<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May29, 1997
The Failure Group, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 0-18655 77-0218904
-------- ------- ----------
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
149 Commonwealth Drive, Menlo Park, California 94025
- ---------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 326-9400
--------------
N/A
-------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
------------------------------------
On May 16, 1997, The Failure Group Washington, Inc., a wholly-owned
subsidiary ("Sub") of The Failure Group, Inc. ("Failure Group"), merged (the
"Merger") with and into Performance Technologies, Incorporated d.b.a. PTI
Environmental Services, a Washington corporation ("PTI"). As a result of the
Merger, PTI became a wholly-owned subsidiary of Failure Group.
The Merger occurred pursuant to the terms of the Agreement and Plan of
Reorganization dated as of April 27, 1997, as amended by Amendment Number 1
thereto dated as of May 7, 1997, entered into by and among Failure Group; Sub;
PTI; Robert C. Barrick, Gary N. Bigham, Thomas C. Ginn, Marc W. Lorenzen and
Larry F. Marx (collectively the "Principal Shareholders"); and Chase Trust
Company of California (the "Reorganization Agreement") and pursuant to a related
Plan of Merger between Sub and PTI filed with the Secretary of State of the
state of Washington as of May 16, 1997 (the "Plan of Merger"). The Merger has
been accounted for under the purchase method of accounting. In addition to $7.5
million in cash, an aggregate of 480,002 shares of Failure Group Common Stock
were issued in connection with the Merger.
All of the shares of Failure Group Common Stock issued pursuant to the
Merger were placed into escrow to satisfy certain indemnification obligations of
PTI and the Principal Shareholders pursuant to the escrow provisions of the
Reorganization Agreement.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
---------------------------------
(a) Financial Statements of Business Acquired.
It is impractical for the registrant to provide the required
financial statements for the business acquired at the time of filing of this
report, but the registrant will file such required financial statements by
amendment as soon as practicable, but not later than 60 days after this report
must be filed.
(b) Pro Forma Financial Information.
It is impractical for the registrant to provide the required
pro forma financial information for the business acquired at the time of filing
of this report, but the registrant will file such required pro forma financial
information by amendment as soon as practicable, but not later than 60 days
after this report must be filed.
(c) Exhibits.
<TABLE>
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of April 27, 1997, entered into by and among
The Failure Group, Inc., The Failure Group Washington, Inc., Performance Technologies,
Incorporated d.b.a. PTI Environmental Services, Robert C. Barrick, Gary N. Bigham, Thomas
C. Ginn, Marc W. Lorenzen, Larry F. Marx, and Chase Trust Company of California.
</TABLE>
-2-
<PAGE>
<TABLE>
<C> <S>
2.2 Amendment Number 1 dated as of May 7, 1997, to the Agreement and Plan of Reorganization
dated as of April 27, 1997, entered into by and among The Failure Group, Inc., The Failure
Group Washington, Inc., Performance Technologies, Incorporated d.b.a. PTI Environmental
Services, Robert C. Barrick, Gary N. Bigham, Thomas C. Ginn, Marc W. Lorenzen, Larry F.
Marx, and Chase Trust Company of California.
2.3 Plan of Merger filed as of May 16, 1997, by and between The Failure Group Washington, Inc.
and Performance Technologies, Incorporated d.b.a. PTI Environmental Services.
4.1 Registration Rights Agreement dated May 16, 1997.
27.1* Financial Data Schedule.
</TABLE>
*To be filed by amendment.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE FAILURE GROUP, INC.
Dated: May 29, 1997 By: /s/ Gail A. Aldrich
-------------------------------
Corporate Vice President
and Secretary
-4-
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization dated as of April 27, 1997, entered into by and among
The Failure Group, Inc., The Failure Group Washington, Inc., Performance Technologies, Incorporated
d.b.a. PTI Environmental Services, Robert C. Barrick, Gary N. Bigham, Thomas C. Ginn, Marc W.
Lorenzen, Larry F. Marx, and Chase Trust Company of California.
2.2 Amendment Number 1 dated as of May 7, 1997, to the Agreement and Plan of Reorganization
dated as of April 27, 1997, entered into by and among The Failure Group, Inc., The Failure Group
Washington, Inc., Performance Technologies, Incorporated d.b.a. PTI Environmental Services, Robert
C. Barrick, Gary N. Bigham, Thomas C. Ginn, Marc W. Lorenzen, Larry F. Marx, and Chase Trust
Company of California.
2.3 Plan of Merger filed as of May 16, 1997, by and between The Failure Group Washington, Inc.
and Performance Technologies, Incorporated d.b.a. PTI Environmental Services.
4.1 Registration Rights Agreement dated May 16, 1997.
27.1* Financial Data Schedule.
</TABLE>
*To be filed by amendment
<PAGE>
Exhibit 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
THE FAILURE GROUP, INC.
THE FAILURE GROUP WASHINGTON, INC.
PERFORMANCE TECHNOLOGIES, INCORPORATED, D.B.A.
PTI ENVIRONMENTAL SERVICES,
ROBERT C. BARRICK, GARY N. BIGHAM, THOMAS C. GINN,
MARC W. LORENZEN, LARRY F. MARX,
AND
CHASE TRUST COMPANY OF CALIFORNIA (AS TO THE PROVISIONS OF ARTICLE VII ONLY)
DATED AS OF APRIL 27, 1997
<PAGE>
INDEX OF EXHIBITS
EXHIBIT DESCRIPTION
Exhibit A Form of Principal Shareholder Voting Agreement
Exhibit B-1 Form of Non-competition Agreement for Principal Shareholders
Exhibit B-2 List of Persons Other than Principal Shareholders Signing
Noncompetition Agreements
Exhibit B-3 Form of Noncompetition Agreement
Exhibit C Form of Shareholder Certificate
Exhibit D Piggyback Registration Rights Provisions
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS PAGE
----
<C> <S> <C>
ARTICLE I THE MERGER.................................................................................................2
1.1 The Merger..........................................................................................2
1.2 Effective Time......................................................................................2
1.3 Effect of the Merger................................................................................2
1.4 Articles of Incorporation; Bylaws...................................................................2
1.5 Directors and Officers..............................................................................2
1.6 Effect of Merger on the Capital Stock of the Constituent Corporations...............................3
1.7 Surrender of Certificates...........................................................................4
1.8 No Further Ownership Rights in Company Capital Stock................................................6
1.9 Lost, Stolen or Destroyed Certificates..............................................................6
1.10 Tax Consequences....................................................................................6
1.11 Taking of Necessary Action; Further Action..........................................................6
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF THE COMPANY AND THE PRINCIPAL SHAREHOLDERS................................................................6
2.1 Organization of the Company.........................................................................7
2.2 Company Capital Structure...........................................................................7
2.3 Subsidiaries........................................................................................8
2.4 Authority...........................................................................................8
2.5 No Conflict.........................................................................................8
2.6 Consents............................................................................................9
2.7 Company Financial Statements........................................................................9
2.8 No Undisclosed Liabilities..........................................................................9
2.9 No Changes..........................................................................................9
2.10 Tax Matters........................................................................................11
2.11 Restrictions on Business Activities................................................................13
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of Equipment ....................13
2.13 Intellectual Property..............................................................................14
2.14 Agreements, Contracts and Commitments..............................................................17
2.15 Interested Party Transactions......................................................................18
2.16 Governmental Authorization.........................................................................18
2.17 Litigation.........................................................................................19
2.18 Accounts Receivable................................................................................19
2.19 Minute Books.......................................................................................19
2.20 Environmental Matters..............................................................................19
2.21 Brokers' and Finders' Fees; Third Party Expenses...................................................20
</TABLE>
-i-
<PAGE>
<TABLE>
<C> <S> <C>
2.22 Employee Matters and Benefit Plans.................................................................20
2.23 Insurance..........................................................................................24
2.24 Compliance with Laws...............................................................................24
2.25 Complete Copies of Materials.......................................................................24
2.26 Representations Complete...........................................................................24
ARTICLE III REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........................................................25
3.1 Organization, Standing and Power...................................................................25
3.2 Authority..........................................................................................25
3.3 Capital Structure..................................................................................25
3.4 No Conflict........................................................................................26
3.5 Consents...........................................................................................26
3.6 SEC Documents; Parent Financial Statements; Other Representations..................................26
3.7 Brokers' and Finders' Fees.........................................................................27
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME......................................................................27
4.1 Conduct of Business of the Company.................................................................27
4.2 No Solicitation....................................................................................29
4.3 S Status...........................................................................................30
ARTICLE V ADDITIONAL AGREEMENTS.....................................................................................30
5.1 Sale of Shares.....................................................................................30
5.2 Access to Information..............................................................................30
5.3 Confidentiality....................................................................................31
5.4 Expenses...........................................................................................31
5.5 Public Disclosure..................................................................................31
5.6 Consents...........................................................................................31
5.7 Commercially Reasonable Efforts....................................................................31
5.8 Notification of Certain Matters....................................................................32
5.9 Additional Documents and Further Assurances........................................................32
5.10 Voting Agreements..................................................................................32
5.11 Blue Sky Laws......................................................................................32
5.12 Tax Returns........................................................................................32
5.13 Shareholder Approval...............................................................................33
5.14 Other Expenses.....................................................................................33
</TABLE>
-ii-
<PAGE>
<TABLE>
<C> <S> <C>
ARTICLE VI CONDITIONS TO THE MERGER.................................................................................33
6.1 Conditions to Obligations of Each Party to Effect the Merger.......................................33
6.2 Additional Conditions to Obligations of Company and the Principal Shareholders ....................33
6.3 Additional Conditions to the Obligations of Parent and Sub.........................................34
ARTICLE VII SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW......................................................36
7.1 Survival of Representations and Warranties.........................................................36
7.2 Escrow Arrangements................................................................................36
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER......................................................................44
8.1 Termination........................................................................................44
8.2 Effect of Termination..............................................................................45
8.3 Amendment..........................................................................................45
8.4 Extension; Waiver..................................................................................45
ARTICLE IX GENERAL PROVISIONS.......................................................................................46
9.1 Notices............................................................................................46
9.2 Interpretation.....................................................................................47
9.3 Counterparts.......................................................................................47
9.4 Entire Agreement; Assignment.......................................................................47
9.5 Severability.......................................................................................48
9.6 Other Remedies.....................................................................................48
9.7 Governing Law......................................................................................48
9.8 Rules of Construction..............................................................................48
</TABLE>
-iii-
<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
---------
entered into as of April 27, 1997 among The Failure Group, Inc., a Delaware
corporation ("Parent"), The Failure Group Washington, Inc., a Washington
------
corporation and a wholly-owned subsidiary of Parent ("Sub"), Performance
---
Technologies, Incorporated d.b.a. PTI Environmental Services, a Washington
corporation (the "Company"), and each of Robert C. Barrick, Gary N. Bigham,
-------
Thomas C. Ginn, Marc W. Lorenzen, and Larry F. Marx, individuals and certain of
the principal shareholders of the Company (such individuals being hereinafter
referred to as the "Principal Shareholders" and individually as a "Principal
---------------------- ---------
Shareholder") and Chase Trust Company of California (the "Escrow Agent") (as to
- -----------
the provisions of Article VII only).
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub
believe it is in the best interests of each company and their respective
shareholders that Parent acquire the Company through the statutory merger of Sub
with and into the Company (the "Merger") and in furtherance thereof, have
------
approved the Merger.
B. Pursuant to the Merger, among other things, and subject to the
terms and conditions of this Agreement, all of the issued and outstanding shares
of capital stock of the Company ("Company Capital Stock") shall be converted
into the right to receive cash and shares of Common Stock of Parent.
C. A portion of the stock otherwise payable by Parent in connection
with the Merger shall be placed in escrow by Parent for the purposes of
satisfying damages, losses, expenses and other similar charges which result from
breaches of representations, warranties or covenants, all as set forth in
Article VII hereof.
D. The Company, the Principal Shareholders, Parent and Sub desire
to make certain representations, warranties, covenants and other agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
intending to be legally bound hereby, the parties agree as follows:
<PAGE>
ARTICLE I
THE MERGER
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
----------
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the Washington Business Corporation Act (the
"Washington Code"), Sub shall be merged with and into the Company, the separate
---------------
corporate existence of Sub shall cease, and the Company shall continue as the
surviving corporation and as a wholly-owned subsidiary of Parent. The surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
----------------------
1.2 Effective Time. Unless this Agreement is earlier terminated
--------------
pursuant to Section 8.1, the closing of the Merger (the "Closing") will take
place as promptly as practicable, but no later than five (5) business days
following satisfaction or waiver of the conditions set forth in Article VI, at
the offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304, unless another place or time is agreed to in writing by Parent
and the Company. The date upon which the Closing actually occurs is herein
referred to as the "Closing Date." On the Closing Date, the parties hereto shall
------------
cause the Merger to be consummated by a Certificate of Merger (or like
instrument) with the Secretary of State of Washington (the "Merger
------
Certificate"), in accordance with the relevant provisions of applicable law (the
- -----------
time of acceptance by the Secretary of State of Washington of such filing being
referred to herein as the "Effective Time").
--------------
1.3 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of the Washington Code.
Without limiting the generality of the foregoing, and subject thereto, at the
Effective Time, all the property, rights, privileges, powers and franchises of
the Company and Sub shall vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Sub shall become the debts,
liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
---------------------------------
(a) Unless otherwise determined by Parent prior to the
Effective Time, at the Effective Time, the Articles of Incorporation of Sub
shall be the Articles of Incorporation of the Surviving Corporation until
thereafter amended as provided by law and such Articles of Incorporation;
provided, however, that Article I of the Articles of Incorporation of the
Surviving Corporation shall be amended to read as follows: "The name of the
corporation is Performance Technologies, Incorporated"
(b) The Bylaws of Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
1.5 Directors and Officers. The director(s) of Sub immediately prior
----------------------
to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
-2-
<PAGE>
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Effect of Merger on the Capital Stock of the Constituent
--------------------------------------------------------
Corporations.
------------
(a) Exchange of Company Capital Stock. As of the Effective
---------------------------------
Time of the Merger, each share of Company Capital Stock that is issued and
outstanding immediately prior to the Effective Time of the Merger shall, by
virtue of the Merger and without any action on the part of Sub, the Company, or
the Principal Shareholders be canceled and extinguished and converted into (i)
the right to receive from Parent 480,000 shares of the Parent's common stock,
par value $.001 per share (the "Parent Common Stock"), divided by the total
-------------------
number of shares of Company Capital Stock outstanding immediately prior to the
Effective Time (the "Share Price"); plus (ii) an amount of cash (the "Cash
----------- ----
Amount") equal to (A) $7,750,000 minus the Option Purchase Amount (as defined
- ------
below) divided by (B) the total number of outstanding shares of Company Capital
Stock outstanding immediately prior to the Effective Time. The number of shares
of Parent Common Stock to be issued in the Merger pursuant to this Section
1.6(a) and the aggregate cash to be paid in the Merger pursuant to this Section
1.6(a) shall hereinafter collectively be referred to as the "Merger
------
Consideration," and the number of shares of Parent Common Stock to be issued in
- -------------
the Merger per share of Company Capital Stock pursuant to this Section 1.6(a)
and the amount of cash to be paid per share of Company Capital Stock pursuant to
this Section 1.6(a) shall hereinafter be referred to as the "Merger
------
Consideration Per Share." "Option Purchase Amount" shall be the amount equal to
- -----------------------
the aggregate amount payable to all holders of Company Options pursuant to
Section 1.6(e) below.
(b) Adjustments to Parent Common Stock. The number of shares
----------------------------------
of Parent Common Stock issuable hereunder shall be adjusted to reflect fully the
effect of any stock split, reverse split, stock dividend (including any dividend
or distribution of securities convertible into Parent Common Stock or Company
Capital Stock), reorganization, recapitalization or other like charge with
respect to Parent Common Stock or Company Capital Stock occurring after the date
hereof.
(c) Capital Stock of Sub. At the Effective Time, each issued and
--------------------
outstanding share of the capital stock of Sub shall be converted into and become
one fully paid and nonassessable share of common stock of the Surviving
Corporation.
(d) Fractional Shares. No fractional share of Parent Common
-----------------
Stock shall be issued in the Merger. In lieu thereof, any fractional share shall
be rounded to the nearest whole share of Parent Common Stock.
(e) Stock Options.
-------------
(i) At the Effective Time, each outstanding option
("Company Option") to purchase Company Capital Stock then outstanding under the
Company's 1992 Stock Option Plan
-3-
<PAGE>
(the "Option Plan"), or otherwise, will be canceled and extinguished and the
holder thereof shall be entitled to receive, in respect of each Company Option
then held by such holder and not exercised (pursuant to Section 1.6(e)(ii)
below), a dollar amount equal to the product of (x) the number of shares of
Company Capital Stock subject to each such Company Option multiplied by (y) the
excess, if any, of the Option Amount (as defined below) over the exercise price
per share of such Company Option. "Option Amount" shall mean $10,750,000 divided
by the sum of (a) the total number of shares of outstanding Company Capital
Stock immediately prior to the Effective Time, plus (b) the total number of
shares of Company Capital Stock subject to all Company Options not exercised.
For the sole purpose of determining the number of shares of Company Capital
Stock subject to each Company Option, each such Company Option will be treated,
immediately prior to the Effective Time under this Section 1.6(e)(i), as if each
such Company Option were fully vested and exercisable for all shares of Company
Capital Stock subject to such Company Option.
(ii) Prior to the Effective Time, the Company shall notify
all holders of Company Options of the anticipated Merger and shall, to the
extent so required under the terms of such Company Options, permit such holders
to exercise their Company Options to the extent then exercisable (without
reference to Section 1.6(e)(i)) and in accordance with the terms thereof
(including payment to the Company of the exercise price). The shares issued upon
such exercise shall be deemed outstanding immediately prior to the Effective
Time, shall participate in the Merger pursuant to Section 1.6(a) and shall not
be subject to Section 1.6(e)(i), and any remaining unexercised options held by
such holder shall terminate and such holder shall not be entitled to any payment
under Section 1.6(e)(i). Any amounts received by the Company on account of
exercises of Company Options pursuant to this Section 1.6(e)(ii) shall be
distributed by the Company pro rata to all shareholders of the Company
immediately prior to the Effective Time (including the Option- holder to the
extent of such exercise).
