<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 30, 1995.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13(D) OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO .
--------- ---------
COMMISSION FILE NUMBER: 0-18690
RADIUS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
CALIFORNIA 68-0101300
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
215 MOFFETT PARK DRIVE
SUNNYVALE, CA 94089
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
(408) 541-6100
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------------------------
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES X NO
----- -----
THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S COMMON STOCK ON FEBRUARY
10, 1996 WAS 17,401,611.
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This report consists of 20 sequentially numbered pages. The exhibit index on
this report is located on sequentially numbered page 19.
<PAGE>
RADIUS INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
- ------------------------------ ----
Item 1. Financial Statements
Consolidated Balance Sheets at December 31, 1995 and
September 30, 1995 3
Consolidated Statements of Operations for the Three Months
Ended December 31, 1995 and 1994 4
Consolidated Statements of Cash Flows for the Three Months
Ended December 31, 1995 and 1994 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 18
- ----------
-2-
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RADIUS INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995 (1)
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash $ 6,990 $ 4,760
Accounts receivable, net 25,308 61,644
Inventories 12,564 15,071
Prepaid expenses and other current assets 12,091 2,336
Income tax receivable 517 519
-------- --------
Total current assets 57,470 84,330
Property and equipment, net 2,572 3,031
Deposits and other assets 512 517
-------- --------
$ 60,554 $ 87,878
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY (Net capital deficiency)
Current liabilities:
Accounts payable $42,886 $73,098
Accrued payroll and related expenses 6,083 5,815
Accrued warranty costs 2,510 3,170
Other accrued liabilities 11,231 11,920
Accrued income taxes 1,636 1,665
Accrued restructuring and other charges 16,980 17,013
Short-term borrowings 43,795 29,489
Obligation under capital leases - current portion 1,524 1,494
-------- --------
Total current liabilities 126,645 143,664
Obligations under capital leases - noncurrent portion 831 1,331
Commitments and contingencies
Shareholders' equity: (Net capital deficiency)
Common stock 117,127 113,791
Common stock to be issued 8,695 12,022
Accumulated deficit (192,776) (182,993)
Accumulated translation adjustment 32 63
-------- --------
Total shareholders' equity (Net capital deficiency) (66,922) (57,117)
-------- --------
$60,554 $87,878
-------- --------
-------- --------
</TABLE>
(1) The balance sheet at September 30, 1995 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
-3-
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------
1995 1994
---- ----
<S> <C> <C>
Net sales $32,652 $79,235
Cost of sales 28,607 56,758
------- -------
Gross profit 4,045 22,477
------- -------
Operating expenses:
Research and development 3,630 4,118
Selling, general and administrative 9,961 15,882
------- -------
Total operating expenses 13,591 20,000
------- -------
Income (loss) from operations (9,546) 2,477
Other expense (46) (920)
Settlement of litigation - (12,422)
------- -------
Loss before income taxes (9,592) (10,865)
Provision for income taxes 191 156
------- -------
Net loss $(9,783) $(11,021)
------- -------
------- -------
Loss per share:
Net loss per share $ (0.57) $ (0.78)
------- -------
------- -------
Common and common equivalent shares used 17,248 14,215
in computing net loss per share ------- -------
------- -------
</TABLE>
See accompanying notes.
-4-
<PAGE>
RADIUS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands, unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,783) $ (11,021)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 654 688
Common stock to be issued - 12,022
(Increase) decrease in assets:
Accounts receivable 36,352 (1,425)
Allowance for doubtful accounts (47) 283
Inventories 2,507 (10,620)
Prepaid expenses and other current assets (9,755) (16)
Income tax receivable 2 -
Deferred income taxes - -
Increase (decrease) in liabilities:
Accounts payable (30,212) 8,894
Accrued payroll and related expenses 268 499
Accrued warranty costs (660) 15
Other accrued liabilities (689) 3,748
Accrued restructuring costs (33) (7,165)
Accrued income taxes (29) 103
--------- ---------
Net cash used in operating activities (11,425) (3,995)
Cash flows from investing activities:
Capital expenditures (195) (955)
Deposits and other assets 5 (270)
--------- ---------
Net cash used in investing activities (190) (1,225)
Cash flows from financing activities:
Principal borrowings(payments) of short-term borrowings, net 14,306 (17)
Principal payments of long-term debt and capital leases (470) (604)
Issuance of common stock 9 299
--------- ---------
Net cash provided by (used in) financing activities 13,845 (322)
--------- ---------
Net increase (decrease) in cash and cash equivalents 2,230 (5,542)
Cash and cash equivalents, beginning of period 4,760 15,997
--------- ---------
Cash and cash equivalents, end of period $ 6,990 $ 10,455
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest paid $ 934 $ 389
--------- ---------
--------- ---------
Income taxes paid $ 218 $ -
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
-5-
<PAGE>
RADIUS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements of Radius Inc. ("Radius") as of December
31, 1995 and for the three months ended December 31, 1995 and 1994 are
unaudited. In the opinion of management, the consolidated financial statements
reflect all adjustments (consisting only of normal recurring items) necessary
for a fair presentation of the financial position and results of operations for
the interim periods presented. These consolidated financial statements should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
September 30, 1995.
During the first quarter of its 1995 fiscal year, the Company changed its fiscal
year end from the Sunday closest to September 30 to the Friday closest to
September 30. During the second quarter of its 1995 fiscal year, the Company
changed its fiscal year end to the Saturday closest to September 30 for
operational efficiency purposes. For clarity of presentation, all fiscal
periods are reported as ending on a calendar month end.
NOTE 2. INVENTORIES
Inventories, stated at the lower of cost or market, consist of (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ -------------
(unaudited)
<S> <C> <C>
Raw materials $ 1,927 $ 1,559
Work in process 1,107 2,258
Finished goods 9,530 11,254
-------- --------
$ 12,564 $ 15,071
-------- --------
-------- --------
</TABLE>
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) In November 1995, Electronics for Imaging, Inc. ("EFI") filed a suit in the
United States District Court in the Northern District of California alleging
that the Company infringes a patent allegedly owned by EFI. Although the
complaint does not specify which of the Company's products allegedly infringe
the patent, subsequent pleading indicates that EFI alleges that the Company's
Color Server products allegedly infringe. As of December 31, 1995, the
Company's Color Server products were material to its business. In January 1996,
the Company completed its divestiture of the Color Server Group. The Company
has certain indemnification obligations relating to this litigation. See Item 5
Other Information - Color Server Group Divestiture.
The Company has filed an answer denying all material allegations, and has filed
amended counterclaims against EFI alleging causes of action for interference
with prospective economic benefit, antitrust violations, and unfair business
practices. EFI has filed a motion to dismiss or sever the Company's amended
counterclaims. The Company believes it has meritorious defenses to EFI's claims
and is defending them vigorously. In addition, the Company believes it may have
indemnification rights with respect to EFI's claims. In the opinion of
management, based on the facts known at this time, the eventual outcome of this
case is unlikely to have a material adverse effect on the results of operations
or financial position of the Company.
(b) The Company was named as one of approximately 42 defendants in Shapiro et
al. v. ADI Systems, Inc. et al., Superior Court of California, Santa Clara
County, case no. CV751685, filed August 14, 1995. Radius was named as one of
approximately 32 defendants in Maizes & Maizes et al. v. Apple Computer et al.,
Superior Court of New Jersey, Essex County, case no. L-13780-95, filed December
15, 1995. Plaintiffs in each case purport to represent alleged classes of
-6-
<PAGE>
similarly situated persons and/or the general public, and allege that the
defendants falsely advertise that the viewing areas of their computer monitors
are larger than in fact they are.
The Company was served with the Shapiro complaint on August 22, 1995, and was
served with the Maizes complaint on January 5, 1996. Defendants' petition to
the California State Judicial Council to coordinate the Shapiro case with
similar cases brought in other California jurisdictions was granted in part and
it is anticipated that the coordinated proceedings will be held in Superior
Court of California, San Francisco County. Discovery proceedings have not yet
begun in either case. In the opinion of management, based on the facts known at
this time, the eventual outcome of these cases is unlikely to have a material
adverse effect on the results of operations or financial position of the
Company.
NOTE 4. BUSINESS DIVESTITURES
COLOR SERVER GROUP DIVESTITURE
In December 1995, the Company signed a definitive agreement pursuant to which
the Company will sell its Color Server Group ("CSG") to Splash Merger Company,
Inc. (the "Buyer"), a wholly owned subsidiary of Splash Technology Holdings,
Inc. (the "Parent"), a corporation formed by various investment entities
associated with Summit Partners. The Company will receive approximately
$21,945,175 in cash (subject to certain post-closing adjustments) and 4,282
shares of the Parent's 6% Series B Redeemable and Convertible Preferred Stock
(the "Series B Preferred Stock"). The shares of Series B Preferred Stock will be
convertible by the Company at any time into approximately 19.9% of the Parent's
common stock outstanding as of the closing of the transaction. The shares of
Series B Preferred Stock also will be redeemable by the Parent at any time, and
will be subject to mandatory redemption beginning on the sixth anniversary of
issuance, in each case at a redemption price of $1,000 per share plus accrued
dividends. The transaction, as subsequently amended, closed in January 1996.
The Company retains certain indemnification obligations in connection with the
patent lawsuit brought by Electronics for Imaging, Inc. See Item 1 "Legal
Proceedings". The net proceeds of the Color Server Group transaction were paid
to Silicon Valley Bank ("SVB"), in order to repay the Company's indebtedness to
SVB, and to IBM Credit Corp. ("ICC"), in order to reduce the Company's
outstanding indebtedness to ICC.
PORTRAIT DISPLAY LABS
In December 1995, the Company signed a series of agreements with Portrait
Display Labs, Inc. ("PDL"). The agreements assigned the Company's pivoting
technology to PDL and canceled PDL's on-going royalty obligation to the Company
under an existing license agreement in exchange for a one-time cash payment. PDL
also granted the Company a limited license back to the pivoting technology.
Under these agreements, PDL also settled its outstanding receivable to the
Company by paying the Company $500,000 in cash and issuing to the Company
214,286 shares of PDL's Common Stock. These transactions closed in January
1996.
DISPLAY TECHNOLOGIES ELECTROHOME INC.
In December 1995, the Company signed a Business Purchase Agreement and an Asset
Purchase and License Agreement with Display Technologies Electrohome Inc.
("DTE"). Pursuant to the agreements, DTE purchased Radius' monochrome display
monitor business and certain assets related thereto, for approximately $200,000
in cash and cancellation of $2.5 million of the Company's indebtedness to DTE.
In addition, DTE and Radius canceled outstanding contracts relating to DTE's
manufacture and sale of monochrome display monitors to Radius.
UMAX DATA SYSTEMS, INC.
In January 1996, the Company signed a definitive agreement pursuant to which the
Company will sell its MacOS compatible systems business to UMAX Computer
Corporation ("UCC"), a company formed by UMAX Data Systems, Inc. ("UMAX"). The
Company will receive approximately $2,250,000 in cash and debt relief, and
1,492,500 shares of UCC's Common Stock, representing approximately 19.9% of
UCC's then outstanding shares of Common Stock. After the closing, the Company
has a right to receive royalties based on UCC's net revenues related to the
MacOS compatible systems business. The closing of this transaction is subject
to certain conditions.
-7-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the consolidated
interim financial statements and the notes thereto in Part I, Item 1 of this
Quarterly Report and with Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in the Company's Annual Report on
Form 10-K for the year ended September 30, 1995.
All assumptions, anticipations, and expectations contained herein are forward-
looking statements that involve uncertainty and risk. Actual results could
differ materially from those projected in such forward-looking statements. Each
forward-looking statement should be read in conjunction with the entire
consolidated interim financial statements and the notes thereto in Part I, Item
1 of this Quarterly Report, with the information contained in Item 2, including,
but not limited to, Management's Discussion and Analysis of Financial Condition
and Results of Operations - Certain Factors That May Affect Future Results, and
with Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the year
ended September 30, 1995, including, but not limited to, Management's Discussion
and Analysis of Financial Condition -- Certain Factors That May Affect the
Company's Future Results of Operations, and Business Divestitures.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated certain operational
data as a percentage of net sales (may not add due to rounding).
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
1995 1994
------ ------
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 87.6 71.6
----- -----
Gross profit 12.4 28.4
----- -----
Operating expenses:
Research and development 11.1 5.2
Selling, general and administrative 30.5 20.0
----- -----
Total operating expenses 41.6 25.2
----- -----
Income (loss) from operations (29.2) 3.1
Other expense (0.1) (1.2)
Settlement of litigation - (15.7)
----- -----
Loss before income taxes (29.4) (13.7)
Provision for income taxes 0.6 0.2
----- -----
Net loss (30.0)% (13.9)%
----- -----
----- -----
</TABLE>
NET SALES
The Company's net sales decreased 58.8% to $32.7 million in the first quarter of
fiscal 1996 from $79.2 million for the same quarter in fiscal 1995. This
decline was primarily due to the Company's efforts to refocus its business which
included exiting markets for high-volume low-margin displays and reduced sales
of the Company's video products caused by Apple's shift from Nubus to PCI Bus
computers. The Company anticipates lower revenue from its video product line in
the future, at least until the Company introduces new products now under
development including those which function on PCI Bus computers. These declines
were partially offset by an increase in net sales from the Company's color
server products. As a result of the sale by the Company of its Color Server
Group (as described more fully in the Company's Annual Report on Form 10-K,
Management's Discussion and Analysis of Financial Condition -- "Certain Factors
That May Affect the Company's Future Results of Operations, and Business
Divestitures," and below in Item 5 "Other Information"), revenue from the
Company's color server products will not continue. Net sales of the Company's
graphics cards was essentially unchanged despite the transition from Nubus to
PCI Bus.
-8-
<PAGE>
One customer, Ingram Mirco, accounted for 37.5% and 10% of the Company's net
sales for the first quarter of fiscal 1996 and 1995, respectively.
The Company's export sales increased to 63.4% of net sales in first quarter of
fiscal 1996 from 29.2% of net sales in the same quarter of fiscal 1995 primarily
due to increased sales in the Asia-Pacific sales region combined with decreased
sales in the North America sales region. The Company anticipates a continued
significant percentage of net sales will be attributable to the Asia-Pacific
sales region even after the divestiture of the Company's Color Server Group.
Export sales are subject to the normal risks associated with doing business in
foreign countries such as currency fluctuations, longer payment cycles, greater
difficulties in accounts receivable collection, export controls and other
government regulations and, in some countries, a lesser degree of intellectual
property protection as compared to that provided under the laws of the United
States. The Company hedges substantially all of its trade receivables
denominated in foreign currency through the use of foreign currency forward
exchange contracts. Gains and losses associated with currency rate changes on
forward contracts are recognized in the Company's consolidated statements of
operations and were not material in the first quarter of fiscal 1996 or 1995.
GROSS PROFIT
The Company's gross profit margin was 12.4% and 28.4% for the first quarters of
fiscal 1996 and 1995, respectively. The decline in gross margin was primarily
due to pricing pressure and greater competition in PCI Bus products than in
Nubus products, and price declines on lower margin displays related to the
Company's exit from that business.
The Company anticipates continued price reductions and margin pressure within
its industry. The Company is responding to these trends by focusing on higher
margin products, taking further steps to reduce product costs and controlling
expenses. There can be no assurance that the Company's gross margins will
recover or remain at current levels.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses decreased to $3.6 million or 11.1% of net
sales in the first quarter of fiscal 1996 from $4.1 million or 5.2% of net sales
in the same quarter of fiscal 1995. The Company decreased its research and
development expenses primarily by reducing expenses related to headcount
resulting from the Company's efforts to refocus its business. The increase in
research and development expenses expressed as a percentage of net sales was
primarily attributed to the decrease in net sales and the Company's refocusing
on higher-end products, rather than high-volume lower-margin products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $10.0 million or 30.5%
of net sales in the first quarter of fiscal 1996 from $15.9 million or 20.0% of
net sales in the same quarter of fiscal 1995. The Company decreased its
selling, general and administrative expenses primarily by reducing expenses
related to headcount resulting from the Company's efforts to refocus its
business. The increase in selling, general and administrative expenses
expressed as a percentage of net sales was primarily attributed to the decrease
in net sales and the Company's refocusing on higher-end products, rather than
high-volume lower-margin products.
RESTRUCTURING, MERGER AND OTHER CHARGES
During fiscal 1994 and 1995, two restructuring and other charges were recorded.
RADIUS FISCAL 1994 MERGER RELATED RESTRUCTURING AND OTHER CHARGES
In the fourth quarter of fiscal 1994, the Company recorded charges of $43.4
million in connection with the Merger of Radius and SuperMac. These charges
include the discontinuance of duplicative product lines and related assets;
elimination of duplicative facilities, property and equipment and other assets;
and personnel severance costs as well as transaction fees and costs incidental
to the merger. The charges (in thousands) are included in: net sales ($3,095);
cost of sales ($25,270); research and development ($4,331); and selling, general
and administrative expenses ($10,711). The elements of the total charge as of
December 31, 1995 are as follows (in thousands):
-9-
<PAGE>
<TABLE>
<CAPTION>
Representing
---------------------------------------------
Cash Outlays
------------------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $22,296 $19,200 $ 3,096 $ -
Excess facilities 2,790 400 2,239 151
Revision of the operations business model 9,061 7,078 1,268 715
Employee severance 6,311 - 6,311 -
Merger related costs 2,949 - 2,949 -
------- ------- ------- -------
Total charges $43,407 $26,678 $15,863 $ 866
</TABLE>
The adjustment of inventory levels reflects the discontinuance of duplicative
product lines. The provision for excess facility costs represents the write-off
of leaseholds and sublease costs of Radius' previous headquarters, the
consolidation into one main headquarters and the consolidation of sales offices.
The revision of the operations business model reflects the reorganization of the
combined Company's manufacturing operations to mirror Radius' manufacturing
reorganization in 1993. This reorganization was designed to outsource a number
of functions that previously were performed internally, reduce product costs
through increased efficiencies and lower overhead, and focus the Company on a
limited number of products. Employee severance costs are related to employees
or temporary employees who were released due to the revised business model.
Approximately 250 employees were terminated in connection with the Merger. The
provision for merger related costs is for the costs associated with the Merger
transaction, such as legal, investment banking and accounting fees. The
Company has spent $15.9 million of cash for restructuring through December 31,
1995. The Company expects to have substantially completed the restructuring by
September 1996. During fiscal 1995, approximately $2.1 million of merger
related restructuring reserves were reversed and recorded as an expense
reduction due to changes in estimated requirements.
RADIUS FISCAL 1995 RESTRUCTURING AND OTHER CHARGES
In September 1995, Radius recorded charges of $57.9 million in connection with
the Company's efforts to restructure its operations by refocusing its business
on the color publishing and multimedia markets. The charges primarily included
a writedown of inventory and other assets. Additionally, the charges included
expenses related to the cancellation of open purchase orders, excess facilities
and employee severance. The Company continues to record charges relating to its
restructuring during the quarter ended December 31, 1995, and the charges
included expenses related to employee severance of $448,000. The Charges (in
thousands) are included in cost of sales ($47,004), and selling, general and
administrative expense ($10,861). The elements of the total charge as of
December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
Representing
---------------------------------------------
Cash Outlays
------------
Asset
Provision Write-Downs Completed Future
<S> <C> <C> <C> <C>
Adjust inventory levels $ 33,138 $ 32,300 $ - $ 838
Excess facilities 2,004 404 - 1,600
Cancellation fees and asset write-offs 19,061 5,196 - 13,865
Employee severance 3,662 - 448 3,214
--------- --------- -------- ---------
Total charges $ 57,865 $ 37,900 $ 448 $ 19,517
</TABLE>
The adjustment of inventory levels reflects the discontinuance of several
product lines. The provision for excess facility costs represent the write-off
of leasehold improvements and the costs associated with anticipated reductions
in facilities. The cancellation fees and asset write-offs reflect the Company's
decision to refocus its efforts on providing solutions for the color publishing
and multimedia markets. Employee severance costs are related to employees or
temporary employees who have been or will be released due to the restructuring.
During the quarter ended December 31, 1995, approximately 200 positions had been
eliminated in connection with the restructuring. The Company had spent
approximately $448,000 of cash for this restructuring during the quarter ended
December 31, 1995. As of December 31, 1995, the Company had cash of $7.0
million. See the Company's Annual Report on Form 10-K, and "Management's
Business Recovery Plans" at Note 1 to the Consolidated Financial Statements
contained therein. The Company expects to have substantially completed the
restructuring by September 1996.
-10-
<PAGE>
LITIGATION SETTLEMENT
In September 1992, the Company and certain of its officers and directors were
named as defendants in a securities class action litigation brought in the
United States District Court for the Northern District of California that sought
unspecified damages, prejudgment and post judgment interest, attorneys' fees,
expert witness fees and costs, and equitable relief. In July 1994, SuperMac
Technology, Inc. ("SuperMac") and certain of its officers and directors, several
venture capital firms and several of the underwriters of SuperMac's May 1992
initial public offering and its February 1993 secondary offering were named as
defendants in a class action litigation brought in the same court that sought
unspecified damages, prejudgment and post judgment interest, attorneys' fees,
experts' fees and costs, and equitable relief (including the imposition of a
constructive trust on the proceeds of defendants' trading activities).
In June 1995, the Court approved the settlement of both litigations and entered
a Final Judgment and Order of Dismissal. Under the settlement of the litigation
brought in 1992 against the Company, the Company's insurance carrier paid $3.7
million in cash and the Company is to issue a total of 128,695 shares of its
Common Stock to a class action settlement fund. In the settlement of the
litigation brought in 1994 against SuperMac, the Company paid $250,000 in cash
and is to issue into a class action settlement fund a total of 707,609 shares of
its Common Stock. The number of shares to be issued by the Company will
increase by up to 100,000 if the price of the Company's Common Stock is below
$12 per share during the 60-day period following the initial issuance of shares.
In connection with these settlements, the financial statements for the first
quarter of fiscal 1995 included a charge to other income of $12.4 million,
reflecting settlement costs not covered by insurance as well as related legal
fees, resulting in a reduction in net income from $1.4 million to a net loss of
$11.0 million or $0.78 per share for the quarter.
The settlements will result in dilution to existing shareholders of the Company
ranging from 4.8% to 5.4% depending on the number of shares of Radius Common
Stock issued. The Company had 17,401,094 weighted average common shares
outstanding as of December 31, 1995. As of December 31, 1995, the Company had
issued 259,130 shares of its Common Stock due to the settlements. The Company
anticipates that the remainder will be issued prior to June 30, 1996. See Note
3 of Notes to Consolidated Financial Statements contained herein.
PROVISION FOR INCOME TAXES
The Company recorded a tax provision of $191,000 for the first quarter of fiscal
1996 as compared to a provision for taxes for the first quarter of fiscal 1995
of $156,000. The tax provision is primarily comprised of foreign taxes.
FASB Statement 109 provides for the recognition of deferred tax assets if
realization of such assets is more likely than not. The Company's valuation
allowance reduced the deferred tax asset to the amount realizable. The Company
has provided a full valuation allowance against its net deferred tax assets due
to uncertainties surrounding their realization. Due to the net losses reported
in the prior three years and as a result of the material changes in operations
reported in its 1995 fiscal fourth quarter, predictability of earnings in future
periods is uncertain. The Company will evaluate the realizability of the
deferred tax asset on a quarterly basis.
FINANCIAL CONDITION
The Company's cash increased approximately $2.2 million in the first quarter of
fiscal 1996 to $7.0 million at December 31, 1995 as compared to the ending
balance at September 30, 1995. This increase was primarily due to the revised
terms of the Inventory and Working Capital Agreement, as recently amended, with
IBM Credit Corp. Approximately $0.9 million of the $7.0 million of cash and
cash equivalents available at December 31, 1995 was restricted under various
letters of credit.
At December 31, 1995, the Company's principal sources of liquidity included
approximately $30.0 million in inventory and working capital financing (and an
additional $20.0 million provided to finance the manufacturing of the Company's
MacOS compatible computers) under an agreement with IBM Credit Corporation (the
"ICC Agreement"), all of which was fully utilized. At December 31, 1995,
approximately $40.1 million was outstanding to IBM Credit Corp., which was
subsequently reduced by approximately $16.6 million in connection with the sale
of the Company's Color Server Group to
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<PAGE>
Splash Merger Company, Inc. and the sale of the Company's pivoting technology to
Portrait Display Labs, Inc. in the first calendar quarter of 1996.
In addition, at December 31, 1995, the Company had a $5.0 million credit
arrangement with Silicon Valley Bank ("SVB") which was partially utilized as of
that date. Additionally, the Company's Japanese subsidiary has a revolving line
of credit with a bank in Japan under which $3.0 million has been utilized as of
December 31, 1995.
As of December 31, 1995, IBM Credit Corp. had waived defaults of the Company
with respect to its contractual obligations and financial covenants under the
ICC Agreement, pursuant to an amendment to the ICC Agreement executed in
December 1995 (the "ICC Amendment") which expires March 31, 1995. The ICC
Amendment, among other things, also provides that IBM Credit Corp. will extend
advances to the Company in an amount up to 90% of the Company's collections and
fund the Company's payroll in the event that collections are insufficient to
permit the advances needed for this purpose. Such advances and payroll funding,
however, may be suspended by IBM Credit Corp. (i) immediately following a
default of the ICC Amendment, and (ii) following thirty days notice in the event
of any default of the underlying ICC Agreement. In the first calendar quarter
of 1996, the Company was not in compliance with all its contractual obligations
and financial covenants under its credit arrangement with ICC.
As of December 31, 1995, the Company was not in compliance with all of its
contractual obligations and financial covenants under its credit arrangement
with SVB. As of December 31, 1995 approximately $700,000 was outstanding under
this credit arrangement, all of which the Company repaid SVB during the first
calendar quarter of 1996 from the proceeds of the sale of the Company's Color
Server Group.
The Company's limited cash resources have restricted the Company's ability to
purchase inventory, which in turn has limited its ability to manufacture and
sell products and has resulted in additional costs for expedited deliveries.
The Company also is delinquent in its accounts payable as payments to vendors
are not being made in accordance with vendor terms. Several vendors have
initiated legal action to collect allegedly delinquent accounts and at least two
vendors have threatened the Company with institution of insolvency and/or
bankruptcy proceedings. The adverse effect on the Company's results of
operations due to its limited cash resources can be expected to continue until
such time as the Company is able to return to profitability, or generate
additional cash from other sources. There can be no assurance that the Company
will be able to do so.
Additional funds will be needed to finance the Company's development plans and
for other purposes, and the Company is now investigating possible financing
opportunities. There can be no assurance that additional financing will be
available when needed or, if available, that the terms of such financing will
not adversely affect the Company's results of operations.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, the following:
NET CAPITAL DEFICIENCY; CREDITOR DEMANDS AND LITIGATION
As of December 31, 1995, the Company had total assets of approximately $60.6
million and total current liabilities of approximately $126.6 million. The
Company is delinquent in its accounts payable as payments to certain vendors are
not being made in accordance with vendor terms. In addition to the matters
discussed in Part II below under "Item 1. Legal Proceedings," several vendors
have initiated legal action to collect allegedly delinquent accounts. At least
two vendors have orally threatened the Company with initiation of insolvency or
bankruptcy proceedings.
The Company has initiated the process of establishing a creditors' committee in
an effort to work toward resolving the capital deficiency and creditor
litigation issues outside of formal insolvency or bankruptcy proceedings. The
Company anticipates formally proposing a plan under which unsecured creditors'
claims will be exchanged for equity in the Company and/or in certain businesses
or holdings of the Company.
The Company has incurred and expects to continue to incur significant legal
expense in responding to creditor demands, litigation, and the workout process.
There can be no assurance that the Company will be able to reach accommodation
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<PAGE>
with its secured creditors and its unsecured creditors outside of
bankruptcy, or that the terms of any accommodation reached will
not dilute shareholder value or adversely affect the Company's
result of operations. There can be no assurance that the Company
will not be placed into an involuntary bankruptcy by its
creditors, or that, if bankruptcy proceedings are initiated, they
will not result in the liquidation of the Company or will not
otherwise materially and adversely affect the Company's result of
operations.
Absent reaching an agreement with its creditors, the Company will
require additional funding to repay its accounts payable and
other indebtedness, in addition to funding its operating and
product development activities. The company is investigating
possible financing alternatives, although there can be no
assurance that additional financing will be available when needed
or, if available, that the terms of such financing will not
adversely affect the Company's results of operations.
CONTINUING OPERATING LOSSES
The Company experienced net operating losses in the fiscal
quarter ended December 31, 1995, and in each of the fiscal years
ended September 30, 1993, 1994 and 1995. The Company's ability
to continue operations will depend, initially, upon the Company's
success in negotiating accommodations with creditors; assuming
such accommodations are reached, the Company's ability to achieve
and sustain profitable operations will depend upon a number of
other factors, including the Company's ability to control costs;
to develop innovative and cost-competitive new products and to
bring those products to market in a timely manner; the continual
commercial acceptance of Apple computers and the rate and mix of
Apple computers and related products sold; competitive factors
such as new product introductions, product enhancements and
aggressive marketing and pricing practices; general economic
conditions; and other factors. The Company has faced and expects
to continue to face increased competition in graphic cards as a
result of Apple's transition of its product line to the PCI Bus.
In addition, the Company anticipates significantly lower revenue
and gross profit from its digital video products primarily due to
lower than anticipated sell through rates for Radius Telecast and
the delayed debut of PCI Bus compatible video products. For
these and other reasons, there can be no assurance that the
Company will be able to achieve profitability in the near term.
FLUCTUATIONS IN OPERATING RESULTS
The Company has experienced substantial fluctuations in operating
results. The Company's customers generally order on an as-needed
basis, and the Company has historically operated with relatively
small backlogs. Quarterly sales and operating results depend
heavily on the volume and timing of bookings received during the
quarter, which are difficult to forecast. A substantial portion
of the Company's revenues are derived from sales made late in
each quarter, which increases the difficulty in forecasting sales
accurately. Recently, shortages of available cash have delayed
the Company's receipt of products from suppliers and increased
shipping and other costs. The Company recognizes sales upon
shipment of product, and allowances are recorded for estimated
uncollectable amounts, returns, credits and similar costs,
including product warranties and price protection. Due to the
inherent uncertainty of such estimates, there can be no assurance
that the Company's forecasts regarding bookings, collections,
rates of return, credits and related matters will be accurate. A
significant portion of the operating expenses of the Company are
relatively fixed in nature, and planned expenditures are based
primarily on sales forecasts which, as indicated above, are
uncertain. Any inability on the part of the Company to adjust
spending quickly enough to compensate for any failure to meet
sales forecasts or to receive anticipated collections, or any
unexpected increase in product returns or other costs, could also
have an adverse impact on the Company's operating results.
DEPENDENCE ON AND COMPETITION WITH APPLE
Historically, substantially all of the Company's products have
been designed for and sold to users of Apple personal computers,
and it is expected that sales of products for such computers will
continue to represent substantially all of the net sales of the
Company for the foreseeable future. The Company's operating
results would be adversely affected if Apple should lose market
share, if Macintosh sales were to decline or if other
developments were to adversely affect Apple's business.
