UNITED STATES
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): November 13, 1998
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fonix corporation
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(Exact name of registrant as specified in its charter)
Delaware
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(State or other jurisdiction of incorporation or organization)
0-23862 22-2994719
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(Commission file number) (I.R.S. Employer Identification No.)
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (801) 328-0161
Not Applicable
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(Former name or former address, if changed since last report)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On October 29, 1998, fonix corporation, a Delaware
corporation, (the "Company" or "fonix") acquired all of the issued
and outstanding stock of Papyrus Associates, Inc., a Pennsylvania
corporation ("PAI") and Papyrus Development Corporation, a
Massachusetts corporation ("PDC"). The acquisitions were
accomplished through a wholly owned subsidiary of the Company,
Papyrus Acquisition Corporation, a Utah corporation ("Merger Sub"),
in each case pursuant to a written Agreement and Plan of Merger,
dated September 10, 1998, as amended by addendum dated October 29,
1998 (collectively, the "Merger Agreements") by and among fonix,
Merger Sub and the acquired companies. Pursuant to the Merger
Agreements, PAI and PDC will be merged (the "Mergers") with and into
Merger Sub, with Merger Sub being the surviving entity. Prior to
the Mergers, there was no material relationship between fonix and
any of its affiliates, directors or executive officers, on the one
hand, and PAI or PDC or any of their affiliates, directors or
executive officers, on the other hand, except that the Company had
entered into consulting agreements PDC and its two principals at the
time the letter of intent was signed for the Mergers. The Mergers
were unanimously approved and recommended to the stockholders by the
boards of directors of PAI and PDC, and was approved by the
affirmative vote of holders of all of the issued and outstanding
stock of both acquired companies, as required by the law of the
states of Delaware, Massachusetts and Utah. The Mergers were also
approved by the board of directors of fonix.
The transactions contemplated by the Merger Agreements were
consummated on October 29, 1998 (the "Closing"), as described below.
At the Closing, the parties to the Merger Agreements entered into
an Addendum to Agreement and Plan of Merger, dated as of October 29,
1998.
Background of the Mergers
PAI develops and markets printing and cursive handwriting
recognition software for "personal digital assistants" ("PDAs"), pen
tablets and mobile phones. Its customers include Philips, Hitachi,
Olivetti/Oracle Research Lab, NuovoMedia, ARM, Amstrad, Purple
Software and Digital Equipment. The Papyrus Recognizer is marketed
under the trademark "Allegro." PAI's software and technology are an
integral part of the Psion PDA.
PDC is a systems integration provider with expertise and
intellectual property in embedded systems and enhanced Internet
applications. PDC has an ongoing partnership with e-Travel, that
resulted in the first corporate travel management Web-browser client
software system. This product is now shipped to customers such as
Fidelity Investments, ADP, Travel One, Coca Cola, Time Inc., and
Unisys.
fonix, since 1994, has been engaged in research and
development of certain proprietary automatic computer voice
recognition and related technologies (collectively the "Core
Technologies"). fonix believes that the Mergers present an
opportunity for fonix to diversify its operations and offer products
that are complementary to its existing Core Technologies. fonix
believes that its entry into the $3.4 billion PDA industry (as
estimated by International Data Corporation) with Papyrus'
Allegro(TM) and future handwriting recognition products will allow
the Company to become a leader in that market. There can be no
assurance, however, that significant marketing opportunities will
accrue to fonix as a result of the Merger.
Terms of the Mergers
Papyrus Associates, Inc. At the Closing, the Company issued
1,076,926 shares of its restricted common stock (having a market
value of $1,110,580 on that date) and promissory notes aggregating
$540,000 to the stockholders of PAI in exchange for all of the
outstanding shares of PAI common stock. The promissory notes are
payable as follows: $360,000 of notes are payable on the fifth
business day following the closing of the Company's next round of
equity financing, but not later than February 28, 1999; and $180,000
of notes are payable on April 30, 1999. The notes bear interest at
the rate of 6% per annum. The Merger Agreements provide that, after
the consummation of the Mergers, Merger Sub will continue the
business of PAI as a wholly owned subsidiary of fonix. Upon the
filing of a certificate of merger with the Department of State of
Pennsylvania and articles of merger the Division of Corporations of
the Utah Department of Commerce (the "Effective Date"), the separate
corporate existence of PAI will cease. The directors and officers
of PAI each resigned their positions at Closing in favor of the
directors and officers of Merger Sub. The principal executive
offices of Merger Sub from and after the Effective Date will be 600
West Cummings Park, Suite 4500, Woburn, Massachusetts 01801, and its
telephone number is (781) 935-5656.
Papyrus Development Corporation At the Closing, the Company
issued 2,034,188 shares of its restricted common stock (having a
market value of $2,097,756 on that date) and promissory notes
aggregating $1,170,000 to the stockholders of PDC in exchange for
all of the outstanding shares of PDC common stock. The promissory
notes are payable as follows: $490,000 of notes are payable on the
fifth business day following the closing of the Company's next round
of equity financing, but not later than February 28, 1999; $340,000
of notes are payable on February 28, 1999; and $340,000 of the notes
are due and payable on September 30, 1999. The notes bear interest
at the rate of 6% per annum. The Merger Agreements provide that,
after the consummation of the Mergers, Merger Sub will continue the
business of PDC as a wholly owned subsidiary of fonix. Upon the
filing of a certificate of merger with the Department of State of
Massachusetts and articles of merger the Division of Corporations of
the Utah Department of Commerce (the "Effective Date"), the separate
corporate existence of PDC will cease. The directors and officers
of PDC each resigned their positions at Closing in favor of the
directors and officers of Merger Sub. The principal executive
offices of Merger Sub from and after the Effective Date will be 600
West Cummings Park, Suite 4500, Woburn, Massachusetts 01801, and its
telephone number is (781) 935-5656.
The total consideration and the value thereof for the Mergers
was determined pursuant to arms-length negotiations between fonix
and the two acquired companies.
After the merger, the former shareholders of PAI and PDC,
constituting 10 persons, beneficially own less than 1% of the total
61,697,747 shares of fonix common stock issued and outstanding as of
the date hereof.
Prior to the Mergers, PDC and PAI owned or leased the
equipment used in its business (primarily computer equipment,
software and office equipment). After the Mergers, Merger Sub
intends to continue to use the same equipment (whether owned or
leased by PDC or PAI) for the same business as was conducted by PDC
and PAI prior to the Mergers.
Additional Terms
Pursuant to an Escrow Agreement executed at the Closing, fonix
and PDC and PAI agreed to place approximately 311,111 fonix shares
issued as part of the Mergers (approximately 10% of the total shares
issued in the two transactions) in escrow as the sole recourse of
fonix in the event of any breach by either PAI or PDC, as the case
may be, of the representations and warranties included in the Merger
Agreements. The term of the escrow arrangement is one year from the
date of the Closing, after the expiration of which, the shares
deposited into escrow, less any amount deemed to be payment to fonix
for damages suffered as a result of any breach by PAI or PDC, are to
be remitted to the former stockholders of PAI and PDC in proportion
to the percentage of PAI or PDC common stock owned by them prior to
the consummation of the Mergers.
As a part of the Merger Agreements, the Company also granted
the former PAI and PDC stockholders limited registration rights.
These rights permit these holders to "piggy back" their shares of
Company common stock received in the Mergers and include them with
certain registrations of Company shares, commencing six months from
the date of Closing.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
It is impracticable at this time for the Company to provide
the audited financial statements of PDC and PAI as required by Item
7(a) of Form 8-K. The Company undertakes that it will file the
required audited financial statements within the time allowed by
Form 8-K.
(b) Pro Forma Financial Information.
It is impracticable at this time for the Company to provide
the required pro forma financial information as required by Item
7(b)of Form 8-K. The Company undertakes that it will file the required pro
forma financial information within the time period allowed by Form 8-K.
(c) Exhibits. The following are filed as exhibits to this
Current Report:
Exhibit
No. Description
__________ ____________________________________
(2)(a) Agreement and Plan of Merger among fonix,
Papyrus Acquisition Corporation and Papyrus
Associates, Inc., dated as of September 10,
1998.
Pursuant to Item 601(b)(2) of Regulation
S-K, the exhibits and schedules to the
Agreement and Plan of Merger are not filed
herewith. The exhibits and schedules
identified in the Agreement and Plan of
Merger, but that are not filed herewith will
be provided to the Commission upon request
therefor.
(2)(b) Addendum to Agreement and Plan of Merger,
dated as of October 29, 1998.
(2)(c) Agreement and Plan of Merger among fonix,
Papyrus Acquisition Corporation and Papyrus
Development Corporation, dated as of
September 10, 1998.
Pursuant to Item 601(b)(2) of Regulation
S-K, the exhibits and schedules to the
Agreement and Plan of Merger are not filed
herewith. The exhibits and schedules
identified in the Agreement and Plan of
Merger, but that are not filed herewith will
be provided to the Commission upon request
therefor.
(2)(d) Addendum to Agreement and Plan of Merger,
dated as of October 29, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned hereunto duly authorized.
fonix corporation
By: /s/ Douglas L. Rex
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Douglas L. Rex
Chief Financial Officer
Date: November 13, 1998
EXHIBIT INDEX
Exhibit
No. Description
__________ ____________________________________
(2)(a) Agreement and Plan of Merger among fonix,
Papyrus Acquisition Corporation and Papyrus
Associates, Inc., dated as of September 10,
1998.
Pursuant to Item 601(b)(2) of Regulation
S-K, the exhibits and schedules to the
Agreement and Plan of Merger are not filed
herewith. The exhibits and schedules
identified in the Agreement and Plan of
Merger, but that are not filed herewith will
be provided to the Commission upon request
therefor.
(2)(b) Addendum to Agreement and Plan of Merger,
dated as of October 29, 1998.
(2)(c) Agreement and Plan of Merger among fonix,
Papyrus Acquisition Corporation and Papyrus
Development Corporation, dated as of
September 10, 1998.
Pursuant to Item 601(b)(2) of Regulation
S-K, the exhibits and schedules to the
Agreement and Plan of Merger are not filed
herewith. The exhibits and schedules
identified in the Agreement and Plan of
Merger, but that are not filed herewith will
be provided to the Commission upon request
therefor.
(2)(d) Addendum to Agreement and Plan of Merger,
dated as of October 29, 1998.
AGREEMENT AND PLAN OF MERGER
AMONG
FONIX CORPORATION
A DELAWARE CORPORATION,
PAPYRUS ACQUISITION CORPORATION
A UTAH CORPORATION, AND
PAPYRUS ASSOCIATES, INC.
A PENNSYLVANIA CORPORATION
SEPTEMBER 10, 1998
<PAGE>
EXHIBIT INDEX
Exhibit A -- Form of Certificate of Merger
Exhibit B -- Form of Transmittal Letter
Exhibit C Form of Buyer Note
Exhibit D Form of Escrow Agreement
Exhibit E Form of Development, Assignment and Confidentiality Agreement
Exhibit F Form of Opinion of Counsel to Papyrus Associates, Inc.
Exhibit G Form of Offer of Employment
Exhibit H Form of Opinion of Counsel to Buyer
Papyrus Associates, Inc. Disclosure Schedule Exceptions to
Representations and Warranties
Buyer Disclosure Schedule Exceptions to Representations and
Warranties
Schedule 8.2(l) List of Papyrus Associates, Inc. Employees
<PAGE>
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger ("Agreement") entered into as of
September 10, 1998, by and among FONIX CORPORATION, a Delaware
corporation ("Buyer"), PAPYRUS ACQUISITION CORPORATION, a Utah
corporation and wholly owned subsidiary of Buyer ("Merger Sub"), and
PAPYRUS ASSOCIATES, INC., a Pennsylvania corporation ("Papyrus").
The Buyer, Merger Sub and Papyrus are referred to collectively
herein as the Parties.
RECITALS
A. The Boards of Directors of Papyrus, Buyer and Merger
Sub believe it is in the best interests of their respective
companies that Papyrus and Merger Sub combine into a single company
through the statutory merger of Papyrus with and into Merger Sub
(the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the
outstanding shares of Papyrus common stock (the "Papyrus Common
Stock") shall be converted into the right to receive the Merger
Consideration (as defined in and subject to adjustment as specified
in Section 2) upon the terms and subject to the conditions set forth
herein.
C. The parties intend, by executing this Agreement, to
adopt a plan of reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and to
cause the Merger to qualify as a reorganization under the provisions
of Section 368(a)(1)(a) of the Code.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein made, and in consideration of the
representations, warranties, and covenants herein contained, the
Parties agree as follows.
ARTICLE 1.
DEFINITIONS
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"BUYER" has the meaning set forth in the preface above.
"BUYER DISCLOSURE SCHEDULE" has the meaning set forth in
Article 4.
"BUYER NOTE" has the meaning set forth in Section 2.4.
"BUYER SHARE" means any share of the common stock, $.0001 par
value per share, of Buyer.
"CASH PAYMENT" has the meaning set forth in Section 2.4(e).
"CERTIFICATE OF MERGER" has the meaning set forth in Section
2.3 below.
"CLOSING" has the meaning set forth in Section 2.2 below.
"CLOSING DATE" has the meaning set forth in Section 2.2 below.
"CONFIDENTIAL INFORMATION" has the meaning set forth in
Section 3.10(g) below.
"CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM" means the
confidential private placement memorandum that shall be prepared
jointly by Buyer and Papyrus and distributed to Papyrus Stockholders
with the Definitive Proxy Materials as part of the Joint Disclosure
Statement.
"DEFINITIVE PROXY MATERIALS" means the definitive proxy
materials relating to the Special Papyrus Meeting.
"DELAWARE GENERAL CORPORATION LAW" means the General
Corporation Law of the State of Delaware, as amended.
"DISSENTING SHARE" means any Papyrus Share which any
stockholder who or which has exercised his or its appraisal rights
under the Pennsylvania General Corporation Law holds of record.
"EFFECTIVE TIME" has the meaning set forth in Section 2.1 below.
"EXCHANGE AGENT" has the meaning set forth in Section
2.4(l)(i) below.
"EXCHANGE RATIO" has the meaning set forth in Section 2.4(e).
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"IRS" means the Internal Revenue Service.
"JOINT DISCLOSURE DOCUMENT" means the disclosure document
combining the Confidential Private Placement Memorandum and the
Definitive Proxy Materials.
"KNOWLEDGE" means actual knowledge after reasonable
investigation.
"MATERIAL" means any material event, change, condition or
effect related to the financial condition, properties, assets
(including intangible assets), liabilities, business, operations or
results of operations of such entity or group of entities.
"MATERIAL ADVERSE EFFECT" means any event, change or effect
that is materially adverse to the financial condition, properties,
assets, liabilities, business, operations or results of operations
of such entity and its subsidiaries, taken as a whole.
"MERGER" has the meaning set forth in the recitals above.
"MERGER CONSIDERATION" has the meaning set forth in Section
2.4(l)(i).
"MERGER SUB COMMON STOCK" has the meaning set forth in
Section 2.4(g).
"MERGER SHARES" shall have the meaning set forth in Section
2.4(e).
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with
respect to quantity and frequency).
"PAPYRUS" has the meaning set forth in the preface above.
"PAPYRUS CERTIFICATE" means any certificate representing
Papyrus Shares.
"PAPYRUS DISCLOSURE SCHEDULE" has the meaning set forth in
Article 3 below.
"PAPYRUS SHARE" means any share of the common stock, no par
value per share, of Papyrus.
"PAPYRUS STOCKHOLDER" means any Person who or which holds any
Papyrus Shares.
"PARTY OR PARTIES" has the meaning set forth in the preface
above.
"PENNSYLVANIA BUSINESS CORPORATION LAW" means the
Pennsylvania Business Corporation Act as set forth in 15 P.S. 1001
et seq., as amended.
"PERSON" means an individual, a partnership, a corporation,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"REQUISITE PAPYRUS STOCKHOLDER APPROVAL" means the
affirmative vote of the holders of a majority of Papyrus Shares in
favor of this Agreement and the Merger.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for taxes
not yet due and payable or for taxes that the taxpayer is contesting
in good faith through appropriate proceedings, (c) purchase money
liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of
Business and not incurred in connection with the borrowing of money.
"SOPHISTICATED STOCKHOLDERS" has the meaning set forth in
Section 2.4(f).
"SUBSIDIARY" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the
common stock or has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
"SURVIVING CORPORATION" has the meaning set forth in Section
2.1 below.
"UNQUALIFIED STOCKHOLDER" has the meaning set forth in
Section 2.4(f).
"UTAH BUSINESS CORPORATION LAW" means the Utah Revised
Business Corporation Act as set forth in Utah Code Annotated,
Section 16-10a-1 et seq., as amended.
ARTICLE 2.
BASIC TRANSACTION
2.1 The Merger. On and subject to the terms and
conditions of this Agreement, Papyrus will merge with and into
Merger Sub (the "Merger") at the Effective Time. Merger Sub shall
be the corporation surviving the Merger (the "Surviving Corporation").
2.2 The Closing. This Agreement is executed on September
10, 1998. The actions described in Section 2.3 and the delivery of
the Merger Shares and the Cash Payment as defined in Section 2.4(e),
below, are referred to herein as the Closing. The Closing of the
transactions contemplated by this Agreement shall take place at the
offices of Papyrus, or such other place as the parties may mutually
agree, commencing at 9:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions
the respective Parties will take at the Closing itself) or such
other date as the Parties may mutually determine (the "Closing
Date"); provided, however, that the Closing Date shall be no later
than October 15, 1998.
2.3 Actions at the Closing. At the Closing, (i) Papyrus
will deliver to Buyer the various certificates, instruments, and
documents required to be delivered hereunder, (ii) Buyer will
deliver to Papyrus the various certificates, instruments, and
documents required to be delivered hereunder, (iii) Merger Sub and
Papyrus will file with the Secretary of State of the State of
Pennsylvania and the Utah Department of Commerce, Division of
Corporations and Commercial Code, a Certificate of Merger in the
form attached hereto as Exhibit A (the "Certificate of Merger"), and
(iv) Buyer will deliver to the Exchange Agent in the manner provided
below in this Section 2 the certificates evidencing Buyer Shares
issued in the Merger.
2.4 Effect of Merger.
(a) General. The Merger shall become effective at the
time (the "Effective Time") Merger Sub and Papyrus file the
Certificate of Merger with the Secretary of State of the State of
Pennsylvania and the Utah Department of Commerce, Division of
Corporations and Commercial Code. The Merger shall have the effect
set forth in the Pennsylvania Business Corporation Law and the Utah
Business Corporation Act. The Surviving Corporation may, at any
time after the Effective Time, take any action (including executing
and delivering any document) in the name and on behalf of either
Merger Sub or Papyrus in order to carry out and effectuate the
transactions contemplated by this Agreement.
(b) Articles of Incorporation. The Articles of
Incorporation of Merger Sub in effect at and as of the Effective
Time will remain the Articles of Incorporation of the Surviving
Corporation without any modification or amendment in the Merger.
(c) Bylaws. The Bylaws of Merger Sub in effect at and as
of the Effective Time will remain the Bylaws of the Surviving
Corporation without any modification or amendment in the Merger.
(d) Directors and Officers. The directors and officers
of Merger Sub in office at and as of the Effective Time will remain
the directors and officers of the Surviving Corporation (retaining
their respective positions and terms of office).
(e) Conversion of Papyrus Shares. At and as of the
Effective Time, and without any further action by any of the Papyrus
Stockholders, subject to Section 2.4(f), each Papyrus Share shall be
converted into the right to receive (i) that number of validly
issued, fully paid and nonassessable restricted Buyer Shares
("Merger Shares"), which equals the amount obtained by dividing (A)
the quotient of (a) $1,260,000 divided by (b) the Closing Price, by
(B) the number of outstanding Papyrus Shares (the "Exchange Ratio");
and (ii) cash in the amount of $540,000 divided by the number of
outstanding Papyrus Shares (the "Cash Payment"). The Cash Payment
will be evidenced by the promissory note or notes of Buyer in the
form attached hereto as Exhibit C, each a "Buyer Note," in the
principal amount of $180,000 and cash, payable by wire transfer or
immediately available funds totaling $360,000. "Closing Price"
shall mean the average of the average closing "bid" price of a Buyer
Share as reported on the Nasdaq SmallCap Market for the thirty (30)
trading days immediately prior to the date one business day before
the Closing Date. No Papyrus Share shall be deemed to be
outstanding or to have any rights other than those set forth in this
Section 2.4 after the Effective Time. The aggregate value of
consideration (Merger Shares and Cash Payment) exchanged by Buyer
for the Papyrus Shares will not exceed $1,800,000.
(f) Restrictions. Notwithstanding Section 2.4(e), Buyer
shall offer, sell, issue or deliver Merger Shares only to Papyrus
Stockholders who are (i) not "U.S. Persons" as that term is defined
in Regulation S, promulgated under the Securities Act, or (ii) in
Buyer's sole discretion, "accredited investors" as that term is
defined in Regulation D promulgated under the Securities Act, and
who have, either alone or with a designated purchaser
representative, such knowledge and experience in financial and
business matters that he or it is capable of evaluating the merits
and risks of exchanging his or its Papyrus Shares for Merger Shares
(each an "Unqualified Stockholder"). Additionally, Buyer shall not
offer, sell, issue or deliver Merger Shares to more than 35 Papyrus
Stockholders who are not accredited investors but who have, either
alone or with their purchaser representatives, such knowledge and
experience in financial and business matters that they are capable
of evaluating the merits and risks of exchanging their Papyrus
Shares for Merger Shares ("Sophisticated Stockholders"). If at
Closing Buyer determines there are any Unqualified Stockholders or
more than 35 Sophisticated Stockholders, Buyer shall:
(i) rank all Sophisticated Stockholders according
to the extent of their respective percentage ownership of Papyrus
Shares, and in accordance with Sections 2.4(e) and 2.4(l) issue and
deliver Merger Shares and Cash Payment to only the 35 Sophisticated
Stockholders who own the largest percentages of the total number of
outstanding Papyrus Shares at Closing; and
(ii) deliver, in accordance with Section 2.4(l), to
each Sophisticated Stockholder who does not receive payment under
Section 2.4(f)(i) and to all Unqualified Stockholders the following
consideration: (1) the Cash Payment, and (2) additional cash
consideration in an amount that shall be determined by multiplying
(a) the number of Merger Shares such Papyrus Stockholders otherwise
would be eligible to receive by (b) the Closing Price. Such
additional cash consideration will reduce the number of Buyer Shares
required to be included in the Merger.
(g) Capital Stock of Merger Sub. At the Effective Time,
each share of common stock of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid
and nonassessable share of common stock of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
(h) Adjustments to Exchange Ratio. The Exchange Ratio
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 Buyer Shares or Papyrus
Shares), reorganization, recapitalization or other like change with
respect to Buyer Shares or Papyrus Shares occurring after the date
hereof and prior to the Effective Time.
(i) Fractional Shares. No fraction of a Merger Share
will be issued, but in lieu thereof, and to the extent not waived in
writing, each holder of Papyrus Shares who otherwise would be
entitled to a fraction of a Merger Share (after aggregating all
fractional Merger Shares to be received by such person) shall
receive from Buyer an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii)
the Closing Price. The fractional share interests of each Papyrus
Stockholder shall be aggregated, so that no Papyrus Stockholder
shall receive cash in respect of fractional share interests in an
amount greater than the value of one full Merger Share.
(j) Dissenters' Rights. Dissenting Papyrus Shares
("Dissenting Shares"), if any, shall not be converted into the
Merger Consideration but shall instead be converted into the right
to receive such consideration as may be determined to be due with
respect to such Dissenting Shares pursuant to the Pennsylvania
Business Corporation Law. Papyrus shall give Buyer prompt notice of
any demand received by Papyrus to require Papyrus to purchase shares
of outstanding Papyrus Shares, and Buyer shall have the right to
direct and participate in all negotiations and proceedings with
respect to such demand. Papyrus agrees that, except with the prior
written consent of Buyer, or as required under the Pennsylvania
Business Corporation Law, it will not voluntarily make any payment
with respect to, or settle or offer to settle, any such purchase
demand. Each holder of Dissenting Shares ("Dissenting Stockholder")
who, pursuant to the provisions of the Pennsylvania Business
Corporation Law, becomes entitled to payment of the fair value for
Dissenting Shares shall receive payment therefor (but only after the
value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any
Dissenting Shares shall lose their status as Dissenting Shares,
Buyer shall issue and deliver, upon surrender by such Dissenting
Stockholder of a certificate or certificates representing shares of
Papyrus Shares, the Merger Consideration to which such stockholder
would otherwise be entitled under this Section 2.4 and the
Certificate of Merger less the Merger Consideration allocable to
such stockholder that has been deposited in the Escrow Fund (as
defined below) in respect of such Papyrus Shares pursuant to Article 7.
(k) Certificate Legends. When issued as contemplated by
this Agreement, the Merger Shares and the Buyer Note(s) shall not
have been registered and shall be characterized as "restricted
securities" under the federal securities laws, and under such laws
such shares may be resold without registration under the Securities
Act, only in certain limited circumstances. Each certificate
evidencing Merger Shares shall bear a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SHARES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE ACT OR AN
OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO BUYER THAT
SUCH REGISTRATION IS NOT REQUIRED.
and any additional legends required by state securities laws. The
Buyer Note(s) will bear a similar legend.
(l) Procedure for Payment.
(i) Immediately after the Effective Time Buyer
will furnish to Durham, Evans, Jones & Pinegar, P.C. (the "Exchange
Agent") (A) stock certificates (issued in the names of the Papyrus
Stockholders or their nominees) representing that number of whole
Merger Shares issuable to the Papyrus Stockholders equal to the
product of (I) the Exchange Ratio times (II) the number of
outstanding Papyrus Shares held of record by each Papyrus
Stockholder, less the number of Merger Shares to be deposited in the
Escrow Fund on such holder's behalf pursuant to Article 7 hereof,
and subject to any adjustment in such number resulting from Section
2.4(f), and (B) checks representing presently available funds
payable to the Papyrus Stockholders in amounts equal to the sum of
(1) cash (without interest) in the amount of the Cash Payment which
such holder has the right to receive in accordance with Section
2.4(e) in respect of Papyrus Shares formerly evidenced by such
tendered certificate, (2) any dividends or other distributions to
which such holder is entitled pursuant to Section 2.4(m), (3) cash
(without interest) in respect of fractional shares as provided in
Section 2.4(i), and (4) any additional cash payment payable to any
Unqualified Stockholder or Sophisticated Stockholder pursuant to
Section 2.4(f), and (C) the Buyer Note(s) (collectively such Merger
Shares, the Buyer Note(s) and cash consideration, "Merger
Consideration").
(ii) Buyer shall cause the Exchange Agent to mail a
letter of transmittal (with instructions for its use) in the form
attached hereto as Exhibit B, together with such other customary
documents as may be required pursuant to such instructions,
including without limitation, a Form W-9 or W-8 to each record
holder of outstanding Papyrus Shares for the holder to use in
surrendering the certificates which represent his or its Papyrus
Shares in exchange for the Merger Consideration payable to such holder.
(iii) Upon surrender to the Exchange Agent of a
Papyrus Certificate for cancellation, together with such letter of
transmittal and other documents, duly completed and validly executed
in accordance with the instructions thereto, the holder of such
Papyrus Shares shall be entitled to receive in exchange therefor the
Merger Consideration payable to such Holder. Upon delivery of such
payment to the Papyrus Stockholder, the Papyrus Certificate so
surrendered shall forthwith be canceled. Until so surrendered, each
outstanding Papyrus Certificate that, prior to the Effective Time,
represented Papyrus Shares will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full Merger
Shares and the cash consideration described in this Section
2.4(l)(iii).
(iv) If any Papyrus Certificates shall have been
lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Papyrus Certificates,
upon the making of an affidavit of that fact by the holder thereof,
such Merger Consideration as may be required pursuant to this
Section 2.4.
(v) Any portion of the Merger Consideration
delivered to the Exchange Agent which remains undistributed to the
Papyrus Stockholders one hundred eighty (180) days after the
Effective Time shall be delivered to Buyer, upon demand, and any
Papyrus Stockholders who have not previously complied with this
Section 2.4 shall thereafter look only to Buyer for payment of their
claim for the Merger Consideration.
(vi) Notwithstanding anything to the contrary in
this Agreement, none of the Exchange Agent, the Surviving
Corporation or any party hereto shall be liable to any person for
any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(vii) Buyer shall pay all charges and expenses of
the Exchange Agent.
(m) Distributions on Merger Shares. Buyer will not pay
any dividend or make any distribution on Merger Shares (with a
record date at or after the Effective Time) to any record holder of
outstanding Papyrus Shares until the holder surrenders for exchange
his or its certificates which represented Papyrus Shares. Buyer
instead will pay the dividend or make the distribution to the
Exchange Agent in trust for the benefit of the holder pending
surrender and exchange. In no event, however, will any holder of
outstanding Papyrus Shares be entitled to any interest or earnings
on the dividend or distribution pending receipt.
(n) Transfers of Ownership. At the Effective Time, the
stock transfer books of Papyrus shall be closed and there shall be
no further registration of transfers of capital stock of Papyrus
thereafter on the records of Papyrus. If any certificate for Merger
Shares is to be issued in a name other than in which the Papyrus
Certificate surrendered in exchange therefor is registered, it will
be a condition of the issuance thereof that the Papyrus 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 Buyer or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for
Merger Shares in any name other than that of the registered holder
of the Papyrus Certificate surrendered, or established to the
satisfaction of Buyer or any agent designated by it that such tax
has been paid or is not payable.
(o) Dissenting Shares. The provisions of this Section
2.4 shall also apply to Dissenting Shares that lose their status as
such, except that the obligations of Buyer under this Section 2.4
shall commence on the date of loss of such status and the holder of
such shares shall be entitled to receive in exchange for such shares
the Merger Consideration to which such holder is entitled pursuant
to Section 2.4(e).
(p) Escrow. As soon as practicable after the Effective
Time, and subject to and in accordance with the provisions of
Article 7, Buyer shall cause to be distributed to the Escrow Agent
(as defined in Section 7.1 hereof) a certificate or certificates
representing the Escrow Shares (which shall be registered in the
name of the Escrow Agent as nominee for the holders of Papyrus
Certificates canceled pursuant to this Section 2.4). Such shares
shall be beneficially owned, pro rata by the Papyrus Stockholders
who receive Merger Consideration, and such shares shall be held in
escrow and shall be available to compensate Buyer for certain
damages as provided in Article 7. To the extent not used for such
purposes, such shares shall be released, all as provided in Article 7.
(q) No Further Ownership Rights in Papyrus Shares. The
Merger Consideration delivered upon the surrender for exchange of
Papyrus Shares in accordance with the terms hereof (including any
dividends, distributions or cash paid in lieu of fractional shares)
shall be deemed to have been issued in full satisfaction of all
rights pertaining to such Papyrus Shares, and there shall be no
further registration of transfers on the records of the Surviving
Corporation of Papyrus Shares which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Papyrus
Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this
Section 2.4.
(r) Tax Consequences. It is intended by the parties
hereto that the Merger shall constitute a tax-free reorganization
within the meaning of Section 368(a) of the Code.
(s) Taking of Necessary Action; Further Action. Each of
Buyer, Papyrus and Merger Sub will take all such reasonable and
lawful action as may be necessary or desirable in order to
effectuate the Merger in accordance with this Agreement as promptly
as possible. If, at any time after the Effective Time, any 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 Papyrus and Merger Sub, the officers and
directors of Papyrus and Merger Sub are fully authorized in the name
of their respective corporations or otherwise to take, and will
take, all such lawful and necessary action, so long as such action
is not inconsistent with this Agreement.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF PAPYRUS
Papyrus represents and warrants to Buyer and Merger Sub that the
statements contained in this Article 3 are correct and complete as
of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date
were substituted for the date of this Agreement throughout this
Article 3), except as set forth in the disclosure schedule of
Papyrus accompanying this Agreement and initialed by the Parties
(the "Papyrus Disclosure Schedule"). The Papyrus Disclosure
Schedule will be arranged and numbered in paragraphs corresponding
to the lettered and numbered paragraphs contained in this Article 3.
3.1 Organization and Standing. Papyrus is a corporation
duly organized, validly existing and in good standing under the laws
of the State of Pennsylvania with full power and authority
(corporate and other) to own, lease, use and operate its properties
and to conduct its business as and where now owned, leased, used,
operated and conducted. Papyrus is duly qualified to do business
and in good standing in each jurisdiction in which the nature of the
business conducted by it or the property it owns, leases or operates
makes qualification necessary, except where the failure to be so
qualified or in good standing in such jurisdiction would not have a
Material Adverse Effect on Papyrus. Papyrus is not in default in
the performance, observance or fulfillment or otherwise in violation
of any provision of its Certificate of Incorporation, as amended and
restated (the "Papyrus Certificate"), or its Bylaws, as in effect on
the date hereof (the "Papyrus Bylaws"). Papyrus has heretofore
furnished to Buyer a complete and correct copy of the Papyrus
Certificate and the Papyrus Bylaws.
3.2 Subsidiaries. Papyrus does not own, directly or
indirectly, any equity or other ownership interest in any
corporation, partnership, joint venture or other entity or
enterprise. Except as set forth in Section 3.2 to the Papyrus
Disclosure Schedule, Papyrus is not subject to any obligation or
requirement to provide funds to or make any investment (in the form
of a loan, capital contribution or otherwise) in any corporation,
partnership, joint venture or other entity or enterprise.
