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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
SOLICITATION/RECOMMENDATION STATEMENT
PURSUANT TO SECTION 14(D)(4) OF THE
SECURITIES EXCHANGE ACT OF 1934
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STATE OF THE ART, INC.
(NAME OF SUBJECT COMPANY)
STATE OF THE ART, INC.
(NAMES OF PERSON(S) FILING STATEMENT)
COMMON STOCK, NO PAR VALUE
(TITLE OF CLASS OF SECURITIES)
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85730710
(CUSIP NUMBER OF CLASS OF SECURITIES)
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DAVID W. HANNA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
STATE OF THE ART, INC.
56 TECHNOLOGY DRIVE
IRVINE, CA 92618
(714) 753-1222
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON
AUTHORIZED TO RECEIVE NOTICE AND COMMUNICATIONS ON
BEHALF OF THE PERSON(S) FILING STATEMENT)
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WITH A COPY TO:
JOHN A. FORE, ESQ.
SELIM DAY, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304
(650) 493-9300
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is State Of The Art, Inc., a California
corporation (the "Company"). The address of the principal executive offices of
the Company is 56 Technology Drive, Irvine, California 92618. The title of the
class of equity securities to which this Solicitation/Recommendation Statement
on Schedule 14D-9 (this "Schedule 14D-9" or the "Statement") relates is the
common stock, no par value, of the Company (the "Common Stock"). Unless the
context otherwise requires, as used herein the term "Shares" shall mean shares
of Common Stock.
ITEM 2. TENDER OFFER OF THE PURCHASER.
This Statement relates to the cash tender offer (the "Offer") described in
the Tender Offer Statement on Schedule 14D-1, dated February 2, 1998 (as
amended or supplemented, the "Schedule 14D-1"), filed by The Sage Group plc, a
company organized under the laws of England ("Parent"), and Rose Acquisition
Corp., a Delaware corporation and a direct and indirect wholly owned
subsidiary of Parent (the "Purchaser"), with the Securities and Exchange
Commission (the "SEC"), relating to an offer to purchase all of the issued and
outstanding Shares at $22.00 per Share, net to the seller in cash, upon the
terms and subject to the conditions set forth in the Purchaser's Offer to
Purchase, dated February 2, 1998 (the "Offer to Purchase"), and in the related
Letter of Transmittal (which together with any amendments or supplements
thereto constitute the "Offer Documents").
The Offer is being made in accordance with an Agreement and Plan of Merger,
dated January 27, 1998 (the "Merger Agreement"), by and among Parent, the
Purchaser and the Company. Pursuant to the Merger Agreement, as soon as
practicable after completion of the Offer and satisfaction or waiver, if
permissible, of all conditions to the merger, the Purchaser will be merged
with and into the Company (the "Merger"), and the Company will become a wholly
owned subsidiary of Parent (the "Surviving Corporation"). At the effective
time of the Merger (the "Effective Time"), each Share issued and outstanding
immediately prior to the Effective Time (other than Shares held by Parent or
the Purchaser and Shares held by shareholders of the Company who will have
properly perfected their dissenters' rights, if any, under California law)
will be converted into the right to receive $22.00 in cash or any greater
amount paid pursuant to the Offer (the "Offer Price") without interest. The
Merger Agreement is summarized in Item 3 of this Schedule 14D-9.
The Offer Documents indicate that the principal executive offices of Parent
and the Purchaser are located at Sage House, Benton Park Road, Newcastle Upon
Tyne England NE7 7LZ.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
Schedule 14D-9, are set forth in Item 1 above.
(b) Certain contracts, agreements, arrangements or understandings between
the Company or its affiliates and certain of its executive officers, directors
or affiliates are described in the Company's Proxy Statement, dated April 4,
1997, relating to its May 29, 1997 Annual Meeting of Shareholders (the "Proxy
Statement"). A copy of the applicable portions of the Proxy Statement has been
filed as an exhibit to this Schedule 14D-9 and is incorporated herein by
reference.
Certain Agreements and Plans
The Company has entered into an employment agreement with David W. Hanna,
and severance agreements with George Riviere, Jeffrey E. Gold, James Moore and
David Butler. Each of these agreements is described in the Proxy Statement
under the heading "Executive Compensation--Employment Agreements", the
corresponding section of which has been filed as an exhibit to this Schedule
14D-9 and is incorporated herein by reference.
The Company has also entered into severance agreements with Gregory
Davidson, James Eckstaedt and Richard Lull (collectively with the severance
agreements with each of Messrs. Riviere, Gold, Moore and Butler, the
"Severance Agreements") in 1997. Each severance agreement provides the
employee with an annual base
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salary and an annual bonus based on an earnings target approved by the Board
of Directors. In addition, if the employee is involuntarily terminated within
twelve months after a change of control, the Severance Agreements provide that
the employee will receive twelve (12) months base salary, a pro-rata portion
of the annual bonus, Company-paid insurance for twelve (12) months and
immediate vesting of options held by the employee that would become
exercisable if the employee remained employed by the Company for a period of
36 months. If the employee voluntarily resigns or is terminated for cause,
death or disability, or is involuntarily terminated without change of control
then the employee will not be eligible to receive severance benefits under the
severance agreements. A copy of each Severance Agreement has been filed as an
exhibit to this Schedule 14D-9 and is incorporated herein by reference.
The Company intends to amend, prior to consummation of the Offer, the
Severance Agreements between State Of The Art, Inc. and each of James Moore,
Richard Lull, Jeffrey Gold, James Eckstaedt, David Butler, Greg Davidson, and
George Riviere (each an "Employee" and collectively the "Employees"). Under
each such Severance Agreement, as amended, in the event the Employee's
employment with the Company terminates as a result of an Involuntary
Termination (as defined in each such agreement) other than for cause after a
change of control of the Company and during the time period in which any
options granted to each Employee on or prior to January 27, 1998 are unvested
(the "Subject Options"), then upon such termination, in addition to any
portion of the Subject Options that were exercisable immediately prior to such
termination, all Subject Options shall immediately become fully vested and
exercisable. A form of amendment to the Severance Agreements has been filed as
an exhibit to this Schedule 14D-9 and is incorporated herein by reference.
Sybex Ltd., a subsidiary of the Company, entered into an employment
agreement with Michael F. King on May 1, 1997. Pursuant to the employment
agreement, Mr. King will receive a base salary, a bonus under such bonus plan
that Sybex, Ltd. may determine from time to time, and an option to purchase an
aggregate of 25,000 shares of Common Stock of the Company, subject to vesting
over a three year period. If Mr. King is terminated without cause, he will
receive twelve (12) months base salary. If Mr. King is terminated for cause or
voluntarily terminates his employment, he will not receive any severance or
termination payments under the employment agreement. A copy of the employment
agreement has been filed as an exhibit to this Schedule 14D-9 and is
incorporated herein by reference.
Stock Options
The Company maintains the 1997 Employee Stock Purchase Plan, the 1994
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan, the 1990 Stock Option Plan, the Stock Plan for Non-Employee
Directors and the Manzanita Software Systems 1985 Stock Option Plan. The 1997
Employee Stock Purchase Plan is described in the Proxy Statement under the
heading "Adoption of the Company's 1997 Employee Stock Purchase Plan" which
has been filed (together with a copy of such 1997 Employee Stock Purchase
Plan) as an exhibit to this Schedule 14D-9 and is incorporated herein by
reference.
Pursuant to the Merger Agreement, the Company will take all actions
necessary to provide that at the Effective Time, (i) each Cash-Out Option (as
defined below) will be cancelled and (ii) in consideration of such
cancellation, each holder of a Cash-Out Option will receive in consideration
thereof an amount (subject to any applicable withholding tax) in cash equal to
the product of (x) the excess, if any, of the Offer Price over the per Share
exercise price of such Cash-Out Option and (y) the number of Shares subject to
such Cash-Out Option. The Company is required to use commercially reasonable
efforts to effectuate the foregoing, including amending the Stock Plans (as
defined below) and obtaining any necessary consents. At the Effective Time,
each Assumed Option (as defined below) will be assumed by Parent, without
disadvantage to the option holders (and Parent will take all action necessary
under applicable law, to cause such result or equivalent result), and shall
thereupon constitute an option to acquire that number of shares of Parent
Common Shares (as defined below) equal to (A) the number of Shares subject to
the Assumed Option immediately prior to the Effective Time, multiplied by (B)
the Exchange Ratio (as defined below), rounded down to the nearest whole
share, at a price per Parent Common Share equal to (1) the exercise price of
the Assumed Option immediately prior to the Effective Time, divided by (2) the
Exchange Ratio, rounded up to the nearest whole cent. Parent shall take all
action necessary for the Parent Common Shares to rank pari passu in all
respects with all other Parent Common Shares then in issue and to be listed
and issuable upon exercise of the Assumed Options to be freely tradeable on
the London Stock Exchange.
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The Company is required to take all actions necessary to provide that at or
immediately prior to the Effective Time, (i) each outstanding option under the
Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan") will
automatically be exercised and (ii) in lieu of the issuance of certificates
representing Shares, each option holder will receive an amount in cash
(subject to applicable withholding tax) equal to the product of (x) the number
of Shares otherwise issuable upon such exercise and (y) the Offer Price in
cash without interest thereon. The Company is required to use all reasonable
efforts to effectuate the foregoing, including amending the Stock Purchase
Plan and obtaining any necessary consents. The Company is required to take all
necessary actions to provide that as of the Effective Time no holder of
options under the Stock Plans will have any right to receive shares of common
stock of the Surviving Corporation upon exercise of any such option.
"Cash-Out Options" means each option outstanding at the Effective Time to
purchase Shares (an "Option") granted under (A) the Company's 1990 Stock
Option Plan, 1994 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan, or Stock Option Plan for Non-Employee
Directors, (B) the Manzanita Software Systems 1985 Stock Option Plan or (C)
any other stock-based incentive plan or arrangement of the Company excluding
any options granted under the Company's 1997 Employee Stock Purchase Plan (the
"Stock Plans") that is not an Assumed Option.
"Assumed Options" means those options or portions thereof granted under the
Company's 1990 Stock Option Plan or 1994 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan that will not have vested and
become exercisable as of the Effective Time having an aggregate exercise price
on the date hereof in an amount not materially less than $5 million as
designated by the Company. To the extent any options or portions thereof
cannot be assumed by Parent, such options or portions thereof shall be treated
as Cash-Out Options and shall be cancelled as of the Effective Time in
consideration for a cash payment.
"Exchange Ratio" means the quotient of (x) the Offer Price multiplied by the
average of the mid-point of the bid and ask price of the rate of currency
exchange of pounds sterling for U.S. dollars quoted in The Financial Times for
each of the business days in a consecutive twenty business period ending two
business days prior to the Effective Time and (y) the average per Share
closing price of the ordinary shares of 1 pence each in the capital of Parent
(a "Parent Common Share") as reported on the London Stock Exchange on each of
the ten trading days immediately preceding the Effective Time.
The effect of this provision in the Merger Agreement is, among others, to
accelerate the vesting of certain options granted to the Company's executive
officers. W. Frank King, Susan L. Rasinski, Richard Lull, David W. Hanna,
James R. Eckstaedt, David Butler, James Moore, Michael King and George Riviere
will each receive at the Effective Time in cash approximately $289,375,
$289,375, $288,300, $271,896, $256,265, $234,079, $196,804, $127,875 and
$108,501, respectively.
Merger Agreement
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions of the
Merger Agreement and is qualified in its entirety by reference to the full
text of the Merger Agreement, which is incorporated by reference and a copy of
which has been filed with the SEC as an exhibit to this Schedule 14D-9.
The Offer. The Merger Agreement provides that the Purchaser will commence
the Offer as promptly as practicable, but in no event later than five business
days after the initial public announcement of the Purchaser's intention to
commence the Offer and that, upon the terms and subject to the prior
satisfaction or waiver of the conditions of the Offer, the Purchaser will
purchase all Shares validly tendered and not withdrawn pursuant to the Offer.