(iii) All amounts payable to a holder of any Company Option
pursuant to this Section 1.6(e) shall be subject to and reduced by, the amount
of any applicable state, federal, or other withholding taxes incurred in
connection with such payment.
1.7 Surrender of Certificates.
-------------------------
(a) Exchange Agent. Secretary of Parent shall act as exchange
--------------
agent (the "Exchange Agent") in the Merger.
--------------
(b) Parent to Provide Common Stock and Cash. At Closing (or in
---------------------------------------
the case of the Parent Common Stock as soon as is practical), Parent shall make
available to the Exchange Agent for exchange in accordance with this Article I,
the aggregate number of shares of Parent Common Stock issuable and the cash
deliverable pursuant to Section 1.6(a) in exchange for outstanding shares
of Company Capital Stock; provided that, on behalf of the holders of Company
Capital Stock, Parent shall deposit into the Escrow Fund (as defined below in
Section 7.2(a)) an aggregate number of shares of Parent Common Stock equal to
$1,000,000 divided by the average of the closing per share
-4-
<PAGE>
bid and asked prices of the Parent Common Stock on the Nasdaq National Market
System for the five trading days ending on the day prior to the Closing Date
(the "Escrow Amount") out of the Merger Consideration otherwise payable pursuant
to Section 1.6(a). The portion of the Escrow Amount deposited into escrow on
behalf of each holder of Company Capital Stock shall be deemed issued and
outstanding Parent Common Stock in the name of such holder and shall be in
proportion to the aggregate number of shares of Parent Common Stock which such
holder would otherwise be entitled to receive under Section 1.6(a) by virtue of
such holder's ownership of outstanding shares of Company Capital Stock. The
Surviving Corporation will pay the Option Purchase Amount for payment pursuant
to Section 1.6(e) as soon as practical after the Closing.
(c) Exchange Procedures. On the Closing Date, (i) each holder
-------------------
of record of a certificate or certificates (collectively, the "Company Stock
-------------
Certificates") that immediately prior to the Effective Time represented
- ------------
outstanding shares of Company Capital Stock whose shares were converted into the
right to receive shares of Parent Common Stock and cash pursuant to Section
1.6(a), will deliver to the Exchange Agent the Company Stock Certificate(s) for
cancellation, together with a letter of transmittal and an executed stock power
in blank, and (ii) the Exchange Agent will deliver to each such holder of record
of the Company Stock Certificate(s) a certificate representing the number of
whole shares of Parent Common Stock (rounded to the nearest whole share), less
the amount of Parent Common Stock deposited into the Escrow Fund on such
holder's behalf pursuant to Section 1.7(b) and Article VII hereof, plus the cash
portion of the Merger Consideration Per Share in accordance with Section
1.6(a)(ii), and the Company Stock Certificates so surrendered shall forthwith be
canceled. Until so surrendered, each outstanding Company Stock Certificate that,
prior to the Effective Time, represented shares of Company Capital Stock will be
deemed from and after the Effective Time, for all corporate purposes, to
evidence the ownership of the number of full shares of Parent Common Stock
(rounded to the nearest whole share) into which such shares of Company Capital
Stock shall have been so converted (minus the shares of Parent Common Stock
subtracted and deposited into the Escrow Fund) and the right to receive an
amount in cash as provided in Section 1.6(a)(ii) hereof. As soon as practicable
after the Effective Time, and subject to and in accordance with the provisions
of Article VII hereof, Parent shall cause to be deposited with the Escrow Agent
(as defined in Article VII) the sum of the Escrow Amount, which amount shall be
available to compensate Parent as provided in Article VII.
(d) Transfers of Ownership. If any certificate for shares of
----------------------
Parent Common Stock is to be issued in a name other than that in which the
certificate surrendered in exchange therefor is registered, it will be a
condition of the issuance thereof that the certificate so surrendered will be
properly endorsed and otherwise in proper form for transfer and that the person
requesting such exchange will have paid to Parent or any agent designated by it
any transfer or other taxes required by reason of the issuance of a certificate
for shares of Parent Common Stock in any name other than that of the registered
holder of the certificate surrendered, or established to the satisfaction of
Parent or any agent designated by it that such tax has been paid or is not
payable.
(e) No Liability. Notwithstanding anything to the contrary in
------------
this Section 1.7, none of the Exchange Agent, the Surviving Corporation, Parent
or any party hereto shall be liable to
-5-
<PAGE>
a holder of shares of Parent Common Stock or Company Capital Stock for any
amount properly paid to a public official pursuant to any applicable abandoned
property, escheat, or similar law.
1.8 No Further Ownership Rights in Company Capital Stock. All shares
-----------------------------------------------------
of Parent Common Stock issued upon the surrender for exchange of shares of
Company Capital Stock in accordance with the terms hereof (including any cash
paid in respect thereof) shall be deemed to have been issued in full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time, Company
Capital Stock Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this Article I.
1.9 Lost, Stolen or Destroyed Certificates. In the event any
--------------------------------------
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such shares of Parent Common Stock (rounded to the
nearest whole share), if any, as may be required pursuant to Section 1.6(a)(i);
provided, however, that Parent may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificates to deliver a bond in such sum as it may reasonably direct
as indemnity against any claim that may be made against Parent or the Exchange
Agent with respect to the certificates alleged to have been lost, stolen or
destroyed.
1.10 Tax Consequences. It is intended by the parties hereto that the
----------------
Merger shall be treated as a taxable asset acquisition. Each party has consulted
with its own tax advisors with respect to the tax consequences of the Merger.
1.11 Taking of Necessary Action; Further Action. If, at any time after
------------------------------------------
the Effective Time, any such further action is necessary or desirable to carry
out the purposes of this Agreement and to vest the Surviving Corporation with
full right, title and possession to all assets, property, rights, privileges,
powers and franchises of the Company and Sub, the officers and directors of the
Company and Sub are fully authorized in the name of their respective
corporations or otherwise to take, and will take, all such lawful and necessary
action.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
AND THE PRINCIPAL SHAREHOLDERS
The Company and the Principal Shareholders hereby, jointly and
severally (but subject to the limitations on recovery set forth in Section 7.2
(l)), represent and warrant to Parent and Sub, subject to such exceptions as are
specifically disclosed in the disclosure letter (referencing the appropriate
-6-
<PAGE>
section and paragraph numbers) supplied by the Company to Parent (the
"Disclosure Letter") and dated as of the date hereof, as follows:
2.1 Organization of the Company. The Company is a corporation duly
---------------------------
organized, validly existing and in good standing under the laws of the State of
Washington. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition, results
of operations or prospects of the Company (hereinafter referred to as a
"Material Adverse Effect"). The Company has delivered a true and correct copy of
-----------------------
its Articles of Incorporation and Bylaws, each as amended to date, to Parent.
Section 2.1 of the Disclosure Letter lists the directors and officers of the
Company. The operations now being conducted by the Company have not been
conducted under any other name.
2.2 Company Capital Structure.
-------------------------
(a) The authorized capital stock of the Company consists of
10,000,000 shares of authorized Common Stock of which 5,064,000 shares are
issued and outstanding. The Company Capital Stock is held by the persons, with
the domicile addresses and in the amounts set forth on Section 2.2(a) of the
Disclosure Letter. All outstanding shares of Company Capital Stock are duly
authorized, validly issued, fully paid and non-assessable, and not subject to
preemptive rights created by statute, the Articles of Incorporation or Bylaws of
the Company or any agreement to which the Company is a party or by which it is
bound, and were issued in compliance with all applicable state and federal
securities laws. The Company has no other capital stock authorized, issued or
outstanding.
(b) The Company has reserved 500,000 shares of Common Capital
Stock for issuance to employees and consultants pursuant to the Option Plan, of
which 443,000 shares are subject to outstanding, unexercised options and 8,200
shares remain available for future grant. Schedule 2.2(b) sets forth for each
outstanding Company Option the name of the holder of such option, the domicile
address of such holder, the number of shares of Common Stock subject to such
option, the exercise price of such option, and the vesting schedule for such
option, including the extent vested to date and whether such option can be
terminated as to unvested shares by virtue of the transactions contemplated by
this Agreement. Except for the Company Options described in Schedule 2.2(b),
there are no options, warrants, calls, rights, commitments or agreements of any
character, written or oral, to which the Company is a party or by which it is
bound obligating the Company to issue, deliver, sell, repurchase or redeem, or
cause to be issued, delivered, sold, repurchased or redeemed, any shares of the
capital stock of the Company, or grant, extend, accelerate the vesting of,
change the price of, otherwise amend or enter into any such option, warrant,
call, right, commitment or agreement. The holders of Company Options and
warrants have been or will be given, or shall have properly waived, any required
notice prior to the Merger and all such rights will be terminated at or prior to
the Effective Time pursuant to Section 1.6(e). As a result of the
-7-
<PAGE>
Merger, Parent will be the record and sole beneficial owner of all Company
Capital Stock and rights to acquire or receive Company Capital Stock. There are
no voting trusts, proxies, or other agreements or understandings with respect to
the voting stock of the Company.
2.3 Subsidiaries. The Company does not, and has never, had any
------------
subsidiaries or affiliated companies and does not otherwise own, and has not
otherwise owned, any shares in the capital of or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
2.4 Authority. Each of the Company and each of the Principal
---------
Shareholders has all requisite power and authority to enter into this Agreement
and any Related Agreements (as hereinafter defined) to which it is a party and
to consummate the transactions contemplated hereby and thereby. The execution
and delivery of this Agreement and any Related Agreements and the consummation
of the transactions contemplated hereby and thereby have been duly authorized by
all necessary corporate action on the part of the Company, and no further action
is required on the part of the Company or the Principal Shareholders to
authorize the Agreement, any Related Agreements to which either the Company or
any of the Principal Shareholders are a party and the transactions contemplated
hereby and thereby. This Agreement and any Related Agreements to which the
Company or any of the Principal Shareholders are a party have been duly executed
and delivered by the Company or the Principal Shareholders, as the case may be,
and, assuming the due authorization, execution and delivery by the other parties
hereto and thereto, constitute the valid and binding obligation of the Company
or the Principal Shareholders, as the case may be, enforceable in accordance
with their respective terms, except as such enforceability may be limited by
principles of public policy and subject to the laws of general application
relating to bankruptcy, insolvency and the relief of debtors and to rules of law
governing specific performance, injunctive relief or other equitable remedies.
The "Related Agreements" shall mean all such ancillary agreements required in
this Agreement to be executed and delivered in connection with the transactions
contemplated hereby, including the Non-competition Agreements.
2.5 No Conflict. The execution and delivery of this Agreement and any
-----------
Related Agreements by the Company and the Principal Shareholders do not, and,
the consummation of the transactions contemplated hereby and thereby will not,
conflict with, or result in any violation of, or default under (with or without
notice or lapse of time, or both), or give rise to a right of termination,
cancellation, modification or acceleration of any obligation or loss of any
benefit under (any such event, a "Conflict") (i) any provision of the Articles
--------
of Incorporation and Bylaws of the Company, (ii) any mortgage, indenture, or
lease, to which the Company or any of the Principal Shareholders or any of their
respective properties or assets are subject, (iii) any contract or other
agreement or instrument listed in Section 2.14 of the Disclosure Letter attached
hereto, (iv) any permit, concession, franchise, or license to which the Company
or any of the Principal Shareholders or any of their respective properties or
assets are subject, or (v) any judgment, order, decree, statute, law, ordinance,
rule or regulation applicable to the Company or the Principal Shareholders or
their respective properties or assets.
-8-
<PAGE>
2.6 Consents. No consent, waiver, approval, order or authorization
--------
of, or registration, declaration or filing with, any court, administrative
agency or commission or other federal, state, county, local or other foreign
governmental authority, instrumentality, agency or commission ("Governmental
------------
Entity") or any third party, including a party to any agreement with the Company
- ------
(so as not to trigger any Conflict), is required by or with respect to the
Company in connection with the execution and delivery of this Agreement and any
Related Agreements or the consummation of the transactions contemplated hereby
and thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations, and filings as may be required
under applicable securities laws thereby, and (ii) the filing of the Merger
Certificate with the Secretary of State of the State of Washington.
2.7 Company Financial Statements. Section 2.7 of the Disclosure
----------------------------
Letter sets forth the Company's audited balance sheets as of December 31, 1995
and December 31, 1996 and the related audited statements of income and cash flow
for the twelve-month periods ended December 31, 1994, December 31, 1995 and
December 31, 1996 (the "Audited Financials") and the Company's unaudited balance
------------------
sheet of February 28, 1997 and the related unaudited statements of income for
the two-month period then ended (the "Unaudited Financials"). The Audited
--------------------
Financials and the Unaudited Financials are correct in all material respects and
have been prepared in accordance with generally accepted accounting principles
("GAAP") applied on a basis consistent throughout the periods indicated
----
consistent with past practice. The Audited Financials and Unaudited Financials
present fairly the financial condition, operating results and cash flows of the
Company as of the dates and during the periods indicated therein, subject in the
case of the Unaudited Financials, to normal year-end adjustments, which will not
be material in amount or significance. The Company's audited Balance Sheet as of
December 31, 1996 shall be referred to as the "Current Balance Sheet". On the
---------------------
Closing Date, the Company's net worth (total assets minus total liabilities
calculated in accordance with GAAP) shall be greater than $2.94 million, minus
the Company's liability associated with termination of the Company Options.
2.8 No Undisclosed Liabilities. The Company does not have any
--------------------------
liability, indebtedness, obligation, expense, claim, deficiency, guaranty or
endorsement of any type, whether accrued, absolute, contingent, matured,
unmatured or other (whether or not required to be reflected in financial
statements prepared in accordance with GAAP), which individually or in the
aggregate (i) has not been reflected in the Current Balance Sheet, or (ii) has
not arisen in the ordinary course of business consistent with past practice
since December 31, 1996.
2.9 No Changes. Since December 31, 1996, there has not been,
----------
occurred or arisen any:
(a) transaction by the Company except in the ordinary course of
business consistent with past practice;
(b) amendments or changes to the Articles of Incorporation or
Bylaws of the Company;
-9-
<PAGE>
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $10,000;
(d) destruction of, damage to or loss of any material assets,
business or customer of the Company (whether or not covered by insurance);
(e) labor trouble or claim of wrongful discharge or other
unlawful labor practice or action;
(f) change in accounting methods or practices (including any
change in depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or
other distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
(i) increase in the salary or other compensation payable or to
become payable by the Company to any of its officers, directors, employees or
advisors, or the declaration, payment or commitment or obligation of any kind
for the payment, by the Company, of a bonus or other additional salary or
compensation to any such person;
(j) any agreement, contract, lease or commitment (collectively
a "Company Agreement") or any extension or modification of the terms of any
-----------------
Company Agreement which (i) involves the payment of greater than $50,000 per
annum or which extends for more than one (1) year, (ii) involves any payment or
obligation to any affiliate of the Company other than in the ordinary course of
business as conducted on that date and consistent with past practice, or (iii)
involves the sale of any material assets;
(k) sale, lease, license or other disposition of any of the
assets or properties of the Company, or any creation of any security interest in
such assets or properties except in the ordinary course of business as conducted
on that date and consistent with past practice;
(l) amendment or termination of any material contract, agreement
or license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by
the Company of any indebtedness, guaranteeing by the Company of any
indebtedness, issuance or sale of any debt securities of the Company or
guaranteeing of any debt securities of others, except for trade payables
-10-
<PAGE>
and advances to employees for travel and business expenses in the ordinary
course of business, consistent with past practice;
(n) waiver or release of any right or claim of the Company,
including any write-off or other compromise of any account receivable of the
Company;
(o) the commencement or notice of, or, to the knowledge of the
Company or any of the Principal Shareholders, the threat of commencement of any
lawsuit or proceeding against, or investigation of, the Company or its affairs;
(p) notice of any claim of ownership by a third party of the
Intellectual Property of the Company (as defined in Section 2.13 below) or of
infringement by the Company of any third party's Intellectual Property rights;
(q) issuance or sale by the Company of any of its shares of
capital stock, or securities exchangeable, convertible or exercisable therefor,
or of any other of its securities;
(r) change in pricing or royalties set or charged by the Company
to its customers or licensees or in pricing or royalties set or charged by
persons who have licensed Intellectual Property (as defined in Section 2.13
below) to the Company;
(s) any event or condition of any character that has had a
Material Adverse Effect on the Company; or
(t) negotiation or agreement by the Company or any officer
thereof or, to the knowledge of the Company or any of the Principal
Shareholders, any employees thereof to do any of the things described in the
preceding clauses (a) through (s) (other than negotiations with Parent and its
representatives regarding the transactions contemplated by this Agreement).
(u) voluntary or involuntary termination of any employee or
consultant.
2.10 Tax Matters.
-----------
(a) Definition of Taxes. For the purposes of this Agreement,
-------------------
"Tax" or, collectively, "Taxes," means (i) any and all federal, state, local and
--- -----
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or
-11-
<PAGE>
implied obligation to indemnify any other person or as a result of any
obligations under any agreements or arrangements with any other person with
respect to such amounts and including any liability for taxes of a predecessor
entity.
(b) Tax Returns and Audits.
----------------------
(i) The Company as of the Effective Time will have prepared
and timely filed or made a timely request for extension for all required
federal, state, local and foreign returns, estimates, information statements and
reports ("Returns") relating to any and all Taxes concerning or attributable to
-------
the Company, or its operations and such Returns are true and correct and have
been completed in accordance with applicable law.
(ii) The Company as of the Effective Time (A) will have paid
or accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has timely paid all Taxes owing and there
is no Tax deficiency outstanding, assessed or proposed against the Company, nor
has the Company executed any waiver of any statute of limitations on or
extending the period for the assessment or collection of any Tax.
(iv) To the knowledge of the Company and the Principal
Shareholders, no audit or other examination of any Return of the Company is
presently in progress, nor has the Company been notified of any request for such
an audit or other examination.
