
to indemnification obligations to, Genesis, including without limitation the
$250,000 fee Seller owes to Genesis.
2.03 Procedures for Indemnification
(a) As used herein, an "Indemnified Party" means a Purchaser
Indemnitee seeking indemnification pursuant to Section 2.02 hereof. The
Indemnified Party agrees to give Gould prompt written notice of any event, or
any claim, action, suit, demand, assessment, investigation, arbitration or
other proceeding by or in respect of a third party (a "Third Party Claim") of
which it has knowledge, for which such Indemnified Party is entitled to
indemnification under this Article II. No delay on the part of an Indemnified
Party in giving Gould notice of a Third Party Claim shall relieve Gould from
any obligation hereunder unless (and then solely to the extent) that Gould is
materially prejudiced thereby.
(b) Gould will have the right, at its sole cost and expense, to
defend the Indemnified Party against the Third Party Claim with counsel of
Gould's choice that is reasonably satisfactory to the Indemnified Party so
long as: (i) Gould notifies the Indemnified Party in writing within ten (10)
days after the Indemnified Party has given notice of the Third Party Claim
that Gould intends to undertake such defense; (ii) Gould provides each
Indemnified Party with evidence reasonably acceptable to the Indemnified Party
that Gould will have the financial resources required to defend against the
Third Party Claim and fulfill its indemnification obligations hereunder; (iii)
the Third Party Claim involves only money damages and does not seek an
injunction or other equitable relief (provided, however, that Gould will have
the right, at its sole cost and expense, to defend the Indemnified Party
against any such Third Party Claim seeking both money damages and an
injunction with counsel of Gould's choice that is reasonably satisfactory to
the Indemnified Party so long as the Indemnified Party has the right through
its own counsel and at Gould's expense to participate in the injunction
portion of any such proceeding and has the right, directly or through its
counsel, to control all tactical decisions in opposing any such application
for an injunction); (iv) Gould conducts the defense of the Third Party Claim
actively and diligently; and (v) the counsel chosen by Gould does not have any
conflict of interest in representing the interests of the Indemnified Party.
(c) So long as Gould is conducting the defense of the Third
Party Claim in accordance with Section 2.03(b) above, (i) the Indemnified
Party may retain separate co-counsel and participate in the defense of the
Third Party Claim at its own cost and expense (except as provided in Section
2.03(d) below) and shall have the right to receive copies of all pleadings,
notices and communications with respect to the Third Party Claim to the extent
no attorney-client privilege is thereby waived, (ii) the Indemnified Party may
participate in settlement negotiations with respect to the Third Party Claim,
and (iii) Gould will not consent to the entry of any judgment or enter into
any settlement with respect to the Third Party Claim unless (A) the affected
Indemnified Party consents thereto in writing (which consent will not
unreasonably be withheld) or (B) the settlement, compromise or consent
includes an unconditional release of the affected Indemnified Party from all
liability with respect to the claim.
(d) If Gould does not elect to assume control of or otherwise
participate in the defense or settlement of any Third Party Claim, or if Gould
does so elect but any of the conditions in Section 2.03(b) above is or becomes
unsatisfied, or if Gould ceases at any time to actively defend the Third Party
Claim, then, (i) the Indemnified Party may defend against and consent to the
entry of any judgment or enter into any settlement with respect to the Third
Party Claim, provided, however, that Gould (A) shall have the right to receive
copies of all pleadings, notices and communications with respect to the Third
Party Claim so long as the receipt of such documents by Gould does not affect
any attorney-client privilege relating to the Indemnified Party, and (B) may
participate in settlement negotiations with respect to the Third Party Claim
and the Indemnified Party shall not enter into any settlement of the
Third-Party Claim without the prior written consent of Gould (which consent
shall not be unreasonably withheld), (ii) Gould will reimburse the Indemnified
Party promptly and periodically for all costs and expenses incurred in
defending against the Third Party Claim (including without limitation
reasonable attorneys' and experts fees and expenses and court and arbitration
costs), and (iii) Gould will remain responsible for any Loss the Indemnified
Party may suffer resulting from, arising out of, relating to or caused by the
Third Party Claim to the fullest extent provided in this Article II.
2.04 No Limitation Except Applicable Cap and Gould Basket.
(a) Gould's liability to indemnify Purchaser Parties and other
Indemnified Parties for Loss under this Article II shall not be subject to any
limitation except for the Gould Basket (as defined and described below) and
except for the Applicable Cap limitation (as defined and described below).
(b) The aggregate Loss recoverable by Indemnified Parties
(considered together as a group) against Gould under this Article II shall not
exceed: (i) $185,000,000 in the aggregate; (ii) $185,000,000 as to claims
arising in the First Contract Year; or (iii) $110,000,000 as to claims arising
in the Second Contract Year (collectively, the "Applicable Cap"). The "First
Contract Year" and the "Second Contract Year" are the two successive annual
periods ending on the first and on the second anniversaries of the Closing
Date, respectively. A claim shall be deemed to arise in a Contract Year if
any of the material facts giving rise to such claim, or any Loss resulting
from facts asserted in such claim, first occurred or were first suffered in
that Contract Year. Gould shall have no liability under this Article II for
any claims for indemnification hereunder first asserted at any time after the
fourth (4th) anniversary of the Closing Date (with respect to claims or Loss
relating to or arising from any fraud or willful misconduct on the part of
Gould) or first asserted at any time after the third (3rd) anniversary of the
Closing Date (as to any claims or Loss not relating to or arising from any
fraud or willful misconduct on the part of Gould) or for any claims not deemed
to arise (as defined above) in the First Contract Year or in the Second
Contract Year.
(c) Notwithstanding the foregoing provisions of this Section
2.04, the Applicable Cap shall not limit the amount of Gould's indemnity
liability for, and Purchaser and any other Indemnified Party shall be entitled
to recover from Gould, any and all Loss arising from: (i) fraud or willful
misconduct on the part of Gould; (ii) any Loss resulting from any Seller
Parties and/or any of their respective Affiliates (and/or any successors or
assigns of any thereof to the extent such successors or assigns take any
action whatsoever with respect to or in relation to any claim of any of the
Seller Parties against Seller ("Assigns")), instituting or causing to be
instituted any Insolvency Action or any Insolvency Proceeding relating to
Seller or any of Seller's assets at any time prior to the end of the Second
Contract Year; (iii) any rescission of or injunction against the purchase by
Purchaser Parties of the Purchased Assets pursuant to the Asset Purchase
Agreement occurring in the First Contract Year; or (iv) any Continuing Gould
Claims or the pursuit, collection or enforcement thereof by any Seller Party
and/or any of its Affiliates or any Assigns; provided, however, that in no
event will Losses in excess of the Applicable Cap for which Purchaser Parties
may be indemnified hereunder include special or consequential damages or lost
profits (but this proviso will not apply to limit the types of Loss
recoverable by any Purchaser Parties below the Applicable Cap).
(d) For purposes of this paragraph (d), the term "Encore Loss"
shall mean any Loss arising solely out of the matters described in Sections
2.02(c), (d), (e), (f), (g), (i), (k), (l) or (m) hereof or solely as a result
of a breach of Section 1.09 hereof. Gould shall not be required to provide
indemnification for any Encore Loss to Purchaser Parties and other Indemnified
Parties under this Article II unless and until the aggregate Encore Loss for
which one or more Indemnified Parties seeks indemnification hereunder exceeds
an aggregate of Five Hundred Thousand Dollars ($500,000) (the "Gould Basket"),
in which event Gould shall be liable to indemnify the Purchaser Parties and
the Indemnified Parties for all Encore Loss, including any Encore Loss within
the Gould Basket. There shall be no Gould Basket or other "basket" of any
amount with respect to any Loss other than an Encore Loss. Notwithstanding
the foregoing, Purchaser and any other Indemnified Party shall be entitled to
recover from Gould any Loss, regardless of the Gould Basket, arising from any
of the matters described in clauses (i), (ii), (iii) or (iv) of Section
2.04(c) above or arising from the failure of any representation or warranty of
Seller contained in Article VII of the Asset Purchase Agreement to be true and
correct as of the Closing or arising from the fraud or willful misconduct on
the part of Seller.