The Merger Agreement further provides that, without the written consent of the
Company, the Purchaser will not (i) decrease the Offer Price or change the
form of consideration payable in the Offer, (ii) decrease the number of Shares
sought to be purchased in the Offer (except as set forth below), (iii) impose
additional conditions to the Offer, (iv) amend any condition to the Offer, (v)
extend the initial expiration date (the "Initial Expiration Date") of the
Offer, except as required by law and except that in the event that any
condition to the Offer is not satisfied or waived on the Initial Expiration
Date, the Purchaser will, and will continue to, extend the Offer from time to
time until a date not later than March 26, 1998 (it being understood that the
Purchaser may determine the interim expiration dates of any extension of the
Offer during such extension period), or (vi) amend any other term of the Offer
in any manner adverse to any holders of Shares without the written consent of
the Company; provided, however that in the event that any condition to the
Offer is not satisfied on a date following the Initial Expiration Date on
which the Offer is scheduled to expire, (i) the
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Purchaser may, from time to time, in its sole discretion, extend the
expiration date of the Offer until a date not later than July 31, 1998 and
(ii) at the written request of the Company delivered no later than March 26,
1998, the Purchaser shall, and shall continue to, extend the Offer from time
to time for the period commencing on the date of the notice referred to above
until a date not later than July 31, 1998 (it being understood that the
Purchaser may determine the interim expiration dates of any extension of the
Offer during such extension period); provided, further, that in the event that
the Purchaser extends the expiration date of the Offer in accordance with such
request: (A) the conditions to the Offer will be deemed to be amended to
provide an additional condition that the Purchaser will not be required to
accept for payment and pay for any tendered Shares unless and until Parent and
the Purchaser will have obtained sufficient financing (the "Substitute
Financing") in replacement, if necessary, of the financing (the "Financing")
described in the conditions to the Offer described below under "Conditions of
the Offer" (the "Conditions") in order to permit Parent and the Purchaser to
acquire all of the Shares in the Offer and the Merger and pay the anticipated
expenses in connection therewith, (B) the condition set forth in paragraph (h)
of the Conditions will be amended and replaced with the condition set forth in
clause (A) above, (C) from and after such time Parent will not be subject to
its financing requirements under the Merger Agreement and (D) Parent will use
all commercially reasonable efforts to secure the Substitute Financing prior
to July 31, 1998 and to provide funds to the Purchaser to permit it to perform
its obligations hereunder and in the Offer (provided that Parent will not be
required to obtain Substitute Financing on economic terms materially less
favorable to it than the Financing). The Purchaser will, on the terms and
subject to the prior satisfaction or waiver of the conditions of the Offer,
accept for payment, and pay for, Shares tendered as soon as it is legally
permitted to do so under applicable law. Parent will provide or cause to be
provided to the Purchaser on a timely basis the funds necessary to accept for
payment, and pay for, any Shares that the Purchaser becomes obligated to
accept for payment, and pay for, pursuant to the Offer.
In the event the Minimum Condition (as defined in the Conditions) is not
satisfied on the Initial Expiration Date, the Purchaser may either (i) extend
the Offer for a period or periods not to exceed, in the aggregate, ten (10)
business days or (ii) amend the Offer to provide that, in the event (x) the
Minimum Condition is not satisfied at the next scheduled expiration date of
the Offer (without giving pro forma effect to the potential issuance of any
Shares issuable upon exercise of the Option Agreement (as described below))
and (y) the number of Shares tendered pursuant to the Offer and not withdrawn
as of such next scheduled expiration date is more than 50% of the then
outstanding Shares, the Purchaser will waive the Minimum Condition and amend
the Offer to reduce the number of Shares subject to the Offer to a number of
Shares equal to a number of Shares that when added to the Shares then owned by
the Purchaser will equal 49.9999% of the Shares then outstanding (the "Revised
Minimum Number") and, if a greater number of Shares is tendered into the Offer
and not withdrawn, purchase, on a pro rata basis, the Revised Minimum Number
of Shares (it being understood that the Purchaser may, but will not in any
event be required to, accept for payment, or pay for any Shares if less than
the Revised Minimum Number of Shares are tendered pursuant to the Offer and
not withdrawn at the applicable expiration date), provided further, that in
the event the Minimum Condition is not satisfied on or before the ten (10)
business day period referred to above, the Purchaser will waive the Minimum
Condition and amend the Offer to reduce the number of Shares subject to the
Offer to the Revised Minimum Number of Shares. In the event that the Purchaser
purchases a number of Shares equal to the Revised Minimum Number, without the
prior written consent of the Purchaser prior to the termination of the Merger
Agreement, the Company will take no action whatsoever to increase the number
of Shares owned by the Purchaser in excess of the Revised Minimum Number.
The Purchaser will, on the terms and subject to the prior satisfaction or
waiver of the conditions to the Offer, accept for payment and pay for Shares
tendered as soon as legally permitted to do so under applicable law.
The Merger. Following the consummation of the Offer, the Merger Agreement
provides that, subject to the terms and conditions thereof, at the Effective
Time the Purchaser will be merged with and into the Company and, as a result
of the Merger, the separate corporate existence of the Purchaser will cease
and the Company will continue as the surviving corporation (sometimes referred
to as the "Surviving Corporation").
The respective obligations of Parent and the Purchaser, on the one hand, and
the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions: (i) the Purchaser will have
purchased or caused to be purchased,
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the Shares pursuant to the Offer, unless such failure to purchase is a result
of a breach of the Purchaser's obligations under the Merger Agreement, (ii)
the Merger Agreement will have been approved and adopted by the requisite vote
of the holders of Shares, to the extent required by the Company's Articles of
Incorporation and the General Corporation Law of California (the "GCL"), in
order to consummate the Merger; (iii) no statute, rule, regulation or order
will have been enacted or promulgated by any United States or United Kingdom
governmental entity which prohibits the consummation of the Merger, and there
will be no order or injunction of a court of competent jurisdiction in effect
preventing the consummation of the Merger and (iv) the applicable waiting
period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act") will have expired or been terminated.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Shares that are owned by Parent, the Purchaser or any Shares which
are held by shareholders properly exercising dissenters' rights under the GCL)
will be converted into the right to receive the Offer Price paid pursuant to
the Offer and (ii) each issued and outstanding share of any class or series of
common stock, par value $.01 per share, of the Purchaser will be converted
into one share of common stock of the Surviving Corporation.
The Company's Board of Directors. The Merger Agreement provides that
promptly upon the purchase of and payment for any Shares by the Purchaser
pursuant to the Offer, Parent will be entitled to designate such number of
directors, rounded up to the next whole number, on the Company's Board of
Directors as will give Parent representation on the Board of Directors equal
to at least that number of directors which equals the product of the total
number of directors on the Company's Board of Directors (after giving effect
to the directors designated by Parent) multiplied by the percentage that the
aggregate number of Shares beneficially owned by
the Purchaser or any of its affiliates bears to the number of Shares
outstanding. The Company will promptly secure the resignations of such number
of its incumbent directors as is necessary to enable Parent's designees to be
elected to the Company's Board of Directors, provided that (i) in the event
that Parent's designees are elected to the Company's Board of Directors, until
the Effective Time the Company's Board of Directors will have at least two
directors who are directors as of the date of the execution of the Merger
Agreement and neither of whom is an officer of the Company (other than the
present Chief Executive Officer of the Company) nor a designee, shareholder,
affiliate or associate (within the meaning of federal securities laws) of
Parent (one or more of such directors, the "Independent Directors"), (ii) if
the number of Independent Directors will be reduced below two for any reason
whatsoever, any remaining Independent Director will be entitled to designate
persons to fill such vacancies who will be deemed Independent Directors for
purposes of the Merger Agreement and (iii) if no Independent Directors remain,
the other directors will designate one person to fill one of the vacancies who
will not be a shareholder, affiliate or associate of Parent or the Purchaser,
such person so designated being deemed an Independent Director. The Company's
obligation to appoint Parent's designees to the Company's Board of Directors
is subject to compliance with Section 14(f) of the Exchange Act and Rule 14f-1
promulgated thereunder.
Following the election of Parent's designees to the Company's Board of
Directors and prior to the Effective Time, the affirmative vote of a majority
of the Independent Directors will be required to (i) amend or terminate the
Merger Agreement on behalf of the Company, (ii) exercise or waive any of the
Company's rights, benefits or remedies under the Merger Agreement, (iii)
extend the time for performance of the Purchaser's obligations thereunder or
(iv) take any other action by the Company's Board of Directors under or in
connection with the Merger Agreement which would adversely affect the rights
of the Company's shareholders under the Merger Agreement; provided, further,
that if there will be no such directors, such actions may be effected by the
unanimous vote of the entire Board of Directors of the Company.
Shareholders' Meeting. Pursuant to the Merger Agreement, the Company will,
if required by applicable law or the Company's Articles of Incorporation, in
order to consummate the Merger, duly call, give notice of, convene and hold a
special meeting of its shareholders as promptly as practicable following the
acceptance for payment and purchase of Shares by the Purchaser pursuant to the
Offer for the purpose of considering and taking action upon the approval of
the Merger and the adoption of the Merger Agreement. The Merger Agreement
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provides that the Company will, if required by applicable law in order to
consummate the Merger, prepare and file with the SEC a preliminary proxy or
information statement relating to the Merger and the Merger Agreement and use
its commercially reasonable efforts (i) to obtain and furnish the information
required to be included by the SEC in the proxy statement and, after
consultation with Parent, to respond promptly to any comments made by the SEC
with respect to the preliminary proxy statement and cause a definitive proxy
statement to be mailed to its shareholders, provided that no amendment or
supplement to the proxy statement will be made by the Company without
consultation with Parent and its counsel and (ii) to obtain the necessary
approvals of the Merger and the Merger Agreement by its shareholders. Subject
to the terms of the Merger Agreement, the Company has agreed to include in the
proxy statement the recommendation of the Company's Board of Directors that
shareholders of the Company vote in favor of the approval of the Merger and
the adoption of the Merger Agreement.
The Merger Agreement provides that in the event that Parent or the Purchaser
acquires at least 90% of outstanding Shares, pursuant to the Offer or
otherwise, Parent, the Purchaser and the Company will, at the request of
Parent and subject to the terms of the Merger Agreement, take all necessary
and appropriate action to cause the Merger to become effective as soon as
practicable after such acquisition, without a meeting of shareholders of the
Company, in accordance with Section 1110 of the GCL.
Options. Pursuant to the Merger Agreement, the Company will take all actions
necessary to provide that at the Effective Time, (i) each Cash-Out Option will
be cancelled and (ii) in consideration of such cancellation, each holder of a
Cash-Out Option will receive in consideration thereof an amount (subject to
any applicable withholding tax) in cash equal to the product of (x) the
excess, if any, of the Offer Price over the per Share exercise price of such
Cash-Out Option and (y) the number of Shares subject to such Cash-Out Option.
The Company is required to use commercially reasonable efforts to effectuate
the foregoing, including amending the Stock Plans and obtaining any necessary
consents. At the Effective Time, each Assumed Option will be assumed by Parent
and, without disadvantage to the option holders, take such steps as to result
in an option to acquire that number of shares of Parent Common Shares equal to
(A) the number of Shares subject to the Assumed Option immediately prior to
the Effective Time, multiplied by (B) the Exchange Ratio, rounded down to the
nearest whole share, at a price per Parent Common Share equal to (1) the
exercise price of the Assumed Option immediately prior to the Effective Time,
divided by (2) the Exchange Ratio, rounded up to the nearest whole cent.
Parent shall take all action necessary for the Parent Common Shares to rank
pari passu in all respects with all other Parent Common Shares then in issue
and to be listed and issuable upon exercise of the Assumed Options to be
freely tradeable on the London Stock Exchange.
The Company is required to take all actions necessary to provide that at or
immediately prior to the Effective Time, (i) each outstanding option under the
Company's 1997 Employee Stock Purchase Plan shall automatically be exercised
and (ii) in lieu of the issuance of certificates representing Shares, each
option holder will receive an amount in cash (subject to applicable
withholding tax) equal to the product of (x) the number of Shares otherwise
issuable upon such exercise and (y) the Merger Consideration in cash without
interest thereon. The Company is required to use all reasonable efforts to
effectuate the foregoing, including amending the Stock Purchase Plan and
obtaining any necessary consents. The Company is required to take all
necessary actions to provide that as of the Effective Time no holder of
Options under the Stock Plans will have any right to receive shares of common
stock of the Surviving Corporation upon exercise of any such Option.