(v) The Company has no liabilities for unpaid federal,
state, local and foreign Taxes which have not been accrued or reserved against
in accordance with GAAP on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal and state income and all state sales and
use Returns filed for 1994-96.
(vii) There are (and immediately following the Effective Time
there will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort (collectively,
"Liens") on the assets of the Company relating to or attributable to Taxes other
than Liens for taxes not yet due and payable.
(viii) Neither the Company nor any of the Principal
Shareholders has knowledge of any basis for the assertion of any claim relating
or attributable to Taxes which, if adversely determined, would result in any
Lien on the assets of the Company.
-12-
<PAGE>
(ix) As of the Effective Time, except as contemplated by
this Agreement, there will not be any contract, agreement, plan or arrangement,
covering any employee or former employee of the Company that, individually or
collectively, could reasonably be expected to give rise to the payment of any
amount that would not be deductible by the Company as an expense under
applicable law, including Section 280G of the Code.
(x) Except for the indemnification agreements identified
on Section 2.14 of the Disclosure Letter, the Company is not a party to any tax
sharing, tax indemnification or allocation agreement nor does the Company owe
any amount under any such agreement.
(xi) The Company is an accrual basis taxpayer, and the
Company's tax basis in its assets for purposes of determining its future
amortization, depreciation and other federal income tax deductions is accurately
reflected on the Company's tax books and records.
(xii) The Company is not, and has not been at any time, a
"United States Real Property Holding Corporation" within the meaning of Section
ss.897(c)(2) of the Code.
(xiii) [INTENTIONALLY OMITTED.]
(xiv) The Company has been an S Corporation within the meaning
of Section 1361 of the Code at all times since the date of its incorporation.
2.11 Restrictions on Business Activities. There is no agreement
-----------------------------------
(noncompete or otherwise), commitment, judgment, injunction, order or decree to
which the Company is a party or otherwise binding upon the Company which has or
reasonably could be expected to have the effect of prohibiting or materially
impairing, as currently conducted, any business practice of the Company, any
acquisition of property (tangible or intangible) by the Company or the conduct
of business by the Company. The Company has not entered into any agreement under
which the Company is restricted from providing services to customers or
potential customers or any class of customers, in any geographic area, during
any period of time or in any segment of the market.
2.12 Title of Properties; Absence of Liens and Encumbrances;
------------------------------------------------------
Condition of Equipment.
----------------------
(a) The Company does not own any real property, nor has it
ever owned any real property. Section 2.12(a) of the Disclosure Letter sets
forth a list of all real property currently leased by the Company, the name of
the lessor, the date of the lease and each amendment thereto and, with respect
to any current lease, the aggregate annual rental and/or other fees payable
under any such lease. All such current leases are in full force and effect, are
valid and effective in accordance with their respective terms, and there is not,
under any of such leases, any existing default or event of default (or event
which with notice or lapse of time, or both, would constitute a default).
(b) The Company has good and valid title to, or, in the case
of leased properties and assets, valid leasehold interests in, all of its
tangible properties and assets, real, personal and
-13-
<PAGE>
mixed, used or held for use in its business, free and clear of any Liens, except
as reflected in the Current Balance Sheet and except for liens for taxes not yet
due and payable and such imperfections of title and encumbrances, if any, which
are not material in character, amount or extent, and which do not detract from
the value, or interfere with the present use, of the property subject thereto or
affected thereby.
(c) Section 2.12(c) of the Disclosure Letter lists all material
items of equipment (the "Equipment") owned or leased by the Company and such
---------
Equipment is (i) adequate for the conduct of the business of the Company as
currently conducted and (ii) in good operating condition, regularly and properly
maintained, subject to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and
clear of any Liens, of all customer lists relating to the Company's current and
former customers (the "Customer Information"). No third party possesses any
--------------------
claims or rights with respect to use of the Customer Information.
2.13 Intellectual Property.
---------------------
For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following
---------------------
and all rights in, arising out of, or associated therewith: (i)
all United States, international and foreign patents and
applications therefor and all reissues, divisions, renewals,
extensions, provisionals, continuations and continuations-in-part
thereof; (ii) all inventions (whether patentable or not),
invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer
lists, and all documentation relating to any of the foregoing;
(iii) all copyrights, copyright registrations and applications
therefor, and all other rights corresponding thereto throughout
the world; (iv) all industrial designs and any registrations and
applications therefor throughout the world; (v) all trade names,
logos, common law trademarks and service marks, trademark and
service mark registrations and applications therefor throughout
the world; (vi) all databases and data collections and all rights
therein throughout the world; and (vii) any similar or equivalent
rights to any of the foregoing anywhere in the world.
"Company Intellectual Property" shall mean any Intellectual
-----------------------------
Property that is owned by, or exclusively licensed to, the
Company.
"Registered Intellectual Property" means all United States,
--------------------------------
international and foreign: (i) patents and patent applications
(including provisional applications); (ii) registered
trademarks, applications to register trademarks, intent-to-use
applications, or other registrations or applications related
to trademarks; (iii) registered copyrights and
-14-
<PAGE>
applications for copyright registration; and (iv) any other
Intellectual Property that is the subject of an application,
certificate, filing, registration or other document issued, filed
with, or recorded by any state, government or other public legal
authority.
(i) Section 2.13 of the Disclosure Letter lists all of
the Registered Intellectual Property owned by, or filed in the name of, the
Company (the "Company Registered Intellectual Property").
----------------------------------------
(ii) Section 2.13 of the Disclosure Letter lists all
proceedings or actions before any court, tribunal (including the United States
Patent and Trademark Office ("PTO") or equivalent authority anywhere in the
---
world) related to any Company Intellectual Property.
(iii) No Company Intellectual Property or product or
service of the Company is subject to any proceeding or outstanding decree,
order, judgment, agreement, or stipulation restricting in any manner the use,
transfer, or licensing thereof by the Company, or which may affect the validity,
use or enforceability of such Company Intellectual Property.
(iv) Each item of Company Registered Intellectual Property
is valid and subsisting, all necessary registration, maintenance and renewal
fees in connection with such Registered Intellectual Property have been made and
all necessary documents and certificates in connection with such Registered
Intellectual Property have been filed with the relevant patent, copyright,
trademark or other authorities in the United States or foreign jurisdictions, as
the case may be, for the purposes of maintaining such Registered Intellectual
Property.
(v) (i) the Company owns and has good and exclusive title
to each item of Company Intellectual Property, including all Company Registered
Intellectual Property listed on Schedule 2.13, free and clear of any lien or
encumbrance; and (ii) the Company is the exclusive owner of all trademarks and
trade names used in connection with the operation or conduct of the business of
the Company, including the sale of any products or the provision of any services
by the Company.
(vi) The Company owns exclusively, and has good title to,
all copyrighted works that are Company products or which the Company otherwise
purports to own.
(vii) To the extent that any work, invention, or material
has been developed or created by a third party for the Company, the Company has
a written agreement with such third party with respect thereto and the Company
thereby has obtained ownership of, and is the exclusive owner of, all
Intellectual Property in such work, material or invention by operation of law or
by valid assignment.
(viii) The Company has not transferred ownership of, or
granted any exclusive license with respect to, any Intellectual Property that is
or was Company Intellectual Property, to any third party.
-15-
<PAGE>
(ix) Schedule 2.13 lists all material contracts, licenses
and agreements to which the Company is a party pursuant to which a third party
has licensed or transferred any Intellectual Property to the Company, with a
potential value or cost in excess of $25,000.
(x) The contracts, licenses and agreements listed on
Schedule 2.13 are in full force and effect. The consummation of the transactions
contemplated by this Agreement will neither violate nor result in the breach,
modification, cancellation, termination, or suspension of such contracts,
licenses and agreements. The Company is in compliance with, and has not breached
any term of such contracts, licenses and agreements and, to the knowledge of the
Company, all other parties to such contracts, licenses and agreements are in
compliance with, and have not breached any term of, such contracts, licenses and
agreements. Following the Closing Date, Parent will be permitted to exercise all
of the Company's rights under the contracts, licenses and agreements listed on
Schedule 2.13 to the same extent the Company would have been able to had the
transactions contemplated by this Agreement not occurred and without the payment
of any additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
(xi) The operation of the business of the Company as such
business currently is conducted, or is reasonably is contemplated to be
conducted, including the Company's design, development, manufacture, marketing
and sale of the products or services of the Company (including with respect to
products currently under development) has not, does not and will not infringe or
misappropriate the Intellectual Property of any third party or constitute unfair
competition or trade practices under the laws of any jurisdiction.
(xii) The Company has not received notice from any third
party that the operation of the business of the Company or any act, product or
service of the Company, infringes or misappropriates the Intellectual Property
of any third party or constitutes unfair competition or trade practices under
the laws of any jurisdiction.
(xiii) To the best knowledge of the Company and each of
the Principal Shareholders, no Person has or is infringing or misappropriating
any Company Intellectual Property.
(xiv) INTENTIONALLY OMITTED.
(xv) The Company has taken all steps that are reasonably
required to protect the Company's rights in the Company's confidential
information and trade secrets or any trade secrets or confidential information
of third parties provided to the Company, and, without limiting the foregoing,
the Company has and enforces a policy requiring each employee to execute a
proprietary information/confidentiality agreement substantially in the Company's
standard form and all current and former employees of the Company have executed
such an agreement.
-16-
<PAGE>
2.14 Agreements, Contracts and Commitments.
-------------------------------------
(a) The Company does not have, or is not bound by:
(i) any contracts, licenses and agreements, to which
the Company is a party with respect to any Intellectual Property with a value or
cost in excess of $25,000, other than "shrink wrap" and similar commercial end-
user licenses.
(ii) either (x) any employment or consulting agreement,
contract, or commitment with an employee, individual consultant, or salesperson
or (y) any consulting or sales agreement, contract, or commitment with a firm or
other organization,
(iii) except as contemplated by Section 1.6(e), any
agreement or plan, including, without limitation, any stock option plan, stock
appreciation rights plan or stock purchase plan, any of the benefits of which
will be increased, or the vesting of benefits of which will be accelerated, by
the occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement,
(iv) any fidelity or surety bond or completion bond,
(v) any lease of personal property having a value
individually in excess of $20,000,
(vi) any agreement of indemnification, to hold harmless
or guaranty; or any obligation or liability with respect to infringement or
misappropriation by the Company or any other person of the Intellectual Property
rights of another person,
(vii) any agreement, contract or commitment containing
any covenant limiting the freedom of the Company to engage in any line of its
current or anticipated business or to compete with any person,
(viii) any agreement, contract or commitment relating to
capital expenditures and involving future payments in excess of $10,000,
(ix) any agreement, contract or commitment relating to
the disposition or acquisition of assets or any interest in any business
enterprise outside the ordinary course of the Company's business,
(x) any mortgages, indentures, loans or credit
agreements, security agreements or other agreements or instruments relating to
the borrowing of money or extension of credit,
-17-
<PAGE>
(xi) any purchase order or contract for the purchase of
materials involving $20,000 or more,
(xii) any construction contracts,
(xiii) any distribution, joint marketing or development
agreement, or
(xiv) any other agreement, contract or commitment that
involves $25,000 or more or is not cancelable without penalty within thirty
(30) days.
(b) The Company is in compliance with and has not breached,
violated or defaulted under, or received notice that it has breached, violated
or defaulted under, any of the terms or conditions of any agreement, contract or
commitment described above to which it is a party or by which it is bound (any
such agreement, contract or commitment, a "Contract"), nor is the Company or any
of the Principal Shareholders aware of any event that would constitute such a
breach, violation or default with the lapse of time, giving of notice or both.
Each Contract is in full force and effect and is not to the knowledge of the
Company and the Principal Shareholders subject to any default thereunder by any
party obligated to the Company pursuant thereto. Following the Effective Time,
the Company will be permitted to exercise all of the Company's rights under the
Contracts without the payment of any additional amounts or consideration other
than ongoing fees, royalties or payments which the Company would otherwise be
required to pay.
2.15 Interested Party Transactions. No officer, director, or, to the
-----------------------------
knowledge of the Company and the Principal Shareholders, shareholders (except
for those shareholders who are officers or directors) of the Company (nor any
ancestor, sibling, descendant or spouse of any of such persons, or any trust,
partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) an interest in any entity
which furnished or sold, or furnishes or sells, services or products that the
Company furnishes or sells, or proposes to furnish or sell, or (ii) any interest
in any entity that purchases from or sells or furnishes to the Company, any
goods or services or (iii) a beneficial interest in any Contract; provided, that
ownership of no more than one percent (1%) of the outstanding voting stock of a
publicly traded corporation shall not be deemed an "interest in any entity" for
----------------------
purposes of this Section 2.15.
2.16 Governmental Authorization. Section 2.16 of the Disclosure
--------------------------
Schedule accurately lists each consent, license, permit, grant or other
authorization issued to the Company by a governmental entity (i) pursuant to
which the Company currently operates or holds any interest in any of its
properties or (ii) which is required for the operation of its business or the
holding of any such interest (herein collectively called "Company
-------
Authorizations"). The Company Authorizations are in full force and effect and
- --------------
constitute all Company Authorizations required to permit the Company to operate
or conduct its business or hold any interest in its properties or assets.
-18-
<PAGE>
2.17 Litigation. There is no action, suit or proceeding of any nature
----------
pending, or to the Company's or each of the Principal Shareholder's knowledge
threatened, against the Company, its properties or any of its officers or
directors, nor, to the knowledge of the Company or each Principal Shareholder,
is there any reasonable basis therefor. There is no investigation pending, or to
the Company's or each of the Principal Shareholder's knowledge threatened,
against the Company, its properties or any of its officers or directors (nor, to
the best knowledge of the Company or of each Principal Shareholder, is there any
reasonable basis therefor) by or before any governmental entity. No governmental
entity has at any time challenged or questioned in writing the legal right of
the Company or any Subsidiary to conduct its operations as presently or
previously conducted.
2.18 Accounts Receivable.
-------------------
(a) The Company has made available to Parent a list of all
accounts receivable of the Company ("Accounts Receivable") as of February 28,
-------------------
1997 along with a summary of the aging of such accounts receivable since the
date of invoice.
(b) All Accounts Receivable, shared savings awards receivable,
and earned unbilled revenues of the Company arose in the ordinary course of
business, are carried at values determined in accordance with GAAP consistently
applied and are collectible, and will be collected no later than one year from
the Closing Date (except for contract withholds), except to the extent of
reserves therefor set forth on the Company's balance sheet for April 30, 1997.
No person has any Lien on any of such Accounts Receivable and no request or
agreement for deduction or discount has been made with respect to any of such
Accounts Receivable.
2.19 Minute Books. The minutes of the Company made available to
------------
counsel for Parent are the only minutes of the Company and contain a reasonably
accurate summary of all actions taken by the Board of Directors (or committees
thereof) of the Company and its shareholders since the time of incorporation of
the Company.
2.20 Environmental Matters.
---------------------
(a) Hazardous Material. The Company has not: (i) operated any
------------------
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous
---------
-19-
<PAGE>
Material"). Excluding office and janitorial supplies properly and safely
- --------
maintained, no Hazardous Materials are present as a result of the deliberate
actions of the Company or, to the Company's or each of the Principal
Shareholder's knowledge, as a result of any actions of any third party or
otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not
------------------------------
transported, stored, used, manufactured, disposed of, released or exposed its
employees or others to Hazardous Materials in violation of any law in effect on
or before the Effective Time, nor has the Company disposed of, transported,
sold, or manufactured any product containing a Hazardous Material (any or all of
the foregoing being collectively referred to as "Hazardous Materials
-------------------
Activities") in violation of any rule, regulation, treaty or statute promulgated
- ----------
by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. The Company currently holds all environmental
-------
approvals, permits, licenses, clearances and consents (the "Environmental
-------------
Permits") necessary for the conduct of the Company's Hazardous Material
- -------
Activities and other businesses of the Company as such activities and businesses
are currently being conducted.
(d) Environmental Liabilities. No action, proceeding,
-------------------------
revocation proceeding, amendment procedure, writ, injunction or claim is
pending, or to the Company's or each of the Principal Shareholder's knowledge,
threatened concerning any Environmental Permit, Hazardous Material or any
Hazardous Materials Activity of the Company. Neither the Company nor each of the
Principal Shareholders is aware of any fact or circumstance which would involve
the Company in any environmental litigation or impose upon the Company any
environmental liability relating to Hazardous Materials Activities of the
Company.
2.21 Brokers' and Finders' Fees; Third Party Expenses.
------------------------------------------------
(a) The Company has not incurred, nor will it incur, directly
or indirectly, any liability for brokerage or finders' fees or agents'
commissions or any similar charges in connection with the Agreement or any
transaction contemplated hereby.
(b) Section 2.21 of the Disclosure Letter sets forth the
Company's current reasonable estimate of all Third Party Expenses (as defined in
Section 5.4) expected to be incurred by the Company in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby. All Third Party Expenses of the Company
shall be accrued by the Company and reflected on the Company's financial
statements prior to the Closing Date. The Company's Third Party Expenses shall
be the obligation of the Surviving Corporation after the Closing.
2.22 Employee Matters and Benefit Plans.
----------------------------------
-20-
<PAGE>
(a) Definitions. With the exception of the definition of
-----------
"Affiliate" set forth in Section 2.22(a)(i) below (which definition shall apply
only to this Section 2.22), for purposes of this Agreement, the following terms
shall have the meanings set forth below:
(i) "Affiliate" shall mean any other person or entity
---------
under common control with the Company within the meaning of Section 414(b), (c),
(m) or (o) of the Code and the regulations thereunder;
(ii) "ERISA" shall mean the Employee Retirement Income
-----
Security Act of 1974, as amended;
(iii) "Employee Plan" shall refer to any plan, program,
-------------
policy, practice, contract, agreement or other arrangement providing for
compensation, severance, termination pay, performance awards, stock or stock-
related awards, fringe benefits or other employee benefits or remuneration of
any kind, whether written or unwritten or otherwise, funded or unfunded,
including without limitation, each "employee benefit plan", within the meaning
of Section 3(3) of ERISA which is or has been maintained, contributed to, or
required to be contributed to, by the Company or any Affiliate for the benefit
of any "Employee" (as defined below);
(iv) "Employee" shall mean any current, former, or
--------
retired employee, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each
------------------
management, employment, severance, consulting, relocation, or similar agreement
or contract between the Company or any Affiliate and any Employee or consultant;
(vi) "IRS" shall mean the Internal Revenue Service;
---
(vii) "Multiemployer Plan" shall mean any "Pension Plan"
------------------
(as defined below) which is a "multiemployer plan", as defined in Section 3(37)
of ERISA; and
(viii) "Pension Plan" shall refer to each Employee Plan
------------
which is an "employee pension benefit plan", within the meaning of Section 3(2)
of ERISA.