ARTICLE III
3.0 Covenants
3.01 Covenant Not to Compete.
(a) Non-Competition Covenant. Subject to the following
provisions of this Section 3.01, as a material inducement and consideration
for Purchaser Parties to enter into the Asset Purchase Agreement, for a period
of five (5) years from and after the Closing Date (such five (5) year period
of time being hereinafter called the "Restricted Period"), Gould will not,
within the Restricted Area (as defined below) carry on any business, or own
(in whole or in part), operate, advise, assist or lend funds to or invest
funds in, any person, firm, partnership, limited liability company, business,
corporation or other entity or enterprise that competes, in any material
respect, with the Storage Products Business (the "Restricted Business"). As
used herein, the term "Restricted Area" means any state of the United States
of America or any geographic area within any other country in which Purchaser
or SMIBV or their respective affiliates, directly or indirectly, at any time
carries on or engages in business. During the Restricted Period, Gould
further agrees not to interfere with, disrupt or attempt to disrupt or
otherwise adversely affect the relationship between Purchaser or SMIBV and any
third party, including without limitation any customer, supplier or employee
of Purchaser or SMIBV, with respect to the Restricted Business.
(b) Non-Solicitation. For a period of three (3) years after the
Closing Date, Gould shall not, directly or indirectly, solicit any Employee
hired by Purchaser or any affiliate of Purchaser to (i) become employed by
Gould or any Affiliate or (ii) terminate such Employee's employment with or
services to Purchaser or any affiliate of Purchaser.
(c) Injunctive Relief; Interpretation. In the event of a breach
of any of the covenants set forth in this Section 3.01, Purchaser and SMIBV
will each be entitled to an injunction against Gould restraining such breach
in addition to any other remedies available at law or in equity. In the event
that any covenant in this Section 3.01 is held to be invalid, illegal or
unenforceable by any court of competent jurisdiction or any other governmental
authority in any respect, it is agreed and understood that such covenant will
not be voided but rather will be construed to impose limitations upon Gould's
activities no greater than allowable under then applicable law.
(d) Gould. As used in this Section 3.01, the term "Gould"
includes, in addition to Gould itself, each person (as defined in the Asset
Purchase Agreement) 50% or more of the equity interests of which is
beneficially owned by Gould (within the meaning of the Securities Act) or that
is otherwise controlled by Gould (each a "Gould Subsidiary") and all
directors, officers, employees, stockholders, agents, subsidiaries and
Affiliates of Gould or any Gould Subsidiary or any other Seller Party acting
on behalf of, or at the direction of or with the direct or indirect assistance
of Gould, any Gould Subsidiary or any other Seller Party.
3.02 Further Actions to Avoid Breach of Intracompany Agreements.
Seller Parties will take all actions required on their part or on the part of
any Affiliate (including without limitation the filing of termination
statements with respect to all UCC-1 Financing Statements, and the termination
of any security agreements, describing or with respect to any of the Purchased
Assets), and will cause Seller to take all actions on its part required, to
ensure that: (i) no breach or default under any of the Intracompany
Agreements will result from execution or performance of the Asset Purchase
Agreement or any of the transactions contemplated thereby; (ii) as of the
Closing, none of the Purchased Assets shall be encumbered by any Encumbrance
arising under any of the Intracompany Agreements or be subject to any other
interest or right of any Seller Party (or of any Affiliate) created by any of
the Intracompany Agreements or otherwise; and (iii) title to all the Purchased
Assets shall, when transferred from Seller to Purchaser Parties at the
Closing, be free and clear of any right or interest of any Seller Party or of
any Affiliate or any Gould Subsidiary.
3.03 Further Assurances as to Continued Seller Solvency. Gould shall,
except as otherwise consented to in writing by Purchaser:
(i) take all actions (including without limitation making
continued capital infusions in Seller, defending, discharging or seeking
dismissal of third party claims or suits against Seller or the Purchased
Assets, forgiving or restructuring indebtedness owed by Seller to any Seller
Party or Gould Subsidiary, terminating or modifying (or causing to be
terminated or modified) any Intracompany Agreements and releasing or
terminating any Encumbrances on any of the Purchased Assets created by any of
the Intracompany Agreements or otherwise), and
(ii) forbear (and cause EFI to forbear) from causing Seller, any
successors or assigns of Seller, or any of the Purchased Assets from becoming
involved in or subject to any Insolvency Action or Insolvency Proceeding and
from otherwise taking any actions to enforce any rights or remedies of Seller
Parties with respect to any claims any Seller Party or any Affiliate may have
against Seller or against or with respect to the Purchased Assets,
in each case (i) and (ii) as required to ensure that (a) Seller is Solvent as
of the Effective Date and at the Closing Date; and (b) Seller (1) remains
Solvent and (2) does not become the subject of any Insolvency Action or any
Insolvency Proceeding, in each case (b)(1) and (b)(2) for a period of one (1)
year after the Closing Date. Without limiting the foregoing in any way, Gould
and EFI shall not, except as otherwise consented to in writing by Purchaser
(which consent will not unreasonably be withheld), for a period of one (1)
year after the Closing Date, institute or cause Seller to become involved in
any Insolvency Action or any Insolvency Proceeding, including without
limitation by institution of an involuntary proceeding in bankruptcy or by
voting as a stockholder, or causing any representatives of Gould on Seller's
Board of Directors to vote as a director, in favor of any proposal to
liquidate, wind up or dissolve Seller.
3.04. Fairness of Consideration. Gould represents, and each of Seller
Parties hereby acknowledges and stipulates, for itself and its respective
Affiliates, as follows and agrees never to assert to the contrary at any time
or in any circumstances: (i) the consideration paid and agreements made by
Purchaser Parties under the Asset Purchase Agreement for the Purchased Assets
represent fair and reasonably equivalent consideration for the Purchased
Assets and all other assignments and agreements made by Seller under the Asset
Purchase Agreement and the Ancillary Agreements, (ii) Seller is not entering
into the Asset Purchase Agreement or any Ancillary Agreement with the intent
to defraud, delay or hinder its creditors and the consummation of the
transactions contemplated by the Asset Purchase Agreement and the Ancillary
Agreements will not have any such effect; and (iii) the transactions
contemplated in the Asset Purchase Agreement or any Ancillary Agreements will
not give rise to any right or ability of any Seller Party, any Gould
Subsidiary or any Affiliate, or to Gould's knowledge, of any other creditor or
shareholder of Seller, to assert any claim whatsoever against any Purchaser
Party or any of the Purchased Assets in the hands of any Purchaser Party or
any Purchaser Party's successors and assigns following the Closing or to in
any way challenge the sale of the Purchased Assets to Purchaser Parties under
the Asset Purchase Agreement.
3.05 Opinion of Counsel. At the Closing, counsel to Seller Parties will
provide a legal opinion as to the truth of the statements in Sections 1.02,
1.03 and 1.04 as respects each of the Seller Parties and as to the
enforceability of all provisions of this Agreement against Gould and EFI
(except Section 4.02 and Section 4.05 hereof, the enforceability of which can
be excluded from any such opinion, and except for standard exceptions as to
statutory or public policy limitations applicable to the extent the scope of
the Restricted Business exceeds, or the duration of the Non-Competition
Covenant in Section 3.01(a) is in excess of, such scope or duration as are
deemed reasonably necessary to protect Purchaser Parties' reasonable
interests).