Interim Operations; Covenants. Pursuant to the Merger Agreement, the Company
has agreed that, except (i) as expressly contemplated by the Merger Agreement
or the Option Agreement, (ii) in the ordinary course of business consistent
with past practice or (iii) as agreed to in writing by Parent, after the date
of execution of the Merger Agreement, and prior to the earlier of (x) the
termination of the Merger Agreement in accordance with its terms and (y) the
time the designees of the Purchaser constitute a majority of the Company's
Board of Directors, the business of the Company and its subsidiaries will be
conducted only in the ordinary course consistent with past practice, the
Company will use its commercially reasonable efforts to preserve its present
business organization intact and maintain its satisfactory relations with
customers, suppliers, employees, contractors, distributors and others having
business dealings with it, and (a) the Company will not, directly or
indirectly, (i) issue, sell, transfer
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or pledge or agree to sell, transfer or pledge any capital stock of any of its
subsidiaries beneficially owned by it, options or other rights to purchase
Shares pursuant to the Stock Plans outstanding on the date of the Merger
Agreement; (ii) amend its Articles of Incorporation or By-Laws or similar
organizational documents; or (iii) split, combine or reclassify the
outstanding Shares; and (b) the Company will not (i) declare, set aside or pay
any dividend or other distribution payable in cash, stock or property with
respect to its capital stock; (ii) issue, sell, pledge, dispose of or encumber
any additional shares of, or securities convertible into or exchangeable for,
or options, warrants, calls, commitments or rights of any kind to acquire any
shares of capital stock of any class of the Company or its subsidiaries, other
than Shares reserved for issuance on the date of the Merger Agreement pursuant
to the exercise of the options outstanding on the date of the Merger Agreement
and except with respect to any sales in accordance with the Stock Purchase
Plan; (iii) transfer, lease, license, sell, mortgage, pledge, dispose of, or
encumber any of its material assets, or incur or modify any material
indebtedness or other liability, other than in the ordinary and usual course
of business and consistent with past practice; (iv) redeem, purchase or
otherwise acquire, any shares of any class or series of its capital stock or
any instrument or security which consists of or includes a right to acquire
such shares except as permitted by the Merger Agreement and other than in
connection with the exercise of options or rights under the Stock Plans and
except with respect to any sales in accordance with the Stock Purchase Plan;
(v) make any change in the compensation payable or to become payable by the
Company to any of its officers, directors, employees, agents or consultants
(other than general increases in wages to employees who are not directors or
affiliates in the ordinary course consistent with past practice) or to persons
providing management services (vi) enter into or amend any employment,
severance, consulting, termination or other agreement or employee benefit plan
or make any loans to any of its officers, directors, employees, affiliates,
agents or consultants or make any change in its existing borrowing or lending
arrangements for or on behalf of any of such persons pursuant to any employee
benefit plan or otherwise; (vii) pay or make any accrual or arrangement for
payment of any pension, retirement allowance or other employee benefit
pursuant to any existing plan, agreement or arrangement to any officer,
director, employee or affiliate or pay or agree to pay or make any accrual or
arrangement for payment to any officers, directors, employees or affiliates of
the Company of any amount relating to unused vacation days, except payments
and accruals made in the ordinary course consistent with past practice; adopt
or pay, grant, issue, accelerate or accrue salary or other payments or
benefits pursuant to any pension, profit-sharing, bonus, extra compensation,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other
employee benefit plan, agreement or arrangement, or any employment or
consulting agreement with or for the benefit of any director, officer,
employee, agent or consultant, whether past or present; or amend in any
material respect any such existing plan, agreement or arrangement in a manner
inconsistent with the foregoing; (viii) modify, amend or terminate any of the
Company Agreements (as defined in the Merger Agreement) or waive, release or
assign any material rights or claims under any of the Company Agreements (as
defined in the Merger Agreement); (ix) make any loans, advances or capital
contributions to or investments in any other person; incur or assume any long-
term debt or any short-term indebtedness; assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person; or enter into any material
commitment or transaction (including, but not limited to, any material
borrowing, capital expenditure or purchase, sale or lease of assets or real
estate); (x) pay, discharge or satisfy any claims or liabilities (whether
absolute, accrued, contingent or otherwise) other than in the ordinary course
of business and consistent with past practices or reflected or reserved
against in the consolidated financial statements (or the notes thereto) of the
Company; (xi) adopt a plan of complete or partial liquidation, dissolution,
merger, consolidation, restructuring, recapitalization or other reorganization
of the Company (other than the Merger); (xii) take or agree in writing or
otherwise to take, any action that would or is reasonably likely to result in
any of the conditions to the Merger or the Offer not being satisfied, or would
make any representation or warranty of the Company contained in the Merger
Agreement inaccurate in any material respect, at or as of any time prior to
the Effective Time, or that would materially impair the Company's ability to
consummate the Merger or materially delays such consummation; (xiii) change
any of the accounting methods used by it materially affecting its assets,
liabilities or business, except for such changes required by generally
accepted accounting principles, make any material tax election, change any
material tax election already made, enter into any closing agreement or settle
any material tax audit; or (xiv) enter into any written agreement, contract,
commitment or arrangement with respect to the foregoing or authorize,
recommend, propose, in writing or announce an intention to do any of the
foregoing.
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No Solicitation. Pursuant to the Merger Agreement, the Company has agreed to
notify the Purchaser promptly if any proposals are received by, any
information is requested from, or any negotiations or discussions are sought
to be initiated or continued with the Company or its representatives, in each
case in connection with any Acquisition Proposal (as defined below) or the
possibility or consideration of making an Acquisition Proposal ("Acquisition
Proposal Interest") indicating, in connection with such notice, the name of
the person indicating such Acquisition Proposal Interest and the terms and
conditions of any proposals or offers. In addition, the Company has agreed
that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted prior to
the date of the Merger Agreement with respect to any Acquisition Proposal
Interest and that it will keep Parent informed, on a current basis, of the
status and terms of any Acquisition Proposal Interest. Pursuant to the Merger
Agreement, except as set forth below, from the date of the Merger Agreement
until the earlier of the termination of the Merger Agreement or the Effective
Time, the Company has agreed that the Company will not (nor shall it authorize
or permit its officers, directors, employees, investment bankers, attorneys,
accountants and other agents to, and at the further request of Parent, will
use reasonable efforts to ensure that such persons do not), directly or
indirectly (i) initiate, solicit or knowingly encourage, or knowingly take any
action to facilitate the making of, any offer or proposal which constitutes or
is reasonably likely to lead to any Acquisition Proposal, (ii) enter into any
agreement with respect to any Acquisition Proposal, or (iii) in the event of
an unsolicited written Acquisition Proposal for the Company engage in
negotiations or discussion with, or provide information or data to, any Person
(other than Parent, any of its affiliates or representatives) relating to any
Acquisition Proposal, except that the Merger Agreement does not prohibit the
Company or the Company's Board of Directors from (x) taking and disclosing to
the Company's shareholders its position with respect to a tender or exchange
offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated under the
Exchange Act, (y) making such disclosure to the Company's shareholders as, in
the good faith judgment of the Board of Directors, after receiving advice from
outside legal counsel, is necessary for the Company's Board of Directors to
comply with its fiduciary duties to the Company's shareholders under
applicable law or (z) otherwise complying with their fiduciary duties to
shareholders.
An "Acquisition Proposal" means any tender or exchange offer involving the
Company, any proposal for a merger, consolidation or other business
combination involving the Company, any proposal or offer to acquire in any
manner a substantial equity interest in, or a substantial portion of the
business or assets of, the Company (other than immaterial or insubstantial
assets or inventory in the ordinary course of business or assets held for
sale), any proposal or offer with respect to any recapitalization or
restructuring with respect to the Company or any proposal or offer with
respect to any other transaction similar to any of the foregoing with respect
to the Company other than pursuant to the transactions effected pursuant to
the Merger Agreement.
Notwithstanding the foregoing, prior to the acceptance of Shares pursuant to
the Offer, the Company may furnish information concerning its business,
properties or assets to any Person (as defined in the Merger Agreement)
pursuant to a confidentiality agreement with terms no less favorable to the
Company than those contained in the Confidentiality Agreement, dated January
14, 1998, entered into between Parent and the Company and may negotiate and
participate in discussions and negotiations with such persons concerning an
Acquisition Proposal if (a) such entity or group has submitted on an
unsolicited basis a bona fide written proposal to the Company relating to any
such transaction which the Board determines in good faith, after receiving
advice from a nationally recognized investment banking firm, represents a
superior transaction to the Offer and the Merger which is not conditioned upon
obtaining additional financing, the certainty of closing of which is less
certain than the satisfaction of the condition to the Offer described in
paragraph (h) of the Conditions on conditions less favorable to the Company
than the Financing and (b) in the opinion of the Company's Board of Directors,
only after receipt of advice from outside legal counsel to the Company, the
failure to provide such information or access or to engage in such discussions
or negotiations would cause the Board of Directors to violate its fiduciary
duties to the Company's shareholders under applicable law (an Acquisition
Proposal which satisfied clauses (a) and (b), a "Superior Proposal"). Within
one business day following receipt by the Company of a Superior Proposal, the
Company must notify Parent of the receipt thereof. The Company must then
provide Parent any material non-public information regarding the Company
provided to the other party which was not previously provided to Parent.
Except as permitted under the terms of the Merger Agreement, neither the
Company's Board of Directors nor any committee thereof will (i) withdraw or
modify, or propose to withdraw or
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modify, in a manner adverse to Parent or the Purchaser, the approval or
recommendation of the Company's Board of Directors, or any such committee
thereof, of the Offer, the Merger Agreement or the Merger, (ii) approve or
recommend, or propose to approve or recommend, any Acquisition Proposal or
(iii) enter into any agreement with respect to any Acquisition Proposal.
Notwithstanding the foregoing, prior to the time of acceptance for payment of
Shares in the Offer, the Board of Directors of the Company may (subject to the
terms of the Merger Agreement) withdraw or modify its approval or
recommendation of the Offer, the Merger Agreement or the Merger, approve or
recommend a Superior Proposal, or enter into an agreement with respect to a
Superior Proposal, in each case at any time after the fifth business day
following the Company's delivery to Parent of written notice advising Parent
that the Board of Directors has received a Superior Proposal, specifying the
material terms and conditions of such Superior Proposal and identifying the
person making such Superior Proposal; provided that the Company will not enter
into an agreement with respect to a Superior Proposal unless the Company also
will have furnished Parent with written notice that it intends to enter into
such agreement.
Indemnification and Insurance. The Merger Agreement provides that for six
years after the Effective Time, the Surviving Corporation (or any successor to
the Surviving Corporation) will indemnify, defend and hold harmless, the
present and former officers and directors of the Company and its subsidiaries,
and any persons who become any of the foregoing prior to the Effective Time
(each, an "Indemnified Party") against all losses, claims, damages,
liabilities, costs, fees and expenses (including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided that any such settlement is effected with
the written consent of Parent or the Surviving Corporation)) arising out of
the actions or omissions occurring at or prior to the Effective Time to the
fullest extent permissible under applicable provisions of the GCL, the terms
of the Company's Articles of Incorporation or the By-Laws, and under any
agreements as in effect at the date of the Merger Agreement. The Merger
Agreement also provides that Parent or the Surviving Corporation will maintain
the Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of not less than six years after the Effective Time,
provided, that if the aggregate premiums for such D&O Insurance at any time
will exceed 150% of the average per annum rate of premium paid by the Company
for such insurance in 1996 and 1997 on an annualized basis for such purpose as
adjusted for any increase in the Consumer Price Index following the date of
the Merger Agreement, then Parent will cause the Company or the Surviving
Corporation to provide the maximum coverage then available at an annual
premium equal to 150% of such rate.
Representations and Warranties. Pursuant to the Merger Agreement, the
Company has made customary representations and warranties to Parent and the
Purchaser with respect to, among other things, its organization,
capitalization, authority relative to the Merger, financial statements, public
filings, conduct of business, employee benefit plans, intellectual property,
labor matters, compliance with laws, tax matters, litigation, environmental
matters, material contracts, potential conflicts of interest, brokers' fees,
real property, insurance, vote required to approve the Merger Agreement,
undisclosed liabilities, information in the Proxy Statement and the absence of
any material adverse effect on the Company since December 31, 1997.
Termination; Fees. The Merger Agreement may be terminated and the
transactions contemplated therein abandoned at any time prior to the Effective
Time, whether before or after approval of the shareholders of the Company
(provided that if Shares are purchased pursuant to the Offer, Parent may not
in any event terminate the Merger Agreement):
a. By mutual written consent of Parent and the Company; or
b. By Parent if the Offer will have expired without any Shares being
purchased thereunder by the Purchaser and without the Purchaser having had
an obligation under the Merger Agreement to extend the Offer; provided,
however, that Parent will not be entitled to terminate this Agreement if it
or the Purchaser is in material breach of its representations and
warranties, covenants or other obligations under this Agreement; or
c. By either Parent or the Company (i) if a court of competent
jurisdiction or other governmental entity will have issued an order, decree
or ruling or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by the
Merger Agreement or (ii) prior to the purchase of Shares pursuant to the
Offer, if there has been a willful breach by the other
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<PAGE>
party of any representation, warranty, covenant or agreement set forth in
this Agreement, which breach will result in any condition set forth in the
conditions of the Offer (other than clause (i) thereof) not being satisfied
(and such breach is not reasonably capable of being cured and such
condition satisfied within thirty (30) days after the receipt of notice
thereof); or
d. By the Company to allow the Company to enter into an agreement with
respect to a Superior Proposal which the Board of Directors has determined
is more favorable to the shareholders of the Company than the transactions
contemplated hereby; provided, however, that it has complied with all
provisions thereof, including the notice provision therein, and that it
makes simultaneous payment of the Termination Fee (as hereinafter defined),
plus any amounts then due as a reimbursement of expenses; or
e. By Parent, at any time prior to the purchase of the Shares pursuant to
the Offer, if (i) the Company's Board of Directors will have withdrawn,
modified, or changed its recommendation in respect of this Agreement or the
Offer in a manner adverse to the Purchaser, or (ii) the Company's Board of
Directors will have recommended any proposal other than by Parent or the
Purchaser in respect of an Acquisition Proposal, (iii) the Company will
have exercised a right with respect to an Acquisition Proposal and directly
or through its representatives, continue discussions with any third party
concerning an Acquisition Proposal for more than ten business days after
the date of receipt of such Acquisition Proposal, or (iv) an Acquisition
Proposal that is publicly disclosed will have been commenced, publicly
proposed or communicated to the Company which contains a proposal as to
price (without regard to whether such proposal specifies a specific price
or a range of potential prices) and the Company will not have rejected such
proposal within ten business days of its receipt or, if sooner, the date
its existence first becomes publicly disclosed; or
f. By the Company, if the Offer will have expired without any Shares
being purchased thereunder by the Purchaser and without the Company having
the right to extend the Offer pursuant to the Merger Agreement (unless
Parent shall have timely extended the Offer in accordance with its rights
under the Merger Agreement); provided, however, that the Company will not
be entitled to terminate the Merger Agreement pursuant to this section if
it is in material breach of its representations, warranties, covenants or
other obligations under the Merger Agreement.