(b) Schedule. Schedule 2.22(b) contains an accurate and
--------
complete list of each Employee Plan and each such Employee Agreement, together
with a schedule of all liabilities, whether or not accrued, under each such
Employee Plan or Employee Agreement. The Company does not have any plan or
commitment, whether legally binding or not, to establish any new Employee Plan
or Employee Agreement, to modify any Employee Plan or Employee Agreement (except
to the extent required by law or to conform any such Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent
-21-
<PAGE>
in writing, or as required by this Agreement), or to enter into any Employee
Plan or Employee Agreement, nor does it have any intention or commitment to do
any of the foregoing.
(c) Documents. The Company has provided to Parent (i) correct
---------
and complete copies of all documents embodying each Employee Plan and each
Employee Agreement including all amendments thereto, written interpretations
thereof and copies of all forms of agreement and enrollment used therewith; (ii)
the most recent annual actuarial valuations, if any, prepared for each Employee
Plan; (iii) the three most recent annual reports (Series 5500 and all schedules
thereto), if any, required under ERISA or the Code in connection with each
Employee Plan or related trust; (iv) if the Employee Plan is funded, the most
recent annual and periodic accounting of Employee Plan assets; (v) the most
recent summary plan description together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Employee Plan; (vi) all IRS determination letters and rulings relating to
Employee Plans and copies of all applications and correspondence to or from the
IRS or the Department of Labor ("DOL") with respect to any Employee Plan; (vii)
---
all material written agreements and contracts relating to each Employee Plan,
including but not limited to, administration service agreements, group annuity
contracts and group insurance contracts; (viii) all communications to any
Employee or Employees relating to any Employee Plan and any proposed Employee
Plans, in each case, relating to any amendments, terminations, establishments,
increases or decreases in benefits, acceleration of payments or vesting
schedules or other events which would result in any liability to the Company;
and (ix) all registration statements and prospectuses prepared in connection
with each Employee Plan.
(d) Employee Plan Compliance. (i) The Company has performed in
------------------------
all material respects all obligations required to be performed by it under each
Employee Plan and, is not in default or violation of, and has no knowledge of
any default or violation by any other party to each Employee Plan, and each
Employee Plan has been established and maintained in all material respects in
accordance with its terms and in compliance with all applicable laws, statutes,
orders, rules and regulations, including but not limited to ERISA or the Code;
(ii) each Employee Plan intended to qualify under Section 401(a) of the Code and
each trust intended to qualify under Section 501(a) of the Code has either
received a favorable determination letter with respect to each such Plan from
the IRS or has remaining a period of time under applicable Treasury regulations
or IRS pronouncements in which to apply for such a determination letter and make
any amendments necessary to obtain a favorable determination; (iii) no
"prohibited transaction", within the meaning of Section 4975 of the Code or
Sections 406 and 407 of ERISA, and not otherwise exempt under Section 408 of
ERISA, has occurred with respect to any Employee Plan; (iv) there are no
actions, suits or claims pending, or, to the knowledge of the Company,
threatened or reasonably anticipated (other than routine claims for benefits)
against any Employee Plan or against the assets of any Employee Plan; (v) each
Employee Plan can be amended, terminated or otherwise discontinued after the
Effective Time in accordance with its terms, without liability to the Company,
Parent or any of its Affiliates (other than ordinary administration expenses
typically incurred in a termination event); (vi) there are no audits, inquiries
or proceedings pending or, to the knowledge of the Company or any Affiliates,
threatened by the IRS or DOL with respect to any Employee Plan; and (vii)
neither the Company nor any
-22-
<PAGE>
Affiliate is subject to any penalty or tax with respect to any Employee Plan
under Section 402(i) of ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, nor has it ever,
-------------
maintained, established, sponsored, participated in, or contributed to, any
Pension Plan which is subject to Title IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company
-------------------
contributed to or been requested to contribute to any Multiemployer Plan.
(g) No Post-Employment Obligations. No Employee Plan provides,
------------------------------
or has any liability to provide, life insurance, medical or other employee
welfare benefits to any Employee upon his or her retirement or termination of
employment for any reason, except as may be required by the Consolidated Omnibus
Budget Reconciliation Act of 1985 ("COBRA") or other applicable statute,
and the Company has never represented, promised or contracted (whether in oral
or written form) to any Employee (either individually or to Employees as a
group) that such Employee(s) would be provided with life insurance, medical or
other employee welfare benefits upon their retirement or termination of
employment, except to the extent required by statute.
(h) No COBRA Violation. Neither the Company nor any Affiliate
------------------
has, prior to the Effective Time and in any material respect, violated any of
the health care continuation requirements of COBRA or any similar provisions of
state law applicable to its employees.
(i) Effect of Transaction.
---------------------
(i) Except as contemplated in Section 1.6(e), the
execution of this Agreement and the consummation of the transactions
contemplated hereby will not (either alone or upon the occurrence of any
additional or subsequent events) constitute an event under any Employee Plan,
Employee Agreement, trust or loan that will or may result in any payment
(whether of severance pay or otherwise), acceleration, forgiveness of
indebtedness, vesting, distribution, increase in benefits or obligation to fund
benefits with respect to any Employee.
(ii) No payment or benefit which will or may be made by
the Company or Parent or any of their respective affiliates with respect to any
Employee as a result of the transactions contemplated by this Agreement will be
characterized as an "excess parachute payment", within the meaning of Section
280G(b)(1) of the Code.
(j) Employment Matters. The Company (i) is in compliance in
------------------
all material respects with all applicable foreign, federal, state and local
laws, rules and regulations respecting employment, employment practices, terms
and conditions of employment and wages and hours, in each case, with respect to
Employees; (ii) has withheld all amounts required by law or by agreement to be
withheld from the wages, salaries and other payments to Employees; (iii) is not
liable for any
-23-
<PAGE>
arrears of wages or any taxes or any penalty for failure to comply with any of
the foregoing; and (iv) is not liable for any payment to any trust or other fund
or to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits or obligations for
Employees (other than routine payments to be made in the normal course of
business and consistent with past practice).
(k) Labor. No work stoppage or labor strike against the
-----
Company is pending or, to the best knowledge of the Company, threatened. The
Company is not involved in or, to the knowledge of the Company, threatened with,
any labor dispute, grievance, or litigation relating to labor, safety or
discrimination matters involving any Employee, including, without limitation,
charges of unfair labor practices or discrimination complaints, which, if
adversely determined, would, individually or in the aggregate, result in any
material liability to the Company. Neither the Company nor any of its
subsidiaries has engaged in any unfair labor practices within the meaning of the
National Labor Relations Act which would, individually or in the aggregate,
directly or indirectly result in any material liability to the Company. The
Company is not presently, nor has it been in the past, a party to, or bound by,
any collective bargaining agreement or union contract with respect to Employees
and no collective bargaining agreement is being negotiated by the Company.
2.23 Insurance. Section 2.23 of the Disclosure Letter lists all
---------
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company or any
Affiliate. There is no claim by the Company or any Affiliate pending under any
of such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid, and the Company and
its Affiliates are otherwise in compliance with the terms of such policies and
bonds (or other policies and bonds providing substantially similar insurance
coverage). Neither the Company nor any of the Principal Shareholders has
knowledge of any threatened termination of, or premium increase with respect to,
any of such policies.
2.24 Compliance with Laws. The Company has complied with, is not in
--------------------
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
2.25 Complete Copies of Materials. Each document (or summary of
----------------------------
same) that has been provided by the Company in response to a request by Parent
or its counsel is true and complete (except as specifically noted thereon).
2.26 Representations Complete. None of the representations or
------------------------
warranties made by the Company or any of the Principal Shareholders (as modified
by the Disclosure Letter), nor any statement made in any Schedule or certificate
furnished by the Company or any of the Principal Shareholders pursuant to this
Agreement, or furnished by the Company or any of the Principal Shareholders in
or in connection with documents mailed or delivered to the shareholders of the
Company in connection with soliciting their consent to this Agreement and the
Merger contains or
-24-
<PAGE>
will contain at the Effective Time, any untrue statement of a material fact, or
omits or will omit at the Effective Time to state any material fact necessary in
order to make the statements contained herein or therein, in the light of the
circumstances under which made, not misleading.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
--------------------------------
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of Washington. Each of Parent and Sub has the corporate
power to own its properties and to carry on its business as now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority. Each of Parent and Sub has all requisite corporate
---------
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Parent and Sub. This
Agreement has been duly executed and delivered by Parent and Sub and constitutes
the valid and binding obligations of Parent and Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by principles of
public policy and subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies.
3.3 Capital Structure.
-----------------
(a) The authorized stock of Parent consists of 20,000,000
shares of Common Stock, $.001 par value, of which 6,805,837 shares were issued
and outstanding as of December 31, 1996, and 2,000,000 shares of undesignated
Preferred Stock, $.001 par value. No shares of Preferred Stock are issued or
outstanding. All such shares have been duly authorized, and all such issued and
outstanding shares have been validly issued, are fully paid and nonassessable
and are free of any liens or encumbrances other than any liens or encumbrances
created by or imposed upon the holders thereof. Parent has also reserved (i)
1,550,000 shares of Common Stock for issuance to employees and consultants
pursuant to the Parent's 1990 Stock Options and Rights Plan, (ii) 119,000 shares
of Common Stock for issuance under the 1989 Stock Option Plan for Subbaiah V.
Malladi, (iii) 200,000 shares of Common Stock for issuance to directors under
its 1991 Directors Restricted Stock Plan, and (iv) 400,000 shares of Common
Stock for issuance under the Parent's 1992 Employee
-25-
<PAGE>
Stock Purchase Plan. There are no other options, warrants, calls, rights,
commitments or agreements of any character to which Parent is a party or by
which it is bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or redeemed, any
shares of the capital stock of Parent or obligating Parent to grant, extend or
enter into any such option, warrant, call, right, commitment or agreement.
(b) The shares of Parent Common Stock to be issued pursuant to
the Merger will be duly authorized, validly issued, fully paid, non-assessable.
3.4 No Conflict. The execution and delivery of this Agreement and any
-----------
Related Agreements by Parent and Sub do not, and, the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation, modification or
acceleration of any obligation or loss of any benefit under (any such event, a
"Conflict") (i) any provision of the Articles of Incorporation and Bylaws of the
--------
Company, (ii) any material mortgage, indenture, or lease, to which Parent or Sub
or any of their respective properties or assets are subject, (iii) any material
permit, concession, franchise, or license to which Parent or Sub or any of their
respective properties or assets are subject, or (v) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to Parent or Sub or their
respective properties or assets.
3.5 Consents. No consent (except for the consent of Bank of America,
--------
which consent has been obtained), waiver, approval, order or authorization of,
or registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
-------------------
third party, including a party to any agreement with the Parent or Sub (so as
not to trigger any Conflict), is required by or with respect to the Parent or
Sub in connection with the execution and delivery of this Agreement and any
Related Agreements or the consummation of the transactions contemplated hereby
and thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations, and filings as may be required
under applicable securities laws thereby, and (ii) the filing of the Merger
Certificate with the Secretary of State of the State of Washington.
3.6 SEC Documents; Parent Financial Statements; Other Representations.
-----------------------------------------------------------------
Parent has furnished or made available to the Company true and complete copies
of all reports or registration statements filed by it with the U.S. Securities
and Exchange Commission (the "SEC") (the "SEC Documents"). As of their
--- -------------
respective filing dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, as applicable and none of the SEC
Documents contained any untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements made therein, in light of the circumstances in which they were made,
not misleading, except to the extent corrected by a subsequently filed document
with the SEC. The financial statements of Parent, including the notes thereto,
included in the SEC Documents (the
-26-
<PAGE>
"Parent Financial Statements") comply as to form in all material respects with
---------------------------
applicable accounting requirements in effect at the time of filing of such SEC
Documents and with the published rules and regulations of the SEC with respect
thereto in effect at the time of filing of such SEC Document have been prepared
in accordance with GAAP consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial position of Parent
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal audit
adjustments). There have been no material adverse changes in the business,
operations, or financial condition of the Parent that are not reflected in such
SEC Documents or that have occurred since the period covered by the most recent
of such SEC Documents. None of the information furnished in writing by Parent or
Sub to the Company expressly for inclusion in the information statement to be
furnished to the Company's shareholders will contain any untrue statement of a
material fact or will omit to state any material fact necessary in order to make
such written information provided, in light of the circumstances under which
made, not misleading.
3.7 Brokers' and Finders' Fees. The Parent has not incurred, nor will
--------------------------
it incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
ARTICLE IV
CONDUCT PRIOR TO THE EFFECTIVE TIME
4.1 Conduct of Business of the Company. During the period from the
----------------------------------
date of this Agreement and continuing until the earlier of the termination of
this Agreement or the Effective Time, each of the Company and each of the
Principal Shareholders agrees (except to the extent that Parent shall otherwise
consent in writing), to carry on the Company's business in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted, to
pay the Company's debts and Taxes when due, to pay or perform other obligations
when due, and, to the extent consistent with such business, use all reasonable
efforts consistent with past practice and policies to preserve intact the
Company's present business organizations, keep available the services of the
Company's present officers and key employees and preserve the Company's
relationships with customers, suppliers, distributors, licensors, licensees, and
others having business dealings with it, all with the goal of preserving
unimpaired the Company's goodwill and ongoing businesses at the Effective Time.
The Company shall promptly notify Parent of any event or occurrence or emergency
not in the ordinary course of business of the Company, and any material event
involving the Company. Except as expressly contemplated by this Agreement, the
Company shall not, without the prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business or any commitment or transaction of the type described in
Section 2.9 hereof;
-27-
<PAGE>
(b) Transfer to any person or entity any rights to the
Intellectual Property of the Company;
(c) Enter into or amend any agreements pursuant to which any
other party is granted marketing, distribution or similar rights of any type or
scope with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in
the ordinary course of business, or violate the terms of, any of the agreements
set forth or described in the Disclosure Letter;
(e) Commence any litigation;
(f) Except as set forth in Section 4.1(f) of the Disclosure
Letter, declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Except as contemplated by Section 1.6, issue, grant,
deliver or sell or authorize or propose the issuance, grant, delivery or sale
of, or purchase or propose the purchase of, any shares of its capital stock or
securities convertible into, or subscriptions, rights, warrants or options to
acquire, or other agreements or commitments of any character obligating it to
issue any such shares or other convertible securities;
(h) Cause or permit any amendments to its Articles of
Incorporation or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating
with, or by purchasing any assets or equity securities of, or by any other
manner, any business or any corporation, partnership, association or other
business organization or division thereof, or otherwise acquire or agree to
acquire any assets which are material, individually or in the aggregate, to its
business;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
(k) Except for borrowings consistent with past practices,
incur any indebtedness for borrowed money or guarantee any such indebtedness or
issue or sell any debt securities or guarantee any debt securities of others;
-28-
<PAGE>
(l) Grant any loans to others or purchase debt securities of
others or amend the terms of any outstanding loan agreement, except in the
ordinary course of business and consistent with past practices.
(m) Grant any severance or termination pay (i) to any director
or officer or (ii) to any other employee except payments made pursuant to
standard written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into
any employment contract, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees, except in connection with annual pay adjustment consistent
with past practices which increases in the aggregate have been approved by
Parent in writing and which for the Principal Shareholders have been approved by
Parent in writing;
(o) Revalue any of its assets, including without limitation
writing down the value of inventory or writing off notes or accounts receivable
other than in the ordinary course of business;
(p) Pay, discharge or satisfy, in an amount in excess of
$5,000 (in any one case) or $10,000 (in the aggregate), any claim, liability or
obligation (absolute, accrued, asserted or unasserted, contingent or otherwise),
other than the payment, discharge or satisfaction in the ordinary course of
business;
(q) Make or change any material election in respect of Taxes,
adopt or change any accounting method in respect of Taxes, enter into any
closing agreement, settle any claim or assessment in respect of Taxes, or
consent to any extension or waiver of the limitation period applicable to any
claim or assessment in respect of Taxes;
(r) Enter into any strategic alliance or joint marketing
arrangement or agreement; or
Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (r) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the
---------------
date of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, neither the Company nor any of the Principal Shareholders will (nor will
the Company or any of the Principal Shareholders permit any of the Company's
officers, directors, agents, representatives or affiliates to) directly or
indirectly, take any of the following actions with any party other than Parent
and its designees: (a) solicit, conduct discussions with or engage in
negotiations with any person, relating to the possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets,
(b) provide information with respect to it to
-29-
<PAGE>
any person, other than Parent, relating to the possible acquisition of the
Company (whether by way of merger, purchase of capital stock, purchase of assets
or otherwise) or any material portion of its or their capital stock or assets,
(c) enter into an agreement with any person, other than Parent or Sub, providing
for the acquisition of the Company (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
or their capital stock or assets or (d) make or authorize any statement,
recommendation or solicitation in support of any possible acquisition of the
Company or any of its subsidiaries (whether by way of merger, purchase of
capital stock, purchase of assets or otherwise) or any material portion of its
or their capital stock or assets by any person, other than by Parent or Sub.
4.3 S Status. The Company shall maintain its tax status as an S
--------
Corporation up to the Effective Time and the shareholders of the Company shall
not revoke or otherwise terminate the election of the Company to be treated as
an S Corporation.