3.06 Assignment of Gould License Agreement. Gould hereby represents and
warrants to Purchaser Parties that Gould is the permitted successor or assign
of all rights of Gould, Inc., a Delaware corporation, under that certain
Intellectual Property License Agreement among Gould, Inc., Seller and Encore
Computer U.S., Inc. and that certain Escrow, Access and Training Agreement
among the same parties, each dated as of January 28, 1991, as amended through
Closing (collectively, the "Gould License Agreements"). Gould further
represents that no sublicenses have been granted nor have any items,
derivatives or works protectible by Intellectual Property Rights been created,
pursuant to any rights granted under the Gould License Agreements. Gould
shall, upon receipt of written request from Purchaser, assign to Purchaser
Parties, effective as of the Closing Date, all right, title and interest of
Gould (but none of Gould's obligations or Liabilities, if any) arising under,
relating to or granted or imposed by the Gould License Agreements, including
without limitation in or to any of the Purchased Assets. Gould shall, upon
receipt of written request from Purchaser, take all further actions required
to cause Gould's non-exclusive technology license rights, rights to obtain
source code, rights to access and training and other rights arising under,
relating to or granted by the Gould License Agreements to be assigned to
Purchaser Parties effective as of the Closing Date, such that Purchaser
Parties shall be able to exercise all rights Gould was entitled to exercise
under or as a result of its entry into the Gould License Agreements as if
Purchaser Parties were the original parties thereto. A true and complete copy
of the Gould License Agreements are attached hereto as Appendix A.
ARTICLE IV
4.0 General Release; Covenant Not to Sue; Waiver of Defenses.
4.01 General Release by Seller Parties. Each of Seller Parties
does hereby, for itself and its respective Affiliates, officers, directors,
stockholders, employees, agents, legal successors and assigns (collectively,
the "Releasing Parties"), release and absolutely and forever discharge each of
Purchaser Parties and all affiliates (as defined under the Securities Act but
excluding shareholders of Purchaser) thereof and each of the respective
shareholders, officers, directors, employees, agents, attorneys, legal
successors and assigns of any of Purchaser Parties or any affiliate (as
defined immediately above) thereof (collectively, the "Released Parties"), of
and from any and all claims, demands, damages, debts, liabilities, accounts,
reckonings, obligations, costs, expenses, liens, actions and causes of action
of every kind and nature whatsoever, whether now known or unknown, suspected
or unsuspected, which the Releasing Parties now have, own or hold or at any
time heretofore ever had, owned or held or could, shall or may hereafter have,
own or hold against the Released Parties (or any of them) based upon or
arising out of any matter, cause, fact, thing, act or omission whatsoever
occurring or existing at any time to and including the date hereof, or arising
on or after the date hereof, in connection with the facts, circumstances and
events relating to the Purchased Assets or to any of the transactions
contemplated by the Asset Purchase Agreement or any of the Ancillary
Agreements or any of the Intracompany Agreements or any Liability or
obligation thereunder or any of the Continuing Gould Claims or any pursuit,
collection or enforcement thereof by any of Seller Parties (collectively,
together with the enumerated examples below, the "Released Matters"),
including without limitation any claim or allegation by any of the Releasing
Parties or any other party that: (i) any of the Released Parties is on any
theory liable for any of the debts or obligations or Liabilities of Seller not
expressly assumed by Purchaser under the Asset Purchase Agreement (including
without limitation any Liability arising under any of the Intracompany
Agreements or any of the Continuing Gould Claims); (ii) any of the Released
Parties is on any theory liable to any of the Releasing Parties for any claim,
cause of action, loss, damages or other amount whatsoever, as a result of
Purchaser Parties' purchase of the Purchased Assets; (iii) any of the
Releasing Parties has any right in, claim as to or Encumbrance on or with
respect to, any of the Purchased Assets; or (iv) the purchase of the Purchased
Assets under the Asset Purchase Agreement constituted a fraudulent conveyance,
a fraudulent transfer, or a preference or was otherwise improper, unlawful or
violative of any rights of any of the Releasing Parties under the Intracompany
Agreements or otherwise (all of which foregoing matters are hereinafter
referred to as and included within the "Released Matters"). It is the
intention of Seller Parties that the release set forth above in this Section
4.01 shall be effective as a full and final accord and satisfaction and
general release by each of the Releasing Parties of and from all claims now
existing or hereafter arising against any of the Released Parties relating to
any of the Released Matters.
4.02 Waiver of Unknown Claims. In furtherance of the intentions set
forth herein, each of Seller Parties acknowledges, for itself and each of the
other Releasing Parties, that it is familiar with Section 1542 of the Civil
Code of the State of California (and similar laws of the States of Ohio and
Florida and of Japan), which provides as follows:
"A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the debtor."
Each of Seller Parties, for itself and each of the other Releasing Parties,
hereby waives and relinquishes any right or benefit which it has or may have
under Section 1542 of the Civil Code of the State of California or any similar
provision of the statutory or nonstatutory law of any other jurisdiction
(including without limitation the States of Ohio and Florida and of Japan), to
the full extent that it may lawfully waive all such rights and benefits
pertaining to the subject matter of this Agreement. In connection with such
waiver and relinquishment, each of Seller Parties acknowledges that it is
aware that it or its attorneys or accountants may hereafter discover claims or
facts in addition to or different from those which it now knows or believes to
exist with respect to the subject matter of this Agreement or of the Asset
Purchase Agreement or the Released Parties, but that it is its intention
hereby fully, finally and forever to settle and release, for itself and each
of the other Releasing Parties, all of the Released Matters which now exist,
may exist or heretofore have existed or which arise on or after the date
hereof as to all of the Released Parties. In furtherance of this intention,
the release herein given by Seller Parties for themselves and each of the
other Releasing Parties shall be and remain in full force and effect as a full
and complete release, and operate as a full release of claims hereafter
arising, notwithstanding the discovery or existence of any such additional or
different claims or facts.
4.03 Authorized Release. Each of Seller Parties warrants and
represents that it is the sole and lawful owner of all right, title and
interest in and to all of the respective Released Matters as to which it is
the Releasing Party and that it has not heretofore voluntarily, by operation
of law or otherwise, assigned or transferred (or purported to assign or
transfer) to any person whomsoever any Released Matter or any part or portion
thereof of any claim, demand or right against any Released Party. Seller
Parties shall indemnify and hold harmless the Released Parties from and
against any Loss based on, or arising in connection with or out of any such
assignment or transfer (or purported or claimed assignment or transfer).
4.04 Covenant Not to Sue. Each of Seller Parties hereby agrees not to
sue or otherwise bring any claim against any of the Released Parties on or
with respect to any of the Released Matters or against or with respect to any
of the Purchased Assets, in each case whether by way of complaint,
cross-complaint, cross claim, set off, defense or by any other means or manner
in any court, other tribunal or otherwise. Each of Seller Parties hereby
further agrees not to take any action against or with respect to any of the
Purchased Assets utilizing any of Seller Parties' rights as a creditor,
secured creditor or stockholder, including without limitation any foreclosure
action or any action permitted to be taken by a secured party under the
Uniform Commercial Code as adopted in any jurisdiction or any action permitted
to be taken by a lienholder or judgment creditor under applicable state laws
(including without limitation, attachment and garnishment actions and
imposition of or execution upon any lien).
4.05 KNOWING AND EXPLICIT WAIVERS. THE SELLER PARTIES ACKNOWLEDGE THAT
PURCHASER PARTIES ARE RELYING ON THIS AGREEMENT IN ENTERING INTO THE ASSET
PURCHASE AGREEMENT AND THE ANCILLARY AGREEMENTS AND THE TRANSACTIONS
CONTEMPLATED THEREBY. SELLER PARTIES AND/OR THEIR RESPECTIVE AFFILIATES ARE
PRINCIPAL STOCKHOLDERS AND/OR DEBT HOLDERS OF SELLER AND ACCORDINGLY SELLER
PARTIES REPRESENT THAT THEY FULLY UNDERSTAND THE BUSINESS, PROSPECTS, CASH
POSITION, LIABILITIES, OPERATING RESULTS AND FINANCIAL CONDITION OF SELLER AND
THE PROVISIONS OF THE ASSET PURCHASE AGREEMENT AND THE ANCILLARY AGREEMENTS.