If (i) Parent will have terminated the Merger Agreement pursuant to clause
(e)(i) or (e)(ii) of the termination provision of the Merger Agreement; (ii)
(x) Parent will have terminated the Merger Agreement pursuant to clause
(c)(ii), (e)(iii) or (e)(iv) of the termination provisions of the Merger
Agreement and (y) following the date of the Merger Agreement but prior to such
termination there will have been an Acquisition Proposal Interest and (z) the
Company will have entered into a definitive agreement with respect to an
Acquisition Proposal or consummated an Acquisition Proposal with respect to
the Company within one year after the termination by Parent pursuant to clause
(c)(ii), clause (e)(iii) or clause (e)(iv) of the termination provision of the
Merger Agreement; or (iii) the Company will have terminated the Merger
Agreement pursuant to clause (d), then the Company will pay (A) simultaneously
with such termination if pursuant to clause (d), (B) promptly, but in no event
later than two business days after the date of such termination if pursuant to
clause (e)(i) or clause (e)(ii), or (C) upon execution of a definitive
agreement with respect to an Acquisition Proposal or upon the consummation of
an Acquisition Proposal with respect to the Company if pursuant to clause
(c)(ii), clause (e)(iii) or clause (e)(iv), to Parent a termination fee (the
"Termination Fee") of $8,000,000 plus an amount, not in excess of $1,250,000,
equal to the Purchaser's reasonable actual and documented out-of-pocket
expenses incurred by Parent and the Purchaser in connection with the Offer,
the Merger, the Merger Agreement and the consummation of the transactions
contemplated thereby.
If the Merger Agreement is terminated, and at any time on or prior to March
26, 1998, all of the conditions set forth in the Conditions to the Offer have
been fulfilled except (i) the condition set forth in paragraph (h) of the
Conditions and (ii) any other conditions that are not fulfilled as a result,
directly or indirectly, of a breach by Parent or the Purchaser or any
representation, warranty, covenant or agreement set forth in this Agreement,
then promptly, but in no event later than two business days after the date of
such termination, Parent will pay to the Company a termination fee of
$8,000,000 plus an amount, not in excess of $1,250,000, equal to the Company's
reasonable actual and documented out-of-pocket expenses incurred by the
Company in connection with the Offer, the Merger, this Agreement and the
consummation of the transactions contemplated hereby.
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<PAGE>
Conditions of the Offer. Notwithstanding any other provisions of the Offer,
the Purchaser is not required to accept for payment or, subject to any
applicable rules and regulations of the SEC, including Rule 14e-l(c) under the
Exchange Act (relating to the Purchaser's obligation to pay for or return
tendered Shares promptly after termination or withdrawal of the Offer), pay
for, and may delay the acceptance for payment of or, subject to the
restriction referred to above, the payment for, any tendered Shares unless
there are validly tendered and not withdrawn prior to the expiration date for
the Offer that number of Shares which, when added to the Shares owned by the
Purchaser, will represent at least 90% of the outstanding Shares on a fully
diluted basis (without giving pro forma effect to the potential issuance of
any Shares issuable under the Option Agreement) on the date of purchase (the
"Minimum Condition"); provided, however, that the Minimum Condition must be
waived by the Purchaser and the Revised Minimum Number substituted therefor as
contemplated, and to the extent required, by the Offer provisions of the
Merger Agreement. Furthermore, notwithstanding any other provisions of the
Offer, the Purchaser is not required to accept for payment or pay for any
tendered Shares if, at the scheduled expiration date, (i) any applicable
waiting period under the HSR Act has not expired or terminated prior to
termination of the Offer, or (ii) any of the following events shall have
occurred and be continuing:
a. there will be pending any suit, action or proceeding by any United
States or United Kingdom governmental entity (as defined in the Merger
Agreement) against the Purchaser, Parent, the Company or any subsidiary of
the Company (i) seeking to prohibit or impose any material limitations on
Parent's or the Purchaser's ownership or operation (or that of any of their
respective subsidiaries or affiliates) of all or a material portion of the
business or assets of Parent and its subsidiaries, taken as a whole, or all
or a material portion of the business or assets of the Company and its
subsidiaries, taken as a whole, or to compel Parent or the Purchaser or
their respective Subsidiaries and affiliates to dispose of or hold separate
any material portion of the business or assets of the Company or Parent and
their respective subsidiaries, in each case taken as a whole, (ii)
challenging the acquisition by Parent or the Purchaser of any Shares under
the Offer or seeking to restrain or prohibit the making or consummation of
the Offer or the Merger, (iii) seeking to impose material limitations on
the ability of the Purchaser, or render the Purchaser unable, to accept for
payment, pay for or purchase some or all of the Shares pursuant to the
Offer and the Merger, or (iv) subject to the limitations under Section
1101(e) of the GCL, seeking to impose material limitations on the ability
of Purchaser or Parent effectively to exercise full rights of ownership of
the Shares, including, without limitation, the right to vote the Shares
purchased by it on all matters properly presented to the Company's
shareholders;
b. there will be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable
(pursuant to an authoritative interpretation by or on behalf of a
government entity, to the Offer or the Merger) or any other action will be
taken by any governmental entity, other than the application to the Offer
or the Merger of applicable waiting periods under the HSR Act, that is
likely to result in any of the consequences referred to in clauses (i)
through (iv) of paragraph (a) of the Conditions;
c. there will have occurred (i) any general suspension of trading in, or
limitation on prices for, securities on the London Stock Exchange, the New
York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market
for a period in excess of 24 hours (excluding suspensions or limitations
resulting solely from physical damage or interference with such exchanges
not related to market conditions), (ii) a declaration of a banking
moratorium or any suspension of payments in respect of banks in the United
States or the United Kingdom (whether or not mandatory), (iii) a
commencement of a war, armed hostilities or other international or United
States or United Kingdom calamity directly or indirectly involving the
United States or the United Kingdom (other than an action involving solely
U.N. personnel or support of U.N. personnel), (iv) any limitation (whether
or not mandatory) by any United States or United Kingdom governmental
entity on the extension of credit generally by banks or other financial
institutions, or (v) a change in general financial, bank or capital market
conditions which materially and adversely affects the ability of financial
institutions in the United States to extend credit or syndicate loans,
which, in the case of any of the foregoing, in the reasonable judgment of
Parent, makes it impractical to proceed with the acceptance of Shares for
payment pursuant to the Offer or the payment therefor;
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<PAGE>
d. the representations and warranties of the Company set forth in the
Merger Agreement that are not qualified by reference to Company Material
Adverse Effect (as defined in the Merger Agreement) were not true and
correct in any respect, or any other such representations or warranties
were not true and correct in any respect that (when taken together with all
other such representations and warranties not true and correct) would
likely have a Company Material Adverse Effect (i) in the case of any
representation or warranty which addresses matters as of a particular date,
as of such date, or (ii) in the case of all other representations and
warranties, as of the date of this Agreement and as of the scheduled
expiration of the Offer.
e. since the date of this Agreement, there will have occurred any change
that constitutes (or that would likely constitute) a Company Material
Adverse Change;
f. the Board of Directors of the Company or any committee thereof will
have withdrawn or materially modified in a manner adverse to Parent or the
Purchaser or its recommendation of the Offer, the Merger or the Merger
Agreement, or approved or recommended any Acquisition Proposal;
g. the Company will have failed to perform or to comply in any material
respect with any agreement or covenant to be performed or complied with by
it under this Agreement;
h. The London Stock Exchange will have failed to admit to the Official
List of the London Stock Exchange the New Shares or such admission will
have not become effective in accordance with paragraph 7.1 of the listing
rules of the London Stock Exchange; provided, however, that this condition
to the Offer will be deemed to have been met if, assuming the Purchaser had
accepted the Shares for payment in the Offer, such Admission would be
substantially certain to occur; and
i. the Merger Agreement will have been terminated in accordance with its
terms.
The foregoing conditions are for the sole benefit of Parent and the
Purchaser, may be asserted by Parent or the Purchaser regardless of the
circumstances giving rise to such condition and may be waived by Parent or the
Purchaser in whole or in part at any time and from time to time in the sole
discretion of Parent or the Purchaser, subject in each case to the terms of
the Merger Agreement. The failure by Parent or the Purchaser at any time to
exercise any of the foregoing rights will not be deemed a waiver of any such
right and each such right will be deemed an ongoing right which may be
asserted at any time and from time to time.
Stock Option Agreement
Pursuant to the Stock Option Agreement, the Company granted to the Purchaser
the Stock Option to purchase the Option Shares at the Option Price, subject to
the terms and conditions set forth in the Option Agreement; provided, however,
that the Stock Option will not be exercisable if the number of shares subject
thereto exceeds the number of authorized shares available for issuance.
The Option Agreement provides that, subject to the conditions therein and
any additional requirements of law, the Stock Option may be exercised by the
Purchaser, in whole but not in part, at any one time after the occurrence of a
Top-up Exercise Event (as defined below) and prior to the Termination Date (as
defined below). For the purpose of the Stock Option Agreement, a "Top-up
Exercise Event" would occur upon the Purchaser's acceptance for payment
pursuant to the Offer of shares of Common Stock constituting more than 50% but
less than 90% of the shares of Common Stock then outstanding on a fully
diluted basis, and the Termination Date would occur upon the first to occur of
any of the following: (i) the Effective Time; (ii) the date which is ten (10)
business days after the occurrence of a Top-up Exercise Event; (iii) the
termination of the Merger Agreement and (iv) the date on which the Purchaser
waives the Minimum Condition and accepts for payment the Revised Minimum
Number of Shares.
The Option Agreement provides that the obligation of the Company to deliver
Option Shares upon the exercise of the Stock Option is subject to the
following conditions: (i) all waiting periods, if any, under the HSR Act
applicable to the issuance of the Option Shares will have expired or have been
terminated and (ii) there will be no preliminary or permanent injunction or
other final, non-appealable judgment by a court of competent
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<PAGE>
jurisdiction preventing or prohibiting the exercise of the Stock Option or the
delivery of the Option Shares in respect of such exercise.
Shareholder Agreement
As a condition and inducement to Parents and the Purchaser's entering into
the Merger Agreement and incurring the liabilities therein, certain
shareholders of the Company (each a "Shareholder") who have voting power and
dispositive power with respect to an aggregate of 1,290,868 Shares,
representing approximately 11.55% of the Shares outstanding on December 31,
1997, concurrently with the execution and delivery of the Merger Agreement
entered into the Shareholder Agreement. The Shareholders are David W. Hanna,
George Riviere and Jeffrey E. Gold, the President and Chief Executive Officer,
Vice President and Vice President, respectively, of the Company. Pursuant to
the Shareholder Agreement, each of the Shareholders has agreed to validly
tender, in accordance with the terms of the Offer promptly, all Shares subject
to the Shareholder Agreement. Each Shareholder agreed not to withdraw his
Shares so tendered unless the Offer is terminated or expired. Each of the
Shareholders has granted Parent an irrevocable proxy with respect to the
voting of such Shares in favor of the Merger, which proxy will terminate in
the event that the Purchaser waives the Minimum Condition and accepts for
payment the Revised Number of Shares.
Each of the Shareholders has agreed that, prior to the termination of the
Shareholder Agreement pursuant to its terms, he will not (i) transfer, or
consent to the transfer, of any or all of the Shares; (ii) enter into any
contract, option or other agreement or understanding with respect to any
transfer of any or all of the Shares or any interest therein; (iii) grant any
proxy, power-of-attorney or other authorization in or with respect to the
Shares; (iv) deposit the Shares into a voting trust or enter into a voting
agreement or arrangement with respect to the Shares or (v) take any other
action that would in any way restrict, limit or interfere with the performance
of the Shareholder's obligations under the Shareholder Agreement or the Merger
Agreement.
The Shareholder Agreement, and all rights and obligations of the parties
thereto, will terminate immediately upon the earlier of (i) six months
following the termination of the Merger Agreement in accordance with its terms
or (ii) the Effective Time.
Confidentiality Agreement
The Company entered into a Confidentiality Agreement, dated January 14,
1998, with Parent (the "Confidentiality Agreement"). The Confidentiality
Agreement contains customary provisions pursuant to which, among other
matters, Parent has agreed to keep confidential all nonpublic, confidential or
proprietary information furnished to it by the Company relating to the Company
subject to certain exceptions (the "Confidential Information"), and to use the
Confidential Information solely in connection with the certain future business
agreements relating to the Company. The Confidentiality Agreement has been
filed with the SEC as an exhibit to this Schedule 14D-9 and is incorporated
herein by reference.