Furthermore, any difficulty that may be experienced by Apple in
the development, manufacturing, marketing or sale of its
computers, or other disruptions to, or uncertainty in the market
regarding, Apple's business, resulting from these or other
factors could result in reduced demand for Apple computers, which
in turn could materially and adversely affect sales of the
Company's products. As software applications for the color
publishing and multimedia markets become more available on
platforms other than Macintosh, it is likely that these other
platforms will continue to gain acceptance in these markets. For
example, recently introduced versions of the Windows operating
environment support high performance graphics and video
applications similar to those offered on the Macintosh. There is
a risk that this trend will reduce the
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<PAGE>
support given to Macintosh products by third party developers and could
substantially reduce demand for Macintosh products and peripherals over
the long term.
A number of the Company's products compete with products marketed
by Apple. As a competitor of the Company, Apple could in the
future take steps to hinder the Company's development of
compatible products and slow sales of the Company's products.
The Company's business is based in part on supplying products
that meet the needs of high-end customers that are not fully met
by Apple's products. As Apple improves its products or bundles
additional hardware or software into its computers, it reduces
the market for Radius products that provide those capabilities.
For example, the Company believes that the on-board performance
capabilities included in Macintosh Power PC products have reduced
and continue to reduce overall sales for the Company's graphics
cards. In the past, the Company has developed new products as
Apple's progress has rendered existing Company products obsolete.
However, in light of the Company's current financial condition
there can be no assurance that the Company will continue to
develop new products on a timely basis or that any such products
will be successful. In order to develop products for the
Macintosh on a timely basis, the Company depends upon access to
advance information concerning new Macintosh products. A
decision by Apple to cease sharing advance product information
with the Company would adversely affect the Company's business.
New products anticipated from and introduced by Apple could cause
customers to defer or alter buying decisions due to uncertainty
in the marketplace, as well as presenting additional direct
competition for the Company. For example, the Company believes
that Apple's transition during 1994 to Power PC products caused
delays and uncertainties in the market place and had the effect
of reducing demand for the Company's products. In addition,
sales of the Company's products have been adversely affected by
Apple's revamping of its entire product line from Nubus-based to
PCI Bus-based computers. In the past, transitions in Apple's
products have been accompanied by shortages in those products and
in key components for them, leading to a slowdown in sales of
those products and in the development and sale by the Company of
compatible products. In addition, it is possible that the
introduction of new Apple products with improved performance
capabilities may create uncertainties in the market concerning
the need for the performance enhancements provided by the
Company's products and could reduce demand for such products.
COMPETITION
The markets for the Company's products are highly competitive,
and the Company expects competition to intensify. Many of the
Company's current and prospective competitors have significantly
greater financial, technical, manufacturing and marketing
resources than the Company. The Company believes that its
ability to compete will depend on a number of factors, including
the amount of financial resources available to the Company,
whether the Company can reach an accommodation with its
creditors, success and timing of new product developments by the
Company and its competitors, product performance, price and
quality, breadth of distribution and customer support. There can
be no assurance that the Company will be able to compete
successfully with respect to these factors. In addition, the
introduction of lower priced competitive products could result in
price reductions that would adversely affect the Company's
results of operations.
DEPENDENCE ON SUPPLIERS
The Company outsources the manufacturing and assembly of its
products to third party suppliers. Although the Company uses a
number of manufacturer/assemblers, each of its products is
manufactured and assembled by a single supplier. The failure of
a supplier to ship the quantities of a product ordered by the
Company could cause a material disruption in the Company's sales
of that product. In the past, the Company has at times
experienced substantial delays in its ability to fill customer
orders for displays and other products, due to the inability of
certain suppliers to meet their volume and schedule requirements
and, more recently, due to the Company's shortages in available
cash. Such shortages have caused some suppliers to put the
Company on a cash basis, and there is a risk that suppliers will
discontinue their relationship with the Company. In the past,
the Company has been vulnerable to delays in shipments from
suppliers because the Company has sought to manage its use of
working capital by, among other things, limiting the backlog of
inventory it purchases. More recently, this vulnerability has
been exacerbated by the Company's shortages in cash reserves.
Delays in shipments from suppliers can cause fluctuations in the
Company's short term results and contribute to order
cancellations. The Company currently has arranged payment terms
for certain of its major suppliers such that certain of the
Company's major customers pay these suppliers directly for
products ordered and shipped.
The Company is also dependent on sole or limited source suppliers
for certain key components used in its products, including
certain digital to analog converters, digital video chips, and
other products. Certain other semiconductor
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<PAGE>
components and molded plastic parts are also purchased from sole or
limited source suppliers. The Company purchases these sole or limited
source components primarily pursuant to purchase orders placed
from time to time in the ordinary course of business and has no
guaranteed supply arrangements with sole or limited source
suppliers. The Company expects that these suppliers will
continue to meet its requirements for the components, but there
can be no assurance that they will do so. The introduction of
new products presents additional difficulties in obtaining timely
shipments from suppliers. Additional time may be needed to
identify and qualify suppliers of the new products. Also, the
Company has experienced delays in achieving volume production of
new products due to the time required for suppliers to build
their manufacturing capacity. An extended interruption in the
supply of any of the components for the Company's products,
regardless of the cause, could have an adverse impact on the
Company's results of operations. The Company's products also
incorporate components, such as VRAMs, DRAMs and ASICs that are
available from multiple sources but have been subject to
substantial fluctuations in availability and price. Since a
substantial portion of the total material cost of the Company's
products is represented by these components, significant
fluctuations in their price and availability could affect its
results of operations.
TECHNOLOGICAL CHANGE; CONTINUING NEED TO DEVELOP NEW PRODUCTS
The personal computer industry in general, and the color
publishing and video applications within the industry, are
characterized by rapidly changing technology, often resulting in
short product life cycles and rapid price declines. The Company
believes that its success will be highly dependent on its ability
to develop innovative and cost-competitive new products and to
bring them to the marketplace in a timely manner. Should the
Company fail to introduce new products on a timely basis, the
Company's operating results could be adversely affected.
Technological innovation is particularly important for the
Company, since its business is based on its ability to provide
functionality and features not included in Apple's products. As
Apple introduces new products with increased functionality and
features, the Company's business will be adversely affected
unless it develops new products that provide advantages over
Apple's latest offerings. Continued reduction in the available
cash resources of the Company could result in the interruption or
cancellation of research and product development efforts.
The Company anticipates that the video editing industry will
follow the pattern of the professional publishing industry in
which desktop publishing products, including those produced by
Radius, replaced more expensive, proprietary products, and the
Company also anticipates that this evolution will lead to a
significant increase in the purchase and use of video editing
products. There is a risk that this evolution will not occur in
the video editing industry as expected by the Company, or that it
will occur at a slower pace than anticipated.
The introduction of new products is inherently subject to risks
of delay. Should the Company fail to introduce new products on a
timely basis, the operating results of the Company could be
adversely affected. The introduction of new products and the
phasing out of older products will require the Company to
carefully manage its inventory to avoid inventory obsolescence
and may require increases in inventory reserves. The long lead
times -- as much as three to five months -- associated with the
procurement of certain components (principally displays and
ASICs) exposes the Company to greater risk in forecasting the
demand for new products. There can be no assurance that the
Company's forecasts regarding new product demand and its
estimates of appropriate inventory levels will be accurate.
Moreover, no assurance can be given that the Company will be able
to cause all of its new products to be manufactured at acceptable
manufacturing yields or that the Company will obtain market
acceptance for these products.
DISTRIBUTION
The Company's primary means of distribution is through a limited
number of third-party distributors and master resellers. As a
result, the Company's business and financial results are highly
dependent on the amount of the Company's products that is ordered
by these distributors and resellers. Such orders are in turn
dependent upon the continued viability and financial condition of
these distributors and resellers as well as on their ability to
resell such products and maintain appropriate inventory levels.
Due in part to the historical volatility of the personal computer
industry, certain of the Company's resellers have from time to
time experienced declining profit margins, cash flow shortages
and other financial difficulties. The future growth and success
of the Company will continue to depend in large part upon its
reseller channels. If its resellers were to experience financial
difficulties, the Company's results of operations could be
adversely affected.
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<PAGE>
INTERNATIONAL SALES
The Company's international sales are primarily made through
distributors and the Company's subsidiary in Japan. The Company
expects that international sales will represent a significant
portion of its net sales and that it will be subject to the
normal risks of international sales such as currency
fluctuations, longer payment cycles, export controls and other
governmental regulations and, in some countries, a lesser degree
of intellectual property protection as compared to that provided
under the laws of the United States. In addition, fluctuations
in exchange rates could affect demand for the Company's products.
If for any reason exchange or price controls or other
restrictions on foreign currencies are imposed, the Company's
business and operating results could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant degree upon the
continued contributions of its key management, marketing, product
development and operational personnel and the Company's ability
to retain and continue to attract highly skilled personnel.
Competition for employees in the computer industry is intense,
and there can be no assurance that the Company will be able to
attract and retain qualified employees. The Company has recently
made a number of management changes, including the appointment of
a new Chief Financial Officer and has had substantial layoffs and
other employee departures. If the Company continues to
experience financial difficulties, it may become increasingly
difficult for it to hire new employees and retain current
employees. The Company does not carry any key person life
insurance with respect to any of its personnel.
DEPENDENCE ON PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright,
trademark and trade secret protection, nondisclosure agreements
and licensing arrangements to establish and protect its
proprietary rights. The Company has a number of patents and
patent applications and intends to file additional patent
applications as it considers appropriate. There can be no
assurance that patents will issue from any of these pending
applications or, if patents do issue, that any claims allowed
will be sufficiently broad to protect the Company's technology.
In addition, there can be no assurance that any patents that may
be issued to the Company will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide
proprietary protection to the Company. The Company has a number
of trademarks and trademark applications. There can be no
assurance that litigation with respect to trademarks will not
result from the Company's use of registered or common law marks,
or that, if litigation against the Company were successful, any
resulting loss of the right to use a trademark would not reduce
sales of the Company's products in addition to the possibility of
a significant damages award. Although, the Company intends to
defend its proprietary rights, policing unauthorized use of
proprietary technology or products is difficult, and there can be
no assurance that the Company's efforts will be successful. The
laws of certain foreign countries may not protect the proprietary
rights of the Company to the same extent as do the laws of the
United States.
The Company has received, and may receive in the future,
communications asserting that its products infringe the
proprietary rights of third parties, and the Company is engaged
and has been engaged in litigation alleging that the Company's
products infringe others' patent rights. As a result of such
claims or litigation, it may become necessary or desirable in the
future for the Company to obtain licenses relating to one or more
of its products or relating to current or future technologies,
and there can be no assurance that it would be able to do so on
commercially reasonable terms.
VOLATILITY OF STOCK PRICE; DILUTION
The price of the Company's Common Stock has fluctuated widely in
the past. Management believes that such fluctuations may have
been caused by announcements of new products, quarterly
fluctuations in the results of operations and other factors,
including changes in conditions of the personal computer industry
in general and changes in the Company's results of operations and
financial condition. Stock markets, and stocks of technology
companies in particular, have experienced extreme price
volatility in recent years. This volatility has had a
substantial effect on the market prices of securities issued by
the Company and other high technology companies, often for
reasons unrelated to the operating performance of the specific
companies. Due to the factors referred to herein, the dynamic
nature of the Company's industry, general economic conditions and
other factors, the Company's future operating results and stock
prices may be subject to significant volatility in the future.
Such stock price volatility for the Common Stock has in the past
provoked securities litigation, and future volatility could
provoke litigation in the future that could divert substantial
management resources and have an adverse effect on the Company's
results of operations. The Company's Common Stock is listed on
the NASDAQ market pursuant
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to an agreement containing certain financial requirement with which
the Company is currently not in compliance. In its attempt to restructure
its debt to creditors, the Company may propose exchanging equity in the
Company in full or partial satisfaction of creditor claims. Although the
Company has no current agreements with respect to the issuance of
additional equity securities, the issuance of any additional
equity in the Company could exert downward pressure on the price
of the Company's Common Stock.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
(a) In November 1995, Electronics for Imaging, Inc. ("EFI")
filed a suit in the United States District Court in the Northern
District of California alleging that the Company infringes a
patent allegedly owned by EFI. Although the complaint does not
specify which of the Company's products allegedly infringe the
patent, subsequent pleading indicates that EFI alleges that the
Company's Color Server products allegedly infringe. As of
December 31, 1995, the Company's Color Server products were
material to its business. In January 1996, the Company completed
its divestiture of the Color Server Group. The Company has
certain indemnification obligations relating to this litigation.
See Item 5 Other Information - Color Server Group Divestiture.
The Company has filed an answer denying all material allegations,
and has filed amended counterclaims against EFI alleging causes
of action for interference with prospective economic benefit,
antitrust violations, and unfair business practices. EFI has
filed a motion to dismiss or sever the Company's amended
counterclaims. The Company believes it has meritorious defenses
to EFI's claims and is defending them vigorously. In addition,
the Company believes it may have indemnification rights with
respect to EFI's claims. In the opinion of management, based on
the facts known at this time, the eventual outcome of this case
is unlikely to have a material adverse effect on the results of
operations or financial position of the Company.
(b) The Company was named as one of approximately 42 defendants
in Shapiro et al. v. ADI Systems, Inc. et al., Superior Court of
California, Santa Clara County, case no. CV751685, filed August
14, 1995. Radius was named as one of approximately 32 defendants
in Maizes & Maizes et al. v. Apple Computer et al., Superior
Court of New Jersey, Essex County, case no. L-13780-95, filed
December 15, 1995. Plaintiffs in each case purport to represent
alleged classes of similarly situated persons and/or the general
public, and allege that the defendants falsely advertise that the
viewing areas of their computer monitors are larger than in fact
they are.
The Company was served with the Shapiro complaint on August 22,
1995, and was served with the Maizes complaint on January 5,
1996. Defendants' petition to the California State Judicial
Council to coordinate the Shapiro case with similar cases brought
in other California jurisdictions was granted in part and it is
anticipated that the coordinated proceedings will be held in
Superior Court of California, San Francisco County. Discovery
proceedings have not yet begun in either case. In the opinion of
management, based on the facts known at this time, the eventual
outcome of these cases is unlikely to have a material adverse
effect on the results of operations or financial position of the
Company.
ITEM 5. OTHER INFORMATION
COLOR SERVER GROUP DIVESTITURE
In December 1995, the Company signed a definitive agreement
pursuant to which the Company will sell its Color Server Group
("CSG") to Splash Merger Company, Inc. (the "Buyer"), a wholly
owned subsidiary of Splash Technology Holdings, Inc. (the
"Parent"), a corporation formed by various investment entities
associated with Summit Partners. The Company will receive
approximately $21,945,175 in cash (subject to certain post-
closing adjustments) and 4,282 shares of the Parent's 6% Series B
Redeemable and Convertible Preferred Stock (the "Series B
Preferred Stock"). The shares of Series B Preferred Stock will be
convertible by the Company at any time into approximately 19.9%
of the Parent's common stock outstanding as of the closing of the
transaction. The shares of Series B Preferred Stock also will be
redeemable by the Parent at any time, and will be subject to
mandatory redemption beginning on the sixth anniversary of
issuance, in each case at a redemption price of $1,000 per share
plus accrued dividends. The transaction, as subsequently amended,
closed in January 1996. The Company retains certain
indemnification obligations in connection with the patent lawsuit
brought by
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<PAGE>
Electronics for Imaging, Inc. See Item 1 "Legal Proceedings". The net
proceeds of the Color Server Group transaction were paid to Silicon
Valley Bank ("SVB"), in order to repay the Company's indebtedness to SVB,
and to IBM Credit Corp. ("ICC"), in order to reduce the Company's
outstanding indebtedness to ICC.
PORTRAIT DISPLAY LABS
In December 1995, the Company signed a series of agreements with
Portrait Display Labs, Inc. ("PDL"). The agreements assigned the
Company's pivoting technology to PDL and canceled PDL's on-going
royalty obligation to the Company under an existing license
agreement in exchange for a one-time cash payment. PDL also
granted the Company a limited license back to the pivoting
technology. Under these agreements, PDL also settled its
outstanding receivable to the Company by paying the Company
$500,000 in cash and issuing to the Company 214,286 shares of
PDL's Common Stock. These transactions closed in January 1996.
UMAX DATA SYSTEMS, INC.
In January 1996, the Company signed a definitive agreement
pursuant to which the Company will sell its MacOS compatible
systems business to UMAX Computer Corporation ("UCC"), a company
formed by UMAX Data Systems, Inc. ("UMAX"). The Company will
receive approximately $2,250,000 in cash and debt relief, and
1,492,500 shares of UCC's Common Stock, representing
approximately 19.9% of UCC's then outstanding shares of Common
Stock. After the closing, the Company has a right to receive
royalties based on UCC's net revenues related to the MacOS
compatible systems business. The closing of this transaction is
subject to certain conditions.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See attached exhibit index.
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed during the three months ended
December 31, 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Dated: February 13, 1996 RADIUS INC.
By: /s/ Dennis J. Dunnigan
____________________________________
Dennis J. Dunnigan
Chief Financial Officer
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EXHIBIT INDEX
Exhibit Sequentially
Number Title Numbered Page
- ------- ----- -------------
2.09 Merger Agreement Dated as of December 21, 1995
among Radius Inc., Splash Technology, Inc.,
Summit Subordinated Debt Fund, L.P., Summit
Ventures IV, L.P., Summit Investors II, L.P.,
Splash Technology Holdings, Inc., and Splash
Merger Company, Inc.
2.10 Amendment No. 1 to Merger Agreement among Radius
Inc., Splash Technology, Inc., Splash Technology
Holdings, Inc., Splash Merger Company, Inc.
et al., dated January 30, 1996.
10.03 B Form of Stock Option Grant as currently in effect
under Registrant's 1995 Stock Option Plan.
10.04 Employee Stock Purchase Plan, as amended on July
20, 1995.
11.01 Computation of per share earnings 20
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EXHIBIT 11.01
COMPUTATION OF NET LOSS PER SHARE
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
1995 1994
----- -----
<S> <C> <C>
Primary:
Average common shares outstanding . . . . 17,248 14,215
Net effect of dilutive stock
options - based on the modified treasury
stock method using average
market price . . . . . . . . . . . . . -- --
------ ------
Totals . . . . . . . . . . . . . . . . . 17,248 14,215
Net loss . . . . . . . . . . . . . . . . $(9,783) $(11,021)
Per share amount . . . . . . . . . . . . $(0.57) $(0.78)
Fully diluted:
Average common shares outstanding . . . 17,248 14,215
Net effect of dilutive stock
options - based on the modified
treasury stock method using
quarter end market price which
is greater than average market
price . . . . . . . . . . . . . . . . -- --
------ ------
Totals . . . . . . . . . . . . . . . . . 17,248 14,215
------ ------
------ ------
Net loss . . . . . . . . . . . . . . . . $(9,783) $(11,021)
------ ------
------ ------
Per share amount* . . . . . . . . . . . $(0.57) $(0.78)
</TABLE>
* The primary net loss per share is shown in the statements of
operations. Net loss per share under the primary and fully
diluted calculations are equivalent.
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EXHIBIT INDEX
Exhibit Sequentially
Number Title Numbered Page
- ------- ----- -------------
2.09 Merger Agreement Dated as of December 21, 1995
among Radius, Inc., Splash Technology, Inc., Summit
Subordinated Debt Funds, L.P. Summit Ventures IV,
L.P., Summit Investors II, L.P., Splash Technology
Holdings, Inc., and Splash Merger Company, Inc.
2.10 Amendment No. 1 to Merger Agreement among Radius Inc.,
Splash Technology, Inc., Splash Technology Holdings,
Inc., Splash Merger Company, Inc. et al., dated
January 30, 1996.
10.03 B Form of Stock Option Grant as currently in effect under
Registrant's 1995 Stock Option Plan.
10.04 Employee Stock Purchase Plan, as amended on July 20, 1995.
11.01 Computation of per share earnings.
<PAGE>
MERGER AGREEMENT
DATED AS OF DECEMBER 21, 1995
AMONG RADIUS INC.,
SPLASH TECHNOLOGY, INC.,
SUMMIT SUBORDINATED DEBT FUND, L.P.,
SUMMIT VENTURES IV, L.P.,
SUMMIT INVESTORS II, L.P.,
SPLASH TECHNOLOGY HOLDINGS, INC.
AND
SPLASH MERGER COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I
THE MERGER; EXCHANGE OF SECURITIES. . . . . . . . . . . . . . . . . . . . 2
1.1 CONTRIBUTION OF CSG ASSETS TO COMPANY. . . . . . . . . . . . . . . . 2
1.2 THE MERGER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.3 CONVERSION OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . 3
1.4 THE CLOSING OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . 3
1.5 POST-CLOSING CONTRIBUTION BY SELLER. . . . . . . . . . . . . . . . . 4
ARTICLE II
REPRESENTATIONS AND WARRANTIES OFTHE INVESTORS, HOLDCO AND HOLDCO SUB . . 5
2.1 HOLDCO AND HOLDCO SUB. . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 INVESTOR AUTHORIZATION . . . . . . . . . . . . . . . . . . . . . . . 7
2.3 FINDERS OR BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY. . . . . . . . . . . 8
3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE COMPANY . . . . 8
ARTICLE IV
CONDITIONS PRECEDENT TO THE OBLIGATIONS . . . . . . . . . . . . . . . . .20
4.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .20
4.2 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . . . . .20
4.3 PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . .20
4.4 DOCUMENTATION AT CLOSING . . . . . . . . . . . . . . . . . . . . . .20
4.5 MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . .23
4.6 CONDUCT OF BUSINESS; REVENUES. . . . . . . . . . . . . . . . . . . .23
4.7 CONSENTS, WAIVERS, ETC.. . . . . . . . . . . . . . . . . . . . . . .23
4.8 ACCOUNTING REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . .24
4.9 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. . . . . . . .24
4.10 HART-SCOTT-RODINO WAITING PERIOD . . . . . . . . . . . . . . . . . .24
4.11 ASSETS TRANSFER. . . . . . . . . . . . . . . . . . . . . . . . . . .24
4.12 ELECTION UNDER SECTION 338(H)(10). . . . . . . . . . . . . . . . . .24
4.13 NUBUS EQUIPPED COMPUTERS.. . . . . . . . . . . . . . . . . . . . . .25
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ARTICLE V
CONDITIONS PRECEDENT TO SELLER'S AND COMPANY'S OBLIGATIONS. . . . . . . .25
5.1 REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . .25
5.2 ABSENCE OF LITIGATION. . . . . . . . . . . . . . . . . . . . . . . .25
5.3 PERFORMANCE OF OBLIGATIONS . . . . . . . . . . . . . . . . . . . . .25
5.4 FAIRNESS OPINION . . . . . . . . . . . . . . . . . . . . . . . . . .25
5.5 CONSENTS, WAIVERS, ETC.. . . . . . . . . . . . . . . . . . . . . . .25
5.6 BOARD OF DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . .26
5.7 HOLDCO CASH. . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
5.8 HART-SCOTT RODINO WAITING PERIOD . . . . . . . . . . . . . . . . . .26
5.9 DOCUMENTATION AT CLOSING . . . . . . . . . . . . . . . . . . . . . .26
5.10 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. . . . . . . .28
ARTICLE VI
POST-CLOSING COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . .28
6.1 AFFIRMATIVE COVENANTS OF HOLDCO OTHER THAN REPORTING REQUIREMENTS. .28
6.2 NEGATIVE COVENANTS OF HOLDCO . . . . . . . . . . . . . . . . . . . .30
6.3 REPORTING REQUIREMENTS OF HOLDCO . . . . . . . . . . . . . . . . . .32
6.4 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . .33
6.5 COVENANTS OF SELLER. . . . . . . . . . . . . . . . . . . . . . . . .34
ARTICLE VII
OBLIGATIONS PENDING THE CLOSING . . . . . . . . . . . . . . . . . . . . .35
7.1 ACCESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
7.2 CONDUCT OF COMPANY'S BUSINESS. . . . . . . . . . . . . . . . . . . .36
7.3 CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
7.4 NOTICE OF BREACH . . . . . . . . . . . . . . . . . . . . . . . . . .38
7.5 SELLER AND INVESTORS AS STOCKHOLDERS . . . . . . . . . . . . . . . .39
7.6 RETENTION OF CSG EARNINGS. . . . . . . . . . . . . . . . . . . . . .39
ARTICLE VIII
OBLIGATIONS AT OR PRIOR TO THE CLOSING. . . . . . . . . . . . . . . . . .40
8.1 EXCLUSIVITY/OTHER OFFERS . . . . . . . . . . . . . . . . . . . . . .40
8.2 OTHER DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . .40
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ARTICLE IXNATURE AND SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS . .41
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . .41
ARTICLE XINDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . .41
10.1 INDEMNIFICATION BY THE SELLER FOR BREACH OF THIS AGREEMENT . . . . .41
10.2 INDEMNIFICATION BY THE SELLER FOR EFI LITIGATION . . . . . . . . . .41
10.3 CLAIMS FOR INDEMNIFICATION OF INVESTORS. . . . . . . . . . . . . . .42
10.4 DEFENSE BY SELLER. . . . . . . . . . . . . . . . . . . . . . . . . .42
10.5 TIME LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND COMPANY.43
10.6 MONETARY LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND
COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
10.7 DAMAGES TO INVESTORS . . . . . . . . . . . . . . . . . . . . . . . .43
10.8 NO WAIVER BY INVESTORS, HOLDCO AND COMPANY. . . . . . . . . . . . .44
10.9 MATERIALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .44
10.10 INDEMNIFICATION BY HOLDCO AND INVESTORS. . . . . . . . . . . . . . .44
10.11 CLAIMS FOR INDEMNIFICATION OF SELLER . . . . . . . . . . . . . . . .44
10.12 DEFENSE BY HOLDCO AND INVESTORS. . . . . . . . . . . . . . . . . . .44
10.13 TIME LIMITATION ON INDEMNIFICATION OF SELLER . . . . . . . . . . . .45
10.14 MONETARY LIMITATION ON INDEMNIFICATION OF SELLER . . . . . . . . . .45
10.15 NO WAIVER BY SELLER. . . . . . . . . . . . . . . . . . . . . . . . .45
ARTICLE XIDEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . .46
11.1 CERTAIN DEFINED TERMS. . . . . . . . . . . . . . . . . . . . . . . .46
11.2 ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . .52
ARTICLE XIIMISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . .52
12.1 NO WAIVER; CUMULATIVE REMEDIES . . . . . . . . . . . . . . . . . . .52
12.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
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12.3 AMENDMENTS, WAIVERS AND CONSENTS. . . . . . . . . . . . . . . . . .52
12.4 ADDRESSES FOR NOTICES, ETC. . . . . . . . . . . . . . . . . . . . .53
12.5 COSTS, EXPENSES AND TAXES . . . . . . . . . . . . . . . . . . . . .54
12.6 BINDING EFFECT; ASSIGNMENT. . . . . . . . . . . . . . . . . . . . .54
12.7 PRIOR AGREEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . .54
12.8 SEVERABILITY. . . . . . . . . . . . . . . . . . . . . . . . . . . .54
12.9 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . .54
12.10 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .54
12.11 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .54
12.12 FURTHER ASSURANCES. . . . . . . . . . . . . . . . . . . . . . . . .54
12.13 CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . .55
12.14 PRESS RELEASE . . . . . . . . . . . . . . . . . . . . . . . . . . .55
12.15 INDEMNIFIED PARTIES. . . . . . . . . . . . . . . . . . . . . . . .55
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EXHIBITS
EXHIBIT
EXHIBIT NAME NUMBER
- ------------ --------
CSG Assets 1.1A
Company Certificate of Incorporation 1.1B
Company By-Laws 1.1C
Assumed Liabilities 1.1D
Holdco Certificate of Incorporation 2.1A
Holdco By-Laws 2.1B
Form of Subordinated Note 2.1C
Invention Assignment and Non-Disclosure Agreement 4.4A
Registration Rights Agreement 4.4B
Stockholders Agreement 4.4C
Consents and Waivers for CSG Asset Transfer 4.7
Projected CSG Financial Statements 7.6
Restricted GAAP Principles 11.0
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<PAGE>
MERGER AGREEMENT
THIS MERGER AGREEMENT (the "Agreement") is made and entered into as of
December 21, 1995, by and among RADIUS INC., a California corporation (the
"Seller"), SPLASH TECHNOLOGY, INC., a Delaware corporation (the "Company"),
SPLASH TECHNOLOGY HOLDINGS, INC., a Delaware corporation ("Holdco"), SPLASH
MERGER COMPANY, INC., a Delaware corporation, ("Holdco Sub") and the
entities listed as Investors on the signature page(s) hereof (the
"Investors").
RECITALS
A. The Seller currently operates a Color Server Group ("CSG") which
is engaged in the business of the design, manufacture and sale of color
servers for the color printing market, which such color servers are
comprised of computer software, computer hardware, hardware interfaces to
computers and color photocopying, scanning and printing devices, and the
integration of such elements with computers, computer networks, software
and color photocopying, scanning and printing devices.
B. Immediately prior to the Merger described below, Seller shall
contribute the assets and certain liabilities of CSG to the Company, which
shall be a wholly-owned subsidiary of Seller. Immediately prior to the
closing of the Merger described below, all of Holdco's capital stock shall
be held by the Investors and Holdco Sub shall be a wholly-owned subsidiary
of Holdco.
C. Immediately following the transfer of the assets and certain
liabilities of CSG to the Company described above, Holdco Sub shall merge
into and with the Company, with the Company surviving, and the Seller shall
receive from Holdco Series B Redeemable and Convertible Preferred Stock,
par value $0.001, of the Company ("Series B Preferred Stock") convertible
into approximately 19.9% of Holdco Common Stock (post-closing and without
considering dilution by management options) and $21,945,175 in cash. Prior
to such Merger, the management of the Company shall have purchased
approximately 6.1% of Holdco Common Stock (post-closing and without
considering dilution by management options) from Holdco pursuant to a
Restricted Stock Purchase Agreement, thus leaving approximately 74% of
Holdco Common Stock (post-closing and without considering dilution by
management options) in the hands of the Investors.
D. The respective boards of directors and stockholders of Holdco Sub
and the Company have approved the merger (the "Merger") of Holdco Sub into
and with the Company pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein, and subject to the terms and conditions hereinafter set forth, the
parties hereby agree as follows:
<PAGE>
ARTICLE I
THE MERGER; EXCHANGE OF SECURITIES
1.1 CONTRIBUTION OF CSG ASSETS TO COMPANY. Immediately prior to the
Effective Time (as hereinafter defined), the Seller shall transfer, assign
and deliver to the Company, and the Company shall accept and receive from
the Seller, all right, title and interest of the Seller, free and clear of
all Liens, other than as specified on Exhibit 1.1A or in the Disclosure
Letter (as hereinafter defined), in and to those tangible and intangible
rights, properties and assets set forth on Exhibit 1.1A hereto (the
"Assets"). Immediately prior to the Effective Time, the Certificate of
Incorporation of the Company shall be in the form of Exhibit 1.1B hereto,
and the By-Laws of the Company shall be in the form of Exhibit 1.1C hereto.
The Company shall assume from the Seller all of its obligations under the
contracts, commitments and undertakings which are specifically identified
on Exhibit 1.1A as Contracts (the "Contracts"). Other than the Company's
obligations under the Contracts, the Company shall assume and agree to
perform or discharge, when and as due, only those obligations, claims and
liabilities described on Exhibit 1.1D hereto (the "Assumed Liabilities").