SELLER PARTIES HAVE ENTERED INTO THIS AGREEMENT BASED SOLELY ON THEIR
INDEPENDENT KNOWLEDGE OF THESE FACTS RELATING TO SELLER AND SELLER PARTIES
ACCORDINGLY ASSUME FULL RESPONSIBILITY FOR OBTAINING ANY FURTHER INFORMATION
WITH RESPECT TO SELLER OR THE CONDUCT OF SELLER'S BUSINESS. SELLER PARTIES
REPRESENT THAT, AS BETWEEN SELLER PARTIES AND PURCHASER PARTIES, SELLER
PARTIES ARE NOW AND WILL FOREVER REMAIN RESPONSIBLE FOR ASCERTAINING THE
FINANCIAL CONDITION OF SELLER. EACH OF SELLER PARTIES WAIVES ANY DUTY ON THE
PART OF ANY OF THE RELEASED PARTIES TO DISCLOSE TO IT, AND AGREES THAT IT IS
NOT RELYING ON OR EXPECTING ANY OF THE RELEASED PARTIES TO DISCLOSE TO IT, ANY
FACT NOW OR HEREAFTER KNOWN BY ANY OF THE RELEASED PARTIES RELATING TO THE
OPERATION OR CONDITION OF SELLER. SELLER PARTIES WAIVE ANY RIGHT TO ASSERT
AGAINST ANY PURCHASER PARTIES ANY DEFENSES OR SET-OFF RIGHTS SELLER HAS OR MAY
ACQUIRE AGAINST ANY OF PURCHASER PARTIES. SELLER PARTIES HEREBY WAIVE, FOR
THEMSELVES AND EACH AFFILIATE, ANY AND ALL DEFENSES BASED UPON OR ARISING BY
REASON OF (A) ANY DISABILITY OR OTHER DEFENSE OF SELLER OR ANY OTHER PERSON,
(B) THE CESSATION, OR ANY LIMITATION, FROM ANY CAUSE WHATSOEVER, OF ANY
LIABILITY OF SELLER OR ANY PORTION THEREOF, (C) ANY LACK OF AUTHORITY OF ANY
AGENT OR OTHER PERSON ACTING OR PURPORTING TO ACT ON BEHALF OF SELLER, (D) ANY
DEFECT IN THE FORMATION OR OTHER CORPORATE FORMALITIES OF SELLER, (E) THE
APPLICATION BY SELLER OF THE PURCHASE PRICE OR ANY PORTION THEREOF FOR
PURPOSES OTHER THAN THE PURPOSES REPRESENTED TO, OR INTENDED OR UNDERSTOOD BY
SELLER PARTIES OR ANY AFFILIATE, INCLUDING WITHOUT LIMITATION THE DISTRIBUTION
BY SELLER OF ANY PORTION OF THE PURCHASE PRICE TO ANY CREDITOR OR SHAREHOLDER
OTHER THAN SELLER PARTIES; (F) ANY ACT OR OMISSION BY SELLER OR PURCHASER
PARTIES THAT DIRECTLY OR INDIRECTLY, BY OPERATION OF LAW OR OTHERWISE, RESULTS
IN OR AIDS THE DISCHARGE OF SELLER, ANY LIABILITIES OF SELLER OR ANY CLAIM OR
ENCUMBRANCE ON OR WITH RESPECT TO ANY OF THE PURCHASED ASSETS; (G) ANY
MODIFICATION OF SELLER'S OBLIGATIONS TO ANY PURCHASER PARTY OR ANY PURCHASER
INDEMNITEE IN ANY FORM WHATSOEVER, INCLUDING BY AMENDMENT TO THE ASSET
PURCHASE AGREEMENT OR ANY ANCILLARY AGREEMENT OR ASSERTION, PAYMENT OR
SETTLEMENT OF ANY CLAIM FOR INDEMNIFICATION BROUGHT THEREUNDER OR ANY OTHER
RENEWAL, EXTENSION, ACCELERATION, INCREASE, MODIFICATION, OR OTHER CHANGE IN
TIME FOR PAYMENT OF SELLER'S OBLIGATIONS OR LIABILITIES TO EITHER OF THE
PURCHASER PARTIES UNDER THE ASSET PURCHASE AGREEMENT OR OTHERWISE OR (H) AN
ELECTION OF REMEDIES BY ANY OF THE RELEASED PARTIES, EVEN THOUGH THAT ELECTION
OF REMEDIES HAS TERMINATED SELLER PARTIES' SECURITY INTEREST IN OR OTHER
RIGHTS WITH RESPECT TO THE PURCHASED ASSETS OR OTHER RIGHTS. EACH OF SELLER
PARTIES REPRESENTS AND WARRANTS THAT IT IS FULLY AWARE OF THE SPECIFIC
PROVISIONS OF DIVISION THREE, PART 4, TITLE 13 OF THE CALIFORNIA CIVIL CODE
("CCC"), INCLUDING SECTIONS 2787 THROUGH 2856 THEREOF, AND OF SECTIONS 580a,
580b, 580d AND 726 OF THE CALIFORNIA CODE OF CIVIL PROCEDURE ("CCP") AND
SIMILAR PROVISIONS UNDER FLORIDA, OHIO AND OTHER STATES' LAWS; EACH OF SELLER
PARTIES NEVERTHELESS WAIVES, FOR ITSELF AND EACH AFFILIATE, AND ANY ALL
DEFENSES ARISING UNDER ANY OF SUCH STATUES OR ANY OTHER DEFENSES THAT ARE OR
MAY BE AVAILABLE TO GUARANTORS OR SECURED PARTIES UNDER ANY APPLICABLE LAW,
INCLUDING WITHOUT LIMITATION THOSE ARISING BY VIRTUE OF ANY ACT OR OMISSION OF
SELLER OR ANY RELEASED PARTY OR OTHER PERSON INCLUDING WITHOUT LIMITATION
THOSE LISTED IN THE ABOVE SECTIONS OF THE CCC AND CCP. EACH OF SELLER PARTIES
FURTHER REPRESENTS AND WARRANTS THAT (A) ITS WAIVERS HEREIN OF ALL RIGHTS,
BENEFITS, PROTECTIONS AND DEFENSES THAT MAY BE AVAILABLE UNDER OR BY VIRTUE OF
THE ABOVE LISTED SECTIONS OF THE CCC AND CCP AND ALL OTHER WAIVERS HEREIN ARE
EXPLICIT, KNOWING WAIVERS, (B) IT HAS EITHER OBTAINED THE ADVICE OF COUNSEL OR
HAS HAD THE OPPORTUNITY TO OBTAIN SUCH ADVICE IN CONNECTION WITH THE TERMS AND
PROVISIONS OF THIS AGREEMENT, (C) BY EXECUTING THIS AGREEMENT, IT IS WAIVING
CERTAIN RIGHTS AS OTHERWISE SET FORTH HEREIN TO WHICH IT MAY OTHERWISE BE
ENTITLED BY LAW, AND (D) IT IS NOT RELYING UPON ANY STATEMENTS OR
REPRESENTATIONS OF ANY OF THE RELEASED PARTIES OR OF SELLER AND THAT SUCH
STATEMENTS OR REPRESENTATIONS, IF ANY, ARE OF NO FORCE OR EFFECT AND ARE FULLY
SUPERSEDED BY THIS AGREEMENT. EACH OF THE RELEASING PARTIES FURTHER WAIVES
ALL RIGHTS AND DEFENSES THAT SUCH RELEASING PARTY MAY HAVE BECAUSE THE
SELLER'S OBLIGATIONS ARE SECURED BY REAL PROPERTY. THIS MEANS, AMONG OTHER
THINGS: (A) PURCHASER PARTIES MAY COLLECT FROM ANY OF SELLER PARTIES ANY
AMOUNTS DUE UNDER OR WHICH ARE RECOVERABLE BECAUSE OF A BREACH OF THIS
AGREEMENT WITHOUT FIRST FORECLOSING ON ANY REAL OR PERSONAL PROPERTY
COLLATERAL OF SELLER; (B) IF THE PURCHASER PARTIES FORECLOSE ON ANY REAL
PROPERTY COLLATERAL PLEDGED BY THE SELLER: (i) THE AMOUNT OF THE OBLIGATIONS
MAY BE REDUCED ONLY BY THE PRICE FOR WHICH THAT COLLATERAL IS SOLD AT THE
FORECLOSURE SALE, EVEN IF THE COLLATERAL IS WORTH MORE THAN THE SALE PRICE;
(ii) PURCHASER PARTIES MAY COLLECT SUCH AMOUNTS FROM THE SELLER PARTIES EVEN
IF PURCHASER PARTIES, BY FORECLOSING ON REAL PROPERTY COLLATERAL, HAVE
DESTROYED ANY RIGHT SELLER PARTIES MAY HAVE TO COLLECT FROM PURCHASER PARTIES
OR SELLER. THIS IS AN UNCONDITIONAL AND IRREVOCABLE WAIVER OF ANY RIGHTS AND
DEFENSES SELLER PARTIES MAY HAVE BECAUSE SELLER'S OBLIGATIONS ARE SECURED BY
REAL PROPERTY, INCLUDING WITHOUT LIMITATION ANY RIGHTS OR DEFENSES BASED UPON
SECTION 580a, 580b, 580d, OR 726 OF THE CCP.