ARTICLE V
ADDITIONAL AGREEMENTS
5.1 Sale of Shares. The parties hereto acknowledge and agree that the
--------------
shares of Parent Common Stock issuable in the Merger shall constitute
"restricted securities" within the meaning of the Securities Act. The
---------------------
certificates for the shares of Parent Common Stock to be issued in the Merger
shall bear appropriate legends to identify such privately placed shares as being
restricted under the Securities Act, to comply with applicable state securities
laws and, if applicable, to notice the restrictions on transfer of such shares.
It is acknowledged and understood that Parent is relying upon those certain
written representations made by each of the shareholders of the Company pursuant
to the Shareholder Certificates in the form attached hereto as Exhibit C.
-------
5.2 Access to Information. The Company shall afford Parent and its
---------------------
accountants, counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. Parent shall provide the Company and the Principal Shareholders with
copies of such publicly available information about Parent as the Company may
request and shall provide the Company and the Principal Shareholders with
reasonable access to its executive officers in this regard. No information or
knowledge obtained in any investigation pursuant to this Section 5.2 shall
affect or be deemed to modify any representation or warranty contained herein or
the conditions to the obligations of the parties to consummate the Merger.
-30-
<PAGE>
5.3 Confidentiality. Each of the parties hereto hereby agrees that
---------------
the information obtained in any investigation pursuant to Section 5.2, or
pursuant to the negotiation and execution of this Agreement or the effectuation
of the transaction contemplated hereby, is confidential; provided, however, that
the foregoing shall not apply to information or knowledge which (a) a party can
demonstrate was already lawfully in its possession prior to the disclosure
thereof by the other party, (b) is generally known to the public and did not
become so known through any violation of law, (c) became known to the public
through no fault of such party, (d) is later lawfully acquired by such party
from other sources, (e) is required to be disclosed by order of court or
government agency without subpoena powers or (f) which is disclosed to the
appropriate tribunal in the course of any litigation between any of the parties
hereto.
5.4 Expenses. Whether or not the Merger is consummated, all fees and
--------
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
--------------------
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses.
5.5 Public Disclosure. Unless otherwise required by law, prior to the
-----------------
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release, provided that such approval
shall not be unreasonably withheld, subject, in the case of Parent, to Parent's
obligation to comply with applicable securities laws and the rules and
regulations of the National Association of Securities Dealers, Inc.
5.6 Consents. The Company shall use its best efforts to obtain the
--------
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger so as to preserve all rights of, and benefits to, the
Company thereunder.
5.7 Commercially Reasonable Efforts. Subject to the terms and
-------------------------------
conditions provided in this Agreement, each of the parties hereto shall use
commercially reasonable efforts to take promptly, or cause to be taken, all
actions, and to do promptly, or cause to be done, all things necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated hereby, to obtain all necessary waivers,
consents and approvals and to effect all necessary registrations and filings and
to remove any injunctions or other impediments or delays, legal or otherwise, in
order to consummate and make effective the transactions contemplated by this
Agreement for the purpose of securing to the parties hereto the benefits
contemplated by this Agreement; provided that Parent shall not be required to
agree to any divestiture by Parent or the Company or any of Parent's
subsidiaries or affiliates of shares of capital stock or of any business, assets
or property of Parent or its subsidiaries or affiliates or of the Company, its
affiliates, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
-31-
<PAGE>
5.8 Notification of Certain Matters. The Company shall give prompt
-------------------------------
notice to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company or the
Principal Shareholders and Parent or Sub, respectively, contained in this
Agreement to be untrue or inaccurate at or prior to the Effective Time and (ii)
any failure of the Company or Parent (or Sub), as the case may be, to comply
with or satisfy any covenant, condition or agreement to be complied with or
satisfied by it hereunder; provided, however, that the delivery of any notice
pursuant to this Section 5.8 shall not limit or otherwise affect any remedies
available to the party receiving such notice.
5.9 Additional Documents and Further Assurances. Each party hereto,
-------------------------------------------
at the request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of this Agreement and the
transactions contemplated hereby.
5.10 Voting Agreements. Concurrently with the execution of this
-----------------
Agreement, each of the Principal Shareholders will execute a Voting Agreement in
the form attached hereto as Exhibit A (the "Voting Agreement"), agreeing, among
--------- ----------------
other things, to vote in favor of the Merger and against any competing
proposals.
5.11 Blue Sky Laws. Parent shall take such steps as may be necessary
-------------
to comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of the Parent Common Stock pursuant hereto. The
Company shall use its best efforts to assist Parent as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable in connection with the issuance of Parent Common Stock pursuant
hereto.
5.12 Tax Returns. The Surviving Corporation shall prepare all federal
-----------
and state income tax returns of the Company to be filed by the Company or the
shareholders of the Company in respect of their ownership of Company Capital
Stock for taxable periods ending on or prior to the Effective Time and the
shareholders of the Company have paid or will pay all income taxes attributable
to them with respect to the income of the Company for such periods. The
Surviving Corporation shall arrange for the preparation of such tax returns
consistent with past practice, but shall not in the case of returns prepared for
the shareholders of the Company be responsible for the content of such returns
or the payment of any taxes related to periods prior to the Merger. All expenses
related to the preparation of such tax returns shall be accrued by the Company
prior to Closing. After the Effective Time, Parent and the Surviving
Corporation, on the one hand, and the shareholders of the Company, on the other
hand, will make available to the other, as reasonably requested, all
information, records or documents relating to the liability for Taxes of the
Company for all periods ending on or prior to the Effective Time and will
preserve such information, records or documents until the expiration of any
applicable statute of limitations or extensions thereof.
-32-
<PAGE>
5.13 Shareholder Approval. As promptly as practicable after the
--------------------
execution of this Agreement the Company shall submit this Agreement and the
transactions contemplated hereby to its shareholders for approval and adoption
as provided by the Washington Code and its Articles of Incorporation and Bylaws.
The Company shall use its best efforts to solicit and obtain the consent of its
shareholders sufficient to approve the Merger and this Agreement and to enable
the Closing to occur as promptly as practicable. The materials submitted to the
Company's shareholders shall be subject to review and approval by Parent and
include information regarding the Company, the terms of the Merger and this
Agreement and the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger and this Agreement. Parent shall cooperate with
the Company to the extent reasonably necessary to accomplish the foregoing, and
shall provide all information regarding Parent or the Merger required by the
Company in connection therewith.
5.14 Other Expenses. All expenses of the Company prior to the
--------------
Closing shall be accrued on the Company's closing balance sheet.
ARTICLE VI
CONDITIONS TO THE MERGER
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
------------------------------------------------------------
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
----------------------------------------
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Litigation. There shall be no action, suit, claim or
----------
proceeding of any nature pending, or overtly threatened, against the Parent, Sub
or the Company, their respective properties or any of their officers or
directors, arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
(c) Shareholder Approval. This Agreement and the Merger shall
--------------------
have been approved and adopted by the shareholders of the Company by the
requisite vote under applicable law and the Company's Articles of Incorporation.
6.2 Additional Conditions to Obligations of Company and the Principal
-----------------------------------------------------------------
Shareholders. The obligations of the Company and the Principal Shareholders to
- ------------
consummate and effect this Agreement and the transactions contemplated hereby
shall be subject to the satisfaction at or prior to
-33-
<PAGE>
the Effective Time of each of the following conditions, any of which may be
waived, in writing, exclusively by the Company and the Principal Shareholders:
(a) Representations, Warranties and Covenants. The
-----------------------------------------
representations and warranties of Parent and Sub in this Agreement shall be true
and correct in all material respects on and as of the Effective Time as though
such representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) No Material Adverse Changes. There shall not have occurred
---------------------------
any material adverse change in the business, assets (including intangible
assets), financial condition, results of operations of the Parent and its
subsidiaries, taken as a whole, since January 3, 1997.
(c) Legal Opinion. The Company and the Principal Shareholders
-------------
shall received a legal opinion from Wilson Sonsini Goodrich & Rosati, legal
counsel to Parent, in form and substance reasonably satisfactory to the Company
and the Principal Shareholders.
(d) Certificate of the Parent. Company and the Principal
-------------------------
Shareholders shall have been provided with a certificate executed on behalf of
the Parent by the President to the effect that, as of the Effective Time:
(i) all representations and warranties made by the
Parent and Sub in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to
be performed by the Parent on or before such date have been so performed in all
material respects.
(iii) the conditions set forth in Section 6.2 (a) and (b)
have been satisfied.
(e) Registration Rights. Parent shall have executed a
-------------------
Registration Rights Agreement pursuant to the terms attached hereto as
Exhibit D.
- ----------
6.3 Additional Conditions to the Obligations of Parent and Sub. The
----------------------------------------------------------
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, but only in a writing signed, by Parent:
(a) Representations, Warranties, and Covenants. The
------------------------------------------
representations and warranties of the Company and the Principal Shareholders in
this Agreement shall be true and correct in all material respects on and as of
the Effective Time as though such representations and warranties were made on
and as of the Effective Time and the Company and the Principal
-34-
<PAGE>
Shareholders shall have performed and complied in all material respects with all
covenants and obligations of this Agreement required to be performed and
complied with by them as of the Effective Time.
(b) Third Party Consents. Any and all consents, waivers, and
--------------------
approvals listed in the Disclosure Letter shall have been obtained.
(c) Legal Opinion. Parent shall have received a legal opinion
-------------
from Hillis, Clark, Martin & Peterson, a Professional Services Corporation,
legal counsel to the Company, in form and substance reasonably satisfactory to
Parent.
(d) Noncompetition Agreements. The Principal Shareholders
-------------------------
shall have executed and delivered to Parent Noncompetition Agreements in the
form attached hereto as Exhibit B-1, and such Noncompetition Agreements shall be
-----------
in full force and effect. Persons other than the Principal Shareholders of the
Company listed on Exhibit B-2 shall have executed and delivered to Parent
-----------
Noncompetition Agreements in the form attached hereto as Exhibit B-3 and such
-----------
Noncompetition Agreements shall be in full force and effect.
(e) No Material Adverse Changes. There shall not have occurred
---------------------------
any material adverse change in the business, assets (including intangible
assets), results of operations, liabilities (contingent or accrued), financial
condition or prospects of the Company since December 31, 1996.
(f) Dissenting Shareholders. No holders of outstanding Capital
-----------------------
Stock of the Company shall have given notice of their intent to exercise rights
to require the purchase under the applicable dissenters, appraisal, or similar
rights provisions of the Washington Code of their Company Capital Stock, which
notice shall not have been properly withdrawn prior to the Effective Time of the
Merger.
(g) Certificate of the Company and the Principal Shareholders.
---------------------------------------------------------
Parent shall have been provided with a certificate executed by the Principal
Shareholders and executed on behalf of the Company by its Chief Executive
Officer to the effect that, as of the Effective Time:
(i) all representations and warranties made by the
Company and the Principal Shareholders in this Agreement are true and correct in
all material respects; and
(ii) all covenants and obligations of this Agreement to
be performed by the Company on or before such date have been so performed in all
material respects.
(iii) the provisions set forth in Section 6.2 (a), (b),
(e) and (f) have been satisfied.
-35-
<PAGE>
(h) Shareholder Certificate. Each holder of record of Company
-----------------------
Capital Stock as of immediately before the Effective Time shall have executed a
certificate in the form set forth as Exhibit C hereto and such Certificates
shall be in full force and effect.
(i) Tax Election. Each shareholder of the Company immediately
------------
prior to the Effective Time shall execute and provide to Parent a joint election
on Form 8023-A for the Company under Section 338(h)(10) of the Code, under
Treasury Regulation Section 1.338(h)(10)-1(d) and under any applicable similar
provisions of state law with respect to the Merger Consideration. Such election
and documentation shall be in a form reasonably satisfactory to Parent.
(j) Agreements to be Amended. The Company shall have entered
------------------------
into an agreement reasonably satisfactory to Parent amending or terminating the
agreement entered into with Mr. Dean.
(k) Environmental Audit. A report to the satisfaction of Parent
-------------------
concerning the results of the Parent's environmental audit of the Company shall
have been delivered.
ARTICLE VII
SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ESCROW
7.1 Survival of Representations and Warranties. All of the Company's
------------------------------------------
and the Principal Shareholders' representations and warranties in this Agreement
or in any instrument delivered pursuant hereto shall terminate on the third
anniversary of the Effective Time; provided, however, that the representations
and warranties relating or pertaining to any Tax or Returns related to such Tax
set forth in Sections 2.10 hereof, shall survive until ninety (90) days
following the expiration of all applicable statutes of limitations, or
extensions thereof, governing each Tax or Returns related to such Tax. All of
the Parent's and Sub's representations and warranties contained herein or in any
instrument delivered pursuant to this Agreement shall terminate on the first
anniversary of the Effective Time.
7.2 Escrow Arrangements.
-------------------
(a) Escrow Fund. At the Effective Time the shareholders of the
-----------
Company will be deemed to have received and deposited with the Escrow Agent (as
defined below) the Escrow Amount without any act of any shareholder. As soon as
practicable after the Effective Time, the Escrow Amount, without any act of any
shareholder, will be deposited with Chase Trust Company of California, (or other
institution acceptable to Parent and the Shareholder Representative (as defined
in Section 7.2(g) below)) as Escrow Agent (the "Escrow Agent"), such deposit to
------------
constitute an escrow fund (the "Escrow Fund") to be governed by the terms set
-----------
forth herein and at Parent's cost and expense. The portion of the Escrow Amount
contributed on behalf of each shareholder of the Company shall be in proportion
to the aggregate portion of the Merger Consideration to which such holder would
otherwise be entitled under Section 1.6(a). The Escrow Fund shall be available
to
-36-
<PAGE>
compensate Parent, Sub, and its affiliates for any claims, losses, liabilities,
damages, deficiencies, costs and expenses, including reasonable attorneys' fees
and expenses, and expenses of investigation and defense (hereinafter
individually a "Loss" and collectively "Losses") incurred by Parent, Sub, its
---- ------
officers, directors, or affiliates (including the Surviving Corporation)
directly or indirectly as a result of (i) any inaccuracy or breach of a
representation or warranty of the Company contained in Article II herein (as
modified by the Company Disclosure Schedule), or (ii) any failure by the Company
to perform or comply with any covenant contained herein or (iii) any breach of
any Shareholder Certificate. Parent, Sub, and the Company each acknowledge that
such Losses, if any, would relate to unresolved contingencies existing at the
Effective Time, which if resolved at the Effective Time would have led to a
reduction in the aggregate Merger Consideration. Subject to Section 8.3 below,
nothing herein shall limit the liability of the Company for any breach of any
representation, warranty or covenant if the Merger does not close. Parent may
not receive any shares from the Escrow Fund unless and until Officer's
Certificates (as defined in paragraph (d) below) identifying Losses in excess of
$25,000 have been delivered to the Escrow Agent as provided in paragraph (d);
provided, however, that with respect to Losses with respect to failure to comply
with Section 5.12 or with respect to breaches of Section 2.10 or 2.21(a), the
aforementioned $25,000 threshold shall not be applicable for purposes of claims
of Losses against the Escrow Amount. No shareholders of the Company shall have
any right to contribution from the Company with respect to any Loss or Losses
claimed by Parent after the Effective Time.
(b) Escrow Period; Distribution upon Termination of Escrow
------------------------------------------------------
Periods. Subject to the following requirements, the Escrow Fund shall be in
- -------
existence immediately following the Effective Time and shall terminate at 5:00
p.m., California time, on the first anniversary of the Closing Date (the "Escrow
------
Period"); provided that the Escrow Period shall not terminate with respect to
- ------
any amount (or portion thereof), that is necessary in the reasonable judgment of
Parent, subject to the objection of the Shareholder Representative (as defined
in Section 7.2(g), below) and the subsequent arbitration of the matter in the
manner provided in Section 7.2(f) hereof, to satisfy any unsatisfied claims
concerning facts and circumstances existing prior to the termination of such
Escrow Period specified in any Officer's Certificate delivered to the Escrow
Agent prior to termination of such Escrow Period. Immediately prior to the
one-year anniversary of the Closing Date, the Escrow Agent shall retain, and it
shall be deemed necessary for purposes of this Section 7.2(b) to retain, in the
Escrow Fund shares of Parent Common Stock representing at least 150% of the
actual dollar amount of any unsatisfied claims to insure that a sufficient
number of shares representing a sufficient dollar amount will be available to
Parent once the claim is satisfied. The shares of Parent Common Stock retained
for this purpose shall be valued at a price equal to the average of the closing
bid and asked prices of the Parent Common Stock on the Nasdaq National Market
System for the five trading days ending on the day prior to the one year
anniversary of the Closing Date. Parent may reduce the number of shares held in
the Escrow Fund for such unresolved claims by delivering a notice to the Escrow
Agent signed by Parent. As soon as all such claims have been resolved, as
evidenced by the written memorandum of the Shareholder Representative and
Parent, the Escrow Agent shall deliver to the shareholders of the Company the
remaining portion of the Escrow Fund and not required to satisfy such claims in
proportion to their respective original
-37-
<PAGE>
contributions to the Escrow Fund. Subject to the foregoing, at the termination
of the Escrow Period, deliveries of Escrow Amounts to the shareholders of the
Company pursuant to this Section 7.2(b) shall be made in proportion to their
respective original contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
-------------------------
(i) The Escrow Agent shall hold and safeguard the Escrow
Fund during the Escrow Period, shall treat such fund as a trust fund in
accordance with the terms of this Agreement and not as the property of Parent
and shall hold and dispose of the Escrow Fund only in accordance with the terms
hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund that
----------
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock that have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such shareholder (and on any voting securities added to the Escrow Fund in
respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund.
-----------------------
(i) Upon receipt by the Escrow Agent at any time on or
before the last day of the Escrow Period of a certificate signed by any officer
of Parent (an "Officer's Certificate"): (A) stating that Parent has paid or
---------------------
properly accrued or reasonably anticipates that it will have to pay or accrue
Losses, and (B) specifying in reasonable detail the individual items of Losses
included in the amount so stated, the date each such item was paid or properly
accrued, or the basis for such anticipated liability, and the nature of the
misrepresentation, breach of warranty or covenant to which such item is related,
the Escrow Agent shall, subject to the provisions of Section 7.2(e) hereof,
deliver to Parent out of the Escrow Fund, as promptly as practicable after such
Losses are actually incurred, shares of Parent Common Stock held in the Escrow
Fund in an amount equal to such Losses.