Exhibit 1.1D sets forth all employees and consultants of the Seller that
are realted to CSG and the Business and who will become employees and
consultants of the Company. As part of the same transaction, the Company
and the Seller shall enter into a Corporate Services Agreement mutually
agreeable in form and substance to the Seller and the Investors. Such
Corporate Services Agreement shall specify that the Seller provide the
Company with certain tax, accounting, legal, logistics, shipping,
receiving, storage, warehousing, inventory management, transportation,
repair, field support, maintenance, purchasing, payroll, information
services, human resources and other services (consistent with Past
Practices and the provision of all services and other items provided by the
Seller to CSG immediately prior to the date hereof) for a period extending
for 3 months after the date of the Closing. The consideration to be
provided by the Company shall be based on the level of use of services and
market rates for similar services. Such Corporate Services Agreement shall
allow for termination by the Company with respect to any services or part
thereof upon 30 days prior notice to the Seller. Holdco shall use
reasonable efforts to become independent of the Seller with respect to such
services within 30 days of the Closing. The Corporate Services Agreement
also will provide for payment of consideration to the Seller for such
services, if any, provided by the Seller to CSG from January 1, 1996 to the
date of the Closing, to the extent that the Seller was not compensated for
such services previously. Further, as part of the same transaction, the
Company and the Seller shall enter into a Sub-Lease mutually agreeable in
form and substance to the Seller and the Investors. Such Sub-Lease shall
specify that the Seller provide the Company with rental of the real
property owned or leased by the Seller that is to be occupied by the
Company for a period extending for 3 months after the date of the Closing.
The consideration to be provided by the Company shall be based on the
amount of rental space actually occupied by the Company and the rent paid
by the Seller for such rental space. Such Sub-Lease shall allow for
termination by the Company with respect to any rental space or part thereof
upon 30 days prior notice to the Seller. The Sub-Lease also will provide
for payment of consideration to the Seller for such rental space, if any,
provided by the Seller to CSG from January 1, 1996 to the date of the
Closing, to the extent that the Seller was not compensated for such rental
previously. In addition, as part of the same transaction, the Company and
the Seller shall have entered into a Trademark License Agreement, mutually
agreeable in form and substance to the Seller and the Investors, which
shall permit the Company to use certain Seller trademarks that have been
and are expected to be used in the Business for a period
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extending 18 months after the date of the Closing. Such Trademark License
Agreement shall be in full force and effect and binding upon the parties
thereto. Any sales, use or transfer Taxes or permit or license transfer
fees and expenses relating to the transfer of the Assets from the Seller to
the Company or otherwise due as a result of the transactions contemplated
by this Agreement shall be paid by the Seller.
1.2 THE MERGER.
(a) SURVIVING CORPORATION. Subject to the conditions contained
herein and in accordance with the provisions of this Agreement and the
DGCL, at the Effective Time (as hereinafter defined), Holdco Sub shall be
merged with and into the Company, which, as the corporation surviving in
the Merger (the "Surviving Corporation"), shall continue unaffected and
unimpaired by the Merger to exist under and be governed by the laws of the
State of Delaware. At the Effective Time, the separate existence of Holdco
Sub shall cease except to the extent provided by law in the case of a
corporation after its merger into another corporation.
(b) EFFECTS OF THE MERGER. The Merger shall have the effects
set forth in Sections 259 through 261 of the DGCL.
(c) CERTIFICATE OF INCORPORATION, BY-LAWS, OFFICERS AND
DIRECTORS. The Certificate of Incorporation and By-Laws of the Company, as
in effect immediately prior to the Effective Time, shall continue in full
force and effect as the Certificate of Incorporation and By-Laws of the
Surviving Corporation. The initial board of directors of the Surviving
Corporation shall consist of the initial directors of Holdco Sub and the
initial officers of the surviving corporation shall be as mutually agreed
to by the Seller and the Investors, who all shall serve until their
respective successors are duly elected and qualified.
1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the
Merger and without any action on the part of the Seller as the sole
stockholder of the Company or Holdco as the sole stockholder of Holdco Sub:
(a) Each share of common stock, par value of $0.001, of the
Company (the "Company Common Stock") outstanding immediately prior to the
Effective Time shall be converted into (i) 4.282 shares of Series B
Preferred Stock and (ii) the right to receive $21,945.175, payable by wire
transfer of federal clearing house funds.
(b) Each share of the common stock, par value $0.001, of Holdco
Sub (the "Holdco Sub Common Stock") outstanding immediately prior to the
Effective Time shall be converted into one share of Company Common Stock.
1.4 THE CLOSING OF THE MERGER. The closing of the Merger (the
"Closing") shall be held at the office of Wilson Sonsini Goodrich & Rosati,
P.C., 650 Page Mill Road, Palo Alto, California 94304-1050, on such date
and at such time as may be mutually agreed upon, but on or prior to January
31, 1996, unless the parties agree otherwise. At the Closing, subject to
the fulfillment or waiver of the conditions
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set forth in Articles IV and V hereof, (a) the parties shall cause the
Merger to be consummated by the filing of a certificate of merger, executed
and acknowledged in accordance with the DGCL, with the Secretary of State
of Delaware, (b) the Seller shall deliver, assign, convey and transfer each
share of Company Common Stock to Holdco, (c) Holdco shall deliver, assign,
convey and transfer to the Seller the shares of Series B Preferred Stock
that the Seller is entitled to pursuant to Section 1.3 hereof, and (d)
Holdco shall transfer to the Seller (or an agent of the Seller, if
previously designated in writing by the Seller) by wire of federal clearing
house funds to such account or accounts as shall have been previously
designated in writing by the Seller, the amount of cash (the "Cash Purchase
Price") that the Seller is entitled to pursuant to Section 1.3 hereof;
PROVIDED that an amount equal to $4,700,000 shall be wired to the escrow
account subject to the Escrow Agreement referred to in Section 4.4(h)
rather than directly to an account of the Seller. The date and time of the
effectiveness of the Merger pursuant to the DGCL shall be herein called the
"Effective Time."
1.5 POST-CLOSING CONTRIBUTION BY SELLER.
(a) DELIVERY OF YEAR-END BALANCE SHEET. As soon as practicable
(but in no event later than 60 days) after the date of the Closing, the
Investors shall deliver to the Seller a balance sheet for the Company,
prepared by the Investors' Accountants at the expense of Holdco, as of the
close of business on December 31, 1995 (the "Year-End Balance Sheet") that
is prepared in accordance with Restricted GAAP and, to the extent in
accordance with Restricted GAAP, on a consistent basis with the Interim
Balance Sheet.
(b) REVIEW BY SELLER; DISPUTE RESOLUTION.
(i) Promptly following receipt of the Year-End Balance
Sheet, Seller and Seller's Accountants may review the same and, within 30
days after the date of such receipt, may deliver to the Investors a
certificate signed by a duly authorized officer of the Seller setting forth
its objections to the Year-End Balance Sheet (set forth in reasonable
detail), together with a summary of the reasons therefor and calculations
and modifications which, in its view, are necessary to eliminate such
objections. In the event the Seller does not so object within such 30-day
period, the Year-End Balance Sheet shall be final and binding for the
purposes of this Agreement.
(ii) In the event the Seller so objects within such 30-day
period, then the Seller and the Investors shall jointly select a national
accounting firm acceptable to each of the Seller and the Investors (or if
they cannot agree on such selection, a national "big-six" accounting firm
will be selected by lot after eliminating the Seller's Accountants and the
Investors' Accountants) and the firm so selected (the "Additional
Accounting Firm") shall be directed by the Seller and the Investors to
conduct a review of the objections of the Seller to the Year-End Balance
Sheet as promptly as reasonably practicable (and the Seller and the
Investors shall use reasonable efforts to allow and cause the Additional
Accounting Firm to conduct such review as promptly as reasonably
practicable) and, upon completion of such review, to deliver written notice
to each of the Seller and the Investors setting forth a summary of all
adjustments to the Year-End Balance Sheet determined necessary by the
Additional Accounting Firm to resolve the objections of the Seller to the
Year-End Balance Sheet (such written notice and related summary being
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herein called the "Additional Report"). The Year-End Balance Sheet as
adjusted by any adjustments as set forth in the Additional Report shall be
final and binding, for purposes of this Agreement.
(iii) Each of the Seller, the Investors, the Seller's
Accountants and the Investors' Accountants and, if applicable, the
Additional Accounting Firm, shall promptly make available to any of the
foregoing Persons such books, records and other information (including work
papers) as may be reasonably requested by any such Person to audit or
review the Year-End Balance Sheet or any objections thereto. The fees and
expenses of the Investors' Accountants related to its services under
Section 1.5(a) shall be paid by Holdco, the fees and expenses of the
Investors' Accountants related to its services under Section 1.5(b) shall
be paid by the Investors, the fees and expenses of the Seller's Accountants
related to its services under this Section 1.5 shall be paid by Seller and
the fees and expenses, if applicable, of the Additional Accounting Firm
related to its services under this Section 1.5 shall be paid 50% by the
Seller and 50% by the Investors.
(c) CONTRIBUTION BY SELLER. If the Working Capital of the
Business and the Company as of the date of the Closing as reported in the
final and binding Year-End Balance Sheet, is less than negative $554,825,
then within five (5) days of the date that the Year-End Balance Sheet
becomes final and binding in accordance with Section 1.5(b), the Seller
shall pay to the Company by wire transfer of federal clearing house funds
the amount by which such Working Capital is less than negative $554,825.
If Seller does not pay any amounts due under this Section in accordance
with the terms of this Section, then the Company, Holdco and the Investors
shall receive indemnification from the Seller in accordance with Article X
and, at their sole election, shall receive payments for such amounts from
the escrow fund described in Section 4.4(h).
(d) PAYMENT BY THE COMPANY. If the Working Capital of the
Business and the Company as of the date of the Closing as reported in the
final and binding Year-End Balance Sheet, is greater than negative
$554,825, then within five (5) days of the date that the Year-End Balance
Sheet becomes final and binding in accordance with Section 1.5(b), the
Company shall pay to the Seller by wire transfer of federal clearing house
funds the amount by which such Working Capital is greater than negative
$554,825; provided that, in any event, such payment by the Company to the
Seller shall not exceed $1,554,825. If Company does not pay all amounts
due under this Section in accordance with the terms of this Section, then
the Seller shall receive indemnification from the Investors, Holdco and the
Company in accordance with Article X hereof.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE INVESTORS, HOLDCO AND HOLDCO SUB
2.1 HOLDCO AND HOLDCO SUB. Holdco, Holdco Sub and each Investor,
jointly and severally, represent and warrant to the Seller and the Company
that (as of the date hereof, as of the date of the Closing and as of the
Effective Time):
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(a) ORGANIZATION AND UNDERSTANDING. Each of Holdco and Holdco
Sub is a duly organized and validly existing corporation in good standing
under the laws the State of Delaware. The Certificate of Incorporation and
the By-Laws of Holdco are in the form of Exhibit 2.1A and 2.1B,
respectively.
(b) CORPORATE ACTION. Holdco has all necessary corporate power
and authority and have taken all corporate action required to make all the
provisions of this Agreement, and any other agreements and instruments
executed in connection herewith, the valid and enforceable obligations of
Holdco. Holdco Sub has all necessary corporate power and authority and has
taken all corporate action required to make all the provisions of this
Agreement, and any other agreements and instruments executed in connection
herewith, the valid and enforceable obligations of the Holdco Sub.
(c) CAPITALIZATION. Immediately prior to the Effective Time,
the authorized capital stock of Holdco shall consist of 10,000,000 shares
of common stock, par value $0.001, of Holdco ("Holdco Common Stock"),
2,002,500 shares of which shall be outstanding and issued, 15,426 shares of
Series A Redeemable Preferred Stock, par value $0.001, of Holdco ("Series A
Preferred Stock"), 15,426 shares of which shall be outstanding and issued,
and 4,282 shares of Series B Preferred Stock, none of which shares shall be
issued and outstanding. Immediately prior to the Effective Time, all such
issued shares shall be validly issued, fully paid and non-assessable and
free and clear of all Liens. Immediately prior to the Effective Time, there
will be no options, warrants or rights to purchase shares of capital stock
or other securities authorized, issued or outstanding, nor will Holdco be
obligated in any other manner to issue shares of its capital stock or other
securities. None of the Investors has, and as of the Closing none of them
shall have, granted or sold, and none of the Investors is, or at the time
of Closing neither will be, a party to any agreement, commitment or
understanding, written or oral, providing for the grant or sale of, options
or other rights to purchase or restricting the transfer of, and none of
them is, and at the Closing none will be, obligated to sell or otherwise
transfer, any of securities or capital stock of Holdco to any person or
entity. Immediately prior to the Effective Time, there shall be sufficient
authorized but unissued shares of Holdco Common Stock reserved for issuance
to Seller upon conversion of all shares of Series B Preferred Stock then
held by the Seller into shares of Holdco Common Stock pursuant to the terms
of Holdco's Certificate of Incorporation. Immediately prior to the
Effective Time, the 4,282 shares of Series B Preferred Stock to be issued
to the Seller shall be convertible into 497,465 shares of Holdco Common
Stock (approximately 19.9% of the issued and outstanding Holdco Common
Stock), which shares have been reserved for issuance pursuant to the terms
of the Certificate of Incorporation of Holdco. When issued to the Seller,
the 4,282 shares of Series B Preferred Stock will be validly issued, fully
paid and non-assessable, and free and clear of all Liens and will be issued
in accordance with the registration and qualification requirements of
federal and any applicable state securities laws. The authorized capital
stock of Holdco Sub consists of 1,000 shares of Holdco Sub Common Stock,
1,000 shares of which are outstanding and issued to Holdco. Immediately
prior to the Effective Time, Investors shall be the owners of 1,850,000
shares of Holdco Common Stock, 15,426 shares of Series A Preferred Stock
and certain Subordinated Notes of Holdco having a face value of $8,000,000
(the "Subordinated Notes," together with such shares of Series A Preferred
Stock held by the Investors and the shares of Series B Preferred Stock to
be received by the Seller pursuant to the Merger, are sometimes
collectively referred to as the "Securities") substantially in the form in
Exhibit 2.1C. Immediately prior to the Effective Time, members of the
management of the Company
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shall be the owners of 152,500 shares of Holdco Common Stock, which shares
will have been purchased pursuant to the Restricted Stock Purchase
Agreement referenced in Sections 5.9(h) and 5.10 hereof, assuming delivery,
execution and performance thereunder by the management of the Company of
such Restricted Stock Purchase Agreement and satisfaction of the conditions
specified in Sections 5.9(h) and 5.10 hereof.
(d) GOVERNMENT APPROVAL. No authorization, consent, approval,
permits, licenses, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with the execution or delivery by the Investors, Holdco or
Holdco Sub of, or for the performance by the Investors, Holdco or Holdco
Sub of their obligations under this Agreement except for filings to be
made, if any to comply with exemptions from registration or qualification
under federal and state security laws and the expiration of any applicable
waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
(e) LIABILITIES. Neither Holdco nor Holdco Sub has any material
Liabilities, except as contemplated herein.
2.2 INVESTOR AUTHORIZATION. Each Investor further represents that:
(a) Each Investor has duly authorized, executed and delivered
this Agreement and any other agreements and instruments executed in
connection herewith and has all necessary power and authority to do so.
(b) This Agreement and such other agreements and instruments
constitute the valid and binding obligations of each Investor, enforceable
against it in accordance with their respective terms, and all such action
to make such agreements so has been taken.
(c) No consent or approval of any Person is required in
connection with the execution, delivery and performance of this Agreement
and such other agreements and instruments by each Investor which has not
heretofore been obtained.
(d) Execution and performance of this Agreement shall not result
in a material default of other agreements or instruments or any Law by any
Investor.
2.3 FINDERS OR BROKERS. Each Investor, Holdco and Holdco Sub
represent that no Person has or will have, as a result of the transactions
contemplated by this Agreement, any right, interest or valid claim upon or
against the Company, Holdco or the Seller for any commission, fee or other
compensation as a finder or broker because of any act or omission by such
Investor, Holdco or Holdco Sub, and each Investor agrees to indemnify and
hold the Seller and the Company harmless against any such commissions, fees
or other compensation.
ARTICLE III
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REPRESENTATIONS AND WARRANTIES OF SELLER AND COMPANY
3.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER AND THE COMPANY.
Except as disclosed in a letter delivered by the Company to the Seller
prior to the date hereof (the "Disclosure Letter," which Disclosure Letter
shall, when qualifying a representation or warranty, refer specifically to
the Section number herein of the representation or warranty so qualified),
the Seller and the Company, jointly and severally, represent and warrant to
the Investors that (as of the date hereof, as of the date of the Closing,
and as of the Effective Time):
(a) ORGANIZATION AND STANDING. Each of the Seller and the
Company is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction in which it is organized and
has all requisite corporate power and authority for the ownership and
operation of its properties and for the carrying on its business,
including, without limitation, the Business as now conducted by CSG and as
now proposed to be conducted by the Company. The Seller, in relation to
CSG and the operation of the Assets, is, and the Company is, or will be as
of the Closing, duly qualified and in good standing as a foreign
corporation authorized to do business in all jurisdictions in which the
character of the property owned or leased, or the nature of the activities
conducted, by it makes such qualification necessary other than where
failure to so qualify would not have a material adverse effect upon CSG,
the Business, the Company or the Assets.
(b) CORPORATE ACTION. The Seller has all necessary corporate
power and authority and has taken all corporate action required to make all
the provisions of this Agreement, and any other agreements and instruments
executed by it in connection herewith, the valid and enforceable
obligations of the Seller. The Company has all necessary corporate power
and authority and has taken all corporate action required to make all the
provisions of this Agreement, and any other agreements and instruments
executed by it in connection herewith the valid and enforceable obligations
of the Company.
(c) GOVERNMENTAL APPROVAL. No authorization, consent, approval,
permits, licenses, exemption of or filing or registration with any court or
governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, is or will be necessary for, or in
connection with the execution or delivery by the Seller or the Company of,
or for the performance by the Seller or the Company of their obligations
under this Agreement except for filings to be made, if any, to comply with
exemptions from registration or qualification under federal and state
securities laws and the expiration of any applicable waiting period
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended.
(d) LITIGATION. There is no litigation or governmental
proceeding or investigation pending or, to the best knowledge of the Seller
and the Company, threatened against the Seller, the Company or the Assets
affecting any of the Assets or the Business, or, to the best knowledge of
the Seller or the Company, pending or threatened against any officer or key
employee of the Seller whose duties relate to the Business, or the Company
that might reasonably be expected to result, either in any case or in the
aggregate, in any material adverse change in the business, operations,
affairs or conditions of CSG, the Company, the Business, or the Assets
taken as a whole, or that might reasonably be expected to call into
question the validity of this Agreement or any action taken or to be taken
pursuant hereto.
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<PAGE>
(e) COMPLIANCE WITH OTHER INSTRUMENTS. The Seller and the
Company are in compliance (i) in all respects with the terms and provisions
of their certificate or articles of incorporation or bylaws, (ii) in all
respects with the terms and provisions of each mortgage, indenture, lease,
agreement and other instrument relating to obligations of the Seller with
respect to CSG and the Company in excess of $50,000 individually or
$100,000 in the aggregate, and, (iii) with all international, foreign,
federal, state or local judgments, decrees, governmental orders, statutes,
rules, regulations, permits or licenses by which either the Company or the
Seller (with respect to CSG, the Assets or the Business) is bound or to
which the Assets are subject that, in the case of any of clauses (ii) or
(iii) the default or violation of which might have a material adverse
effect on the Business, the Assets, the Company or CSG or that might
reasonably be expected to call into question the validity of this
Agreement, or any action taken or to be taken pursuant hereto. There is no
term or provision in any of the foregoing documents and instruments and
judgments, orders, statutes, rules, regulations, permits or licenses that
materially adversely affects the Business, the Assets, or the financial
condition of CSG or the Company. Neither the execution and delivery of
this Agreement nor the consummation of any transaction contemplated hereby,
has constituted or resulted in or will constitute or result in a material
violation of any term or provision in the certificate or articles of
incorporation or bylaws of the Seller or the Company or has constituted or
resulted in a material default or violation of any term or provision in any
document or instrument to which they are subject.
(f) NO BROKERS OR FINDERS. No Person has or will have, as a
result of the transactions contemplated by this Agreement, any right,
interest or valid claim upon or against the Investors, the Company or
Holdco for any commission, fee or other compensation or as a finder or
broker because of any act or omission by the Seller or the Company or, to
the knowledge of the Seller and the Company, by any other Person.
(g) CAPITALIZATION; STATUS OF CAPITAL STOCK. Immediately
preceding the Effective Time, the Company will have a total authorized
capitalization consisting of 1,000 shares of Company Common Stock, of which
1,000 shares will be issued to the Seller and outstanding. There will be
no options, warrants or rights to purchase shares of capital stock or other
securities authorized, issued or outstanding, nor will the Company be
obligated in any other manner to issue shares of its capital stock or other
securities. Neither of the Seller or the Company, and as of the Closing
neither of them shall have, granted or sold, and neither of the Seller or
the Company is, or at the time of Closing neither will be, a party to any
agreement, commitment or understanding, written or oral, providing for the
grant or sale of, options or other rights to purchase or restricting the
transfer of, and neither of them is, and at the Closing neither will be,
obligated to sell or otherwise transfer, any of securities or capital stock
of the Company to any person or entity except to Holdco pursuant to this
Agreement.
(h) FINANCIAL STATEMENTS. The unaudited pro forma, after giving
effect to the transfer of the Assets to the Company and the assumption by
the Company of the Contracts and the Assumed Liabilities, income statement
of CSG and the Company for the year ended September 30, 1995 (the
"Financial Statements"), and the unaudited pro forma balance sheet of CSG
and the Company as of December 8, 1995 (the "Interim Balance Sheet"),
copies of which Financial Statements and Interim Balance Sheet, along with
any officers reports, have heretofore been delivered to Investors and are
attached to the Disclosure Letter, were prepared in accordance with GAAP
throughout the periods
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involved, and, to the extent consistent with GAAP, in accordance with the
Past Practice, subject to normal year-end adjustments with respect to the
Interim Balance Sheet, and fairly present the financial position and
results of operations of CSG, and on a pro forma basis, the Company for the
periods covered. Notwithstanding the foregoing, the Interim Balance Sheet
was prepared in accordance with Restricted GAAP and fairly presents, as of
its date, the Working Capital of CSG, the Company and the Business,
including all liabilites of CSG, the Company and the Business. The
unaudited income statements and cash flow statements have been presented on
a pro forma basis to reflect recurring results of the Business on a
stand-alone basis. All pro forma adjustments to the Financial Statements
and Interim Balance Sheet are set forth in the Disclosure Letter. The
balance sheets within the Financial Statements and Interim Balance Sheet
reflect all of the assets and liabilities which are necessary to conduct,
operate and maintain the Business, and the related income statements
originated from the books, records and accounts of the Seller and the
Company described in Section 3.1(j).
(i) INVENTORY. Except as would not have a material adverse
effect on the Business, the Assets, the Company or CSG, all inventory of
the Seller and the Company used in the conduct of the Business, including,
without limitation, raw materials, work-in-process and finished goods,
reflected on the Interim Balance Sheet or acquired since the date thereof
was acquired and has been maintained in the ordinary course of the Business
consistent with Past Practice, is of good and merchantable quality,
consists substantially of a quality, quantity and condition usable,
leasable or saleable in the ordinary course of the Business, is valued at
reasonable amounts based on the ordinary course of the Business during the
past six months, and is not subject to any material write-down or write-off
in excess of the inventory reserves set forth on the Interim Balance Sheet.
Neither the Seller nor the Company is under any liability or obligation
with respect to the return of the inventory used in the conduct of the
Business in the possession of wholesalers, retailers or other customers.
(j) BOOKS OF ACCOUNT. The books, records and accounts of the
Seller and the Company maintained with respect to the Business accurately
and fairly reflect, in reasonable detail and in all material respects, the
transactions and the assets and liabilities of the Seller and the Company
related to the Business and being transferred to the Company in accordance
with Section 1.1 hereof.
(k) ACCOUNTS RECEIVABLE. The accounts receivable of the Seller
and the Company arising from the Business as set forth on the Interim
Balance Sheet or arising since the date thereof are valid and genuine, have
arisen solely out of bona fide sales and deliveries of goods, performance
of services and other business transactions in the ordinary course of
business consistent with Past Practice and, to the best knowledge of the
Seller and the Company, are not subject to valid defenses, set-offs or
counterclaims. The allowance for doubtful accounts has been determined in
accordance with Restricted GAAP and, to the extent consistent with
Restricted GAAP, in accordance with the Past Practice. The Disclosure
Letter provides true and complete information with respect to the accounts
receivable of the Seller with respect to the Business as of December 8,
1995. All of the accounts receivable included in the Assets (i) have
arisen in the normal course of business, (ii) represent bona fide
indebtedness incurred by the applicable account debtors in the stated
amounts reflected on the books of Seller, subject to collection and (iii)
will be subject on the date of the Closing, to the best knowledge of the
Seller and the Company, to no prior assignment, lien, set-off or security
interest. To the best of Seller's and the Company's knowledge, such
accounts are not, and as of the date of the Closing will not be, (i) owed
by
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a person or entity that has sought the protection of any bankruptcy or
insolvency laws, or (ii) the subject of any dispute as to payment.
(l) SEC DOCUMENTS; FINANCIAL STATEMENTS. The Seller has
furnished to the Investors a true and complete copy of each statement,
report, registration statement, definitive proxy statement and other filing
filed with the Securities and Exchange Commission ("SEC") pursuant to the
Exchange Act by Seller since September 30, 1992, and, prior to the
Effective Time, the Seller will have furnished the Investors with true and
complete copies of any additional documents filed with the SEC by the
Seller prior to the Effective Time (collectively, the "Seller SEC
Documents"). In addition, the Seller has made available to the Investors
all exhibits to the Seller SEC Documents filed prior to the date hereof,
and will promptly make available to the Investors all exhibits to any
additional Seller SEC Documents filed or incorporated by reference prior to
the Effective Time, in each case limited to those exhibits which relate to
or otherwise affect the Assets and the Business. All documents required to
be filed as exhibits to the Seller SEC Documents and which relate to or
otherwise affect the Assets or the Business have been so filed. As of
their respective filing dates, the Seller SEC Documents complied in all
material respects as to form with the requirements of the Exchange Act and
the Securities Act, and as of their respective filing dates, none of the
Seller SEC Documents contain or contained any untrue statement of a
material fact, or omit or omitted to state a material fact required to be
stated therein or necessary to make the statements made therein relating to
CSG, the Assets or the Business, in light of the circumstances in which
they were made, not misleading, except to the extent corrected by a
subsequently filed Seller SEC Document. The financial statements,
including the notes thereto, of Seller that relate in any way to CSG, the
Assets or the Business included in the Seller SEC Documents (the "Seller
Financial Statements") were and are complete and correct in all material
respects as of their respective dates, complied as to form in all material
respects with applicable accounting requirements and with the published
rules and regulations of the SEC with respect thereto as of their
respective dates, and have been prepared in accordance with GAAP applied on
a basis consistent throughout the periods indicated and consistent with
each other (except as may be indicated in the notes thereto or, in the case
of unaudited statements included in Quarterly Reports on Form 10-Qs, as
permitted by Form 10-Q of the SEC). The Seller Financial Statements fairly
present the consolidated financial condition and operating results of the
Seller and its subsidiaries with respect to CSG and the Business at the
dates and during the periods indicated therein (subject, in the case of
unaudited statements, to normal, recurring year-end adjustments). There
has been no change in the Seller accounting policies with respect to CSG,
the Assets, or the Business except as described in the notes to the Seller
Financial Statements.
(m) ABSENCE OF CHANGES. Since December 8, 1995 there has not
been any event, occurrence, circumstance, state of facts or condition of
any type, whether or not in the ordinary course of business and whether or
not covered by insurance, that has materially and adversely affected, or
might reasonably be expected to materially and adversely effect, the
Business, the Assets, or the business, properties, Prospects, or financial
condition of CSG or the Company, taken as a whole, except for any change
resulting from general economic conditions.
(n) GOOD AND MARKETABLE TITLE. Each of the Seller, in relation
to the Business, CSG and the Assets (as of the date hereof) has, and the
Company (as of the date of the Closing) will have, good and marketable
title to, or a valid leasehold interest in, the Assets, free and clear of
all Liens and
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Claims and have the right to use all the Assets in the operation of the
Business, or that CSG used in the operation of the Business immediately
prior to the transactions contemplated by Section 1.1 hereof. The Assets
are in all material respects in good condition and repair, ordinary wear
and tear excepted, and are in operating condition for the purpose for which
they are currently being used. The Seller has, and, as of the Closing, the
Company will have, legal rights to all of the intangible Assets, including
the Contracts, free and clear of any Lien.
(o) SUBSIDIARIES. The Company does not control, directly or
indirectly, any other corporation, association, partnership, limited
liability company or other business entity or own any shares of capital
stock or other securities of any other Person. The Company has no
subsidiaries.
(p) TAXES AND TAX RETURNS.
(i) (A) the Seller and the Company have duly filed all Tax
Returns which are required by law to be filed by them; (B) the Company and
the Seller, in relation to CSG and the operation of the Business and the
Assets, have duly paid all Taxes due from them (whether or not shown on any
Tax Return), and there are no assessments or claims for payment of Taxes
now pending or, to the best knowledge of the Seller and the Company,
threatened, nor is there any audit of the records of the Company or the
Seller, in relation to CSG and operation of the Business and the Assets,
being made or, to the best knowledge of the Company and the Seller,
threatened by any taxing authority; (C) to the best knowledge of the
Company, there are no facts or circumstances which could reasonably be
expected to constitute a valid basis for assessments or claims for the
payment of additional Taxes with respect to such Tax Returns; (D) each Tax
Return of the Company and the Seller, in relation to CSG and the operation
of the Business and the Assets, previously filed, or to be filed in the
future relating to any period up to the date of Closing, is or will be (as
the case may be) correct and complete in all material respects; and (E) the
Company and the Seller, in relation to CSG and the operation of the
Business and the Assets, are not currently the beneficiary of any extension
of time within which to file any Tax Return. The amounts set up as
provisions for Taxes, if any, on the pro forma September 30, 1995 and
December 8, 1995 balance sheets of the Company included in the Financial
Statements and Interim Balance Sheet are sufficient for the payment of all
unpaid Taxes of the Company accrued for or applicable to the periods ended
on such date and all years and periods prior thereto and for which the
Company or the Seller in relation to CSG and operation of the Business and
the Assets, at those dates, may have been or is liable. The Company and
the Seller, in relation to CSG and the operation of the Business and the
Assets, have properly withheld and paid, or accrued for payment, when due,
to appropriate state and/or federal authorities, all sales and use taxes,
if any, and all amounts required to be withheld from payments made to its
employees, independent contractors, creditors, stockholders, shareholders
or other third parties and has also paid all employment taxes as required
under applicable laws.
(ii) The Company and the Seller, in relation to CSG, the
Business and the operation of the Assets, have not waived any statute of
limitation in respect of any Taxes or assessments by any federal, state,
county, local, foreign or other taxing jurisdiction or agreed to any
extension of time with respect to an assessment or deficiency in any Tax.
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(iii) The Company has not made any payments, and is not
obligated to make any payments, nor is the Company a party to any agreement
that under any circumstances could obligate it to make any payments, that
would not be deductible under Section 280G of the Code. The Company has
not been a United States real property holding corporation within the
meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(a)(ii) of the Code. The Company is not a
party to any tax allocation or tax sharing agreement.