ARTICLE V
5.0 General Provisions
5.01 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
5.02 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. 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 greatest extent possible.
5.03 Entire Agreement. This Agreement, along with the defined terms in
the Asset Purchase Agreement used herein, constitute the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersede all prior agreements and undertakings with respect to the
subject matter hereof, both written and oral.
5.04 Assignment. This Agreement shall not be assigned or delegated by
Seller Parties without the prior written consent of Purchaser Parties.
Purchaser Parties shall be free to assign their rights hereunder and such
rights will inure to all of the Released Parties and to the respective
successors, assigns and affiliates of any of the Released Parties.
5.05 Amendment; Waiver. This Agreement may not be amended or modified
except by an instrument in writing signed by Gould and Purchaser (which
instrument will bind EFI and SMIBV). Waiver of any term or condition of this
Agreement shall only be effective if in writing and shall not be construed as
a waiver of any subsequent breach or waiver of the same term or condition, or
a waiver of any other term or condition of this Agreement.
5.06 Governing Law; Jurisdiction and Venue. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State
of California applicable to contracts executed in and to be performed by
residents of California within that State, without reference to the conflict
of laws provisions thereof. As to matters arising out of or relating to this
Agreement, Gould and EFI consent to submit to the jurisdiction of any federal
or state court located in the State of California and agree not to object to
venue in the federal or state courts located in Santa Clara County, California.
5.07 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
5.08 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to
each party at the addresses indicated for such party on the signature page
hereof (or at such other address for a party as shall be specified by like
notice).
5.09 Termination. In the event that the Asset Purchase Agreement is
terminated by Purchaser in accordance with its terms, this Agreement shall
then terminate concurrently.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed
as of the date first written above by their respective officers thereunto duly
authorized.
GOULD ELECTRONICS INC. SUN MICROSYSTEMS, INC.
By: By:
Name: Name:
Title: Title:
Address for Notice: Address for Notice:
___________________________ __________________________
___________________________ __________________________
___________________________ __________________________
EFI INTERNATIONAL, INC. SUN MICROSYSTEMS INTERNATIONAL, B.V.
By: By:
Name: Name:
Title: Title:
Address for Notice: Address for Notice:
___________________________ __________________________
___________________________ __________________________
___________________________ __________________________
[GOULD/EFI INDUCEMENT AGREEMENT SIGNATURE PAGE]
APPENDIX A
Copy of
Gould License Agreements
dated January 28, 1991
-20-
Exhibit A
JEC INDUCEMENT AGREEMENT
This JEC Inducement Agreement (this "Agreement") is made and entered into
effective as of August __, 1997 (the "Effective Date") by and between Japan
Energy Corporation, a Japanese corporation ("JEC"), on the one hand, and Sun
Microsystems, Inc., a Delaware corporation ("Purchaser") and Sun Microsystems
International, B.V., a Netherlands corporation ("SMIBV"), on the other hand.
Purchaser and SMIBV are hereinafter sometimes collectively referred to as
"Purchaser Parties". JEC, EFI International, Inc., a Delaware corporation
("EFI"), and Gould Electronics Inc., an Ohio corporation ("Gould") are
hereinafter sometimes collectively referred to as "Seller Parties". The term
"Affiliates" shall mean any and all "Affiliates" (as defined for purposes of
U.S. federal securities laws) of any of Seller Parties, and all successors and
assigns of any of the Seller Parties or any of their respective Affiliates.
R E C I T A L S
A. Purchaser, SMIBV and Encore Computer Corporation, a Delaware corporation
("Seller") have, concurrently herewith, entered into a certain Asset Purchase
Agreement dated as of July 16, 1997 (the "Asset Purchase Agreement") pursuant
to which Seller has agreed to sell to Purchaser Parties, and Purchaser Parties
have agreed to purchase, certain assets associated with Seller's Storage
Products Business. JEC has reviewed, and understands, the provisions of the
Asset Purchase Agreement. All terms (whether in upper or lower case text or
any combination thereof) defined in the Asset Purchase Agreement will have the
same meanings assigned to such terms in the Asset Purchase Agreement, except
as otherwise expressly defined herein; provided, however, that for purposes of
this Agreement the term "material", when used herein with reference to any of
Seller Parties or any Affiliate, shall mean any fact, event, action or failure
to act, or other circumstance with respect to, involving or affecting any of
Seller Parties or any Affiliate that: (i) involves in excess of $350,000 or
that results or is reasonably likely to result in a financial loss of at least
$350,000, (ii) involves any of the Purchased Assets or any Encumbrance on any
of the Purchased Assets or (iii) is otherwise material.
B. JEC's subsidiaries, Gould and EFI, are principal stockholders and/or
debt holders of Seller as of the Effective Date and no other Affiliate is a
stockholder or debt holder of Seller.
C. As a material inducement and consideration for Purchaser Parties to
enter into the Asset Purchase Agreement and to pay the Purchase Price provided
for therein, and as a material condition precedent to Purchaser Parties'
obligations to consummate the transactions contemplated by the Asset Purchase
Agreement, JEC has agreed to enter into and to perform its obligations under
this Agreement and to be bound by the terms of this Agreement.
NOW THEREFORE, as a material inducement to Purchaser Parties to enter into, to
consummate the transactions contemplated by, the Asset Purchase Agreement, and
in consideration of the mutual agreements and promises made herein, the
parties hereto, intending to be legally bound, hereby agree as follows:
ARTICLE I
1.0 Representations and Warranties. JEC hereby represents and warrants to
purchaser Parties that all statements in the following subparagraphs of this
Section 1.0 are true and correct:
1.01 Organization and Good Standing. JEC is a corporation duly
organized, validly existing and in good standing under the laws of Japan and
has the corporate power and authority to own, operate and lease its properties
and to carry on its business as now conducted and as proposed to be conducted.
1.02 Authorization and Validity. JEC has all necessary right,
corporate power, legal capacity and authority to enter into, execute and
deliver this Agreement and to perform all of its covenants, agreements and
obligations under this Agreement. This Agreement has been duly executed and
delivered by JEC and will constitute a legal, valid and binding obligation of
JEC enforceable against it in accordance with its terms. The execution,
delivery and performance by JEC of this Agreement has been duly and validly
approved and authorized by all necessary corporate action on the part of JEC.
1.03 No Conflict. The execution and delivery of this Agreement by JEC
and the performance of this Agreement by JEC do not and will not (a) breach,
violate or conflict with the certificate of incorporation or bylaws or other
applicable charter documents of JEC, in each case as amended to date, (b)
conflict with or violate any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award applicable to JEC, (c) result in
any breach or violation of, or constitute a default (or event which with the
giving of notice or lapse of time, or both, would become a breach, violation
or default) under, or give to JEC or others any rights of termination,
amendment, acceleration or cancellation of, any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument to which JEC is a party or is bound or by which any Purchased
Assets are bound or affected or (d) result in the creation of any Encumbrance
on any of the Purchased Assets in favor of JEC. As of the Effective Date and
as of the Closing, no Affiliate, other than Gould and EFI, is or will be a
stockholder and/or debt holder of Seller or has or will have any other rights
against Seller or any of the Purchased Assets.