3.3 Corporate Power and Authority. Papyrus has all
requisite corporate power and authority to enter into this Agreement
and, subject to authorization and adoption of the Merger and the
transactions contemplated hereby by Papyrus Stockholders, to
consummate the transactions contemplated by this Agreement. 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 Papyrus, subject to
authorization and adoption of the Merger and the transactions
contemplated hereby by the Papyrus Stockholders. The Board of
Directors of Papyrus has (i) unanimously approved this Agreement and
the Merger, (ii) determined that in its opinion the Merger is in the
best interests of the Papyrus Stockholders and is on terms that are
fair to the Papyrus Stockholders and (iii) recommended that the
Papyrus Stockholders approve this Agreement and the Merger. This
Agreement has been duly executed and delivered by Papyrus and
constitutes the legal, valid and binding obligation of Papyrus,
enforceable against Papyrus in accordance with its terms.
3.4 Capitalization of Papyrus. As of the date hereof,
Papyrus' authorized capital stock consists solely of (a) 100,000
shares of common stock, no par value per share ("Papyrus Shares"),
of which (i) ______ shares are issued and outstanding, (ii) no
shares are issued and held in treasury (which does not include the
shares reserved for issuance set forth in clauses (iii) through (iv)
below), (iii) ________ shares are reserved for issuance upon the
conversion of outstanding warrants, (iv) ________ shares are
reserved for issuance upon the exercise or conversion of outstanding
options granted or issued by Papyrus (which have an average weighted
exercise price of $___________ per share). Each outstanding share
of Papyrus capital stock is duly authorized and validly issued,
fully paid and nonassessable, and has not been issued in violation
of any preemptive or similar rights. Other than as set forth in the
first sentence hereof or in Section 3.4 to the Papyrus Disclosure
Schedule, there are no outstanding subscriptions, options, warrants,
puts, calls, agreements, understandings, claims or other commitments
or rights of any type relating to the issuance, sale or transfer of
any securities of Papyrus, nor are there outstanding any securities
which are convertible into or exchangeable for any shares of capital
stock of Papyrus, and Papyrus has no obligation of any kind to issue
any additional securities or to pay for securities of Papyrus or any
predecessor. Except as set forth in Section 3.4 to the Papyrus
Disclosure Schedule, Papyrus has not agreed to register any
securities under the Securities Act or under any state securities
law or granted registration rights to any person or entity. There
are no other contracts, commitments or agreements relating to
voting, purchase or sale of capital stock of Papyrus (i) between or
among Papyrus and the holders of Papyrus' capital stock, and (ii) to
Papyrus' Knowledge, between or among the holders of Papyrus' capital
stock.
3.5 Conflicts; Consents and Approvals. Neither the
execution and delivery of this Agreement by Papyrus nor the
consummation of the transactions contemplated hereby will:
(a) conflict with, or result in a breach of any provision
of, the Papyrus Certificate or the Papyrus Bylaws;
(b) violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with
the giving of notice, the passage of time or otherwise, would
constitute a default) under, or entitle any party (with the giving
of notice, the passage of time or otherwise) to terminate,
accelerate, modify or call a default under, or result in the
creation of any lien, security interest, charge or encumbrance upon
any of the properties or assets of Papyrus under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, contract, undertaking, agreement, lease or
other instrument or obligation to which Papyrus is a party;
(c) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Papyrus; or
(d) require any action or consent or approval of, or
review by, or registration or filing by Papyrus or any of its
affiliates with, any third party or any governmental entity, other
than (i) authorization of the Merger and the transactions
contemplated hereby by Papyrus Stockholders, (ii) any actions
required under federal and state securities laws as are contemplated
by this Agreement and (iii) consents or approvals of any
governmental entity set forth in Section 3.5 to the Papyrus
Disclosure Schedule; except in the case of clause (b) , (c) and (d)
for any of the foregoing that are set forth in Section 3.5 of the
Papyrus Disclosure Schedule or that would not individually or in the
aggregate have a Material Adverse Effect on Papyrus or upon the
ability of the parties to consummate the transactions contemplated
hereby.
3.6 Absence of Certain Changes.
Except as set forth in Section 3.6 to the Papyrus Disclosure
Schedule, since June 30, 1998, there has not been and Papyrus has
not committed and has not negotiated to do any of the following:
(a) Any change in the business, operations, assets,
properties, customer base, prospects, rights or condition (financial
or otherwise) of Papyrus or any occurrence, circumstance, or
combination thereof which reasonably could be expected to result in
a Material Adverse Effect on Papyrus;
(b) Any declaration, setting aside or payment of any
dividend or any distribution (in cash or in kind) to any stockholder
of Papyrus, or any direct or indirect redemption, purchase or other
acquisition by Papyrus of any of its capital stock or any options,
warrants, rights or agreements to purchase or acquire such stock;
(c) Any increase in amounts payable by Papyrus to or for
the benefit of, or committed to be paid by Papyrus to or for the
benefit of, any stockholder, director, officer or other consultant,
agent or employee of Papyrus whose total annual compensation exceeds
$50,000 or any relatives of such person, or any increase in any
benefits granted under any bonus, stock option, profit-sharing,
pension, retirement, severance, deferred compensation, group health,
insurance, or other direct or indirect benefit plan, payment or
arrangement made to, with or for the benefit of any such person
(except in the Ordinary Course of Business, consistent with past
practice);
(d) Any borrowing or agreement to borrow funds by Papyrus
or any incurring by Papyrus of any other obligation or liability
(contingent or otherwise), except liabilities incurred in the
Ordinary Course of Business (consistent with past practices), or any
endorsement, assumption or guarantee of payment or performance of
any loan or obligation of any other person by Papyrus;
(e) Any material change in Papyrus' method of doing
business or any material change in its accounting principles or
practices or its method of application of such principles or practices;
(f) Any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be
imposed on or with respect to the property or assets of Papyrus
other than in Ordinary Course of Business, consistent with past
practice;
(g) Any sale, lease or other disposition of, or any
agreement to sell, lease or otherwise dispose of any of the
properties or assets of Papyrus, other than sales in the usual and
Ordinary Course of Business for fair equivalent value to persons
other than directors, officers, stockholders, or other affiliates of
Papyrus;
(h) Any purchase of or any agreement to purchase assets
(other than purchases in the Ordinary Course of Business consistent
with past practices) for an amount in excess of $10,000 for any one
purchase or $50,000 for all such purchases made by Papyrus or any
lease or any agreement to lease, as lessee, any capital assets with
payments over the term thereof to be made by Papyrus exceeding an
aggregate of $50,000;
(i) Any loan or advance made by Papyrus to any person
other than loans made to Papyrus' customers in the Ordinary Course
of Business consistent with past practices not exceeding $10,000, in
the aggregate, to any customer;
(j) Any modification, waiver, change, amendment, release,
rescission or termination of, or accord and satisfaction with
respect to, any material term, condition or provision of any
material contract, agreement, license or other instrument to which
Papyrus is a party, other than any satisfaction by performance in
accordance with the terms thereof in the usual and Ordinary Course
of Business;
(k) Any labor dispute or disturbance having a Material
Adverse Effect on Papyrus, including without limitation the filing
of any petition or charge of unfair labor practice with any
governmental or regulatory authority, efforts to effect a union
representation election, actual or threatened employee strike, work
stoppage or slow down;
(l) Any grant of any license or sublicense of any rights
under or with respect to any Intellectual Property, or any other
transfer or grant of a right under, in or to Intellectual Property
other than transfers or grants in the Ordinary Course of Business;
(m) Any change made or authorized in the Papyrus
Certificate or Papyrus Bylaws;
(n) Any issuance, sale or other disposal by Papyrus of
any of its capital stock, or any grant of any options, warrants, or
other rights to purchase or obtain (including upon conversion,
exchange, or exercise) any of its capital stock;
(o) Any damage, destruction, or loss (whether or not
covered by insurance) to Papyrus' property;
(p) Any employment contract or collective bargaining
agreement, written or oral, or modified the terms of any existing
such contract or agreement; or
(q) Any other material occurrence, event, incident,
action, failure to act, or transaction outside the Ordinary Course
of Business involving Papyrus.
3.7 Financial Statements.
(a) Papyrus has furnished to Buyer balance sheets of
Papyrus as of June 30, 1998, 1997 and 1996, and the related
statements of income, changes in stockholders' equity, and cash
flows for the fiscal years then ended, including, in each case, the
related notes (collectively, the "Papyrus Statements"). The Papyrus
Statements have been prepared from and are in accordance with the
books and records of Papyrus and fairly present the financial
condition of Papyrus as of the date stated and the results of
operations of Papyrus for the periods then ended in accordance with
such practices.
(b) Papyrus has furnished to Buyer the unaudited balance
sheet of Papyrus as of the last calendar month ending prior to the
Closing Date and the related statements of income and cash flows for
the period beginning July 1, 1998 and then ended (the "Papyrus
Interim Statements"). The Papyrus Interim Statements have been
prepared from and in accordance with the books and records of
Papyrus and fairly present the financial condition of Papyrus as of
such dates and the results of operations of Papyrus for such
periods.
3.8 Taxes.
(a) Papyrus has timely paid or caused to be timely paid
all Taxes required to be paid by it through the date hereof and
prior to the Closing Date shall have paid or caused to be paid all
Taxes required to be paid by it through the Closing Date. Papyrus
has timely filed or caused to be filed timely all Tax Returns
required to be filed by it through the date hereof and prior to the
Closing Date shall have timely filed or caused to be filed all Tax
Returns required to be filed by it through the Closing Date. All
such Tax Returns that have been filed are true complete and correct.
Neither the IRS nor any other governmental entity is now auditing
or asserting or, to the Knowledge of Papyrus, threatening to assert
against Papyrus, any deficiency or claim for additional Taxes.
Papyrus currently is not the beneficiary of any extension of time
within which to file any Tax Return. No claim has ever been made by
any authority in a jurisdiction where Papyrus does not file Tax
Returns that it is or may be subject to taxation by that
jurisdiction. There are no Security Interests on any of the assets
of Papyrus that arose in connection with any failure (or alleged
failure) to pay any Tax. No Papyrus director or officer (or
employee responsible for Tax matters) of Papyrus expects any
authority to assess any additional Taxes for any period for which
Tax Returns have been filed. Papyrus has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(b) Papyrus has delivered to Buyer correct and complete
copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by Papyrus
since 1994.
(c) Papyrus is not obligated by any contract, agreement
or other arrangement to indemnify any other person with respect to
Taxes. Papyrus is not now nor ever has been a party to or bound by
any tax sharing agreement or any agreement or arrangement (whether
or not written and including, without limitation, any arrangement
required or permitted by law) binding Papyrus which (i) requires
Papyrus to make any tax payment to or for the account of any other
person, (ii) affords any other person the benefit of any net
operating loss, net capital loss, investment tax credit, foreign tax
credit, charitable deduction or any other credit or tax attribute
which could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes) of Papyrus, (iii)
requires or permits the transfer or assignment of income, revenues,
receipts or gains to Papyrus, from any other person, or (iv)
otherwise requires Papyrus to indemnify any other person in respect
of Taxes.
(d) Papyrus has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or
other third party.
(e) "Tax Returns" means returns, information returns,
reports, forms and other documents (including, any related or
supporting information) required to be filed with any governmental
authority of the United States or any other jurisdiction responsible
for the imposition, administration or collection of Taxes.
(f) "Taxes" means (i) all Taxes (whether federal, state,
local or foreign) based upon or measured by income and any other tax
whatsoever, including, without limitation, gross receipts,
estimated, profits, sales, use, occupation, value added, ad valorem,
transfer, franchise, withholding, payroll, employment, excise, or
property Taxes, together with any interest or penalties, additions
to Taxes or additional amounts, imposed with respect thereto, (ii)
any liability for payments of amounts of Taxes described in the
immediately preceding clause (i) as a result of being a "transferee"
(within the meaning of Section 6901 of the Code or any other
applicable law) of another person, successor or a member of any
affiliated, consolidated or combined group and (iii) any obligations
under any agreements or arrangements with respect to any Taxes
described in clause (i) above.
3.9 Compliance with Law; Products. To Papyrus'
Knowledge, except as set forth in Section 3.9 to the Papyrus
Disclosure Schedule, Papyrus is in compliance in all material
respects with all applicable laws, statutes, orders, rules,
regulations, policies or guidelines promulgated, or judgments,
decisions or orders entered by any governmental authority
(collectively, "Applicable Laws") relating to Papyrus or its
business or properties. Papyrus has heretofore made available to
Buyer copies of all material correspondence in Papyrus' possession
from and to the Occupational Safety and Health Administration and
any other governmental authority and inspectors.
3.10 Intellectual Property.
(a) Papyrus owns and has good and marketable title to, or
is licensed or otherwise possesses legally enforceable rights to use
(free and clear of any lien, encumbrance or security interest), all
patents, patent applications, trademarks, trade names, service
marks, copyrights (whether registered or unregistered), and any
applications therefor, maskworks, maskwork applications, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs including all
object code, source code, configurations, routines and algorithms
contained therein with annotations and related documentation,
together with all alterations, modifications, and configurations
therein in all forms of expression, including, but not limited to,
the source code, object code, flow charts, mock diagrams, manuals
and all other documentation no matter how stored, transmitted, read
or utilized, or applications (in both source code and object or
binary code form), client lists and tangible or intangible
proprietary information or material ("Intellectual Property") that
are used or currently proposed to be used in the business of Papyrus
as currently conducted or as proposed to be conducted by Papyrus,
including without limitation the pen-voice technology, signature
recognition technology and handwriting recognition technology,
whether in development or completed, except to the extent that the
failure to have such rights has not had and would not reasonably be
expected to have a Material Adverse Effect on Papyrus. Papyrus is
the exclusive owner of all Intellectual Property. Each item of
Intellectual Property owned or used by Papyrus immediately prior to
the Closing hereunder will be owned or available for use by Buyer or
Merger Sub on identical terms and conditions immediately subsequent
to the Closing hereunder.
(b) Section 3.10 the Papyrus Disclosure Schedule lists
(i) all patents and patent applications and all registered and
unregistered trademarks, trade names and service marks, registered
and unregistered copyrights, and maskworks, included in the
Intellectual Property, including the jurisdictions in which each
such Intellectual Property right has been issued or registered or in
which any application for such issuance and registration has been
filed, (ii) all licenses, sublicenses and other agreements as to
which Papyrus is a party and pursuant to which any person is
authorized to use any Intellectual Property, and (iii) all licenses,
sublicenses and other agreements as to which Papyrus is a party and
pursuant to which Papyrus is authorized to use any third party
patents, trademarks, copyrights, know-how or other Intellectual
Property, including software ("Third Party Intellectual Property
Rights") which are incorporated in, are, or form a part of any
Papyrus product or are used in the manufacture of any Papyrus product.
(c) There has not been and there is not now any
unauthorized use, disclosure, infringement or misappropriation of
any Intellectual Property rights of Papyrus, any trade secret
material to Papyrus, or any Intellectual Property right of any third
party to the extent licensed by or through Papyrus, by any third
party, including any employee or former employee of Papyrus.
Papyrus has not entered into any agreement to indemnify any other
person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in sales
agreements arising in the Ordinary Course of Business. There are no
royalties, fees or other payments payable by Papyrus to any person
by reason of the ownership, use, sale or disposition of Intellectual
Property.
(d) Papyrus is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its
obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Intellectual Property
or Third Party Intellectual Property Rights, the breach of which
would have a Material Adverse Effect on Papyrus.
(e) All patents, registered trademarks, service marks and
copyrights held by Papyrus are valid and subsisting. Papyrus is not
infringing, misappropriating or making unlawful use of, and, except
to the extent disclosed in Section 3.10 to the Papyrus Disclosure
Statement, has not received any notice or any communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of any proprietary
asset owned or used by any third party. Except to the extent
disclosed in Section 3.10 to the Papyrus Disclosure Schedule,
Papyrus (i) has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks,
service marks, copyrights or violation of any trade secret or other
proprietary right of any third party; and (ii) has not brought any
action, suit or proceeding for infringement of Intellectual Property
or breach of any license or agreement involving Intellectual
Property against any third party.
(f) All current and former officers, employees and
consultants of Papyrus have executed and delivered to Papyrus an
agreement (containing no exceptions or exclusions from the scope of
its coverage) regarding the protection of proprietary information
and the assignment to Papyrus of any Intellectual Property arising
from services performed for Papyrus by such persons, the form or
forms of which have been supplied to Buyer and all current and
former consultants and independent contractors to Papyrus involved
in the development, modification, marketing and servicing of
Papyrus' technology and/or software have executed and delivered to
Papyrus an agreement (containing no exceptions or exclusions from
the scope of its coverage) in the form of which has been delivered
to Buyer. To Papyrus' Knowledge, no employee or independent
contractor of Papyrus is in violation of any term of any patent
disclosure agreement or employment contract or any other contract or
agreement relating to the relationship of any such employee or
independent contractor with Papyrus.
(g) Papyrus has taken all commercially reasonable and
customary measures and precautions necessary to protect and maintain
the confidentiality of all Intellectual Property (except such
Intellectual Property the value of which would be unimpaired by
public disclosure) and otherwise to maintain and protect the full
value of all proprietary assets. All use, disclosure or
appropriation of Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential
Information") owned by Papyrus by or to a third party has been
pursuant to the terms of a written agreement between Papyrus and
such third party. All use, disclosure or appropriation of
Confidential Information not owned by Papyrus has been pursuant to
the terms of a written agreement between Papyrus and the owner of
such Confidential Information, or is otherwise lawful.
(h) A complete list of Papyrus' proprietary software
("Papyrus Software"), together with a brief description, is set
forth in Section 3.10 of the Papyrus Disclosure Schedule. The
Papyrus Software conforms in all material respects with any
specification, documentation, performance standard, representation
or statement provided with respect thereto by or on behalf of Papyrus.
(i) No Intellectual Property is subject to any
outstanding order, judgment, decree, stipulation or agreement
restricting in any manner the licensing thereof by Papyrus. Papyrus
has not entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property.
Papyrus has not entered into any agreement granting any third party
the right to bring infringement actions with respect to, or
otherwise to enforce rights with respect to, any Intellectual
Property. Papyrus has the exclusive right to file, prosecute and
maintain all applications and registrations with respect to
Intellectual Property.
(j) Except as set forth in Section 3.10 to the Papyrus
Disclosure Schedule, Papyrus has full title and ownership of, or has
all necessary licenses, permissions and other consents to use all
right, title and interest in and to all Intellectual Property or
other consents necessary and sufficient to enable Papyrus to (x) use
the Intellectual Property for its intended purpose, (y) fulfill its
obligations to Buyer hereunder, and (z) carry on its business,
without any infringement of any third party.
(k) Papyrus has received no written opinion or written
advice of counsel, express or implied, which is or could reasonably
be deemed to be, in conflict, contravention, or contradiction with
any or all of the foregoing representations and warranties in this
Section 3.10.
(l) No software developed by Papyrus or, to Papyrus'
knowledge developed by third parties contained in software developed
by Papyrus, included in the Intellectual Property contains any back
door, time bomb, drop dead device, or other software routine
designed to disable a computer program automatically with the
passage of time or under the positive control of any unauthorized
person, or, to Papyrus' knowledge, any virus, Trojan horse, worm, or
other software routines or hardware components designed to permit
unauthorized access, disable, erase, or otherwise harm software,
hardware, or data or to perform any other such actions.
(m) Papyrus does not have any Knowledge of any new
products, inventions, procedures, or methods of manufacturing or
processing that any competitors or other third parties have
developed which reasonably could be expected to supersede or make
obsolete any product or process of any of Papyrus.
3.11 Title to and Condition of Properties. Except as set
forth in Section 3.11 to the Papyrus Disclosure Schedule, Papyrus
has good, valid and indefeasible title to all of its assets and
properties of every kind, nature and description, tangible or
intangible, wherever located. Except as set forth in Section 3.11
to the Papyrus Disclosure Schedule, all such properties are owned
free and clear of all mortgages, pledges, liens, security interests,
encumbrances and restrictions of any nature whatsoever, including,
without limitation, (a) rights or claims of parties in possession;
(b) easements or claims of easements; (c) encroachments, overlaps,
boundary line or water drainage disputes or any other matters; (d)
any lien or right to a lien for services, labor or material
furnished; (e) special tax or other assessments; (f) options to
purchase, leases, tenancies, or land contracts; (g) contracts,
covenants, or reservations which restrict the use of such properties
and (h) violations of any Applicable Laws applicable to such
properties, except where such mortgages, pledges, liens, security
interests, encumbrances or restrictions could not reasonably be
likely to have a Material Adverse Effect on Papyrus. Papyrus owns
no real property. Section 3.11 to the Papyrus Disclosure Schedule
contains a complete and accurate list of the location of all real
property which is leased or operated by Papyrus. Except as set
forth in Section 3.11 to the Papyrus Disclosure Schedule, all
machinery and equipment and tangible personal property owned, leased
or used by Papyrus and material to the operation of its business are
reasonably suitable for the purpose or purposes for which they are
being used and are in good condition and repair, ordinary wear and
tear excepted.
3.12 Litigation. Except as set forth in Section 3.12 to
the Papyrus Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation (an "Action") pending or, to the
Knowledge of Papyrus, threatened against Papyrus or any officer or
director of Papyrus which, individually or in the aggregate, if
adversely determined, would have a Material Adverse Effect on
Papyrus. Papyrus is not subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate,
insofar as can be reasonably foreseen, could have a Material Adverse
Effect on Papyrus or a Material Adverse Effect on the ability of
Papyrus to consummate the transactions contemplated hereby.
3.13 Brokerage and Finder's Fees; Expenses. Neither
Papyrus nor any stockholder, director, officer or employee thereof,
has incurred or will incur on behalf of Papyrus, any brokerage,
finder's or similar fee in connection with the transactions
contemplated by this Agreement.
3.14 Employee Benefit Plans. Except as set forth in
Section 3.14 to the Papyrus Disclosure Schedule, and except for
medical benefit plans with respect to which the Company has made all
required contributions and has complied with all applicable laws,
the Company does not have or otherwise contribute to or participate
in any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974.
3.15 Contracts.
(a) Section 3.15 to the Papyrus Disclosure Schedule lists
all written or oral contracts, agreements, guarantees, leases and
executory commitments (each a "Contract") to which Papyrus is a
party and which fall within any of the following categories: (i)
Contracts not entered into in the Ordinary Course of Business of
Papyrus, (ii) joint venture, partnership and similar agreements,
(iii) Contracts which are service contracts or equipment leases
involving payments by Papyrus of more than $20,000 annually, (iv)
Contracts containing covenants purporting to limit the freedom of
Papyrus to compete in any line of business in any geographic area or
to hire any individual or group of individuals, (v) Contracts which
after the Effective Time would have the effect of limiting the
freedom of Buyer or its subsidiaries (other than Papyrus) to compete
in any line of business in any geographic area or to hire any
individual or group of individuals, including any Contracts with
distributors granting any exclusive rights, (vi) Contracts which
contain minimum purchase conditions or requirements or other terms
that restrict or limit the purchasing relationships of Papyrus or
its affiliates, or any customer, licensee or lessee thereof, (vii)
Contracts relating to any outstanding commitment for capital
expenditures in excess of $20,000, (viii) Contracts relating to the
lease or sublease of or sale or purchase of real or personal
property involving any annual expense or price in excess of $20,000
and not cancelable by Papyrus (without premium or penalty) within
one month, (ix) Contracts with any labor organization, (x)
indentures, mortgages, promissory notes, loan agreements, guarantees
of amounts in excess of $20,000, letters of credit or other
agreements or instruments of Papyrus or commitments for the
borrowing or the lending of amounts in excess of $20,000 by Papyrus
or providing for the creation of any charge, security interest,
encumbrance or lien upon any of the assets of Papyrus, (xi)
Contracts which are fixed price, capitation or other risk sharing
agreements with customers not cancelable by Papyrus (without premium
or penalty) within one month; (xii) Contracts involving annual
revenues or expenditures to the business of Papyrus in excess of
1.0% of Papyrus' annual revenues, (xiii) Contracts providing for
"earn-outs" or other contingent payments involving more than $10,000
over the term of the Contract; (xiv) any agreement concerning
confidentiality; (xv) any profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance, or
other material plan or arrangement for the benefit of its current or
former directors, officers, and employees.
(b) All such Contracts are valid and binding obligations
of Papyrus and, to the Knowledge of Papyrus, the valid and binding
obligation of each other party thereto, and will continue to be
legal, valid, binding, enforceable, and in full force and effect on
identical terms following the consummation of the transactions
contemplated. Neither Papyrus nor, to the Knowledge of Papyrus, any
other party thereto is in violation of or in default in any material
respect in respect of, nor has there occurred an event or condition
which with the passage of time or giving of notice (or both) would
constitute a material default under or permit the termination of,
any Contract.
(c) Except as set forth in Section 3.15 of the Papyrus
Disclosure Schedule or as contemplated by the transactions
contemplated hereby, there are no Contracts or other transactions
between Papyrus, on the one hand, and any (i) officer or director of
Papyrus, (ii) record or beneficial owner of five percent or more of
the voting securities of Papyrus or (iii) affiliate of any such
officer, director or beneficial owner, on the other hand.
3.16 Accounts Receivable. All accounts and notes
receivable (including lease and finance notes receivable) and
accrued interest receivable of Papyrus have arisen in the Ordinary
Course of Business and the accounts receivable reserves reflected on
the balance sheet included in the Papyrus Interim Statements are as
of such date.
3.17 Labor Matters. Except as set forth in Section 3.17
to the Papyrus Disclosure Schedule, Papyrus does not have any labor
contracts, collective bargaining agreements or employment or
consulting agreements with any persons employed by Papyrus or any
persons otherwise performing personal services primarily for Papyrus
(the "Papyrus Business Personnel"). Papyrus has not engaged in any
unfair labor practice with respect to Papyrus Business Personnel,
and there is no unfair labor practice complaint pending or, to the
Knowledge of Papyrus, threatened, against Papyrus with respect to
Papyrus Business Personnel. There is no labor strike, dispute,
slowdown or stoppage pending or, to the Knowledge of Papyrus,
threatened against Papyrus. Papyrus is in compliance with all
currently applicable laws and regulations respecting discrimination
in employment, terms and conditions of employment, wages, hours and
occupational safety and health and employment practices, except for
such noncompliance as has not and would not reasonably be expected
to have had a Material Adverse Effect on Papyrus, and is not engaged
in any unfair labor practice. There are no pending claims against
Papyrus under any workers' compensation plan or policy or for long
term disability. Papyrus has no material obligations under COBRA
with respect to any former employees or beneficiaries thereunder.
There are no proceedings pending or, to the Knowledge of Papyrus,
threatened, between Papyrus and its employees or former employees,
which proceedings have or could reasonably be expected to have a
Material Adverse Effect on Papyrus. There has been no claim against
Papyrus based on actual or alleged race, age, sex, disability or
other harassment or discrimination, or similar tortuous conduct,
nor, to Papyrus' Knowledge, is there any basis for such claim. In
addition, Papyrus has provided all employees with all relocation
benefits, stock options, bonuses and incentives, and all other
compensation earned up through the date of this Agreement.
3.18 Undisclosed Liabilities. Except (i) as and to the
extent disclosed or reserved against on the balance sheet of Papyrus
as of June 30, 1998, included in the Papyrus Interim Statements,
(ii) as incurred after the date thereof in the Ordinary Course of
Business consistent with prior practice and not prohibited by this
Agreement or (iii) as set forth in Section 3.18 to the Papyrus
Disclosure Schedule or elsewhere in this Agreement, Papyrus does not
have any liabilities or obligations of any nature, whether known or
unknown, absolute, accrued, contingent or otherwise and whether due
or to become due, that, individually or in the aggregate, have or
could be reasonably likely to have a Material Adverse Effect on
Papyrus.
3.19 Operation of Papyrus' Business; Relationships.
(a) Papyrus believes that the relationships of Papyrus
with its customers, suppliers, distributors and value added
resellers (including, without limitation, data suppliers,
Intellectual Property licensors and product distributors) are
satisfactory and that the execution of this Agreement, the Merger
and the transactions contemplated hereby will not have a Material
Adverse Effect on the relationships of Papyrus with such customers
or suppliers.
(b) Papyrus is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions,
consents, certificates, approvals and orders necessary to own, lease
and operate its properties and to carry on its business as it is now
being conducted (collectively, the "Papyrus Permits") except where
the failure to possess such Papyrus Permits, individually or in the
aggregate, could not reasonably be expected to have a Material
Adverse Effect on Papyrus, and there is no action pending or, to the
Knowledge of Papyrus, threatened regarding any of the Papyrus
Permits. To Papyrus' Knowledge, Papyrus is not in conflict with, or
in default or violation of any of the Papyrus Permits in any
material respect, except for any such conflicts, defaults or
violations which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Papyrus.
(c) As of the date hereof, no customer which individually
accounted for more than 5% of Papyrus' gross revenues during the 12
month period preceding the date hereof and no supplier of Papyrus,
has canceled or otherwise terminated, or made any written threat to
Papyrus to cancel or otherwise terminate its relationship with
Papyrus or has at any time on or after June 30, 1997 decreased
materially its services or supplies to Papyrus in the case of any
such supplier, or its usage of the services or products of Papyrus
in the case of such customer, and to Papyrus' Knowledge, no such
supplier or customer has indicated either orally or in writing that
it will cancel or otherwise terminate its relationship with Papyrus
or to decrease materially its services or supplies to Papyrus or its
usage of the services or products of Papyrus, as the case may be.
(d) During the period from the date of execution of this
Agreement until the Closing, Papyrus and each of its Affiliates
shall continue to conduct its operations in the ordinary course and
in the manner in which they have been heretofore conducted. Papyrus
will use its best efforts to preserve intact its present business
organization, to keep available the services of its present key
employees, to preserve its present relationships with persons having
significant business relations with it, to maintain all of its
properties in customary repair and condition and to maintain
insurance policies in respect of its business and properties
consistent with current practice. Papyrus and each Affiliate agrees
not to do and Papyrus Stockholders will not request, permit or cause
Papyrus or any Affiliate to do any of the following prior to Closing
without the prior written consent of Buyer:
(i) Declare or pay any dividends or other
distributions on its stock or purchase or redeem any of its stock;
(ii) Issue any stock or other securities,
including any right or option to purchase or otherwise acquire any
of its stock, or issue any notes or other evidence of indebtedness
not in the usual course of business;
(iii) Make or incur any capital expenditure
outside the ordinary course of business in excess of $10,000 without
the prior written consent of Buyer;
(iv) Sell, dispose or transfer assets outside the
ordinary course of business.
(v) Except as otherwise permitted by this
Agreement, incur any debt, secured or unsecured, outside the
ordinary course of business.
3.20 Insurance. Except as set forth in Section 3.20 to
the Papyrus Disclosure Schedule, Papyrus is presently insured,
against such risks as companies engaged in a similar business would,
in accordance with good business practice, customarily be insured.
3.21 Lease Arrangements.
(a) Except as set forth in Section 3.21 to the Papyrus
Disclosure Schedule there are no lessees ("Master Lessees") who have
been granted the right to use, purchase, lease or license goods or
services from Papyrus and to provide, resell, sublease or relicense
the same to other authorized lessees or third parties. The identity
of each Master Lessee and a description of all lessees and third
parties to whom such Master Lessee is entitled to provide, resell,
sublease or relicense goods and services of Papyrus are set forth in
Section 3.21 to the Papyrus Disclosure Schedule. There are no
agreements between Papyrus and any Master Lessee other than those in
writing that are set forth in Section 3.21 to the Papyrus Disclosure
Schedule.
(b) Except as set forth in Section 3.10 to the Papyrus
Disclosure Schedule, there are no licensees who have been granted
the right to use, purchase, lease or license the Intellectual
Property from Papyrus and to provide, resell, sublease or relicense
the same to authorized sublicensees or other third parties. The
identity of each licensee and a description of all sublicensees and
third parties to whom such licensee is entitled to provide, resell,
sublease or relicense goods and services of Papyrus are set forth in
Section 3.10 to the Papyrus Disclosure Schedule.
(c) Papyrus believes that the relationships of Papyrus
with its lessees and licensees are satisfactory and that the
execution of this Agreement, the consummation of the Merger, and the
consummation of the transactions contemplated thereby would not be
reasonably likely to have a Material Adverse Effect on the
relationships of Papyrus with such lessees and licensees.
(d) Papyrus is not a party to any vendor financing
arrangement which (i) requires Papyrus to use such financing for any
particular transaction, or (ii) cannot be terminated (without
premium or penalty) upon less than one month's notice.
3.22 Books of Account; Records. Papyrus' general ledgers,
stock record books, minute books and other material records relating
to the assets, properties, contracts and outstanding legal
obligations of Papyrus are, in all material respects, complete and
correct and the matters contained therein are appropriate and
accurately reflected in the Papyrus Statements and the Papyrus
Interim Statements.
3.23 Officers, Employees and Consultants and Compensation.
Section 3.23 to the Papyrus Disclosure Schedule sets forth the
names of all directors and officers of Papyrus, and the total
salary, bonus, fringe benefits and perquisites each received from
Papyrus in the year ended June 30, 1998. There have been no changes
to the foregoing which have occurred subsequent to June 30, 1998,
other than changes in the Ordinary Course of Business consistent
with past practice. Except as disclosed in Section 3.23 to the
Papyrus Disclosure Schedule, there are no other forms of
compensation paid to any such director, officer, employee or
consultant of Papyrus. Except as set forth in Section 3.23 to the
Papyrus Disclosure Schedule, Papyrus has not become obligated,
directly or indirectly, to any stockholder, director or officer of
Papyrus or any person related to such person by blood or marriage,
except for current liability for such compensation. Except as set
forth in Section 3.23 to the Papyrus Disclosure Schedule, to the
Knowledge of Papyrus, no stockholder, director, officer, agent or
employee of Papyrus or any person related to such person by blood or
marriage holds any position or office with or has any material
financial interest, direct or indirect, in any supplier, customer or
account of, or other outside business which has material
transactions with, Papyrus. To Papyrus' Knowledge, no executive,
key employee, or group of employees has any plans to terminate
employment with Papyrus.