(iv) The Company (A) is not and never has been required to
file a consolidated or combined state or federal income Tax Return with any
other person or entity and (B) is not liable for the Taxes of any person
under Treas. Reg. Section 1. 1502-6 (or any similar provision of state,
local, or foreign law), as a transferee or successor, by contract or
otherwise.
(v) There are no Tax Liens (other than any Lien for current
Taxes not yet due and payable) on any of the Assets. Neither the Company
nor Holdco has or will become liable for any Taxes of CSG, the Seller or
any present or former Affiliate of Seller as a result of the consummation
of the transactions contemplated by this Agreement.
(vi) Seller shall treat the transfer of the Assets described
in Section 1.1 hereof as a taxable transaction for federal and state income
tax purposes.
(q) INSURANCE. Included in the Disclosure Letter is a complete
list of all insurance policies currently maintained by the Company or by
the Seller on behalf of CSG or the Company and in effect, and, with respect
to each of such policies, a general description of the risks covered and
claims insured; copies of all of such policies have been furnished or made
available to Investors.
(r) CERTAIN TRANSACTIONS. The Company is not indebted, either
directly or indirectly, to any of the officers, directors, or stockholders
of the Company, or, to their respective spouses or children, in any amount
whatsoever, other than for payment of salary for services rendered and
reasonable expenses, and none of said officers, directors, stockholders or
any members of their immediate families, are indebted to the Company. To
the best knowledge of the Seller and the Company, no officer, director or
stockholder of the Company has any direct or indirect ownership interest in
(other than ownership interests of one percent (1%) or less in companies
whose securities are publicly traded), or any contractual relationship
with, any firm, corporation or other Person with which the Company is
Affiliated or with which the Company has a business relationship, or any
firm, corporation or other Person which competes with the Company. To the
best knowledge of the Seller and the Company, no officer, director or
stockholder or shareholder (with respect to the Seller, only if such
shareholder holds greater than 1% of the Seller's voting securities) of the
Seller or the Company, or any member of their immediate families, are a
party to or otherwise an interested party with respect to any material
contract with the Company.
(s) CONTRACTS AND COMMITMENTS.
(i) Except as expressly contemplated by this Agreement,
neither the Seller, in relation to CSG, the Assets or the Business, nor the
Company is and will be, as of the Closing, a party to, or bound by, any
currently effective and executory written or oral:
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(A) collective bargaining agreement with any labor union;
(B) contract for the employment of any officer,
individual employee, or other person or entity on a full-time, part-time,
consulting or other basis which, in any way, restricts or limits its right
to terminate such contract at will (other than the existence of any law,
public policy, or any oral discussions, or oral statements of policy which
might, under current law, be interpreted as imposing upon the Company any
covenant of good faith and fair dealing, or otherwise generally restrict
the Company's ability to terminate its employees other than on an "at-will"
basis or within sixty (60) days following delivery of such notice);
(C) agreement or indenture relating to the borrowing
of money in excess of $50,000 (in aggregate) or to the mortgaging,
pledging, transfer of a security interest, or otherwise placing a Lien on
any Asset or on any material asset or material group of assets of the
Company or the Seller, in relation to CSG, the Assets or the Business;
(D) guarantee of any obligation in excess of $50,000
(in aggregate);
(E) lease or agreement under which it is the lessee of
or holds or operates any property, real or personal, owned by any other
party other than leases or agreements under which the aggregate annual
rental payments of the Company or the Seller, in relation to CSG, the
Assets or the Business, do not, in the aggregate, exceed $25,000;
(F) agreement or group of related agreements with the
same party or any group of parties who, to the best knowledge of the Seller
and the Company, are Affiliated, which requires an aggregate payment by or
to the Company or the Seller, in relation to CSG, the Assets or the
Business, in an amount in excess of (x) with respect to purchase or sales
orders in the ordinary course of business, $25,000, and (y) with respect to
any other contracts, $50,000;
(G) warranty agreement of the Company or the Seller,
in relation to CSG, the Assets or the Business, with respect to services
provided or products sold, licensed or leased by the Company or the Seller,
in relation to CSG, the Assets or the Business, as seller, licensor or
lessor;
(H) contract or agreement prohibiting it from freely
engaging in any business or competing anywhere in the world;
(I) agreement which has not been fully performed and
involves consideration in excess of $25,000 which in the best judgment of
the Seller or the Company is material to the Business;
(J) Contract; or
(K) instrument, document, or written agreement
relating to any of the Assumed Liabilities and to which the Seller or the
Company is a party.
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(ii) The Seller, in relation to CSG, the Business and the
Assets, and the Company have performed in all material respects all
obligations required to be performed by them and are not in material
default under, or in material breach of, or after due inquiry by the
officers of the Seller and the Company, in receipt of any claim of default
under or breach of, any material agreement, all of which are described in
the Disclosure Letter, to which any of them are a party or to which the
Assets are subject; the Seller and the Company have no present expectation
or intention of not fully performing all such obligations; the Seller in
relation to CSG, the Business and the Assets, and the Company do not have
any knowledge of any material breach or anticipatory breach by the other
parties to any material contract or commitment, all of which are described
in the Disclosure Letter, to which it is a party or to which any of CSG or
the Assets are subject; and neither the Seller, in relation to CSG, the
Business and the Assets, nor the Company is a party to any contract or
contracts which, either individually or in the aggregate, are reasonably
likely to result in a material loss to CSG, the Business or the Company.
There are no warranty claims or other uninsured claims under completed
contracts with respect to the Business which might involve a material
monetary liability which is not reserved against in the Financial
Statements.
(iii) To the best knowledge of the Seller and the Company, no
officer of the Company is a party to any oral or written contract which
prohibits, or materially restricts or limits, or will prohibit or
materially restrict or limit his performance of his duties or the
fulfillment of his obligations as an employee and an officer of the Company.
(iv) a true and correct copy of each of the written
contracts and other documents and a description of the oral contracts which
are referred to in the Disclosure Letter, together with any amendments or
written waivers thereto, have been supplied to the Investors' counsel,
Wilson Sonsini Goodrich & Rosati, P.C.
(t) ERISA.
(i) The Company does not and has not at any time maintained
any employee benefit plan (as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), bonus, stock
option, stock purchase, incentive, deferred compensation, supplemental
retirement, severance and other similar fringe or benefit plans, programs
or arrangements (collectively, the "Employee Plans"). Other than as shown
in the Disclosure Letter, neither Seller with respect to the Business nor
any ERISA Affiliate of Seller maintains or has at any time maintained any
Employee Plan for the benefit of any active, retired or former employee of
the Business or their spouses or dependents. For purposes of this
Agreement, the term "ERISA Affiliate" shall refer to all members of the
group consisting of all corporations and all trades or businesses (whether
or not incorporated) under common control with the Seller and/or the
Company within the meaning of Section 414 of the Code.
(ii) No Employee Plan maintained by the Seller or any ERISA
Affiliate of Seller is subject to either Title IV of ERISA or Section 412
of the Code, and no such Employee Plan which is subject to such provisions
has been terminated within the last six years. No Employee Plan of Seller
with respect to the Business or any ERISA Affiliate of Seller has been
administered in
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violation of any of the health care continuation coverage requirements of
the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA"). Each
Employee Plan of Seller with respect to the Business or any ERISA Affiliate
of Seller intended to be qualified under Section 401(a) of the Code has
either obtained a current favorable determination letter as to its
qualified status (including its compliance with the Tax Reform Act of 1986)
from the Internal Revenue Service or still has a remaining period of time
under applicable Treasury Regulations in which to apply for such
determination letter and make amendments necessary to obtain a favorable
determination. To the best knowledge of the Seller, there are no pending
or anticipated claims (other than claims for benefits incurred in the
ordinary course of plan adminstration) or suits brought by or on behalf of
any of the employees of the Business against or otherwise involving
Seller's Employee Plans, and no event has occurred that would likely lead
to any such claims or suits. All contributions, premiums or other payments
due from the Company to (or under) any such Employee Plan have been fully
paid or adequately provided for on the Company's most recent financial
statements.
(u) INTELLECTUAL PROPERTY.
(i) The Disclosure Letter contains a list and description
(showing in each case any product, device, process, service, business or
publication covered thereby, the registered or other owner, expiration date
and number, if any) of all Copyrights, Patent Rights and Trademarks
(including all assumed or fictitious names under which the Seller or the
Company is conducting the Business) owned by, licensed to or used by the
Seller or the Company that are material to the conduct of the Business.
(ii) The Disclosure Letter contains a list and description
(showing in each case any owner, licensor or licensee) of all Software
owned by, licensed to or used by the Seller or the Company that is material
to the conduct of the Business other than "off the shelf" Software obtained
for less than $5,000 individually which are subject to shrink wrap licenses.
(iii) The Disclosure Letter contains a list and description
(showing in each case the parties thereto) of all agreements, contracts,
licenses, sublicenses and assignments which relate to (A) any Copyrights,
Patent Rights or Trademarks listed in the Disclosure Letter, (B) any Trade
Secrets owned by, licensed to or used by the Seller or the Company that are
material to the conduct of the Business or (C) any Software listed in the
Disclosure Letter.
(iv) Except for existing licenses or as disclosed in the
Disclosure Letter, the Seller, as of the date hereof, and the Company, as
of the closing date either: (A) owns or will own the entire right, title
and interest (subject to such exceptions as do not materially adversely
affect CSG, the Assets, the Business, or the Company) in and to the
Intellectual Property and Software listed in the Disclosure Letter free and
clear of any Lien, except as would not have a material adverse effect on
the Business, the Assets, CSG or the Company, or (B) has or will have the
necessary right and license to use the same, and which (together with the
services to be provided by the Seller to the Company pursuant to the
License Agreement described in Section 4.4) will enable the Company to
conduct the Business as it has been conducted in the past and as currently
conducted, without restrictions that materially adversely affect the
Business as it has been conducted and without additional material cost.
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The Seller's Software which is used in the conduct of the Business, as of
the date hereof, and the Company's Software, as of the date of the Closing,
includes those flow charts, diagrams, coding sheets, source code listings
and annotations, programmers' notes, information and work papers that the
Seller or the Company is using to maintain, modify, develop and enhance
such Software.
(v) (A) All registrations for Copyrights, Patent Rights and
Trademarks identified in the Disclosure Letter are valid and in force, and
all applications to register any unregistered copyrights, Patent Rights and
Trademarks so identified are pending and in good standing, and, to the best
knowledge of the Seller and the Company, are all without challenge of any
kind; (B) the Intellectual Property owned by the Seller, in respect of the
Assets, the Business and CSG, and by the Company is valid and enforceable;
and (C) the Seller has, as of the date hereof, and the Company will have,
as of the Closing Date, the sole and exclusive right to bring actions for
infringement or unauthorized use of the Intellectual Property and Software
owned by the Seller or the Company and used in the Business, and, to the
best knowledge of the Seller and the Company, there is no valid basis for
any such action, subject, in the case of each of clause (A), (B) and (C),
to such exceptions as do not materially adversely affect the Business, CSG,
the Assets or the Company. Correct and complete copies of registrations for
all registered Copyrights, Patent Rights and Trademarks identified in the
Disclosure Letter (together with any subsequent correspondence with the
U.S. Copyright Office or the U.S. Patent and Trademark Office, as
applicable, or filings relating to the foregoing) have already been
delivered or made available by the Seller to the Investors.
(vi) (A) No infringement by the Seller with respect to the
conduct of the Business or the Company of any Intellectual Property of any
other Person has occurred within the past five years or results in any way
from the operations of the Business and (B) neither the Seller nor the
Company has had notice of, nor, to the best knowledge of the Seller and the
Company, is there a valid basis for, a claim against it that the
operations, activities, products, Software, equipment, machinery or
processes of the Business infringe any Intellectual Property of any other
Person, other than, in each case, any infringement which does not have a
material adverse effect on the Business, CSG, the Assets or the Company.
(vii) (A) No proceedings are pending or, to the best
knowledge of the Seller and the Company, threatened against the Seller or
the Company that challenge the validity or ownership of any Copyright,
Patent Right or Trademark described in the Disclosure Letter; and (B) to
the knowledge of the Seller and the Company, there is no infringing use of
any of the same by any other Person.
(v) ENVIRONMENTAL MATTERS.
(i) Other than Hazardous Materials reasonably necessary for
the conduct of the Business which are properly stored in material
compliance with applicable Environmental Laws, no Hazardous Material is
present on any Company Facility now owned or leased by the Company or the
Seller during the time such property was owned or leased by the Company or
the Seller and which is or was used for the conduct of the Business.
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(ii) The Hazardous Material Activities of the Company, and
the Seller, with respect to the operations of CSG, the Business and the
Assets, have been conducted in material compliance with applicable
Environmental Laws.
(iii) The Disclosure Letter accurately describes all of the
material Environmental Permits currently held by the Company, and by the
Seller, with respect to the operations of CSG, the Business and the Assets,
and, to the best knowledge of the Seller and the Company, such
Environmental Permits are all of the Environmental Permits necessary for
the continued conduct of any Hazardous Material Activities associated with
CSG, the Business and the Assets as such activities are currently being
conducted. All such Environmental Permits are valid, in full force and
effect, and will survive the Closing. Except as would not have a material
adverse effect on the Business, the Assets, the Company or CSG, to the best
knowledge of the Seller and the Company, no circumstances exist which could
cause any Environmental Permit to be revoked, modified, or rendered
non-renewable upon payment of the permit fee or which could impose upon the
Company the obligation to obtain any additional Environmental Permit.
Except as would not have a material adverse effect on the Business, the
Assets, the Company or CSG, all Environmental Permits and all other
consents and clearances required by any Environmental Law or any agreement
to which the Company is bound as a condition to the performance and
enforcement of this Agreement or which are required by any Governmental
Authority in connection with the transactions contemplated by this
Agreement have been obtained or will be obtained prior to the Closing at no
cost to the Investors or Holdco.
(iv) The Company and the Seller, with respect to the
operations of CSG, the Business and the Assets, have transferred or
released Hazardous Materials only to those Disposal Sites described in the
Disclosure Letter. To the best knowledge of the Seller and the Company, no
action, proceeding, liability or claim by a private party or any
Governmental Authority, exists or is threatened, against any Disposal Site
or against the Seller or the Company with respect to any transfer or
release of Hazardous Materials to a Disposal Site in connection with the
operations of CSG, the Business and the Assets and there is no valid basis
for such claim except for those actions, proceedings, liabilities or claims
which, if adversely determined would not have a material adverse effect on
the Business, the Assets, the Company or CSG.
(w) COMPLIANCE WITH LAWS. The Company, and the Seller, with
respect to the operation of CSG, the Business and the Assets, have complied
in all respects with all Laws promulgated by any Governmental Authority,
except for such noncompliance as would not have a material adverse effect
on the Business, the Assets, the Company or CSG.
(x) DISCLOSURE. No representation, warranty or statement by the
Seller or the Company in this Agreement (including the Exhibits hereto), in
the Disclosure Letter, in that certain Business Plan Summary of CSG dated
September 18, 1995 (the "Business Plan," which is in the form previously
furnished to the Investors and is included in the Disclosure Letter), in
the Seller SEC Dcouments (taken as a whole), in the Seller Financial
Statements (taken as a whole) or in any written certificate required by
this Agreement to be furnished to the Investors or their counsel pursuant
to this Agreement contains or will contain any untrue statement of material
fact or, omits or will omit to
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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, it being understood that Investors have not received or been
provided with a "prospectus" (as defined in the Securities Act) with
respect the Company, the Seller, CSG or the Business. To the extent that
the foregoing representation and warranty is interpreted as relating to any
projections which may have been delivered by the Seller or the Company to
Investors, the Seller and the Company represent only that any such
projections were prepared in good faith, that the Seller and the Company
believe that there was at the time of the preparation of such projections a
reasonable basis for such projections, and that the Seller and the Company
are not aware of any change in their circumstances or other fact that has
occurred that causes them to believe that CSG and the Company will be
unable to meet the sales and income forecasts set forth in such
projections. Seller has not failed to disclose to the Investors or the
Company any fact or circumstance known to Seller that could reasonably be
expected to have a material adverse effect on CSG, the Business, the
Company or the Assets.
(y) NO THIRD PARTY OPTIONS. Other than this Agreement, there
are no existing agreements, options, commitments or rights with, of or to
any person to acquire all or any portion of the Business or any of the
Assets or any interest therein, except for those contracts entered into in
the normal course of business consistent with Past Practice for the sale of
inventory of Seller with respect to CSG.
(z) NECESSARY ASSETS. The Assets are sufficient (and on the
date of the Closing will be sufficient) to permit the Company to conduct,
operate and maintain the Business in all material respects consistent with
Past Practice and as contemplated by the Business Plan.
(aa) CONDITIONS AFFECTING SELLER. To the best knowledge of
Seller and the Company, there is no fact or development with respect to the
products, services, customers, facilities, computer software, data bases,
suppliers, operations or assets of CSG, the Business or the Assets which
could materially adversely affect the Business. Seller has used all
commercially reasonable efforts to keep available for the Company the
services of the employees, customers and suppliers of Seller active in the
conduct of the Business and the maintenance and operation of the Assets
whose activities are material to the Business. To the best of Seller's and
the Company's knowledge, the consummation of the transactions contemplated
hereby will not result in any materially adverse loss of any customer or
supplier of the Business.
(bb) PERMITS, LICENSES. (i) There are no governmental permits
necessary for or used by Seller to carry on the Business as now being conducted
or to use and occupy the premises leased or owned by the Seller and used by CSG
or for the Business as now being used, which governmental permits are required
by currently effective laws, rules and regulations which have not yet been
obtained, or if not obtained, would not have a material adverse effect on the
Business, the Assets, the Company or CSG; (ii) all such governmental permits are
in full force and effect and no proceeding is pending or, to the best knowledge
of Seller and the Company, threatened, to revoke or limit any such governmental
permit except for such revocations or limitations which would not have a
material adverse effect on the Business, the Assets, the Company or CSG and
(iii) Seller is in compliance in all respects with the terms and conditions of
all such governmental permits except for
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such non-compliance as could not reasonably be expected to have a material
adverse effect on the Business. No action by Seller, the Investors or the
Company is required in order that all such governmental permits will remain
in full force and effect following the consummation of the transactions
provided for herein.
(cc) SELLER INTENT. The Seller has no present intent to transfer
the Holdco Common Stock that it shall hold after the Closing.
(dd) RETENTION OF CSG EARNINGS. As of the date of the Closing
and the Effective Time, the Seller and the Company have complied in all
respects with all terms of Section 7.6 hereof.
ARTICLE IV
CONDITIONS PRECEDENT TO THE OBLIGATIONS
OF THE INVESTORS, HOLDCO AND HOLDCO SUB
The obligations of the Investors, Holdco and Holdco Sub to effect the
Merger at the Closing shall be subject to the fulfillment, or the waiver by
the Investors and Holdco, at or prior to the Closing, of each of the
following conditions (provided that any such waiver, to be effective, must
be in writing and signed by Holdco and each of the Investors):
4.1 REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of the Seller and the Company set forth in Article III hereof
shall be true in all respects on the date of the Closing. The Disclosure
Letter delivered to the Investors by the Seller prior to the date hereof
shall not have been altered or withdrawn.
4.2 ABSENCE OF LITIGATION. There shall be no litigation, whether
brought against the Seller, the Company, Holdco, Holdco Sub, or any of the
Investors, seeking to prevent the consummation of the transactions
contemplated by this Agreement, and, to the best knowledge of the Seller
and the Company, no such litigation shall have been threatened. There shall
not be in effect any order restraining or prohibiting the consummation of
the transactions contemplated by this Agreement and there shall be no
proceedings pending with respect thereto. Other than the EFI Litigation,
there shall be no pending or, to the best knowledge of the Seller, the
Company, Holdco, Holdco Sub and the Investors, threatened litigation, or
asserted or unasserted claims, assessments, or other loss contingencies,
materially affecting CSG, the Company, the Business, their Prospects, or
the Assets other than as disclosed in the Exhibits delivered pursuant
hereto as of the date of this Agreement.
4.3 PERFORMANCE OF OBLIGATIONS. The Company and the Seller shall
have performed and complied, in all material respects, with all covenants,
conditions and obligations required by this Agreement to have been
performed by the Company and the Seller at or prior to the Closing.
4.4 DOCUMENTATION AT CLOSING. The Investors shall have received
prior to or at the Closing all of the following, each in form and substance
satisfactory to the Investors and their
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counsel, and all of the following events shall have occurred prior to or
simultaneous with the Closing hereunder:
(a) A copy of all charter documents of the Seller and the
Company certified by the Secretary of State of their respective states of
incorporation, a certified copy of the resolutions of the board of
directors and, if required, the shareholders of the Seller and stockholders
of the Company, evidencing approval of this Agreement and all other matters
contemplated hereby, a certified copy of the bylaws of the Seller and the
Company, and certified copies of all documents evidencing other necessary
corporate or other action and governmental approvals, if any, with respect
to this Agreement and the Merger.
(b) An opinion of Fenwick & West, counsel for the Seller, as to
such matters as counsel to the Investors may reasonably request.
(c) A certificate of the Secretary or an Assistant Secretary of
the Seller stating the names of the officers of the Seller authorized to
sign this Agreement and the other documents or certificates to be delivered
pursuant to this Agreement by the Seller or any of its officers, together
with the true signatures of such officers. A certificate of the Secretary
or an Assistant Secretary of the Company stating the names of the officers
of the Company authorized to sign this Agreement and the other documents or
certificates to be delivered pursuant to this Agreement by the Company or
any of its officers, together with the true signatures of such officers.
The Investors, Holdco and Holdco Sub may conclusively rely on such
certificates until they shall receive a further certificate of the
Secretary or Assistant Secretary of the Seller or the Company, as the case
may be, canceling or amending a prior certificate and submitting the
signatures of the officers named in such further certificate.
(d) A certificate from the Chief Executive Officer of the Seller
stating that the representations and warranties of the Seller and the Company
contained in Article III hereof and otherwise made by the Seller or the Company
in writing in connection with the transactions contemplated hereby are true and
correct as of the date hereof and as of the date of Closing, as if such
representations and warranties were made on the date of Closing, and that all
conditions required to be performed by the Seller or the Company prior to or at
the Closing have been performed, and, to the best of such Person's knowledge,
that no condition or event has occurred or is continuing or will result from the
execution and delivery of this Agreement, which is a breach by the Seller or the
Company of a material term hereof or would constitute a breach by the Seller or
the Company of a material term hereof but for the requirement that notice be
given or time elapse or both. A certificate from the President of the Company
stating that the representations and warranties of the Company contained in
Article III hereof and otherwise made by the Company in writing in connection
with the transactions contemplated hereby are true and correct as of the date
hereof and as of the date of Closing, as if such representations and warranties
were made on the date of Closing, and that all conditions required to be
performed by the Company prior to or at the Closing have been performed, and,
to the best of such Person's knowledge, that no condition or event has occurred
or is continuing or will result from the execution and delivery of this
Agreement, which is a breach by the Company of
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a material term hereof or would constitute a breach by the Company of a
material term hereof but for the requirement that notice be given or time
elapse or both.
(e) An Invention Assignment and Non-Disclosure Agreement between
each Key Employee of the Company and the Company in the form set forth in
Exhibit 4.4A hereto shall have been executed and delivered by such Key
Employee and the Company and shall be in full force and effect and binding
upon the parties thereto.
(f) A Registration Rights Agreement in the form set forth in
Exhibit 4.4B hereto shall have been executed and delivered by the Seller
and the management of the Company and shall be in full force and effect and
binding upon the parties thereto, assuming execution and delivery thereof
by the Investors and Holdco.
(g) A Stockholders Agreement in the form set forth in Exhibit
4.4C hereto shall have been executed and delivered by the Seller and the
management of the Company and shall be in full and effect and binding upon
the parties thereto, assuming execution and delivery thereof by the
Investors and Holdco.
(h) An Escrow Agreement, mutually acceptable in form and
substance to the Seller and the Investors and providing for an escrow of
$4,700,000 for satisfaction of any claim for indemnification by the
Investors, the Company and Holdco against the Seller pursuant to Article X
hereof, shall have been executed and delivered by the Seller. Subject to
any indemnification paid to Holdco, the Company or the Investors pursuant
to Article X hereof, such Escrow Agreement shall specify that the escrow
funds be released to the Seller, and not any other Person, as follows: (i)
50% of the amount initially placed in escrow shall be released after both
(A) the Year-End Balance Sheet becomes final and binding in accordance with
Section 1.5(b) and (B) the payment of any amount due to the Investors in
accordance with Section 1.5(c) and (ii) the remainder of the amount
initially placed in escrow (the "Escrow Remainder") shall be released to
the Seller, and not any other Person, on the later of (C) the date six
months after the date of the Closing and (D) the date of a final,
non-appealable order dismissing with prejudice the EFI Litigation.
Notwithstanding the foregoing, the Escrow Remainder shall be released to
the Seller, and not to any other Person, if, at any time after the first
anniversary of the date of the Closing, each of the three following
conditions are true: (X) the consolidated net worth of the Seller, as
determined in accordance with GAAP, is greater than $5,000,000, (Y) the
Seller has reported positive net income in each of its two most recently
regularly prepared quarterly financial statements, and (Z) to the best
knowledge of the Seller, there are no facts or circumstances that have
occurred or that are reasonably likely to occur, that, taken in aggregate,
that could reasonably be expected to reduce the consolidated net worth of
the Seller, as determined in accordance with GAAP, to an amount less than
$5,000,000 within the next twelve months. In addition, if the Investors
reasonably and in good faith determine that the maximum potential Investor
Damages (as defined in Section 10.1 hereof) that could result from the EFI
Litigation is less than $2,000,000, then the amount of the Escrow Remainder
exceeding such maximum potential Investor Damages shall be released to the
Seller, and not to any other Person. The terms of such Escrow Agreement
shall provide that the escrow amount be kept under the possession and
control of an independent financial institution in a separate account of
such institution, and that Holdco have a
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perfected security interest in the escrow account and the status of a
first-priority secured creditor with respect to the escrow account. Such
Escrow Agreement shall be in full force and effect and binding on the
parties thereto, assuming execution and delivery by the Investors and
Holdco.
(i) A Restricted Stock Purchase Agreement, providing for the
purchase of 152,500 shares of Holdco Common Stock by the management of the
Company at a purchase price of $0.04 per share prior to the Effective Time,
subject to vesting and otherwise mutually agreeable in form and substance
to the Seller and the Investors, shall have been executed and delivered by
the management of the Company. Such Stock Purchase Agreement shall specify
vesting of 50% of the shares purchased by each member of management on the
first anniversary of purchase, and straight-line monthly vesting for the
remainder of shares over the following two years. Such agreement shall be
in full force and effect and binding upon the parties thereto, assuming
execution and delivery thereof by Holdco.
(j) An opinion of patent counsel, addressed to Holdco, the
Company and the Seller, of non-infringement by the Seller and the Company
of U.S. Patent No. 4,941,038, in form and substance acceptable to the
Investors and their legal counsel, which acceptance shall not be
unreasonably withheld.
(k) Such UCC financing statements shall have been filed with
respect to the escrow account established pursuant to the Escrow Agreement
referenced in clause (h) above, as may be necessary to ensure that Holdco
has obtained the status of a secured creditor with respect thereto.
(l) To the extent considered reasonably necessary by the
Investors, consents of the creditors of the Seller and any other consents
to the transactions contemplated hereby shall have been obtained.
4.5 MATERIAL ADVERSE CHANGE. There shall not have been, subsequent
to December 8, 1995, any material adverse change in the financial condition
of the Business, CSG's or the Company's assets, liabilities, business,
results of operations, Prospects or customer, supplier or employee
relations, or the Assets.
4.6 CONDUCT OF BUSINESS; REVENUES. The Business shall have been
conducted up until the date of the Closing as usual and consistent with the
practices of the Company prior to December 8, 1995. All practices of CSG,
the Company and the Business, including procurement of inventory and raw
materials, payment of accounts payable, and fulfillment of customer orders
shall have been conducted to the date of Closing in the ordinary course of
business. The revenues of CSG and the Company for the calendar quarter
ending on December 31, 1995 shall have been at least $7,000,000.
4.7 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Seller, the
Investors, Holdco, Holdco Sub and the Company shall have obtained all
consents or waivers, if any, necessary to transfer assets to the Company in
accordance with Section 1.1 hereof (including, but not limited to, those
consents or waivers listed on Exhibit 4.7 hereto), to issue the Securities,
to effect the Merger, and to
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carry out the transactions contemplated hereby, and all such consents and
waivers shall be in full force and effect. All corporate and other action
and governmental filings necessary to effectuate the terms of this
Agreement, all transactions contemplated by this Agreement (including the
transactions described in Section 1.1) and other agreements and instruments
executed and delivered by the Seller, the Investors, Holdco, Holdco Sub and
the Company in connection herewith shall have been made or taken, except
for any post-sale filing that may be required under federal and state
securities laws. In addition to the documents set forth above, the Seller
and the Company shall have provided or made available to the Investors any
other information or copies of documents that they may reasonably request.
4.8 ACCOUNTING REVIEW. The Investors shall have received, at
Holdco's expense, an accounting review by the Investors' Accountants of all
financial statements relating to CSG, the Business and the Company provided
to the Investors by the Seller or its representatives. Investors'
Accountants, at Holdco's expense, shall have determined that audited
financial statements of the Company, prepared in accordance with GAAP and
Regulation S-X promulgated under the Securities Act throughout the periods
involved and fairly presenting the financial position and result of
operations of CSG, and, on a pro forma basis, the Company for the periods
covered, for the years ended September 30, 1993, 1994 and 1995 (the
"Audited Financial Statements"), could be readily produced by the Company
from its records within 60 days after the Closing.
4.9 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. Prior to
the Effective Time, the management of the Company shall have purchased from
Holdco, in accordance with the terms of a Restricted Stock Purchase
Agreement entered into in accordance with Section 4.4(i), 152,500 shares of
Holdco Common Stock at $0.04 per share, assuming performance by Holdco of
its obligations under such Restricted Stock Purchase Agreement.
4.10 HART-SCOTT-RODINO WAITING PERIOD. Any applicable waiting period
with respect to the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired.
4.11 ASSETS TRANSFER. All documentation pursuant to which the
transactions described in Section 1.1 shall have been presented to the
Investors and Investors' counsel for review and shall have been consistent
with this Agreement and satisfactory in form and substance to the Investors
and their counsel prior to the consummation of such transactions. The
consummation of the transaction pursuant to such documentation shall have
been satisfactory in form and substance to the Investors and their legal
counsel. All of the Assets, including the Contracts, shall have been
transferred or assigned to the Company free and clear of all Liens, other
than the Assumed Liabilities, and the Investors and their counsel shall
have received evidence of such transfers reasonably satisfactory to them.
4.12 ELECTION UNDER SECTION 338(H)(10). The Seller shall have
executed the Form 8023A prepared in accordance with Section 6.5(d) hereof.
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4.13 NUBUS EQUIPPED COMPUTERS. The Investors shall have received
assurances reasonably satisfactory to them that the Company has been
allocated by Apple Computer, Inc., for sale to the Company, 400 Nubus Apple
computers consistent with the needs of the Company.