Indemnification
The Company's articles of incorporation and the articles of incorporation of
Manzanita Software Systems, Inc. ("Manzanita"), a subsidiary of the Company,
provide that the liability of the directors of each entity for monetary
damages will be eliminated to the fullest extent permissible under California
law and that each entity is authorized to provide indemnification of agents in
excess of the indemnification otherwise permitted under the GCL subject to
certain limitations under the GCL.
The Company's bylaws and the bylaws of Manzanita provide that each entity
will indemnify, to the maximum extent permitted by the GCL, each of its agents
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation. For purposes
of the indemnification provision in the bylaws, agent is defined as any person
who is or was a director, officer, employee, or other agent of the
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corporation, or is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership,
joint venture, trust or other enterprise, or was a director, officer,
employee, or agent of a corporation which was a predecessor corporation of the
Company or Manzanita or of another enterprise at the request of such
predecessor corporation.
The Company intends to enter into indemnification agreements (each an
"Indemnification Agreement" and collectively, the "Indemnification
Agreements") with each officer and director (each an "Indemnittee") of the
Company prior to the consummation of the tender offer. Pursuant to the
Indemnification Agreements, the Company will indemnify each Indemnitee if
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director or officer or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement (if such settlement is approved in advance by the Company,
which approval will not be unreasonably withheld) actually and reasonably
incurred by Indemnitee in connection with such action, suit or proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect cause to believe Indemnitee's conduct was unlawful.
In addition, the Indemnification Agreements provide that the Company will
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding by or in the right of the Company or any subsidiary of the Company
to procure a judgment in its favor by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or any subsidiary
of the Company, by reason of any action or inaction on the part of Indemnitee
while a director of officer or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) and, to the fullest
extent permitted by law, amounts paid in settlement, in each case to the
extent actually and reasonably incurred by Indemnitee in connection with the
defense or settlement of such action, suit or proceeding if Indemnitee acted
in good faith and in a manner Indemnitee reasonably believed to be in or not
opposed to the best interests of the Company and its shareholders, except that
no indemnification will be made in respect of any claim, issue or matter as to
which Indemnitee will have been adjudged to be liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders unless
and only to the extent that the court in which such action, suit or proceeding
is or was pending will determine upon application that, in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for expenses and then only to the extent that the court will
determine.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation of the Board of Directors.
The Board of Directors of the Company has unanimously (a) approved the
Merger Agreement, the Stock Option Agreement, the Offer and the Merger and the
other transactions contemplated thereby, (b) determined that the Offer Price
to be received by the Company's shareholders pursuant to the Offer and the
Merger is fair to the shareholders and (c) recommends that the Company's
shareholders tender their Shares pursuant to the Offer.
(b) Background of the Offer; Reasons for the Recommendation.
Background. From time to time since 1994, the Company has discussed possible
strategic alliances and business combination transactions with various
companies, including Parent. The Company's position with respect to such
discussions has been that, while the Company was not for sale, the Company was
prepared to consider potential strategic alliances and business combinations
in order to maximize shareholder value.
In February 1994, Mr. David W. Hanna, the Company's President and Chief
Executive Officer, met with Messrs. Paul A. Walker, Parent's President, and
Michael E.W. Jackson, Parent's Chairman, as well other
14
<PAGE>
representatives of Parent. At this meeting, the parties exchanged information
relating to each of their respective companies but did not discuss a possible
business combination. Except for brief product due diligence discussions in
the fall of 1995, the parties did not engage in discussions again until
November 1995, when representatives of each of the Company and Parent
discussed the status of their respective businesses.
In July 1996, Mr. Hanna met with Mr. Walker and other representatives of
Parent. At this meeting, Mr. Hanna provided an update of the Company's
marketing and product initiatives. The parties also discussed, on a
preliminary basis, the possibility of a merger transaction although there was
no discussion of price or valuation.
In July 1996, representatives of each of BT Alex. Brown Incorporated,
Parent's financial advisor ("BT Alex. Brown"), and UBS Securities LLC, the
Company's financial advisor ("UBS"), met to discuss a possible business
combination between Parent and the Company. At this meeting, BT Alex. Brown
representatives indicated that Parent might be willing to explore a possible
business combination with the Company for a purchase price in the range of
$15.00 to $20.00 per Share. Representatives of UBS indicated that the
Company's Board of Directors was unlikely to consider a transaction with
Parent at the indicated levels.
In October 1996, representatives of each of the Company and Parent met
again. At this meeting, the possibility of a business combination was
discussed further and Parent indicated that it might be prepared to acquire
all of the outstanding Shares of the Company for $15.00 per Share. The
Company's representative rejected this proposal and the parties ceased further
discussions until the spring of 1997.
From time to time in March 1997, representatives of each Parent and the
Company met to discuss the possibility of exploring whether to consider a
business combination. During this time, representatives of each of BT Alex.
Brown and UBS discussed by telephone their respective preliminary views
regarding the valuation of the Company. Although BT Alex. Brown indicated that
Parent might be willing to pay a price in the range of $16.00 to $18.00 per
Share, UBS indicated that the Company likely would not consider a proposal of
less than $20.00 per Share.
In September 1997, a representative of the Company met with representatives
of Parent and discussed the business of the Company and management's
expectations for the Company's future performance as well as the possibility
of a business combination.
In mid-November of 1997, a representative of the Company met with
representatives of Parent and further discussed a possible business
combination and the terms of a possible proposal Parent might be prepared to
make. At this meeting, the parties discussed the relative benefits of a
business combination between the Company and Parent. In addition, the
Company's representative indicated that he did not believe that the Company's
Board of Directors would be interested in a transaction at a purchase price of
less than $20.00 per Share.
During December 1997, Parent continued its review of the Company's products
through product review meetings with the Company.
On December 15, 1997, a representative of Parent telephoned a representative
of the Company to indicate that Parent was prepared to submit a proposal to
acquire all of the outstanding Shares of the Company at an all-cash purchase
price of $20.00 per Share, subject to Parent's satisfactory completion of its
due diligence.
On December 18, 1997, a meeting of the Board of Directors of the Company was
held during which the Company's President and Chief Executive Officer informed
the Board of Directors of discussions with Parent relating to a possible
business combination. The Board of Directors discussed Parent's proposal.
Although no decision was reached with respect to the terms of a business
combination, the Board of Directors instructed the Company's President and
Chief Executive Offer to continue discussions with Parent. Subsequently,
Parent made an acquisition proposal at $20.00 per Share.
15
<PAGE>
On December 23, 1997, the Company's Board of Directors met again to discuss
the status of the negotiations with Parent and the proposed terms. At this
meeting, UBS presented its analysis with respect to the financial terms of
Parent's proposal. The Board of Directors instructed the Company's President
and Chief Executive Officer to continue the negotiations with Parent.
On January 7 and 8, 1998, representatives of the parties met to discuss
further the Company's business. On January 9, 1998, representatives of Parent
indicated that Parent would be prepared to propose an all-cash purchase price
of $21.50 per Share. The Company's representative indicated that he did not
believe that the Company's Board of Directors would find such price
acceptable. After further discussions at this meeting, Parent's
representatives indicated that they would explore whether Parent would be
prepared to offer $22.00 per Share. Subsequent to this meeting,
representatives of Parent proposed to acquire all of the Company's outstanding
Shares for an all-cash purchase price of $22.00 per Share, subject to
negotiation of definitive agreements and completion of additional due
diligence.
On January 14, 1998, the Company and Parent entered into a confidentiality
agreement pursuant to which each party agreed to keep all information relating
to the proposed transaction confidential and which included a "standstill"
provision. Parent then commenced its due diligence of the Company.
On January 20 and 21, 1998, representatives of each of Parent and the
Company and their legal and financial advisors met to discuss issues relating
to the proposed transaction, including possible legal structures and Parent's
potential financing arrangements.
On January 24, 1998, the Company's Board of Directors met and discussed the
terms of the Merger Agreement, the Stock Option Agreement and the Shareholders
Agreement. The Board of Directors advised the Company's President and Chief
Executive Officer that he should continue negotiations and report again to the
Board of Directors.
From January 24, 1998 through to January 27, 1998, representatives of the
Company, and the Company's legal advisors, and Parent, and Parent's legal
advisors, negotiated the terms of the Merger Agreement and the Stock Option
Agreement. Simultaneously, Parent, and Parent's legal advisors, negotiated the
terms of the Shareholders Agreement with certain shareholders of the Company
and their legal advisor.
On the afternoon of January 26, 1998, the Company's Board of Directors met
and reviewed and discussed the Merger Agreement, the Stock Option Agreement
and the Shareholders Agreement. At this meeting, UBS delivered its oral
opinion to the Company's Board of Directors that, as of such date, the
consideration to be received by the holders of Shares pursuant to the Offer
and the Merger as contemplated in the Merger Agreement was fair, from a
financial point of view, to such holders (and such oral opinion was
subsequently confirmed by delivery of the written opinion of UBS, dated
January 26, 1998). The Board of Directors then voted and unanimously approved
the Merger Agreement and the Stock Option Agreement.
On January 27, 1998, Parent and the Company executed the Merger Agreement
and the Stock Option Agreement. Simultaneously, Parent and certain
shareholders of the Company executed the Shareholders Agreement.
Factors Considered by the Board of Directors. In approving the Merger
Agreement and the transactions contemplated thereby, and recommending that all
shareholders tender their Shares pursuant to the Offer, the Board of Directors
considered a number of factors, including:
(i) the financial and other terms of the Offer, the Merger and the Merger
Agreement;
(ii) that the $22.00 per Share tender offer price represents a premium of 33%
over the closing price on January 26, 1998, the last full trading day
prior to the public announcement of the execution of the Merger
Agreement;
(iii) the written opinion of UBS delivered to the Board on January 26, 1998 to
the effect that, as of that date, the consideration to be received by
the holders of the Shares pursuant to the Offer and the Merger as
contemplated in the Merger Agreement is fair, from a financial point of
view, to such holders. The full text of UBS' written opinion, which set
forth, among other things, assumptions made, matters considered and
16
<PAGE>
limitations on the review undertaken, is attached hereto as an Exhibit and
is incorporated herein by reference. Shareholders are urged to read the
opinion in its entirety. UBS' opinion is directed to the Board of
Directors of the Company, addresses only the fairness of the
consideration to be received by holders of the shares from a financial
point of view and does not constitute a recommendation to any
shareholders as to whether such shareholders should accept the Offer and
tender its Shares;
(iv) the provisions of the Merger Agreement, including the provision allowing
the Company to respond to unsolicited bona fide written proposals
concerning an acquisition of the Company that the Company's Board has
concluded (A) after receiving advice from its financial advisors,
represents a superior transaction not subject to less certain financing
than that of Parent and (B) only after receipt of advice from outside
legal counsel to the Company, that the failure to respond would cause the
Board to violate its fiduciary duties to the Company's shareholders (a
"Superior Proposal"), and the provisions which permit the Company to
terminate the Merger Agreement upon payment to the Purchaser of a break-
up fee in the amount set forth in the description of the Merger Agreement
set forth in Item 3(b), in the event that the Board of Directors
determines to withdraw its recommendation that shareholders accept the
Offer;
(v) Parent's financial condition and ability to cause the Purchaser to meet
its obligations under the Merger Agreement;
(vi) the familiarity of the Board of Directors with the business, results of
operations, properties and financial condition of the Company and the
nature of the industry in which it operates; and
(vii) the Board of Directors' belief that the transactions contemplated by the
Merger Agreement would offer growth opportunities to the Company's
employees.
The foregoing discussion of the information and factors considered and given
weight by the Board of Directors is not intended to the exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Merger Agreement and the Offer, the Board of Directors did not find it
practicable to, and did not, quantify or otherwise assign relative weights to
the specific factors considered in reaching its determination. In addition,
individual members of the Board of Directors may have given different weights
to different factors.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The Company retained UBS as its financial advisor in connection with the
Offer and the Merger. Pursuant to a letter agreement, dated as of January 12,
1998, the Company will pay UBS a transaction fee of 1.0% of the aggregate
consideration paid in the Offer and the Merger in the event certain key
advisors remain with UBS through the Closing of the Merger. Otherwise, the
Company is free to make other advisory compensation arrangements. In addition
to the foregoing compensation, the Company has agreed to reimburse UBS for its
out-of-pocket expenses, including reasonable fees and expenses of its counsel
and to indemnify UBS against certain liabilities and expenses arising out of
the engagement and the transactions in connection therewith, including certain
liabilities under the federal securities laws.
Except as set forth above, neither the Company nor any person acting on its
behalf has or currently intends to employ, retain or compensate any person to
make solicitations or recommendations to the stockholders of the Company on
its behalf with respect to the Offer and the Merger.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) Except as described below in this Item 6(a), no transactions in the
Shares have been effected during the past 60 days by the Company or, to the
best of the Company's knowledge, by any executive officer, director, affiliate
or subsidiary of the Company. On December 3, 1997, Susan Rasinski, an outside
director of the Company, sold 1,000 Shares at $15.94 per Share. On December
15, 1997, the Company granted to Richard G. Lull, an executive officer of the
Company, options to purchase 60,000 Shares at a purchase price of $15.50 per
Share.