3.24 Product Warranty. To the best Knowledge of Papyrus,
each product manufactured, sold, leased, or delivered by Papyrus has
been in conformity with all applicable contractual commitments and
all express and implied warranties, and Papyrus has no liability
(and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or
demand against any of them giving rise to any liability) for
replacement or repair thereof or other damages in connection
therewith. To the best Knowledge of Papyrus, no product
manufactured, sold, leased, or delivered by Papyrus is subject to
any guaranty, warranty, or other indemnity beyond the applicable
standard terms and conditions of sale or lease.
.
3.25 Product Liability. To the best knowledge of Papyrus,
it does not have any liability (and there is no basis for any
present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against any of them giving rise
to any liability) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any
product manufactured, sold, leased, or delivered by Papyrus. No
product liability claims have been communicated in writing to or
threatened against Papyrus.
3.26 Questionable Payments. Neither Papyrus nor to its
Knowledge any director, officer or other employee of Papyrus has:
(i) made any payments or provided services or other favors in the
United States of America or in any foreign country in order to
obtain preferential treatment or consideration by any governmental
entity with respect to any aspect of the business of Papyrus; or
(ii) made any political contributions which would not be lawful
under the laws of the United States and the foreign country in which
such payments were made. Neither Papyrus nor to its Knowledge any
director, officer or other employee of Papyrus nor, to the Knowledge
of Papyrus, any customer or supplier of any of them has been the
subject of any inquiry or investigation by any governmental entity
in connection with payments or benefits or other favors to or for
the benefit of any governmental or armed services official, agent,
representative or employee with respect to any aspect of the
business of Papyrus or with respect to any political contribution.
3.27 Disclosure. The representations and warranties
contained in this Article 3 do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements and information contained in this Article 3
not misleading. The Definitive Proxy Materials will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light
of the circumstances under which they will be made, not misleading;
provided, however, that Papyrus makes no representation or warranty
with respect to any information that Buyer will supply specifically
for use in the Definitive Proxy Materials. None of the information
that Papyrus will supply specifically for use in the Joint
Disclosure Document will contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under
which they will be made, not misleading.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Papyrus and to the Papyrus
Stockholders receiving Buyer's shares that the statements contained
in this Article 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted
for the date of this Agreement throughout this Article 4), except as
set forth in the disclosure schedule of Buyer accompanying this
Agreement and initialed by the Parties (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule will be arranged in
paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article 4.
4.1 Organization, Standing and Power. Each of Buyer and
Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization.
Each of Buyer and Merger Sub has the corporate power to own its
properties and to carry on its business as now being conducted and
as proposed to be conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse
Effect on Buyer. Buyer has delivered a true and correct copy of the
Certificate of Incorporation, Articles of Incorporation and Bylaws
or other charter documents, as applicable, of Buyer and Merger Sub,
each as amended to date, to Papyrus. Neither Buyer nor Merger Sub
is in violation of any of the provisions of its Certificate or
Articles of Incorporation or Bylaws or equivalent organizational
documents.
4.2 Capital Structure. Buyer has an authorized
capitalization consisting of 100,000,000 shares of Common Stock, par
value $.0001 per share, and 20,000,000 shares of Preferred Stock,
par value $.0001 per shares. As of August 31, 1998, Buyer had
issued and outstanding 51,833,184 shares of Common Stock.
10,995,000 shares of Common Stock are subject to issuance upon the
conversion or exercise of presently issued and outstanding warrants
and options of Buyer. 12,511,000 shares of Common Stock are
reserved for issuance under Buyer's existing stock option plans.
166,667 shares of Series A Preferred Stock have been issued and
166,667 shares are outstanding and are convertible into 166,667
shares of Common Stock. All of the shares of Common Stock and
Preferred Stock issued to date have been duly and validly authorized
and issued and are fully paid and non-assessable. Except as set
forth above or as disclosed in Section 4.2 of the Buyer Disclosure
Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, script, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock
of Buyer or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which Buyer or any of its
subsidiaries is or may become bound to redeem or issue additional
shares of capital stock of Buyer or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to calls or
commitments of any character whatsoever relating, or securities or
rights convertible into, any shares of capital stock of Buyer or any
of its subsidiaries, (ii) there are no outstanding debt securities
and (iii) there are no agreements or arrangements under which Buyer
or any of its subsidiaries is obligated to register the sale of any
of their securities under the Securities Act. Except as disclosed
in Section 4.2 of the Buyer Disclosure Schedule, there are no
securities or instruments containing any anti-dilution, right of
first refusal, preemptive rights or similar provisions that will be
triggered by the issuance of the Buyer Shares as described in this
Agreement. Upon issuance of the Merger Shares, such securities will
be duly and validly issued, fully paid and non-assessable.
4.3 Authority. Buyer and Merger Sub have 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 Buyer and Merger Sub. This
Agreement has been duly executed and delivered by Buyer and Merger
Sub and constitutes the valid and binding obligations of Buyer and
Merger Sub. The execution and delivery of this Agreement do not and
the consummation of the transactions contemplated hereby 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 or acceleration of any material
obligation or loss of a material benefit under (i) any provision of
the Certificate or Articles of Incorporation or Bylaws of Buyer or
any of its subsidiaries, as amended, or (ii) to Buyer's Knowledge,
any material mortgage, indenture, lease, contract or other agreement
or instrument permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to Buyer or any of its subsidiaries or their properties
or assets. No consent, approval, order or authorization of or
registration, declaration or filing with, any governmental entity,
is required by or with respect to Buyer or any of its subsidiaries
in connection with the execution and delivery of this Agreement by
Buyer and Merger Sub or the consummation by Buyer and Merger Sub of
the transactions contemplated hereby, except for (i) the filing of
the Certificate of Merger, together with the required officers'
certificates, as provided in Section 2.2, (ii) the filing of a Form
8-K with the Securities and Exchange Commission ("SEC") and Nasdaq
Stock Market within 15 days after the Closing Date, (iii) any
filings as may be required under applicable state securities laws
and the securities laws of any foreign country, (iv) the filing with
the Nasdaq SmallCap Market of a Notification Form of Listing of
Additional Shares with respect to the Merger Shares issuable upon
conversion of the Papyrus Common Stock in the Merger, and (v) such
other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse
Effect on Buyer and would not prevent, materially alter or delay any
of the transactions contemplated by this Agreement.
4.4 SEC Documents; Financial Statements. Buyer has
furnished to Papyrus a true and complete copy of each statement,
report, registration statement, definitive proxy statement, and
other filing filed with the SEC by Buyer since December 31, 1997,
and, prior to the Effective Time, Buyer will have furnished Papyrus
with true and correct copies of any additional documents filed with
the SEC by Buyer prior to the Effective Time (collectively, the
"Buyer SEC Documents"). In addition, Buyer has made available to
Papyrus all material exhibits to the Buyer SEC Documents filed prior
to the date hereof and will promptly make available to Papyrus all
material exhibits to any additional Buyer SEC Documents filed prior
to the Effective Time. All documents required to be filed as
exhibits to the Buyer SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect
except those which have expired in accordance with their terms, and
neither Buyer nor any of its subsidiaries is in default thereunder.
As of their respective filing dates, the Buyer SEC Documents
complied in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Securities Act and none of the Buyer 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 Buyer SEC Document prior to the date hereof. The
financial statements of Buyer, including the notes thereto, included
in the Buyer SEC Documents (the "Buyer Financial Statements"),
complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and
have been prepared in accordance with GAAP applied on a basis
consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the
case of unaudited statements included in Quarterly Reports on Form
10-Q or Form 10-QSB, as permitted by Form 10-Q or Form 10-QSB of the
SEC). The Buyer Financial Statements fairly present the
consolidated financial condition and operating results of Buyer and
its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments). There has been no material change
in Buyer accounting policies except as described in the notes to the
Buyer Financial Statements. Since December 31, 1997, no event has
occurred that would have required the filing of any report that
otherwise would have been included among the SEC Documents and for
which an appropriate report was not filed.
4.5 Absence of Certain Changes. Since June 30, 1998 (the
"Buyer Balance Sheet Date"), except as described in the Buyer SEC
Documents, Buyer has conducted its business in the Ordinary Course
of Business consistent with past practice and there has not
occurred: (i) any change, event or condition (whether or not covered
by insurance) that has resulted in, or might reasonably be expected
to result in, a Material Adverse Effect to Buyer; (ii) any
acquisition, sale or transfer of any material asset of Buyer or any
of its subsidiaries other than in the Ordinary Course of Business
and consistent with past practice; (iii) any material change in
accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Buyer or any
revaluation by Buyer of any of its assets; (iv) any declaration,
setting aside, or payment of a dividend or other distribution with
respect to the shares of Buyer, or any direct or indirect
redemption, purchase or other acquisition by Buyer of any of its
shares of capital stock; (v) any material contract entered into by
Buyer, other than in the Ordinary Course of Business and as provided
to Papyrus or any material amendment or termination of, or default
under, any material contract to which Buyer is a party or by which
it is bound; (vi) any amendment or change to Buyer's Certificate of
Incorporation or Bylaws; or (vii) any negotiation or agreement by
Buyer or any of its subsidiaries to do any of the things described
in the preceding clauses (i) through (vi) (other than negotiations
with Papyrus and its representatives regarding the transactions
contemplated by this Agreement).
4.6 Absence of Undisclosed Liabilities. Buyer has no
material obligations or liabilities of any nature (matured or
unmatured, fixed or contingent) other than (i) those set forth or
adequately provided for in the Balance Sheet included in Buyer's
Quarterly Report on Form 10-Q for the period ended March 31, 1998
(the "Buyer Balance Sheet"), (ii) those incurred in the Ordinary
Course of Business and not required to be set forth in the Buyer
Balance Sheet under GAAP, and (iii) those incurred in the Ordinary
Course of Business since the Buyer Balance Sheet Date and consistent
with past practice.
4.7 Litigation. Except as described in the Buyer SEC
Documents, there is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any
agency, court or tribunal, foreign or domestic, or, to the Knowledge
of Buyer or any of its subsidiaries, threatened against Buyer or any
of its subsidiaries or any of their respective properties or any of
their respective officers or directors (in their capacities as such)
that, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect on Buyer. There is no judgment,
decree or order against Buyer or any of its subsidiaries or, to the
Knowledge of Buyer or any of its subsidiaries, any of their
respective directors or officers (in their capacities as such) that
could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement, or that could
reasonably be expected to have a Material Adverse Effect on Buyer.
4.8 Governmental Authorization. Buyer and each of its
subsidiaries have obtained each federal, state, county, local or
foreign governmental consent, license, permit, grant, or other
authorization of a governmental entity (i) pursuant to which Buyer
or any of its subsidiaries currently operates or holds any interest
in any of its properties or (ii) that is required for the operation
of Buyer's or any of its subsidiaries' business or the holding of
any such interest ((i) and (ii) herein collectively called "Buyer
Authorizations"), and all of such Buyer Authorizations are in full
force and effect, except where the failure to obtain or have any of
such Buyer Authorizations could not reasonably be expected to have a
Material Adverse Effect on Buyer.
4.9 Broker's and Finders' Fees. Buyer has not incurred,
nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or investment
bankers' fees or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
4.10 Interim Operations of Merger Sub. Merger Sub was
formed solely for the purpose of engaging in the transactions
contemplated by this Agreement, has engaged in no other business
activities and has conducted its operations only as contemplated by
this Agreement.
4.11 Post-Merger Operations of Merger Sub. Buyer has no
present plan or intention to liquidate Merger Sub; to merge Merger
Sub with and into another corporation; to sell or otherwise dispose
of the stock of Merger Sub; or to cause Merger Sub to sell or
otherwise dispose of any of the assets of Papyrus acquired in the
transaction, except for dispositions made in the Ordinary Course of
Business or transfers described in Section 368(a)(2)(C) of the Code.
Buyer intends that following the Merger, Merger Sub will continue
the historic business of Papyrus or use a significant portion of
Papyrus' business assets in a business.
4.12 Disclosure. The Confidential Private Placement
Memorandum will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under
which they will be made, not misleading; provided, however, that
Buyer makes no representation or warranty with respect to any
information that Papyrus will supply specifically for use in the
Disclosure Materials None of the information that Buyer will supply
specifically for use in the Disclosure Materials will contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light
of the circumstances under which they will be made, not misleading.
ARTICLE 5
COVENANTS
5.1 Preparation of Solicitation Statement.
(a) As soon as practicable after the execution of this
Agreement, Papyrus and Buyer shall jointly prepare a solicitation
statement (the "Joint Solicitation Statement") for the solicitation
of approval of the Papyrus Stockholders describing this Agreement,
the Certificate of Merger and the transactions contemplated hereby
and thereby. The information supplied by Papyrus for inclusion in
the Joint Solicitation Statement to be sent to the Papyrus
Stockholders shall not, on the date the Joint Solicitation Statement
is first mailed to the Papyrus Stockholders or at the Effective
Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made,
not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication
which has become false or misleading. Notwithstanding the
foregoing, Papyrus makes no representation, warranty or covenant
with respect to any information supplied by Buyer or Merger Sub
which is contained in any of the foregoing documents. The
information supplied by Buyer for inclusion in the Joint
Solicitation Statement shall not, on the date the Joint Solicitation
Statement is first mailed to Papyrus' stockholders, nor at the
Effective Time, contain any statement which, at such time, is false
or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein,
in light of the circumstances under which it is made, not false or
misleading; or omit to state any material fact necessary to correct
any statement in any earlier communication which has become false or
misleading. Notwithstanding the foregoing, Buyer and Merger Sub
make no representation, warranty or covenant with respect to any
information supplied by Papyrus which is contained in any of the
foregoing documents.
(b) The Joint Solicitation Statement shall constitute a
disclosure document for the offer and issuance of the Merger Shares
and a proxy statement for use at the Papyrus Special Meeting or any
substitute therefor. Buyer and Papyrus shall each use reasonable
commercial efforts to cause the Joint Solicitation Statement to
comply with applicable federal and state securities laws
requirements. Each of Buyer and Papyrus agrees to provide promptly
to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the
providing party or its counsel, may be required or appropriate for
inclusion in the Joint Solicitation Statement or in any amendments
or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation
of the Joint Solicitation Statement. Papyrus will promptly advise
Buyer, and Buyer will promptly advise Papyrus, in writing if at any
time prior to the Effective Time either Papyrus or Buyer shall
obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Joint Solicitation Statement
in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law.
The Joint Solicitation Statement shall contain the recommendation of
the Board of Directors of Papyrus that the Papyrus Stockholders
approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are
fair and reasonable to the stockholders of Papyrus. Anything to the
contrary contained herein notwithstanding, Papyrus shall not include
in the Joint Solicitation Statement any information with respect to
Buyer or its affiliates or associates, the form and content of which
information shall not have been approved by Buyer prior to such
inclusion.
5.2 Approval of Stockholders. Papyrus shall promptly
after the date hereof take all action necessary in accordance with
the Pennsylvania General Corporation Law and its Certificate of
Incorporation and Bylaws to obtain the written consent of the
Papyrus Stockholders approving the Merger as soon as practicable.
Papyrus shall use its best efforts to solicit from stockholders of
Papyrus written consents in favor of the Merger and shall take all
other action necessary or advisable to secure the vote or consent of
stockholders required to effect the Merger.
5.3 Sale of Shares Pursuant to Section 4(2) of the
Securities Act. The parties hereto acknowledge and agree that the
Merger Shares shall be issued and sold pursuant to the exemption
available by Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder including, without limitation,
Regulation D, and also Regulation S under the Securities Act. As
such, the Merger Shares, shall constitute "restricted securities"
within the Securities Act. The certificates representing the Merger
Shares shall bear the legends set forth in Section 2.4(k).
5.4 Access to Information.
(a) Papyrus shall afford Buyer and its accountants,
counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i)
all of Papyrus' properties, books, contracts, commitments and
records (including Tax Returns filed and those in preparation), and
(ii) all other information concerning the business, properties and
personnel of Papyrus as Buyer may reasonably request. Papyrus
agrees to provide to Buyer and its accountants, counsel and other
representatives copies of internal financial statements promptly
upon request.
(b) Buyer shall afford Papyrus and its accountants,
counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i)
all of Buyer's and its subsidiaries' properties, books, contracts,
commitments and records, and (ii) all other information concerning
the business, properties and personnel of Buyer and its subsidiaries
as Papyrus may reasonably request. Buyer agrees to provide to
Papyrus and its accountants, counsel and other representatives
copies of internal financial statements promptly upon request.
(c) Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Buyer and Papyrus
shall confer on a regular and frequent basis with one or more
representatives of the other party to report operational matters of
materiality and the general status of ongoing operations.
(d) No information or knowledge contained in any
investigation pursuant to this Section 5.4 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.
5.5 Confidentiality. The parties acknowledge that Buyer
and William Kania have previously executed a Confidentiality and
Non-Disclosure Agreement dated as of April 17, 1998 (the
"Confidentiality Agreement"), which Confidentiality Agreement is
hereby incorporated herein by reference and shall continue in full
force and effect in accordance with its terms.
5.6 Public Disclosure. Unless otherwise permitted by
this Agreement, Buyer and Papyrus shall consult with each other
before issuing any press release or otherwise making any public
statement or making any other public (or non-confidential)
disclosure (whether or not in response to an inquiry) regarding the
terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other
(which approval shall not be unreasonably withheld), except as may
be required by law or by obligations pursuant to any listing
agreement with any national securities exchange or with the Nasdaq
Stock Market.
5.7 Legal Requirements. Each of Buyer, Merger Sub and
Papyrus will, and will cause their respective subsidiaries to, take
all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement and
will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed
upon such other party in connection with the consummation of the
transactions contemplated by this Agreement and will take all
reasonable actions necessary to obtain (and will cooperate with the
other parties hereto in obtaining) any consent, approval, order or
authorization of or any registration, declaration or filing with,
any governmental entity or other person, required to be obtained or
made in connection with the taking of any action contemplated by
this Agreement.
5.8 Blue Sky Laws. Buyer 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 Merger
Shares. Papyrus shall use its best efforts to assist Buyer 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 the Merger Shares.
5.9 Covenant Not to Compete. For a period of two (2)
years from the date of this Agreement, Papyrus Stockholders, and
each of them, shall not, directly or indirectly, without the prior
express written consent of Buyer, participate in the ownership of or
be employed by, as an employee, consultant, partner, director,
officer or otherwise, any business enterprise, association,
corporation, partnership or other entity that is engaged in the
development, research, production, distribution, sale, or marketing
of products in direct competition with Buyer or its affiliates.
5.10 Escrow Agreement. On or before the Effective Time,
Buyer, Merger Sub, Escrow Agent and the Stockholders' Agent (as
defined in Section 7.7 hereto) will execute the Escrow Agreement
contemplated by Section 7.1 in the form attached hereto as Exhibit D
("Escrow Agreement").
5.11 Registration of Shares Issued in the Merger.
(a) Definitions. For purposes of this Agreement,
"Registrable Shares" shall mean the Merger Shares, including any and
all Escrow Shares (as defined in Section 7.1) and any Buyer Shares
or other securities of Buyer resulting from any stock split,
reorganization or stock dividend in respect of Merger Shares and any
securities into which Merger Shares are converted or exchanged
pursuant to any merger, consolidation or acquisition of or by Buyer,
but excluding Merger Shares that have been sold or otherwise
transferred by the Target Stockholders who initially received such
shares in the Merger (collectively, the "Holders"); provided,
however, that a distribution of Merger Shares without additional
consideration to underlying beneficial owners (such as the general
and limited partners, stockholders or trust beneficiaries of a
Holder) shall not be deemed such a sale or transfer for purposes of
this Section 5.11 and such underlying beneficial owners shall be
entitled to the same rights under this Section 5.11 as the initial
Holder from which the Registrable Shares were received and shall be
deemed a Holder for the purposes of this Section 5.11.
(b) Company Registration. If at any time or from time to
time Buyer shall determine to register any of its equity securities,
either for its own account or the account of a security holder or
holders other than (i) a registration relating solely to employee
benefit plans, (ii) a registration relating solely to a Rule 145
transaction or (iii) a registration pursuant to registration rights
granted as of the date hereof which rights prohibit the Buyer's
actions contemplated by this Section 5.11, as set forth in Schedule
5.11 to the Buyer Disclosure Schedule, Buyer will promptly give to
each Holder written notice thereof; and include in such registration
(and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the
Registrable Shares requested by such Holder to be so included in a
written request or requests, made within twenty (20) days after
receipt of such written notice from Buyer, by any Holder.
(c) Underwriting.
(i) If the registration of which Buyer gives
notice is for a registered public offering involving an
underwriting, Buyer shall so advise the Holders as a part of the
written notice given pursuant to Section 5.11(b). In such event,
the right of any Holder to registration pursuant to this Section
5.11 shall be conditioned upon such Holder's participation in such
underwriting, and the inclusion of his or its Registrable Shares in
the underwriting shall be limited to the extent provided herein.
(ii) All Holders proposing to distribute their
securities through such underwriting shall (together with Buyer and
the other Holders distributing their Registrable Shares through such
underwriting) enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by
Buyer. Notwithstanding any other provision of this Section 5.11, if
the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, then Buyer
shall so advise all Holders of Registrable Shares and the holders of
any other securities to be included in the registration pursuant to
other piggyback registration rights, and the managing underwriter
may limit the number of shares of Registrable Shares and other
securities to be included pursuant to other piggyback rights that
may be included in such registration to an amount no less than 25%
of all shares to be included in such offering; provided however,
that any such limitation or "cut back" shall first be applied to all
shares proposed to be sold in such offering other than for the
account of Buyer which are not Registrable Shares. Buyer shall so
advise all Holders and other holders distributing their securities
through such underwriting, and the number of shares of Registrable
Shares or other securities that may be included in the registration
and underwriting shall be first allocated among all Holders
requesting inclusion of their Registrable Shares in the registration
in proportion, as nearly as practicable, to the respective amounts
of Registrable Shares requested to be included in such registration
statement. No Registrable Shares or other securities excluded from
the underwriting by reason of the managing underwriters' marketing
limitation shall be included in such registration.
(iii) If any of the Holders disapprove of the terms
of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to Buyer and the managing underwriter.
Any securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
(d) Right to Terminate Registration. Buyer shall have
the right to terminate or withdraw any registration initiated by it
under this Section prior to the effectiveness of such registration
whether or not any Holder has elected to include securities in such
registration, provided that any registration termination pursuant to
this Section 5.11(d) shall have not adversely affect the
registration rights granted under this Section 5.11.
(e) Copies of Registration Statement and Prospectus.
Buyer shall promptly deliver to each Holder, and any underwriters,
without charge, a copy of each registration statement filed with the
Commission pursuant to this Section 5.11 (the "Registration
Statement"), and as many copies of the prospectus or prospectuses
(including each form of prospectus) included in any such
Registration Statement and each amendment or supplement thereto as
such persons may reasonably request.
(f) Effectiveness Period. Buyer shall use its best
efforts to cause any Registration Statement to be declared effective
under the Securities Act as promptly as possible after the filing
thereof, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the
date which is one year after the date that such Registration
Statement is declared effective by the Commission or such earlier
date when all Registrable Shares covered by such Registration
Statement have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act, as
determined by the counsel to Buyer pursuant to a written opinion
letter to such effect, addressed and acceptable to Buyer's transfer
agent (as to such Registration Statement, the "Effectiveness Period").
(g) Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission
which may at any time permit the sale of the Merger Shares to the
public without registration, Buyer shall use commercially reasonable
efforts to:
(i) 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 Closing Date and during the
Effectiveness Period;
(ii) File with the Commission in a timely manner
all reports, documents and other information required of Buyer under
the Securities Act and the Exchange Act at all times after the
Closing Date and during the Effectiveness Period; and
(iii) So long as any of the Holders owns any Merger
Shares, to furnish to such Holders forthwith upon request a written
statement by Buyer as to its compliance (or failure to comply) with
the reporting requirements of said Rule 144, and with the Securities
Act and the Exchange Act, a copy of the most recent annual or
quarterly report of Buyer, and such other reports and documents of
Buyer and other information in the possession of or reasonably
obtainable by Buyer as such Holders may reasonably request in
availing themselves of any rule or regulation of the Commission
allowing the Holders to sell any such securities without registration.
(h) Limitations. Notwithstanding the foregoing, Buyer
shall not be obligated to take any action pursuant to this Section
5.11:
(i) in any particular jurisdiction in which Buyer
would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance, unless
Buyer is already subject to service in such jurisdiction and except
as may be required by the Securities Act; or
(ii) prior to six months after the Effective Time.
(i) Expenses. The costs and expenses to be borne by
Buyer for purposes of this Section 5.11 shall include, without
limitation, printing expenses, legal fees and disbursements of
counsel for Buyer, "blue sky" expenses, accounting fees and filing
fees, but shall not include underwriting commissions or similar
charges, legal fees and disbursements of counsel for the selling
Holders. All expenses of any registered offering not otherwise
borne by Buyer shall be borne pro rata among the selling Holders on
the basis of the number of shares registered.
(j) Indemnification by Buyer. To the fullest extent
permitted by law, Buyer will indemnify and hold harmless each
selling Holder, each underwriter of Buyer Common Stock being sold by
such Holders pursuant to this Section 5.11 and each person, if any,
who controls any such Holder or underwriter within the meaning of
the Securities Act or the Exchange Act against all actions, claims,
losses, damages, liabilities and expenses to which they or any of
them become subject under the Securities Act, the Exchange Act or
under any other statute or at common law or otherwise and, except as
hereinafter provided, will promptly reimburse each such Holder, each
such underwriter and each such controlling person, if any, for any
legal or other expenses reasonably incurred by them or any of them
in connection with investigating or defending any actions whether or
not resulting in any liability, insofar as such losses, claims,
damages, expenses, liabilities or actions arise out of or are based
upon any untrue statement or alleged untrue statement of material
fact in any registration statement and any prospectus filed pursuant
to Section 5.10 or any post-effective amendment thereto or arise out
of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading or any violation by Buyer of any rule or
regulation promulgated under the Securities Act or the Exchange Act
applicable to Buyer and relating to action or inaction required by
Buyer in connection with such registration; provided, however, that
Buyer shall not be liable to any such Holder, underwriter or
controlling person in respect of any claims, losses, damages,
liabilities and expenses resulting from any untrue statement or
alleged untrue statement, or omission or alleged omission made in
reliance upon and in conformity with information furnished in
writing to Buyer by such Holder or underwriter specifically for use
in connection with such registration statement and prospectus or
post-effective amendment.
(k) Indemnification by Holders. To the fullest extent
permitted by law, each selling Holder of Registrable Shares
registered in accordance with this Section 5.11 will indemnify
Buyer, each person, if any, who controls Buyer within the meaning of
the Securities Act or the Exchange Act, each director of Buyer and
each officer of Buyer who signs the registration statement and each
underwriter of Buyer Common Stock against any actions, claims,
losses, damages, liabilities and expenses to which they or any of
them may become subject under the Securities Act, the Exchange Act
or under any other statute or at common law or otherwise, and will
promptly reimburse Buyer and each such director, officer,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in
any liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact in any
registration statement and any prospectus filed pursuant to this
Section 5.11 or any post-effective amendment thereto, or any
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading,
which untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
information furnished in writing to Buyer by such Holder or
underwriter specifically for use in connection with such
registration statement, or any violation by such Holder of any rule
or regulation promulgated under the Securities Act or the Exchange
Act applicable to such Holder and relating to action or inaction
required by such Holder in connection with sales of securities
covered by such registration, prospectus or post-effective
amendment; provided, however, that the obligations of each such
selling Holder hereunder shall be limited to an amount equal to the
gross proceeds to such Holder from the sale of such Holder's
Registrable Shares in such registration.
(l) Indemnification Procedures. Each person entitled to
indemnification under this Section 5.11 (an "Indemnified Person")
shall give notice to the party required to provide indemnification
(the "Indemnifying Person") promptly after such Indemnified Person
has actual knowledge of any claim as to which indemnity may be
sought and shall permit the Indemnifying Person to assume the
defense of any such claim and any litigation resulting therefrom,
provided that counsel for the Indemnifying Person who conducts the
defense of such claim or any litigation resulting therefrom shall be
approved by the Indemnified Person (whose approval shall not
unreasonably be withheld), and the Indemnified Person may
participate in such defense at such party's expense (unless the
Indemnified Person has reasonably concluded that there may be a
conflict of interest between the Indemnifying Person and the
Indemnified Person in such action, in which case the fees and
expenses of counsel for the Indemnified Person shall be at the
expense of the Indemnifying Person), and provided further that the
failure of any Indemnified Person to give notice as provided herein
shall not relieve the Indemnifying Person of its obligations under
this Section 5.10 except to the extent the Indemnifying Person is
materially prejudiced thereby. No Indemnifying Person, in the
defense of any such claim or litigation, shall (except with the
consent of each Indemnified Person) 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 Person of a release from all liability in
respect to such claim or litigation. Each Indemnified Person shall
furnish such information regarding itself or the claim in question
as an Indemnifying Person may reasonably request in writing and as
shall be reasonably required in connection with the defense of such
claim and litigation resulting therefrom.
(m) Contribution. In order to provide for just and
equitable contribution in any case in which Buyer or any Holder
makes a claim for indemnification pursuant to this Section 5.11 but
it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding
that indemnification would be available under this Section 5.11, in
such case, then Buyer and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may
be subject (after contribution from others) in such proportion as is
appropriate to reflect (i) the relative fault of Buyer on the one
hand and of the Holder on the other in connection with the
statements or omission which resulted in such losses, claims,
damages or liabilities, (ii) the relative benefits received by Buyer
and any Holder of Registrable Shares from the offering of the
securities covered by such Registration Statement, and (iii) any
other relevant equitable considerations, all subject to applicable
law. The relative fault of Buyer on the one hand and of the Holder
on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact
relates to information supplied by Buyer on the one hand or by the
Holder on the other, and each party's relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission; provided, however, that, in any such case no
person or entity guilty of fraudulent misrepresentation within the
meaning of Section 11(f) of the Securities Act will be entitled to
contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
(n) "Market Stand-Off" Agreement. In connection with an
underwritten public offering of securities by Buyer pursuant to
Section 5.11, each holder who participates in the registration
statement filed under the Securities Act for such offering will not,
to the extent requested in good faith by an underwriter of
securities of Buyer, sell or otherwise transfer or dispose of any
Registrable Shares not included in such registration statement
(other than to donees or partners of the Holder who agree to be
similarly bound) for up to that period of time, not to exceed sixty
(60) days (the "Market Stand-Off Period"), following the effective
date of such registration statement of Buyer filed under the
Securities Act as is requested by the managing underwriter(s) of
such offering; provided that the officers and directors of Buyer who
own stock of Buyer also agree to such restrictions. In order to
enforce the foregoing covenant, Buyer may impose stop transfer
instructions with respect to the Registrable Shares of each such
holder (and the shares or securities of every other person subject
to the foregoing restriction) until the end of such period.
(o) Termination of Buyer's Obligations. Buyer will have
no obligations pursuant to this Section 5.11 with respect to
Registrable Shares held by a Holder if in the opinion of counsel to
Buyer, which Buyer shall cause to be delivered to the Holders within
twenty (20) days after receipt of the written notice described in
subsection (b) of this Section 5.11 and upon which Holders may rely,
at the time of filing a registration statement such Holder may sell
all of such Holder's Registrable Shares in any single three
(3)-month period without registration under the Securities Act
pursuant to Rule 144, provided that if at any time after a Holder
becomes eligible to sell the Registrable Shares pursuant to Rule 144
but before such securities may be resold under Rule 144(k) Buyer
fails to take all action necessary to be taken by Buyer in order to
allow Holder to sell under Rule 144, Buyer shall have continuing
obligations under this Section 5.11 until Holder may sell such
securities pursuant to Rule 144(k), at which time such continuing
obligations shall terminate.
(p) Other Piggyback Rights. So long as any Papyrus
Stockholder has registration rights pursuant to this Section 5.11,
Buyer shall not grant any rights relating to the piggyback
registration of its capital stock which are superior to the rights
granted to the Holders under this Section 5.11.
5.12 Reasonable Commercial Efforts and Further Assurances.
Each of the parties to this Agreement shall use reasonable
commercial efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable
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.
5.13 Listing of Buyer Shares. Buyer will use its
reasonable best efforts to cause the Merger Shares to be approved
for listing on the Nasdaq SmallCap Market, within the time
prescribed therefor in the Nasdaq Stock Market rules and
regulations.
5.14 Notice of Developments. Each Party will give prompt
written notice to the other of any material adverse development
causing a breach of any of its own representations and warranties in
Articles 3 and 4 above. No disclosure by any Party pursuant to this
Section 5.14, however, shall be deemed to amend or supplement the
Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
5.15 Exclusivity. Papyrus will not solicit, initiate, or
encourage the submission of any proposal or offer from any Person
relating to the acquisition of all or substantially all of the
capital stock or assets of Papyrus (including any acquisition
structured as a merger, consolidation, or share exchange); provided,
however, that Papyrus and its directors and officers will remain
free to participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in,
or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing to the extent their
fiduciary duties may require. Papyrus shall notify Buyer
immediately if any Person makes any proposal, offer, inquiry, or
contact with respect to any of the foregoing.