ARTICLE V
CONDITIONS PRECEDENT TO SELLER'S AND COMPANY'S OBLIGATIONS
The obligations of the Seller and the Company to cause the
consummation by the Company of the Merger at the Closing, of the Seller to
contribute the Assets to the Company prior thereto, and of the Seller and
the Company to perform their other obligations under this Agreement shall
be subject to the fulfillment, or the waiver by the Seller and the Company,
at or prior to the Closing, of each of the following conditions (provided
that any such waiver, to be effective, must be in writing and signed by the
Seller and the Company):
5.1 REPRESENTATIONS AND WARRANTIES. The representations and
warranties made by the Investors, Holdco and Holdco Sub in this Agreement
shall have been true and correct at and as of the date hereof, and they
shall be true and correct at and as of the Closing with the same force and
effect as though made at and as of that time.
5.2 ABSENCE OF LITIGATION. There shall be no litigation, whether
brought against the Seller, the Company, Holdco, Holdco Sub or any of the
Investors, seeking to prevent the consummation of the transactions
contemplated by this Agreement, and, to the best knowledge of Holdco,
Holdco Sub, the Investors, the Seller and the Company, no such litigation
shall have been threatened. There shall not be in effect any order
restraining or prohibiting the consummation of the transactions
contemplated by this Agreement and there shall not be any proceedings
pending with respect thereto. There shall be no pending or, to the best
knowledge of the Investors, Holdco and Holdco Sub, threatened litigation,
asserted claims, assessments or other loss contingencies, materially
affecting Holdco other than as set forth in this Agreement.
5.3 PERFORMANCE OF OBLIGATIONS. Investors, Holdco and Holdco Sub
shall have performed and complied, in all material respects, with all of
their covenants, conditions and obligations required by this Agreement to
be performed or complied with by them at or prior to the Closing.
5.4 FAIRNESS OPINION. Prior to the Closing, the Seller shall have
obtained an opinion by Broadview Associates, L.P. stating that the
transactions contemplated hereby shall be fair to the shareholders of the
Seller from a financial point of view.
5.5 CONSENTS, WAIVERS, ETC. Prior to the Closing, the Seller, the
Investors, Holdco, Holdco Sub, and the Company shall have obtained all
consents or waivers, if any, necessary for the Seller to contribute the
Assets to the Company, for the Company to accept and receive the Assets and
assume the Contracts from the Seller, for the Company to consummate the
Merger, for Holdco to
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issue the Securities and to carry out the transactions contemplated hereby,
and all such consents and waivers shall be in full force and effect. All
corporate and other action and governmental filings necessary to effectuate
the terms of this Agreement, and other agreements and instruments executed
and delivered by the Seller, the Investors, Holdco, Holdco Sub, and the
Company in connection herewith shall have been made or taken, except for
any post-sale filing that may be required under federal and state
securities laws.
5.6 BOARD OF DIRECTORS. The number of members of the board of
directors of Holdco Sub shall have been fixed at five and no less than four
of these five members shall have been appointed as follows: (i) Mr. Charles
Berger (as the initial designee of the Seller); (ii) two designees of the
Investors (one such designee as a Series A Director, as defined in the
Certificate of Incorporation of Holdco); and (iii) Kevin Macgillivray (as
the initial designee of the management of the Company).
5.7 HOLDCO CASH. Holdco's accounts shall contain approximately
$23,500,000 in cash and Holdco shall have no Liabilities other than as set
forth in or contemplated by this Agreement and Holdco's authorized officers
shall have executed a certificate to that effect.
5.8 HART-SCOTT RODINO WAITING PERIOD. Any applicable waiting period
with respect to the Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, shall have expired.
5.9 DOCUMENTATION AT CLOSING. The Seller and the Company shall have
received prior to or at the Closing all of the following, each in form and
substance satisfactory to the Seller and the Company and their counsel, and
all of the following events shall have occurred prior to or simultaneous
with the Closing hereunder:
(a) A copy of all charter documents of Holdco and Holdco Sub
certified by the Secretary of their respective states of incorporation, a
certified copy of the resolutions of the board of directors and, if
required, the stockholders of Holdco and Holdco Sub, evidencing approval of
this Agreement, and other matters contemplated hereby, a certified copy of
the bylaws of Holdco and Holdco Sub, and certified copies of all documents
evidencing other necessary corporate or other action and governmental
approvals, if any, with respect to this Agreement, the Merger and the
transactions contemplated by this Agreement.
(b) An opinion of Wilson Sonsini Goodrich & Rosati, P.C.,
counsel for Investors, as to such matters as counsel to the Seller may
reasonably request.
(c) A certificate of the Secretary or an Assistant Secretary of
Holdco stating the names of the officers of Holdco authorized to sign this
Agreement and the other documents or certificates to be delivered pursuant to
this Agreement by Holdco or any of its officers, together with the true
signatures of such officers. A certificate of the Secretary or an Assistant
Secretary of Holdco Sub stating the names of the officers of Holdco Sub
authorized to sign this Agreement and the other documents or certificates to be
delivered pursuant to this Agreement by Holdco Sub or any of its officers,
together with the true signatures of such officers. The Seller and the Company
may
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conclusively rely on such certificates until they shall receive a further
certificate of the Secretary or Assistant Secretary of Holdco or Holdco
Sub, as the case may be, canceling or amending a prior certificate and
submitting the signatures of the officers named in such further certificate.
(d) A certificate from the Chief Executive Officer of Holdco
stating that the representations and warranties of Holdco and Holdco Sub
contained in Article II hereof and otherwise made by Holdco or Holdco Sub
in writing in connection with the transactions contemplated hereby are true
and correct as of the date hereof and as of the date of Closing, as if such
representations and warranties were made on the date of Closing and that
all conditions required to be performed by Holdco or Holdco Sub prior to or
at the Closing have been performed, and that, to the best of such Person's
knowledge, no condition or event has occurred or is continuing or will
result from the execution and delivery of this Agreement, which is a breach
by Holdco or Holdco Sub of a material term hereof or would constitute a
breach by Holdco or Holdco Sub of a material term hereof but for the
requirement that notice be given or time elapse or both. A certificate
from the Chief Executive Officer of Holdco Sub stating that the
representations and warranties of Holdco Sub contained in Article II hereof
and otherwise made by Holdco Sub in writing in connection with the
transactions contemplated hereby are true and correct as of the date hereof
and as of the date of Closing, as if such representations and warranties
were made on the date of Closing and that all conditions required to be
performed by Holdco Sub prior to or at the Closing have been performed, and
that, to the best of such Person's knowledge, no condition or event has
occurred or is continuing or will result from the execution and delivery of
this Agreement, which is a breach by the Company of a material term hereof
or would constitute a breach by the Company of a material term hereof but
for the requirement that notice be given or time elapse or both.
(e) A Registration Rights Agreement in the form set forth in
Exhibit 4.4B hereto shall have been executed and delivered by the Investors
and Holdco and shall be in full force and effect and binding upon the
parties thereto, assuming execution and delivery thereof by Seller and the
management of the Company.
(f) A Stockholders Agreement in the form set forth in Exhibit
4.4C hereto shall have been executed and delivered by the Investors and
Holdco and shall be in full and effect and binding upon the parties
thereto, assuming execution and delivery thereof by the Seller and the
management of the Company.
(g) Holdco shall have adopted a Management Stock Option Plan
mutually agreeable in form and substance to the Seller and the Investors,
which plan shall reserve for issuance options for 261,758 shares of Holdco
Common Stock. Such plan either shall specify that the board of directors of
Holdco shall specify appropriate vesting for each option granted under the
plan, or shall specify specific vesting provisions for each option issued
thereunder that are mutually agreeable to the Seller and the Investors.
(h) A Restricted Stock Purchase Agreement, providing for the purchase
of 152,500 shares of Holdco Common Stock by the management of the Company at a
purchase price of $0.04 per share, subject to vesting and otherwise mutually
agreeable in form and substance to the
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Seller and the Investors, shall have been executed and delivered by Holdco.
Such Stock Purchase Agreement shall specify vesting of 50% of the shares
purchased by each member of management on the first anniversary of
purchase, and straight-line monthly vesting for the remainder of shares
over the following two years. Such agreement shall be in full force and
effect and binding upon the parties thereto, assuming execution and
delivery thereof by the management of the Company.
5.10 PERFORMANCE UNDER RESTRICTED STOCK PURCHASE AGREEMENT. Holdco
shall have performed all of its obligations under a Restricted Stock
Purchase Agreement entered into in accordance with Section 5.9(h), unless
the management of the Company has not performed all of their obligations
thereunder.
ARTICLE VI
POST-CLOSING COVENANTS
6.1 AFFIRMATIVE COVENANTS OF HOLDCO OTHER THAN REPORTING
REQUIREMENTS. Without limiting any other covenants and provisions hereof,
Holdco covenants and agrees that, after the Closing and for so long as (i)
shares of either series of Preferred Stock or (ii) the Subordinated Notes
remain outstanding, Holdco will perform and observe the following covenants
and provisions and will cause each of its subsidiaries to perform and
observe such of the following covenants and provisions as are applicable to
such subsidiaries, and will not, without approval of the holders of a
majority of the shares of Preferred Stock and of a majority in interest in
principal amount of the holders of the Subordinated Notes, amend or revise
any terms of this Section:
(a) PAYMENT OF TAXES AND TRADE DEBT. Pay and discharge, and
cause each of its subsidiaries to pay and discharge, all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income or profits or business, or upon any properties belonging to it,
prior to the date on which penalties attach thereto, and all lawful claims,
which, if unpaid, might become a lien or charge upon any properties of
Holdco or any of its subsidiaries, provided that neither Holdco nor any
subsidiaries shall be required to pay any such tax, assessment, charge,
levy or claim that is being contested in good faith and by appropriate
proceedings if Holdco or its subsidiary concerned shall have set aside on
its books adequate reserves with respect thereto as shall be determined by
its board of directors. Pay on a timely basis the Subordinated Notes as
and when due. Pay and cause each of its subsidiaries to pay, when due, or
in conformity with customary trade terms, all lease obligations, all trade
debt, and all other Indebtedness incident to the operations of Holdco or
its subsidiaries, except such as are being contested in good faith and by
appropriate proceedings so long as the Company or the subsidiary concerned
shall have set aside on its books adequate reserves with respect thereto as
shall be determined by its board of directors.
(b) MAINTENANCE OF INSURANCE. Maintain, and cause each of its
subsidiaries to maintain, with responsible and reputable insurance
companies or associations, insurance in such amounts and covering such
risks as is usually carried by companies of similar size engaged in similar
businesses and owning similar properties in the same general areas in which
Holdco or such subsidiary
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operates, but in any event in amounts sufficient to allow Holdco or
subsidiaries to replace any of their properties that might be damaged or
destroyed without additional expenditures by Holdco and its subsidiaries
except for reasonable deductibles. Within sixty (60) days of the date of
this Agreement, Holdco shall use all commercially reasonable efforts to
obtain and thereafter maintain term life insurance payable to Holdco in the
amount of $1,000,000 on the life of Kevin Macgillivray.
(c) PRESERVATION OF CORPORATE EXISTENCE. Except as permitted by
Section 6.2(a), Preserve and maintain, and cause each of its subsidiaries
to preserve and maintain, its corporate existence, rights, franchises and
privileges in the jurisdiction of its incorporation, and qualify and remain
qualified, and cause each of its subsidiaries to qualify and remain
qualified, as a foreign corporation in each jurisdiction in which such
qualification is necessary or desirable in view of its business and
operations or the ownership of its properties. Preserve and maintain, and
cause each of its subsidiaries to preserve and maintain, all material
licenses and other rights to use patents, processes, licenses, trademarks,
trade names, inventions, intellectual property rights or copyrights owned
or possessed by it and necessary to the conduct of its business; PROVIDED,
HOWEVER, that nothing contained in this Section 6.1(c) shall require Holdco
to bring or maintain a cause of action with respect to the foregoing.
(d) COMPLIANCE WITH LAWS. Comply, and cause each of its
subsidiaries to comply, in all material respects with all applicable laws,
rules, regulations and orders of any United States' federal or state
governmental authority, noncompliance with which could materially adversely
affect its business or condition, financial or otherwise, except
non-compliance being contested in good faith through appropriate
proceedings so long as Holdco or its subsidiary concerned shall have set up
sufficient reserves required under GAAP with respect to such items and
except for such noncompliance as would not have a material adverse effect
on Holdco, its subsidiaries or its business taken as a whole. Use its best
efforts to comply, and cause each of its subsidiaries to comply, in all
material respects with all applicable foreign laws, rules, regulations and
orders of any foreign governmental authority, noncompliance with which
could materially adversely affect its business or condition, financial or
otherwise, except non-compliance being contested in good faith through
appropriate proceedings so long as Holdco or its subsidiary concerned shall
have set up sufficient reserves required under GAAP with respect to such
items and except for such noncompliance as would not have a material
adverse effect on Holdco, its subsidiaries or its business taken as a whole.
(e) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep, and cause
each of its subsidiaries to keep, adequate records and books of account, in
which complete entries will be made in accordance with GAAP, reflecting all
financial transactions of Holdco and such subsidiary, and in which, for
each fiscal year, all proper reserves for depreciation, depletion,
obsolescence, amortization, taxes, bad debts and other purposes in
connection within its business shall be made.
(f) MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve, and
cause each of its subsidiaries to maintain and preserve, all of its
properties necessary or useful in the proper conduct of its business, in
good repair, working order and condition, ordinary wear and tear excepted.
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<PAGE> (g) BUDGETS AND BOARD APPROVAL. Prior to the commencement
of each fiscal year, prepare and submit to, and obtain the approval of a
majority of the board of directors of Holdco of a budget and operating
plan for the upcoming fiscal year, including projections or forecasts of
capital and operating expenses, cash flow, and profits and losses, all
itemized in reasonable detail and obtain the approval of such budget and
plan not more than sixty (60) days following the end of the prior fiscal
year.
(h) AGREEMENTS. Use its best efforts to cause each officer, Key
Employee, consultant and other personnel, including employees, agents and
contractors who have contributed to or participated in the conception and
development of the intellectual property on behalf of CSG, the Company or
Holdco and all employees now or hereafter employed by Holdco or any of its
subsidiaries promptly to execute an Invention Assignment and Non-Disclosure
Agreement substantially in the form of Exhibit 4.4A hereto or in a form
approved by the board of directors of Holdco.
(i) BOARD OF DIRECTORS; INDEMNIFICATION. The board of directors
of Holdco initially shall consist of five (5) directors. The certificate
of incorporation or bylaws of Holdco and its subsidiaries shall at all
times provide for the indemnification of the board of directors of Holdco
and its subsidiaries to the full extent provided by the law of the
jurisdiction in which Holdco or its concerned subsidiary, as the case may
be, is organized. Holdco and its subsidiaries shall use all commercially
reasonable efforts to obtain and maintain directors and officers liability
insurance with coverage and premium levels consistent with policies carried
by companies of similar size. Holdco and its subsidiaries shall pay for
reasonable travel and living expenses of the members of their board of
directors who are not employees of Holdco or its subsidiaries in attending
meetings of their board of directors and committees thereof and in
conducting other business on behalf of Holdco or its concerned subsidiary,
as the case may be.
(j) RESERVATION FOR SERIES B PREFERRED STOCK. As long as any
shares of Series B Preferred Stock remain outstanding, Holdco shall keep
reserved sufficient shares of Holdco Common Stock to allow all of such
outstanding shares of Series B Preferred Stock to convert into the number
of shares of Holdco Common Stock specified by the terms of the Certificate
of Incorporation of Holdco.
6.2 NEGATIVE COVENANTS OF HOLDCO. Without limiting any other
covenants and provisions hereof, Holdco covenants and agrees that, after
the Closing and for so long as either shares of Preferred Stock or the
Subordinated Notes remain outstanding, it will not without the consent of a
majority in interest in principal amount of the Subordinated Notes and the
holders of a majority of the shares of Preferred Stock take the actions
contained in the following covenants and provisions, and will cause each
subsidiary of Holdco to not, without the consent of a majority in interest
in principal amount of the Subordinated Notes and the holders of a majority
of the shares of Preferred Stock take actions contained in the following
covenants and provisions as are applicable to such subsidiary, and will
not, without the approval of the holders of a majority of the Preferred
Stock and of a majority in interest in principal amount of the holders of
the Subordinated Notes, amend or revise any terms of this Section:
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(a) MERGER, SALE OF ASSETS, ETC. Merge or consolidate with, or
sell, assign, lease or otherwise dispose of or voluntarily part with the
control of (whether in one transaction or in a series of transactions), a
material portion of its assets (whether now owned or hereinafter acquired)
to any Person, or permit any of its subsidiaries to do any of the
foregoing, except for sales or other dispositions of assets in the ordinary
course of business and except that (1) any wholly-owned subsidiary of
Holdco may merge into or consolidate with or transfer assets to any other
wholly-owned subsidiary of Holdco, (2) any wholly-owned subsidiary of
Holdco may merge into or transfer assets to Holdco, and (3) Holdco may
merge any Person into it or otherwise acquire such Person so long as Holdco
is the surviving entity, the holders of voting stock of Holdco immediately
prior to such merger are the holders of more than 50% of Holdco immediately
following such merger, such merger or acquisition does not result in the
violation of any of the provisions of this Agreement and no such violation
exists at the time of such merger or acquisition. The foregoing shall not
prohibit Holdco or any of its subsidiaries from pledging or granting a
security interest in a material portion of its assets, provided that such
transaction has been approved by the board of directors of Holdco.
(b) MAINTENANCE OF OWNERSHIP OF SUBSIDIARIES. Create any
subsidiary that is not a wholly-owned subsidiary, sell or otherwise dispose
of any shares of capital stock of any of its subsidiaries, except to Holdco
or another of its subsidiaries, or permit any of its subsidiaries to issue,
sell or otherwise dispose of any shares of its capital stock or the capital
stock of any of its subsidiaries except to Holdco or another of its
subsidiaries; provided, however, that nothing herein contained shall
prevent any merger, consolidation or transfer of assets permitted by
subsection 6.2(a).
(c) DEALINGS WITH AFFILIATES AND OTHERS. Enter into any
transaction, including, without limitation, any loans or extensions of
credit or royalty agreements, with any officer or director of Holdco or any
officer or director of any of its subsidiaries or holder of any class of
capital stock of Holdco, or any member of their respective immediate
families or any corporation or other entity directly or indirectly
controlled by one or more of such officers, directors or stockholders or
members of their immediate families (other than any such transactions in
the ordinary course of business which are in an amount not in excess of
$50,000 and loans for purchases of Holdco securities by employees,
officers, directors or consultants and housing loans to officers and
directors, so long as approved by a majority of the disinterested members
of the board of directors of Holdco).
(d) CHANGE IN NATURE OF BUSINESS. Make, or permit any of its
subsidiaries to make, any material change in the nature of its business as
carried on at the date hereof by CSG or the Company or as contemplated in
written materials delivered to the Investors prior to the date hereof.
(e) DIVIDENDS. While the Preferred Stock is outstanding,
declare or pay any dividends on any class of Holdco's or any of its
subsidiaries' capital stock now or hereafter outstanding (other than
dividends on the Preferred Stock, dividends payable in Holdco Common Stock
or dividends payable by any of Holdco's subsidiaries to either Holdco or
another subsidiary that is the parent of the paying subsidiary), or
purchase, redeem or otherwise acquire or retire any of Holdco's or any of
its subsidiaries capital stock of any class now or hereafter outstanding or
otherwise return capital or make distributions of assets to stockholders as
such, other than redemption of the Series A Preferred Stock and the Series
B Preferred Stock pursuant to the Certificate of
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Incorporation of Holdco and repurchases of capital stock under other
agreements providing for the repurchase of Holdco stock from employees,
officers, directors or consultants on termination of their relationship
with Holdco.
(f) AGREEMENTS WITH EMPLOYEES FOR THE PURCHASE OF SECURITIES.
Except as set forth herein, without approval of a majority of the
disinterested members of the board of directors of Holdco, accelerate or
terminate the vesting schedules under which restrictions on transfer of
capital stock of Holdco lapse over a period of time with respect to capital
stock held by employees, officers, directors or consultants of Holdco,
increase the number of shares (such number to be equitably adjusted in the
event of any stock split, combination, reclassification or other similar
event occurring on or after the date of this Agreement) currently available
for exercise under Holdco's stock option plan or otherwise, or issue, sell
or exchange, agree to issue, sell or exchange, or reserve or set aside for
issuance, sale or exchange to directors, officers, employees and/or
consultants shares of Holdco Common Stock, or options exercisable therefor,
except as issued at fair market value, or granted with an exercise price
equal to fair market value, at the time of issuance or grant, to directors,
officers, employees or consultants of Holdco and any of its subsidiaries.
(g) ISSUANCES OF SECURITIES AND EMPLOYEE STOCK OPTIONS. Except
as set forth herein, issue, sell or exchange, agree to issue, sell or
exchange, or reserve or set aside for issuance, sale or exchange, (i) any
equity security of Holdco (other than Holdco Common Stock), including,
without limitation, shares of Preferred Stock, (ii) any debt security of
Holdco that by its terms is convertible into or exchangeable for any equity
security of Holdco, (iii) any security of Holdco that is a combination of
debt and equity, or (iv) any option, warrant or other right to subscribe
for, purchase or otherwise acquire any equity security or any such debt
security, except for (x) Holdco Common Stock issued as a stock dividend to
holders of Holdco Common Stock or upon any subdivision or combination of
shares of Holdco Common Stock, and (y) shares of Holdco Common Stock (or
options to purchase such stock), issued pursuant to stock plans or
arrangements approved by all of the disinterested members of the board of
directors of Holdco.
6.3 REPORTING REQUIREMENTS OF HOLDCO. Holdco will furnish the
following to each holder of the Subordinated Notes, to each holder who owns
of record or beneficially any Preferred Stock, and to each holder of at
least 10% of the issued and outstanding Holdco Common Stock:
(a) as soon as available and in any event within thirty (30)
days after the end of each fiscal month of Holdco, unaudited Consolidated
balance sheets of Holdco and its subsidiaries as of the end of such month
and Consolidated statements of income and of statements of cash flow of
Holdco and its subsidiaries for the period ending with such month, setting
forth in each case in comparative form the corresponding figures for the
corresponding period of the prior fiscal year, all in reasonable detail and
duly certified (subject to year-end audit adjustments) by the chief
executive officer or chief financial officer of Holdco as having been
prepared in accordance with GAAP except for a lack of customary year end
disclosures, footnotes and year end adjustments;
(b) as soon as available and in any event within ninety (90)
days after the end of each fiscal year of Holdco, a copy of the annual
audit report for such year for Holdco and its
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subsidiaries, including therein consolidated balance sheets of Holdco and
its subsidiaries as of the end of such fiscal year and consolidated
statements of income and retained earnings and of statements of cash flow
of Holdco and its subsidiaries for such fiscal year, setting forth in each
case in comparative form the corresponding figures for the preceding fiscal
year, all duly certified by a "Big Six" independent public accounting firm
selected by Holdco's board of directors;
(c) at the time of delivery of each monthly and annual
statement, a certificate, executed by the chief executive officer or chief
financial officer of Holdco in the case of monthly statements, and Holdco's
independent public accountants in the case of annual statements, stating
that such officer or accountants, as the case may be, has caused Sections
6.1(a) (insofar as it relates to payment of federal and state income
taxes), 6.2(b), 6.2(c), 6.2(f) and 6.2(g) to be reviewed and has no
knowledge of any default by Holdco or any of its subsidiaries in the
performance or observance of any of the provisions of this Agreement or, if
such officer or accountant has such knowledge, specifying such default and
the nature thereof;
(d) promptly upon the request of any holder of at least $250,000
in principal amount of Subordinated Notes or any Person holding an
aggregate of at least 250 shares of Preferred Stock, any written report
submitted to Holdco by independent public accountants in connection with an
annual or interim audit of the books of Holdco and its subsidiaries made by
such accountants;
(e) promptly after the commencement thereof, notice of all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
materially affecting Holdco and its subsidiaries when considered as a whole;
(f) at least thirty (30) days prior to the commencement of each
fiscal year of Holdco, a copy of the operating plan and budget provided
for in Section 6.1(g);
(g) upon request, to any holder of at least $250,000 in
principal amount of Subordinated Notes or any Person holding an aggregate
of at least 250 shares of Preferred Stock, copies of all materials provided
to the committees of the board of directors of Holdco, and to any such
holder or Person who is not a member of the board of directors of Holdco
copies of all materials provided to the board of directors of Holdco and
all other information respecting the business, properties or the condition
or operations, financial or otherwise, of Holdco or any of its subsidiaries
that any Investor may from time to time reasonably request; PROVIDED,
HOWEVER, that Holdco shall not be required to deliver any such information
to the extent that such action would, in the opinion of counsel to Holdco,
be deemed to constitute a waiver of the attorney-client privilege.
Any person receiving the information distributed pursuant to
subsections (f) and (g) above agrees to hold such information in confidence
to the same extent that would be required of a member of Holdco's board of
directors.
6.4 CONFIDENTIALITY. Any confidential information obtained by any
holder of the Subordinated Notes or the Preferred Stock pursuant to this
Agreement shall be treated as confidential
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and shall not be disclosed to a third party without the consent of the
board of directors of Holdco, except that such information shall not be
deemed confidential for the purpose of enforcement of this Agreement or
valuation of the Preferred Stock or Subordinated Notes and except that any
such holder may otherwise disclose such information to its partners if such
partners agree to be bound by the restrictions contained in this Section.
At the request of the board of directors of Holdco, any Person to receive
or receiving any information pursuant to this Agreement shall execute and
deliver a reasonable confidentiality agreement in form and substance
reasonably satisfactory to the board of directors of Holdco.
6.5 COVENANTS OF SELLER.
(a) FURTHER ASSET TRANSFER. From and after the date of the
Closing, the Seller agrees to convey, transfer, and assign to the Company,
free and clear of all Liens, any tangible or intangible rights, properties
or assets then held by the Seller (i) that are necessary to permit the
Company to conduct, operate and maintain the Business consistent with Past
Practice and as it is proposed to be conducted, (ii) that are among the
Assets, including without limitation, the Contracts, (iii) the conveyance,
transfer or assignment of which would have been necessary for
representations and warranties of the Seller herein to be true and correct
as of the date of the Closing, or (iv) the conveyance, transfer or
assignment of which was or is required by the covenants of the Seller
contained in this Agreement. To the extent that any Contract was not
assigned to the Company because of a limit on assignability of such
Contract, the Seller shall take all actions necessary to pass through to
the Company all benefits of such Contracts and the Company shall perform
all obligations of the Seller thereunder and shall indemnify the Seller
with respect to such obligations; PROVIDED that such indemnification shall
be contingent on the passing of all benefits of such Contracts to the
Company; PROVIDED, FURTHER, that compliance of the Seller with this
sentence shall not excuse the Seller from any breach of the
representations, warranties and covenants of the Seller, resulting from
such non-assignment.
(b) EFI NON-INFRINGEMENT OPINION. The Seller shall use its best
efforts to cause the opinion of patent counsel described in Section 4.4(j)
to be updated and delivered to Holdco and the Company if reasonably
requested to do so by Holdco or the Company.
YEAR-END BALANCE SHEET. The Seller shall cooperate with and
give assistance to the Investors and the Investors' Accountants in relation
to the preparation of the Year-End Balance Sheet and the Audited Financial
Statements. Until the Year-End Balance Sheet is final and binding in
accordance with Section 1.5(b) and until the Audited Financial Statements
have been prepared and finalized, the Seller shall give to the Additional
Accounting Firm, the Investors, Holdco, the Company and their counsel,
accountants and other authorized representatives, on prior request therefor
from the Additional Accounting Firm, the Investors, Holdco, the Company or
such representatives, such access during normal business hours to copies of
the Seller's financial statements, books and records so as to allow the
Investors' Accountants to prepare the Year-End Balance Sheet, so as to
allow the Additional Accounting Firm to resolve disputes as specified in
Section 1.5(b), and so as to allow Holdco, the Company and their
accountants to prepare the Audited Financial Statements.
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(d) ELECTION UNDER SECTION 338(H)(10). Seller shall join with
Holdco in preparing a protective joint election on Form 8023A for the
Company under Section 338(h)(10) of the Code and under any applicable
similar provisions of state law with respect to the Merger. The Form 8023A
shall be prepared by advisers of Holdco and executed by those parties
hereto required to execute such form within 90 days after the date of the
Closing and filed by Holdco if it so elects in its sole discretion.
Information accompanying the Form 8023A will reflect the purchase price
allocation determined by Holdco; the parties hereto agree to take no
position for any tax or reporting purposes which is contrary to such
allocation.
(e) TAX TREATMENT. The Seller shall treat the formation of the
Company and the transfer of the Assets described in Section 1.1 hereof as a
taxable transaction for federal and state income tax purposes.
ARTICLE VII
OBLIGATIONS PENDING THE CLOSING
Between the date hereof and the Closing, unless this Agreement is
terminated sooner, pursuant to Section 12.2 hereof:
7.1 ACCESS. The Seller shall give to the Investors and their
counsel, accountants and other authorized representatives from and after
the date of execution of this Agreement, on prior request therefor from the
Investors or such representatives, such access during normal business hours
to the premises, employees, agents and consultants of the Seller relating
to CSG, the Business or the Assets, and of the Company, and such copies of
the Seller's financial statements, books and records, and contracts and
leases and other documentation relating to CSG, the Business, the Assets or
the Company, so as to enable the Investors to inspect and evaluate all
aspects of the business and operations, assets, operating results,
financial condition, future Prospects, capitalization, ownership, and legal
and regulatory affairs of CSG, the Business and the Company and to verify
the accuracy of the information heretofore furnished to the Investors and
the representations and warranties made in this Agreement by the Seller or
the Company with respect to the foregoing matters. The Seller agrees that
it will take no action to prevent or delay CSG or the Company from
furnishing or making available all information reasonably requested by the
Investors. Each of the Investors agrees to conduct its review in a manner
designed to minimize any disruption of the Seller's and the Company's
operations. All information and records obtained by the Investors pursuant
to this Agreement shall be maintained as confidential prior to the Closing
and shall not be disclosed to any third party prior to the Closing without
the prior written consent of the Seller, except (i) in response to legal
process; PROVIDED that Investors shall notify the Seller of such legal
process so as to provide the Seller with a reasonable opportunity to
contest the validity thereof or (ii) to the extent required to comply with
applicable law; PROVIDED, HOWEVER, that prior to making such disclosure,
Investors shall use their best efforts to have such information and records
afforded confidential treatment. Seller may require, as a condition to
providing the access described in Section 7.1, that each Investor and its
representatives execute and deliver a confidentiality agreement in form and
substance reasonably satisfactory to the
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Seller. The Investors shall not be obligated to maintain as confidential
any information obtained from the Seller or the Company which is publicly
available, readily available from public sources, known to it at the time
the information was disclosed, or which was rightly obtained from a third
party. In the event that this Agreement is terminated prior to the date of
the Closing, Investors shall return all information (and any copies
thereof) received by them (from the Seller or its agents or
representatives) and relating to the Seller, the Company, the Assets, the
Business or CSG to the Seller.
7.2 CONDUCT OF COMPANY'S BUSINESS. Unless the Investors give their
prior written consent for actions to be taken to the contrary, from the
date of this Agreement and until the Closing or termination of this
Agreement, whichever first occurs, the Seller and the Company shall, and
the Seller shall take no action to prevent or delay CSG or the Company from
being able to (except that from and after December 31, 1995, all dollar
amounts shown in this Section 7.2 shall be considered to be $0):
(a) OPERATION OF BUSINESS. Operate and conduct CSG's and the
Company's business and operations diligently and only in the ordinary
course of business consistent with Past Practice. The Business shall be
conducted up until the date of the Closing as usual and consistent with the
practices of the Seller with respect to the Business prior to December 8,
1995. All practices of CSG, the Company and the Business, including
procurement of inventory and raw materials, payment of accounts payable,
and fulfillment of customers order, shall be conducted to the date of
Closing in the ordinary course of business consistent with Past Practice.