1.04 Consents and Approvals. The execution and delivery of this
agreement by JEC do not, and the performance of this Agreement by JEC will
not, require any consent, approval, authorization or other action by, or
filing with or notification to, any court or governmental or regulatory
authority or any other third party.
1.05 Intracompany Agreements; Absence of Unwaived Breach. The
Purchased Assets are, or as of immediately prior to the Closing the Purchased
Assets will be, free of any and all Encumbrances or other rights in favor of
JEC. No event or right exists that gives or would give JEC any right as to
any of the Purchased Assets (except for rights that were either waived,
released or terminated effective as of the Closing) or any right to pursue any
claim against Purchaser Parties after the Closing. The sale and transfer of
the Purchased Assets and the consummation of the other transactions and
actions contemplated by the Asset Purchase Agreement will not violate, breach
or cause any default, event of default, or event which with the passage of
time would constitute a default, under any agreement or understanding to which
JEC and Seller are parties.
ARTICLE II
2.0 Covenants
2.01 Covenant Not to Compete.
(a) Non-Competition Covenant. Subject to the following
provisions of this Section 2.01, as a material inducement and consideration
for Purchaser Parties to enter into the Asset Purchase Agreement, for a period
of five (5) years from and after the Closing Date (such five (5) year period
of time being hereinafter called the "Restricted Period"), JEC will not,
within the Restricted Area (as defined below) carry on any business, or own
(in whole or in part), operate, advise, assist or lend funds to or invest
funds in, any person, firm, partnership, limited liability company, business,
corporation or other entity or enterprise that competes, in any material
respect, with the Storage Products Business (the "Restricted Business"). As
used herein, the term "Restricted Area" means any state of the United States
of America or any geographic area within any other country in which Purchaser
or SMIBV or their respective affiliates, directly or indirectly, at any time
carries on or engages in business. During the Restricted Period, JEC further
agrees not to interfere with, disrupt or attempt to disrupt or otherwise
adversely affect the relationship between Purchaser or SMIBV and any third
party, including without limitation any customer, supplier or employee of
Purchaser or SMIBV, with respect to the Restricted Business.
(b) Non-Solicitation. For a period of three (3) years after the
Closing Date, JEC shall not, directly or indirectly, solicit any Employee
hired by Purchaser or any affiliate of Purchaser to (i) become employed by JEC
or any Affiliate or (ii) terminate such Employee's employment with or services
to Purchaser or any affiliate of Purchaser.
(c) Injunctive Relief; Interpretation. In the event of a breach
of any of the covenants set forth in this Section 2.01, Purchaser and SMIBV
will each be entitled to an injunction against JEC restraining such breach in
addition to any other remedies available at law or in equity. In the event
that any covenant in this Section 2.01 is held to be invalid, illegal or
unenforceable by any court of competent jurisdiction or any other governmental
authority in any respect, it is agreed and understood that such covenant will
not be voided but rather will be construed to impose limitations upon JEC's
activities no greater than allowable under then applicable law.
(d) JEC. As used in this Section 2.01, the term "JEC" includes
in addition to JEC itself, each person (as defined in the Asset Purchase
Agreement) 50% or more of the equity interests of which is beneficially owned
by JEC (within the meaning of the Securities Act) or that is otherwise
controlled by JEC (each a "JEC Subsidiary") and all directors, officers,
employees, stockholders, agents, subsidiaries and Affiliates of JEC or any JEC
Subsidiary acting on behalf of, or at the direction of or with the direct or
indirect assistance of JEC or any JEC Subsidiary.
2.02 Further Actions to Avoid Breach of Intracompany Agreements. JEC
will take all actions required on its part (including without limitation the
filing of termination statements with respect to all UCC-1 Financing
Statements, and the termination of any security agreements, describing or with
respect to any of the Purchased Assets) to ensure that (i) no breach or
default under any agreement between JEC and Seller will result from execution
or performance of the Asset Purchase Agreement or any of the transactions
contemplated thereby; (ii) as of the Closing, none of the Purchased Assets
shall be encumbered by any Encumbrance arising under any agreement between JEC
and Seller or be subject to any other interest or right of JEC created by any
agreement between JEC and Seller; and (iii) title to all the Purchased Assets
shall, when transferred from Seller to Purchaser Parties at Closing, be free
and clear of any right or interest of JEC or any JEC Subsidiary.
2.03 Fairness of Consideration. JEC hereby acknowledges and stipulates
as follows and agrees never to assert to the contrary at any time or in any
circumstances: (i) the consideration paid and agreements made by Purchaser
Parties under the Asset Purchase Agreement for the Purchased Assets represent
fair and reasonably equivalent consideration for the Purchased Assets, (ii)
Seller is not entering into the Asset Purchase Agreement or any Ancillary
Agreement with the intent to defraud, delay or hinder its creditors and the
consummation of the transactions contemplated by the Asset Purchase Agreement
and the Ancillary Agreements will not have any such effect; and (iii) the
transactions contemplated in the Asset Purchase Agreement or any Ancillary
Agreements will not give rise to any right or ability of JEC or any JEC
Subsidiary to assert any claim whatsoever against any Purchaser Party or any
of the Purchased Assets in the hands of any Purchaser Party or any Purchaser
Party's successors and assigns following the Closing or to in any way
challenge the sale of the Purchased Assets to Purchaser Parties under the
Asset Purchase Agreement.
2.04 Opinion of Counsel. At the Closing, counsel to JEC will provide a
legal opinion from its Japanese counsel as to the truth of the statements in
Sections 1.01, 1.02, 1.03 and 1.04 and as to the enforceability of all
provisions of this Agreement (except Section 3.02 hereof, which can be
excluded from any such opinion) against JEC.
2.05 Guaranty of Gould Performance; Knowing Waiver of Surety Defenses.
(a) Guaranty. JEC unconditionally guarantees to Purchaser
Parties all the obligations of Gould under the Gould/EFI Inducement Agreement
dated July 17, 1997 (the "Gould Agreement") among Gould, EFI, Purchaser and
SMIBV. This guaranty is a guaranty of performance and not a guaranty of
collection. If Gould fails to fulfill, or violates any of its obligations
under the Gould Agreement, (a) if JEC is able to fulfill the obligation or
cause the obligation to be fulfilled, JEC will do so immediately on demand by
Purchaser, and (b) if JEC is not able to fulfill the obligation or cause the
obligation to be fulfilled, JEC will be liable to each of Purchaser Parties
for any damages it suffers because of the failure of Gould to fulfill its
obligations under the Gould Agreement as fully as though JEC were the party to
the Gould Agreement which had failed to fulfill the obligations.
(b) Waivers. JEC waives any requirement of notice, presentment
or other diligence by Purchaser Parties with regard to this guaranty. JEC
agrees that Purchaser Parties may enforce this guaranty against JEC without
making any effort to obtain remedies against Gould because of Gould's failure
to fulfill or violation of its obligations under the Gould Agreement. JEC
agrees that this guaranty will remain in force despite any amendments to the
Gould Agreement, whether or not those amendments increase the obligations of
Gould, and this guaranty will not be affected by any agreement by Purchaser
Parties to waive any obligation of Gould, or to defer the time by which Gould
is required to fulfill any obligation under the Gould Agreement, except to the
extent that because of a waiver or extension, Gould is not, or is not yet,
required to fulfill particular obligations under the Gould Agreement. The
obligations under this guaranty shall remain in full force and effect and JEC
shall not be exonerated or discharged by reason of any action or circumstance
that might constitute a defense available to, or a legal or equitable
discharge of, any surety, pledgor or guarantor. JEC hereby affirms and
acknowledges the knowing and explicit waivers made on its behalf for the
benefit of Purchaser Parties in Section 4.05 of the Gould Agreement.