5.16 Maintenance of Business. Papyrus will carry on and
preserve the business and its relationship with customers,
suppliers, employees, consultants and others in substantially the
same manner as it has prior to the date hereof. If Papyrus becomes
aware of a material deterioration in the relationship with any
customer, supplier, key employee, consultant or business partner, it
will promptly bring such information to the attention of Buyer in
writing and, if requested by Buyer, will exert its best efforts to
restore the relationship.
5.17 Conduct of Business. Papyrus will continue to
conduct its business and maintain its business relationship in the
ordinary and usual course and will not, without the prior written
consent of the Buyer:
(a) borrow or lend any money other than advances to
employees for travel and expenses that are incurred in the ordinary
course of Papyrus' business consistent with Papyrus' past practice;
(b) purchase or sell shares or other equity interest in
any corporation or other business or enter into any transaction or
agreement not in the ordinary course of Papyrus' business consistent
with Papyrus' past practice;
(c) encumber, or permit to be encumbered, any of its assets;
(d) sell, transfer or dispose of any of its assets except
in the ordinary course of Papyrus' business consistent with Papyrus'
past practice;
(e) enter into any material lease or contract for the
purchase or sale of any property, whether real or personal, tangible
or intangible;
(f) pay any bonus, increased salary or special
remuneration to any officer, employee or consultant (except for
normal salary increases consistent with past practices not to exceed
5% of such officer's, employee's or consultant's base annual
compensation and except for payment of accrued salary and bonuses to
William Kania and Brian Mottershead not to exceed $100,000) except
pursuant to existing arrangements previously disclosed to and
approve in writing by Buyer or enter into any new employment or
consulting agreement with any such person;
(g) change any of its accounting methods (except that
henceforth Papyrus will prepare its financial statements in
accordance with GAAP);
(h) declare, set aside or pay any cash or stock dividend
or other distribution in respect to any of its capital stock,
redeem, repurchase or otherwise acquire any of its capital stock or
other securities, pay or distribute any cash or property to any
Papyrus Stockholder or security holder or make any other cash
payment to any shareholder or security holder of Papyrus that is
unusual, extraordinary, or not made in the Ordinary Course of
Business consistent with Papyrus' past practice;
(i) amend or terminate any contract, agreement or license
to which it is a party except those amended or terminated in the
Ordinary Course of Business, consistent with Papyrus' past practice,
and which are not material in amount or effect;
(j) guarantee or act as a surety for any obligation of
any third party;
(k) waive or release any material right or claim except
in the Ordinary Course of Business, consistent with the past
practice or agree to any audit assessment by any tax authority or
file any federal or state income or franchise tax return unless
copies of such returns have been delivered to Buyer for its review
prior to filing;
(l) issue, sell, create or authorize any shares of its
capital stock of any class or series or any other of its securities,
or issue, grant or create any warrants, obligations, subscriptions,
options, convertible securities, or other commitments to issue
shares of its capital stock or securities ultimately exchangeable
for, or convertible into, shares of its capital stock;
(m) subdivide or split or combine or reverse split the
outstanding shares of its capital stock of any class or enter into
any recapitalization affecting the number of outstanding shares of
its capital stock of any class or affecting any other of its
securities;
(n) merge, consolidate or reorganize with, or acquire,
any entity or enter into any negotiations, discussions or agreement
for such purpose;
(o) amend its charter documents;
(p) license any of its technology or Intellectual
Property Rights except in the ordinary course of business consistent
with past practice;
(q) change any insurance coverage or issue any
certificates of insurance;
(r) modify or change the exercise or conversion rights or
exercise or purchase prices of any Papyrus Stock, options, warrants
or other securities, or accelerate or otherwise modify (i) the right
to exercise any option, warrant or other right to purchase any
Papyrus stock or other securities or (ii) the vesting or release of
any shares of Papyrus capital stock or other securities of Papyrus
from any repurchase options or rights of refusal held by Papyrus or
any other party or any other restrictions unless such
accelerations/modifications are expressly required and mandated by
the terms of a formal written agreement or plan that has been
disclosed in writing to Buyer and was entered into prior to the
execution of this Agreement by Buyer and Papyrus;
(s) purchase or otherwise acquire, or sell or otherwise
dispose of (i) any Buyer Shares or other Buyer securities or (ii)
any securities whose value is derived from or determined with
reference to, in whole or in part, the value of Buyer Shares or
other Buyer securities;
(t) agree to do any of the things described in the
preceding clauses 5.17(a) through 5.17 (s).
5.18 Certain Investments, Agreements. Papyrus and the
Papyrus Stockholders do not own, and shall not make any purchase or
other acquisition of, or investment in, any Buyer Shares or other
securities of Buyer. Papyrus and the Papyrus Stockholders shall not
enter into any agreement with any holders of Buyer Shares calling
for either Papyrus or Buyer to retire or reacquire all or part of
the Buyer Shares to be issued pursuant to the Merger. Papyrus shall
not enter into any financial arrangements for the benefit of any
Papyrus Stockholder and the Papyrus Stockholders shall not enter
into any agreement which, in effect, would negate the exchange of
equity securities contemplated under this Agreement, including
without limitation, any loan or other financial arrangement at
abnormally low interest rates, or any guarantee of loans secured by
Buyer Shares to be issued pursuant to the Merger.
5.19 Invention Assignment and Confidentiality Agreements.
Papyrus shall obtain from each employee, agent and consultant of
Papyrus who has had access to any software, technology or
copyrightable, patentable or other proprietary works or intellectual
property owned or developed by Papyrus or other Intellectual
Property Rights, or to any other confidential or proprietary
information of Papyrus or its clients, an invention assignment and
confidentiality agreement in form acceptable to Buyer and its
counsel, duly executed by such employee, agent or consultant and
delivered to Papyrus. Each Papyrus employee who accepts employment
with Buyer following the Closing will execute and agree to be bound
by a similar agreement in favor of Buyer and in the form attached
hereto as Exhibit E, by reference made a part hereof.
ARTICLE 6
TERMINATION; AMENDMENT AND WAIVER
6.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time (with respect to Section 6.1(b)
through Section 6.1(d), by written notice by the terminating party
to the other party):
(a) by the mutual written consent of Buyer and Papyrus;
(b) by either Buyer or Papyrus if the Merger shall not
have been consummated (except for the filing of the Merger
Certificate) by October 31, 1998, provided, however, that the right
to terminate this Agreement under this Section 6.1(b) shall not be
available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date;
(c) by either Buyer or Papyrus if a court of competent
jurisdiction or other governmental entity shall have issued a
nonappealable final order, decree or ruling or taken any other
action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, except, if the party
relying on such order, decree or ruling or other action has not
complied with its obligations under this Agreement;
(d) by Buyer, if there has been a breach of any of
Papyrus' representations, warranties or covenants, which breach (i)
causes the conditions set forth in Sections 8.1(a) and (b) and
8.2(f) and (i), and (ii) shall not have been cured within ten (10)
business days following receipt by Papyrus of written notice of such
breach from Buyer; or
(e) by Papyrus, if there has been a breach of any of
Buyer's representations, warranties or covenants which breach (i)
causes the conditions set forth in Sections 8.3(a) and (c), and (ii)
shall not have been shall not have been cured within ten (10)
business days following receipt by Buyer of written notice of such
breach from Papyrus.
6.2 Effect of Termination. In the event of termination
of this Agreement as provided in Section 6.1(a), (b) or (c), there
shall be no liability or obligation on the part of Buyer, Papyrus,
Merger Sub or their respective officers, directors, or stockholders,
except (i) to the extent that such termination results from the
willful breach by a party of any of its representations, warranties
or covenants set forth in this Agreement and (ii) the provisions of
Section 5.5 shall remain in full force and effect and survive any
termination of this Agreement.
6.3 Amendment. This Agreement may be amended by the
parties hereto, by action taken or authorized by their respective
Boards of Directors. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
6.4 Extension; Waiver. At any time prior to the
Effective Time, the parties hereto, by action taken or authorized by
their respective Boards of Directors, may, to the extent legally
allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions 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 a written
instrument signed on behalf of such party.
ARTICLE 7
ESCROW AND INDEMNIFICATION
7.1 Escrow Fund
(a) Deposit into Escrow. At the Closing, ten percent
(10%) of the total number of Merger Shares issued by Buyer at
Closing (the "Escrow Shares") shall be registered in the name of,
and be deposited with Durham, Evans, Jones & Pinegar, P.C. (or other
institution selected by Buyer with the reasonable consent of
Papyrus) as escrow agent (the "Escrow Agent"), such deposit to
constitute the Escrow Fund and to be governed by the terms set forth
herein and in the Escrow Agreement attached hereto as Exhibit D.
The Escrow Fund shall be available to compensate Buyer pursuant to
the indemnification obligations of the Papyrus Stockholders as set
forth in Section 7.2. If Buyer issues any Additional Escrow Shares
(as defined below), such shares will be issued in the name of the
Escrow Agent and delivered to the Escrow Agent in the same manner as
the Escrow Shares delivered at the Closing.
(b) Rights of Papyrus Stockholders. Except for dividends
paid in stock declared with respect to the Escrow Shares
("Additional Escrow Shares"), which shall be treated pursuant to
Section 7.l(a) hereof, any cash dividends, dividends payable in
securities or other distributions of any kind made in respect of the
Escrow Shares will be delivered to the Papyrus Stockholders on a pro
rata basis. Each Papyrus Stockholder will have voting rights with
respect to the Escrow Shares deposited in the Escrow Fund with
respect to such stockholder so long as such Escrow Shares are held
in escrow, and Buyer will take all reasonable steps necessary to
allow the exercise of such rights. While the Escrow Shares remain
in the Escrow Agent's possession pursuant to this Agreement, the
Papyrus Stockholders will retain and will be able to exercise all
other incidents of ownership of said Escrow Shares which are not
inconsistent with the terms and conditions of this Agreement.
7.2 Indemnification.
(a) Survival of Warranties. All representations and
warranties made by Papyrus herein, or in any certificate, schedule
or exhibit delivered pursuant hereto, shall survive the Closing and
continue in full force and effect until the first anniversary of the
Closing Date (sometimes referred to herein as the "Termination Date").
(b) Indemnification of Buyer and Surviving Corporation.
Subject to the limitations set forth in this Section 7, the Papyrus
Stockholders will indemnify and hold harmless Buyer and the
Surviving Corporation and their respective officers, directors,
agents, attorneys and employees, and each person, if any, who
controls or may control Buyer or the Surviving Corporation within
the meaning of the Securities Act (hereinafter referred to
individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against any and all losses, costs,
damages, liabilities and expenses arising from claims, demands,
actions, causes of action, including, without limitation, legal fees
(collectively, "Damages") arising out of any misrepresentation or
breach of or default in connection with any of the representations,
warranties, covenants and agreements given or made by Papyrus in
this Agreement, the Papyrus Disclosure Schedules or any exhibit,
schedule or other instrument made or given in connection with the
execution and delivery of this Agreement, provided, however, that
the Papyrus Stockholders and Papyrus shall not have any obligation
to indemnify Buyer or the Surviving Corporation from and against any
Damages caused by the breach of any representation or warranty
contained in Article 3 of this Agreement until the Buyer and
Surviving Corporation have suffered Damages by reason of all such
breaches in excess of a $50,000 aggregate deductible (after which
point the Papyrus Stockholders and Papyrus will be obligated only to
indemnify Buyer and Surviving Corporation from and against further
such Damages). Buyer and its Affiliates shall act in good faith and
in a commercially reasonable manner to mitigate any Damages they may
suffer. The Escrow Fund provided herein is intended by the parties
to this Agreement to apply to breaches of any representation,
warranty, covenant or agreement of Papyrus and Papyrus Stockholders
in this Agreement, including any Exhibits and Schedules attached
hereto, and the Articles of Merger, and, resort to the Escrow Fund
shall be the exclusive remedy and maximum indemnification available
hereunder of the Indemnified Persons.
(c) Limitations on Indemnification. Nothing in this
Agreement shall limit the liability in amount or otherwise of
Papyrus or the Papyrus Stockholders with respect to fraud, criminal
activity or intentional breach of any covenant contained in this
Agreement.
7.3 Escrow Period; Release from Escrow.
(a) Termination. The Escrow Period shall terminate upon
the expiration of twelve months after the Effective Time; provided,
however, that a portion of the Escrow Fund, which, in the reasonable
judgment of Buyer, subject to the objection of the Stockholders'
Agent and the subsequent arbitration of the matter in the manner
provided in Section 7.6 hereof, is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate
theretofore delivered to the Escrow Agent prior to termination of
the Escrow Period with respect to facts and circumstances existing
prior to expiration of the Escrow Period, shall remain in the Escrow
Fund until such claims have been resolved.
(b) Release Following Termination. Within three (3)
business days after the Termination Date (the "Release Date"), the
Escrow Agent shall release from escrow to the Papyrus Stockholders
their pro rata portion of the Escrow Shares and Additional Escrow
Shares less with respect to each such stockholder the number of
Escrow Shares and Additional Escrow Shares with a value (as
determined pursuant to Section 7.4) equal to (A) such stockholder's
pro rata portion of any liability delivered to Buyer in accordance
with Section 7.4 in satisfaction of indemnification claims by
Indemnified Persons and (B) such stockholder's pro rata portion of
any liability subject to delivery to Indemnified Persons in
accordance with Section 7.3(a) with respect to any pending but
unresolved indemnification claims of Indemnified Persons. Any
Escrow Shares and Additional Escrow Shares held as a result of
clause (B) shall be released to the Papyrus Stockholders or released
to Buyer (as appropriate) promptly upon resolution of each specific
indemnification claim involved. Escrow Shares and Additional Escrow
Shares shall be released to the respective Papyrus Stockholders in
proportion to their respective ownership interest in Papyrus
immediately prior to the Effective Time. Buyer will take such
action as may be necessary to cause such certificates to be issued
in the names of the appropriate persons. Certificates representing
Escrow Shares and Additional Escrow Shares so issued that are
subject to resale restrictions under applicable securities laws will
bear a legend to that effect. No fractional shares shall be
released and delivered from Escrow to the Papyrus Stockholders. In
lieu of any fraction of an Escrow Share to which a Papyrus
Stockholder would otherwise be entitled, such holder will receive
from Buyer an amount of cash (rounded to the nearest whole cent)
equal to the product of such fraction multiplied by the
Indemnification Price (as defined below).
(c) No Assignment of Escrow Shares. No Escrow Shares or
Additional Escrow Shares or any beneficial interest therein may be
pledged, sold, assigned or transferred, including by operation of
law, by any Papyrus Stockholder or be taken or reached by any legal
or equitable process in satisfaction of any debt or other liability
of any such stockholder, prior to the delivery to such stockholder
of his pro rata portion of the Escrow Fund by the Escrow Agent as
provided herein.
(d) Transfer by Escrow Agent. The Escrow Agent is hereby
granted the power to effect any transfer of Escrow Shares
contemplated by this Agreement. Buyer will cooperate with the
Escrow Agent in promptly issuing stock certificates to effect such
transfers.
7.4 Claims upon Escrow Fund. Upon receipt by the Escrow
Agent on or before the Release Date of a certificate signed by any
officer of Buyer (an "Officer's Certificate") stating that with
respect to the indemnification obligations of the Papyrus
Stockholders set forth in Section 7.2, Damages exist and specifying
in reasonable detail the individual items of such Damages included
in the amount so stated, the date each such item was paid, or
properly accrued or arose, and the nature of the misrepresentation,
breach of warranty or claim to which such item is related, the
Escrow Agent shall, subject to the provisions of this Section 7,
deliver to Buyer out of the Escrow Fund, as promptly as practicable,
Escrow Shares, Additional Escrow Shares (in each case rounded to the
nearest whole number) or other assets held in the Escrow Fund having
a value equal to such Damages. For the purpose of compensating
Buyer for its Damages pursuant to this Agreement, Escrow Shares
shall be valued at the average closing "bid" price of a Buyer Share
for the ten (10) trading days immediately preceding the date on
which the Officer's Certificate is delivered to the Escrow Agent, as
reported on the Nasdaq SmallCap Market (the "Indemnification
Price"). In determining the amount of any Damage attributable to a
breach, any materiality standard contained in a representation,
warranty or covenant of Buyer shall be disregarded.
7.5 Objections to Claims. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such
Officer's Certificate shall be delivered to the Stockholders' Agent
(defined in Section 7.7 below) and for a period of thirty (30) days
after such delivery, the Escrow Agent shall make no delivery of
Escrow Shares, Additional Escrow Shares or other property pursuant
to Section 8.4 hereof unless the Escrow Agent shall have received
written authorization from the Stockholders' Agent to make such
delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of Escrow Shares, Additional Escrow
Shares or other property in the Escrow Fund in accordance with
Section 7.4 hereof, provided that no such payment or delivery may be
made if the Stockholders' Agent 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 and to Buyer prior to
the expiration of such thirty (30) day period.
7.6 Resolution of Conflicts and Arbitration.
(a) Procedure for Handling Objections. In case the
Stockholders' Agent shall so object in writing to any claim or
claims by Buyer made in any Officer's Certificate, Buyer shall have
thirty (30) days to respond in a written statement to the objection
of the Stockholders' Agent. If after such thirty (30) day period
there remains a dispute as to any claims, the Stockholders' Agent
and Buyer shall attempt in good faith for thirty (30) days to agree
upon the rights of the respective parties with respect to each of
such claims. If the Stockholders' Agent and Buyer 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 shall distribute the Escrow Shares, Additional Shares or other
property from the Escrow Fund in accordance with the terms thereof.
(b) Arbitration. If no such agreement can be reached
after good faith negotiation, either Buyer or the Stockholders'
Agent may, by written notice to the other, 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 one arbitrator. Buyer
and the Stockholders' Agent shall agree on the arbitrator, provided
that if Buyer and the Stockholders' Agent cannot agree on such
arbitrator, either Buyer or Stockholders' Agent can request that the
American Arbitration Association select the arbitrator. The
arbitrator 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 arbitrator
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 arbitrator determine that discovery was sought without
substantial justification or that discovery was refused or objected
to without substantial justification. The decision of the
arbitrator shall be written, shall be in accordance with applicable
law and with this Agreement, and shall be supported by written
findings of fact and conclusion of law which shall set forth the
basis for the decision of the arbitrator. The decision of the
arbitrator 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
7.5 hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith.
(c) Enforcement of Arbitration Award. Judgment upon any
award rendered by the arbitrator may be entered in any court having
jurisdiction. Any such arbitration shall be held in Salt Lake
County, Utah under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section
7.6(c), in any arbitration hereunder in which any claim or the
amount thereof stated in the Officer's Certificate is at issue,
Buyer shall be deemed to be the Non-Prevailing Party unless the
arbitrators award Buyer more than one-half (1/2) of the amount in
dispute, plus any amounts not in dispute; otherwise, the Papyrus
Stockholders for whom the Escrow Shares, Additional Escrow Shares
(if any) or other property deposited into escrow have been deposited
in the Escrow Fund shall be deemed to be the Non-Prevailing Party.
The Non-Prevailing Party to an arbitration shall pay its own
expenses, the fees of the arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including
attorneys' fees and costs, reasonably incurred by the other party to
the arbitration.
7.7 Stockholders' Agent. William Kania shall be
constituted and appointed as agent ("Stockholders' Agent") for and
on behalf of the Papyrus Stockholders to give and receive notices
and communications, to authorize delivery to Buyer of the Escrow
Shares, Additional Escrow Shares or other property from the Escrow
Fund in satisfaction of claims by Buyer, 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 the
Stockholders' Agent for the accomplishment of the foregoing. Such
agency may be changed by the holders of a majority in interest of
the Escrow Fund from time to time upon not less than 10 days' prior
written notice to Buyer. No bond shall be required of the
Stockholders' Agent, and the Stockholders' Agent shall receive no
compensation for his services. Notices or communications to or from
the Stockholders' Agent shall constitute notice to or from each of
the Papyrus Stockholders.
(a) Limitation of Liability. The Stockholders' Agent
shall not be liable for any act done or omitted hereunder as
Stockholders' 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.
The Papyrus Stockholders shall severally indemnify the Stockholders'
Agent and hold him harmless against any loss, liability or expense
incurred without gross negligence or bad faith on the part of the
Stockholders' Agent and arising out of or in connection with the
acceptance or administration of his duties hereunder.
(b) Access to Information. The Stockholders' Agent shall
have reasonable access to information about Papyrus and the
reasonable assistance of Papyrus' officers and employees for
purposes of performing his duties and exercising his rights
hereunder, provided that the Stockholders' Agent shall treat
confidentially and not disclose any nonpublic information from or
about Papyrus to anyone (except on a need to know basis to
individuals who agree to treat such information confidentially).
(c) Conflicts of Interest. Buyer acknowledges that
William Kania may have a conflict of interest with respect to his
duties as Stockholders' Agent, and in such regard Mr. Kania has
informed Buyer that he will act in the best interests of Papyrus
Stockholders.
7.8 Actions of the Stockholders' Agent. A decision, act,
consent or instruction of the Stockholders' Agent shall constitute a
decision of all Papyrus Stockholders for whom Merger Shares
otherwise issuable to them are deposited in the Escrow Fund and
shall be final, binding and conclusive upon each such Papyrus
Stockholder, and the Escrow Agent and Buyer may rely upon any
decision, act, consent or instruction of the Stockholders' Agent as
being the decision, act, consent or instruction of each and every
such Papyrus Stockholder. The Escrow Agent and Buyer 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
Stockholders' Agent.
7.9 Third-Party Claims. In the event Buyer becomes aware
of a third-party claim which Buyer believes may result in a demand
against the Escrow Fund, Buyer shall notify the Stockholders' Agent
of such claim, and the Stockholders' Agent and the Papyrus
Stockholders for whom Merger Shares otherwise issuable to them are
deposited in the Escrow Fund shall be entitled, at their expense, to
participate in any defense of such claim. Buyer shall have the
right in its sole discretion to settle any such claim. In the event
that the Stockholders' Agent has consented to any such settlement,
the Stockholders' Agent shall have no power or authority to object
under Section 7.5 or any other provision of this Section 7 to the
amount of any claim by Buyer against the Escrow Fund for indemnity
with respect to such settlement.
7.10 Substitution of Collateral. Notwithstanding anything
herein to the contrary, in the event a public market is established
for the Merger Shares, Papyrus Stockholders shall have the right,
but not the obligation to substitute cash in the amount equal to the
value of the Escrow Shares. In the event Papyrus Stockholders elect
to effect such substitution, they shall provide ten (10) business
days prior written notice thereof to Buyer and shall execute such
additional documents as Buyer may reasonably request to evidence
such substitution. Such cash shall be delivered to and held by the
Escrow Agent pursuant to the terms of this Agreement and, upon
receipt of such cash, Escrow Agent shall release the Merger Shares
(provided that Buyer and Papyrus Stockholders may agree to such
other manner of release to allow Papyrus Stockholders to sell the
Merger Shares concurrently with the delivery of such cash, if
permitted by law).
ARTICLE 8
CONDITIONS TO OBLIGATION TO CLOSE
8.1 Mutual Conditions. The respective obligations of
each Party 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, in writing, by
agreement of all the Parties:
(a) Stockholder Approval. This Agreement and the Articles
of Merger shall be approved and adopted by the Papyrus Stockholders
by the requisite vote under applicable law and the Papyrus Certificate;
(b) 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 or regulatory restraint or prohibition preventing the
consummation of the Merger shall be and remain in effect, nor shall
any proceeding brought by any administrative agency or commission or
other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending, which would have a
Material Adverse Effect on either Buyer or on Buyer combined with
the Surviving Corporation after the Effective Time, 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. In the event an
injunction or other order shall have been issued, each party agrees
to use its reasonable diligent efforts to have such injunction or
other order lifted;
(c) Tax Opinion. Buyer shall each have received a
written opinion from its counsel, Durham, Evans, Jones & Pinegar,
P.C., in form and substance reasonably satisfactory to them to the
effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. In rendering such opinion,
said counsel may rely upon (and, to the extent reasonably required,
the Parties and the Papyrus Stockholders shall make) reasonable
representations related thereto.
8.2 Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions, any of which Buyer may waive if it executes a
writing so stating at or prior to the Closing:
(a) Dissenting Shares. The number of Dissenting Shares
shall not exceed 5% of the number of outstanding Papyrus Shares;
(b) Limitation on Additional Cash Payments. The total
amount of additional cash payments made to Sophisticated
Stockholders and Unqualified Stockholders pursuant to Section 2.4(f)
shall not exceed $100,000;
(c) Third-party Consents. Papyrus shall have procured
all of the third party consents specified in Section 3.5(d);
(d) Representations and Warranties True. The
representations and warranties set forth in Article 3 above shall be
true and correct in all material respects at and as of the Closing
Date;
(e) Papyrus Covenants. Papyrus shall have performed and
complied with all of its covenants hereunder in all material
respects through the Closing;
(f) No Material Adverse Change. There shall not have
occurred any Material adverse change in the financial condition,
properties, assets (including intangible assets), liabilities,
business, operations or results or operations of Papyrus;
(g) Officer's Certificate. Papyrus shall have delivered
to Buyer an officer's certificate to the effect that each of the
conditions specified in this Section 8.2 is satisfied in all respects;
(h) Opinion of Counsel to Papyrus. Buyer shall have
received from counsel to Papyrus an opinion in form and substance as
set forth in Exhibit F attached hereto, addressed to Buyer, and
dated as of the Closing Date;
(i) Execution of Escrow Agreement. Buyer, Merger Sub,
Papyrus, Escrow Agent and the Stockholders' Agent shall have
entered into an Escrow Agreement substantially in the form attached
hereto as Exhibit D.
(j) Employees of Papyrus. The employees of Papyrus set
forth on Schedule 8.2(j) shall have accepted employment with Merger
Sub pursuant to the terms of an offer letter substantially in the
form attached hereto as Exhibit G, as applicable;
(k) Exercise or Cancellation of Options. All stock
options issued by Papyrus shall have been exercised or canceled;
(l) Resignations of Officers and Directors. Buyer shall
have received the resignations, effective as of the Closing, of each
director and officer of Papyrus;
(m) Due Diligence Investigation. Buyer shall have
completed its due diligence investigations and such investigations
shall not have disclosed any facts or circumstances with respect to
the business, operations, organization, financial condition or
prospects of Papyrus, which Buyer in good faith shall have
determined may have a material adverse effect on the proposed or
continuing operations, financial condition and business of Papyrus;
(n) Licenses and Assignments. William Kania, Tim Scanlon
and Brian Mottershead shall have executed assignments and
royalty-free license agreements in forms acceptable to Buyer's
counsel and granting to Buyer free, unrestricted and exclusive use
of certain technology and software designed, developed or created by
each of them relating to the handwriting and signature recognition
technology that forms the basis for the products and technology
developed or under development by Papyrus.
(o) Other Actions. All actions to be taken by Papyrus in
connection with consummation of the transactions contemplated hereby
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
satisfactory in form and substance to Buyer.
8.3 Conditions to Obligation of Papyrus. The obligation
of Papyrus to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions, any of which Papyrus may waive if it executes
a writing so stating at or prior to the Closing:
(a) Representations and Warranties True. The
representations and warranties set forth in Article 4 above shall be
true and correct in all material respects at and as of the Closing
Date;
(b) Buyer Covenants. Buyer shall have performed and
complied with all of its covenants hereunder in all material
respects through the Closing;
(c) Officer's Certificate. Buyer shall have delivered to
Papyrus an officer's certificate to the effect that each of the
conditions specified in this Section 8.3 is satisfied in all respects;
(d) Opinion of Counsel to Buyer. Papyrus shall have
received from counsel to Buyer an opinion in form and substance as
set forth in Exhibit G attached hereto, addressed to Papyrus and
Papyrus Stockholders, and dated as of the Closing Date; and
(e) Due Diligence Investigation. Papyrus shall have
completed its due diligence investigations and such investigations
shall not have disclosed any facts or circumstances with respect to
the business, operations, organization, financial condition or
prospects of Buyer, which Papyrus in good faith shall have
determined may have a material adverse effect on the proposed or
continuing operations, financial condition and business of Buyer.
ARTICLE 9
MISCELLANEOUS
9.1 Survival. None of the representations, warranties,
and covenants of the Parties (other than the provisions in Section 2
concerning issuance of Merger Shares and Section 5.5 concerning
confidentiality) will survive the Effective Time.
9.2 Press Releases and Public Announcements. No Party
shall issue any press release or make any public announcement
relating to the subject matter of this Agreement without the prior
written approval of the other Party; provided, however, that any
Party may make any public disclosure it believes in good faith is
required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the
disclosing Party will use its reasonable best efforts to advise the
other Party prior to making the disclosure).
9.3 No Third-Party Beneficiaries. This Agreement shall
not confer any rights or remedies upon any Person other than the
Parties and their respective successors and permitted assigns;
provided, however, that (i) the provisions in Section 2 above
concerning issuance of Buyer Shares are intended for the benefit of
Papyrus Stockholders.
9.4 Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire agreement
between the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties, written or
oral, to the extent they related in any way to the subject matter
hereof.
9.5 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein
and their respective successors and permitted assigns. No Party may
assign either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the
other Party.
9.6 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same instrument.
9.7 Headings. The section headings contained in this
Agreement are inserted for convenience only and shall not affect in
any way the meaning or interpretation of this Agreement.
9.8 Notices. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice,
request, demand, claim, or other communication hereunder shall be
deemed duly given if (and then two business days after) it is sent
by registered or certified mail, return receipt requested, postage
prepaid, and addressed to the intended recipient as set forth below:
If to Papyrus, to it at:
William Kania, President
Papyrus Associates, Inc.
124 Mount Auburn Street
Cambridge, MA 02138
With a copy to:
Frederic J. Marx, Esq.
Hemenway & Barnes
60 State Street
Boston, MA 02109
If to Buyer or Merger Sub, to either of them at:
FONIX corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
Fax: (801) 328-8778
Attn: Thomas A. Murdock, President
With a copy to:
Durham, Evans, Jones & Pinegar, P.C.
KeyBank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Fax: (801) 538-2425
Attn. Jeffrey M. Jones, Esq.
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set
forth above using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary
mail, or electronic mail), but no such notice, request, demand,
claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to
be delivered by giving the other Party notice in the manner herein
set forth.
9.9 Governing Law. This Agreement shall be governed by
and construed in accordance with the domestic laws of the State of
Utah without giving effect to any choice or conflict of law
provision or rule (whether of the State of Utah or any other
jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Utah. Each of the parties
hereto irrevocably consents to the exclusive jurisdiction of any
court located within Salt Lake County, State of Utah, in connection
with any matter based upon or arising out of this Agreement or the
matters contemplated hereby and it agrees that process may be served
upon it in any manner authorized by the laws of the State of Utah
for such persons and waives and covenants not to assert or plead any
objection which it might otherwise have to such jurisdiction and
such process.
9.10 Amendments and Waivers. The Parties may mutually
amend any provision of this Agreement at any time prior to the
Effective Time with the prior authorization of their respective
boards of directors; provided, however, that any amendment effected
subsequent to Papyrus Stockholder approval will be subject to the
restrictions contained in the Pennsylvania General Corporation Law.
No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by both of the
Parties. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or
not, shall be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
9.11 Severability. Any term or provision of this
Agreement that is invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
9.12 Expenses. Whether or not the Merger is consummated,
each of the Parties will bear its own costs and expenses (including
legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
9.13 Construction. The Parties have participated jointly
in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the Parties
and no presumption or burden of proof shall arise favoring or
disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state,
local, or foreign statute or law shall be deemed also to refer to
all rules and regulations promulgated thereunder, unless the context
otherwise requires. The word "including" shall mean including
without limitation.
9.14 Incorporation of Exhibits and Schedules. The Exhibits
and Schedules identified in this Agreement are incorporated herein
by reference and made a part hereof.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
[SIGNATURE PAGE FOLLOWS IMMEDIATELY]
SIGNED as of the date first set forth above.
BUYER
FONIX CORPORATION
By: /s/ Thomas A. Murdock
-----------------------------
Title: President
MERGER SUB
PAPYRUS ACQUISITION CORPORATION
By: /s/ Thomas A. Murdock
-----------------------------
Title: President
PAPYRUS
PAPYRUS ASSOCIATES, INC.
By: /s/ William E. Kania
----------------------------
Title: President
PAPYRUS STOCKHOLDERS
By: /s/ William E. Kania
-----------------------------
William Kania, Stockholders' Agent
ADDENDUM TO AGREEMENT AND PLAN OF MERGER
THIS ADDENDUM dated the 29TH day of October 1998, is entered
into by and among FONIX CORPORATION, a Delaware corporation
("fonix"), Papyrus Acquisition Corporation, a Utah corporation
("PAC") and Papyrus Associates, Inc., a Massachusetts corporation
("PAI").
RECITALS:
A. The parties entered into that certain Agreement and
Plan of Merger on September 10, 1998 (the "Agreement"); and
B. The parties have set October 29, 1998 as the Closing
Date under the Agreement and desire to modify certain of the
provisions of the Agreement to facilitate the Closing.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree to modify the
Agreement as follows:
1. Delivery of Promissory Notes. Article II of the
Agreement is hereby modified and amended to reflect
the mutual agreement and understanding of the
parties as to the payment of the "Cash Payment"
referred to in the Agreement. As hereby amended and
modified, PAC and fonix will satisfy the requirement
of the Cash Payment by the delivery of promissory
notes in the aggregate principal amount of $360,000
due the earlier of five business days following the
closing of the next equity funding completed by
fonix, but not later than February 28, 1999. Each
stockholder of PAI will receive his pro rata share
of such notes as indicated.