Neither CSG nor the Company shall (i) incur any new indebtedness or
increase the amount due and owing to any lender for borrowed money, except
it may incur indebtedness for up to $50,000 for purposes of financing
equipment purchases or leases, or (ii) increase the compensation or
benefits of an employee, independent contractor or agent or adopt or amend
any commission plan or arrangement or any employee benefit plan or
arrangement of any type which results or may result in an increase in costs
or liabilities thereunder of more than $10,000 per month, in the aggregate,
above those existing on the date hereof, or otherwise lend or advance any
sum or extend credit to any employee, director, shareholder or stockholder
or any of their respective affiliates;
(b) ORGANIZATION. Preserve intact CSG's and the Company's
organization and use its reasonable best efforts to retain all employees of
and consultants to the Seller, relating to CSG, the Business and the
Assets, and the Company, commensurate with the requirements of the Business;
(c) VENDORS. Use its reasonable best efforts to retain services
of all vendors, suppliers, agents and consultants used in the Business,
commensurate with the requirements of the Business;
(d) INSURANCE. Maintain insurance (either directly or through
the Corporate Services Agreement described in Section 1.1), including
liability and efforts and omissions insurance, consistent with Past
Practice and, unless comparable insurance is substituted therefor or is not
generally available to businesses of the type conducted by CSG and the
Company, not take any action to terminate or modify, nor permit the lapse
or termination of, the present insurance policies and
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coverages of the Seller, relating to CSG, the Business and the Assets, and
the Company as set forth in the Disclosure Letter;
(e) LAWSUITS, CLAIMS. Promptly notify the Investors of, and if
requested by the Investors, diligently defend against, all lawsuits,
claims, proceedings or investigations that are, or which any officers of
the Company or the Seller, as a result of events or circumstances known to
them, has reason to believe may be, threatened, brought, asserted or
commenced against the Seller in relation to CSG or the Company or any of
their officers or directors, involving or affecting in any way CSG's or the
Company's operations, or any of the Assets, or the Business or the
transactions contemplated hereby; and, without the prior written consent of
the Investors, not settle any action or proceeding which would materially
and adversely affect the Business, the Assets, CSG or the Company, their
business, financial condition or operating results and, without the prior
written consent of the Investors, not release, settle, compromise or
relinquish any claims, causes of action or rights involving more than
$50,000 individually or $100,000 in the aggregate which the Company or the
Seller may have against any other persons, including, without limitation,
claims or rights to reimbursement or payment for services rendered by the
Company, CSG or the Seller, in relation to CSG, the Business and the Assets;
(f) CERTAIN CHANGES. Not sell or otherwise dispose, or enter
into any agreement for the sale, of any of the Assets, except for sales of
inventory and obsolete equipment in the ordinary course of business and
consistent with Past Practice, and not permit or allow, or enter into any
agreements providing for or permitting, any of its assets or properties to
be subjected to any option or Lien other than Liens in existence on the
date hereof and statutory liens to secure Taxes that are not yet due and
payable, all of which are listed on the Disclosure Letter;
(g) CONDITION OF ASSETS. Maintain in good working order and
condition, ordinary wear and tear excepted, and in compliance in all
material respects with all applicable laws and regulations, all of the
tangible Assets, wherever located, that are used, leased or owned by the
Seller or by the Company;
(h) AGREEMENTS. Observe and perform all terms, conditions,
covenants and obligations contained in all existing material agreements
between the Seller, in relation to CSG, or the Company and third parties
the violation of which would have, individually or in the aggregate, a
material adverse effect on the Business, the Assets, CSG or the Company or
their business, financial condition, operating results or future Prospects;
and, except as required by any existing agreements, not enter into any new
agreements or transactions with respect to the Company, the Business, the
Assets or CSG, or incur any expenditures, liabilities or obligations,
involving more than $50,000 individually or $100,000 in the aggregate, or
renew, extend, amend or modify any existing agreement involving any
commitments, obligations, liabilities or requiring any expenditures that
would exceed $50,000 individually or $100,000 in the aggregate with respect
to the Company, the Business, the Assets or CSG; not take any action which
would cause a material breach or violation of or material default under any
material agreement, lease, contract, or other written instrument,
commitment or arrangement, or under any material permit, license,
franchise, judgment, writ or order, applicable to or affecting the Seller
in relation to CSG, or the Company or the Business, and promptly notify the
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Investors in writing of the occurrence of any such breach or default; and
not enter into any transaction with respect to the Company, the Business,
the Assets or CSG with any stockholder, shareholder, director or officer or
any person or entity related to or affiliated with any such person other
than those transactions that are described in the Disclosure Letter, if any;
(i) TAXES. Pay, when due, and prior to the imposition or
assessment of any interest, penalties or liens by reason of the non-payment
of, all Taxes assessed against the Seller (as related to the Assets, the
Business, CSG or the Company) or the Company, any of its assets or its
operations other than Taxes, the validity of which is being contested in
good faith and for which adequate reserves have been established in
accordance with GAAP;
(j) DIVIDENDS, ETC. Except as contemplated by this Agreement
not: (i) declare or pay any dividends or make any distributions with
respect to or redeem any shares of the Company's capital stock; (ii)
accelerate the payment of or prepay any indebtedness or other obligations
of the Company; (iii) approve or effect any reclassification or
recapitalization of the Company or its authorized or outstanding shares;
(iv) merge or consolidate the Seller or the Company with or sell any of
their assets to a third party other than sales of assets in the ordinary
course of business and consistent with Past Practice; (v) approve or
commence any proceedings for the liquidation of the Seller or the Company;
or (vi) enter into any agreement to do any of the foregoing;
(k) CORPORATE MATTERS. Except as expressly contemplated by this
Agreement, not: (i) amend in any manner the Certificate of Incorporation or
Bylaws of the Company; (ii) alter the composition or membership of the
Company's board of directors; (iii) except for shares purchased upon
exercise of outstanding options, authorize or issue any shares of capital
stock of the Company of any class or series; (iv) create or issue any
warrants, obligations, subscriptions, options, convertible securities or
other commitments under which any additional shares of the capital stock of
any class or other equity securities of the Company may be directly or
indirectly authorized, issued or transferred; or (v) agree to do any of the
above; and
(l) LIABILITIES AND EXPENSES. Not: with respect to CSG, the
Assets, the Business or the Company, create or incur (whether as principal,
surety or otherwise) any actual or contingent liabilities or expenses in
excess of $25,000 in the aggregate other than liabilities and expenses
incurred in the ordinary course of business consistent with Past Practice.
7.3 CONSENTS. Each party to this Agreement shall use its reasonable
best efforts to obtain or cause to be obtained at the earliest practicable
date, and prior to the Closing, all consents, approvals and licenses, if
any, which such party requires to permit it to consummate the transactions
contemplated hereby without violating any material agreement, contract,
instrument or applicable law or regulation, license or permit, to which it
is a party or to which it or its assets are subject. The parties hereto
shall cooperate with each other in their efforts to obtain all such
consents, approvals and licenses.
7.4 NOTICE OF BREACH. Each party to this Agreement will immediately give
notice to the other parties of the occurrence of any event, or the failure of
any event to occur, that results in a
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breach by it of any representation or warranty or a failure by it to comply
with or fulfill any covenant, condition or agreement contained herein.
7.5 SELLER AND INVESTORS AS STOCKHOLDERS. The Seller agrees, as the
sole stockholder of the Company prior to the Closing, to cause the Company,
and the Investors agree as the controlling stockholders of Holdco prior to
the Closing, to cause Holdco and Holdco Sub to comply with all of their
respective obligations hereunder to be fulfilled prior to the Closing.
7.6 RETENTION OF CSG EARNINGS. It is the intent of the parties
hereto that all assets and liabilities shown on the Year-End Balance Sheet,
all proceeds and obligations relating to such assets and liabilities, and
all earnings, revenues, income and profits earned by CSG and the Business
from and after December 31, 1995 shall be transferred to the Company
immediately prior to the Effective Time. In addition, it is the intent of
the parties hereto that CSG and the Business be run separately from the
remainder of the business of the Seller for the benefit of Holdco and those
who will be Holdco's stockholders immediately after the Effective Time. In
furtherance of these purposes, from and after December 31, 1995, the Seller
shall keep and hold all assets and liabilities related to, and all revenue
and income attributable to, CSG, the Business and the Assets, including but
not limited to those assets and liabilities shown on the Year-End Balance
Sheet, separate from other Seller assets, revenue, income and liabilities.
As of December 31, 1995, all assets related to, and all revenue and income
attributable to CSG, the Business and the Assets, including but not limited
to those assets and liabilities shown on the Year-End Balance Sheet and all
assets, receivables, income and revenue received by the Seller that relates
to CSG, the Business and the Assets, shall be held in trust for transfer to
the Company pursuant to this Agreement. From and after December 31, 1995,
the Seller shall not cause or allow the Company, CSG, the Business, and the
Assets to assume any Liability or to become subject to any Lien other than
pursuant to the assumption of trade payables of CSG and the Business in the
ordinary course of business. From and after December 31, 1995, any
increases in the Working Capital of CSG and any additional receivables
received by the Seller in relation to CSG, the Business and the Assets
shall be held in trust by the Seller for transfer to the Company. From and
after December 31, 1995, all cash shown (or to be shown) on the Year-End
Balance Sheet shall be placed in an account separate from that of all other
funds of the Seller. All cash received by the Seller in relation to CSG,
the Business and the Assets from and after December 31, 1995, as income,
conversion of accounts receivable or otherwise, shall be placed in such
separate account and held there in trust until transferred to the Company
pursuant to Section 1.1. No cash shall be paid out of this separate
account except for (x) payments (other than those set forth in clauses (y)
and (z) of this sentence) in the ordinary course of business not exceeding
$10,000 in the aggregate, (y) payment in the ordinary course of business of
trade payables shown on (or to be shown on) the final and binding Year-End
Balance Sheet, and (z) payment of the amounts of salary (at the level shown
on Exhibit 1.1D), accruing after December 31, 1995 in the ordinary course
of business, of those employees and consultants of the Seller that are
listed on Schedule 1.1D as to be employees or consultants of the Company.
In no event shall cash from such separate account be used to pay
obligations accruing on or before December 31, 1995 that are not shown on
the Year-End Balance Sheet, and, to the extent that any such obligations
exist, such obligations shall remain obligations only of the Seller after
the Effective Time. The Company shall not transfer assets or cash, whether
as a dividend, an assumption of liabilities, a payment for deemed or actual
federal or state income taxes, a loan or otherwise, or
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obligate itself to transfer any assets or cash, to the Seller (and the
Seller shall not receive such from the Company), prior to the Effective
Time. As of and after December 31, 1995, the Seller and its directors
shall owe the Investors the same fiduciary duties with respect to CSG, the
Assets and the Business that the Company and its directors will owe the
holders of Company Common Stock and that Holdco and its directors will owe
the holders of Holdco Common Stock after the Closing. From and after
December 31, 1995 and until the Effective Time, the Seller shall use its
best efforts to cause CSG and the Business to achieve the financial results
for the period from January 1, 1996 to the Effective Time shown in the
projected financial statements set forth in Exhibit 7.6 hereto. From and
after December 31, 1995 and until the Effective Time, the Seller shall not
take any action that, and shall not fail to take any action that the
failure to take, could reasonably be expected to have a material adverse
effect on the ability of the Company to achieve the financial results for
the period from and after the Effective Time shown in the projected
financial statements set forth in Exhibit 7.6 hereto. The Seller shall
take all actions necessary to insure, that, as of the moment immediately
prior to the Effective Time, the Company shall hold all profits, earnings,
revenue, and cash held by the Seller as of December 31, 1995 and shown or
to be shown and the Year-End Balance Sheet, or received by the Seller from
and after December 31, 1995 in relation to the operation of CSG, the
Business, the Assets, and the Company or related to any of the items shown
on the Year-End Balance Sheet including, with limitations, accounts
receivable. Any of the requirements of this Section 7.6 may be waived with
the prior written consent of the Investors. In the event of any conflict
between this Section 7.6 and any other provision of this Article VII, the
provisions of this Section 7.6 shall control.
ARTICLE VIII
OBLIGATIONS AT OR PRIOR TO THE CLOSING
8.1 EXCLUSIVITY/OTHER OFFERS. Unless and until this Agreement has
been terminated in accordance with Section 12.2 below, none of the
Investors, Holdco, Holdco Sub, the Company, or the Seller, or any of their
respective representatives, agents, officers, directors, shareholders,
stockholders, partners or employees, will solicit or accept offers from,
provide information or assistance to, or negotiate or enter into any
agreement or understanding (written or oral) with, any other person or
entity regarding (i) the sale, merger, initial public offering or
reorganization of the Company; the sale or other disposition of, or the
granting of any security interest, lien or encumbrance on, any of the
Assets, the Business or CSG other than dispositions of inventory in the
ordinary course of business; or (iii) any other transaction which would
cause or result in any change, other than of an immaterial nature, in or
adversely affect the Business, the Assets, or the business of CSG or the
Company or otherwise interfere with the consummation of the transactions
contemplated herein.
8.2 OTHER DELIVERIES. At the Closing, the parties hereto shall also
execute and deliver all agreements and instruments referred to in Articles
IV, V and otherwise provided herein.
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ARTICLE IX
NATURE AND SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
9.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations
and warranties made by Holdco, Holdco Sub and the Investors in Section
2.1(c) hereof and by the Seller in this Agreement or any other instrument
or document delivered in connection herewith, including the documents
contained the Exhibits hereto and the Disclosure Letter, shall survive
until the date one year after the date of the Closing. Other than as set
forth above, all representations and warranties made by the Investors,
Holdco, Holdco Sub, and the Company in this Agreement or any other
instrument or document delivered in connection herewith shall terminate
upon the Closing and shall not survive the Closing. All covenants made in
the Agreement and any other instrument or document delivered in connection
with the Agreement shall survive indefinitely unless this Agreement or such
instrument or document specifically specifies otherwise.
ARTICLE X
INDEMNIFICATION
10.1 INDEMNIFICATION BY THE SELLER FOR BREACH OF THIS AGREEMENT.
Subject to the limitations set forth in this Article, the Seller shall
indemnify and hold harmless the Investors, the Company, Holdco and their
respective officers, directors, employees, successors and assigns (the
"Indemnified Investor Parties") in respect of any and all claims, actions,
suits or other proceedings and any and all losses, costs, expenses,
liabilities, fines, penalties, interest and damages, whether or not arising
out of any claim, action, suit or other proceeding (and including
reasonable counsel and accountants' fees and expenses and all other
reasonable costs and expenses of investigation, defense or settlement of
claims and amounts paid in settlement) incurred by, imposed on or borne by
the Indemnified Investor Parties ("Investor Damages") resulting from the
breach of any of the representations, warranties or covenants (including,
but not limited to, the covenant in Section 1.5 hereof) made by the Seller
in this Agreement, the Disclosure Letter, or any agreement, instrument or
document that is attached as an Exhibit to this Agreement. Investor
Damages shall exclude (i) any amount with respect to which the Indemnified
Investor Parties shall be entitled to receive and shall have received
payment under any insurance policy which provides coverage for the
liability to which such amount relates and (ii) the amount of any tax
benefit actually received by the Indemnified Investor Parties as a result
of such Investor Damages, after taking into account the tax consequences of
the indemnification payment for such Investor Damages.
10.2 INDEMNIFICATION BY THE SELLER FOR EFI LITIGATION AND BULK SALES
VIOLATIONS. The Seller shall indemnify and hold harmless the Indemnified
Investor Parties in respect of any and all Investor Damages resulting from the
EFI Litigation and from any violation by the Seller or the Company of the
requirements and provisions of any "bulk-transfer" laws of any jurisdiction in
connection with any of the transactions contemplated herein. Investor Damages
shall exclude any amount with respect to which the Indemnified Investor Parties
shall be entitled to receive and shall have received payment under any insurance
policy which provides coverage for the liability to which such amount relates.
Investor Damages shall exclude (i) any amount with respect to which the
Indemnified Investor Parties shall be entitled to receive and shall
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have received payment under any insurance policy which provides coverage
for the liability to which such amount relates and (ii) the amount of any
tax benefit actually received by the Indemnified Investor Parties as a
result of such Investor Damages, after taking into account the tax
consequences of the indemnification payment for such Investor Damages.
10.3 CLAIMS FOR INDEMNIFICATION OF INVESTORS. Whenever any claim
shall arise for indemnification hereunder, the Indemnified Investor Parties
making such claim shall promptly notify the Seller in writing of the claim
and, when known, the facts constituting the basis for such claim and use
its reasonable efforts to cooperate with the Seller to mitigate the
Investor Damages suffered or to be suffered by the such Indemnified
Investor Parties; PROVIDED that failure to give such notice shall not
affect any rights or remedies of the Indemnified Investor Parties hereunder
with respect to indemnification for Investor Damages except to the extent
that the Seller is materially prejudiced thereby. In the event of any
claim for indemnification hereunder resulting from or in connection with
any claim or legal proceedings by a third party, the notice to the Seller
shall specify, if known, the amount or an estimate of the amount of the
liability arising therefrom. None of the Indemnified Investor Parties
shall settle or compromise any claim by a third party for which they are
entitled to indemnification hereunder, without the prior written consent of
the Seller (which shall not be unreasonably withheld).
10.4 DEFENSE BY SELLER. In connection with any claim giving rise to
indemnity hereunder or resulting from or arising out of any claim or legal
proceeding by a person who is not a party to this Agreement, the Seller at
its sole cost and expense may, upon written notice to the Indemnified
Investor Parties, assume the defense of any such claim or legal proceeding
if it acknowledges to the Indemnified Investor Parties in writing its
obligation to indemnify the Indemnified Investor Parties with respect to
all elements of such claim, and thereafter diligently conduct the defense
thereof with counsel reasonably acceptable to the Indemnified Investor
Parties. The Indemnified Investor Parties shall be entitled to participate
in (but not control) the defense of any such action with their counsel and
at their own expense. If the Seller does not assume or fails to conduct in
a diligent manner the defense of any such claim or litigation resulting
therefrom, (a) the Indemnified Investor Parties may defend against such
claim or litigation, in such manner as they may deem appropriate,
including, but not limited to, settling such claim or litigation, after
giving reasonable notice of the same to the Seller, on such terms as the
Indemnified Investor Parties may deem appropriate (with the Seller's prior
written consent, which consent shall not be unreasonably withheld), and (b)
the Seller shall be entitled to participate in (but not control) the
defense of such action, with its counsel and at its own expense. If the
Seller thereafter seeks to question the manner in which the Indemnified
Investor Parties defended such third party claim or the amount or nature of
any such settlement, the Seller shall have the burden to prove by a
preponderance of the evidence that the Indemnified Investor Parties did not
defend or settle such third party claim in a reasonably prudent manner.
Notwithstanding the foregoing, no party shall consent to entry of any
judgment or enter into any settlement (or have any liability for Investor
Damages with respect thereto) which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified
and indemnifying party of a release
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from all liability in respect to such Claim. Each party agrees to
cooperate fully with the other, with such cooperation to include, without
limitation, attendance at depositions and the provision of relevant
documents as may be reasonably requested by the Seller, provided that the
Seller will hold the Indemnified Investor Parties harmless from all of
their reasonable expenses, including reasonable attorneys' fees, incurred
in connection with such cooperation by the Indemnified Investor Parties.
10.5 TIME LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND
COMPANY. Except for indemnification claims for Investor Damages resulting
from (a) the EFI litigation, (b) the violation of "bulk-transfer" laws of
any jurisdiction by the Seller or the Company in connection with any of the
transactions contemplated hereby, (c) the violation of any covenants of the
Seller made in this Agreement, the Disclosure Letter, or any agreement,
instrument or document that is attached as an Exhibit to this Agreement, or
(d) the failure of the Seller to pay any obligation greater than $2,000,000
pursuant to Section 1.5(c) hereof (collectively the "Unlimited Claims"), no
claim for indemnification under this Article may be made or suit instituted
by the Indemnified Investor Parties after the date one year after the date
of the Closing. Notwithstanding the foregoing, this Agreement shall place
no such limitation on the Unlimited Claims.
10.6 MONETARY LIMITATION ON INDEMNIFICATION OF INVESTORS, HOLDCO AND
COMPANY. With respect to any indemnification claims, except for any
Unlimited Claims, made by the Indemnified Investor Parties under this
Article, the Seller shall have no obligation to indemnify the Indemnified
Investor Parties for any Investor Damages which exceed an aggregate
cumulative amount equal to the amount, at the time of such claim, in the
escrow fund established in accordance with the terms of the Escrow
Agreement described in Section 4.4(h). Further, with respect to any
indemnification claims, except for the Unlimited Claims, made by the
Indemnified Investor Parties under this Article, the Seller have no
obligation to indemnify the Indemnified Investor Parties until the
aggregate cumulative amount of Investor Damages exceeds $250,000; provided
that if the aggregate cumulative amounts of Investor Damages exceeds
$250,000, this Article X shall provide for payment of indemnification
claims for all Investor Damages. Payment of indemnification pursuant to
this Article (except for the Unlimited Claims, which claims may be made
directly against the Seller or the such escrow fund at the option of the
Indemnified Investor Parties, as the case may be, seeking indemnification),
shall be made only from such escrow fund. Notwithstanding the foregoing,
there shall be no limit on the amount of the Unlimited Claims that may be
recovered by the Investors, Holdco and the Company from the Seller.
10.7 DAMAGES TO INVESTORS. The Seller acknowledges and agrees that,
if the Company suffers, incurs or otherwise becomes subject to any Investor
Damages as a result of or in connection with any inaccuracy in or breach of
any representation, warranty, covenant or obligation of the Seller or as a
result of the EFI Litigation or violation by the Seller or the Company of
"bulk-transfer" laws, then Holdco and the Investors also shall be deemed,
by virtue of their ownership of the stock of the Company, to have incurred
Investor Damages as a result of or in connection with such inaccuracy or
breach in the same amount and to the same extent as has the Company;
PROVIDED that the terms of this Section 10.7 shall not permit the Company,
Holdco and the Investors to receive from the Seller, pursuant to this
Article X, an aggregate of indemnification payments greater than such
Investor Damages.
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10.8 NO WAIVER BY INVESTORS, HOLDCO AND COMPANY. The Indemnified
Investor Parties shall not be barred from receiving indemnification under
this Article X because any of them had knowledge, prior to the date of
Closing or at any other time, of a breach of representation, warranty or
covenant of the Seller or a violation by the Seller or the Company of any
"bulk-transfer" laws by the Seller or the Company.
10.9 MATERIALITY. For the purposes of determining the amount of
Investor Damages under this Article X, all representations and warranties
of the Seller contained herein or in any instrument, document or agreement
contemplated hereby shall be deemed to be without any materiality or
material adverse effect exceptions or qualifications or any similar
exceptions or qualifications that may be present in such representations
and warranties.
10.10 INDEMNIFICATION BY HOLDCO AND INVESTORS. Subject to the
limitations set forth in this Article, the Holdco and the Investors shall
indemnify and hold harmless the Seller and its officers, directors,
employees successors and assigns (the "Indemnified Seller Parties") in
respect of any and all claims, actions, suits or other proceedings and any
and all losses, costs, expenses, liabilities, fines, penalties, interest
and damages, whether or not arising out of any claim, action, suit or other
proceeding (and including reasonable counsel and accountants' fees and
expenses and all other reasonable costs and expenses of investigation,
defense or settlement of claims and amounts paid in settlement) incurred
by, imposed on or borne by the Indemnified Seller Parties ("Seller
Damages") resulting from the breach of any of the representations or
warranties of Holdco and the Investors contained in Section 2.1(c) hereof
or of any of the covenants set forth in Section 1.5(d) hereof. Seller
Damages shall exclude (i) any amount with respect to which the Indemnified
Seller Parties shall be entitled to receive and shall have received payment
under any insurance policy which provides coverage for the liability to
which such amount relates and (ii) the amount of any tax benefit actually
received by the Indemnified Seller Parties as a result of such Seller
Damages, after taking into account the tax consequences of the
indemnification payment for such Seller Damages.
10.11 CLAIMS FOR INDEMNIFICATION OF SELLER. Whenever any claim
shall arise for indemnification hereunder, the Indemnified Seller Parties
making such claim shall promptly notify Holdco and the Investors in writing
of the claim and, when known, the facts constituting the basis for such
claim and use its reasonable efforts to cooperate with the indemnifying
party to mitigate the Seller Damages suffered or to be suffered by such
Indemnified Seller Parties; PROVIDED that failure to give such notice shall
not affect any rights or remedies of the Indemnified Seller Parties
hereunder with respect to indemnification for Seller Damages except to the
extent that Holdco and the Investors are materially prejudiced thereby. In
the event of any claim for indemnification hereunder resulting from or in
connection with any claim or legal proceedings by a third party, the notice
to Holdco and the Investors shall specify, if known, the amount or an
estimate of the amount of the liability arising therefrom. The Indemnified
Seller Parties shall settle or compromise any claim by a third party for
which they are entitled to indemnification hereunder, without the prior
written consent of Holdco and the Investors (which shall not be
unreasonably withheld).
10.12 DEFENSE BY HOLDCO AND INVESTORS. In connection with any claim
giving rise to indemnity hereunder or resulting from or arising out of any claim
or legal proceeding by a person who
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is not a party to this Agreement, Holdco and the Investors at their sole
cost and expense may, upon written notice to the Indemnified Seller
Parties, assume the defense of any such claim or legal proceeding if they
acknowledge to the Indemnified Seller Parties in writing their obligation
to indemnify the Indemnified Seller Parties with respect to all elements of
such claim, and thereafter diligently conduct the defense thereof with
counsel reasonably acceptable to the Indemnified Seller Parties. The
Indemnified Seller Parties shall be entitled to participate in (but not
control) the defense of any such action with its counsel and at its own
expense. If Holdco and the Investors do not assume or fails to conduct in
a diligent manner the defense of any such claim or litigation resulting
therefrom, (a) the Indemnified Seller Parties may defend against such claim
or litigation, in such manner as they may deem appropriate, including, but
not limited to, settling such claim or litigation, after giving reasonable
notice of the same to Holdco and the Investors, on such terms as the
Indemnified Seller Parties may deem appropriate (with the prior written
consent of Holdco and the Investors, which consent shall not be
unreasonably withheld), and (b) Holdco and the Investors shall be entitled
to participate in (but not control) the defense of such action, with their
counsel and at their own expense. If Holdco and the Investors thereafter
seek to question the manner in which the Indemnified Seller Parties
defended such third party claim or the amount or nature of any such
settlement, Holdco and the Investors shall have the burden to prove by a
preponderance of the evidence that the Indemnified Seller Parties did not
defend or settle such third party claim in a reasonably prudent manner.
Notwithstanding the foregoing, no party shall consent to entry of any
judgment or enter into any settlement (or have any liability for Seller
Damages with respect thereto) which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified
and indemnifying party of a release from all liability in respect to such
Claim. Each party agrees to cooperate fully with the other, with such
cooperation to include, without limitation, attendance at depositions and
the provision of relevant documents as may be reasonably requested by
Holdco and the Investors, provided that Holdco and the Investors will hold
the Indemnified Seller Parties harmless from all of their reasonable
expenses, including reasonable attorneys' fees, incurred in connection with
such cooperation by the Indemnified Seller Parties.
10.13 TIME LIMITATION ON INDEMNIFICATION OF SELLER. No claim for
indemnification under this Article may be made or suit instituted by the
Indemnified Seller Parties after the date one year after the date of the
Closing.
10.14 MONETARY LIMITATION ON INDEMNIFICATION OF SELLER. With
respect to any indemnification claims made by the Indemnified Seller
Parties under this Article, Holdco and the Investors shall have no
obligation to indemnify the Indemnified Seller Parties for any Seller
Damages which exceed an aggregate cumulative amount equal to the
$4,282,000. Further, with respect to any indemnification claims made by
the Indemnified Seller Parties under this Article, Holdco and the Investors
have no obligation to indemnify the Indemnified Seller Parties until the
aggregate cumulative amount of Seller Damages exceeds $250,000; provided
that if the aggregate cumulative amounts of Seller Damages exceeds
$250,000, this Article X shall provide for payment of indemnification
claims for all Seller Damages.
10.15 NO WAIVER BY SELLER. The Indemnified Seller Parties shall not be
barred from receiving indemnification under this Article X because any of them
had knowledge, prior to the date
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of Closing or at any other time, of a breach of the representations and
warranties of Holdco and the Investors made in Section 2.1(c).
ARTICLE XI
DEFINITIONS AND ACCOUNTING TERMS
11.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Additional Accounting Firm" has the meaning specified in Section
1.5.
"Additional Report" has the meaning specified in Section 1.5.
"Affiliate" (and, with a correlative meaning, "Affiliated") shall
mean, with respect to any Person, any other Person that directly, or
through one or more intermediaries, controls or is controlled by or is
under common control with such first Person, and, if such a Person is an
individual, any member of the immediate family of such individual and any
trust whose principal beneficiary is such individual or one or more members
of such immediate family and any Person who is controlled by any such
member or trust. As used in this definition, "control" (including, with
correlative meanings, "controlled by" and "under common control with")
shall mean possession, directly or indirectly, of power to direct or cause
the direction of management or policies (whether through ownership of
securities or partnership or other ownership interests, by contract or
otherwise), and "immediate family" shall mean parents, spouse and children.
"Agreement" means this Merger Agreement as from time to time
amended and in effect between the parties hereto.
"Assets" has the meaning specified in Section 1.1.
"Assumed Liabilities" has the meaning specified in Section 1.1.
"Audited Financial Statements" has the meaning specified in
Section 4.8.
"Business" means the business of CSG as operated as of December
8, 1995 and the business of the Company as now proposed or contemplated,
including the operations of the Assets.
"Business Plan" has the meaning specified in Section 3.1.
"Cash Purchase Price" has the meaning specified in Section 1.4.
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"Claims" means any and all personal injury, property damage,
nuisance, tort, contract or other claims, actions or demands brought at any
time by any Person, any and all demands, actions or claims for
investigation, remediation, removal, closure or other action with respect
to Hazardous Materials, and any and all other investigations, suits,
demands, actions, fines, penalties, claims, enforcement actions, Liens,
Liabilities, damages, deficiencies, injunctions, reasonable attorneys'
fees, reasonable experts' fees, costs and expenses actually paid, imposed
or incurred.
"Closing" has the meaning specified in Section 1.4.
"COBRA" has the meaning specified in Section 3.1.
"Code" has the meaning specified in Section 3.1.
"Company" means and shall include Splash Technology, Inc., a
Delaware corporation, and its successors and assigns.
"Company Common Stock" has the meaning specified in Section 1.3.
"Company Facility" shall mean any real property asset (including
the land, the improvements and fixtures thereon, and the ambient air ground
water and surface water thereof and including, but not limited to, the
Assets), that the Seller, the Company or any of their past or present
subsidiaries has at any time owned, operated, occupied, controlled or
leased in connection with CSG, the Business or the Assets.
"Consolidated" when used with reference to any term defined
herein shall mean that term as applied to the accounts of the Company or
Holdco, as appropriate in the context, and its subsidiaries consolidated
in accordance with GAAP after eliminating intercompany items and minority
interests.
"Contracts" has the meaning specified in Section 1.1.