(ii) For the purposes of determining the number of shares
of Parent Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to Section 7.2(d)(i) hereof, the shares of Parent Common
Stock shall be valued at a price equal to the average of the closing bid and
asked prices of the Parent Common Stock on the Nasdaq National
-38-
<PAGE>
Market System for the five trading days ending on the day prior to the date of
delivery of the shares to Parent.
(e) Objections to Claims. At the time of delivery of any
--------------------
Officer's Certificate to the Escrow Agent, a duplicate copy of such certificate
shall be delivered to the Shareholder Representative and for a period of thirty
(30) days after such delivery, the Escrow Agent shall make no delivery to Parent
of any Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent
shall have received written authorization from the Shareholder Representative to
make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of shares of Parent Common Stock from the
Escrow Fund in accordance with Section 7.2(d) hereof, provided that no such
payment or delivery may be made if the Shareholder Representative shall object
in a written statement to the claim made in the Officer's Certificate, and such
statement shall have been delivered to the Escrow Agent prior to the expiration
of such thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
------------------------------------
(i) In case the Shareholder Representative shall so
object in writing to any claim or claims made in any Officer's Certificate, the
Shareholder Representative and Parent shall attempt in good faith to agree upon
the rights of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any
such memorandum and distribute Parent Common Stock from the Escrow Fund in
accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
three arbitrators. Parent and the Shareholder Representative (as a group) shall
each select one arbitrator, and the two arbitrators so selected shall select a
third arbitrator, each of which arbitrators shall be independent and have at
least ten years relevant experience. The arbitrators shall set a limited time
period and establish procedures designed to reduce the cost and time for
discovery while allowing the parties an opportunity, adequate in the sole
judgment of the arbitrators, to discover relevant information from the opposing
parties about the subject matter of the dispute. The arbitrators shall rule upon
motions to compel or limit discovery and shall have the authority to impose
sanctions, including attorneys fees and costs, to the same extent as a court of
competent law or equity, should the arbitrators determine that discovery was
sought without substantial justification or that discovery was refused or
objected to without substantial justification. The decision of a majority of the
three arbitrators as to the validity and amount of any claim in such Officer's
Certificate shall be binding and conclusive upon the parties to this Agreement,
and notwithstanding anything in Section 7.2(e) hereof, the Escrow Agent shall be
entitled to act in accordance with such decision and make or withhold payments
out of the
-39-
<PAGE>
Escrow Fund in accordance therewith. Such decision shall be written and shall be
supported by written findings of fact and conclusions which shall set forth the
award, judgment, decree or order awarded by the arbitrators.
(iii) Judgment upon any award rendered by the arbitrators
may be entered in any court having jurisdiction. Any such arbitration shall be
held in San Mateo or Santa Clara Counties, California under the rules then in
effect of the Judicial Arbitration and Mediation Services, Inc. For purposes of
this Section 7.2(f), in any arbitration hereunder in which any claim or the
amount thereof stated in the Officer's Certificate is at issue, Parent shall be
deemed to be the Non- Prevailing Party in the event that the arbitrators award
Parent less than the sum of one-half (1/2) of the disputed amount; otherwise,
the shareholders of the Company as represented by the Shareholder Representative
shall be deemed to be the Non-Prevailing Party. The Non-Prevailing Party to an
arbitration shall pay its own expenses, the fees of each arbitrator, the
administrative costs of the arbitration, and the expenses, including without
limitation, reasonable attorneys' fees and costs, incurred by the other party to
the arbitration.
(g) Shareholder Representative of the Shareholders; Power of
--------------------------------------------------------
Attorney.
--------
(i) In the event that the Merger is approved, effective
upon such vote, and without further act of any shareholder, Marc W. Lorenzen
shall be appointed as agent and attorney-in-fact (the "Shareholder
-----------
Representative") for each shareholder of the Company (except such shareholders,
- --------------
if any, as shall have perfected their appraisal or dissenters' appraisal, or
similar rights under Washington Law), for and on behalf of the shareholders of
the Company, to give and receive notices and communications, to authorize
delivery to Parent of shares of Parent Common Stock from the Escrow Fund in
satisfaction of claims by Parent, to object to such deliveries, to agree to,
negotiate, enter into settlements and compromises of, and demand arbitration and
comply with orders of courts and awards of arbitrators with respect to such
claims, and to take all actions necessary or appropriate in the judgment of
Shareholder Representative for the accomplishment of the foregoing. Such agency
may be changed by the shareholders of the Company from time to time upon not
less than thirty (30) days prior written notice to Parent and Escrow Agent;
provided that the Shareholder Representative may not be removed unless
shareholders entitled to two-thirds of the Escrow Fund agree to such removal and
to the identity of the substituted agent. Any vacancy in the position of
Shareholder Representative may be filled by approval of the holders of a
majority in interest of the Escrow Fund. No bond shall be required of the
Shareholder Representative, and the Shareholder Representative shall not receive
compensation for his services. Notices or communications to or from the
Shareholder Representative shall constitute notice to or from each of the
shareholders of the Company for purposes of this Section.
(ii) The Shareholder Representative shall not be liable
for any act done or omitted hereunder as Shareholder Representative while acting
in good faith and in the exercise of reasonable judgment. The shareholders of
the Company on whose behalf the Escrow Amount was contributed to the Escrow Fund
shall severally indemnify the Shareholder Representative and hold
-40-
<PAGE>
the Shareholder Representative harmless against any loss, liability or expense
incurred without negligence or bad faith on the part of the Shareholder
Representative and arising out of or in connection with the acceptance or
administration of the Shareholder Representative's duties hereunder, including
the reasonable fees and expenses of any legal counsel retained by the
Shareholder Representative.
(h) Actions of the Shareholder Representative. For purposes of
-----------------------------------------
this Section, a decision, act, consent or instruction of the Shareholder
Representative shall constitute a decision of all the shareholders of the
Company for whom a portion of the Escrow Amount otherwise issuable to them are
deposited in the Escrow Fund and shall be final, binding and conclusive upon
each of such shareholders of the Company, and the Escrow Agent, Parent and Sub
may rely upon any such decision, act, consent or instruction of the Shareholder
Representative as being the decision, act, consent or instruction of each such
shareholder of the Company. The Escrow Agent, Parent, and Sub are hereby
relieved from any liability to any person for any acts done by them in
accordance with such decision, act, consent or instruction of the Shareholder
Representative.
(i) Third-Party Claims. In the event Parent becomes aware of a
------------------
third-party claim which Parent believes may result in a demand against the
Escrow Fund, Parent shall notify in writing the Shareholder Representative of
such claim, and the Shareholder Representative, as representative for the
shareholders of the Company, shall be entitled, at their expense, to participate
in any defense of such claim. Parent shall have the right in its reasonable
discretion to settle any such claim; provided, however, that except with the
consent of the Shareholder Representative, no settlement of any such claim with
third-party claimants shall alone be determinative of the amount of any claim
against the Escrow Fund. In the event that the Shareholder Representative has
consented to any such settlement and acknowledged that the claim is a valid
claim against the Escrow Fund, the Shareholder Representative shall have no
power or authority to object under any provision of this Article VII to the
amount of any claim by Parent against the Escrow Fund with respect to such
settlement.
(j) Escrow Agent's Duties.
---------------------
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer of
Parent and the Shareholder Representative and approved by the Escrow Agent, and
may rely and shall be protected in relying or refraining from acting on any
instrument reasonably believed to be genuine and to have been signed or
presented by the proper party or parties. The Escrow Agent shall not be liable
for any act done or omitted hereunder as Escrow Agent while acting in good faith
and in the exercise of reasonable judgment, and any act done or omitted pursuant
to the advice of counsel shall be conclusive evidence of such good faith.
-41-
<PAGE>
(ii) The Escrow Agent is hereby expressly authorized to
comply with and obey orders, judgments or decrees of any court. In case the
Escrow Agent obeys or complies with any such order, judgment or decree of any
court, the Escrow Agent shall not be liable to any of the parties hereto or to
any other person by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
(iii) The Escrow Agent shall not be liable in any respect
on account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the
expiration of any rights under any statute of limitations with respect to this
Agreement or any documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the
Escrow Agent shall not be liable to any party for damages, losses, or expenses,
except for negligence or willful misconduct on the part of the Escrow Agent. The
Escrow Agent shall not incur any such liability for (A) any act or failure to
act made or omitted in good faith, or (B) any action taken or omitted in
reliance upon any instrument, including any written statement or affidavit
provided for in this Agreement that the Escrow Agent shall in good faith believe
to be genuine, nor will the Escrow Agent be liable or responsible for forgeries,
fraud, impersonations, or determining the scope of any representative authority.
In addition, the Escrow Agent may consult with legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected in any
act taken, suffered, or permitted by him/her in good faith in accordance with
the advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to
this Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and shares of Parent Common Stock and may wait for
settlement of any such controversy by final appropriate legal proceedings or
other means as, in the Escrow Agent's discretion, the Escrow Agent may be
required, despite what may be set forth elsewhere in this Agreement. In such
event, the Escrow Agent will not be liable for damage.
Furthermore, the Escrow Agent may at its option, file an
action of interpleader requiring the parties to answer and litigate any claims
and rights among themselves. The Escrow Agent is authorized to deposit with the
clerk of the court all documents and shares of Parent Common Stock held in
escrow, except all cost, expenses, charges and reasonable attorney fees incurred
by the Escrow Agent due to the interpleader action and which the parties jointly
and
-42-
<PAGE>
severally agree to pay. Upon initiating such action, the Escrow Agent shall be
fully released and discharged of and from all obligations and liability imposed
by the terms of this Agreement.
(vii) The parties and their respective successors and
assigns agree jointly and severally to indemnify and hold Escrow Agent harmless
against any and all losses, claims, damages, liabilities, and expenses,
including reasonable costs of investigation, counsel fees, and disbursements
that may be imposed on Escrow Agent or incurred by Escrow Agent in connection
with the performance of his/her duties under this Agreement, including but not
limited to any litigation arising from this Agreement or involving its subject
matter.
(viii) The Escrow Agent may resign at any time upon giving
at least thirty (30) days written notice to the parties; provided, however, that
no such resignation shall become effective until the appointment of a successor
escrow agent which shall be accomplished as follows: the parties shall use their
best efforts to mutually agree on a successor escrow agent within thirty (30)
days after receiving such notice. If the parties fail to agree upon a successor
escrow agent within such time, the Escrow Agent shall have the right to appoint
a successor escrow agent authorized to do business in the state of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow agent
as if originally named as escrow agent. The Escrow Agent shall be discharged
from any further duties and liability under this Agreement.
(k) Fees. All fees of the Escrow Agent for performance of its
----
duties hereunder shall be paid by Parent. It is understood that the fees and
usual charges agreed upon for services of the Escrow Agent shall be considered
compensation for ordinary services as contemplated by this Agreement. In the
event that the conditions of this Agreement are not promptly fulfilled, or if
the Escrow Agent renders any service not provided for in this Agreement, or if
the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes in,
any litigation pertaining to this escrow or its subject matter, the Escrow Agent
shall be reasonably compensated for such extraordinary services and reimbursed
for all costs, attorney's fees, and expenses occasioned by such default, delay,
controversy or litigation. Parent promises to pay these sums upon demand.
(l) Maximum Payments. Notwithstanding any other provision of
----------------
this Agreement, except (i) with respect to fraudulent breaches of the
representations and warranties or covenants of the Company or the Principal
Shareholders contained in any Article of this Agreement or any of the
representations made by any of the shareholders of the Company in the
Shareholder's Certificates, or (ii) any breaches of, or inaccuracies with
respect to Section 2.10 or any failure to comply with Section 5.12, the maximum
amount that Parent may recover from the shareholders of the Company for Losses
(including the Escrow Amount) shall be limited to $3,000,000. Parent's recourse
for all Losses shall be solely, first, against the Escrow Fund and, second, when
the Escrow Fund is exhausted, against the Principal Shareholders; provided,
however, that for any Loss arising out of a
-43-
<PAGE>
Shareholder Certificate, once the Escrow Fund is exhausted, Parent may seek
recourse only from the shareholder furnishing such Shareholder Certificate. In
the event that Parent pursues actions directly against the Principal
Shareholders each Principal Shareholder shall only be responsible for his Pro
Rata (as defined below) portion of any claim (except for claims of fraudulent
actions committed by such Principal Shareholder). "Pro Rata" shall mean that
portion equal to the total number of shares of the Company Capital Stock owned
by such Principal Shareholder immediately prior to the Effective Time over the
total number of shares of Company Capital Stock owned by all Principal
Shareholders of the Company immediately prior to the Effective Time. No
Principal Shareholder shall have any right to contribution from the Company for
any claims by Parent after the Effective Time.
(m) Consequential Damages. In no event shall the Escrow Agent
---------------------
be liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Escrow Agent
has been advised of the likelihood of such loss or damage and regardless of the
form of action.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this
-----------
Agreement may be terminated and the Merger abandoned at any time prior to the
Effective Time:
(b) by Parent, Sub, or the Company if: (i) the Effective Time
has not occurred by June 30, 1997; (ii) there shall be a final nonappealable
order of a federal or state court in effect preventing consummation of the
Merger; or (iii) there shall be any statute, rule, regulation or order enacted,
promulgated or issued or deemed applicable to the Merger by any governmental
entity that would make consummation of the Merger illegal;
(c) by Parent, Sub (or both) or if there shall be any action
taken, or any statute, rule, regulation or order enacted, promulgated or issued
or deemed applicable to the Merger by any Governmental Entity, which would: (i)
prohibit Parent's or Sub's ownership or operation of any portion of the business
of the Company or (ii) compel Parent or the Company to dispose of or hold
separate all or a portion of the business or assets of the Company or Parent as
a result of the Merger;
(d) by Parent or Sub (or both) if it is not in material breach
of its obligations under this Agreement, and there has been a material breach of
any representation, warranty, covenant or agreement contained in this Agreement
on the part of the Company or any of the Principal Shareholders and such breach
has not been cured within five (5) calendar days after written notice to
-44-
<PAGE>
the Company (provided that no cure period shall be required for a breach which
by its nature cannot be cured);
(e) by the Company if neither it nor each of the Principal
Shareholders is in material breach of their respective obligations under this
Agreement and there has been a material breach of any representation, warranty,
covenant or agreement contained in this Agreement on the part of Parent or Sub
and such breach has not been cured within five (5) calendar days after written
notice to Parent (provided that no cure period shall be required for a breach
which by its nature cannot be cured);
(f) by Parent or Sub (or both) if an event having a Material
Adverse Effect on the Company shall have occurred after the date of this
Agreement; or
(g) by the Company, if an event having a material adverse
effect on business, assets (including intangible assets), financial condition or
results of operations of Parent and its subsidiaries taken as a whole shall have
occurred after the date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this
Section 8.1, it shall be sufficient for such action to be authorized by the
Board of Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 8.1, this Agreement shall forthwith become void
and there shall be no liability or obligation on the part of Parent, Sub, the
Principal Shareholders or the Company, or their respective officers, directors
or shareholders, provided that each party shall remain liable for any breaches
of this Agreement prior to its termination; provided further that, the
provisions of Sections 5.3, 5.4, 5.5 and
Article IX of this Agreement shall remain in full force and effect and survive
any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto
---------
at any time by execution of an instrument in writing signed on behalf of each of
the parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time,
-----------------
Parent and Sub, on the one hand, and the Company and the Principal Shareholders,
on the other, may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations of the other party hereto, (ii) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (iii) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
-45-
<PAGE>
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be
-------
in writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
The Failure Group, Inc.
149 Commonwealth Drive
P.O. Box 3015
Menlo Park, CA 94025
Attention: Michael Gaulke
Telephone No.: (415) 326-9400
Facsimile No: (415) 328-2996
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Thomas C. Klein
Telephone No.: (415) 493-9300
Facsimile No.: (415) 493-6811
(b) if to the Company or the Principal Shareholders, to:
Performance Technologies, Incorporated
15375 SE 30th Place, Suite 250
Bellevue, Washington 98007
Telephone No.: (206) 643-9803
Facsimile No.: (206) 643-9827
Attention: Marc W. Lorenzen
-46-
<PAGE>
with a copy to:
Hillis, Clark, Martin & Peterson
500 Galland Building
1221 Second Avenue
Seattle, Washington 98101-2925
Telephone No: (206) 623-1745
Facsimile No.: (206) 623-7789
Attention: Joel N. Bodansky
(c) If to Escrow Agent, to:
Chase Trust Company of California
101 California Street, Suite 2725
San Francisco, California 94111
Telephone No.: (415) 954-9518
Facsimile No.: (415) 693-8850
Attention: Karen Lei
(d) If to Shareholder Representative, to:
Performance Technologies, Incorporated
15375 SE 30th Place, Suite 250
Bellevue, Washington 98007
Telephone No.: (206) 643-9803
Facsimile No.: (206) 643-9827
Attention: Marc W. Lorenzen
9.2 Interpretation. The words "include," "includes" and "including"
--------------
when used herein shall be deemed in each case to be followed by the words
"without limitation." The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto
----------------------------
and the Disclosure Letter, and the documents and instruments and other
agreements among the parties hereto referenced herein: (a) constitute the entire
agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings both written and oral, among
the parties with respect to the subject matter hereof; (b) are not intended to
confer upon any other person any rights or remedies hereunder; and (c) shall not
be assigned by operation of law or otherwise except as otherwise specifically
provided.
-47-
<PAGE>
9.5 Severability. In the event that any provision of this Agreement
------------
or the application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as reasonably
to effect the intent of the parties hereto. The parties further agree to replace
such void or unenforceable provision of this Agreement with a valid and
enforceable provision that will achieve, to the extent possible, the economic,
business and other purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
--------------
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of laws
thereof. Except where arbitration in California is mandated by Section 7.2
hereof, each of the parties hereto irrevocably consents to the exclusive
jurisdiction and venue of any court within Santa Clara County, State of
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection which
they might otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have
---------------------
been represented by counsel during the negotiation and execution of this
Agreement and, therefore, waive the application of any law, regulation, holding
or rule of construction providing that ambiguities in an agreement or other
document will be construed against the party drafting such agreement or
document.