2. Other Provisions. Except as necessary to conform
the remaining terms and conditions of the Agreement
to the change agreed upon in Paragraph 1, above, all
other terms, conditions and provisions of the
Agreement shall remain in full force and effect as
originally adopted.
DATED the day and year first written above.
FONIX CORPORATION
By /s/ Thomas A. Murdock
- - -----------------------------------------------
Thomas A. Murdock, President
Papyrus Associates, Inc.
By /s/ William E. Kania
- - -----------------------------------------------
William E. Kania, President
Papyrus Acquisition Corporation
By /s/ Thomas A. Murdock
- - -----------------------------------------------
Thomas A. Murdock, President
AGREEMENT AND PLAN OF MERGER
AMONG
FONIX CORPORATION
A DELAWARE CORPORATION,
PAPYRUS ACQUISITION CORPORATION
A UTAH CORPORATION, AND
PAPYRUS DEVELOPMENT CORPORATION
A MASSACHUSETTS CORPORATION
SEPTEMBER 10, 1998
EXHIBIT INDEX
Exhibit A -- Form of Certificate of Merger
Exhibit B -- Form of Transmittal Letter
Exhibit C Form of Buyer Note
Exhibit D Form of Escrow Agreement
Exhibit E Form of Development, Assignment and Confidentiality
Agreement
Exhibit F Form of Opinion of Counsel to Papyrus Development
Corporation
Exhibit G Form of Offer of Employment
Exhibit H Form of Opinion of Counsel to Buyer
Papyrus Development Corporation Disclosure Schedule Exceptions to
Representations and Warranties
Buyer Disclosure Schedule Exceptions to Representations and
Warranties
Schedule 8.2(l) List of Papyrus Development Corporation Employees
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger ("Agreement") entered into as of
September 10, 1998, by and among FONIX CORPORATION, a Delaware
corporation ("Buyer"), PAPYRUS ACQUISITION CORPORATION, a Utah
corporation and wholly owned subsidiary of Buyer ("Merger Sub"), and
PAPYRUS DEVELOPMENT CORPORATION, a Massachusetts corporation
("Papyrus"). The Buyer, Merger Sub and Papyrus are referred to
collectively herein as the Parties.
RECITALS
A. The Boards of Directors of Papyrus, Buyer and Merger
Sub believe it is in the best interests of their respective
companies that Papyrus and Merger Sub combine into a single company
through the statutory merger of Papyrus with and into Merger Sub
(the "Merger") and, in furtherance thereof, have approved the Merger.
B. Pursuant to the Merger, among other things, the
outstanding shares of Papyrus common stock (the "Papyrus Common
Stock") shall be converted into the right to receive the Merger
Consideration (as defined in and subject to adjustment as specified
in Section 2) upon the terms and subject to the conditions set forth
herein.
C. The parties intend, by executing this Agreement, to
adopt a plan of reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code"), and to
cause the Merger to qualify as a reorganization under the provisions
of Section 368(a)(1)(a) of the Code.
AGREEMENT
NOW, THEREFORE, in consideration of the premises and the
mutual promises herein made, and in consideration of the
representations, warranties, and covenants herein contained, the
Parties agree as follows.
ARTICLE 1.
DEFINITIONS
"AFFILIATE" has the meaning set forth in Rule 12b-2 of the
regulations promulgated under the Securities Exchange Act.
"BUYER" has the meaning set forth in the preface above.
"BUYER DISCLOSURE SCHEDULE" has the meaning set forth in
Article 4.
"BUYER NOTE" has the meaning set forth in Section 2.4.
"BUYER SHARE" means any share of the common stock, $.0001 par
value per share, of Buyer.
"CASH PAYMENT" has the meaning set forth in Section 2.4(e).
"CERTIFICATE OF MERGER" has the meaning set forth in Section
2.3 below.
"CLOSING" has the meaning set forth in Section 2.2 below.
"CLOSING DATE" has the meaning set forth in Section 2.2 below.
"CONFIDENTIAL INFORMATION" has the meaning set forth in
Section 3.10(g) below.
"CONFIDENTIAL PRIVATE PLACEMENT MEMORANDUM" means the
confidential private placement memorandum that shall be prepared
jointly by Buyer and Papyrus and distributed to Papyrus Stockholders
with the Definitive Proxy Materials as part of the Joint Disclosure
Statement.
"DEFINITIVE PROXY MATERIALS" means the definitive proxy
materials relating to the Special Papyrus Meeting.
"DELAWARE GENERAL CORPORATION LAW" means the General
Corporation Law of the State of Delaware, as amended.
"DISSENTING SHARE" means any Papyrus Share which any
stockholder who or which has exercised his or its appraisal rights
under the Massachusetts General Corporation Law holds of record.
"EFFECTIVE TIME" has the meaning set forth in Section 2.1 below.
"EXCHANGE AGENT" has the meaning set forth in Section
2.4(l)(i) below.
"EXCHANGE RATIO" has the meaning set forth in Section 2.4(e).
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"IRS" means the Internal Revenue Service.
"JOINT DISCLOSURE DOCUMENT" means the disclosure document
combining the Confidential Private Placement Memorandum and the
Definitive Proxy Materials.
"KNOWLEDGE" means actual knowledge after reasonable
investigation.
"MATERIAL" means any material event, change, condition or
effect related to the financial condition, properties, assets
(including intangible assets), liabilities, business, operations or
results of operations of such entity or group of entities.
"MATERIAL ADVERSE EFFECT" means any event, change or effect
that is materially adverse to the financial condition, properties,
assets, liabilities, business, operations or results of operations
of such entity and its subsidiaries, taken as a whole.
"MERGER" has the meaning set forth in the recitals above.
"MERGER CONSIDERATION" has the meaning set forth in Section
2.4(l)(i).
"MERGER SUB COMMON STOCK" has the meaning set forth in
Section 2.4(g).
"MERGER SHARES" shall have the meaning set forth in Section
2.4(e).
"ORDINARY COURSE OF BUSINESS" means the ordinary course of
business consistent with past custom and practice (including with
respect to quantity and frequency).
"PAPYRUS" has the meaning set forth in the preface above.
"PAPYRUS CERTIFICATE" means any certificate representing
Papyrus Shares.
"PAPYRUS DISCLOSURE SCHEDULE" has the meaning set forth in
Article 3 below.
"PAPYRUS SHARE" means any share of the common stock, no par
value per share, of Papyrus.
"PAPYRUS STOCKHOLDER" means any Person who or which holds any
Papyrus Shares.
"PARTY OR PARTIES" has the meaning set forth in the preface
above.
"MASSACHUSETTS BUSINESS CORPORATION LAW" means the
Massachusetts Business Corporation Act as set forth in 15 P.S. 1001
et seq., as amended.
"PERSON" means an individual, a partnership, a corporation,
an association, a joint stock company, a trust, a joint venture, an
unincorporated organization, or a governmental entity (or any
department, agency, or political subdivision thereof).
"REQUISITE PAPYRUS STOCKHOLDER APPROVAL" means the
affirmative vote of the holders of a majority of Papyrus Shares in
favor of this Agreement and the Merger.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SECURITIES EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
"SECURITY INTEREST" means any mortgage, pledge, lien,
encumbrance, charge, or other security interest, other than (a)
mechanic's, materialmen's, and similar liens, (b) liens for taxes
not yet due and payable or for taxes that the taxpayer is contesting
in good faith through appropriate proceedings, (c) purchase money
liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of
Business and not incurred in connection with the borrowing of money.
"SOPHISTICATED STOCKHOLDERS" has the meaning set forth in
Section 2.4(f).
"SUBSIDIARY" means any corporation with respect to which a
specified Person (or a Subsidiary thereof) owns a majority of the
common stock or has the power to vote or direct the voting of
sufficient securities to elect a majority of the directors.
"SURVIVING CORPORATION" has the meaning set forth in Section
2.1 below.
"UNQUALIFIED STOCKHOLDER" has the meaning set forth in
Section 2.4(f).
"UTAH BUSINESS CORPORATION LAW" means the Utah Revised
Business Corporation Act as set forth in Utah Code Annotated,
Section 16-10a-1 et seq., as amended.
ARTICLE 2.
BASIC TRANSACTION
2.1 The Merger. On and subject to the terms and
conditions of this Agreement, Papyrus will merge with and into
Merger Sub (the "Merger") at the Effective Time. Merger Sub shall
be the corporation surviving the Merger (the "Surviving Corporation").
2.2 The Closing. This Agreement is executed on September
10, 1998. The actions described in Section 2.3 and the delivery of
the Merger Shares and the Cash Payment as defined in Section 2.4(e),
below, are referred to herein as the Closing. The Closing of the
transactions contemplated by this Agreement shall take place at the
offices of Papyrus, or such other place as the parties may mutually
agree, commencing at 9:00 a.m. local time on the second business day
following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions
contemplated hereby (other than conditions with respect to actions
the respective Parties will take at the Closing itself) or such
other date as the Parties may mutually determine (the "Closing
Date"); provided, however, that the Closing Date shall be no later
than October 31, 1998.
2.3 Actions at the Closing. At the Closing, (i) Papyrus
will deliver to Buyer the various certificates, instruments, and
documents required to be delivered hereunder, (ii) Buyer will
deliver to Papyrus the various certificates, instruments, and
documents required to be delivered hereunder, (iii) Merger Sub and
Papyrus will file with the Secretary of State of the Commonwealth of
Massachusetts and the Utah Department of Commerce, Division of
Corporations and Commercial Code, a Certificate of Merger in the
form attached hereto as Exhibit A (the "Certificate of Merger"), and
(iv) Buyer will deliver to the Exchange Agent in the manner provided
below in this Section 2 the certificates evidencing Buyer Shares
issued in the Merger.
2.4 Effect of Merger.
(a) General. The Merger shall become effective at the
time (the "Effective Time") Merger Sub and Papyrus file the
Certificate of Merger with the Secretary of State of the
Commonwealth of Massachusetts and the Utah Department of Commerce,
Division of Corporations and Commercial Code. The Merger shall have
the effect set forth in the Massachusetts Business Corporation Law
and the Utah Business Corporation Act. The Surviving Corporation
may, at any time after the Effective Time, take any action
(including executing and delivering any document) in the name and on
behalf of either Merger Sub or Papyrus in order to carry out and
effectuate the transactions contemplated by this Agreement.
(b) Articles of Incorporation. The Articles of
Incorporation of Merger Sub in effect at and as of the Effective
Time will remain the Articles of Incorporation of the Surviving
Corporation without any modification or amendment in the Merger.
(c) Bylaws. The Bylaws of Merger Sub in effect at and as
of the Effective Time will remain the Bylaws of the Surviving
Corporation without any modification or amendment in the Merger.
(d) Directors and Officers. The directors and officers
of Merger Sub in office at and as of the Effective Time will remain
the directors and officers of the Surviving Corporation (retaining
their respective positions and terms of office).
(e) Conversion of Papyrus Shares. At and as of the
Effective Time, and without any further action by any of the Papyrus
Stockholders, subject to Section 2.4(f), each Papyrus Share shall be
converted into the right to receive (i) that number of validly
issued, fully paid and nonassessable restricted Buyer Shares
("Merger Shares"), which equals the amount obtained by dividing (A)
the quotient of (a) $2,380,000 divided by (b) the Closing Price, by
(B) the number of outstanding Papyrus Shares (the "Exchange Ratio");
and (ii) cash in the amount of $1,020,000 divided by the number of
outstanding Papyrus Shares (the "Cash Payment"). The Cash Payment
will be evidenced by the promissory note or notes of Buyer in the
form of note attached hereto as Exhibit C, each a "Buyer Note," in
the principal amount of $340,000 and cash, payable by wire transfer
or immediately available funds totaling $680,000. "Closing Price"
shall mean the average of the average closing "bid" price of a Buyer
Share as reported on the Nasdaq SmallCap Market for the thirty (30)
trading days immediately prior to the date one business day before
the Closing Date. No Papyrus Share shall be deemed to be
outstanding or to have any rights other than those set forth in this
Section 2.4 after the Effective Time. The aggregate value of
consideration (Merger Shares and Cash Payment) exchanged by Buyer
for the Papyrus Shares will not exceed $3,400,000.
(f) Restrictions. Notwithstanding Section 2.4(e), Buyer
shall offer, sell, issue or deliver Merger Shares only to Papyrus
Stockholders who are (i) not "U.S. Persons" as that term is defined
in Regulation S, promulgated under the Securities Act, or (ii) in
Buyer's sole discretion, "accredited investors" as that term is
defined in Regulation D promulgated under the Securities Act, and
who have, either alone or with a designated purchaser
representative, such knowledge and experience in financial and
business matters that he or it is capable of evaluating the merits
and risks of exchanging his or its Papyrus Shares for Merger Shares
(each an "Unqualified Stockholder"). Additionally, Buyer shall not
offer, sell, issue or deliver Merger Shares to more than 35 Papyrus
Stockholders who are not accredited investors but who have, either
alone or with their purchaser representatives, such knowledge and
experience in financial and business matters that they are capable
of evaluating the merits and risks of exchanging their Papyrus
Shares for Merger Shares ("Sophisticated Stockholders"). If at
Closing Buyer determines there are any Unqualified Stockholders or
more than 35 Sophisticated Stockholders, Buyer shall:
(i) rank all Sophisticated Stockholders according
to the extent of their respective percentage ownership of Papyrus
Shares, and in accordance with Sections 2.4(e) and 2.4(l) issue and
deliver Merger Shares and Cash Payment to only the 35 Sophisticated
Stockholders who own the largest percentages of the total number of
outstanding Papyrus Shares at Closing; and
(ii) deliver, in accordance with Section 2.4(l), to
each Sophisticated Stockholder who does not receive payment under
Section 2.4(f)(i) and to all Unqualified Stockholders the following
consideration: (1) the Cash Payment, and (2) additional cash
consideration in an amount that shall be determined by multiplying
(a) the number of Merger Shares such Papyrus Stockholders otherwise
would be eligible to receive by (b) the Closing Price. Such
additional cash consideration will reduce the number of Buyer Shares
required to be included in the Merger.
(g) Capital Stock of Merger Sub. At the Effective Time,
each share of common stock of Merger Sub ("Merger Sub Common Stock")
issued and outstanding immediately prior to the Effective Time shall
be converted into and exchanged for one validly issued, fully paid
and nonassessable share of common stock of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing
ownership of any such shares shall continue to evidence ownership of
such shares of capital stock of the Surviving Corporation.
(h) Adjustments to Exchange Ratio. The Exchange Ratio
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 Buyer Shares or Papyrus
Shares), reorganization, recapitalization or other like change with
respect to Buyer Shares or Papyrus Shares occurring after the date
hereof and prior to the Effective Time.
(i) Fractional Shares. No fraction of a Merger Share
will be issued, but in lieu thereof, and to the extent not waived in
writing, each holder of Papyrus Shares who otherwise would be
entitled to a fraction of a Merger Share (after aggregating all
fractional Merger Shares to be received by such person) shall
receive from Buyer an amount of cash (rounded to the nearest whole
cent) equal to the product of (i) such fraction, multiplied by (ii)
the Closing Price. The fractional share interests of each Papyrus
Stockholder shall be aggregated, so that no Papyrus Stockholder
shall receive cash in respect of fractional share interests in an
amount greater than the value of one full Merger Share.
(j) Dissenters' Rights. Dissenting Papyrus Shares
("Dissenting Shares"), if any, shall not be converted into the
Merger Consideration but shall instead be converted into the right
to receive such consideration as may be determined to be due with
respect to such Dissenting Shares pursuant to the Massachusetts
Business Corporation Law. Papyrus shall give Buyer prompt notice of
any demand received by Papyrus to require Papyrus to purchase shares
of outstanding Papyrus Shares, and Buyer shall have the right to
direct and participate in all negotiations and proceedings with
respect to such demand. Papyrus agrees that, except with the prior
written consent of Buyer, or as required under the Massachusetts
Business Corporation Law, it will not voluntarily make any payment
with respect to, or settle or offer to settle, any such purchase
demand. Each holder of Dissenting Shares ("Dissenting Stockholder")
who, pursuant to the provisions of the Massachusetts Business
Corporation Law, becomes entitled to payment of the fair value for
Dissenting Shares shall receive payment therefor (but only after the
value therefor shall have been agreed upon or finally determined
pursuant to such provisions). If, after the Effective Time, any
Dissenting Shares shall lose their status as Dissenting Shares,
Buyer shall issue and deliver, upon surrender by such Dissenting
Stockholder of a certificate or certificates representing shares of
Papyrus Shares, the Merger Consideration to which such stockholder
would otherwise be entitled under this Section 2.4 and the
Certificate of Merger less the Merger Consideration allocable to
such stockholder that has been deposited in the Escrow Fund (as
defined below) in respect of such Papyrus Shares pursuant to Article 7.
(k) Certificate Legends. When issued as contemplated by
this Agreement, the Merger Shares and the Buyer Note(s) shall not
have been registered and shall be characterized as "restricted
securities" under the federal securities laws, and under such laws
such shares may be resold without registration under the Securities
Act, only in certain limited circumstances. Each certificate
evidencing Merger Shares shall bear a legend in substantially the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SHARES
MAY NOT BE SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION WITHOUT AN EXEMPTION UNDER THE ACT OR AN
OPINION OF LEGAL COUNSEL REASONABLY ACCEPTABLE TO BUYER THAT
SUCH REGISTRATION IS NOT REQUIRED.
and any additional legends required by state securities laws. The
Buyer Note(s) will bear a similar legend.
(l) Procedure for Payment.
(i) Immediately after the Effective Time Buyer
will furnish to Durham, Evans, Jones & Pinegar, P.C. (the "Exchange
Agent") (A) stock certificates (issued in the names of the Papyrus
Stockholders or their nominees) representing that number of whole
Merger Shares issuable to the Papyrus Stockholders equal to the
product of (I) the Exchange Ratio times (II) the number of
outstanding Papyrus Shares held of record by each Papyrus
Stockholder, less the number of Merger Shares to be deposited in the
Escrow Fund on such holder's behalf pursuant to Article 7 hereof,
and subject to any adjustment in such number resulting from Section
2.4(f), and (B) checks representing presently available funds
payable to the Papyrus Stockholders in amounts equal to the sum of
(1) cash (without interest) in the amount of the Cash Payment which
such holder has the right to receive in accordance with Section
2.4(e) in respect of Papyrus Shares formerly evidenced by such
tendered certificate, (2) any dividends or other distributions to
which such holder is entitled pursuant to Section 2.4(m), (3) cash
(without interest) in respect of fractional shares as provided in
Section 2.4(i), and (4) any additional cash payment payable to any
Unqualified Stockholder or Sophisticated Stockholder pursuant to
Section 2.4(f), and (C) the Buyer Note(s) (collectively such Merger
Shares, the Buyer Note(s) and cash consideration, "Merger
Consideration").
(ii) Buyer shall cause the Exchange Agent to mail a
letter of transmittal (with instructions for its use) in the form
attached hereto as Exhibit B, together with such other customary
documents as may be required pursuant to such instructions,
including without limitation, a Form W-9 or W-8 to each record
holder of outstanding Papyrus Shares for the holder to use in
surrendering the certificates which represent his or its Papyrus
Shares in exchange for the Merger Consideration payable to such holder.
(iii) Upon surrender to the Exchange Agent of a
Papyrus Certificate for cancellation, together with such letter of
transmittal and other documents, duly completed and validly executed
in accordance with the instructions thereto, the holder of such
Papyrus Shares shall be entitled to receive in exchange therefor the
Merger Consideration payable to such Holder. Upon delivery of such
payment to the Papyrus Stockholder, the Papyrus Certificate so
surrendered shall forthwith be canceled. Until so surrendered, each
outstanding Papyrus Certificate that, prior to the Effective Time,
represented Papyrus Shares will be deemed from and after the
Effective Time, for all corporate purposes, other than the payment
of dividends, to evidence the ownership of the number of full Merger
Shares and the cash consideration described in this Section
2.4(l)(iii).
(iv) If any Papyrus Certificates shall have been
lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Papyrus Certificates,
upon the making of an affidavit of that fact by the holder thereof,
such Merger Consideration as may be required pursuant to this
Section 2.4.
(v) Any portion of the Merger Consideration
delivered to the Exchange Agent which remains undistributed to the
Papyrus Stockholders one hundred eighty (180) days after the
Effective Time shall be delivered to Buyer, upon demand, and any
Papyrus Stockholders who have not previously complied with this
Section 2.4 shall thereafter look only to Buyer for payment of their
claim for the Merger Consideration.
(vi) Notwithstanding anything to the contrary in
this Agreement, none of the Exchange Agent, the Surviving
Corporation or any party hereto shall be liable to any person for
any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
(vii) Buyer shall pay all charges and expenses of
the Exchange Agent.
(m) Distributions on Merger Shares. Buyer will not pay
any dividend or make any distribution on Merger Shares (with a
record date at or after the Effective Time) to any record holder of
outstanding Papyrus Shares until the holder surrenders for exchange
his or its certificates which represented Papyrus Shares. Buyer
instead will pay the dividend or make the distribution to the
Exchange Agent in trust for the benefit of the holder pending
surrender and exchange. In no event, however, will any holder of
outstanding Papyrus Shares be entitled to any interest or earnings
on the dividend or distribution pending receipt.
(n) Transfers of Ownership. At the Effective Time, the
stock transfer books of Papyrus shall be closed and there shall be
no further registration of transfers of capital stock of Papyrus
thereafter on the records of Papyrus. If any certificate for Merger
Shares is to be issued in a name other than in which the Papyrus
Certificate surrendered in exchange therefor is registered, it will
be a condition of the issuance thereof that the Papyrus 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 Buyer or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for
Merger Shares in any name other than that of the registered holder
of the Papyrus Certificate surrendered, or established to the
satisfaction of Buyer or any agent designated by it that such tax
has been paid or is not payable.
(o) Dissenting Shares. The provisions of this Section
2.4 shall also apply to Dissenting Shares that lose their status as
such, except that the obligations of Buyer under this Section 2.4
shall commence on the date of loss of such status and the holder of
such shares shall be entitled to receive in exchange for such shares
the Merger Consideration to which such holder is entitled pursuant
to Section 2.4(e).
(p) Escrow. As soon as practicable after the Effective
Time, and subject to and in accordance with the provisions of
Article 7, Buyer shall cause to be distributed to the Escrow Agent
(as defined in Section 7.1 hereof) a certificate or certificates
representing the Escrow Shares (which shall be registered in the
name of the Escrow Agent as nominee for the holders of Papyrus
Certificates canceled pursuant to this Section 2.4). Such shares
shall be beneficially owned, pro rata by the Papyrus Stockholders
who receive Merger Consideration, and such shares shall be held in
escrow and shall be available to compensate Buyer for certain
damages as provided in Article 7. To the extent not used for such
purposes, such shares shall be released, all as provided in Article 7.
(q) No Further Ownership Rights in Papyrus Shares. The
Merger Consideration delivered upon the surrender for exchange of
Papyrus Shares in accordance with the terms hereof (including any
dividends, distributions or cash paid in lieu of fractional shares)
shall be deemed to have been issued in full satisfaction of all
rights pertaining to such Papyrus Shares, and there shall be no
further registration of transfers on the records of the Surviving
Corporation of Papyrus Shares which were outstanding immediately
prior to the Effective Time. If, after the Effective Time, Papyrus
Certificates are presented to the Surviving Corporation for any
reason, they shall be canceled and exchanged as provided in this
Section 2.4.
(r) Tax Consequences. It is intended by the parties
hereto that the Merger shall constitute a tax-free reorganization
within the meaning of Section 368(a) of the Code.
(s) Taking of Necessary Action; Further Action. Each of
Buyer, Papyrus and Merger Sub will take all such reasonable and
lawful action as may be necessary or desirable in order to
effectuate the Merger in accordance with this Agreement as promptly
as possible. If, at any time after the Effective Time, any 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 Papyrus and Merger Sub, the officers and
directors of Papyrus and Merger Sub are fully authorized in the name
of their respective corporations or otherwise to take, and will
take, all such lawful and necessary action, so long as such action
is not inconsistent with this Agreement.
ARTICLE 3.
REPRESENTATIONS AND WARRANTIES OF PAPYRUS
Papyrus represents and warrants to Buyer and Merger Sub that the
statements contained in this Article 3 are correct and complete as
of the date of this Agreement and will be correct and complete as of
the Closing Date (as though made then and as though the Closing Date
were substituted for the date of this Agreement throughout this
Article 3), except as set forth in the disclosure schedule of
Papyrus accompanying this Agreement and initialed by the Parties
(the "Papyrus Disclosure Schedule"). The Papyrus Disclosure
Schedule will be arranged and numbered in paragraphs corresponding
to the lettered and numbered paragraphs contained in this Article 3.
3.1 Organization and Standing. Papyrus is a corporation
duly organized, validly existing and in good standing under the laws
of the Commonwealth of Massachusetts with full power and authority
(corporate and other) to own, lease, use and operate its properties
and to conduct its business as and where now owned, leased, used,
operated and conducted. Papyrus is duly qualified to do business
and in good standing in each jurisdiction in which the nature of the
business conducted by it or the property it owns, leases or operates
makes qualification necessary, except where the failure to be so
qualified or in good standing in such jurisdiction would not have a
Material Adverse Effect on Papyrus. Papyrus is not in default in
the performance, observance or fulfillment or otherwise in violation
of any provision of its Certificate of Incorporation, as amended and
restated (the "Papyrus Certificate"), or its Bylaws, as in effect on
the date hereof (the "Papyrus Bylaws"). Papyrus has heretofore
furnished to Buyer a complete and correct copy of the Papyrus
Certificate and the Papyrus Bylaws.
3.2 Subsidiaries. Papyrus does not own, directly or
indirectly, any equity or other ownership interest in any
corporation, partnership, joint venture or other entity or
enterprise. Except as set forth in Section 3.2 to the Papyrus
Disclosure Schedule, Papyrus is not subject to any obligation or
requirement to provide funds to or make any investment (in the form
of a loan, capital contribution or otherwise) in any corporation,
partnership, joint venture or other entity or enterprise.
3.3 Corporate Power and Authority. Papyrus has all
requisite corporate power and authority to enter into this Agreement
and, subject to authorization and adoption of the Merger and the
transactions contemplated hereby by Papyrus Stockholders, to
consummate the transactions contemplated by this Agreement. 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 Papyrus, subject to
authorization and adoption of the Merger and the transactions
contemplated hereby by the Papyrus Stockholders. The Board of
Directors of Papyrus has (i) unanimously approved this Agreement and
the Merger, (ii) determined that in its opinion the Merger is in the
best interests of the Papyrus Stockholders and is on terms that are
fair to the Papyrus Stockholders and (iii) recommended that the
Papyrus Stockholders approve this Agreement and the Merger. This
Agreement has been duly executed and delivered by Papyrus and
constitutes the legal, valid and binding obligation of Papyrus,
enforceable against Papyrus in accordance with its terms.
3.4 Capitalization of Papyrus. As of the date hereof,
Papyrus' authorized capital stock consists solely of (a) 100,000
shares of common stock, no par value per share ("Papyrus Shares"),
of which (i) ______ shares are issued and outstanding, (ii) no
shares are issued and held in treasury (which does not include the
shares reserved for issuance set forth in clauses (iii) through (iv)
below), (iii) ________ shares are reserved for issuance upon the
conversion of outstanding warrants, (iv) ________ shares are
reserved for issuance upon the exercise or conversion of outstanding
options granted or issued by Papyrus (which have an average weighted
exercise price of $___________ per share). Each outstanding share
of Papyrus capital stock is duly authorized and validly issued,
fully paid and nonassessable, and has not been issued in violation
of any preemptive or similar rights. Other than as set forth in the
first sentence hereof or in Section 3.4 to the Papyrus Disclosure
Schedule, there are no outstanding subscriptions, options, warrants,
puts, calls, agreements, understandings, claims or other commitments
or rights of any type relating to the issuance, sale or transfer of
any securities of Papyrus, nor are there outstanding any securities
which are convertible into or exchangeable for any shares of capital
stock of Papyrus, and Papyrus has no obligation of any kind to issue
any additional securities or to pay for securities of Papyrus or any
predecessor. Except as set forth in Section 3.4 to the Papyrus
Disclosure Schedule, Papyrus has not agreed to register any
securities under the Securities Act or under any state securities
law or granted registration rights to any person or entity. There
are no other contracts, commitments or agreements relating to
voting, purchase or sale of capital stock of Papyrus (i) between or
among Papyrus and the holders of Papyrus' capital stock, and (ii) to
Papyrus' Knowledge, between or among the holders of Papyrus' capital
stock.
3.5 Conflicts; Consents and Approvals. Neither the
execution and delivery of this Agreement by Papyrus nor the
consummation of the transactions contemplated hereby will:
(a) conflict with, or result in a breach of any provision
of, the Papyrus Certificate or the Papyrus Bylaws;
(b) violate, or conflict with, or result in a breach of
any provision of, or constitute a default (or an event which, with
the giving of notice, the passage of time or otherwise, would
constitute a default) under, or entitle any party (with the giving
of notice, the passage of time or otherwise) to terminate,
accelerate, modify or call a default under, or result in the
creation of any lien, security interest, charge or encumbrance upon
any of the properties or assets of Papyrus under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, license, contract, undertaking, agreement, lease or
other instrument or obligation to which Papyrus is a party;
(c) violate any order, writ, injunction, decree, statute,
rule or regulation applicable to Papyrus; or
(d) require any action or consent or approval of, or
review by, or registration or filing by Papyrus or any of its
affiliates with, any third party or any governmental entity, other
than (i) authorization of the Merger and the transactions
contemplated hereby by Papyrus Stockholders, (ii) any actions
required under federal and state securities laws as are contemplated
by this Agreement and (iii) consents or approvals of any
governmental entity set forth in Section 3.5 to the Papyrus
Disclosure Schedule; except in the case of clause (b) , (c) and (d)
for any of the foregoing that are set forth in Section 3.5 of the
Papyrus Disclosure Schedule or that would not individually or in the
aggregate have a Material Adverse Effect on Papyrus or upon the
ability of the parties to consummate the transactions contemplated
hereby.
3.6 Absence of Certain Changes.
Except as set forth in Section 3.6 to the Papyrus Disclosure
Schedule, since June 30, 1998, there has not been and Papyrus has
not committed and has not negotiated to do any of the following:
(a) Any change in the business, operations, assets,
properties, customer base, prospects, rights or condition (financial
or otherwise) of Papyrus or any occurrence, circumstance, or
combination thereof which reasonably could be expected to result in
a Material Adverse Effect on Papyrus;
(b) Any declaration, setting aside or payment of any
dividend or any distribution (in cash or in kind) to any stockholder
of Papyrus, or any direct or indirect redemption, purchase or other
acquisition by Papyrus of any of its capital stock or any options,
warrants, rights or agreements to purchase or acquire such stock;
(c) Any increase in amounts payable by Papyrus to or for
the benefit of, or committed to be paid by Papyrus to or for the
benefit of, any stockholder, director, officer or other consultant,
agent or employee of Papyrus whose total annual compensation exceeds
$50,000 or any relatives of such person, or any increase in any
benefits granted under any bonus, stock option, profit-sharing,
pension, retirement, severance, deferred compensation, group health,
insurance, or other direct or indirect benefit plan, payment or
arrangement made to, with or for the benefit of any such person
(except in the Ordinary Course of Business, consistent with past
practice);
(d) Any borrowing or agreement to borrow funds by Papyrus
or any incurring by Papyrus of any other obligation or liability
(contingent or otherwise), except liabilities incurred in the
Ordinary Course of Business (consistent with past practices), or any
endorsement, assumption or guarantee of payment or performance of
any loan or obligation of any other person by Papyrus;
(e) Any material change in Papyrus' method of doing
business or any material change in its accounting principles or
practices or its method of application of such principles or practices;
(f) Any mortgage, pledge, lien, security interest,
hypothecation, charge or other encumbrance imposed or agreed to be
imposed on or with respect to the property or assets of Papyrus
other than in Ordinary Course of Business, consistent with past
practice;
(g) Any sale, lease or other disposition of, or any
agreement to sell, lease or otherwise dispose of any of the
properties or assets of Papyrus, other than sales in the usual and
Ordinary Course of Business for fair equivalent value to persons
other than directors, officers, stockholders, or other affiliates of
Papyrus;
(h) Any purchase of or any agreement to purchase assets
(other than purchases in the Ordinary Course of Business consistent
with past practices) for an amount in excess of $10,000 for any one
purchase or $50,000 for all such purchases made by Papyrus or any
lease or any agreement to lease, as lessee, any capital assets with
payments over the term thereof to be made by Papyrus exceeding an
aggregate of $50,000;
(i) Any loan or advance made by Papyrus to any person
other than loans made to Papyrus' customers in the Ordinary Course
of Business consistent with past practices not exceeding $10,000, in
the aggregate, to any customer;
(j) Any modification, waiver, change, amendment, release,
rescission or termination of, or accord and satisfaction with
respect to, any material term, condition or provision of any
material contract, agreement, license or other instrument to which
Papyrus is a party, other than any satisfaction by performance in
accordance with the terms thereof in the usual and Ordinary Course
of Business;
(k) Any labor dispute or disturbance having a Material
Adverse Effect on Papyrus, including without limitation the filing
of any petition or charge of unfair labor practice with any
governmental or regulatory authority, efforts to effect a union
representation election, actual or threatened employee strike, work
stoppage or slow down;
(l) Any grant of any license or sublicense of any rights
under or with respect to any Intellectual Property, or any other
transfer or grant of a right under, in or to Intellectual Property
other than transfers or grants in the Ordinary Course of Business;
(m) Any change made or authorized in the Papyrus
Certificate or Papyrus Bylaws;
(n) Any issuance, sale or other disposal by Papyrus of
any of its capital stock, or any grant of any options, warrants, or
other rights to purchase or obtain (including upon conversion,
exchange, or exercise) any of its capital stock;
(o) Any damage, destruction, or loss (whether or not
covered by insurance) to Papyrus' property;
(p) Any employment contract or collective bargaining
agreement, written or oral, or modified the terms of any existing
such contract or agreement; or
(q) Any other material occurrence, event, incident,
action, failure to act, or transaction outside the Ordinary Course
of Business involving Papyrus.