17
<PAGE>
(b) To the best of the Company's knowledge, to the extent permitted by
applicable securities laws, rules or regulations, all of the Company's
executive officers, directors and affiliates who own shares presently intend
to tender such shares to Purchaser pursuant to the Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY SUBJECT COMPANY.
(a) Except as set forth herein, the Company is not engaged in any
negotiation in response to the Offer which relates to or would result in (i)
an extraordinary transaction such as a merger or reorganization, involving the
Company or any subsidiary of the Company; (ii) a purchase, sale or transfer of
a material amount of assets by the Company or any subsidiary of the Company;
(iii) a tender offer for or other acquisition of securities by or of the
Company; or (iv) any material change in the present capitalization or dividend
policy of the Company.
(b) Except as set forth herein, there are no transactions, Board of
Directors resolutions, agreements in principle or signed contracts in response
to the Offer that relate to or would result in one or more of the events
referred to in Item 7(a) above.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
Short Form Merger. Under the GCL, if Purchaser acquires, pursuant to the
Offer, the Stock Option or otherwise, at least 90% of the outstanding shares
of Common Stock, the Purchaser will be able to effect the Merger after
consummation of the Offer without a vote of the Company's shareholders.
However, if the Purchaser does not acquire at least 90% of the Common Stock
pursuant to the Offer or otherwise and a vote of the Company's shareholders is
required under California Law, a significantly longer period of time will be
required to effect the Merger.
18
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Agreement and Plan of Merger, dated January 27, 1998, by and among
The Sage Group plc, Rose Acquisition Corp., and State Of The Art,
Inc.
2 Stock Option Agreement, dated January 27, 1998, by and among The
Sage Group plc, Rose Acquisition Corp., and State Of The Art, Inc.
3 Shareholder Agreement, dated January 27, 1998, by and among The Sage
Group plc, Rose Acquisition Corp., and each of David W. Hanna,
George Riviere and Jeffrey E. Gold
4 Letter to Shareholders of State Of The Art, Inc., dated February 2,
1998.
5 Press Release issued by State Of The Art, Inc., dated January 27,
1998.
6 Fairness Opinion of UBS Securities LLC, dated January 26, 1998.
7 Confidentiality Agreement, dated January 14, 1998, by and between
The Sage Group plc and State of The Art, Inc.
8 Severance Agreement, dated March 17, 1997, by and between James R.
Eckstaedt and State Of The Art, Inc.
9 Severance Agreement, dated September 22, 1997, by and between
Gregory G. Davidson and State Of The Art, Inc.
10 Severance Agreement, dated October 17, 1997, by and between Richard
G. Lull and State Of The Art, Inc.
11 Severance Agreement, dated January 24, 1995, by and between Jeffrey
E. Gold and State Of The Art, Inc.
12 Severance Agreement, dated March 4, 1996, by and between James P.
Moore and State Of The Art, Inc.
13 Severance Agreement, dated January 24, 1995, by and between George
Riviere and State Of The Art, Inc.
14 Executive Severance/Change of Control Agreement, dated March 16,
1996, by and between David R. Butler and State Of The Art, Inc.
15 Form of Indemnification Agreement.
16 Form of Amendment to the Executive Severance/Change of Control
Agreement.
17 Employment Agreement, dated May 1, 1997, by and between Michael F.
King and Sybex, Ltd.
18 Pages 6-13 of the Proxy Statement for State Of The Art, Inc., dated
April 4,1997, for the Annual Shareholder meeting on May 29, 1997
and the 1997 Employee Stock Purchase Plan attached as an exhibit
thereto.
19 Conditions of the Offer.
</TABLE>
19
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
By: /s/ David W. Hanna
----------------------------------
Name: David W. Hanna
Title: President and Chief
Executive Officer
Dated: February 2, 1998
20
<PAGE>
SCHEDULE I
STATE OF THE ART, INC.
56 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
----------------
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement is being mailed on or about February 2, 1998 as
part of the Solicitation/Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") to holders of shares (the "Shares") of common stock, no par
value (the "Common Stock"), of State Of The Art, Inc., a California
corporation (the "Company"). Capitalized terms used herein and not otherwise
defined herein shall have the meanings set forth in the Schedule 14D-9. You
are receiving this Information Statement in connection with the possible
election of persons designated by Rose Acquisition Corp. (the "Purchaser"), a
wholly owned subsidiary of The Sage Group plc, a company organized under the
laws of England ("Parent"), to the board of directors of the Company (the
"Board"). Such designation is to be made pursuant to an Agreement and Plan of
Merger, dated January 27, 1998 (the "Merger Agreement"), by and among Parent,
the Purchaser and the Company.
This Information Statement is required by Section 14(f) of the Securities
Exchange Act of 1934, as amended, and Rule 14f-1 thereunder. YOU ARE URGED TO
READ THIS INFORMATION STATEMENT CAREFULLY. YOU ARE NOT, HOWEVER, REQUIRED TO
TAKE ANY ACTION.
Pursuant to the Merger Agreement, on February 2, 1998, the Purchaser
commenced a cash tender offer to acquire all of the Shares (the "Offer"). The
Offer is scheduled to expire at 12:00 Midnight on March 2, 1998, unless the
Offer is extended. Following the successful completion of the Offer, upon
approval by a shareholder vote, if required, the Purchaser will be merged with
and into the Company (the "Merger").
The information contained in this Information Statement concerning Parent,
the Purchaser and the Parent Designees (as defined below) has been furnished
to the Company by either Parent or the Purchaser, and the Company assumes no
responsibility for the accuracy or completeness of such information.
GENERAL INFORMATION REGARDING THE COMPANY
GENERAL
The Common Stock is the only class of voting securities of the Company
outstanding. Each Share entitles its record holder to one vote. As of December
31, 1997, there were 11,173,945 Shares outstanding and 1,709,227 Shares were
reserved for issuance upon the exercise of options to acquire Shares. The
Board currently consists of five members and there are currently no vacancies
on the Board.
PARENT DESIGNEES
Pursuant to the Merger Agreement and subject to compliance with applicable
law, promptly upon the purchase of, and payment for, any Shares by the
Purchaser pursuant to the Offer, and from time to time thereafter as Shares
are acquired by the Purchaser, Parent will be entitled to designate such
number of directors, rounded up to the next whole number, on the Board (the
"Parent Designees") as is equal to the product of the total number of
directors on the Board (determined after giving effect to the directors
designated by Parent pursuant to this sentence) multiplied by the percentage
that the aggregate number of Shares which the Purchaser or any affiliate of
the Purchaser owns beneficially bears to the total number of Shares then
outstanding. The foregoing notwithstanding, the Merger Agreement further
provides that in the event the Parent Designees are elected to the Board, at
least two directors who were directors when the Merger Agreement was signed on
January 27, 1998, and neither of whom is an officer of the Company (other than
the then present Chief Executive Officer of the Company) nor a designee,
shareholder, affiliate or associate of Parent (one or more of such directors,
the "Independent Directors") shall continue to serve on the Board until the
effectiveness of the Merger.
I-1
<PAGE>
Parent has informed the Company that Parent will choose the Parent Designees
from the list of persons set forth in the following table. With respect to the
Parent Designees, the following table, prepared from information furnished to
the Company by Parent, sets forth the name, age, citizenship, present
principal occupation or employment and five-year employment history for each
of the persons who may be designated by Parent as the Parent Designees. Parent
has informed the Company that each of such individuals has consented to act as
a director, if so designated. If necessary, Parent may choose additional or
other Parent Designees, subject to the requirements of Rule 14f-1. Unless
otherwise indicated below, the business address of each such person is The
Sage Group plc, Sage House, Benton Park Road, Newcastle Upon Tyne, England NE7
7LZ.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT; MATERIAL POSITIONS
NAME AND CITIZENSHIP AGE HELD DURING THE PAST FIVE YEARS
-------------------- --- -------------------------------
<C> <C> <S>
Aidan John Hughes.............. 37 Director, Vice-President and Treasurer of Rose
Citizen of the United Kingdom Acquisition Corp. since January 1998; Finance
Director of The Sage Group plc since January
1994; Director of Sagesoft Ltd. from 1993 to
1997.
Michael Edward Wilson Jackson.. 47 Director and President of Rose Acquisition Corp.
Citizen of the United Kingdom since January 1998; Director of The Sage Group
plc from October 1988 to present, and Chairman
from October 1997 to present; Director of
Sagesoft Ltd. since October 1988; Director of Hat
Pin plc since June 1996; Director of Bywel
Holdings Ltd. since June 1996; Director of Weyrad
Electronics Ltd. since February 1996; Director of
Quality & Safety Services Ltd. since November
1995; Director of BR QAS Ltd. since November
1995; Director of Steve Dudman Plant Ltd. since
November 1995; Director of Elderstreet Corporate
Finance Ltd. since June 1995; Director of
Photoaward Ltd. since June 1995; Director of
Select Software plc since September 1992;
Director of Matrix Aegis plc since February 1992;
Director of A&M Furniture Hire Ltd. since January
1992; Director of Faverwise Ltd. since October
1991; Director of Elmbridge Village Ltd. since
March 1991; Director of ID Data Holdings Ltd.
since December 1992; Director of Micromuse plc
since September 1993; Director of Golf Park
Developments Ltd. since September 1993; Director
of Baldwin & Francis Ltd since May 1994; Director
of Starburst Ltd. since May 1994; Director of
Spargo Consulting plc since May 1994; Director of
Cedars Village Ltd. since June 1994; Director of
Elderstreet Capital Partners Ltd. since June
1995; Director of Service Power Business
Solutions until December 1996; Director of W
Fearnehough Limited until February 1995; Director
of Target Resources Ltd. until January 1994;
Director of SLS Information Systems until October
1994; Director of Brightstone Properties plc
until October 1993; Director of Pharmasol Ltd.
until February 1993.
Paul Ashton Walker............. 40 Director, Vice President and Secretary of Rose
Citizen of the United Kingdom Acquisition Corp. since January 1998; Director of
The Sage Group plc from October 1988 to present,
and Chief Executive Officer from January 1994 to
present; Director of Sagesoft Ltd. since October
1987; Director of DacEasy, Inc. since 1991;
Director of Sage France SA since November 1996;
Director of KHK Software GmbH & Co. KG since
February 1997; Director of Cussins Property Group
plc since February 1997.
Kevin Clyde Howe............... 48 Vice President of Rose Acquisition Corp. since
Citizen of the United States January 1998; President of Sage U.S. Holdings,
of America Inc. since May 1991; Director of The Sage Group
plc since May 1991. Sage U.S. Holdings, Inc.,
17950 Preston Road, Suite 800, Dallas, Texas
75252.
</TABLE>
I-2
<PAGE>
Parent has advised the Company that to the best knowledge of Parent, none of
the Parent Designees currently is a director of, or holds any position with,
the Company, and except as disclosed in the Offer to Purchase, none of the
Parent Designees beneficially owns any securities (or rights to acquire any
securities) of the Company or has been involved in any transactions with the
Company or any of its directors, executive officers or affiliates that are
required to be disclosed pursuant to the rules of the Securities and Exchange
Commission (the "SEC"), except as may be disclosed in the Offer to Purchase.
None of the Parent Designees has any family relationship with any director or
executive officer of the Company.
Parent has advised the Company that each of the persons listed in the table
above has consented to act as a director, and that none of such persons has
during the last five years been convicted in a criminal proceeding (excluding
traffic violations and similar misdemeanors) or was a party to a civil
proceeding of a judicial or administrative body of competent jurisdiction and
as a result of such proceeding was, or is, subject to a judgment, decree or
final order enjoining future violations of, or prohibiting activities subject
to, federal or state securities laws or finding any violation of such laws or
is involved in any other legal proceeding which is required to be disclosed
under Item 401(f) of Regulation S-K promulgated by the SEC.
It is expected that the Parent Designees may assume office at any time
following the purchase by the Purchaser of a majority of outstanding Shares
pursuant to the Offer, which purchase cannot be earlier than March 2, 1998,
and that, upon assuming office, the Parent Designees will thereafter
constitute at least a majority of the Company's Board of Directors. Parent has
informed the Company that it will choose the Parent Designees from the
individuals shown in the table to serve on the Board of Directors.
I-3
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
THE CURRENT MEMBERS OF THE BOARD
The names of the current directors, their ages as of January 30, 1998 and
certain other information about them are set forth below. As indicated above,
some of the current directors may resign effective immediately following the
purchase of Shares by the Purchaser pursuant to the Offer.