-48-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company, the Principal
Shareholders and the Shareholder Representative and the Escrow Agent (as to the
provisions of Article VII only) have caused this Agreement to be signed by their
duly authorized respective officers, all as of the date first written above.
<TABLE>
<S> <C>
PERFORMANCE TECHNOLOGIES
INCORPORATED,
D.B.A. PTI ENVIRONMENTAL SERVICES THE FAILURE GROUP, INC.
By: /s/ Marc Lorenzen By: /s/ Michael R. Gaulke
----------------------------- -----------------------------
Title: President Title: President and C.E.O.
ESCROW AGENT THE FAILURE GROUP
CHASE TRUST COMPANY OF WASHINGTON INC.
CALIFORNIA (AS TO THE PROVISIONS OF
ARTICLE VII ONLY)
By: /s/ Chii Ling Lei By: /s/ Michael R. Gaulke
----------------------------- -----------------------------
Name: Chii Ling Lei
Title: President
Title: Trust Officer
SHAREHOLDER REPRESENTATIVE PRINCIPAL SHAREHOLDERS
By: /s/ Marc Lorenzen /s/ Robert C. Barrick
----------------------------- -----------------------------
Robert C. Barrick
Name: President
/s/ Gary N. Bigham
-----------------------------
Gary N. Bigham
/s/ Thomas C. Ginn
-----------------------------
Thomas C. Ginn
/s/ Marc W. Lorenzen
-----------------------------
Marc W. Lorenzen
/s/ Larry F. Marx
-----------------------------
Larry F. Marx
</TABLE>
-49-
<PAGE>
Exhibit 2.2
AMENDMENT NUMBER 1 TO AGREEMENT AND PLAN OF REORGANIZATION
This Amendment Number 1 (the "Amendment") to the Agreement and Plan of
Reorganization (the "Agreement") dated April 27, 1997 by and among The Failure
Group, Inc., a Delaware corporation ("Parent"), The Failure Group Washington,
------
Inc., a Washington corporation and a wholly-owned subsidiary of Parent ("Sub"),
---
Performance Technologies, Incorporated d.b.a. PTI Environmental Services, a
Washington corporation (the "Company"), and each of Robert C. Barrick, Gary N.
-------
Bigham, Thomas C. Ginn, Marc W. Lorenzen, and Larry F. Marx, individuals and
certain of the principal shareholders of the Company (such individuals being
hereinafter referred to as the "Principal Shareholders" and individually as a
----------------------
"Principal Shareholder") and Chase Trust Company of California (the "Escrow
--------------------
Agent") (as to the provisions of Article VII of the Agreement) is being executed
as of May 7, 1997. Capitalized terms that are not otherwise defined in this
Amendment have the same meaning given to them in the Agreement.
RECITAL
A. The parties to the Agreement deem it advisable to amend the
Agreement to provide that all of the 480,000 shares of Common Stock of Parent to
be issued pursuant to the Agreement will be placed into the Escrow Fund in order
to provide for an additional means for satisfaction of any claims by Parent for
Losses during the term of the Escrow Fund without resort to personal legal
action against the Company's shareholders during such term.
B. In addition the parties to the Agreement deem it advisable to
amend the Agreement to correct representation 3.3(a) of the Agreement by adding
the reference to the non-statutory options granted to the certain directors of
Parent.
The parties intending to be legally bound, agree as follows:
AGREEMENT
1. Recital C of the Agreement is hereby amended in its entirety
to read as follows:
"C. All of the stock otherwise payable by Parent in
connection with the Merger shall be placed in escrow by Parent
for the purposes of satisfying damages, losses, expenses and
other similar charges which result from breaches of
representations, warranties or covenants, all as set forth in
Article VII hereof."
2. Section 1.7(b) of the Agreement is hereby amended in its
entirety to read as follows:
"(b) Parent to Provide Cash and Deposit Stock. At
----------------------------------------
Closing, Parent shall make available to the Exchange Agent
for exchange in accordance with this Article I, the
<PAGE>
cash deliverable pursuant to Section 1.6(a) in exchange for
outstanding shares of Company Capital Stock; and, on behalf of
the holders of Company Capital Stock, Parent shall deposit
into the Escrow Fund (as defined below in Section 7.2(a)) an
aggregate of 480,000 shares of Parent Common Stock (the
"Escrow Amount") out of the Merger Consideration otherwise
payable pursuant to Section 1.6(a). The portion of the Escrow
Amount deposited into escrow on behalf of each holder of
Company Capital Stock shall be deemed issued and outstanding
Parent Common Stock in the name of such holder and shall be in
proportion to the aggregate number of shares of Parent Common
Stock which such holder would otherwise be entitled to receive
under Section 1.6(a) by virtue of such holder's ownership of
outstanding shares of Company Capital Stock. The Surviving
Corporation will pay the Option Purchase Amount for payment
pursuant to Section 1.6(e) as soon as practical after the
Closing."
3. Section 1.7(c) of the Agreement is hereby amended in its
entirety to read as follows:
"(c) Exchange Procedures. On the Closing Date, (i) each holder
-------------------
of record of a certificate or certificates (collectively, the
"Company Stock Certificates") that immediately prior to the
--------------------------
Effective Time represented outstanding shares of Company
Capital Stock whose shares were converted into the right to
receive shares of Parent Common Stock and cash pursuant to
Section 1.6(a), will deliver to the Exchange Agent the Company
Stock Certificate(s) for cancellation, together with a letter
of transmittal and an executed stock power in blank, and (ii)
the Exchange Agent will deliver to each such holder of record
of the Company Stock Certificate(s) the cash portion of the
Merger Consideration Per Share in accordance with Section
1.6(a)(ii), and the Company Stock Certificates so surrendered
shall forthwith be canceled. Until so surrendered, each
outstanding Company Stock Certificate that, prior to the
Effective Time, represented shares of Company Capital Stock
will be deemed from and after the Effective Time, for all
corporate purposes, to evidence the ownership of the number of
full shares of Parent Common Stock (rounded to the nearest
whole share) into which such shares of Company Capital Stock
shall have been so converted (which shares of Parent Common
will be deposited by the Exchange Agent into the Escrow Fund)
and the right to receive an amount in cash as provided in
Section 1.6(a)(ii) hereof. As soon as practicable after the
Effective Time, and subject to and in accordance with the
provisions of Article VII hereof, Parent shall cause to be
deposited with the Escrow Agent (as defined in Article VII)
the sum of the Escrow Amount, which amount shall be available
to compensate Parent as provided in Article VII."
4. Section 3.3(a) of the Agreement is hereby amended in its
entirety to read as follows:
"(a) The authorized stock of Parent consists of 20,000,000
shares of Common Stock, $.001 par value, of which 6,805,837
shares were issued and outstanding as of
-2-
<PAGE>
December 31, 1996, and 2,000,000 shares of undesignated
Preferred Stock, $.001 par value. No shares of Preferred Stock
are issued or outstanding. All such shares have been duly
authorized, and all such issued and outstanding shares have
been validly issued, are fully paid and nonassessable and are
free of any liens or encumbrances other than any liens or
encumbrances created by or imposed upon the holders thereof.
Parent has also reserved (i) 1,550,000 shares of Common Stock
for issuance to employees and consultants pursuant to the
Parent's 1990 Stock Options and Rights Plan, (ii) 119,000
shares of Common Stock for issuance under the 1989 Stock
Option Plan for Subbaiah V. Malladi, (iii) 200,000 shares of
Common Stock for issuance to directors under its 1991
Directors Restricted Stock Plan, (iv) 400,000 shares of Common
Stock for issuance under the Parent's 1992 Employee Stock
Purchase Plan, and (v) 84,000 shares of Common Stock reserved
for issuance pursuant to individual non-statutory options
issued to certain directors of Parent. There are no other
options, warrants, calls, rights, commitments or agreements of
any character to which Parent is a party or by which it is
bound obligating Parent to issue, deliver, sell, repurchase or
redeem, or cause to be issued, delivered, sold, repurchased or
redeemed, any shares of the capital stock of Parent or
obligating Parent to grant, extend or enter into any such
option, warrant, call, right, commitment or agreement."
5. Except as expressly provided herein, the Agreement shall
remain in full force and effect in accordance with its terms, and all the
provisions of the Agreement (and all schedules and exhibits thereto) are hereby
incorporated by reference as though fully set forth herein.
-3-
<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company, the Principal
Shareholders and the Shareholder Representative and the Escrow Agent (as to the
provisions of Article VII only) have caused this Amendment to be signed by their
duly authorized respective officers (or in the case of the Principal
Shareholders, personally signed), all as of the date first written above.
<TABLE>
<S> <C>
PERFORMANCE TECHNOLOGIES
INCORPORATED,
D.B.A. PTI ENVIRONMENTAL SERVICES THE FAILURE GROUP, INC.
By: /s/ Marc Lorenzen By: /s/ Michael R. Gaulke
-------------------------- --------------------------
Title: President Title: President and C.E.O
ESCROW AGENT THE FAILURE GROUP
CHASE TRUST COMPANY OF WASHINGTON INC.
CALIFORNIA (AS TO THE PROVISIONS OF
ARTICLE VII ONLY)
By: /s/ Chii Ling Lei By: /s/ Michael R. Gaulke
-------------------------- --------------------------
Name: Chii Ling Lei
Title: President and C.E.O
Title: Trust Officer
SHAREHOLDER REPRESENTATIVE PRINCIPAL SHAREHOLDERS
By: /s/ Marc Lorenzen /s/ Robert C. Barrick
-------------------------- --------------------------
Robert C. Barrick
Name: Marc Lorenzen
/s/ Gary N. Bigham
--------------------------
Gary N. Bigham
/s/ Thomas C. Ginn
--------------------------
Thomas C. Ginn
/s/ Marc W. Lorenzen
--------------------------
Marc W. Lorenzen
/s/ Larry F. Marx
--------------------------
Larry F. Marx
</TABLE>
-4-
<PAGE>
Exhibit 2.3
PLAN OF MERGER
This Plan of Merger ("Plan") is between Performance Technologies,
Incorporated, a Washington corporation ("PTI" or the "Surviving Corporation"),
and The Failure Group Washington, Inc., a Washington corporation ("Sub"), a
wholly-owned subsidiary of The Failure Group, Inc., a Delaware corporation
("Parent").
Recitals
A. Pursuant to an Agreement and Plan of Reorganization dated April 27,
1997, by and among Parent, Sub, PTI and certain shareholders of PTI (the "Merger
Agreement"), the parties to the Merger Agreement have agreed that Sub will merge
into PTI (the "Merger").
B. Pursuant to the provisions of chapter 23B.11 of the Revised Code of
Washington, PTI and Sub desire to adopt this Plan.
Plan
1. Merging Corporations. Sub will merge with and into PTI. PTI will be the
--------------------
surviving corporation.
________________________________________________________________________________
PTI Plan of Merger page 1 of 5
<PAGE>
2. Terms and Conditions of Merger.
------------------------------
2.1 Effective Time. The Merger shall be effective upon the filing of
--------------
Articles of Merger duly executed by the Surviving Corporation (the "Effective
Time").
2.2 Effect of the Merger. At the Effective Time, the effect of the
--------------------
Merger shall be as provided in the applicable provisions of the Washington
Business Corporations Act. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all the property, rights,
privileges, powers and franchises of PTI and Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of PTI and Sub shall become
the debts, liabilities and duties of the Surviving Corporation.
2.3 Articles of Incorporation; Bylaws. The Articles of Incorporation
---------------------------------
of the Surviving Corporation shall be amended in their entirety to read as set
forth in Exhibit A hereto. The Bylaws of Sub, as in effect immediately prior to
the Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
2.4 Directors and Officers. The directors and officers of Sub
----------------------
immediately prior to the Effective Time shall be the initial directors and
officers of the Surviving Corporation, each to hold office in accordance with
the Articles of Incorporation and Bylaws of the Surviving Corporation.
2.5 Merger Agreement. This Plan is a summary of certain portions of
----------------
the Merger Agreement. The complete terms and conditions of the Merger shall be
in accordance with, and this Plan is subject to, the Merger Agreement.
________________________________________________________________________________
PTI Plan of Merger page 2 of 5
<PAGE>
3. Manner and Basis of Conversion of Shares.
----------------------------------------
3.1 Exchange of PTI Common Stock. At the Effective Time, each share of
----------------------------
PTI common stock that is issued and outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of Sub, PTI, or the shareholders of PTI be canceled and extinguished and
converted into (i) the right to receive from Parent 480,000 shares of the
Parent's common stock, par value $.001 per share (the "Parent Common Stock"),
divided by the total number of outstanding shares of PTI Common Stock
outstanding immediately prior to the Effective Time; plus (ii) an amount of cash
equal to (A) $7,750,000 minus the Option Purchase Amount (as defined below)
divided by (B) the total number of outstanding shares of PTI Common Stock
outstanding immediately prior to the Effective Time. "Option Purchase Amount"
shall be the amount equal to the aggregate amount payable to all holders of
holders of options to acquire PTI common stock pursuant to Section 1.6(e) of the
Merger Agreement, as described in Section 3.3 below.
3.2 Capital Stock of Sub. At the Effective Time, each issued and
--------------------
outstanding share of the capital stock of Sub shall be converted into and become
one fully paid and nonassessable share of the stock of the Surviving
Corporation.
3.3 Stock Options. As further provided in the Merger Agreement, each
-------------
holder of an option to acquire PTI common stock may elect either (a) to receive
cash in respect of each option, whether vested or unvested, in an amount based
on the net value of such option (calculated as provided in the Agreement), and
the option will terminate, or (b), to the extent such option is vested and
exercisable, to exercise such option prior to the Effective Time. In the event
the option holder elects to exercise any such option, any shares issued upon
such exercise will participate in the Merger, any remaining unexercised options
held by such holder will terminate, and the holder will not be entitled to any
cash payment for such terminated options.
3.4 Escrow. A portion of the shares of Parent common stock (as set
------
forth in the Merger Agreement) otherwise deliverable to PTI shareholders
pursuant to the Merger will be placed in escrow on behalf of the PTI
shareholders and will be available to compensate Parent, Sub and its affiliates
for losses resulting from any inaccuracy or breach of any of PTI's
representations and warranties under the Merger Agreement, any failure of PTI to
perform or comply with any covenant in the Merger Agreement, or any breach of
any certificate to be delivered by the PTI shareholders in connection with the
________________________________________________________________________________
PTI Plan of Merger page 3 of 5
<PAGE>
Merger. Such shares will be held in escrow for a period of one year, or longer
if necessary to protect against any unsatisfied claim pending at the time the
escrow would otherwise have terminated. The number of escrowed shares
contributed on behalf of each PTI shareholder will be in proportion to the
aggregate portion of the merger consideration described in Section 3.1 above to
which such shareholder would otherwise be entitled. Marc W. Lorenzen is
appointed as agent and attorney-in-fact to act as shareholder representative for
each of the PTI shareholders with respect to the escrowed shares as described in
the Merger Agreement, and all PTI shareholders will be deemed to have consented
to such appointment.
3.5 Taxation. It is intended by the parties to the Merger Agreement
--------
that the Merger shall be treated as a taxable asset acquisition under Section
338(h)(10) of the Internal Revenue Code.
4. Miscellaneous.
-------------
4.1 Amendment. This Plan may be amended, supplemented or interpreted
---------
at any time by action taken by the Board of Directors of PTI and Sub; provided,
however, that this Plan may not be amended or supplemented after having been
approved by the shareholders of PTI or Sub except by a vote or consent of
shareholders in accordance with applicable law.
4.2 Termination of Merger Agreement. This Plan may be terminated, and
-------------------------------
the Merger abandoned, at any time prior to the Effective Time, as provided in
the Merger Agreement. To the extent that any decision of a party with respect to
termination is discretionary, such discretion may be exercised on behalf of such
party by its Board of Directors, notwithstanding any prior shareholder approval
of this Plan.
ADOPTED this 16th day of May, 1997.
PERFORMANCE TECHNOLOGIES,
INCORPORATED, d/b/a PTI Environmental
Services
By /s/ Marc W. Lorenzen
-----------------------------------
Marc W. Lorenzen, President
________________________________________________________________________________
PTI Plan of Merger page 4 of 5
<PAGE>
THE FAILURE GROUP WASHINGTON,
INC.
By /s/ Michael R. Gaulke ,
---------------------------------
its President and C.E.O.
-----------------------------
________________________________________________________________________________
PTI Plan of Merger page 5 of 5
<PAGE>
Exhibit 4.1
THE FAILURE GROUP, INC.
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of May 16,
1997 by and among The Failure Group, Inc., a Delaware corporation (the
"Company"), and the parties listed on Exhibit A hereto (each a "Holder" and
collectively the "Holders").
RECITALS
1. The Company, Performance Technologies, Incorporated, d.b.a. PTI
Environmental Services, a Washington corporation ("PTI"), The Failure Group
Washington, Inc., a Washington corporation ("Sub"), each of Robert C. Barrick,
Gary N. Bigham, Thomas C. Ginn, Marc W. Lorenzen, and Larry F. Marx, and Chase
Trust Company of California entered into an Agreement and Plan of Reorganization
dated as of April 27, 1997 (the "Reorganization Agreement"), which provides for
the merger (the "Merger") of Sub with and into PTI. The effective date of the
consummation of the Merger shall be the effective date of this Agreement.
2. The Holders are acquiring shares of the Common Stock of the Company
pursuant to the Reorganization Agreement and the Merger.
3. As a condition to the Merger and as additional consideration to the
Holders, the Reorganization Agreement contemplates, among other things, that the
Company and the Holders enter into this Agreement and that this Agreement become
effective upon the closing of the Merger.