3.7 Financial Statements.
(a) Papyrus has furnished to Buyer balance sheets of
Papyrus as of June 30, 1998, 1997 and 1996, and the related
statements of income, changes in stockholders' equity, and cash
flows for the fiscal years then ended, including, in each case, the
related notes (collectively, the "Papyrus Statements"). The Papyrus
Statements have been prepared from and are in accordance with the
books and records of Papyrus and fairly present the financial
condition of Papyrus as of the date stated and the results of
operations of Papyrus for the periods then ended in accordance with
such practices.
(b) Papyrus has furnished to Buyer the unaudited balance
sheet of Papyrus as of the last calendar month ending prior to the
Closing Date and the related statements of income and cash flows for
the period beginning July 1, 1998 and then ended (the "Papyrus
Interim Statements"). The Papyrus Interim Statements have been
prepared from and in accordance with the books and records of
Papyrus and fairly present the financial condition of Papyrus as of
such dates and the results of operations of Papyrus for such
periods.
3.8 Taxes.
(a) Papyrus has timely paid or caused to be timely paid
all Taxes required to be paid by it through the date hereof and
prior to the Closing Date shall have paid or caused to be paid all
Taxes required to be paid by it through the Closing Date. Papyrus
has timely filed or caused to be filed timely all Tax Returns
required to be filed by it through the date hereof and prior to the
Closing Date shall have timely filed or caused to be filed all Tax
Returns required to be filed by it through the Closing Date. All
such Tax Returns that have been filed are true complete and correct.
Neither the IRS nor any other governmental entity is now auditing
or asserting or, to the Knowledge of Papyrus, threatening to assert
against Papyrus, any deficiency or claim for additional Taxes.
Papyrus currently is not the beneficiary of any extension of time
within which to file any Tax Return. No claim has ever been made by
any authority in a jurisdiction where Papyrus does not file Tax
Returns that it is or may be subject to taxation by that
jurisdiction. There are no Security Interests on any of the assets
of Papyrus that arose in connection with any failure (or alleged
failure) to pay any Tax. No Papyrus director or officer (or
employee responsible for Tax matters) of Papyrus expects any
authority to assess any additional Taxes for any period for which
Tax Returns have been filed. Papyrus has not waived any statute of
limitations in respect of Taxes or agreed to any extension of time
with respect to a Tax assessment or deficiency.
(b) Papyrus has delivered to Buyer correct and complete
copies of all federal income Tax Returns, examination reports, and
statements of deficiencies assessed against or agreed to by Papyrus
since 1994.
(c) Papyrus is not obligated by any contract, agreement
or other arrangement to indemnify any other person with respect to
Taxes. Papyrus is not now nor ever has been a party to or bound by
any tax sharing agreement or any agreement or arrangement (whether
or not written and including, without limitation, any arrangement
required or permitted by law) binding Papyrus which (i) requires
Papyrus to make any tax payment to or for the account of any other
person, (ii) affords any other person the benefit of any net
operating loss, net capital loss, investment tax credit, foreign tax
credit, charitable deduction or any other credit or tax attribute
which could reduce Taxes (including, without limitation, deductions
and credits related to alternative minimum Taxes) of Papyrus, (iii)
requires or permits the transfer or assignment of income, revenues,
receipts or gains to Papyrus, from any other person, or (iv)
otherwise requires Papyrus to indemnify any other person in respect
of Taxes.
(d) Papyrus has withheld and paid all Taxes required to
have been withheld and paid in connection with amounts paid or owing
to any employee, independent contractor, creditor, stockholder or
other third party.
(e) "Tax Returns" means returns, information returns,
reports, forms and other documents (including, any related or
supporting information) required to be filed with any governmental
authority of the United States or any other jurisdiction responsible
for the imposition, administration or collection of Taxes.
(f) "Taxes" means (i) all Taxes (whether federal, state,
local or foreign) based upon or measured by income and any other tax
whatsoever, including, without limitation, gross receipts,
estimated, profits, sales, use, occupation, value added, ad valorem,
transfer, franchise, withholding, payroll, employment, excise, or
property Taxes, together with any interest or penalties, additions
to Taxes or additional amounts, imposed with respect thereto, (ii)
any liability for payments of amounts of Taxes described in the
immediately preceding clause (i) as a result of being a "transferee"
(within the meaning of Section 6901 of the Code or any other
applicable law) of another person, successor or a member of any
affiliated, consolidated or combined group and (iii) any obligations
under any agreements or arrangements with respect to any Taxes
described in clause (i) above.
3.9 Compliance with Law; Products. To Papyrus'
Knowledge, except as set forth in Section 3.9 to the Papyrus
Disclosure Schedule, Papyrus is in compliance in all material
respects with all applicable laws, statutes, orders, rules,
regulations, policies or guidelines promulgated, or judgments,
decisions or orders entered by any governmental authority
(collectively, "Applicable Laws") relating to Papyrus or its
business or properties. Papyrus has heretofore made available to
Buyer copies of all material correspondence in Papyrus' possession
from and to the Occupational Safety and Health Administration and
any other governmental authority and inspectors.
3.10 Intellectual Property.
(a) Papyrus owns and has good and marketable title to, or
is licensed or otherwise possesses legally enforceable rights to use
(free and clear of any lien, encumbrance or security interest), all
patents, patent applications, trademarks, trade names, service
marks, copyrights (whether registered or unregistered), and any
applications therefor, maskworks, maskwork applications, net lists,
schematics, technology, know-how, trade secrets, inventory, ideas,
algorithms, processes, computer software programs including all
object code, source code, configurations, routines and algorithms
contained therein with annotations and related documentation,
together with all alterations, modifications, and configurations
therein in all forms of expression, including, but not limited to,
the source code, object code, flow charts, mock diagrams, manuals
and all other documentation no matter how stored, transmitted, read
or utilized, or applications (in both source code and object or
binary code form), client lists and tangible or intangible
proprietary information or material ("Intellectual Property") that
are used or currently proposed to be used in the business of Papyrus
as currently conducted or as proposed to be conducted by Papyrus,
including without limitation the pen-voice integration technology
and handwriting recognition technology, whether in development or
completed, except to the extent that the failure to have such
rights has not had and would not reasonably be expected to have a
Material Adverse Effect on Papyrus. Papyrus is the exclusive owner
of all Intellectual Property. Each item of Intellectual Property
owned or used by Papyrus immediately prior to the Closing hereunder
will be owned or available for use by Buyer or Merger Sub on
identical terms and conditions immediately subsequent to the Closing
hereunder.
(b) Section 3.10 the Papyrus Disclosure Schedule lists
(i) all patents and patent applications and all registered and
unregistered trademarks, trade names and service marks, registered
and unregistered copyrights, and maskworks, included in the
Intellectual Property, including the jurisdictions in which each
such Intellectual Property right has been issued or registered or in
which any application for such issuance and registration has been
filed, (ii) all licenses, sublicenses and other agreements as to
which Papyrus is a party and pursuant to which any person is
authorized to use any Intellectual Property, and (iii) all licenses,
sublicenses and other agreements as to which Papyrus is a party and
pursuant to which Papyrus is authorized to use any third party
patents, trademarks, copyrights, know-how or other Intellectual
Property, including software ("Third Party Intellectual Property
Rights") which are incorporated in, are, or form a part of any
Papyrus product or are used in the manufacture of any Papyrus product.
(c) There has not been and there is not now any
unauthorized use, disclosure, infringement or misappropriation of
any Intellectual Property rights of Papyrus, any trade secret
material to Papyrus, or any Intellectual Property right of any third
party to the extent licensed by or through Papyrus, by any third
party, including any employee or former employee of Papyrus.
Papyrus has not entered into any agreement to indemnify any other
person against any charge of infringement of any Intellectual
Property, other than indemnification provisions contained in sales
agreements arising in the Ordinary Course of Business. There are no
royalties, fees or other payments payable by Papyrus to any person
by reason of the ownership, use, sale or disposition of Intellectual
Property.
(d) Papyrus is not, nor will it be as a result of the
execution and delivery of this Agreement or the performance of its
obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Intellectual Property
or Third Party Intellectual Property Rights, the breach of which
would have a Material Adverse Effect on Papyrus.
(e) All patents, registered trademarks, service marks and
copyrights held by Papyrus are valid and subsisting. Papyrus is not
infringing, misappropriating or making unlawful use of, and, except
to the extent disclosed in Section 3.10 to the Papyrus Disclosure
Statement, has not received any notice or any communication (in
writing or otherwise) of any actual, alleged, possible or potential
infringement, misappropriation or unlawful use of any proprietary
asset owned or used by any third party. Except to the extent
disclosed in Section 3.10 to the Papyrus Disclosure Schedule,
Papyrus (i) has not been sued in any suit, action or proceeding
which involves a claim of infringement of any patents, trademarks,
service marks, copyrights or violation of any trade secret or other
proprietary right of any third party; and (ii) has not brought any
action, suit or proceeding for infringement of Intellectual Property
or breach of any license or agreement involving Intellectual
Property against any third party.
(f) All current and former officers, employees and
consultants of Papyrus have executed and delivered to Papyrus an
agreement (containing no exceptions or exclusions from the scope of
its coverage) regarding the protection of proprietary information
and the assignment to Papyrus of any Intellectual Property arising
from services performed for Papyrus by such persons, the form or
forms of which have been supplied to Buyer and all current and
former consultants and independent contractors to Papyrus involved
in the development, modification, marketing and servicing of
Papyrus' technology and/or software have executed and delivered to
Papyrus an agreement (containing no exceptions or exclusions from
the scope of its coverage) in the form of which has been delivered
to Buyer. To Papyrus' Knowledge, no employee or independent
contractor of Papyrus is in violation of any term of any patent
disclosure agreement or employment contract or any other contract or
agreement relating to the relationship of any such employee or
independent contractor with Papyrus.
(g) Papyrus has taken all commercially reasonable and
customary measures and precautions necessary to protect and maintain
the confidentiality of all Intellectual Property (except such
Intellectual Property the value of which would be unimpaired by
public disclosure) and otherwise to maintain and protect the full
value of all proprietary assets. All use, disclosure or
appropriation of Intellectual Property not otherwise protected by
patents, patent applications or copyright ("Confidential
Information") owned by Papyrus by or to a third party has been
pursuant to the terms of a written agreement between Papyrus and
such third party. All use, disclosure or appropriation of
Confidential Information not owned by Papyrus has been pursuant to
the terms of a written agreement between Papyrus and the owner of
such Confidential Information, or is otherwise lawful.
(h) A complete list of Papyrus' proprietary software
("Papyrus Software"), together with a brief description, is set
forth in Section 3.10 of the Papyrus Disclosure Schedule. The
Papyrus Software conforms in all material respects with any
specification, documentation, performance standard, representation
or statement provided with respect thereto by or on behalf of Papyrus.
(i) No Intellectual Property is subject to any
outstanding order, judgment, decree, stipulation or agreement
restricting in any manner the licensing thereof by Papyrus. Papyrus
has not entered into any agreement to indemnify any other person
against any charge of infringement of any Intellectual Property.
Papyrus has not entered into any agreement granting any third party
the right to bring infringement actions with respect to, or
otherwise to enforce rights with respect to, any Intellectual
Property. Papyrus has the exclusive right to file, prosecute and
maintain all applications and registrations with respect to
Intellectual Property.
(j) Except as set forth in Section 3.10 to the Papyrus
Disclosure Schedule, Papyrus has full title and ownership of, or has
all necessary licenses, permissions and other consents to use all
right, title and interest in and to all Intellectual Property or
other consents necessary and sufficient to enable Papyrus to (x) use
the Intellectual Property for its intended purpose, (y) fulfill its
obligations to Buyer hereunder, and (z) carry on its business,
without any infringement of any third party.
(k) Papyrus has received no written opinion or written
advice of counsel, express or implied, which is or could reasonably
be deemed to be, in conflict, contravention, or contradiction with
any or all of the foregoing representations and warranties in this
Section 3.10.
(l) No software developed by Papyrus or, to Papyrus'
knowledge developed by third parties contained in software developed
by Papyrus, included in the Intellectual Property contains any back
door, time bomb, drop dead device, or other software routine
designed to disable a computer program automatically with the
passage of time or under the positive control of any unauthorized
person, or, to Papyrus' knowledge, any virus, Trojan horse, worm, or
other software routines or hardware components designed to permit
unauthorized access, disable, erase, or otherwise harm software,
hardware, or data or to perform any other such actions.
(m) Papyrus does not have any Knowledge of any new
products, inventions, procedures, or methods of manufacturing or
processing that any competitors or other third parties have
developed which reasonably could be expected to supersede or make
obsolete any product or process of any of Papyrus.
3.11 Title to and Condition of Properties. Except as set
forth in Section 3.11 to the Papyrus Disclosure Schedule, Papyrus
has good, valid and indefeasible title to all of its assets and
properties of every kind, nature and description, tangible or
intangible, wherever located. Except as set forth in Section 3.11
to the Papyrus Disclosure Schedule, all such properties are owned
free and clear of all mortgages, pledges, liens, security interests,
encumbrances and restrictions of any nature whatsoever, including,
without limitation, (a) rights or claims of parties in possession;
(b) easements or claims of easements; (c) encroachments, overlaps,
boundary line or water drainage disputes or any other matters; (d)
any lien or right to a lien for services, labor or material
furnished; (e) special tax or other assessments; (f) options to
purchase, leases, tenancies, or land contracts; (g) contracts,
covenants, or reservations which restrict the use of such properties
and (h) violations of any Applicable Laws applicable to such
properties, except where such mortgages, pledges, liens, security
interests, encumbrances or restrictions could not reasonably be
likely to have a Material Adverse Effect on Papyrus. Papyrus owns
no real property. Section 3.11 to the Papyrus Disclosure Schedule
contains a complete and accurate list of the location of all real
property which is leased or operated by Papyrus. Except as set
forth in Section 3.11 to the Papyrus Disclosure Schedule, all
machinery and equipment and tangible personal property owned, leased
or used by Papyrus and material to the operation of its business are
reasonably suitable for the purpose or purposes for which they are
being used and are in good condition and repair, ordinary wear and
tear excepted.
3.12 Litigation. Except as set forth in Section 3.12 to
the Papyrus Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation (an "Action") pending or, to the
Knowledge of Papyrus, threatened against Papyrus or any officer or
director of Papyrus which, individually or in the aggregate, if
adversely determined, would have a Material Adverse Effect on
Papyrus. Papyrus is not subject to any outstanding order, writ,
injunction or decree which, individually or in the aggregate,
insofar as can be reasonably foreseen, could have a Material Adverse
Effect on Papyrus or a Material Adverse Effect on the ability of
Papyrus to consummate the transactions contemplated hereby.
3.13 Brokerage and Finder's Fees; Expenses. Neither
Papyrus nor any stockholder, director, officer or employee thereof,
has incurred or will incur on behalf of Papyrus, any brokerage,
finder's or similar fee in connection with the transactions
contemplated by this Agreement.
3.14 Employee Benefit Plans. Except as set forth in
Section 3.14 to the Papyrus Disclosure Schedule, and except for
medical benefit plans with respect to which the Company has made all
required contributions and has complied with all applicable laws,
the Company does not have or otherwise contribute to or participate
in any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974.
3.15 Contracts.
(a) Section 3.15 to the Papyrus Disclosure Schedule lists
all written or oral contracts, agreements, guarantees, leases and
executory commitments (each a "Contract") to which Papyrus is a
party and which fall within any of the following categories: (i)
Contracts not entered into in the Ordinary Course of Business of
Papyrus, (ii) joint venture, partnership and similar agreements,
(iii) Contracts which are service contracts or equipment leases
involving payments by Papyrus of more than $20,000 annually, (iv)
Contracts containing covenants purporting to limit the freedom of
Papyrus to compete in any line of business in any geographic area or
to hire any individual or group of individuals, (v) Contracts which
after the Effective Time would have the effect of limiting the
freedom of Buyer or its subsidiaries (other than Papyrus) to compete
in any line of business in any geographic area or to hire any
individual or group of individuals, including any Contracts with
distributors granting any exclusive rights, (vi) Contracts which
contain minimum purchase conditions or requirements or other terms
that restrict or limit the purchasing relationships of Papyrus or
its affiliates, or any customer, licensee or lessee thereof, (vii)
Contracts relating to any outstanding commitment for capital
expenditures in excess of $20,000, (viii) Contracts relating to the
lease or sublease of or sale or purchase of real or personal
property involving any annual expense or price in excess of $20,000
and not cancelable by Papyrus (without premium or penalty) within
one month, (ix) Contracts with any labor organization, (x)
indentures, mortgages, promissory notes, loan agreements, guarantees
of amounts in excess of $20,000, letters of credit or other
agreements or instruments of Papyrus or commitments for the
borrowing or the lending of amounts in excess of $20,000 by Papyrus
or providing for the creation of any charge, security interest,
encumbrance or lien upon any of the assets of Papyrus, (xi)
Contracts which are fixed price, capitation or other risk sharing
agreements with customers not cancelable by Papyrus (without premium
or penalty) within one month; (xii) Contracts involving annual
revenues or expenditures to the business of Papyrus in excess of
1.0% of Papyrus' annual revenues, (xiii) Contracts providing for
"earn-outs" or other contingent payments involving more than $10,000
over the term of the Contract; (xiv) any agreement concerning
confidentiality; (xv) any profit sharing, stock option, stock
purchase, stock appreciation, deferred compensation, severance, or
other material plan or arrangement for the benefit of its current or
former directors, officers, and employees.
(b) All such Contracts are valid and binding obligations
of Papyrus and, to the Knowledge of Papyrus, the valid and binding
obligation of each other party thereto, and will continue to be
legal, valid, binding, enforceable, and in full force and effect on
identical terms following the consummation of the transactions
contemplated. Neither Papyrus nor, to the Knowledge of Papyrus, any
other party thereto is in violation of or in default in any material
respect in respect of, nor has there occurred an event or condition
which with the passage of time or giving of notice (or both) would
constitute a material default under or permit the termination of,
any Contract.
(c) Except as set forth in Section 3.15 of the Papyrus
Disclosure Schedule or as contemplated by the transactions
contemplated hereby, there are no Contracts or other transactions
between Papyrus, on the one hand, and any (i) officer or director of
Papyrus, (ii) record or beneficial owner of five percent or more of
the voting securities of Papyrus or (iii) affiliate of any such
officer, director or beneficial owner, on the other hand.
3.16 Accounts Receivable. All accounts and notes
receivable (including lease and finance notes receivable) and
accrued interest receivable of Papyrus have arisen in the Ordinary
Course of Business and the accounts receivable reserves reflected on
the balance sheet included in the Papyrus Interim Statements are as
of such date.
3.17 Labor Matters. Except as set forth in Section 3.17
to the Papyrus Disclosure Schedule, Papyrus does not have any labor
contracts, collective bargaining agreements or employment or
consulting agreements with any persons employed by Papyrus or any
persons otherwise performing personal services primarily for Papyrus
(the "Papyrus Business Personnel"). Papyrus has not engaged in any
unfair labor practice with respect to Papyrus Business Personnel,
and there is no unfair labor practice complaint pending or, to the
Knowledge of Papyrus, threatened, against Papyrus with respect to
Papyrus Business Personnel. There is no labor strike, dispute,
slowdown or stoppage pending or, to the Knowledge of Papyrus,
threatened against Papyrus. Papyrus is in compliance with all
currently applicable laws and regulations respecting discrimination
in employment, terms and conditions of employment, wages, hours and
occupational safety and health and employment practices, except for
such noncompliance as has not and would not reasonably be expected
to have had a Material Adverse Effect on Papyrus, and is not engaged
in any unfair labor practice. There are no pending claims against
Papyrus under any workers' compensation plan or policy or for long
term disability. Papyrus has no material obligations under COBRA
with respect to any former employees or beneficiaries thereunder.
There are no proceedings pending or, to the Knowledge of Papyrus,
threatened, between Papyrus and its employees or former employees,
which proceedings have or could reasonably be expected to have a
Material Adverse Effect on Papyrus. There has been no claim against
Papyrus based on actual or alleged race, age, sex, disability or
other harassment or discrimination, or similar tortuous conduct,
nor, to Papyrus' Knowledge, is there any basis for such claim. In
addition, Papyrus has provided all employees with all relocation
benefits, stock options, bonuses and incentives, and all other
compensation earned up through the date of this Agreement.
3.18 Undisclosed Liabilities. Except (i) as and to the
extent disclosed or reserved against on the balance sheet of Papyrus
as of June 30, 1998, included in the Papyrus Interim Statements,
(ii) as incurred after the date thereof in the Ordinary Course of
Business consistent with prior practice and not prohibited by this
Agreement or (iii) as set forth in Section 3.18 to the Papyrus
Disclosure Schedule or elsewhere in this Agreement, Papyrus does not
have any liabilities or obligations of any nature, whether known or
unknown, absolute, accrued, contingent or otherwise and whether due
or to become due, that, individually or in the aggregate, have or
could be reasonably likely to have a Material Adverse Effect on
Papyrus.
3.19 Operation of Papyrus' Business; Relationships.
(a) Papyrus believes that the relationships of Papyrus
with its customers, suppliers, distributors and value added
resellers (including, without limitation, data suppliers,
Intellectual Property licensors and product distributors) are
satisfactory and that the execution of this Agreement, the Merger
and the transactions contemplated hereby will not have a Material
Adverse Effect on the relationships of Papyrus with such customers
or suppliers.
(b) Papyrus is in possession of all franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions,
consents, certificates, approvals and orders necessary to own, lease
and operate its properties and to carry on its business as it is now
being conducted (collectively, the "Papyrus Permits") except where
the failure to possess such Papyrus Permits, individually or in the
aggregate, could not reasonably be expected to have a Material
Adverse Effect on Papyrus, and there is no action pending or, to the
Knowledge of Papyrus, threatened regarding any of the Papyrus
Permits. To Papyrus' Knowledge, Papyrus is not in conflict with, or
in default or violation of any of the Papyrus Permits in any
material respect, except for any such conflicts, defaults or
violations which, individually or in the aggregate, could not
reasonably be expected to have a Material Adverse Effect on Papyrus.
(c) As of the date hereof, no customer which individually
accounted for more than 5% of Papyrus' gross revenues during the 12
month period preceding the date hereof and no supplier of Papyrus,
has canceled or otherwise terminated, or made any written threat to
Papyrus to cancel or otherwise terminate its relationship with
Papyrus or has at any time on or after June 30, 1997 decreased
materially its services or supplies to Papyrus in the case of any
such supplier, or its usage of the services or products of Papyrus
in the case of such customer, and to Papyrus' Knowledge, no such
supplier or customer has indicated either orally or in writing that
it will cancel or otherwise terminate its relationship with Papyrus
or to decrease materially its services or supplies to Papyrus or its
usage of the services or products of Papyrus, as the case may be.
(d) During the period from the date of execution of this
Agreement until the Closing, Papyrus and each of its Affiliates
shall continue to conduct its operations in the ordinary course and
in the manner in which they have been heretofore conducted. Papyrus
will use its best efforts to preserve intact its present business
organization, to keep available the services of its present key
employees, to preserve its present relationships with persons having
significant business relations with it, to maintain all of its
properties in customary repair and condition and to maintain
insurance policies in respect of its business and properties
consistent with current practice. Papyrus and each Affiliate agrees
not to do and Papyrus Stockholders will not request, permit or cause
Papyrus or any Affiliate to do any of the following prior to Closing
without the prior written consent of Buyer:
(i) Declare or pay any dividends or other
distributions on its stock or purchase or redeem any of its stock;
(ii) Issue any stock or other securities,
including any right or option to purchase or otherwise acquire any
of its stock, or issue any notes or other evidence of indebtedness
not in the usual course of business;
(iii) Make or incur any capital expenditure
outside the ordinary course of business in excess of $10,000 without
the prior written consent of Buyer;
(iv) Sell, dispose or transfer assets outside the
ordinary course of business.
(v) Except as otherwise permitted by this
Agreement, incur any debt, secured or unsecured, outside the
ordinary course of business.
3.20 Insurance. Except as set forth in Section 3.20 to
the Papyrus Disclosure Schedule, Papyrus is presently insured,
against such risks as companies engaged in a similar business would,
in accordance with good business practice, customarily be insured.
3.21 Lease Arrangements.
(a) Except as set forth in Section 3.21 to the Papyrus
Disclosure Schedule there are no lessees ("Master Lessees") who have
been granted the right to use, purchase, lease or license goods or
services from Papyrus and to provide, resell, sublease or relicense
the same to other authorized lessees or third parties. The identity
of each Master Lessee and a description of all lessees and third
parties to whom such Master Lessee is entitled to provide, resell,
sublease or relicense goods and services of Papyrus are set forth in
Section 3.21 to the Papyrus Disclosure Schedule. There are no
agreements between Papyrus and any Master Lessee other than those in
writing that are set forth in Section 3.21 to the Papyrus Disclosure
Schedule.
(b) Except as set forth in Section 3.10 to the Papyrus
Disclosure Schedule, there are no licensees who have been granted
the right to use, purchase, lease or license the Intellectual
Property from Papyrus and to provide, resell, sublease or relicense
the same to authorized sublicensees or other third parties. The
identity of each licensee and a description of all sublicensees and
third parties to whom such licensee is entitled to provide, resell,
sublease or relicense goods and services of Papyrus are set forth in
Section 3.10 to the Papyrus Disclosure Schedule.
(c) Papyrus believes that the relationships of Papyrus
with its lessees and licensees are satisfactory and that the
execution of this Agreement, the consummation of the Merger, and the
consummation of the transactions contemplated thereby would not be
reasonably likely to have a Material Adverse Effect on the
relationships of Papyrus with such lessees and licensees.
(d) Papyrus is not a party to any vendor financing
arrangement which (i) requires Papyrus to use such financing for any
particular transaction, or (ii) cannot be terminated (without
premium or penalty) upon less than one month's notice.
3.22 Books of Account; Records. Papyrus' general ledgers,
stock record books, minute books and other material records relating
to the assets, properties, contracts and outstanding legal
obligations of Papyrus are, in all material respects, complete and
correct and the matters contained therein are appropriate and
accurately reflected in the Papyrus Statements and the Papyrus
Interim Statements.
3.23 Officers, Employees and Consultants and Compensation.
Section 3.23 to the Papyrus Disclosure Schedule sets forth the
names of all directors and officers of Papyrus, and the total
salary, bonus, fringe benefits and perquisites each received from
Papyrus in the year ended June 30, 1998. There have been no changes
to the foregoing which have occurred subsequent to June 30, 1998,
other than changes in the Ordinary Course of Business consistent
with past practice. Except as disclosed in Section 3.23 to the
Papyrus Disclosure Schedule, there are no other forms of
compensation paid to any such director, officer, employee or
consultant of Papyrus. Except as set forth in Section 3.23 to the
Papyrus Disclosure Schedule, Papyrus has not become obligated,
directly or indirectly, to any stockholder, director or officer of
Papyrus or any person related to such person by blood or marriage,
except for current liability for such compensation. Except as set
forth in Section 3.23 to the Papyrus Disclosure Schedule, to the
Knowledge of Papyrus, no stockholder, director, officer, agent or
employee of Papyrus or any person related to such person by blood or
marriage holds any position or office with or has any material
financial interest, direct or indirect, in any supplier, customer or
account of, or other outside business which has material
transactions with, Papyrus. To Papyrus' Knowledge, no executive,
key employee, or group of employees has any plans to terminate
employment with Papyrus.
3.24 Product Warranty. To the best Knowledge of Papyrus,
each product manufactured, sold, leased, or delivered by Papyrus has
been in conformity with all applicable contractual commitments and
all express and implied warranties, and Papyrus has no liability
(and there is no basis for any present or future action, suit,
proceeding, hearing, investigation, charge, complaint, claim, or
demand against any of them giving rise to any liability) for
replacement or repair thereof or other damages in connection
therewith. To the best Knowledge of Papyrus, no product
manufactured, sold, leased, or delivered by Papyrus is subject to
any guaranty, warranty, or other indemnity beyond the applicable
standard terms and conditions of sale or lease.
.
3.25 Product Liability. To the best knowledge of Papyrus,
it does not have any liability (and there is no basis for any
present or future action, suit, proceeding, hearing, investigation,
charge, complaint, claim, or demand against any of them giving rise
to any liability) arising out of any injury to individuals or
property as a result of the ownership, possession, or use of any
product manufactured, sold, leased, or delivered by Papyrus. No
product liability claims have been communicated in writing to or
threatened against Papyrus.
3.26 Questionable Payments. Neither Papyrus nor to its
Knowledge any director, officer or other employee of Papyrus has:
(i) made any payments or provided services or other favors in the
United States of America or in any foreign country in order to
obtain preferential treatment or consideration by any governmental
entity with respect to any aspect of the business of Papyrus; or
(ii) made any political contributions which would not be lawful
under the laws of the United States and the foreign country in which
such payments were made. Neither Papyrus nor to its Knowledge any
director, officer or other employee of Papyrus nor, to the Knowledge
of Papyrus, any customer or supplier of any of them has been the
subject of any inquiry or investigation by any governmental entity
in connection with payments or benefits or other favors to or for
the benefit of any governmental or armed services official, agent,
representative or employee with respect to any aspect of the
business of Papyrus or with respect to any political contribution.
3.27 Disclosure. The representations and warranties
contained in this Article 3 do not contain any untrue statement of a
material fact or omit to state any material fact necessary in order
to make the statements and information contained in this Article 3
not misleading. The Definitive Proxy Materials will not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light
of the circumstances under which they will be made, not misleading;
provided, however, that Papyrus makes no representation or warranty
with respect to any information that Buyer will supply specifically
for use in the Definitive Proxy Materials. None of the information
that Papyrus will supply specifically for use in the Joint
Disclosure Document will contain any untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under
which they will be made, not misleading.
ARTICLE 4.
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Papyrus and to the Papyrus
Stockholders receiving Buyer's shares that the statements contained
in this Article 4 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date
(as though made then and as though the Closing Date were substituted
for the date of this Agreement throughout this Article 4), except as
set forth in the disclosure schedule of Buyer accompanying this
Agreement and initialed by the Parties (the "Buyer Disclosure
Schedule"). The Buyer Disclosure Schedule will be arranged in
paragraphs corresponding to the numbered and lettered paragraphs
contained in this Article 4.
4.1 Organization, Standing and Power. Each of Buyer and
Merger Sub is a corporation duly organized, validly existing and in
good standing under the laws of its jurisdiction of organization.
Each of Buyer and Merger Sub has the corporate power to own its
properties and to carry on its business as now being conducted and
as proposed to be conducted and is duly qualified to do business and
is in good standing in each jurisdiction in which the failure to be
so qualified and in good standing would have a Material Adverse
Effect on Buyer. Buyer has delivered a true and correct copy of the
Certificate of Incorporation, Articles of Incorporation and Bylaws
or other charter documents, as applicable, of Buyer and Merger Sub,
each as amended to date, to Papyrus. Neither Buyer nor Merger Sub
is in violation of any of the provisions of its Certificate or
Articles of Incorporation or Bylaws or equivalent organizational
documents.
4.2 Capital Structure. Buyer has an authorized
capitalization consisting of 100,000,000 shares of Common Stock, par
value $.0001 per share, and 20,000,000 shares of Preferred Stock,
par value $.0001 per shares. As of August 31, 1998, Buyer had
issued and outstanding 51,833,184 shares of Common Stock.
10,995,000 shares of Common Stock are subject to issuance upon the
conversion or exercise of presently issued and outstanding warrants
and options of Buyer. 12,511,000 shares of Common Stock are
reserved for issuance under Buyer's existing stock option plans.
166,667 shares of Series A Preferred Stock have been issued and
166,667 shares are outstanding and are convertible into 166,667
shares of Common Stock. All of the shares of Common Stock and
Preferred Stock issued to date have been duly and validly authorized
and issued and are fully paid and non-assessable. Except as set
forth above or as disclosed in Section 4.2 of the Buyer Disclosure
Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, script, rights to subscribe to, calls
or commitments of any character whatsoever relating to, or
securities or rights convertible into, any shares of capital stock
of Buyer or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which Buyer or any of its
subsidiaries is or may become bound to redeem or issue additional
shares of capital stock of Buyer or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to calls or
commitments of any character whatsoever relating, or securities or
rights convertible into, any shares of capital stock of Buyer or any
of its subsidiaries, (ii) there are no outstanding debt securities
and (iii) there are no agreements or arrangements under which Buyer
or any of its subsidiaries is obligated to register the sale of any
of their securities under the Securities Act. Except as disclosed
in Section 4.2 of the Buyer Disclosure Schedule, there are no
securities or instruments containing any anti-dilution, right of
first refusal, preemptive rights or similar provisions that will be
triggered by the issuance of the Buyer Shares as described in this
Agreement. Upon issuance of the Merger Shares, such securities will
be duly and validly issued, fully paid and non-assessable.