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED A POSITION WITH THE COMPANY OR
NAME OF DIRECTOR AGE DIRECTOR PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- ---------- -----------------------------------------------
<S> <C> <C> <C>
David W. Hanna.......... 59 1985 Mr. Hanna has served as a director of the Com-
pany since 1985. He was appointed Chairman of
the Board and Chief Executive Officer of the
Company in November 1993, and in February 1994
he was also appointed as President. Since May
1992, Mr. Hanna has been Chairman of Kelly-Hanna
Capital Management Company, an investment man-
agement company. Since June 1984, Mr. Hanna has
been President of the Hanna Group, a privately
held operational consulting firm based in Menlo
Park, California, which he founded. Mr. Hanna
previously served as President, Chief Executive
Officer and Chairman of the Company from March
1985 to July 1985 and as the Company's Chairman
of the Board from March 1985 to September 1987.
Also as a consultant, Mr. Hanna served from 1991
to 1992 as President of Ventura Software, Inc.,
a maker of desktop publishing related software,
in 1990 as President of Emulex Corporation, a
computer peripheral products company, in 1989 as
President and Chief Executive Officer of Xerox
Desktop Software, the predecessor of Ventura
Software, Inc., and in 1988 as President and
Chief Executive Officer of NetFRAME, a maker of
high performance file servers. In 1987, Mr.
Hanna was President and Chief Executive Officer
of Versatec, Inc., a manufacturer of electro-
static plotters.
George Riviere.......... 46 1983 Mr. Riviere joined the Company in October 1982
as its Vice President--Development. He has been
a director of the Company since 1983. In 1985,
he was appointed Vice President--Research and
Development. Prior to his employment with the
Company, he was Vice President of Development
with Application Software Corp., a division of
MAI Basic Four, Inc., a California-based sup-
plier of computer products and services, which
position he had held since 1979. From 1974 to
1979 he was the Vice President of Development of
Interactive Computer Systems, Inc., a firm en-
gaged in the development of accounting software.
</TABLE>
I-4
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
ELECTED A POSITION WITH THE COMPANY OR
NAME OF DIRECTOR AGE DIRECTOR PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS
- ---------------- --- ---------- -----------------------------------------------
<S> <C> <C> <C>
Susan L. Rasinski....... 35 1989 Ms. Rasinski has served as a director of the
Company since 1989. Ms. Rasinski is presently a
managing director at Eagle Creek Capital, an in-
vestment management firm. From April 1994 until
September 1996, Ms. Rasinski was a principal at
Robertson, Stephens & Company, a nationwide in-
vestment banking firm focusing on emerging
growth company, a position she held since April
1994. From November 1990 to April 1994, Ms.
Rasinski served as the director of Corporate De-
velopment at Resna Industries, Inc., a San Fran-
cisco-based environmental services concern. From
1988 to 1990, Ms. Rasinski was an associate at
Robertson, Stephens & Company. Prior to attend-
ing Harvard Business School from 1986 to 1988,
Ms. Rasinski was employed as a business analyst
from 1984 to 1986 at the management consulting
firm of McKinsey & Co.
W. Frank King........... 58 1992 Mr. King has served as a director of the Company
since 1992. Mr. King is presently serving as
President and Chief Executive Officer of PSW
Technologies, Inc. (formerly a division of
Pencom, Inc.) a provider of software-related en-
gineering, development and support services.
From 1988 to 1992, Mr. King served as Senior
Vice President of Development for Lotus Develop-
ment Corporation, and from 1969 to 1988, Mr.
King was employed with IBM Corporation, serving
in his last assignment with IBM as Vice Presi-
dent of Development, Entry Systems Division. Mr.
King is also a director of Weitek Corporation,
Excaliber Technologies Corporation, Auspex Sys-
tems, Inc., Systernsoft Corporation and PSW
Technologies.
James H. Clement, Jr.... 43 1994 Mr. Clement has served as a director of the Com-
pany since 1994. He has been a private investor
and consultant since 1991, providing financial
consulting services to businesses. From 1989 to
1991 Mr. Clement served as a consultant with
Merit Energy Company, a manager of partnerships
that acquire producing oil and gas properties,
and from 1984 to 1989 he was employed with King
Ranch, Inc., a multinational agribusiness and
oil and gas exploration company, serving as Vice
President and Treasurer. Mr. Clement continues
to serve as a director of King Ranch and also
served as managing director of King Ranch in
late 1994 and early 1995 until a permanent chief
executive officer was hired for the King Ranch.
</TABLE>
Each of the directors has been engaged in the principal occupation(s)
described above during the past five (5) years. There are no family
relationships among any of the directors or executive officers of the Company.
I-5
<PAGE>
INFORMATION CONCERNING THE BOARD
The Board held five meetings during the fiscal year ended December 31, 1997.
Each of the directors attended at least 75% of the aggregate number of
meetings of the Board and each Board committee on which he or she served. The
Board has standing Executive, Audit and Compensation Committees, but does not
have a Nominating Committee. The entire Board performs the function of a
Nominating Committee.
The Executive Committee held two meetings during fiscal year ended December
31, 1997. The Executive Committee is empowered to act for and on behalf of the
Board and its committees, but may not undertake actions reserved in the Bylaws
to the Board itself, such as filling vacancies on the Board and declaring
certain dividends to shareholders. Currently, Mr. Hanna, Ms. Rasinski and Mr.
King are members of the Executive Committee.
The Audit Committee of the Board held three meetings during the fiscal year
ended December 31, 1997. The Audit Committee's responsibility is to review and
act, or report to the Board, on various audit and accounting matters,
including management's plan for engaging the Company's independent public
accountants, the scope of the audit procedures, the nature of the services to
be performed by, and the fees to be paid to, the auditors, and any changes in
the Company's accounting standards. Currently, Ms. Rasinski and Mr. Clement
are members of the Audit Committee.
The Compensation Committee of the Board held one meeting during the fiscal
year ended December 31, 1997. The Compensation Committee is responsible for
making recommendations to the Board concerning such executive compensation
arrangements and plans as the Board deems appropriate, and the grant of stock
options to selected employees under the Company's stock plans. Currently, Ms.
Rasinski and Mr. King are members of the Compensation Committee.
The Company pays its non-employee directors an annual retainer of $5,000,
plus the amount of $1,000 per Board meeting attended, plus reimbursement for
reasonable expenses incurred in attending meetings. No additional fees are
paid for participation in committee meetings. Directors who are officers of
the Company receive no additional compensation for Board service. Non-employee
directors also participate in the Company's Stock Option Plan for Non-Employee
Directors. Non-employee directors in office on February 17, 1994 each received
options to purchase 10,000 shares of Common Stock. [All such options vested
six months after the date of the annual meeting at which the Company's
shareholders approved this stock option plan.] Upon initial election to the
Board, a director receives an option to purchase 15,000 shares of Common
Stock. Upon the date of each Company annual shareholder meeting at which a
director is reelected, the director receives an option to purchase 10,000
shares of Common Stock. These latter two grant types vest at a rate of 25% per
year over four years. All options under this plan expire after five years. The
option price is the Common Stock's closing price on the day of the grant.
EXECUTIVE OFFICERS OF THE COMPANY
The following individuals currently serve as executive officers of the
Company:
<TABLE>
<CAPTION>
NAME AGE POSITION(S) HELD
- ---- --- ----------------
<S> <C> <C>
David W. Hanna............ 59 Chairman of the Board, President, and Chief
Executive Officer
George Riviere............ 46 Vice President, Midrange Products Engineering and
Director
James R. Eckstaedt........ 43 Vice President, Finance, Chief Financial Officer,
and Secretary
Jeffrey E. Gold........... 50 Vice President, Entry Level Products Engineering
James P. Moore............ 33 Vice President, Customer Support
David R. Butler........... 42 Vice President, Sales
Gregory G. Davidson....... 36 Vice President and General Manager, Client/Server
Division
Richard G. Lull........... 44 Vice President, Marketing
Michael F. King........... 44 Vice President and General Manager, ProvideX
Division
</TABLE>
See "The Current Members of the Board" above for background information on
Messrs. Hanna and Riviere.
I-6
<PAGE>
Mr. Eckstaedt joined the Company in March 1997 and replaced Joe R.
Armstrong, the Company's former Chief Financial Officer, who retired in March
1997. From July 1996 until joining the Company, Mr. Eckstaedt was Senior Vice
President and Chief Financial Officer at the Cerplex Group Inc., an
outsourcing service for the computer industry. From 1987 to 1996, Mr.
Eckstaedt held various management positions, including Vice President of
Finance, Vice President and Treasurer with Western Digital Corp., a leading
manufacturer of data storage devices for computers. He has held senior finance
and auditing positions at Price Waterhouse, Petrolane, Inc., and Tomy
Corporation. Mr. Eckstaedt is a graduate of Valparaiso University and is a
certified public accountant.
Mr. Gold joined the Company in December 1994 upon the completion of the
merger between the Company and Manzanita Software Systems. Mr. Gold was a co-
founder of Manzanita Software Systems and served as its Chief Technical
Officer and Chairman from 1990 through 1994. Mr. Gold served as President and
Chief Executive Officer of Manzanita Software Systems from 1984 to 1990. From
1983 to 1984, Mr. Gold was the director of Special Projects for ASK Computer,
a manufacturer of minicomputer and microcomputer based accounting software.
Prior thereto, Mr. Gold founded and served as President of MicroGold, Inc., a
computer software company focused on software development for Apple Computer
systems. From 1971 to 1980, Mr. Gold was employed with ESL Corporation, a
defense contractor, as an Engineering Department Manager responsible for the
development of sophisticated reconnaissance and direction finding systems.
Mr. Moore joined the Company in March 1996. From 1993 until he joined the
Company, Mr. Moore served as director of Operations, and then as Senior
Director, information Services and Facilities, for Delrina Corporation, a
developer and marketer of microcomputer software. From 1987 through 1993, he
served as National Customer Support and Service Manager for Lotus Development
Corporation, a business applications software developer and marketing firm, in
Toronto, Ontario, Canada. In 1986 and 1987, he was a programmer analyst for
Kakari Systems Limited in Edmonton, Alberta, Canada, and for the provincial
government of Quebec. Mr. Moore is a 1986 graduate of the University of
Alberta.
Mr. Butler joined the Company in April 1996. From 1993 through his joining
the Company, Mr. Butler was the Director of Sales for the southern and western
United States for Lawson Software, a developer of high-end accounting
software. From 1991 through 1993, he was the Western United States Regional
Manager for Bachman Information Systems, Inc., a seller and implementer of
CASE software tools for the IBM AD/Cycle market. From 1990 through 1991, Mr.
Butler was the Southern California Branch Manager for VERSYSS, Inc., a
manufacturer of turnkey hardware and software solutions.
Mr. Davidson was named Vice President of Client/Server Engineering in
January of 1997. Previously he served as the Company'sVice President of
Development for the Troy, Michigan, development center. In 1994, he founded
Systems Engineering Group, a client/server consulting firm, and served as its
President. Until 1994, Mr. Davidson was with Platinum Software Corporation,
where he served as Vice President of Platinum's Michigan development center
and as President of Platinum's financial systems division. Prior to his tenure
at Platinum, Mr. Davidson served as President of Systems Engineering
Associates ("SEA"), a custom software development firm that was acquired by
Platinum in 1992. Before founding SEA in 1989, Mr. Davidson provided contract
software engineering services to General Motors Corporation, Chrysler
Corporation, and other Detroit-area manufacturing and distribution clients.
Mr. Lull joined the Company in October 1997. From 1996 until he joined the
Company, Mr. Lull was self-employed as a management consultant. From 1994
until 1996, Mr. Lull was President, Chief Executive Officer and Vice
President, Sales and Marketing of Penultimate, Inc., a software company. Prior
to joining Penultimate, Inc., from late 1990 until early 1994, Mr. Lull was
Executive Vice President, Sales and Field Marketing for Fujitsu Business
Systems.
Mr. King joined the Company in 1997. From 1982 until 1997, Mr. King served
as President and as a director of Sybex Ltd., a software development company
based in Markham, Ontario. Since 1994, Mr. Lull has served as President and as
a director of BBICON, Inc., a software marketing company.
I-7
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the cash and non-cash
compensation in each of the last three fiscal years for the Company's Chief
Executive Officer and the next four most highly compensated executive officers
during the fiscal year ended December 31, 1997:
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
---------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
- --------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
David W. Hanna........... 1997 $324,423 $(5) 50,000 $ --
Chairman of the Board,
President and 1996 250,000 137,000 -- --
Chief Executive Officer 1995 250,000 75,000 100,000 --
George Riviere........... 1997 163,308 (5) -- 2,725(3)
Vice President--Midrange
Products 1996 146,875 55,625 50,000 2,707
Engineering 1995 143,636 40,547 -- 1,330
James R. Eckstaedt....... 1997 126,654 20,000(5) 75,000 11,907(4)
Chief Financial Officer, 1996 -- -- -- --
Vice President--
Finance and Secretary 1995 -- -- -- --
Jeffrey E. Gold.......... 1997 134,002 (5) -- 4,750
Vice President--Entry
Level Products 1996 125,275 39,375 -- 4,670
Engineering 1995 115,500 27,125 -- 3,548
David R. Butler.......... 1997 150,346 (5) 25,000 --
Vice President--Sales 1996 108,962 48,394 50,000 --
1995 -- -- -- --
</TABLE>
- --------
(1) Amounts shown include compensation deferred pursuant to Section 401(k) of
the Internal Revenue Code of 1986, as amended.