"Copyrights" mean U.S. and foreign copyrights, whether registered
or unregistered, and pending applications to register the same.
"CSG" has the meaning specified in the Recitals.
"DGCL" means the State of Delaware General Corporation Law, as
amended.
"Disclosure Letter" has the meaning specified in Section 3.1.
"Disposal Site" shall mean a landfill, incinerator, disposal
agent, waste hauler or recycler of Hazardous Materials.
"Effective Time" has the meaning specified in Section 1.4.
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"EFI Litigation" means any and all litigation or other claims
arising out of or related to U.S. Patent No. 4,941,038 and any divisionals,
continuations in part, or reissues thereof, to case number C95-04110 DLG
pending in United States District Court in the Northern District of
California and any amendments thereto, and any claims for indemnification
related to the foregoing.
"Employee Plans" has the meaning specified in Section 3.1.
"Environmental Law" means any Law pertaining to land use, air,
soil, surface water, groundwater (including the protection, cleanup,
removal, remediation or damage thereof), public or employee health or
safety or any other environmental matter, including, without limitation,
the following laws as in effect on the date of the Closing: (a) Clean Air
Act (42 U.S.C. Section 7401, et seq.); (b) Clean Water Act (33 U.S.C.
Section 1251, et seq.); (c) Resource Conservation and Recovery Act (42
U.S.C. Section 6901, et seq.); (d) Comprehensive Environmental Response
Compensation and Liability Act (42 U.S.C. Section 9601, et seq.); (e) Safe
Drinking Water Act (42 U.S.C. Section 300f, et seq.); (f) Toxic Substances
Control Act (15 U.S.C. Section 2601, et seq.); (g) Rivers and Harbors Act
(33 U.S.C. Section 401, et seq.); (h) Endangered Species Act (16 U.S.C.
Section 1531, et seq.); and (i) Occupational Safety and Health Act (29
U.S.C. Section 651, et seq.); together with any other foreign or domestic
laws (federal, state, provincial or local) relating to Hazardous Materials
of Hazardous Materials Activities.
"Environmental Permit" shall mean any approval, permit, license,
clearance or consent required to be obtained from any Person or any
Governmental Authority with respect to a Hazardous Materials Activity which
is or was conducted by the Seller in relation to CSG, the Business, the
Assets or the Company, by the Company or by any of their past or present
subsidiaries.
"ERISA" has the meaning specified in Section 3.1.
"ERISA Affiliate" has the meaning specified in Section 3.1.
"Escrow Remainder" has the meaning specified in Section 4.4.
"Exchange Act" means the Securities Exchange Act of 1934, or any
similar federal statute, and the rules and regulations of the Securities
and Exchange Commission (or of any other Federal Agency then administering
the Exchange Act) thereunder, all as the same shall be in effect at the
time.
"Financial Statements" has the meaning specified in Section 3.1.
"GAAP" means generally accepted accounting principles,
consistently applied.
"Governmental Authority" means any local, state, federal, foreign
or international governmental authority, agency or entity, including, but
not limited to, any court, commission, tribunal or panel having
jurisdiction over the matter at issue.
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"Hazardous Materials Activity" shall mean the handling
transportation, transfer, recycling, storage, use, treatment, manufacture,
investigation, removal, remediation, release, exposure of others to, sale,
or distribution of any Hazardous Material or any product containing a
Hazardous Material.
"Hazardous Material" shall mean any material or substance that is
prohibited or regulated by any Environmental Law or that has been
designated by any Governmental Authority to be radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment,
including without limitation asbestos, petroleum, radon gas, and
radioactive matter.
"Holdco" has the meaning specified in the Preamble.
"Holdco Common Stock" has the meaning specified in Section 2.1.
"Holdco Sub Common Stock" has the meaning specified in Section
1.3.
"Holdco Sub" has the meaning specified in the Preamble.
"Indemnified Investor Parties" has the meaning specified in
Section 10.1.
"Indemnified Seller Parties" has the meaning specified in Section
10.10.
"Intellectual Property" means Copyrights, Patent Rights,
Trademarks and Trade Secrets.
"Interim Balance Sheet" has the meaning specified in Section 3.1.
"Investor Damages" has the meaning specified in Section 10.1.
"Investors" has the meaning specified in the Preamble.
"Investors' Accountants" means Coopers & Lybrand, L.L.P.
"Key Employee" means and includes the Chairman of the board of
directors, the President, any Vice-President and the Chief Financial
Officer of the Company, Holdco, or any of their subsidiaries, or any person
who is not an officer of Company, Holdco or any of their subsidiaries and
is in charge of one or more of the following functions: sales, marketing,
production, or engineering and technical development or any employee with
access to the confidential information of Holdco or the Company.
"Law" means any national, international, state, or local law,
statute, rule, regulation, ordinance, requirement for approval or permit,
judgment, injunction, decree of any court of applicable jurisdiction, or
any treaty, international understanding, or other rule which has the force
of law, including, without limitation, any Environmental Law.
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"Liability" means any direct or indirect liability, indebtedness,
obligation, guarantee or endorsement, either accrued, absolute, contingent
or otherwise, as determined in accordance with GAAP.
"Lien" means any mortgage, deed of trust, pledge, hypothecation,
security interest, encumbrance, lien, charge or Claim of any kind, whether
voluntarily incurred or arising by operation of Law or otherwise, including
any agreement to give any of the foregoing, any conditional sale or other
title retention agreement, any lease in the nature thereof, and/or the
filing of or agreement to give any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction.
"Merger" has the meaning specified in Recitals.
"Past Practice" shall mean the Past Practice of the Seller with
respect to CSG, excluding any practices of the Seller after September 30,
1995 that were not consistent with practices of the Seller prior to
September 30, 1995.
"Patent Rights" means U.S. and foreign patents, patent
applications pending or filed between the date hereof and the date of the
Closing, continuations, continuations-in-part, divisions, reissues or
patent disclosures.
"Person" means an individual, corporation, partnership, limited
liability company, joint venture, trust, or unincorporated organization, or
a government or any agency or political subdivision thereof.
"Preferred Stock" shall mean the Series A Preferred Stock and the
Series B Preferred Stock.
"Prospects" means the prospects of the Business as described in
and contemplated by the Business Plan.
"Restricted GAAP" means GAAP, as further limited to those
accounting principles and methods, all consistent with GAAP (except as
disclosed on Exhibit 11.0), shown on Exhibit 11.0 hereto.
"SEC" has the meaning specified in Section 3.1.
"Securities Act" means the Securities Act of 1933, as amended, or
any similar Federal statute, and the rules and regulations of the
Securities and Exchange Commission (or of any other Federal agency then
administering the Securities Act) thereunder, all as the same shall be in
effect at the time.
"Securities" has the meaning specified in Section 2.1.
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"Seller" has the meaning specified in the Preamble.
"Seller Damages" has the meaning specified in Section 10.10.
"Seller Financial Statements" has the meaning specified in Section
3.1.
"Seller SEC Documents" has the meaning specified in Section 3.1.
"Seller's Accountants" shall mean the Seller's auditors and any
other accounting firm otherwise engaged by the Seller.
"Series A Preferred Stock" has the meaning specified in Section 2.1.
"Series B Preferred Stock" has the meaning specified in Section 1.3.
"Software" means computer software programs and software systems,
including, without limitation, all databases, compilations, tool sets,
compilers, higher level "proprietary" languages, related documentation and
materials, whether in source code, object code or human readable form.
"Subordinated Notes" has the meaning specified in Recitals.
"Surviving Corporation" has the meaning specified in Section 1.2.
"Tax Return" means any return, declaration, report, claim for
refund, or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Tax" or "Taxes" shall mean any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including
taxes under Code Section 59A), customs duties, capital stock, franchise
profits, withholding, social security, unemployment, disability, real
property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated, or other tax of any kind
whatsoever, including any interest, penalty, or addition thereto, whether
disputed or not.
"Trademarks" mean United States, state and foreign trademarks,
service marks, logos, trade dress and trade names, whether registered or
unregistered, and pending applications to register the foregoing and all
goodwill associated therewith.
"Trade Secrets" mean confidential ideas, trade secrets, know-how,
concepts, methods, processes, formulae, inventions (whether or not
patentable), reports, data, customer lists, mailing lists, business plans,
or other proprietary information that provides the owner with a competitive
advantage.
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"Unlimited Claims" shall have the meaning set forth in Section
10.5.
"Working Capital" means the aggregate of the cash, net accounts
receivable (less any allowances for doubtful accounts), net value of
inventory (adjusted for all applicable write-downs and write-offs) less
liabilities of any kind, which liabilities will include, but not be limited
to, accounts payable, royalties payable, warranty reserves, accrued
bonuses, accrued vacation, employee expense obligations, deferred revenue,
open purchase order commitments, other commitments or obligations to
customers, and liabilities under development agreements.
"Year-End Balance Sheet" has the meaning specified in Section 1.5.
11.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP, and all other financial
data submitted pursuant to this Agreement shall be prepared and calculated
in accordance with such principles.
ARTICLE XII
MISCELLANEOUS
12.1 NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part
of the Seller, the Company, Holdco Sub, Holdco, any Investor, any
Indemnified Party, or any holder of the Subordinated Notes or the Preferred
Stock, in exercising any right, power or remedy hereunder shall operate as
a waiver thereof; nor shall any single or partial exercise of any such
right, power or remedy preclude any other or further exercise thereof or
the exercise of any other right, power or remedy hereunder. The remedies
herein provided are cumulative and not exclusive of any remedies provided
by law.
12.2 TERMINATION. This Agreement may be terminated prior to the
Closing (i) by the mutual consent of the parties hereto; (ii) by the Seller
and the Company if there has been a material misrepresentation or material
breach on the part of any of the Investors, Holdco or Holdco Sub in the
representations and warranties of the Investors, Holdco or Holdco Sub set
forth herein, which, if curable, has not been cured within 10 business days
after notice thereof by Seller; (iii) by Investors, Holdco, Holdco Sub, if
there has been a material misrepresentation or material breach on the part
of the Company or the Seller in the representations, warranties and
covenants of Seller or the Company set forth herein, which, if curable, has
not been cured within 10 business days after notice thereof by Investors;
and (iv) by any party hereto, if the Closing does not occur by January 31,
1996 for any reason. Upon termination of this Agreement, no party shall
have any further obligations or liability hereunder. Sections 12.5, 12.13
and 12.14 alone shall survive the termination of this Agreement.
12.3 AMENDMENTS, WAIVERS AND CONSENTS. Any provision in this
Agreement to the contrary notwithstanding, changes in or additions to this
Agreement may be made, and compliance with any covenant or provision herein
or therein set forth may be omitted or waived, if each of the Seller, the
Company, Holdco, Holdco Sub and the Investors shall consent in writing.
Any waiver or
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consent may be given subject to satisfaction of conditions stated therein
and any waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
12.4 ADDRESSES FOR NOTICES, ETC. Any notices and other communications
required or permitted under this Agreement shall be effective if in writing
and delivered personally or sent by telecopier, Federal Express or
registered or certified mail, postage prepaid, addressed as follows:
<TABLE>
<S> <C>
If to the Seller or the Company Radius Inc.
(prior to the Closing), to: 215 Moffet Park Drive
Sunnyvale, California 94089-1374
Telecopier: (408) 541-5105
Attention: Charles Berger
with a copy to: Gordon Davidson, Esq.
Fenwick & West
Two Palo Alto Square, Suite 800
Palo Alto, California 94306
Telecopier: (415) 857-0361
If to the Company or Holdco Splash Technology, Inc. or Splash Technology
(after the Closing), to: Holdings, Inc.
c/o Radius Inc.
215 Moffet Park Drive
Sunnyvale, California 94089-1374
Telecopier: (408) 541-5015
Attention: Kevin Macgillivray
If to the Investors, Holdco (before Summit Partners
the Closing), or Holdco Sub, to: 499 Hamilton Avenue, Suite 200
Palo Alto, California 94301
Telecopier: (415) 321-1188
Attention: Gregory M. Avis
with a copy to: Jeffrey D. Saper, Esq.
Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto, California 94304-1050
Telecopier: (415) 493-6811
</TABLE>
Unless otherwise specified herein, such notices or other
communications shall be deemed effective (a) on the date delivered, if
delivered personally, (b) two business days after being sent, if sent by
Federal Express, (c) one business day after being sent, if sent by
telecopier with confirmation of good transmission and receipt, and (d)
three business days after being sent, if sent by registered or
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certified mail. Each of the parties herewith shall be entitled to specify
another address by giving notice as aforesaid to each of the other parties
hereto.
12.5 COSTS, EXPENSES AND TAXES. Holdco agrees to pay on demand all
costs and expenses of the Investors in connection with the investigation,
preparation, execution and delivery of this Agreement and any other
instruments and documents to be delivered hereunder and the consummation of
the Merger and all other transactions contemplated hereby and thereby,
including the fees and out-of-pocket expenses of Wilson Sonsini Goodrich &
Rosati, P.C., counsel for Investors, fees for any government filings
required by any of the transactions contemplated hereby, and to pay the
legal expenses of the Investors, if this transaction is completed. In
addition, if the Closing occurs, the Seller shall pay any and all stamp and
other taxes payable or determined to be payable in connection with the
execution and delivery of this Agreement and instruments and documents to
be delivered hereunder and the consummation of the transactions hereunder,
and agrees to hold the Investors harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes and filing fees.
12.6 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Company, the Seller, Holdco, Holdco Sub and
Investors and their respective successors and assigns, except that no party
shall have the right to assign its rights hereunder or any interest herein
without the prior written consent of the other parties.
12.7 PRIOR AGREEMENTS. This Agreement, including all Exhibits hereto
and the Disclosure Letter, constitutes the entire agreement between the
parties and supersedes any prior understandings or agreements concerning
the subject matter hereof.
12.8 SEVERABILITY. The invalidity or unenforceability of any
provision hereto shall in no way affect the validity or enforceability of
any other provision.
12.9 GOVERNING LAW. This Agreement shall be governed by, and
construed in accordance with, the internal laws of the State of California
without regard to principles of conflicts of law.
12.10 HEADINGS. Article, Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall
not constitute a part of this Agreement for any other purpose.
12.11 COUNTERPARTS. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one
and the same instrument, and any of the parties hereto may execute this
Agreement by signing any such counterpart.
12.12 FURTHER ASSURANCES. From and after the date of this
Agreement, upon the reasonable request of the Investors, the Seller, the
Company and each of their subsidiaries shall execute and deliver such
instruments, documents and other writings as may be necessary or desirable
to confirm and carry out and to effectuate fully the intent and purposes of
this Agreement.
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12.13 CONFIDENTIALITY. Until the date of Closing, any information
relating to the terms of this Agreement and the transactions contemplated
hereby shall be treated as confidential and shall not be disclosed, by any
of the parties hereto, to a third party without the consent of the board of
directors of the Seller and the mutual consent of the Investors except as
otherwise required by federal securities laws. The parties hereto agree to
request that any federal or state security regulator treat as confidential
any information submitted to such regulator with respect to the
transactions contemplated by this Agreement.
12.14 PRESS RELEASE. No party hereto shall release a press
release relating to this Agreement or any of the transactions or documents
contemplated hereby without first submitting a copy of such press release
to the other parties hereto and obtaining the prior approval of such other
parties to any such press release, which approval shall not be unreasonably
withheld.
12.15 INDEMNIFIED PARTIES. The Indemnified Investor Parties and
Indemnified Seller Parties that are not parties to this Agreement shall be
third parties beneficiaries hereof for the purposes of Article X.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized and in
accordance with Section 1102 of the DGCL, as of the date first above
written.
SELLER:
RADIUS INC.,
a California corporation
By: /s/ Charles W. Berger
-----------------------------------
Name: Charles W. Berger
Title: Chairman and CEO
COMPANY:
SPLASH TECHNOLOGY, INC.
a Delaware corporation
By: /s/ Charles W. Berger
-----------------------------------
Name: Charles W. Berger
Title: Chairman and CE
HOLDCO:
SPLASH TECHNOLOGY HOLDINGS, INC.
a Delaware corporation
By: /s/ Gregory M. Avis
-----------------------------------
Name: Gregory M. Avis
Title: President and CEO
HOLDCO SUB:
SPLASH MERGER COMPANY, INC.
a Delaware corporation
By: /s/ Gregory M. Avis
-----------------------------------
Name: Gregory M. Avis
Title: President and CEO
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INVESTORS:
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners SD, L.P., General Partner
By: Stamps, Woodsum & Co., III, General Partner
By: /s/ Gregory M. Avis
-----------------------------------
Name: Gregory M. Avis
General Partner
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P., General Partner
By: Stamps, Woodsum & Co., IV, General Partner
By: /s/ Gregory M. Avis
-----------------------------------
Name: Gregory M. Avis
General Partner
SUMMIT INVESTORS II, L.P.
By: /s/ Gregory M. Avis
-----------------------------------
Name: Gregory M. Avis
General Partner
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AMENDMENT NO. 1 TO
MERGER AGREEMENT
This Amendment No. 1 to Merger Agreement (this "Amendment") is made as of
January 30, 1996, among RADIUS INC., a California corporation (the "Seller"),
SPLASH TECHNOLOGY, INC., a Delaware corporation (the "Company"), SPLASH
TECHNOLOGY HOLDINGS, INC., a Delaware corporation ("Holdco"), SPLASH MERGER
COMPANY, INC., a Delaware corporation, ("Holdco Sub"), the entities listed as
Old Investors on the signature page(s) hereof (the "Old Investors") and the
entities listed as New Investors on the signature page(s) hereof (the "New
Investors").
WHEREAS, the Seller, the Company, Holdco, Holdco Sub, and the Old Investors
are parties to that certain Merger Agreement dated December 21, 1995 (the
"Merger Agreement").
WHEREAS, the parties to the Merger Agreement wish to amend the terms
thereof as provided in this Amendment.
WHEREAS, the parties hereto also wish to waive certain requirements under
the Merger Agreement as set forth below.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein, and subject to the terms and conditions hereinafter set forth, the
parties hereby agree as follows:
1. Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed thereto in the Merger Agreement.
2. The entities listed as New Investors on the signature page(s) hereto
shall be, in addition to the Old Investors, Investors, as that term is defined
in the Merger Agreement. The New Investors, along with the Old Investors, shall
have all of the rights and obligations of the Investors under the Merger
Agreement, except that the notices to each New Investor shall be delivered to
the address set forth beneath its respective signature on the signature page(s)
hereof rather than to the address specified for the Investors in Section 12.4 of
the Merger Agreement, if an address appears directly beneath such signature.
3. The Exhibits to the Merger Agreements shall be deemed modified as
follows:
EXHIBIT NAME EXHIBIT NUMBER MODIFICATION(S)
------------ -------------- ---------------
CSG Assets 1.1A addition of the items listed in
Exhibit 1 hereto
Company 1.1B Change: size of the board of
Cert. Incorp. directors from five to six
Company 1.1C Change: size of the board of
By-Laws directors from five to six
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EXHIBIT NAME EXHIBIT NUMBER MODIFICATION(S)
------------ -------------- ---------------
Holdco Cert. 2.1A Change: size of the board of directors
of Incorp. from being fixed at five members to
being set in the bylaws at a size
between three and thirteen members
Holdco 2.1B Changes: (i) size of board of directors
By-Laws from five to six and (ii) allow
stockholders holding at least 10% of
the voting shares to call a special
stockholders meeting
Registration 4.4B Changes:(i) alter recitals to indicate
Rights that the Series B shares may be issued
Agreement after the Closing as set forth in
Section 6.6 of the Merger Agreement
and (ii) add Imperial Bank as a
beneficiary with respect to piggy back
registration rights
Stockholders 4.4C Change: size of board of directors from
Agreement five to six, with the Investors to
designate the added director
4. The recital C on the first page of the Merger Agreement shall be
modified to read in full as follows:
"C. Immediately following the transfer of the assets and certain
liabilities of CSG to the Company described above, Holdco Sub shall merge
into and with the Company, with the Company surviving, and the Seller shall
receive from Holdco $21,945,175 in cash. Prior to such Merger, the
management of the Company shall have purchased from Holdco certain shares
of Holdco Common Stock pursuant to Restricted Stock Purchase Agreement(s).
In consideration for its promises and covenants herein, after the
satisfaction of certain conditions set forth in Section 6.6 below, Holdco
shall issue to the Seller shares of Series B Redeemable and Convertible
Preferred Stock, par value $0.001, of Holdco ("Series B Preferred Stock")
convertible into approximately 19.9% of Holdco Common Stock (post-closing,
assuming the conversion into Holdco Common Stock of the shares of Series B
Preferred Stock issued to the Seller and without considering dilution by
management options). After the issuance of such shares of Series B
Preferred Stock to the Seller, the shares of Holdco Common Stock purchased
by the management of the Company prior to the Merger shall constitute
approximately 6.1% of Holdco Common Stock (post-closing, assuming the
conversion into Holdco Common Stock of the shares of Series B Preferred
Stock issued to the Seller and without considering dilution by management
options) and the shares of Holdco Common Stock purchased by the Investors
prior to the Merger shall constitute approximately 74% of Holdco Common
Stock (post-closing, assuming the conversion into Holdco Common Stock of
the shares of Series B Preferred Stock issued to the Seller and without
considering dilution by management options)."
2
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5. Section 1.3 of the Merger Agreement shall be modified to read in full
as follows:
"1.3 CONVERSION OF SHARES. As of the Effective Time, by virtue of the
Merger and without any action on the part of the Seller as the sole
stockholder of the Company or Holdco as the sole stockholder of Holdco Sub:
(a) Each share of common stock, par value of $0.001, of the
Company (the "Company Common Stock") outstanding immediately prior to
the Effective Time shall be converted into the right to receive
$21,945.175, payable by wire transfer of federal clearing house funds.
(b) Each share of the common stock, par value $0.001, of Holdco
Sub (the "Holdco Sub Common Stock") outstanding immediately prior to
the Effective Time shall be converted into one share of Company Common
Stock."
6. Section 1.4 of the Merger Agreement is hereby amended by deleting the
clause (c) thereof in its entirety and by deleting the "(d)" in the tenth line
thereof and inserting "(c)" therefor.
7. The third sentence of Section 2.1(c) of the Merger Agreement is hereby
modified to read in full as follows:
"Immediately prior to the Effective Time, there will be no options,
warrants or rights to purchase shares of capital stock or other securities
of Holdco authorized, issued or outstanding other than as provided for in
Section 6.6 hereof, nor will Holdco be obligated in any other manner to
issue shares of its capital stock or other securities other than as
provided for in Section 6.6 hereof."
8. The sixth sentence of Section 2.1(c) of the Merger Agreement is hereby
modified to read in full as follows:
"Immediately after the issuance of the 4,282 shares of Series B
Preferred Stock to be issued to the Seller after the Effective Time subject
to the terms and conditions of Section 6.6, such shares shall be
convertible into 497,465 shares of Holdco Common Stock (approximately 19.9%
of the issued and outstanding Holdco Common Stock after such conversion,
not accounting for any other conversion or exercise of any options,
warrants, convertible securities or other rights to purchase Holdco Common
Stock and not accounting for any other securities issued by Holdco after
the date of the Effective Time), which shares shall have been reserved for
issuance pursuant to the terms of the Certificate of Incorporation of
Holdco."
9. Section 4.7 of the Merger Agreement is hereby amended by inserting the
words "other than the shares of Series B Preferred Stock" immediately after the
word "Securities," and immediately prior to the comma preceding the words "to
effect the Merger" contained in the fourth line thereof.
10. Section 5.5 of the Merger Agreement is hereby amended by inserting the
words "other than the shares of Series B Preferred Stock" immediately after the
word "Securities," and immediately prior to the words "and to carry out the
transactions" contained in the fifth line thereof.
11. Section 5.6 of the Merger Agreement shall be modified to read in full
as follows:
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"5.6 BOARD OF DIRECTORS. The number of members of the board of
directors of Holdco Sub shall have been fixed at no less than five and no
more than six and no less than five members shall have been appointed as
follows: (i) Mr. Charles Berger; (ii) three designees of the Investors (one
such designee as a Series A Director, as defined in the Certificate of
Incorporation of Holdco); and (iii) Kevin Macgillivray (as the initial
designee of the management of the Company)."
12. The first sentence of Section 6.1(i) of the Merger Agreement is hereby
modified to read in full as follows: "The board of directors of Holdco
initially shall consist of six (6) directors."
13. Article VI of the Merger Agreement shall be modified by the addition
of the following Section 6.6 at the end of such Article:
"6.6 ISSUANCE OF SERIES B PREFERRED STOCK. After the later to occur
of (but in no event later than March 31, 1996) (a) the Effective Time and
(b) the issuance of a permit to Holdco by the California Department of
Corporations that qualifies the issuance of 4,282 shares of Series B
Preferred Stock to the Seller under Sections 25120 and 25121 of the
California Securities Law, in consideration for the promises and covenants
of the Seller contained herein, the Holdco shall issue to the Seller 4,282
shares of Series B Preferred Stock."
14. Holdco, Holdco Sub, the Old Investors and the New Investors hereby
waive the requirement that the third party consents with respect to the
transactions contemplated by the Merger Agreement described in items 2, 6 and 10
of Exhibit 4.7 to the Merger Agreement (the "Certain Third Party Consents") be
received prior to the Closing. The Seller agrees to take all reasonable efforts
to obtain the Certain Third Party Consents as soon as practicable after the
Closing (as defined in the Merger Agreement). Any failure by the Seller to
obtain the Certain Third Party Consents shall be considered a breach of a
covenant of the Merger Agreement for the purposes of Article 10 of the Merger
Agreement and the last sentence of Article 9 of the Merger Agreement.
15. Section 4.12 of the Merger Agreement shall be modified to read in full
as follows:
"4.12. ELECTION UNDER SECTION 338(H)(10). The Seller shall have
executed the Form 8023A to be prepared in accordance with Section 6.5(d)
hereof."
16. Section 6.5(c) of the Merger Agreement shall be amended by the
addition of the following sentence as the last sentence thereof:
"Upon the completion of the Audited Financial Statements, the Chief
Financial Officer of the Seller shall deliver to the Investors' Accountants
a representation to the effect that the Seller has provided to the
Investors' Accountants all books and records of the Business, CSG and the
Company with respect to the period extending from October 1, 1992 to the
date of the Closing, and that the Seller has disclosed, to the best
knowledge of the Seller, all financial transactions and all contingent
liabilities required to be reported or reserved for in accordance with
GAAP, existing or occurring during the period extending from October 1,
1992 to the date of the Closing, of the Business, CSG and the Company to
the Investors' Accountants"
4
<PAGE>
17. The first sentence of Section 9.1 of the Merger Agreement is hereby
amended by the deleting the words "Section 2.1(c)" and replacing such words with
the words "Sections 2.1(c) and 2.2."
18. The definition of the term for "EFI Litigation" in Section 11.1 of the
Merger Agreement is hereby amended by deleted the three capitalized letters
"DLG" and replacing such three letters with the three capitalized letters "DLJ."
19. Except as amended hereby, the Merger Agreement shall remain in full
force and effect.
20. No failure or delay on the part of the Seller, the Company, Holdco
Sub, Holdco, any New Investor, any Old Investor, any Indemnified Party, or any
holder of the Subordinated Notes or the Preferred Stock, in exercising any
right, power or remedy hereunder shall operate as a waiver thereof; nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy hereunder. The remedies herein provided are cumulative and not exclusive
of any remedies provided by law.
21. Any provision in this Amendment to the contrary notwithstanding,
changes in or additions to this Amendment may be made, and compliance with any
covenant or provision herein set forth may be omitted or waived, if each of the
Seller, the Company, Holdco, Holdco Sub, the Old Investors and the New
Investors shall consent in writing. Any waiver or consent may be given subject
to satisfaction of conditions stated therein and any waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given.
22. This Agreement shall be binding upon and inure to the benefit of the
Company, the Seller, Holdco, Holdco Sub, the Old Investors and the New Investors
and their respective successors and assigns, except that no party shall have the
right to assign its rights hereunder or any interest herein without the prior
written consent of the other parties.
23. The invalidity or unenforceability of any provision hereof shall in no
way affect the validity or enforceability of any other provision.
24. This Amendment shall be governed by, and construed in accordance with,
the internal laws of the State of California without regard to principles of
conflicts of law.
25. This Amendment may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any of the parties hereto may execute this Amendment by signing any such
counterpart.
26. From and after the date of this Amendment, upon the reasonable request
by any of the other parties hereto, the Old Investors, the New Investors,
Holdco, Holdco Sub, the Seller, the Company and each of their affiliates shall
execute and deliver such instruments, documents and other writings as may be
necessary or desirable to confirm and carry out and to effectuate fully the
intent and purposes of this Amendment.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and in
accordance with Section 1102 of the Delaware General Corporation Law, as of the
date first above written.
SELLER:
RADIUS INC.
a California corporation
By: /s/ Charles W. Berger
-----------------------------
Name: Charles W. Berger
Title: Chairman and CEO
COMPANY:
SPLASH TECHNOLOGY, INC.
a Delaware corporation
By: /s/ Charles W. Berger
-----------------------------
Name: Charles W. Berger
Title: Chairman and CEO
HOLDCO:
SPLASH TECHNOLOGY HOLDINGS, INC.
a Delaware corporation
By:
-----------------------------
Gregory M. Avis
President and Chief Executive Officer
HOLDCO SUB:
SPLASH MERGER COMPANY, INC.
a Delaware corporation
By:
------------------------------------
Gregory M. Avis
President and Chief Executive Officer
[Signature Page of Amendment No.1 to Merger Agreement]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed by their respective officers thereunto duly authorized and in
accordance with Section 1102 of the Delaware General Corporation Law, as of the
date first above written.
SELLER:
RADIUS INC.
a California corporation
By:
-----------------------------
Name:
Title:
COMPANY:
SPLASH TECHNOLOGY, INC.
a Delaware corporation
By:
-----------------------------
Name:
Title:
HOLDCO:
SPLASH TECHNOLOGY HOLDINGS, INC.
a Delaware corporation
By: /s/ Gregory M. Avis
-----------------------------
Gregory M. Avis
President and Chief Executive Officer
HOLDCO SUB:
SPLASH MERGER COMPANY, INC.
a Delaware corporation
By: /s/ Gregory M. Avis
------------------------------------
Gregory M. Avis
President and Chief Executive Officer
[Signature Page of Amendment No.1 to Merger Agreement]
<PAGE>
OLD INVESTORS:
SUMMIT SUBORDINATED DEBT FUND, L.P.
By: Summit Partners SD, L.P., General Partner
By: Stamps, Woodsum & Co., III, General Partner
By: /s/ Gregory M. Avis
------------------------------------
Gregory M. Avis
General Partner
SUMMIT VENTURES IV, L.P.
By: Summit Partners IV, L.P., General Partner
By: Stamps, Woodsum & Co., IV, General Partner
By: /s/ Gregory M. Avis
------------------------------------
Gregory M. Avis
General Partner
SUMMIT INVESTORS II, L.P.
By:
------------------------------------
Gregory M. Avis
General Partner
NEW INVESTORS:
SUMMIT INVESTORS III, L.P.
By:
------------------------------------
Gregory M. Avis
General Partner
[Signature Page of Amendment No.1 to Merger Agreement]
<PAGE>
SIGMA PARTNERS III, L.P.
By: Sigma Management III, General Partner
By: /s/ Wade Woodson
------------------------------------
Wade Woodson
General Partner
Address: c/o Sigma Partners
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
Telecopier: (415) 854-1323
SIGMA ASSOCIATES III, L.P.