4.3 Authority. Buyer and Merger Sub have 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 Buyer and Merger Sub. This
Agreement has been duly executed and delivered by Buyer and Merger
Sub and constitutes the valid and binding obligations of Buyer and
Merger Sub. The execution and delivery of this Agreement do not and
the consummation of the transactions contemplated hereby 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 or acceleration of any material
obligation or loss of a material benefit under (i) any provision of
the Certificate or Articles of Incorporation or Bylaws of Buyer or
any of its subsidiaries, as amended, or (ii) to Buyer's Knowledge,
any material mortgage, indenture, lease, contract or other agreement
or instrument permit, concession, franchise, license, judgment,
order, decree, statute, law, ordinance, rule or regulation
applicable to Buyer or any of its subsidiaries or their properties
or assets. No consent, approval, order or authorization of or
registration, declaration or filing with, any governmental entity,
is required by or with respect to Buyer or any of its subsidiaries
in connection with the execution and delivery of this Agreement by
Buyer and Merger Sub or the consummation by Buyer and Merger Sub of
the transactions contemplated hereby, except for (i) the filing of
the Certificate of Merger, together with the required officers'
certificates, as provided in Section 2.2, (ii) the filing of a Form
8-K with the Securities and Exchange Commission ("SEC") and Nasdaq
Stock Market within 15 days after the Closing Date, (iii) any
filings as may be required under applicable state securities laws
and the securities laws of any foreign country, (iv) the filing with
the Nasdaq SmallCap Market of a Notification Form of Listing of
Additional Shares with respect to the Merger Shares issuable upon
conversion of the Papyrus Common Stock in the Merger, and (v) such
other consents, authorizations, filings, approvals and registrations
which, if not obtained or made, would not have a Material Adverse
Effect on Buyer and would not prevent, materially alter or delay any
of the transactions contemplated by this Agreement.
4.4 SEC Documents; Financial Statements. Buyer has
furnished to Papyrus a true and complete copy of each statement,
report, registration statement, definitive proxy statement, and
other filing filed with the SEC by Buyer since December 31, 1997,
and, prior to the Effective Time, Buyer will have furnished Papyrus
with true and correct copies of any additional documents filed with
the SEC by Buyer prior to the Effective Time (collectively, the
"Buyer SEC Documents"). In addition, Buyer has made available to
Papyrus all material exhibits to the Buyer SEC Documents filed prior
to the date hereof and will promptly make available to Papyrus all
material exhibits to any additional Buyer SEC Documents filed prior
to the Effective Time. All documents required to be filed as
exhibits to the Buyer SEC Documents have been so filed, and all
material contracts so filed as exhibits are in full force and effect
except those which have expired in accordance with their terms, and
neither Buyer nor any of its subsidiaries is in default thereunder.
As of their respective filing dates, the Buyer SEC Documents
complied in all material respects with the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Securities Act and none of the Buyer 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 Buyer SEC Document prior to the date hereof. The
financial statements of Buyer, including the notes thereto, included
in the Buyer SEC Documents (the "Buyer Financial Statements"),
complied as to form in all material respects with applicable
accounting requirements and with the published rules and regulations
of the SEC with respect thereto as of their respective dates, and
have been prepared in accordance with GAAP applied on a basis
consistent throughout the periods indicated and consistent with each
other (except as may be indicated in the notes thereto or, in the
case of unaudited statements included in Quarterly Reports on Form
10-Q or Form 10-QSB, as permitted by Form 10-Q or Form 10-QSB of the
SEC). The Buyer Financial Statements fairly present the
consolidated financial condition and operating results of Buyer and
its subsidiaries at the dates and during the periods indicated
therein (subject, in the case of unaudited statements, to normal,
recurring year-end adjustments). There has been no material change
in Buyer accounting policies except as described in the notes to the
Buyer Financial Statements. Since December 31, 1997, no event has
occurred that would have required the filing of any report that
otherwise would have been included among the SEC Documents and for
which an appropriate report was not filed.
4.5 Absence of Certain Changes. Since June 30, 1998 (the
"Buyer Balance Sheet Date"), except as described in the Buyer SEC
Documents, Buyer has conducted its business in the Ordinary Course
of Business consistent with past practice and there has not
occurred: (i) any change, event or condition (whether or not covered
by insurance) that has resulted in, or might reasonably be expected
to result in, a Material Adverse Effect to Buyer; (ii) any
acquisition, sale or transfer of any material asset of Buyer or any
of its subsidiaries other than in the Ordinary Course of Business
and consistent with past practice; (iii) any material change in
accounting methods or practices (including any change in
depreciation or amortization policies or rates) by Buyer or any
revaluation by Buyer of any of its assets; (iv) any declaration,
setting aside, or payment of a dividend or other distribution with
respect to the shares of Buyer, or any direct or indirect
redemption, purchase or other acquisition by Buyer of any of its
shares of capital stock; (v) any material contract entered into by
Buyer, other than in the Ordinary Course of Business and as provided
to Papyrus or any material amendment or termination of, or default
under, any material contract to which Buyer is a party or by which
it is bound; (vi) any amendment or change to Buyer's Certificate of
Incorporation or Bylaws; or (vii) any negotiation or agreement by
Buyer or any of its subsidiaries to do any of the things described
in the preceding clauses (i) through (vi) (other than negotiations
with Papyrus and its representatives regarding the transactions
contemplated by this Agreement).
4.6 Absence of Undisclosed Liabilities. Buyer has no
material obligations or liabilities of any nature (matured or
unmatured, fixed or contingent) other than (i) those set forth or
adequately provided for in the Balance Sheet included in Buyer's
Quarterly Report on Form 10-Q for the period ended March 31, 1998
(the "Buyer Balance Sheet"), (ii) those incurred in the Ordinary
Course of Business and not required to be set forth in the Buyer
Balance Sheet under GAAP, and (iii) those incurred in the Ordinary
Course of Business since the Buyer Balance Sheet Date and consistent
with past practice.
4.7 Litigation. Except as described in the Buyer SEC
Documents, there is no private or governmental action, suit,
proceeding, claim, arbitration or investigation pending before any
agency, court or tribunal, foreign or domestic, or, to the Knowledge
of Buyer or any of its subsidiaries, threatened against Buyer or any
of its subsidiaries or any of their respective properties or any of
their respective officers or directors (in their capacities as such)
that, individually or in the aggregate, could reasonably be expected
to have a Material Adverse Effect on Buyer. There is no judgment,
decree or order against Buyer or any of its subsidiaries or, to the
Knowledge of Buyer or any of its subsidiaries, any of their
respective directors or officers (in their capacities as such) that
could prevent, enjoin, or materially alter or delay any of the
transactions contemplated by this Agreement, or that could
reasonably be expected to have a Material Adverse Effect on Buyer.
4.8 Governmental Authorization. Buyer and each of its
subsidiaries have obtained each federal, state, county, local or
foreign governmental consent, license, permit, grant, or other
authorization of a governmental entity (i) pursuant to which Buyer
or any of its subsidiaries currently operates or holds any interest
in any of its properties or (ii) that is required for the operation
of Buyer's or any of its subsidiaries' business or the holding of
any such interest ((i) and (ii) herein collectively called "Buyer
Authorizations"), and all of such Buyer Authorizations are in full
force and effect, except where the failure to obtain or have any of
such Buyer Authorizations could not reasonably be expected to have a
Material Adverse Effect on Buyer.
4.9 Broker's and Finders' Fees. Buyer has not incurred,
nor will it incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or investment
bankers' fees or any similar charges in connection with this
Agreement or any transaction contemplated hereby.
4.10 Interim Operations of Merger Sub. Merger Sub was
formed solely for the purpose of engaging in the transactions
contemplated by this Agreement, has engaged in no other business
activities and has conducted its operations only as contemplated by
this Agreement.
4.11 Post-Merger Operations of Merger Sub. Buyer has no
present plan or intention to liquidate Merger Sub; to merge Merger
Sub with and into another corporation; to sell or otherwise dispose
of the stock of Merger Sub; or to cause Merger Sub to sell or
otherwise dispose of any of the assets of Papyrus acquired in the
transaction, except for dispositions made in the Ordinary Course of
Business or transfers described in Section 368(a)(2)(C) of the Code.
Buyer intends that following the Merger, Merger Sub will continue
the historic business of Papyrus or use a significant portion of
Papyrus' business assets in a business.
4.12 Disclosure. The Confidential Private Placement
Memorandum will not contain any untrue statement of a material fact
or omit to state a material fact necessary in order to make the
statements made therein, in the light of the circumstances under
which they will be made, not misleading; provided, however, that
Buyer makes no representation or warranty with respect to any
information that Papyrus will supply specifically for use in the
Disclosure Materials None of the information that Buyer will supply
specifically for use in the Disclosure Materials will contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made therein, in the light
of the circumstances under which they will be made, not misleading.
ARTICLE 5
COVENANTS
5.1 Preparation of Solicitation Statement.
(a) As soon as practicable after the execution of this
Agreement, Papyrus and Buyer shall jointly prepare a solicitation
statement (the "Joint Solicitation Statement") for the solicitation
of approval of the Papyrus Stockholders describing this Agreement,
the Certificate of Merger and the transactions contemplated hereby
and thereby. The information supplied by Papyrus for inclusion in
the Joint Solicitation Statement to be sent to the Papyrus
Stockholders shall not, on the date the Joint Solicitation Statement
is first mailed to the Papyrus Stockholders or at the Effective
Time, contain any statement which, at such time, is false or
misleading with respect to any material fact, or omit to state any
material fact necessary in order to make the statements made
therein, in light of the circumstances under which they are made,
not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication
which has become false or misleading. Notwithstanding the
foregoing, Papyrus makes no representation, warranty or covenant
with respect to any information supplied by Buyer or Merger Sub
which is contained in any of the foregoing documents. The
information supplied by Buyer for inclusion in the Joint
Solicitation Statement shall not, on the date the Joint Solicitation
Statement is first mailed to Papyrus' stockholders, nor at the
Effective Time, contain any statement which, at such time, is false
or misleading with respect to any material fact, or omit to state
any material fact necessary in order to make the statements therein,
in light of the circumstances under which it is made, not false or
misleading; or omit to state any material fact necessary to correct
any statement in any earlier communication which has become false or
misleading. Notwithstanding the foregoing, Buyer and Merger Sub
make no representation, warranty or covenant with respect to any
information supplied by Papyrus which is contained in any of the
foregoing documents.
(b) The Joint Solicitation Statement shall constitute a
disclosure document for the offer and issuance of the Merger Shares
and a proxy statement for use at the Papyrus Special Meeting or any
substitute therefor. Buyer and Papyrus shall each use reasonable
commercial efforts to cause the Joint Solicitation Statement to
comply with applicable federal and state securities laws
requirements. Each of Buyer and Papyrus agrees to provide promptly
to the other such information concerning its business and financial
statements and affairs as, in the reasonable judgment of the
providing party or its counsel, may be required or appropriate for
inclusion in the Joint Solicitation Statement or in any amendments
or supplements thereto, and to cause its counsel and auditors to
cooperate with the other's counsel and auditors in the preparation
of the Joint Solicitation Statement. Papyrus will promptly advise
Buyer, and Buyer will promptly advise Papyrus, in writing if at any
time prior to the Effective Time either Papyrus or Buyer shall
obtain knowledge of any facts that might make it necessary or
appropriate to amend or supplement the Joint Solicitation Statement
in order to make the statements contained or incorporated by
reference therein not misleading or to comply with applicable law.
The Joint Solicitation Statement shall contain the recommendation of
the Board of Directors of Papyrus that the Papyrus Stockholders
approve the Merger and this Agreement and the conclusion of the
Board of Directors that the terms and conditions of the Merger are
fair and reasonable to the stockholders of Papyrus. Anything to the
contrary contained herein notwithstanding, Papyrus shall not include
in the Joint Solicitation Statement any information with respect to
Buyer or its affiliates or associates, the form and content of which
information shall not have been approved by Buyer prior to such
inclusion.
5.2 Approval of Stockholders. Papyrus shall promptly
after the date hereof take all action necessary in accordance with
the Massachusetts General Corporation Law and its Certificate of
Incorporation and Bylaws to obtain the written consent of the
Papyrus Stockholders approving the Merger as soon as practicable.
Papyrus shall use its best efforts to solicit from stockholders of
Papyrus written consents in favor of the Merger and shall take all
other action necessary or advisable to secure the vote or consent of
stockholders required to effect the Merger.
5.3 Sale of Shares Pursuant to Section 4(2) of the
Securities Act. The parties hereto acknowledge and agree that the
Merger Shares shall be issued and sold pursuant to the exemption
available by Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder including, without limitation,
Regulation D, and also Regulation S under the Securities Act. As
such, the Merger Shares, shall constitute "restricted securities"
within the Securities Act. The certificates representing the Merger
Shares shall bear the legends set forth in Section 2.4(k).
5.4 Access to Information.
(a) Papyrus shall afford Buyer and its accountants,
counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i)
all of Papyrus' properties, books, contracts, commitments and
records (including Tax Returns filed and those in preparation), and
(ii) all other information concerning the business, properties and
personnel of Papyrus as Buyer may reasonably request. Papyrus
agrees to provide to Buyer and its accountants, counsel and other
representatives copies of internal financial statements promptly
upon request.
(b) Buyer shall afford Papyrus and its accountants,
counsel and other representatives, reasonable access during normal
business hours during the period prior to the Effective Time to (i)
all of Buyer's and its subsidiaries' properties, books, contracts,
commitments and records, and (ii) all other information concerning
the business, properties and personnel of Buyer and its subsidiaries
as Papyrus may reasonably request. Buyer agrees to provide to
Papyrus and its accountants, counsel and other representatives
copies of internal financial statements promptly upon request.
(c) Subject to compliance with applicable law, from the
date hereof until the Effective Time, each of Buyer and Papyrus
shall confer on a regular and frequent basis with one or more
representatives of the other party to report operational matters of
materiality and the general status of ongoing operations.
(d) No information or knowledge contained in any
investigation pursuant to this Section 5.4 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.
5.5 Confidentiality. The parties acknowledge that Buyer
and William Kania have previously executed a Confidentiality and
Non-Disclosure Agreement dated as of April 17, 1998 (the
"Confidentiality Agreement"), which Confidentiality Agreement is
hereby incorporated herein by reference and shall continue in full
force and effect in accordance with its terms.
5.6 Public Disclosure. Unless otherwise permitted by
this Agreement, Buyer and Papyrus shall consult with each other
before issuing any press release or otherwise making any public
statement or making any other public (or non-confidential)
disclosure (whether or not in response to an inquiry) regarding the
terms of this Agreement and the transactions contemplated hereby,
and neither shall issue any such press release or make any such
statement or disclosure without the prior approval of the other
(which approval shall not be unreasonably withheld), except as may
be required by law or by obligations pursuant to any listing
agreement with any national securities exchange or with the Nasdaq
Stock Market.
5.7 Legal Requirements. Each of Buyer, Merger Sub and
Papyrus will, and will cause their respective subsidiaries to, take
all reasonable actions necessary to comply promptly with all legal
requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement and
will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such requirements imposed
upon such other party in connection with the consummation of the
transactions contemplated by this Agreement and will take all
reasonable actions necessary to obtain (and will cooperate with the
other parties hereto in obtaining) any consent, approval, order or
authorization of or any registration, declaration or filing with,
any governmental entity or other person, required to be obtained or
made in connection with the taking of any action contemplated by
this Agreement.
5.8 Blue Sky Laws. Buyer 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 Merger
Shares. Papyrus shall use its best efforts to assist Buyer 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 the Merger Shares.
5.9 Covenant Not to Compete. For a period of two (2)
years from the date of this Agreement, Papyrus Stockholders, and
each of them, shall not, directly or indirectly, without the prior
express written consent of Buyer, own more than 3% of the equity of
or be employed by, as an employee, consultant, partner, director,
officer or otherwise, any business enterprise, association,
corporation, partnership or other entity that is engaged in the
development, research, production, distribution, sale, or marketing
of products in direct competition with Buyer or its affiliates;
provided, however, that it shall not be a violation of this
Agreement if such person becomes an owner or employed as described
above by the division, subsidiary or affiliate of an entity in
competition with Buyer or its affiliates so long as such division,
subsidiary or affiliate does not compete with Buyer or its
affiliates as described in this Section 5.9.
5.10 Escrow Agreement. On or before the Effective Time,
Buyer, Merger Sub, Escrow Agent and the Papyrus Stockholders will
execute the Escrow Agreement contemplated by Section 7.1 in the form
attached hereto as Exhibit D ("Escrow Agreement").
5.11 Registration of Shares Issued in the Merger.
(a) Definitions. For purposes of this Agreement,
"Registrable Shares" shall mean the Merger Shares, including any and
all Escrow Shares (as defined in Section 7.1) and any Buyer Shares
or other securities of Buyer resulting from any stock split,
reorganization or stock dividend in respect of Merger Shares and any
securities into which Merger Shares are converted or exchanged
pursuant to any merger, consolidation or acquisition of or by Buyer,
but excluding Merger Shares that have been sold or otherwise
transferred by the Target Stockholders who initially received such
shares in the Merger (collectively, the "Holders"); provided,
however, that a distribution of Merger Shares without additional
consideration to underlying beneficial owners (such as the general
and limited partners, stockholders or trust beneficiaries of a
Holder) shall not be deemed such a sale or transfer for purposes of
this Section 5.11 and such underlying beneficial owners shall be
entitled to the same rights under this Section 5.11 as the initial
Holder from which the Registrable Shares were received and shall be
deemed a Holder for the purposes of this Section 5.11.
(b) Company Registration. If at any time or from time to
time Buyer shall determine to register any of its equity securities,
either for its own account or the account of a security holder or
holders other than (i) a registration relating solely to employee
benefit plans, (ii) a registration relating solely to a Rule 145
transaction or (iii) a registration pursuant to registration rights
granted as of the date hereof which rights prohibit the Buyer's
actions contemplated by this Section 5.11, as set forth in Schedule
5.11 to the Buyer Disclosure Schedule, Buyer will promptly give to
each Holder written notice thereof; and include in such registration
(and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all the
Registrable Shares requested by such Holder to be so included in a
written request or requests, made within twenty (20) days after
receipt of such written notice from Buyer, by any Holder.
(c) Underwriting.
(i) If the registration of which Buyer gives
notice is for a registered public offering involving an
underwriting, Buyer shall so advise the Holders as a part of the
written notice given pursuant to Section 5.11(b). In such event,
the right of any Holder to registration pursuant to this Section
5.11 shall be conditioned upon such Holder's participation in such
underwriting, and the inclusion of his or its Registrable Shares in
the underwriting shall be limited to the extent provided herein.
(ii) All Holders proposing to distribute their
securities through such underwriting shall (together with Buyer and
the other Holders distributing their Registrable Shares through such
underwriting) enter into an underwriting agreement in customary form
with the managing underwriter selected for such underwriting by
Buyer. Notwithstanding any other provision of this Section 5.11, if
the managing underwriter determines that marketing factors require a
limitation of the number of shares to be underwritten, then Buyer
shall so advise all Holders of Registrable Shares and the holders of
any other securities to be included in the registration pursuant to
other piggyback registration rights, and the managing underwriter
may limit the number of shares of Registrable Shares and other
securities to be included pursuant to other piggyback rights that
may be included in such registration to an amount no less than 25%
of all shares to be included in such offering; provided however,
that any such limitation or "cut back" shall first be applied to all
shares proposed to be sold in such offering other than for the
account of Buyer which are not Registrable Shares. Buyer shall so
advise all Holders and other holders distributing their securities
through such underwriting, and the number of shares of Registrable
Shares or other securities that may be included in the registration
and underwriting shall be first allocated among all Holders
requesting inclusion of their Registrable Shares in the registration
in proportion, as nearly as practicable, to the respective amounts
of Registrable Shares requested to be included in such registration
statement. No Registrable Shares or other securities excluded from
the underwriting by reason of the managing underwriters' marketing
limitation shall be included in such registration.
(iii) If any of the Holders disapprove of the terms
of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to Buyer and the managing underwriter.
Any securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
(d) Right to Terminate Registration. Buyer shall have
the right to terminate or withdraw any registration initiated by it
under this Section prior to the effectiveness of such registration
whether or not any Holder has elected to include securities in such
registration, provided that any registration termination pursuant to
this Section 5.11(d) shall have not adversely affect the
registration rights granted under this Section 5.11.
(e) Copies of Registration Statement and Prospectus.
Buyer shall promptly deliver to each Holder, and any underwriters,
without charge, a copy of each registration statement filed with the
Commission pursuant to this Section 5.11 (the "Registration
Statement"), and as many copies of the prospectus or prospectuses
(including each form of prospectus) included in any such
Registration Statement and each amendment or supplement thereto as
such persons may reasonably request.
(f) Effectiveness Period. Buyer shall use its best
efforts to cause any Registration Statement to be declared effective
under the Securities Act as promptly as possible after the filing
thereof, and shall use its best efforts to keep such Registration
Statement continuously effective under the Securities Act until the
date which is one year after the date that such Registration
Statement is declared effective by the Commission or such earlier
date when all Registrable Shares covered by such Registration
Statement have been sold or may be sold without volume restrictions
pursuant to Rule 144(k) promulgated under the Securities Act, as
determined by the counsel to Buyer pursuant to a written opinion
letter to such effect, addressed and acceptable to Buyer's transfer
agent (as to such Registration Statement, the "Effectiveness Period").
(g) Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission
which may at any time permit the sale of the Merger Shares to the
public without registration, Buyer shall use commercially reasonable
efforts to:
(i) 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 Closing Date and during the
Effectiveness Period;
(ii) File with the Commission in a timely manner
all reports, documents and other information required of Buyer under
the Securities Act and the Exchange Act at all times after the
Closing Date and during the Effectiveness Period; and
(iii) So long as any of the Holders owns any Merger
Shares, to furnish to such Holders forthwith upon request a written
statement by Buyer as to its compliance (or failure to comply) with
the reporting requirements of said Rule 144, and with the Securities
Act and the Exchange Act, a copy of the most recent annual or
quarterly report of Buyer, and such other reports and documents of
Buyer and other information in the possession of or reasonably
obtainable by Buyer as such Holders may reasonably request in
availing themselves of any rule or regulation of the Commission
allowing the Holders to sell any such securities without registration.
(h) Limitations. Notwithstanding the foregoing, Buyer
shall not be obligated to take any action pursuant to this Section
5.11:
(i) in any particular jurisdiction in which Buyer
would be required to execute a general consent to service of process
in effecting such registration, qualification or compliance, unless
Buyer is already subject to service in such jurisdiction and except
as may be required by the Securities Act; or
(ii) prior to six months after the Effective Time.
(i) Expenses. The costs and expenses to be borne by
Buyer for purposes of this Section 5.11 shall include, without
limitation, printing expenses, legal fees and disbursements of
counsel for Buyer, "blue sky" expenses, accounting fees and filing
fees, but shall not include underwriting commissions or similar
charges, legal fees and disbursements of counsel for the selling
Holders. All expenses of any registered offering not otherwise
borne by Buyer shall be borne pro rata among the selling Holders on
the basis of the number of shares registered.
(j) Indemnification by Buyer. To the fullest extent
permitted by law, Buyer will indemnify and hold harmless each
selling Holder, each underwriter of Buyer Common Stock being sold by
such Holders pursuant to this Section 5.11 and each person, if any,
who controls any such Holder or underwriter within the meaning of
the Securities Act or the Exchange Act against all actions, claims,
losses, damages, liabilities and expenses to which they or any of
them become subject under the Securities Act, the Exchange Act or
under any other statute or at common law or otherwise and, except as
hereinafter provided, will promptly reimburse each such Holder, each
such underwriter and each such controlling person, if any, for any
legal or other expenses reasonably incurred by them or any of them
in connection with investigating or defending any actions whether or
not resulting in any liability, insofar as such losses, claims,
damages, expenses, liabilities or actions arise out of or are based
upon any untrue statement or alleged untrue statement of material
fact in any registration statement and any prospectus filed pursuant
to Section 5.11 or any post-effective amendment thereto or arise out
of or are based upon any omission or alleged omission to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they
were made, not misleading or any violation by Buyer of any rule or
regulation promulgated under the Securities Act or the Exchange Act
applicable to Buyer and relating to action or inaction required by
Buyer in connection with such registration; provided, however, that
Buyer shall not be liable to any such Holder, underwriter or
controlling person in respect of any claims, losses, damages,
liabilities and expenses resulting from any untrue statement or
alleged untrue statement, or omission or alleged omission made in
reliance upon and in conformity with information furnished in
writing to Buyer by such Holder or underwriter specifically for use
in connection with such registration statement and prospectus or
post-effective amendment.
(k) Indemnification by Holders. To the fullest extent
permitted by law, each selling Holder of Registrable Shares
registered in accordance with this Section 5.11 will indemnify
Buyer, each person, if any, who controls Buyer within the meaning of
the Securities Act or the Exchange Act, each director of Buyer and
each officer of Buyer who signs the registration statement and each
underwriter of Buyer Common Stock against any actions, claims,
losses, damages, liabilities and expenses to which they or any of
them may become subject under the Securities Act, the Exchange Act
or under any other statute or at common law or otherwise, and will
promptly reimburse Buyer and each such director, officer,
underwriter or controlling person for any legal or other expenses
reasonably incurred by them or any of them in connection with
investigating or defending any actions whether or not resulting in
any liability, insofar as such losses, claims, damages, expenses,
liabilities or actions arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact in any
registration statement and any prospectus filed pursuant to this
Section 5.11 or any post-effective amendment thereto, or any
omission or alleged omission to state a material fact required to be
stated therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not misleading,
which untrue statement or alleged untrue statement or omission or
alleged omission was made in reliance upon and in conformity with
information furnished in writing to Buyer by such Holder or
underwriter specifically for use in connection with such
registration statement, or any violation by such Holder of any rule
or regulation promulgated under the Securities Act or the Exchange
Act applicable to such Holder and relating to action or inaction
required by such Holder in connection with sales of securities
covered by such registration, prospectus or post-effective
amendment; provided, however, that the obligations of each such
selling Holder hereunder shall be limited to an amount equal to the
gross proceeds to such Holder from the sale of such Holder's
Registrable Shares in such registration.
(l) Indemnification Procedures. Each person entitled to
indemnification under this Section 5.11 (an "Indemnified Person")
shall give notice to the party required to provide indemnification
(the "Indemnifying Person") promptly after such Indemnified Person
has actual knowledge of any claim as to which indemnity may be
sought and shall permit the Indemnifying Person to assume the
defense of any such claim and any litigation resulting therefrom,
provided that counsel for the Indemnifying Person who conducts the
defense of such claim or any litigation resulting therefrom shall be
approved by the Indemnified Person (whose approval shall not
unreasonably be withheld), and the Indemnified Person may
participate in such defense at such party's expense (unless the
Indemnified Person has reasonably concluded that there may be a
conflict of interest between the Indemnifying Person and the
Indemnified Person in such action, in which case the fees and
expenses of counsel for the Indemnified Person shall be at the
expense of the Indemnifying Person), and provided further that the
failure of any Indemnified Person to give notice as provided herein
shall not relieve the Indemnifying Person of its obligations under
this Section 5.11 except to the extent the Indemnifying Person is
materially prejudiced thereby. No Indemnifying Person, in the
defense of any such claim or litigation, shall (except with the
consent of each Indemnified Person) 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 Person of a release from all liability in
respect to such claim or litigation. Each Indemnified Person shall
furnish such information regarding itself or the claim in question
as an Indemnifying Person may reasonably request in writing and as
shall be reasonably required in connection with the defense of such
claim and litigation resulting therefrom.
(m) Contribution. In order to provide for just and
equitable contribution in any case in which Buyer or any Holder
makes a claim for indemnification pursuant to this Section 5.11 but
it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of
time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case notwithstanding
that indemnification would be available under this Section 5.11, in
such case, then Buyer and such Holder will contribute to the
aggregate losses, claims, damages or liabilities to which they may
be subject (after contribution from others) in such proportion as is
appropriate to reflect (i) the relative fault of Buyer on the one
hand and of the Holder on the other in connection with the
statements or omission which resulted in such losses, claims,
damages or liabilities, (ii) the relative benefits received by Buyer
and any Holder of Registrable Shares from the offering of the
securities covered by such Registration Statement, and (iii) any
other relevant equitable considerations, all subject to applicable
law. The relative fault of Buyer on the one hand and of the Holder
on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material
fact or omission or alleged omission to state a material fact
relates to information supplied by Buyer on the one hand or by the
Holder on the other, and each party's relative intent, knowledge,
access to information and opportunity to correct or prevent such
statement or omission; provided, however, that, in any such case no
person or entity guilty of fraudulent misrepresentation within the
meaning of Section 11(f) of the Securities Act will be entitled to
contribution from any person or entity who was not guilty of such
fraudulent misrepresentation.
(n) "Market Stand-Off" Agreement. In connection with an
underwritten public offering of securities by Buyer pursuant to
Section 5.11, each holder who participates in the registration
statement filed under the Securities Act for such offering will not,
to the extent requested in good faith by an underwriter of
securities of Buyer, sell or otherwise transfer or dispose of any
Registrable Shares not included in such registration statement
(other than to donees or partners of the Holder who agree to be
similarly bound) for up to that period of time, not to exceed sixty
(60) days (the "Market Stand-Off Period"), following the effective
date of such registration statement of Buyer filed under the
Securities Act as is requested by the managing underwriter(s) of
such offering; provided that the officers and directors of Buyer who
own stock of Buyer also agree to such restrictions. In order to
enforce the foregoing covenant, Buyer may impose stop transfer
instructions with respect to the Registrable Shares of each such
holder (and the shares or securities of every other person subject
to the foregoing restriction) until the end of such period.
(o) Termination of Buyer's Obligations. Buyer will have
no obligations pursuant to this Section 5.11 with respect to
Registrable Shares held by a Holder if in the opinion of counsel to
Buyer, which Buyer shall cause to be delivered to the Holders within
twenty (20) days after receipt of the written notice described in
subsection (b) of this Section 5.11 and upon which Holders may rely,
at the time of filing a registration statement such Holder may sell
all of such Holder's Registrable Shares in any single three
(3)-month period without registration under the Securities Act
pursuant to Rule 144, provided that if at any time after a Holder
becomes eligible to sell the Registrable Shares pursuant to Rule 144
but before such securities may be resold under Rule 144(k) Buyer
fails to take all action necessary to be taken by Buyer in order to
allow Holder to sell under Rule 144, Buyer shall have continuing
obligations under this Section 5.11 until Holder may sell such
securities pursuant to Rule 144(k), at which time such continuing
obligations shall terminate.
(p) Other Piggyback Rights. So long as any Papyrus
Stockholder has registration rights pursuant to this Section 5.11,
Buyer shall not grant any rights relating to the piggyback
registration of its capital stock which are superior to the rights
granted to the Holders under this Section 5.11.
5.12 Reasonable Commercial Efforts and Further Assurances.
Each of the parties to this Agreement shall use reasonable
commercial efforts to effectuate the transactions contemplated
hereby and to fulfill and cause to be fulfilled the conditions to
closing under this Agreement. Each party hereto, at the reasonable
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.
5.13 Listing of Buyer Shares. Buyer will use its
reasonable best efforts to cause the Merger Shares to be approved
for listing on the Nasdaq SmallCap Market, within the time
prescribed therefor in the Nasdaq Stock Market rules and
regulations.
5.14 Notice of Developments. Each Party will give prompt
written notice to the other of any material adverse development
causing a breach of any of its own representations and warranties in
Articles 3 and 4 above. No disclosure by any Party pursuant to this
Section 5.14, however, shall be deemed to amend or supplement the
Disclosure Schedule or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant.
5.15 Exclusivity. Papyrus will not solicit, initiate, or
encourage the submission of any proposal or offer from any Person
relating to the acquisition of all or substantially all of the
capital stock or assets of Papyrus (including any acquisition
structured as a merger, consolidation, or share exchange); provided,
however, that Papyrus and its directors and officers will remain
free to participate in any discussions or negotiations regarding,
furnish any information with respect to, assist or participate in,
or facilitate in any other manner any effort or attempt by any
Person to do or seek any of the foregoing to the extent their
fiduciary duties may require. Papyrus shall notify Buyer
immediately if any Person makes any proposal, offer, inquiry, or
contact with respect to any of the foregoing.
5.16 Maintenance of Business. Papyrus will carry on and
preserve the business and its relationship with customers,
suppliers, employees, consultants and others in substantially the
same manner as it has prior to the date hereof. If Papyrus becomes
aware of a material deterioration in the relationship with any
customer, supplier, key employee, consultant or business partner, it
will promptly bring such information to the attention of Buyer in
writing and, if requested by Buyer, will exert its best efforts to
restore the relationship.