ARTICLE III
3.0 General Release; Covenant Not to Sue; Waiver of Defenses.
3.01 General Release by JEC. JEC does hereby, for itself and its
respective Affiliates, officers, directors, stockholders, employees, agents,
legal successors and assigns (collectively, the "Releasing Parties"), release
and absolutely and forever discharge each of Purchaser Parties and all
affiliates (as defined under the Securities Act but excluding shareholders of
Purchaser) thereof and each of the respective shareholders, officers,
directors, employees, agents, attorneys, legal successors and assigns of any
of Purchaser Parties or any affiliate (as defined immediately above) thereof
(collectively, the "Released Parties"), of and from any and all claims,
demands, damages, debts, liabilities, accounts, reckonings, obligations,
costs, expenses, liens, actions and causes of action of every kind and nature
whatsoever, whether now known or unknown, suspected or unsuspected, which the
Releasing Parties now have, own or hold or at any time heretofore ever had,
owned or held or could, shall or may hereafter have, own or hold against the
Released Parties (or any of them) based upon or arising out of any matter,
cause, fact, thing, act or omission whatsoever occurring or existing at any
time to and including the date hereof, or arising on or after the date hereof,
in connection with the facts, circumstances and events relating to the
Purchased Assets or to any of the transactions contemplated by the Asset
Purchase Agreement or any of the Ancillary Agreements or any of the
Intracompany Agreements (as defined in the Gould/EFI Inducement Agreement of
even date herewith) or any agreement between JEC and Seller or any Liability
or obligation thereunder (collectively, together with the enumerated examples
below, the "Released Matters"), including without limitation any claim or
allegation by any of the Releasing Parties or any other party that: (i) any
of the Released Parties is on any theory liable for any of the debts or
obligations or Liabilities of Seller not expressly assumed by Purchaser under
the Asset Purchase Agreement (including without limitation any Liability
arising under any of the Intracompany Agreements or any agreement between JEC
and Seller); (ii) any of the Released Parties is on any theory liable to any
of the Releasing Parties for any claim, cause of action, loss, damages or
other amount whatsoever, as a result of Purchaser Parties' purchase of the
Purchased Assets; (iii) any of the Releasing Parties has any right in, claim
as to or Encumbrance on or with respect to, any of the Purchased Assets; or
(iv) the purchase of the Purchased Assets under the Asset Purchase Agreement
constituted a fraudulent conveyance, a fraudulent transfer, or a preference or
was otherwise improper, unlawful or violative of any rights of any of the
Releasing Parties under the Intracompany Agreements or any agreement between
JEC and Seller or otherwise (all of which foregoing matters are hereinafter
referred to as and included within the "Released Matters"). It is the
intention of JEC that the release set forth above in this Section 3.01 shall
be effective as a full and final accord and satisfaction and general release
by each of the Releasing Parties of and from all claims now existing or
hereafter arising against any of the Released Parties relating to any of the
Released Matters.
3.02 Waiver of Unknown Claims. In furtherance of the intentions set
forth herein, JEC acknowledges, for itself and each of the other Releasing
Parties, that it is familiar with Section 1542 of the Civil Code of the State
of California (and similar laws of Japan), which provides as follows:
"A general release does not extend to claims which the creditor does not know
or suspect to exist in his favor at the time of executing the release, which
if known by him must have materially affected his settlement with the debtor."
JEC, for itself and each of the other Releasing Parties, hereby waives and
relinquishes any right or benefit which it has or may have under Section 1542
of the Civil Code of the State of California or any similar provision of the
statutory or nonstatutory law of any other jurisdiction (including without
limitation Japan), to the full extent that it may lawfully waive all such
rights and benefits pertaining to the subject matter of this Agreement. In
connection with such waiver and relinquishment, JEC acknowledges that it is
aware that it or its attorneys or accountants may hereafter discover claims or
facts in addition to or different from those which it now knows or believes to
exist with respect to the subject matter of this Agreement or of the Asset
Purchase Agreement or the Released Parties, but that it is its intention
hereby fully, finally and forever to settle and release, for itself and each
of the other Releasing Parties, all of the Released Matters which now exist,
may exist or heretofore have existed or which arise on or after the date
hereof as to all of the Released Parties. In furtherance of this intention,
the release herein given by JEC, for itself and each of the other Releasing
Parties, shall be and remain in full force and effect as a full and complete
release, and operate as a full release of claims hereafter arising,
notwithstanding the discovery or existence of any such additional or different
claims or facts.
3.03 Authorized Release. JEC warrants and represents that it is the
sole and lawful owner of all right, title and interest in and to all of the
respective Released Matters as to which it is the Releasing Party and that it
has not heretofore voluntarily, by operation of law or otherwise, assigned or
transferred (or purported to assign or transfer) to any person whomsoever any
Released Matter or any part or portion thereof of any claim, demand or right
against any Released Party.
3.04 Covenant Not to Sue. JEC hereby agrees not to sue or otherwise
bring any claim against any of the Released Parties on or with respect to any
of the Released Matters or against or with respect to any of the Purchased
Assets, in each case whether by way of complaint, cross-complaint, cross
claim, set off, defense or by any other means or manner in any court, other
tribunal or otherwise. JEC hereby further agrees not to take any action
against or with respect to any of the Purchased Assets utilizing any rights
JEC may have or hereafter acquire as a creditor, secured creditor or
stockholder of Seller, including without limitation any foreclosure action or
any action permitted to be taken by a secured party under the Uniform
Commercial Code as adopted in any jurisdiction or any action permitted to be
taken by a lienholder or judgment creditor under applicable state laws
(including without limitation, attachment and garnishment actions and
imposition of or execution upon any lien).
ARTICLE IV
4.0 General Provisions
4.01 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
4.02 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. 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 greatest extent possible.
4.03 Entire Agreement. This Agreement, along with the defined terms in
the Asset Purchase Agreement used herein, constitute the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersede all prior agreements and undertakings with respect to the
subject matter hereof, both written and oral.
4.04 Assignment. This Agreement shall not be assigned or delegated by
JEC without the prior written consent of Purchaser Parties. Purchaser Parties
shall be free to assign their rights hereunder and such rights will inure to
all of the Released Parties and to the respective successors, assigns and
affiliates of the Released Parties.
4.05 Amendment; Waiver. This Agreement may not be amended or modified
except by an instrument in writing signed by JEC and Purchaser (which
instrument will be binding on SMIBV). Waiver of any term or condition of this
Agreement shall only be effective if in writing and shall not be construed as
a waiver of any subsequent breach or waiver of the same term or condition, or
a waiver of any other term or condition of this Agreement.
4.06 Governing Law; Jurisdiction and Venue. This Agreement shall be
governed by, and construed in accordance with, the internal laws of the State
of California applicable to contracts executed in and to be performed by
residents of California within that State, without reference to the conflict
of laws provisions thereof. As to matters arising out of or relating to this
Agreement, JEC consents to submit to the jurisdiction of any federal or state
court located in the State of California and agrees not to object to venue in
the federal or state courts located in Santa Clara County, California.
4.07 Counterparts. This Agreement may be executed in one or more
counterparts, and by the different parties hereto in separate counterparts,
each of which when executed shall be deemed to be an original but all of which
taken together shall constitute one and the same agreement.
4.08 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to
each party at the addresses indicated for such party on the signature page
hereof (or at such other address for a party as shall be specified by like
notice).
4.09 Termination. In the event that the Asset Purchase Agreement is
terminated by Purchaser in accordance with its terms, this Agreement shall
then terminate concurrently.
[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be executed
as of the date first written above by their respective officers thereunto duly
authorized.
JAPAN ENERGY CORPORATION SUN MICROSYSTEMS, INC.