By: Sigma Management III, General Partner
By: /s/ Wade Woodson
------------------------------------
Wade Woodson
General Partner
Address: c/o Sigma Partners
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
Telecopier: (415) 854-1323
SIGMA INVESTORS III, L.P.
By: Sigma Management III, General Partner
By: /s/ Wade Woodson
------------------------------------
Wade Woodson
General Partner
Address: c/o Sigma Partners
2884 Sand Hill Road
Suite 121
Menlo Park, CA 94025
Telecopier: (415) 854-1323
[Signature Page of Amendment No.1 to Merger Agreement]
<PAGE>
RADIUS INC.
NEW EMPLOYEE STOCK OPTION GRANT
OPTIONEE:
ADDRESS:
NUMBER OF SHARES OF COMMON STOCK PURCHASABLE:
EXERCISE PRICE PER SHARE:
DATE OF GRANT:
START DATE:
EXPIRATION DATE:
TYPE OF STOCK OPTION (CHECK ONE): INCENTIVE NONQUALIFIED
---- ----
1. GRANT OF OPTION. Radius Inc. (the "COMPANY"), a California
corporation, hereby grants to the optionee named above ("OPTIONEE") an option
(this "OPTION") to purchase to the total number of shares of common stock of the
Company set forth above (the "SHARES") at the exercise price per share set forth
above (the "EXERCISE PRICE"), subject to all of the terms and conditions of this
Grant and the Company's 1986 Stock Option Plan as amended to date (the "PLAN").
If designated as an Incentive Stock Option above, this Option is intended to
qualify as an "incentive stock option" ("ISO") within the meaning of Section
422A of the Internal Revenue Code of 1986, as amended (the "CODE"). Unless
otherwise defined herein, capitalized terms shall have the meanings ascribed to
them in the Plan.
2. EXERCISE PERIOD OF OPTION. Subject to the terms and conditions
of the Plan and this Grant, this Option shall become exercisable following the
first six (6) month period after the Start Date set forth above, at the rate of
four percent (4%) of the total number of Shares per calendar month for the next
six months and two percent (2%) of the total number of shares per month for the
next 38 months; provided, however, that this Option shall expire on the
Expiration Date set forth above and must be exercised, if at all, on or before
the Expiration Date.
3. RESTRICTIONS ON EXERCISE. Exercise of this Option is subject to
the following limitations:
(a) This Option may not be exercised unless such exercise is in
compliance with the 1933 Act and all applicable state securities laws, as they
are in effect on the date of exercise.
(b) This Option may not be exercised as to fewer than 100 Shares
unless it is exercised as to all Shares as to which this Option is then
exercisable.
4. TERMINATION OF OPTION. Except as provided below in this Section,
this Option shall terminate and may not be exercised if Optionee ceases to be
employed by the Company or any Parent or Subsidiary of the Company (or in the
case of an NQSO, an Affiliate of the Company). Optionee shall be considered to
be employed by the Company for all purposes under this Section 4 if Optionee is
an officer or full-time employee of the Company or any Parent, Subsidiary or
Affiliate of the Company or if the Board determines that Optionee is rendering
substantial services
<PAGE>
as a part-time employee, consultant, contractor or adviser to the Company or
any Parent, Subsidiary or Affiliate of the Company. The Board shall have
discretion to determine whether Optionee has ceased to be employed by the
Company and the effective date on which such employment terminated (the
"TERMINATION DATE").
(a) If an Optionee ceases to be employed by the Company or any
Parent, Subsidiary or Affiliate of the Company for any reason except death or
disability, this Option, to the extent that it would have been exercisable by
Optionee on the Termination Date, may be exercised by Optionee no later than (i)
thirty (30) days after the Termination Date, or (ii) the Expiration Date,
whichever occurs first.
(b) If Optionee's employment with the Company or any Parent,
Subsidiary or Affiliate of the Company is terminated because of the death of
Optionee or disability of Optionee within the meaning of Section 22(e)(3) of the
Code, this Option, to the extent that it would have been exercisable by Optionee
on the Termination Date, may be exercised by Optionee (or Optionee's legal
representative) no later than (i) twelve (12) months after the Termination Date
or (ii) the Expiration Date, whichever occurs first.
Nothing in the Plan or this Grant shall confer on Optionee any right to continue
in the employ of the Company or any Parent, Subsidiary or Affiliate of the
Company or limit in any way the right of the Company or any Parent, Subsidiary
or Affiliate of the Company to terminate Optionee's employment at any time, with
or without cause.
5. MANNER OF EXERCISE.
(a) This Option shall be exercisable by delivery to the Company
of an executed Stock Option Exercise Notice in a form available from the
Company, which shall set forth Optionee's election to exercise this Option and
the number of Shares being subscribed to.
(b) Such notice shall be accompanied by full payment of the
Exercise Price for the Shares being purchased (i) in cash (by check), (ii) by
surrender of shares of common stock of the Company that have been owned by
Optionee for more than six (6) months (and which have been paid for within the
meaning of SEC Rule 144 and, if such shares were purchased from the Company by
use of a promissory note, such note has been fully paid with respect to such
shares) or were obtained by the Optionee in the open public market, having a
Fair Market Value equal to the exercise price of the Option; (iii) by waiver of
compensation due or accrued to Optionee for services rendered; (iv) through a
"same day sale" commitment from the Optionee and a broker-dealer that is a
member of the National Association of Securities Dealers (an "NASD DEALER")
whereby the Optionee irrevocably elects to exercise the Option and to sell a
portion of the Shares so purchased to pay for the exercise price and whereby the
NASD Dealer irrevocably commits upon receipt of such Shares to forward the
exercise price directly to the Company; (v) through a "margin" commitment from
the Optionee and an NASD Dealer whereby the Optionee irrevocably elects to
exercise the Option and to pledge the Shares so purchased to the NASD Dealer in
a margin account as security for a loan from the NASD Dealer in the amount of
the exercise price, and whereby the NASD Dealer irrevocably commits upon receipt
of such Shares to forward the exercise price directly to the Company; (vi) where
permitted by applicable law and approved by the Committee in its sole
discretion, by tender of a full recourse promissory note having such terms as
may be approved by the Committee and bearing interest at a rate sufficient to
avoid imputation of income under Sections 483 and 1274 of the Code; or (vii) by
any combination of the foregoing where approved by the Committee in its sole
discretion. Optionees who are not employees or directors of the Company shall
not be entitled to purchase Shares with a promissory note unless the note is
adequately secured by collateral other than the Shares.
(c) Prior to the issuance of the Shares upon exercise of this
Option, Optionee
<PAGE>
must pay or make adequate provision for any federal or state withholding
obligations of the Company. Optionee may provide for payment of withholding
taxes upon exercise of the Option by requesting that the Company retain
Shares with a Fair Market Value equal to the minimum amount of taxes required
to be withheld. In such case, the Company shall issue the net number of
Shares to the Optionee by deducting the Shares retained from the Shares
issuable upon exercise.
(d) Provided that such notice and payment are in form and
substance satisfactory to counsel for the Company, the Company shall issue the
Shares registered in the name of Optionee or Optionee's legal representative.
6. NOTICE OF DISQUALIFYING DISPOSITION OF ISO SHARES. If the Option
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the date of this grant, or (ii) the date
one year after transfer of such Shares to the Optionee upon exercise of the ISO,
the Optionee shall immediately notify the Company in writing of such
disposition. Optionee agrees that Optionee may be subject to income tax
withholding by the Company on the compensation income recognized by the Optionee
from the early disposition by payment in cash or out of the current earnings
paid to the Optionee.
7. COMPLIANCE WITH LAWS AND REGULATIONS. The issuance and transfer
of Shares shall be subject to compliance by the Company and the Optionee with
all applicable requirements of federal or state securities laws and with all
applicable requirements of any stock exchange or national market system on which
the Company's common stock may be listed at the time of such issuance or
transfer.
8. NONTRANSFERABILITY OF OPTION. This Option may not be transferred
in any manner other than by will or by the laws of descent and distribution and
may be exercised during the lifetime of the Optionee only by the Optionee. The
terms of this Option shall be binding upon the executors, administrators,
successors and assigns of the Optionee.
9. TAX CONSEQUENCES. Set forth below is a brief summary as of the
date of this Option of some of the federal and California tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(a) EXERCISE OF ISO. If this Option qualifies as an ISO, there
will be no regular federal income tax liability or California income tax
liability upon the exercise of the Option, although the excess, if any, of the
Fair Market Value of the Shares on the date of exercise over the Exercise Price
will be treated as a tax preference item for federal income tax purposes and may
subject the Optionee to the alternative minimum tax in the year of exercise.
(b) EXERCISE OF NONQUALIFIED STOCK OPTION. If this Option does
not qualify as an ISO, there may be a regular federal income tax liability and a
California income tax liability upon the exercise of the Option. The Optionee
will be treated as having received compensation income (taxable at ordinary
income tax rates) equal to the excess, if any, of the Fair Market Value of the
Shares on the date of exercise over the Exercise Price. The Company will be
required to withhold from Optionee's compensation or collect from Optionee and
pay to the applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(c) DISPOSITION OF SHARES. If the Shares are held for at least
twelve months after the date of the transfer of the Shares pursuant to the
exercise of this Option (and, in the case of an ISO, are disposed of at least
two years after the Date of Grant), any gain realized on disposition of
<PAGE>
the Shares will be treated as long term capital gain for federal and
California income tax purposes. If Shares purchased under an ISO are
disposed of within such one year period or within two years after the Date of
Grant, any gain realized on such disposition will be treated as compensation
income (taxable at ordinary income rates) to the extent of the excess, if
any, of the Fair Market Value of the Shares - the date of exercise over the
Exercise Price.
10. INTERPRETATION. Any dispute regarding the interpretation of this
agreement shall be submitted by Optionee or the Company forthwith to the Board
or the committee thereof that administers the Plan, which shall review such
dispute at its next regular meeting. The resolution of such a dispute by the
Board or committee shall be final and binding on the Company and on Optionee.
11. ENTIRE AGREEMENT. The Plan and the Stock Option Exercise Notice
are incorporated herein by reference. This Grant, the Plan and the Stock Option
Exercise Notice constitute the entire agreement of the parties and supersede all
prior undertakings and agreements with respect to the subject matter hereof.
ACCEPTANCE
Optionee hereby acknowledges receipt of a copy of the Plan, represents that
Optionee has read and understands the terms and provisions thereof, and accepts
this Option subject to all the terms and provisions of the Plan and this Grant.
Optionee acknowledges that there may be adverse tax consequences upon exercise
of this Option or disposition of the Shares and that Optionee should consult a
tax adviser prior to such exercise or disposition.
OPTIONEE
By:
-------------------------------
<PAGE>
RADIUS INC.
1990 EMPLOYEE STOCK PURCHASE PLAN
As Amended by the Board of Directors Through June 21 1995
As Approved by Shareholders on August 23, 1995
1. ESTABLISHMENT OF PLAN. Radius, Inc. (the "Company") proposes to
grant options for purchase of the Company's Common Stock to eligible
employees of the Company and Subsidiaries (as hereinafter defined)
pursuant to this Employee Stock Purchase Plan (the "Plan"). For
purposes of this Plan, "parent corporation" and "Subsidiary" (when
used in the plural, "Subsidiaries") shall have the same meanings as
"parent corporation" and "subsidiary corporation" in Sections 425(e)
and 425(f), respectively, of the Internal Revenue Code of 1986, as
amended (the "Code"). The Company intends that the Plan shall qualify
as an "employee stock purchase plan" under Section 423 of the Code
(including any amendments or replacements of such section), and the
Plan shall be so construed. Any term not expressly defined in the
Plan but defined for purposes of Section 423 of the Code shall have
the same definition herein. Subject to adjustment as provided in
Section 14 of the Plan, the aggregate number of shares of Common Stock
which may be purchased under this Plan shall not exceed 650,000 shares
of Common Stock of the Company, which may be treasury shares
reacquired by the Company or authorized and unissued shares, or a
combination of both.
2. PURPOSES. The purpose of the Plan is to provide employees of
the Company and Subsidiaries designated by the Board of Directors as
eligible to participate in the Plan with a convenient means to acquire
an equity interest in the Company through payroll deductions, to
enhance such employees' sense of participation in the affairs of the
Company and Subsidiaries, and to provide an incentive for continued
employment.
3. ADMINISTRATION. The Plan is administered by the Board of
Directors of the Company or by a committee designated by the Board of
Directors of the Company (in which event all references herein to the
Board of Directors shall be to the committee). Subject to the
provisions of the Plan and the limitations of Section 423 of the Code
or any successor provision in the Code, all questions of
interpretation or application of the Plan shall be determined by the
Board and its decisions shall be final and binding upon all
participants. Members of the Board shall receive no compensation for
their services in connection with the administration of the Plan,
other than standard fees as established from time to time by the Board
of Directors of the Company for services rendered by Board members
serving on Board committees. All expenses incurred in connection with
the administration of the Plan shall be paid by the Company.
4. ELIGIBILITY. Any employee of the Company or the Subsidiaries is
eligible to participate in an Offering Period (as hereinafter defined)
under the Plan except the following:
(a) employees who are not employed by the Company or
Subsidiaries on the day before the beginning of such Offering
Period;
(b) employees who are customarily employed for less than 20
hours per week;
(c) employees who are customarily employed for less than 5
months in a calendar year; and
<PAGE>
(d) employees who, together with any other person whose
stock would be attributed to such employee pursuant to Section
425(d) of the Code, own stock or hold options to purchase stock
or who, as a result of being granted an option under the Plan
with respect to such Offering Period, would own stock or hold
options to purchase stock possessing 5 percent or more of the
total combined voting power or value of all classes of stock of
the Company or any of its Subsidiaries.
5. OFFERING DATES. The Offering Periods of the Plan (the "Offering
Period") shall be of six (6) months duration commencing April 1 and
October 1 of each year and ending on September 30 and March 31,
respectively, during which payroll deductions of the participant are
accumulated under this Plan. The first Offering Period shall commence
on April 1, 1991. The first day of each Offering Period is referred
to as the "Offering Date." The last day of each Offering Period is
hereinafter referred to as the "Purchase Date". The Board of
Directors of the Company shall have the power to change the duration
of Offering Periods with respect to future offerings without
shareholder approval if such change is announced at least fifteen (15)
days prior to the scheduled beginning of the first Offering Period to
be affected.
6. PARTICIPATION IN THE PLAN. Eligible employees may become
participants in an Offering Period under the Plan on the first
Offering Date after satisfying the eligibility requirements by
delivering to the Company's or Subsidiary's (whichever employs such
employee) payroll department not later than March 22, 1991 a
subscription agreement authorizing payroll deductions for the Offering
Period beginning April 1, 1991. For subsequent Offering Periods the
subscription agreement is due (i) for current employees, not later
than the 15th day of the month before such Offering Date, or (ii) for
new employees who commenced employment with the Company within thirty
(30) days of the next Offering Date, not later than the day before the
beginning of the new Offering period, unless a later time for filing
the subscription agreement is set by the Board for all eligible
employees with respect to a given Offering Period, An eligible
employee who does not deliver a subscription agreement to the payroll
department by such date after becoming eligible to participate in such
Offering Period under the Plan shall not participate in that Offering
Period or any subsequent Offering Period unless such employee enrolls
in the Plan by filing the subscription agreement with the payroll
department not later than the 15th day of the month preceding a
subsequent Offering Date. Once an employee becomes a participant in
an Offering Period, such employee will automatically participate in
the Offering Period commencing immediately following the last day of
the prior Offering Period unless the employee withdraws from the Plan
or terminates further participation in the Offering Period as set
forth in Section 11 below. Such participant is not required to file
any additional subscription agreements in order to continue
participation in the Plan. Any participant whose option expires and
who has not withdrawn from the Plan pursuant to Section 11 below will
automatically be re-enrolled in the Plan and granted a new option on
the Offering Date of the next Offering Period.
7. GRANT OF OPTION ON ENROLLMENT. An eligible employee who enrolls
in the Plan with respect to an Offering Period pursuant to Section 6
hereof, will receive a grant of an option (as of the Offering Date) to
purchase on the Purchase Date up to that number of shares of Common
Stock of the Company determined by dividing the amount accumulated in
such employee's payroll deduction account during such Offering Period
by the lower of (i) eighty-five percent (85%) of the fair market value
of a share of the Company's Common Stock on the Offering Date (the
"Entry Price") or (ii) eighty-five percent (85%) of the fair market
value of a share of the Company's Common Stock on the Purchase Date,
provided, however, that the number of shares of the Company's Common
Stock subject to any option granted pursuant to this Plan shall not
exceed the lesser of (a) the maximum number of shares set by the Board
pursuant to Section 10(c) below with respect to the applicable
Offering Period, or (b) 200% of the number
<PAGE>
of shares determined by using 85% of the fair market value of a
share of the Company's Common Stock on the Offering Date as the
denominator. Fair market value of a share of the Company's Common
Stock shall be determined as provided in Section 8 hereof.
8. PURCHASE PRICE. The purchase price per share at which a share
of Common Stock will be purchased in any Offering Period shall be 85
percent of the lesser of:
(a) the fair market value at the close of trading on the
day prior to the Offering Date; or
(b) the fair market value at the close of trading on the
Purchase Date.
For purposes of the Plan, the term "fair market value" on a given
date shall mean the closing price in U.S. dollars of a share of the
Company's Common Stock on that date as reported on the NASDAQ National
Market System.
9. PAYMENT OF PURCHASE PRICE; CHANGES IN PAYROLL DEDUCTIONS;
ISSUANCE OF SHARES.
(a) The purchase price of the shares is accumulated by
regular payroll deductions made during each Offering Period.
The deductions are made as a percentage of the employee's
compensation in one percent increments not less than 2 percent
nor greater than 10 percent. Compensation shall be limited to
base salary or wages, bonuses, overtime and commissions, if any,
paid; provided, however, that for purposes of determining a
participant's compensation, any election by such participant to
reduce his or her regular cash remuneration under Sections 125
or 401(k) of the Code shall be treated as if the participant did
not make such election. Payroll deductions shall commence on
the first payday following the Offering Date and shall continue
to the end of the Offering Period unless sooner altered or
terminated as provided in the Plan.
(b) A participant may decrease (but not increase) the rate
of payroll deductions during an Offering Period by filing with
the payroll department a new authorization for payroll
deductions, in which case the new rate shall become effective
for the next payroll period commencing more than 15 days after
the payroll department's receipt of the authorization and shall
continue for the remainder of the Offering Period unless changed
as described below. Such change in the rate of payroll
deductions may be made at any time during an Offering Period,
but not more than one change may be made effective during any
Offering Period. A participant may increase or decrease the
rate of payroll deductions for any subsequent Offering Period by
filing with the payroll department a new authorization for
payroll deductions not later than the 15th day of the month
before the beginning of such Offering Period.
(c) All payroll deductions made for a participant are
credited to his or her account under the Plan and are deposited
with the general funds of the Company; no interest accrues on
the payroll deductions. All payroll deductions received or held
by the Company may be used by the Company for any corporate
purpose, and the Company shall not be obligated to segregate
such payroll deductions.
(d) On each Purchase Date, so long as the Plan remains in
effect and provided that the participant has not submitted a
signed and completed withdrawal form before that date which
notifies the Company that the participant wishes to
<PAGE>
withdraw from that Offering Period under the Plan and have all
payroll deductions accumulated in the account maintained on
behalf of the participant as of that date returned to the
participant, the Company shall apply the funds then in the
participant's account to the purchase of whole shares of Common
Stock reserved under the option granted to such participant with
respect to the Offering Period to the extent that such option is
exercisable on the Purchase Date. The purchase price per share
shall be as specified in Section 8 of the Plan. Any cash
remaining in a participant's account after such purchase of
shares by reason of any limitation on the number of shares that
may be purchased under the Plan as set forth in Section 10
hereof, shall be refunded to such participant in cash; provided,
however, that any amount remaining in such participant's account
on a Purchase Date which is less than the amount necessary to
purchase a full share of Common Stock of the Company shall be
carried forward, without interest, into the next Offering
Period. In the event that the Plan has been oversubscribed,
all funds not used to purchase shares on the Purchase Date
shall be returned to the participant. No Common Stock shall
be purchased on a Purchase Date on behalf of any employee
whose participation in the Plan has terminated prior to such
Purchase Date.
(e) As promptly as practicable after the Purchase Date, the
Company shall arrange the delivery to each participant, as
appropriate, of a statement of shares purchased upon exercise
of his option.
(f) During a participant's lifetime, such participant's
option to purchase shares hereunder is exercisable only by him
or her. The participant will have no interest or voting right
in shares covered by his or her option until such option has
been exercised. Shares purchased on behalf of a participant
under the Plan will be included in the Beneficial Owners list
associated with the total shares registered in the name of the
Employee Stock Purchase Plan individual accounts.
10. LIMITATIONS ON SHARES TO BE PURCHASED.
(a) No employee shall be entitled to purchase stock under
the Plan at a rate which, when aggregated with his or her rights
to purchase stock under all other employee stock purchase plans
of the Company or any Subsidiary, exceeds $25,000 in fair market
value, determined as of the Offering Date (or such other limit
as may be imposed by the Code) for each calendar year in which
the employee participates in the Plan.
(b) No more than 200% of the number of shares determined by
using 85% of the fair market value of a share of the Company's
Common Stock on the Offering Date as the denominator may be
purchased by a participant on any single Purchase Date.
(c) No employee shall be entitled to purchase more than the
Maximum Share Amount (as defined below) on any single Purchase
Date. Not less than thirty days prior to the commencement of
any Offering Period, the Board may, in its sole discretion, set
a maximum number of shares which may be purchased by any
employee at any single Purchase Date (hereinafter the "Maximum
Share Amount"). In no event shall the Maximum Share Amount
exceed the amounts permitted under Section 10(b) above. If a
new Maximum Share Amount is set, then all participants must be
notified of such Maximum Share Amount not less than fifteen days
prior to the commencement of the next Offering Period. Once the
Maximum Share Amount is set, it shall continue to apply in
respect of all succeeding Purchase Dates and Offering Periods
unless revised by the Board as set forth above.
<PAGE>
(d) If the number of shares to be purchased on a Purchase
Date by all employees participating in the Plan exceeds the
number of shares then available for issuance under the Plan, the
Company will make a pro rata allocation of the remaining shares
in as uniform a manner as shall be practicable and as the Board
shall determine to be equitable. In such event, the Company
shall give written notice of such reduction of the number of
shares to be purchased under a participant's option to each
employee affected thereby.
(e) Any payroll deductions accumulated in a participant's
account which are not used to purchase stock due to the
limitations in this Section 10 shall be returned to the
participant as soon as practicable after the end of the Offering
Period.
11. WITHDRAWAL.
(a) Each participant may withdraw from an Offering Period
under the Plan by signing and delivering to the payroll
department a notice on a form provided for such purpose. Such
withdrawal may be elected at any time prior to the 15th day of
the month in which an Offering Period ends.
(b) Upon withdrawal from the Plan, the accumulated payroll
deductions shall be returned to the withdrawn employee and his
or her interest in the Plan shall terminate. In the event an
employee voluntarily elects to withdraw from the Plan, he or she
may not resume his or her participation in the Plan during the
same Offering Period, but he or she may participate in any
Offering Period under the Plan which commences on a date
subsequent to such withdrawal by filing a new authorization for
payroll deductions in the same manner as set forth above for
initial participation in the Plan.
12. TERMINATION OF EMPLOYMENT. Termination of a participant's
employment for any reason, including retirement or death or the
failure of a participant to remain an eligible employee, terminates
his or her participation in the Plan immediately. In such event, the
payroll deductions credited to the participant's account will be
returned to him or her or, in the case of his or her death, to his or
her legal representative. For this purpose, an employee will not be
deemed to have terminated employment or failed to remain in the
continuous employ of the Company in the case of sick leave, military
leave, or any other leave of absence approved by the Board of
Directors of the Company; provided that such leave is for a period of
not more than ninety (90) days or reemployment upon the expiration of
such leave is guaranteed by contract or statute.
13. RETURN OF PAYROLL DEDUCTIONS. In the event an employee's
interest in the Plan is terminated by withdrawal, termination of
employment or otherwise, or in the event the Plan is terminated by the
Board, the Company shall promptly deliver to the employee all payroll
deductions credited to his account. No interest shall accrue on the
payroll deductions of a participant in the Plan.
14. CAPITAL CHANGES. Subject to any required action by the
shareholders of the Company, the number of shares of Common Stock
covered by each option under the Plan which has not yet been exercised
and the number of shares of Common Stock which have been authorized
for issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of
Common Stock covered by each option under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or
decrease in the number of issued shares of Common Stock resulting from
a stock split or the
<PAGE>
payment of a stock dividend (but only on the Common Stock) or
any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the
Company; provided, however, that conversion of any convertible
securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by
the Board, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issue by the
Company of shares of stock of any class, or securities convertible
into shares of stock of any class, shall affect, and no adjustment by
reason thereof shall be made with respect to, the number or price of
shares of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the
Company, the Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the
Board. The Board may, in the exercise of its sole discretion in such
instances, declare that the options under the Plan shall terminate as
of a date fixed by the Board and give each participant the right to
exercise his or her option as to all of the optioned stock, including
shares which would not otherwise be exercisable. In the event of a
proposed sale of all or substantially all of the assets of the
Company, or the merger of the Company with or into another
corporation, each option under the Plan shall be assumed or an
equivalent option shall be substituted by such successor corporation
or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, that the participant shall have
the right to exercise the option as to all of the optioned stock. If
the Board makes an option exercisable in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board
shall notify the participant that the option shall be fully
exercisable for a period of twenty (20) days from the date of such
notice, and the option will terminate upon the expiration of such
period.
The Board may, if it so determines in the exercise of its sole
discretion, also make provision for adjusting the Reserves, as well as
the price per share of Common Stock covered by each outstanding
option, in the event that the Company effects one or more
reorganizations, recapitalizations, rights offerings or other
increases or reductions of shares of its outstanding Common Stock, and
in the event of the Company being consolidated with or merged into any
other corporation.
15. NONASSIGNABILITY. Neither payroll deductions credited to a
participant's account nor any rights with regard to the exercise of an
option or to receive shares under the Plan may be assigned,
transferred, pledged or otherwise disposed of in any way (other than
by will, the laws of descent and distribution or as provided in
Section 22 hereof) by the participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without
effect.
16. REPORTS. Individual accounts will be maintained for each
participant in the Plan. Each participant shall receive promptly
after the end of each Offering Period a report of his account setting
forth the total payroll deductions accumulated, the number of shares
purchased, the per share price thereof and the remaining cash balance,
if any, carried forward to the next Offering Period.
17. NOTICE OF DISPOSITION. Each participant shall notify the
Company if the participant disposes of any of the shares purchased in
any Offering Period pursuant to this Plan if such disposition occurs
within two years from the Offering Date or within twelve months from
the Purchase Date on which such shares were purchased (the "Notice
Period"). Unless such participant is disposing of any of such shares
during the Notice Period, such participant shall keep the
certificates representing such shares in his or her name (and not in
the name of a nominee) during the Notice Period. The Company may, at
any time during the Notice Period, place a legend or legends on any
certificate representing shares acquired pursuant to the Plan
requesting the Company's transfer agent to notify the Company of any
transfer of the shares.
<PAGE>
The obligation of the participant to provide such notice shall
continue notwithstanding the placement of any such legend
on certificates.
18. NO RIGHTS TO CONTINUED EMPLOYMENT. Neither this Plan nor the
grant of any option hereunder shall confer any right on any employee
to remain in the employ of the Company or any Subsidiary or restrict
the right of the Company or any Subsidiary to terminate such
employee's employment.
19. EQUAL RIGHTS AND PRIVILEGES. All eligible employees shall have
equal rights and privileges with respect to the Plan so that the Plan
qualifies as an "employee stock purchase plan" within the meaning of
Section 423 or any successor provision of the Code and the related
regulations. Any provision of the Plan which is inconsistent with
Section 423 or any successor provision of the Code shall without
further act or amendment by the Company or the Board be reformed to
comply with the requirements of Section 423. This Section 19 shall
take precedence over all other provisions in the Plan.
20. NOTICES. All notices or other communications by a participant
to the Company under or in connection with the Plan shall be deemed to
have been duly given when received in the form specified by the
Company at the location, or by the person, designated by the Company
for the receipt thereof.
21. SHAREHOLDER APPROVAL OF AMENDMENTS.
Any required approval of the shareholders of the Company shall be
solicited substantially in accordance with Section 14(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
the rules and regulations promulgated thereunder. Any such approval
shall be solicited at or prior to the first annual meeting of
shareholders held subsequent to the grant to an officer or director of
the Company of an option under the Plan as then amended. Such
shareholder approval shall be obtained at a duly held meeting or by
written consent only to the extent required by and by a vote that
satisfies the requirements of Section 423 of the Code and Rule 16b-3
as promulgated under the Exchange Act ("Rule 16b-3").
22. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from
the participant's account under the Plan in the event of such
participant's death subsequent to the end of an Offering Period
but prior to delivery to him of such shares and cash. In
addition, a participant may file a written designation of a
beneficiary who is to receive any cash from the participant's
account under the Plan in the event of such participant's death
prior to a Purchase Date.
(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the
death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of
such participant's death, the Company shall deliver such shares
or cash to the executor or administrator of the estate of the
participant, or if no such executor or administrator has been
appointed (to the knowledge of the Company), the Company, in its
discretion, may deliver such shares or cash to the spouse or to
any one or more dependents or relatives of the participant, or
if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
23. CONDITIONS UPON ISSUANCE OF SHARES; LIMITATION ON SALE OF
SHARES. Shares shall
<PAGE>
not be issued with respect to an option unless the exercise
of such option and the issuance and delivery of such shares
pursuant thereto shall comply with all applicable provisions of
law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed, and shall be
further subject to the approval of counsel for the Company with
respect to such compliance.
If the purchase of shares on a Purchase Date is exempt from the
operation of Section 16(b) of the Exchange Act by the operation of
Rule 16b-6 promulgated under the Exchange Act, to the extent required
by the Exchange Act, shares purchased by an person subject to the
requirements of Section 16(b) of the Exchange Act may not be sold
prior to the expiration of six (6) months from the Purchase Date on
which such shares were purchased (or on such other date as may be
required by Rule 16b-3 or any successor rule).
24. APPLICABLE LAW. The Plan shall be governed by the substantive
laws (excluding the conflict of laws rules) of the State of
California.
25. AMENDMENT OR TERMINATION OF THE PLAN. This Plan shall be
effective April 1, 1991 or such later date as the Board determines,
and shall continue until the earlier to occur of termination by the
Board, issuance of all of the shares of Common Stock reserved for
issuance under the Plan, or ten (10) years from the adoption of the
Plan by the Board. The Board of Directors of the Company may at any
time amend or terminate the Plan, except that any such termination
cannot affect options previously granted under the Plan, nor may any
amendment make any change in an option previously granted which would
adversely affect the right of any participant, nor may any amendment
be made without approval of the shareholders of the Company obtained
in accordance with Section 21 hereof within 12 months of the adoption
of such amendment (or earlier if required by Section 21) if such
amendment would:
(a) increase the number of shares that may be issued under
the Plan;
(b) change the designation of the employees (or class of
employees) eligible for participation in the Plan; or
(c) constitute an amendment for which shareholder approval
is required in order to comply with Rule 16b-3 (or any successor
rule) of the Exchange Act.