Now therefore, in consideration of the mutual promises made herein, the
Company and the Holders (collectively referred to as the "Parties") hereby agree
as follows:
AGREEMENT
SECTION
RESTRICTIONS ON TRANSFERABILITY OF SECURITIES;
COMPLIANCE WITH SECURITIES ACT
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the following respective meanings:
<PAGE>
"Commission" shall mean the Securities and Exchange Commission or any
----------
other federal agency at the time administering the Securities Act.
"Holder" shall mean any Holder holding Registrable Securities,
------
including any person holding Registrable Securities to whom the rights under
this Section 1 have been transferred in accordance with Section 1.10 hereof.
The terms "register," "registered" and "registration" refer to a
-------- ---------- ------------
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and the declaration or ordering of the
effectiveness of such registration statement.
"Registrable Securities" means any Common Stock of the Company issued
----------------------
or issuable in respect of such shares upon any stock split, stock dividend,
recapitalization or similar event or any Common Stock otherwise issued with
respect to such shares; provided, however, that Common Stock or other securities
-------- -------
shall only be treated as Registrable Securities if and so long as they have not
been (A) sold to or through a broker or dealer or underwriter in a public
distribution or a public securities transaction, or (B) sold in a transaction
exempt from the registration and prospectus delivery requirements of the
Securities Act under Section 4(1) or pursuant to Rule 144 thereof so that all
transfer restrictions and restrictive legends with respect thereto, if any, are
removed upon the consummation of such sale.
"Registration Expenses" shall mean all expenses incurred by the
---------------------
Company in complying with Section 1.5 hereof, including, without limitation, all
registration, qualification and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel, blue sky fees and expenses, and the expense
of any special audits incident to or required by any such registration (but
excluding the compensation of regular employees of the Company which shall be
paid in any event by the Company).
"Securities Act" shall mean the Securities Act of 1933, as amended, or
--------------
any similar federal statute and the rules and regulations of the Commission
thereunder, all as the same shall be in effect at the time.
"Selling Expenses" shall mean all underwriting discounts, selling
----------------
commissions and stock transfer taxes applicable to the securities registered by
any of the Holders and all fees and disbursements of counsel for such Holders
(as limited by Section 1.6).
"Shares" shall mean shares of the Company's Common Stock owned by the
------
Holders pursuant to the Reorganization Agreement and the Merger which have been
released from the escrow fund in accordance with the provisions of the
Reorganization Agreement.
1.2 Restrictions on Transferability. The Shares shall not be sold,
-------------------------------
assigned, transferred or pledged except upon the conditions specified in this
Section 1, which conditions are intended to ensure compliance with the
provisions of the Securities Act. Each Holder will cause any proposed purchaser,
assignee, transferee or pledgee of any of the Shares, it held by it to agree to
take and hold such Shares subject to the provisions and upon the conditions
specified in this Section 1, including without limitation those imposed upon
Holders under Section 1.10.
-2-
<PAGE>
1.3 Restrictive Legends.
-------------------
(a) Each certificate representing (i) the Shares and (ii) any other
securities issued in respect of the Shares upon any stock split, stock dividend,
recapitalization, merger, consolidation or similar event, shall (unless
otherwise permitted by the provisions of Section 1.4 below) be stamped or
otherwise imprinted with a legend in substantially the following form (in
addition to any legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT FOR DISTRIBUTION, AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT THERETO UNDER SUCH ACT
UNLESS SOLD PURSUANT TO RULE 144 OF SUCH ACT OR UNLESS THE SALE IS
OTHERWISE EXEMPT FROM REGISTRATION. THE COMPANY MAY REQUEST A WRITTEN
OPINION OF COUNSEL, WHICH OPINION AND COUNSEL ARE ACCEPTABLE TO THE
COMPANY, TO THE EFFECT THAT REGISTRATION IS NOT REQUIRED IN CONNECTION
WITH ANY SUCH SALE. THIS CERTIFICATE MUST BE SURRENDERED TO THE
CORPORATION OR ITS TRANSFER AGENT AS A CONDITION PRECEDENT TO THE
SALE, PLEDGE OR OTHER TRANSFER OF ANY INTEREST IN ANY OF THE SHARES
REPRESENTED BY THIS CERTIFICATE.
(b) Each Holder consents to the Company making a notation on its
records and giving instructions to any transfer agent of the Shares in order to
implement the restrictions on transfer established in this Section 1.
1.4 Notice of Proposed Transfers. Each Holder by acceptance of Shares
----------------------------
agrees to comply in all respects with the provisions of this Section 1.4. Unless
transferred in compliance with Rule 144 prior to any proposed sale, assignment,
transfer or pledge of any Shares, unless there is in effect a registration
statement under the Securities Act covering the proposed transfer, the holder
thereof shall give written notice to the Company of such holder's intention to
effect such transfer, sale, assignment or pledge. Each such notice shall
describe the manner and circumstances of the proposed transfer, sale, assignment
or pledge in sufficient detail and, if the Company reasonably so requests, shall
be accompanied at such holder's expense by either (i) an opinion of legal
counsel which shall be reasonably satisfactory to the Company, which opinion
shall be addressed to the Company, to the effect that the proposed transfer of
the Shares may be effected without registration under the Securities Act, or
(ii) a "no action" letter from the Commission to the effect that the transfer of
such securities without registration will not result in a recommendation by the
staff of the Commission that action be taken with respect thereto, whereupon the
holder of such Shares shall be entitled to transfer such Shares in accordance
with the terms of the notice delivered by the holder to the Company. Each
certificate or
-3-
<PAGE>
other writing evidencing the Shares transferred as above provided shall bear,
except if such transfer is made pursuant to Rule 144, the appropriate
restrictive legend set forth in Section 1.3 above, except that such certificate
shall not bear such restrictive legend if in the opinion of counsel for such
holder and the Company such legend is not required in order to establish
compliance with any provisions of the Securities Act. Notwithstanding the
provisions of this Section 1.4, no such opinion of counsel shall be necessary
for a transfer by a Holder which is (A) a partnership to its partners or former
partners in accordance with partnership interests, (B) a corporation to its
shareholders in accordance with their interest in the corporation, (C) a limited
liability company to its members or former members in accordance with their
interest in the limited liability company, or (D) to the Holder's family member
or to a trust for the benefit of an individual Holder, provided, that in all
cases the transferee will be subject to the terms of this Section 1.4 to the
same extent as if such transferee were an original Holder hereunder.
1.5 Company Registration.
--------------------
(a) Notice of Registration. If at any time or from time to time the
----------------------
Company shall determine to register any of its securities in connection with the
sale thereof for cash, either for its own account or the account of a security
holder or holders exercising their respective registration rights, other than
(i) a registration relating solely to employee benefit plans, or (ii) a
registration relating solely to a Commission Rule 145 transaction, the Company
will:
(A) promptly give to each Holder written notice thereof; and
(B) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made within thirty (30) days after receipt of such written notice from
the Company by any Holder.
(b) Underwriting. If the registration of which the Company gives
------------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.5(a). In such event, the right of any Holder to
registration pursuant to Section 1.5 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and the other holders distributing their securities through such
underwriting) enter into an underwriting agreement in customary form with the
managing underwriter selected for such underwriting by the Company.
Notwithstanding any other provision of this Section 1.5, if the managing
underwriter determines that marketing factors require a limitation of the number
of shares to be underwritten, the managing underwriter may limit or exclude
completely the Registrable Securities of the Holders otherwise to be included in
such registration prior to the exclusion from such registration of any
securities to be sold by the Company or of any securities subject to
registration rights granted prior to the effective date of this Agreement with
respect to such registration; provided, that if any limitation of Registrable
--------
Securities of the Holders is so required, such limitation shall be allocated
-4-
<PAGE>
among the Holders of Registrable Securities participating in such registration
in proportion to the number of shares of the Company's Common Stock (or
equivalents thereof) held by such Holders. No such reduction shall reduce the
securities being offered by the Company for its own account to be included in
the registration and underwriting. If any Holder disapproves of the terms of any
such underwriting, he may elect to withdraw therefrom by written notice to the
Company and the managing underwriter. Any securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.
(c) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by the Company under this
Section 1.5 without liability prior to the effectiveness of such registration
whether or not any Holder has elected to include securities in such
registration.
1.6 Expenses of Registration.
------------------------
(a) The Holder or Holders participating in any registration hereunder
shall bear their pro rata share of the Registration Expenses incurred in
connection with such registration according to the number of Registrable
Securities included by each Holder in such registration.
(b) All Selling Expenses incurred in connection with any registration
hereunder shall be borne pro rata by the Holder or Holders participating in such
registration according to the number of Registrable Securities included by each
Holder in such registration.
(c) Notwithstanding the provisions of this Section 1.6, if, as a
condition of registration or qualification of any offering in any state or
jurisdiction in which the Company or any underwriter determines in good faith
that it wishes to offer securities registered in an offering to which this
Agreement applies, it is required that Registration Expenses be allocated in a
manner different from that provided in this Section 1.6, the Registration
Expenses shall be allocated in whatever permitted manner is most nearly in
compliance with the provisions of this Agreement.
1.7 Indemnification.
---------------
(a) To the extent permitted by law, the Company will indemnify each
Holder, each of its officers and directors and partners, and each person
controlling such Holder within the meaning of Section 15 of the Securities Act,
with respect to which registration, qualification or compliance has been
effected pursuant to this Section 1, and each underwriter, if any, and each
person who controls any underwriter within the meaning of Section 15 of the
Securities Act, against all expenses, claims, losses, damages or liabilities (or
actions in respect thereof), including any of the foregoing incurred in
settlement of any litigation, commenced or threatened, arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any registration statement, prospectus, offering circular or other
document, or any amendment or supplement thereto, incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein, in light of the
-5-
<PAGE>
circumstances in which they were made, not misleading, or any violation (or
alleged violation) by the Company of the Securities Act or any rule or
regulation promulgated under the Securities Act applicable to the Company in
connection with any such registration, qualification or compliance, and the
Company will reimburse or pay for the account of each such Holder, each of its
officers and directors, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, for any legal and
any other expenses reasonably incurred (as and when incurred) in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to the
extent that any such claim, loss, damage, liability or expense arises out of or
is based on any untrue statement or omission or alleged untrue statement or
omission, made in reliance upon and in conformity with written information
furnished to the Company by an instrument duly executed by such Holder,
controlling person or underwriter and stated to be specifically for use therein.
(b) To the extent permitted by law, each Holder will, if Registrable
Securities held by such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of Section 15 of the
Securities Act, and each other such Holder, each of its officers and directors
and each person controlling such Holder within the meaning of Section 15 of the
Securities Act, against all claims, losses, damages and liabilities (or actions
in respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and will reimburse
or pay for the account of the Company, such Holders, such directors, officers,
persons, underwriters or control persons for any legal or any other expenses
reasonably incurred (as and when incurred) in connection with investigating or
defending any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such-registration
statement, prospectus, offering circular or other document in reliance upon and
in conformity with written information furnished to the Company by an instrument
duly executed by such Holder and stated to be specifically for use therein;
provided, however, that the liability of a Holder for indemnification under this
- -------- -------
Section 1.7(b) shall not exceed the net proceeds from the offering received by
such Holder, unless such liability arises out of or is based on willful
misconduct of such Holder.
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (which approval shall not unreasonably be
withheld), and the Indemnified Party may participate in such defense at such
party's expense; provided, however, that an Indemnified Party shall have the
-------- -------
right to retain its own counsel, with
-6-
<PAGE>
the fees and expenses to be paid by the Indemnifying Party, if representation of
such Indemnified Party by the counsel retained by the Indemnifying Party would
be inappropriate due to actual or potential differing interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. The failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 1 except to the extent that the failure to give such notice is
materially prejudicial to an Indemnifying Party's ability to defend such action.
No Indemnifying Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement that does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect to such claim or litigation. No
Indemnifying Party shall be liable for indemnification hereunder with respect to
any settlement or consent to judgment in connection with any claim or litigation
to which these indemnification provisions apply, that has been entered into
without the prior consent of the Indemnifying Party (which consent will not be
unreasonably withheld).
(d) If the indemnification provided for in this Section 1.7 is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any losses, claims, damages or liabilities referred to herein, the
Indemnifying Party, in lieu of indemnifying such Indemnified Party hereunder,
shall to the extent permitted by applicable law contribute to the amount paid or
payable by such Indemnified Party as a result of such loss, claim, damage or
liability in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the other
in connection with the untrue statement (or alleged untrue statement) or
omission (or alleged omission) that resulted in such loss, claim, damage or
liability, as well as any other relevant equitable considerations. The relative
fault of the Indemnifying Party and of the Indemnified Party shall be determined
by a court of law by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission to state a material
fact relates to information supplied by the Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission;
provided, that in no event shall any contribution by a Holder hereunder exceed
the net proceeds from the offering received by such Holder.
(e) The obligations of the Company and the Holders under this Section
1.7 shall survive the completion of any offering of Registrable Securities in a
registration statement pursuant to this Section 1.
1.8 Information of Holder; Copies of Prospectus. The Holder or Holders of
-------------------------------------------
Registrable Securities included in any registration shall furnish to the Company
such information regarding such Holder or Holders, the Registrable Securities
held by them and the distribution proposed by such Holder or Holders as the
Company may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Section 1. In
connection with any such registration, such Holder or Holders shall provide
advance payment to the Company for the cost of such numbers of copies of any
prospectus or preliminary prospectus prepared in conformity with the Securities
Act reasonably requested by such Holder or Holders in order to facilitate the
disposition of Registrable Securities owned by such Holder or Holders.
-7-
<PAGE>
1.9 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission, which may permit the sale of
the Shares to the public without registration, the Company agrees to use
reasonably diligent efforts to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act at all times after
the effective date that the Company becomes subject to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act");
(b) file with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) so long as a Holder owns any Shares, to furnish to the Holder
forthwith upon request a written statement by the Company as to its compliance
with the reporting requirements of said Rule 144, a copy of the most recent
annual or quarterly report of the Company and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as a Holder may reasonably request in availing itself
of any rule or regulation of the Commission allowing a Holder to sell any such
securities without registration.
1.10 Transfer of Registration Rights. The rights to cause the Company to
-------------------------------
register securities granted Holders under Section 1.5 may be assigned or
otherwise conveyed to a transferee or assignee in connection with any transfer
or assignment of Registrable Securities by a Holder (together with any
affiliate) provided that such transfer may otherwise be effected in accordance
with applicable securities laws, the Holder effecting such transfer shall comply
with the requirements of Section 1.4 of this Agreement, the transferee shall
agree to be bound by all of the provisions of this Agreement, such transfer does
not violate any agreements by and among the Company and such Holders or any
agreements among such Holders, and such transferee or assignee is a wholly-owned
subsidiary, constituent partner (including retired and limited partners) or
affiliate of such Holder, is any family member of any individual Holder, or is a
trust for the benefit of any individual Holder, provided in each case that the
Company is given written notice by such transferee at the time of said transfer
stating the name and address of said transferee and said transferee's agreement
to be bound by this Agreement.
1.11 Standoff Agreement. Each Holder agrees, upon request of the Company or
------------------
the underwriters managing any underwritten offering of the Company's securities,
not to sell, make any short sale of, loan, grant any option for the purchase of
or otherwise dispose of any Registrable Securities (other than those included in
the registration) without the prior written consent of the Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days) from the effective date of such registration as may
be requested by the Company or such managing underwriters.
-8-
<PAGE>
SECTION 2
MISCELLANEOUS
2.1 Transfer; Successors and Assigns. Except as the transferability of
--------------------------------
rights is expressly limited herein, the terms and conditions of this Agreement
shall inure to the benefit of and be binding upon the respective successors and
assigns of the parties. Nothing in this Agreement, express or implied, is
intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
2.2 Modifications and Amendments. This Agreement may be modified or
----------------------------
amended only with the written consent of the Company and the Holders holding at
least a majority of the Registrable Securities then subject to this Agreement.
Any waiver by a party of its rights hereunder shall be effective only if
evidenced by a written instrument executed by such party. In no event shall such
waiver of any rights hereunder constitute the waiver of such rights in any
future instance unless the waiver so specifies in writing. Each Holder
acknowledges that by the operation of this Section 2.8 the Holders of a majority
of the Registrable Securities interests may have the right and power to diminish
or eliminate all rights of such Holder under this Agreement. Notwithstanding the
foregoing, each Holder agrees that its consent to amend this Agreement shall not
be required in the event the Company desires to amend this Agreement (i) to
include in the definition of Holder additional purchasers of Registrable
Securities of the Company who acquire such shares in a transaction subsequent to
the date of this Agreement, and (ii) to grant to those Holders who acquire such
Registrable Securities in a subsequent transaction rights similar to those
granted to the Holders hereunder.
2.3 Consent of the Holders Not Required for the Company to Grant
------------------------------------------------------------
Additional Registration Rights. This Agreement imposes no restriction on the
- ------------------------------
ability of the Company to grant registration rights regarding any security of
the Company at any time in the future, and nothing in this Agreement requires
the Company to solicit or otherwise obtain the consent of any Holder or of the
Holders under this Agreement in order to grant registration rights in the
future.
2.4 Termination. This Agreement shall terminate on the second anniversary
-----------
of the effective date of this Agreement.
2.5 Governing Law. This Agreement shall be governed by and construed under
-------------
the laws of the state of California.
2.6 Notices. All notices and other communications required or permitted
-------
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed
(a) if to a Holder, at such address as such Holder shall have furnished to the
Company in writing, or (b) if to the Company, at such address as the Company
shall have furnished in writing to the Holder to the attention of the President.
A notice shall be effective when actually delivered by hand or messenger, or
five (5) business days after deposit in the mail as aforesaid.
-9-
<PAGE>
2.7 Severability. If any provision of this Agreement, or the application
------------
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement and application of such provision to other persons
or circumstances will be interpreted so as to reasonably effect the intent of
the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of the void or unenforceable provision.
2.8 Entire Agreement. This Agreement constitutes the full and entire
----------------
understanding and agreement between the parties with regard to the subjects
hereof.
2.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-10-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first above written.
"COMPANY" THE FAILURE GROUP, INC.
By: /s/ Michael R. Gaulke
--------------------------------
Title: President and C.E.O
-----------------------------
"HOLDERS"
-11-