5.17 Conduct of Business. Papyrus will continue to
conduct its business and maintain its business relationship in the
ordinary and usual course and will not, without the prior written
consent of the Buyer:
(a) borrow or lend any money other than advances to
employees for travel and expenses that are incurred in the ordinary
course of Papyrus' business consistent with Papyrus' past practice;
(b) purchase or sell shares or other equity interest in
any corporation or other business or enter into any transaction or
agreement not in the ordinary course of Papyrus' business consistent
with Papyrus' past practice;
(c) encumber, or permit to be encumbered, any of its assets;
(d) sell, transfer or dispose of any of its assets except
in the ordinary course of Papyrus' business consistent with Papyrus'
past practice;
(e) enter into any material lease or contract for the
purchase or sale of any property, whether real or personal, tangible
or intangible;
(f) pay any bonus, increased salary or special
remuneration to any officer, employee or consultant (except for
normal salary increases consistent with past practices not to exceed
5% of such officer's, employee's or consultant's base annual
compensation) except pursuant to existing arrangements previously
disclosed to and approve in writing by Buyer or enter into any new
employment or consulting agreement with any such person;
(g) change any of its accounting methods (except that
henceforth Papyrus will prepare its financial statements in
accordance with GAAP);
(h) declare, set aside or pay any cash or stock dividend
or other distribution in respect to any of its capital stock,
redeem, repurchase or otherwise acquire any of its capital stock or
other securities, pay or distribute any cash or property to any
Papyrus Stockholder or security holder or make any other cash
payment to any shareholder or security holder of Papyrus that is
unusual, extraordinary, or not made in the Ordinary Course of
Business consistent with Papyrus' past practice;
(i) amend or terminate any contract, agreement or license
to which it is a party except those amended or terminated in the
Ordinary Course of Business, consistent with Papyrus' past practice,
and which are not material in amount or effect;
(j) guarantee or act as a surety for any obligation of
any third party;
(k) waive or release any material right or claim except
in the Ordinary Course of Business, consistent with the past
practice or agree to any audit assessment by any tax authority or
file any federal or state income or franchise tax return unless
copies of such returns have been delivered to Buyer for its review
prior to filing;
(l) issue, sell, create or authorize any shares of its
capital stock of any class or series or any other of its securities,
or issue, grant or create any warrants, obligations, subscriptions,
options, convertible securities, or other commitments to issue
shares of its capital stock or securities ultimately exchangeable
for, or convertible into, shares of its capital stock;
(m) subdivide or split or combine or reverse split the
outstanding shares of its capital stock of any class or enter into
any recapitalization affecting the number of outstanding shares of
its capital stock of any class or affecting any other of its
securities;
(n) merge, consolidate or reorganize with, or acquire,
any entity or enter into any negotiations, discussions or agreement
for such purpose;
(o) amend its charter documents;
(p) license any of its technology or Intellectual
Property Rights except in the ordinary course of business consistent
with past practice;
(q) change any insurance coverage or issue any
certificates of insurance;
(r) modify or change the exercise or conversion rights or
exercise or purchase prices of any Papyrus Stock, options, warrants
or other securities, or accelerate or otherwise modify (i) the right
to exercise any option, warrant or other right to purchase any
Papyrus stock or other securities or (ii) the vesting or release of
any shares of Papyrus capital stock or other securities of Papyrus
from any repurchase options or rights of refusal held by Papyrus or
any other party or any other restrictions unless such
accelerations/modifications are expressly required and mandated by
the terms of a formal written agreement or plan that has been
disclosed in writing to Buyer and was entered into prior to the
execution of this Agreement by Buyer and Papyrus;
(s) purchase or otherwise acquire, or sell or otherwise
dispose of (i) any Buyer Shares or other Buyer securities or (ii)
any securities whose value is derived from or determined with
reference to, in whole or in part, the value of Buyer Shares or
other Buyer securities;
(t) agree to do any of the things described in the
preceding clauses 5.17(a) through 5.17 (s).
5.18 Certain Investments, Agreements. Papyrus and the
Papyrus Stockholders do not own, and shall not make any purchase or
other acquisition of, or investment in, any Buyer Shares or other
securities of Buyer. Papyrus and the Papyrus Stockholders shall not
enter into any agreement with any holders of Buyer Shares calling
for either Papyrus or Buyer to retire or reacquire all or part of
the Buyer Shares to be issued pursuant to the Merger. Papyrus shall
not enter into any financial arrangements for the benefit of any
Papyrus Stockholder and the Papyrus Stockholders shall not enter
into any agreement which, in effect, would negate the exchange of
equity securities contemplated under this Agreement, including
without limitation, any loan or other financial arrangement at
abnormally low interest rates, or any guarantee of loans secured by
Buyer Shares to be issued pursuant to the Merger.
5.19 Invention Assignment and Confidentiality Agreements.
Papyrus shall obtain from each employee, agent and consultant of
Papyrus who has had access to any software, technology or
copyrightable, patentable or other proprietary works or intellectual
property owned or developed by Papyrus or other Intellectual
Property Rights, or to any other confidential or proprietary
information of Papyrus or its clients, an invention assignment and
confidentiality agreement in form acceptable to Buyer and its
counsel, duly executed by such employee, agent or consultant and
delivered to Papyrus. Each Papyrus employee who accepts employment
with Buyer following the Closing will execute and agree to be bound
by a similar agreement in favor of Buyer and in the form attached
hereto as Exhibit E, by reference made a part hereof.
ARTICLE 6
TERMINATION; AMENDMENT AND WAIVER
6.1 Termination. This Agreement may be terminated at any
time prior to the Effective Time (with respect to Section 6.1(b)
through Section 6.1(d), by written notice by the terminating party
to the other party):
(a) by the mutual written consent of Buyer and Papyrus;
(b) by either Buyer or Papyrus if the Merger shall not
have been consummated (except for the filing of the Merger
Certificate) by October 31, 1998, provided, however, that the right
to terminate this Agreement under this Section 6.1(b) shall not be
available to any party whose failure to fulfill any obligation under
this Agreement has been the cause of or resulted in the failure of
the Merger to occur on or before such date;
(c) by either Buyer or Papyrus if a court of competent
jurisdiction or other governmental entity shall have issued a
nonappealable final order, decree or ruling or taken any other
action, in each case having the effect of permanently restraining,
enjoining or otherwise prohibiting the Merger, except, if the party
relying on such order, decree or ruling or other action has not
complied with its obligations under this Agreement;
(d) by Buyer, if there has been a breach of any of
Papyrus' representations, warranties or covenants, which breach (i)
causes the conditions set forth in Sections 8.1(a) and (b) and
8.2(f) and (i), and (ii) shall not have been cured within ten (10)
business days following receipt by Papyrus of written notice of such
breach from Buyer; or
(e) by Papyrus, if there has been a breach of any of
Buyer's representations, warranties or covenants which breach (i)
causes the conditions set forth in Sections 8.3(a) and (c), and (ii)
shall not have been shall not have been cured within ten (10)
business days following receipt by Buyer of written notice of such
breach from Papyrus.
6.2 Effect of Termination. In the event of termination
of this Agreement as provided in Section 6.1(a), (b) or (c), there
shall be no liability or obligation on the part of Buyer, Papyrus,
Merger Sub or their respective officers, directors, or stockholders,
except (i) to the extent that such termination results from the
willful breach by a party of any of its representations, warranties
or covenants set forth in this Agreement and (ii) the provisions of
Section 5.5 shall remain in full force and effect and survive any
termination of this Agreement.
6.3 Amendment. This Agreement may be amended by the
parties hereto, by action taken or authorized by their respective
Boards of Directors. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
6.4 Extension; Waiver. At any time prior to the
Effective Time, the parties hereto, by action taken or authorized by
their respective Boards of Directors, may, to the extent legally
allowed, (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive
any inaccuracies in the representations and warranties contained
herein or in any document delivered pursuant hereto and (iii) waive
compliance with any of the agreements or conditions 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 a written
instrument signed on behalf of such party.
ARTICLE 7
ESCROW AND INDEMNIFICATION
7.1 Escrow Fund
(a) Deposit into Escrow. At the Closing, ten percent
(10%) of the total number of Merger Shares issued by Buyer at
Closing (the "Escrow Shares") shall be registered in the name of,
and be deposited with Durham, Evans, Jones & Pinegar, P.C. (or other
institution selected by Buyer with the reasonable consent of
Papyrus) as escrow agent (the "Escrow Agent"), such deposit to
constitute the Escrow Fund and to be governed by the terms set forth
herein and in the Escrow Agreement attached hereto as Exhibit D.
The Escrow Fund shall be available to compensate Buyer pursuant to
the indemnification obligations of the Papyrus Stockholders as set
forth in Section 7.2. If Buyer issues any Additional Escrow Shares
(as defined below), such shares will be issued in the name of the
Escrow Agent and delivered to the Escrow Agent in the same manner as
the Escrow Shares delivered at the Closing.
(b) Rights of Papyrus Stockholders. Except for dividends
paid in stock declared with respect to the Escrow Shares
("Additional Escrow Shares"), which shall be treated pursuant to
Section 7.l(a) hereof, any cash dividends, dividends payable in
securities or other distributions of any kind made in respect of the
Escrow Shares will be delivered to the Papyrus Stockholders on a pro
rata basis. Each Papyrus Stockholder will have voting rights with
respect to the Escrow Shares deposited in the Escrow Fund with
respect to such stockholder so long as such Escrow Shares are held
in escrow, and Buyer will take all reasonable steps necessary to
allow the exercise of such rights. While the Escrow Shares remain
in the Escrow Agent's possession pursuant to this Agreement, the
Papyrus Stockholders will retain and will be able to exercise all
other incidents of ownership of said Escrow Shares which are not
inconsistent with the terms and conditions of this Agreement.
7.2 Indemnification.
(a) Survival of Warranties. All representations and
warranties made by Papyrus herein, or in any certificate, schedule
or exhibit delivered pursuant hereto, shall survive the Closing and
continue in full force and effect until the first anniversary of the
Closing Date (sometimes referred to herein as the "Termination Date").
(b) Indemnification of Buyer and Surviving Corporation.
Subject to the limitations set forth in this Section 7, the Papyrus
Stockholders will indemnify and hold harmless Buyer and the
Surviving Corporation and their respective officers, directors,
agents, attorneys and employees, and each person, if any, who
controls or may control Buyer or the Surviving Corporation within
the meaning of the Securities Act (hereinafter referred to
individually as an "Indemnified Person" and collectively as
"Indemnified Persons") from and against any and all losses, costs,
damages, liabilities and expenses arising from claims, demands,
actions, causes of action, including, without limitation, legal fees
(collectively, "Damages") arising out of any misrepresentation or
breach of or default in connection with any of the representations,
warranties, covenants and agreements given or made by Papyrus in
this Agreement, the Papyrus Disclosure Schedules or any exhibit,
schedule or other instrument made or given in connection with the
execution and delivery of this Agreement, provided, however, that
the Papyrus Stockholders and Papyrus shall not have any obligation
to indemnify Buyer or the Surviving Corporation from and against any
Damages caused by the breach of any representation or warranty
contained in Article 3 of this Agreement until the Buyer and
Surviving Corporation have suffered Damages by reason of all such
breaches in excess of a $50,000 aggregate deductible (after which
point the Papyrus Stockholders and Papyrus will be obligated only to
indemnify Buyer and Surviving Corporation from and against further
such Damages). Buyer and its Affiliates shall act in good faith and
in a commercially reasonable manner to mitigate any Damages they may
suffer. The Escrow Fund provided herein is intended by the parties
to this Agreement to apply to breaches of any representation,
warranty, covenant or agreement of Papyrus and Papyrus Stockholders
in this Agreement, including any Exhibits and Schedules attached
hereto, and the Articles of Merger, and, resort to the Escrow Fund
shall be the exclusive remedy and maximum indemnification available
hereunder of the Indemnified Persons.
(c) Limitations on Indemnification. Nothing in this
Agreement shall limit the liability in amount or otherwise of
Papyrus or the Papyrus Stockholders with respect to fraud, criminal
activity or intentional breach of any covenant contained in this
Agreement.
7.3 Escrow Period; Release from Escrow.
(a) Termination. The Escrow Period shall terminate upon
the expiration of twelve months after the Effective Time; provided,
however, that a portion of the Escrow Fund, which, in the reasonable
judgment of Buyer, subject to the objection of the Papyrus
Stockholders and the subsequent arbitration of the matter in the
manner provided in Section 7.6 hereof, is necessary to satisfy any
unsatisfied claims specified in any Officer's Certificate
theretofore delivered to the Escrow Agent prior to termination of
the Escrow Period with respect to facts and circumstances existing
prior to expiration of the Escrow Period, shall remain in the Escrow
Fund until such claims have been resolved.
(b) Release Following Termination. Within three (3)
business days after the Termination Date (the "Release Date"), the
Escrow Agent shall release from escrow to the Papyrus Stockholders
their pro rata portion of the Escrow Shares and Additional Escrow
Shares less with respect to each such stockholder the number of
Escrow Shares and Additional Escrow Shares with a value (as
determined pursuant to Section 7.4) equal to (A) such stockholder's
pro rata portion of any liability delivered to Buyer in accordance
with Section 7.4 in satisfaction of indemnification claims by
Indemnified Persons and (B) such stockholder's pro rata portion of
any liability subject to delivery to Indemnified Persons in
accordance with Section 7.3(a) with respect to any pending but
unresolved indemnification claims of Indemnified Persons. Any
Escrow Shares and Additional Escrow Shares held as a result of
clause (B) shall be released to the Papyrus Stockholders or released
to Buyer (as appropriate) promptly upon resolution of each specific
indemnification claim involved. Escrow Shares and Additional Escrow
Shares shall be released to the respective Papyrus Stockholders in
proportion to their respective ownership interest in Papyrus
immediately prior to the Effective Time. Buyer will take such
action as may be necessary to cause such certificates to be issued
in the names of the appropriate persons. Certificates representing
Escrow Shares and Additional Escrow Shares so issued that are
subject to resale restrictions under applicable securities laws will
bear a legend to that effect. No fractional shares shall be
released and delivered from Escrow to the Papyrus Stockholders. In
lieu of any fraction of an Escrow Share to which a Papyrus
Stockholder would otherwise be entitled, such holder will receive
from Buyer an amount of cash (rounded to the nearest whole cent)
equal to the product of such fraction multiplied by the
Indemnification Price (as defined below).
(c) No Assignment of Escrow Shares. No Escrow Shares or
Additional Escrow Shares or any beneficial interest therein may be
pledged, sold, assigned or transferred, including by operation of
law, by any Papyrus Stockholder or be taken or reached by any legal
or equitable process in satisfaction of any debt or other liability
of any such stockholder, prior to the delivery to such stockholder
of his pro rata portion of the Escrow Fund by the Escrow Agent as
provided herein.
(d) Transfer by Escrow Agent. The Escrow Agent is hereby
granted the power to effect any transfer of Escrow Shares
contemplated by this Agreement. Buyer will cooperate with the
Escrow Agent in promptly issuing stock certificates to effect such
transfers.
7.4 Claims upon Escrow Fund. Upon receipt by the Escrow
Agent on or before the Release Date of a certificate signed by any
officer of Buyer (an "Officer's Certificate") stating that with
respect to the indemnification obligations of the Papyrus
Stockholders set forth in Section 7.2, Damages exist and specifying
in reasonable detail the individual items of such Damages included
in the amount so stated, the date each such item was paid, or
properly accrued or arose, and the nature of the misrepresentation,
breach of warranty or claim to which such item is related, the
Escrow Agent shall, subject to the provisions of this Section 7,
deliver to Buyer out of the Escrow Fund, as promptly as practicable,
Escrow Shares, Additional Escrow Shares (in each case rounded to the
nearest whole number) or other assets held in the Escrow Fund having
a value equal to such Damages. For the purpose of compensating
Buyer for its Damages pursuant to this Agreement, Escrow Shares
shall be valued at the average closing "bid" price of a Buyer Share
for the ten (10) trading days immediately preceding the date on
which the Officer's Certificate is delivered to the Escrow Agent, as
reported on the Nasdaq SmallCap Market (the "Indemnification
Price"). In determining the amount of any Damage attributable to a
breach, any materiality standard contained in a representation,
warranty or covenant of Buyer shall be disregarded.
7.5 Objections to Claims. At the time of delivery of any
Officer's Certificate to the Escrow Agent, a duplicate copy of such
Officer's Certificate shall be delivered to the Papyrus Stockholders
and for a period of thirty (30) days after such delivery, the Escrow
Agent shall make no delivery of Escrow Shares, Additional Escrow
Shares or other property pursuant to Section 8.4 hereof unless the
Escrow Agent shall have received written authorization from the
Papyrus Stockholders to make such delivery. After the expiration of
such thirty (30) day period, the Escrow Agent shall make delivery of
Escrow Shares, Additional Escrow Shares or other property in the
Escrow Fund in accordance with Section 7.4 hereof, provided that no
such payment or delivery may be made if the Papyrus Stockholders
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 and to Buyer prior to the expiration of such
thirty (30) day period.
7.6 Resolution of Conflicts and Arbitration.
(a) Procedure for Handling Objections. In case the
Papyrus Stockholders shall so object in writing to any claim or
claims by Buyer made in any Officer's Certificate, Buyer shall have
thirty (30) days to respond in a written statement to the objection
of the Papyrus Stockholders. If after such thirty (30) day period
there remains a dispute as to any claims, the Papyrus Stockholders
and Buyer shall attempt in good faith for thirty (30) days to agree
upon the rights of the respective parties with respect to each of
such claims. If the Papyrus Stockholders and Buyer 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 shall distribute the Escrow Shares, Additional Shares or other
property from the Escrow Fund in accordance with the terms thereof.
(b) Arbitration. If no such agreement can be reached
after good faith negotiation, either Buyer or the Papyrus
Stockholders may, by written notice to the other, 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 one arbitrator. Buyer
and the Papyrus Stockholders shall agree on the arbitrator, provided
that if Buyer and the Papyrus Stockholders cannot agree on such
arbitrator, either Buyer or Papyrus Stockholders can request that
the American Arbitration Association select the arbitrator. The
arbitrator 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 arbitrator
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 arbitrator determine that discovery was sought without
substantial justification or that discovery was refused or objected
to without substantial justification. The decision of the
arbitrator shall be written, shall be in accordance with applicable
law and with this Agreement, and shall be supported by written
findings of fact and conclusion of law which shall set forth the
basis for the decision of the arbitrator. The decision of the
arbitrator 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
7.5 hereof, the Escrow Agent shall be entitled to act in accordance
with such decision and make or withhold payments out of the Escrow
Fund in accordance therewith.
(c) Enforcement of Arbitration Award. Judgment upon any
award rendered by the arbitrator may be entered in any court having
jurisdiction. Any such arbitration shall be held in Salt Lake
County, Utah under the commercial rules then in effect of the
American Arbitration Association. For purposes of this Section
7.6(c), in any arbitration hereunder in which any claim or the
amount thereof stated in the Officer's Certificate is at issue,
Buyer shall be deemed to be the Non-Prevailing Party unless the
arbitrators award Buyer more than one-half (1/2) of the amount in
dispute, plus any amounts not in dispute; otherwise, the Papyrus
Stockholders for whom the Escrow Shares, Additional Escrow Shares
(if any) or other property deposited into escrow have been deposited
in the Escrow Fund shall be deemed to be the Non-Prevailing Party.
The Non-Prevailing Party to an arbitration shall pay its own
expenses, the fees of the arbitrator, the administrative fee of the
American Arbitration Association, and the expenses, including
attorneys' fees and costs, reasonably incurred by the other party to
the arbitration.
7.7 Third-Party Claims. In the event Buyer becomes aware
of a third-party claim which Buyer believes may result in a demand
against the Escrow Fund, Buyer shall notify the Papyrus Stockholders
of such claim, and the Papyrus Stockholders for whom Merger Shares
otherwise issuable to them are deposited in the Escrow Fund shall be
entitled, at their expense, to participate in any defense of such
claim. Buyer shall have the right in its sole discretion to settle
any such claim. In the event that the Papyrus Stockholders have
consented to any such settlement, the Papyrus Stockholders shall
have no power or authority to object under Section 7.5 or any other
provision of this Section 7 to the amount of any claim by Buyer
against the Escrow Fund for indemnity with respect to such settlement.
7.10 Substitution for Merger Shares. Notwithstanding
anything herein to the contrary, in the event a public market is
established for the Merger Shares, Papyrus Stockholders shall have
the right, but not the obligation to substitute cash in the amount
equal to the value of the Escrow Shares. In the event Papyrus
Stockholders elect to effect such substitution, they shall provide
ten (10) business days prior written notice thereof to Buyer and
shall execute such additional documents as Buyer may reasonably
request to evidence such substitution. Such cash shall be delivered
to and held by the Escrow Agent pursuant to the terms of this
Agreement and, upon receipt of such cash, Escrow Agent shall release
the Merger Shares (provided that Buyer and Papyrus Stockholders may
agree to such other manner of release to allow Papyrus Stockholders
to sell the Merger Shares concurrently with the delivery of such
cash, if permitted by law).
ARTICLE 8
CONDITIONS TO OBLIGATION TO CLOSE
8.1 Mutual Conditions. The respective obligations of
each Party 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, in writing, by
agreement of all the Parties:
(a) Stockholder Approval. This Agreement and the Articles
of Merger shall be approved and adopted by the Papyrus Stockholders
by the requisite vote under applicable law and the Papyrus Certificate;
(b) 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 or regulatory restraint or prohibition preventing the
consummation of the Merger shall be and remain in effect, nor shall
any proceeding brought by any administrative agency or commission or
other governmental authority or instrumentality, domestic or
foreign, seeking any of the foregoing be pending, which would have a
Material Adverse Effect on either Buyer or on Buyer combined with
the Surviving Corporation after the Effective Time, 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. In the event an
injunction or other order shall have been issued, each party agrees
to use its reasonable diligent efforts to have such injunction or
other order lifted;
(c) Tax Opinion. Buyer shall each have received a
written opinion from its counsel, Durham, Evans, Jones & Pinegar,
P.C., in form and substance reasonably satisfactory to them to the
effect that the Merger will constitute a reorganization within the
meaning of Section 368(a) of the Code. In rendering such opinion,
said counsel may rely upon (and, to the extent reasonably required,
the Parties and the Papyrus Stockholders shall make) reasonable
representations related thereto.
8.2 Conditions to Obligation of Buyer. The obligation of
Buyer to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions, any of which Buyer may waive if it executes a
writing so stating at or prior to the Closing:
(a) Dissenting Shares. The number of Dissenting Shares
shall not exceed 5% of the number of outstanding Papyrus Shares;
(b) Third-party Consents. Papyrus shall have procured
all of the third party consents specified in Section 3.5(d);
(c) Representations and Warranties True. The
representations and warranties set forth in Article 3 above shall be
true and correct in all material respects at and as of the Closing
Date;
(d) Papyrus Covenants. Papyrus shall have performed and
complied with all of its covenants hereunder in all material
respects through the Closing;
(e) No Material Adverse Change. There shall not have
occurred any Material adverse change in the financial condition,
properties, assets (including intangible assets), liabilities,
business, operations or results or operations of Papyrus;
(f) Officer's Certificate. Papyrus shall have delivered
to Buyer an officer's certificate to the effect that each of the
conditions specified in this Section 8.2 is satisfied in all respects;
(g) Opinion of Counsel to Papyrus. Buyer shall have
received from counsel to Papyrus an opinion in form and substance as
set forth in Exhibit F attached hereto, addressed to Buyer, and
dated as of the Closing Date;
(h) Execution of Escrow Agreement. Buyer, Merger Sub,
Papyrus, Escrow Agent and the Papyrus Stockholders shall have
entered into an Escrow Agreement substantially in the form attached
hereto as Exhibit D.
(i) Employees of Papyrus. The employees of Papyrus set
forth on Schedule 8.2(j) shall have accepted employment with Merger
Sub pursuant to the terms of an offer letter substantially in the
form attached hereto as Exhibit G, as applicable;
(j) Exercise or Cancellation of Options. All stock
options issued by Papyrus shall have been exercised or canceled;
(k) Resignations of Officers and Directors. Buyer shall
have received the resignations, effective as of the Closing, of each
director and officer of Papyrus; and
(l) Other Actions. All actions to be taken by Papyrus in
connection with consummation of the transactions contemplated hereby
and all certificates, opinions, instruments, and other documents
required to effect the transactions contemplated hereby will be
satisfactory in form and substance to Buyer.
(m) Due Diligence Investigation. Buyer shall have
completed its due diligence investigations and such investigations
shall not have disclosed any facts or circumstances with respect to
the business, operations, organization, financial condition or
prospects of Papyrus, which Buyer in good faith shall have
determined may have a material adverse effect on the proposed or
continuing operations, financial condition and business of Papyrus;
(n) Licenses and Assignments. William Kania, Tim Scanlon
and Brian Mottershead shall have executed assignments and
royalty-free license agreements in forms acceptable to Buyer's
counsel and granting to Buyer free, unrestricted and exclusive use
of certain technology and software designed, developed or created by
each of them relating to the handwriting recognition and pen-voice
integration technology that forms the basis for the products and
technology developed or under development by Papyrus.
8.3 Conditions to Obligation of Papyrus. The obligation
of Papyrus to consummate the transactions to be performed by it in
connection with the Closing is subject to satisfaction of the
following conditions, any of which Papyrus may waive if it executes
a writing so stating at or prior to the Closing:
(a) Representations and Warranties True. The
representations and warranties set forth in Article 4 above shall be
true and correct in all material respects at and as of the Closing
Date;
(b) Buyer Covenants. Buyer shall have performed and
complied with all of its covenants hereunder in all material
respects through the Closing;
(c) Officer's Certificate. Buyer shall have delivered to
Papyrus an officer's certificate to the effect that each of the
conditions specified in this Section 8.3 is satisfied in all respects;
(d) Opinion of Counsel to Buyer. Papyrus shall have
received from counsel to Buyer an opinion in form and substance as
set forth in Exhibit G attached hereto, addressed to Papyrus and
Papyrus Stockholders, and dated as of the Closing Date; and
(e) Due Diligence Investigation. Papyrus shall have
completed its due diligence investigations and such investigations
shall not have disclosed any facts or circumstances with respect to
the business, operations, organization, financial condition or
prospects of Buyer, which Papyrus in good faith shall have
determined may have a material adverse effect on the proposed or
continuing operations, financial condition and business of Buyer.
ARTICLE 9
MISCELLANEOUS
9.1 Survival. None of the representations, warranties,
and covenants of the Parties (other than the provisions in Section 2
concerning issuance of Merger Shares and Section 5.5 concerning
confidentiality) will survive the Effective Time.
9.2 Press Releases and Public Announcements. No Party
shall issue any press release or make any public announcement
relating to the subject matter of this Agreement without the prior
written approval of the other Party; provided, however, that any
Party may make any public disclosure it believes in good faith is
required by applicable law or any listing or trading agreement
concerning its publicly-traded securities (in which case the
disclosing Party will use its reasonable best efforts to advise the
other Party prior to making the disclosure).
9.3 No Third-Party Beneficiaries. This Agreement shall
not confer any rights or remedies upon any Person other than the
Parties and their respective successors and permitted assigns;
provided, however, that (i) the provisions in Section 2 above
concerning issuance of Buyer Shares are intended for the benefit of
Papyrus Stockholders.
9.4 Entire Agreement. This Agreement (including the
documents referred to herein) constitutes the entire agreement
between the Parties and supersedes any prior understandings,
agreements, or representations by or between the Parties, written or
oral, to the extent they related in any way to the subject matter
hereof.
9.5 Succession and Assignment. This Agreement shall be
binding upon and inure to the benefit of the Parties named herein
and their respective successors and permitted assigns. No Party may
assign either this Agreement or any of its rights, interests, or
obligations hereunder without the prior written approval of the
other Party.
9.6 Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed an original but
all of which together will constitute one and the same instrument.
9.7 Headings. The section headings contained in this
Agreement are inserted for convenience only and shall not affect in
any way the meaning or interpretation of this Agreement.
9.8 Notices. All notices, requests, demands, claims, and
other communications hereunder will be in writing. Any notice,
request, demand, claim, or other communication hereunder shall be
deemed duly given if (and then two business days after) it is sent
by registered or certified mail, return receipt requested, postage
prepaid, and addressed to the intended recipient as set forth below:
If to Papyrus, to it at: William Kania,
President
Papyrus Development Corporation
124 Mount Auburn Street
Cambridge, MA 02138
With a copy to: Frederic J. Marx, Esq.
Hemenway & Barnes
60 State Street
Boston, MA 02109
If to Buyer or Merger Sub: FONIX corporation
1225 Eagle Gate Tower
60 East South Temple Street
Salt Lake City, Utah 84111
Fax: (801) 328-8778
Attn: Thomas A. Murdock, President
With a copy to: Durham, Evans, Jones & Pinegar, P.C.
KeyBank Tower, Suite 850
50 South Main Street
Salt Lake City, Utah 84144
Fax: (801) 538-2425
Attn. Jeffrey M. Jones, Esq.
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set
forth above using any other means (including personal delivery,
expedited courier, messenger service, telecopy, telex, ordinary
mail, or electronic mail), but no such notice, request, demand,
claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to
be delivered by giving the other Party notice in the manner herein
set forth.
9.9 Governing Law. This Agreement shall be governed by
and construed in accordance with the domestic laws of the State of
Utah without giving effect to any choice or conflict of law
provision or rule (whether of the State of Utah or any other
jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Utah. Each of the parties
hereto irrevocably consents to the exclusive jurisdiction of any
court located within Salt Lake County, State of Utah, in connection
with any matter based upon or arising out of this Agreement or the
matters contemplated hereby and it agrees that process may be served
upon it in any manner authorized by the laws of the State of Utah
for such persons and waives and covenants not to assert or plead any
objection which it might otherwise have to such jurisdiction and
such process.
9.10 Amendments and Waivers. The Parties may mutually
amend any provision of this Agreement at any time prior to the
Effective Time with the prior authorization of their respective
boards of directors; provided, however, that any amendment effected
subsequent to Papyrus Stockholder approval will be subject to the
restrictions contained in the Massachusetts General Corporation Law.
No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by both of the
Parties. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or
not, shall be deemed to extend to any prior or subsequent default,
misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
9.11 Severability. Any term or provision of this
Agreement that is invalid or unenforceable in any situation in any
jurisdiction shall not affect the validity or enforceability of the
remaining terms and provisions hereof or the validity or
enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
9.12 Expenses. Whether or not the Merger is consummated,
each of the Parties will bear its own costs and expenses (including
legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
9.13 Construction. The Parties have participated jointly
in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this
Agreement shall be construed as if drafted jointly by the Parties
and no presumption or burden of proof shall arise favoring or
disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state,
local, or foreign statute or law shall be deemed also to refer to
all rules and regulations promulgated thereunder, unless the context
otherwise requires. The word "including" shall mean including
without limitation.
9.14 Incorporation of Exhibits and Schedules. The Exhibits
and Schedules identified in this Agreement are incorporated herein
by reference and made a part hereof.
SIGNED as of the date first set forth above.
BUYER
FONIX CORPORATION
By: /s/ Thomas A. Murdock
-------------------------------
Title: President
MERGER SUB
PAPYRUS ACQUISITION CORPORATION
By: /s/ Thomas A. Murdock
-------------------------------
Title: President
PAPYRUS
PAPYRUS DEVELOPMENT CORPORATION
By: /s/ William E. Kania
-------------------------------
Title: President
By: /s/ Brian Mottershead
-------------------------------
Title: Treasurer
ADDENDUM TO AGREEMENT AND PLAN OF MERGER
THIS ADDENDUM dated the 29th day of October 1998, is entered
into by and among FONIX CORPORATION, a Delaware corporation
("fonix"), Papyrus Acquisition Corporation, a Utah corporation
("PAC") and Papyrus Development Corporation, a Massachusetts
corporation ("PDC").
RECITALS:
A. The parties entered into that certain Agreement and
Plan of Merger on September 10, 1998 (the "Agreement"); and
B. The parties have set October 29, 1998 as the Closing
Date under the Agreement and desire to modify certain of the
provisions of the Agreement to facilitate the Closing.
NOW, THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree to modify the
Agreement as follows:
1. Delivery of Promissory Notes. Article II of the
Agreement is hereby modified and amended to reflect
the mutual agreement and understanding of the
parties as to the payment of the "Cash Payment"
referred to in the Agreement. As hereby amended and
modified, PAC and fonix will satisfy the requirement
of the Cash Payment by the delivery of promissory
notes in the aggregate principal amount of
$1,170,000 as follows: $490,000 due the earlier of
five business days following the closing of the next
equity funding completed by fonix, but not later
than February 28, 1999; $340,000 due on February 28,
1999; and $340,000 due on September 30, 1999. Each
stockholder of PDC will receive his pro rata share
of such notes as indicated.
2. Delivery of Shares. fonix and PAC acknowledge that
two of PDC's stockholders, William E. Kania and
Brian Mottershead, have entered into agreements
which will require, among other things, an
assignment of certain of the Merger Shares to two
individuals. The parties agree that these
assignments, the details of which have been
disclosed to fonix and PAC may proceed,
notwithstanding the restrictions against transfer in
the Agreement, and that the individual transferees
will take such Merger Shares with the same rights,
including registration rights, as granted to the
Papyrus Stockholders under the Agreement, and
subject to the same limitations, including
restrictions on transfer, as those binding upon the
Papyrus Stockholders under the Agreement.
3. Other Provisions. Except as necessary to conform
the remaining terms and conditions of the Agreement
to the change agreed upon in Paragraph 1, above, all
other terms, conditions and provisions of the
Agreement shall remain in full force and effect as
originally adopted.
DATED the day and year first written above.
FONIX CORPORATION
By /s/ Thomas A. Murdock
- - -------------------------------------------
Thomas A. Murdock, President
Papyrus Development Corporation
By /s/ William E. Kania
- - -------------------------------------------
William E. Kania, President
Papyrus Acquisition Corporation
By /s/ Thomas A. Murdock
- - -------------------------------------------
Thomas A. Murdock, President