By: By:
Name: Name:
Title: Title:
Address for Notice: Address for Notice:
___________________________ ___________________________
___________________________ ___________________________
___________________________ ___________________________
[SIGNATURE PAGE TO JEC INDUCEMENT AGREEMENT]
-9-
Exhibit B
July 14, 1997
The Board of Directors
Encore Computer Corporation
6901 West Sunrise Boulevard
Fort Lauderdale, Florida 33313
Dear Members of the Board:
We understand that Encore Computer Corporation (the "Company"), Sun
Microsystems, Inc. ("Sun") and Sun Microsystems International, B.V. ("SMIBV")
propose to enter into an asset purchase agreement ("Agreement") pursuant to
which Sun and SMIBV will acquire certain assets associated with, and assume
certain liabilities of, the storage business of the Company (the "Storage
Business") for (i) $150 million in cash (the "Closing Payment"), payable at
the closing of the Acquisition Transaction (as defined below) (the "Closing"),
and (ii) $35 million in cash (the "Second Payment" and, together with the
Closing Payment, the "Cash Payment"), payable on July 1, 1998 (the
"Acquisition Transaction"). The terms of the Acquisition Transaction are more
fully described in the Agreement.
You have requested our opinion as to the fairness to the Company,
from a financial point of view, of the Cash Payment to be paid for the Storage
Business in the Acquisition Transaction. In connection with this opinion, we
have:
(i) reviewed the financial terms and conditions of a draft dated
July 10, 1997 of the Agreement;
(ii) analyzed certain historical business and financial information
relating to the Company and the Storage Business;
(iii) reviewed certain financial forecasts and other data provided to
us by the Company relating to its business and the Storage
business;
(iv) conducted discussions with members of the senior management of
the Company and Gould Electronics, Inc. ("Gould"), the
principal stockholder of the Company, with respect to (A) each
of the Company's and the Storage Business' business and
prospects, (B) recent efforts undertaken by the Company and
Gould to solicit third party indications of interest in either
entering into an OEM relationship with the Company or acquiring
the Company or the Storage Business, (C) the unwillingness of
Gould to continue to provide financial support to the Company
and (D) the strategic rationale for the Acquisition Transaction
and alternatives thereto reasonably available to the Company;
(v) reviewed public information with respect to certain other
companies in lines of businesses we believe to be generally
comparable to the business of the Storage Business;
(vi) reviewed the financial terms of certain business combinations
and acquisitions involving companies in lines of business we
believe to be generally comparable to the Storage Business;
(vii) reviewed the historical stock prices and trading volumes of the
shares of common stock of the Company; and
(viii) conducted such other financial studies, analyses and
investigations as we deemed appropriate.
We have relied upon the accuracy and completeness of the foregoing
financial and other information, and have not assumed any responsibility for
any independent verification of such information or any independent valuation
or appraisal of any of the assets, or technology of the Company or the Storage
Business. With respect to the financial forecasts referred to above, we have
assumed that they have beenreasonably prepared on bases reflecting the best
currently available estimates and judgments of management of the Company as to
the future financial performance of the Company and the Storage Business. We
assume no responsibility for and express no view as to such forecasts or the
assumptions on which they are based. In addition, we express no
recommendation or opinion as to how stockholders of the Company should vote at
the stockholders' meeting held in connection with the Acquisition Transaction.
For the purposes of this opinion, we have assumed that (i) the full
amount of the Closing Payment shall be paid to the Company at the Closing and
(ii) the full amount of Second Payment shall be paid to the Company on July 1,
1998.
Further, our opinion is necessarily based on economic, monetary,
market and other conditions as in effect on, and the information made
available to us as of, the date hereof.
In rendering our opinion, we have assumed that the Acquisition
Transaction will be consummated on the terms described in the draft of the
Agreement that we reviewed, without any waiver of any material terms or
conditions by the Company. We were not requested to, and did not, solicit
third party indications of interest in acquiring the Company or the Storage
Business. In addition, we did not participate in the negotiation of the
Agreement or the Memorandum of Understanding dated May 27, 1997 among the
Company, Sun and SMIBV.
Genesis Merchant Group Securities LLC is acting as financial advisor
to the Company in connection with the Acquisition Transaction and will receive
a fee for our services.
Our engagement and the opinion expressed herein were prepared for the
use of the Company's Board of Directors and do not constitute a recommendation
to Encore's stockholders as to how they should vote at the stockholders'
meeting in connection with the Acquisition Transaction. It is understood that
this letter may not be disclosed or otherwise referred to without our prior
consent, which consent will not be unreasonably withheld.
Based on and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Cash Payment to be paid for the Storage Business in
the Acquisition Transaction is fair to the Company from a financial point of
view.
Very truly yours,
GENESIS MERCHANT GROUP SECURITIES LLC
Exhibit C Memorandum
To Ed Baker, Encore Computer Private
From/Location Mark Weinsten, Price Waterhouse
Date August 19, 1997
Re Liquidation Analysis Assumptions
The following are the major assumptions associated with the Encore Computer
Liquidation Analysis:
Accounts Receivable: 60.5% of receivables are for equipment and have a
recovery rate of 75% and 39.5% of receivables are for service and have a
recovery rate of 25%. The split between equipment and service is based on
YTD revenues.
Proceeds From Foreign Liquidations: Includes residual equity amounts and
intercompany receivables paid from the liquidation of foreign subsidiaries
pursuant to regulations and procedures in respective countries.
Inventories: Different recovery rates were used for different inventory
groups. Typically, the less proprietary the item, the higher the recovery
rate. 15% was applied to gross raw materials, 12% was applied to purchased
sub-assemblies, and 10% was applied to work in process and finished goods.
Fixed Assets: Includes land, buildings, machinery and equipment, furniture
and fixtures and spares inventory. The recovery for land and building is
based on 90% of low end of appraisals net of a 6% cost for commissions and
fees. Recovery rates for other fixed assets are based on estimates from
liquidators of like assets.
Other Assets: Other assets include: pre-paid expenses and deposits, the
net value of capitalized software used to support the business (e.g. payroll
and accounting systems) and patents and licenses. A 40% recovery rate was
applied to all "other assets" not including patents and licenses which were
valued at $2,600,000.
Administrative Claims: Includes Trustee's fees based on formula stipulated
in Bankruptcy Code and professional/liquidation fees based on experience
with liquidation of similar organizations.
Secured Claims: It is assumed that the holder of the mortgage will have
sufficient collateral to recover 100% of the value of the balance
outstanding. The balance of proceeds available to secured creditors will be
paid towards the outstanding principal and accrued interest of the notes
held by Gould.
Priority Claims: It is assumed that priority claims per employee will
amount to $2,500 which approximately equals one pay period including
benefits and accrued vacation. The amount of pre-petition taxes is equal to
the amount of accrued tax expense.
Unsecured Claims: Includes accounts payable, accrued expenses net of
accrued taxes and accrued interest payable to Gould, and lease/purchase
obligations. Lease obligations are based on the maximum of one year's
payment or 15% of future payments (capped at three years).
Encore Computer Corporation
Summary of U.S. Chapter 7 Liquidation Analysis
Assuming Contemporaneous Liquidation of Foreign Subsidiaries
As of June 29, 1997
(In US Dollars)
Amount Estimated
As of 6/29/97 Liquidation Value
Assets and Proceeds
Total Cash & Equivalents 330,807 330,807 100%
Accounts Receivable 2,210,046 1,221,050 55%
Proceeds from Foreign Liquidations 0 708,929
Inventory 6,288,051 4,232,431 67%
Fixed Assets 28,883,328 14,825,338 51%
Other Assets 1,118,786 3,047,114 272%
Total Proceeds 38,831,018 24,365,669 63%
Liabilities & Claims
Administrative Claims 1,755,000 1,755,000 100%
Secured Claims
Notes Payable Gould (incl. Acc. Interest) 71,438,717 22,044,978 31%
Morgage Payable 565,690 565,690 100%
72,004,407 22,610,668 31%
Priority Claims 2,406,500 0 0%
Unsecured Claims 25,019,747 0 0%