(2) Amounts shown include contributions made by the Company pursuant to the
Company's 401(k) Profit Sharing Plan.
(3) Amounts shown include annual premiums of $695 paid by the Company on term
life insurance policies for the benefit of Mr. Riviere.
(4) Includes a signing bonus of $10,000 paid to Mr. Eckstaedt in March 1997.
(5) The Company has not determined the full bonuses payable to executive
officers for the fiscal year ended December 31, 1997. Such bonuses are
generally determined by late February of the following year. The maximum
bonus payable to each executive officer is 50% of such executive's base
salary for the year ended December 31, 1997. Accordingly, the maximum
amount payable to each of Messrs. Hanna, Riviere, Eckstaedt, Gold and
Butler is $150,000, $70,000, $66,000, $50,000 and $75,000, respectively.
As of the date hereof, Messrs. Riviere, Eckstaedt, Gold and Butler have
received from the Company $17,500, $20,000 $12,500 and $42,338,
respectively, as prepayment of such bonus amounts.
I-8
<PAGE>
GRANTS OF STOCK OPTIONS
The following table sets forth certain information with respect to stock
options granted to the Company's Chief Executive Officer and each of the
Company's next four most highly compensated officers during the fiscal year
ended December 31, 1997:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
NUMBER OF SECURITIES EMPLOYEES EXERCISE OPTION TERM
UNDERLYING OPTIONS IN FISCAL PRICE(1) EXPIRATION ----------------------
NAME GRANTED(#) YEAR ($/SH) DATE 5% ($) 10% ($)
---- -------------------- ---------- -------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
David W. Hanna.......... 50,000 11.2% $12.375 1/2/00 $97,530 $204,806
David R. Butler......... 25,000 5.6 12.375 2/25/02 85,475 188,877
James R. Eckstaedt...... 75,000 16.9 9.625 4/22/02 199,441 440,712
George Riviere.......... -- -- -- -- -- --
Jeffrey E. Gold......... -- -- -- -- -- --
</TABLE>
- --------
(1) All grants were made at the market price of the Shares on the date of
grant.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information concerning the exercise of
options under the Company's 1990 and 1994 Stock Option Plans by the Company's
Chief Executive Officer and each of the Company's next four most highly
compensated officers during the fiscal year ended December 31, 1997 and the
value of such unexercised options held as of the fiscal year ended December
31, 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(1)
ACQUIRED ON VALUE -------------------------------- -------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David W. Hanna.......... -- -- 470,833 79,167 $4,162,498 $409,378
George Riviere.......... -- -- 20,833 29,167 88,540 123,960
David R. Butler......... -- -- 20,833 54,167 88,540 220,835
James R. Eckstaedt...... -- -- -- 75,000 -- 496,875
Jeffrey E. Gold......... -- -- 52,672 -- 511,074 --
</TABLE>
- --------
(1) Market value of the underlying securities at year-end, minus the exercise
price of the options.
I-9
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 31, 1997 for (i) each person
known to the Company to be the beneficial owner of more than five percent of
the outstanding Common Stock, (ii) each director of the Company, (iii) the
Company's Chief Executive Officer and each of the Company's next four most
highly compensated executive officers during the fiscal year ended December
31, 1997 and (iv) all directors and executive officers of the Company as a
group. Except as may be indicated in the footnotes to the table, each such
person has the sole voting and investment power with respect to the Shares
owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF CLASS
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED(1)
---- ------------ ------------
<S> <C> <C>
GeoCapital Corporation.............................. 876,190 7.8%
767 Fifth Avenue
New York, NY 10153
Nevis Capital Management............................ 1,032,862 9.2%
1119 Saint Paul Street
Baltimore, MD 21202
Frontier Capital Management......................... 573,040 5.1%
99 Summer Street
Boston, MA 02110
David W. Hanna...................................... 173,811(2) 1.6%
56 Technology Drive
Irvine, CA 92618
George Riviere...................................... 700,221(3) 6.3%
56 Technology Drive
Irvine, CA 92618
Susan L. Rasinski................................... 6,845(4) *
W. Frank King....................................... 6,000(5) *
James H. Clement, Jr................................ 54,250(6) *
Jeffrey L. Gold..................................... 479,836(7) 4.3%
All officers and directors as a group
(12 persons)....................................... 1,421,033(8) 12.7%
</TABLE>
- --------
* Represents less than 1% of the outstanding shares.
(1) Percentages based on shares actually owned or which the individual
possesses a right to acquire within 60 days as of December 31, 1997.
(2) Excludes 499,999 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Mr. Hanna under the Company's stock plans.
Shares owned by Mr. Hanna are held by him as trustee of the David W.
Hanna Trust.
(3) Excludes 22,917 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Mr. Riviere under the Company's stock
plans.
(4) Excludes 25,000 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Ms. Rasinski under the Company's stock
plans.
(5) Excludes 35,000 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Mr. King under the Company's stock plans.
(6) Excludes 18,750 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Mr. Clement under the Company's stock
plans.
I-10
<PAGE>
(7) Excludes 52,672 shares subject to options exercisable within 60 days of
December 31, 1997, granted to Mr. Gold under the Company's stock plans.
(8) Excludes 759,963 shares subject to options exercisable within 60 days of
December 31, 1997 (including 29,167 shares subject to options granted to
David R. Butler).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION; CERTAIN TRANSACTIONS
Ms. Rasinski and Mr. King served as members of the Compensation Committee
during the fiscal year ended December 31, 1997. Neither Ms. Rasinski nor Mr.
King was an officer or an employee of the Company or any of its subsidiaries
during such time.
Neither the Company nor any of its directors, nominees, officers, or
beneficial owners of more than five percent of the outstanding Common Stock,
or any immediate family member of the foregoing, are, or during fiscal 1997 at
any time were, or are proposed to be, parties to, or have a direct or indirect
material interest in, any relationships or transactions, or series of related
transactions, described in Item 404 of Regulation S-K promulgated by the SEC.
EMPLOYMENT CONTRACTS; TERMINATION OF EMPLOYMENT; AND CHANGE-IN-CONTROL
ARRANGEMENTS
The Company has entered into an employment agreement with David W. Hanna,
and severance agreements with George Riviere, Jeffrey E. Gold, James R.
Eckstaedt and David R. Butler.
Employment Agreement
The Company entered into an employment agreement with Mr. Hanna that became
effective February 17, 1994. The agreement may be terminated by the Company at
any time. The material features of the employment agreement with Mr. Hanna
provide for an annual base salary of $250,000, with a bonus to be determined
by mutual agreement between Mr. Hanna and the Company. In January, 1997 Mr.
Hanna's salary was adjusted to an annual base salary of $325,000. Pursuant to
the employment agreement, Mr. Hanna was also granted options under the
Company's 1994 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan to purchase an aggregate of 400,000 shares of
the Common Stock. With respect to 300,000 of such Shares, the option exercise
price is the fair market value of the Common Stock on the date of grant, and
with respect to the remaining 100,000 Shares the option exercise price is 125%
of such fair market value. Twenty-five percent of the option Shares were fully
vested on the date of grant, and the remaining Shares have fully vested.
Mr. Hanna's employment agreement provides that if Mr. Hanna's employment is
terminated by the Company without cause, or if such employment is terminated
by Mr. Hanna for good reason, the Company is required to pay him severance pay
equal to: (i) 12 months' base salary, plus (ii) a pro rata portion of bonuses
payable under the then effective bonus formula, using the actual financial
results through the date of termination (provided that if a bonus formula has
not been established for the year in which the termination occurs, the Company
will pay a pro rata portion of the prior year's bonus). For purposes of the
employment agreement, "cause" is defined as the employee's willful breach of,
habitual neglect of, or continued incapacity to perform, duties in the course
of employment, and "good reason" is defined as any significant diminution of
position or responsibilities of the employee, substantial reduction in
facilities or perquisites provided to the employee, material reduction in
benefits unless such reduction is applicable to employees of the Company
generally, relocation of the employee to a location outside Southern
California, or material breach of the employment agreement by the Company.
In addition, Mr. Hanna's employment agreement provides that if Mr. Hanna's
employment is terminated for any reason following a change of control, the
Company is required to pay him severance pay equal to: (i) 18
I-11
<PAGE>
months' base salary, plus (ii) the accrued bonuses, if any, payable through
the date of termination, plus (iii) an amount equal to the aggregate bonus for
the preceding year. In the event that Mr. Hanna's employment is terminated by
the Company without cause, or if such employment is terminated by Mr. Hanna
for good reason, or if such employment is terminated for any reason following
a change of control, then an additional number of the option shares granted
under the employment agreement equal to the remaining balance of unvested
shares or 100,000 shares, whichever is less, shall vest upon such termination.
Severance Agreements
On January 24, 1995, the Company entered into severance agreements with Mr.
Riviere and Mr. Gold and, in 1996, the Company entered into a Severance
Agreement with Mr. Butler. The agreements remain in effect for an initial
period of one year. After January 24, 1996, unless the Company or the employee
provides a non-renewal notice to the other party, then each agreement will
automatically be extended by one month at the end of each month, so that the
remaining term of the agreement is one year from the date of extension.
Notwithstanding the foregoing, the agreements terminate on January 24, 2000.
The agreements provide the employee with an annual base salary and an annual
target bonus. If the employee is involuntarily terminated other than for cause
within 12 months following a change of control, then pursuant to the
agreement, the employee will be entitled to the following: (i) 12 months' base
salary, (ii) a pro-rata portion of the target bonus for the year, (iii)
Company-paid insurance for one year and (iv) immediate vesting of options held
by the employee that would become exercisable if the employee remained
employed by the Company for a period of 36 months. The agreements also provide
that if the employee is involuntarily terminated prior to or in the absence of
a change of control within two years of the effective date of the agreements,
then the employee is entitled to receive the following: (i) 12 months' base
salary, (ii) a pro-rata portion of the target bonus for the year and (iii)
Company-paid insurance for one year. Finally, if at any time the employee
voluntarily resigns or is terminated for cause, death or disability, then the
employee shall not be entitled to receive any severance benefits under the
agreements.
During 1997, the Company entered into a severance agreement with Mr.
Eckstaedt. Mr. Eckstaedt's severance agreement provides for an annual base
salary and an annual bonus based on an earnings target approved by the Board.
In addition, if Mr. Eckstaedt is involuntarily terminated within twelve months
after a change of control, the severance agreement provides that Mr. Eckstaedt
will receive twelve (12) months base salary, a pro-rata portion of the annual
bonus, Company-paid insurance for twelve (12) months and immediate vesting of
options held by Mr. Eckstaedt that would become exercisable if he remained
employed by the Company for a period of 36 months. If Mr. Eckstaedt
voluntarily resigns or is terminated for cause, death, or disability, then he
will not be eligible to receive severance benefits under the severance
agreement.
The Company intends to amend, prior to consummation of the Offer, the
Severance Agreements between the Company and each of Messrs. Gold, Eckstaedt,
Butler and Riviere (each an "Employee" and collectively the "Employees").
Under each such Severance Agreement, in the event the Employee's employment
with the Company terminates as a result of an Involuntary Termination (as
defined in each such agreement) other than for cause after a change of control
of the Company and during the time period in which any options granted to each
Employee on or prior to January 27, 1998 are unvested (the "Subject Options"),
then upon such termination, in addition to any portion of the Subject Options
that were exercisable immediately prior to such termination, all Subject
Options shall immediately become fully vested and exercisable.
Sybex, Ltd., a subsidiary of the Company, entered into an employment
agreement with Michael F. King on May 1, 1997. Pursuant to the employment
agreement, Mr. King will receive a base salary, a bonus under such bonus plan
that Sybex, Ltd. may determine from time to time, and an option to purchase an
aggregate of 25,000 shares of Common Stock of the Company, subject to vesting
over a three year period. If Mr. King is terminated without cause, he will
receive twelve (12) months base salary. If Mr. King is terminated for cause or
voluntarily terminates his employment, he will not receive any severance or
termination payments under the employment agreement.
I-12
<PAGE>
Stock Options
The Company maintains the 1997 Employee Stock Purchase Plan, the 1994
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan, the 1990 Stock Option Plan, the Stock Plan for Non-Employee
Directors and Manzanita Software Systems 1985 Stock Option Plan.
Pursuant to the Merger Agreement, the Company will take all actions
necessary to provide that at the Effective Time, (i) each Cash-Out Option (as
defined below) shall be cancelled and (ii) in consideration of such
cancellation, each holder of a Cash-Out Option shall receive in consideration
thereof an amount (subject to any applicable withholding tax) in cash equal to
the product of (x) the excess, if any, of the Offer Price over the per Share
exercise price of such Cash-Out Option and (y) the number of Shares subject to
such Cash-Out Option. The Company is required to use commercially reasonable
efforts to effectuate the foregoing, including amending the Stock Plans (as
defined below) and obtaining any necessary consents. At the Effective Time,
each Assumed Option (as defined below) will be assumed by Parent and, without
disadvantage to the option holders, take such steps as to result in an option
to acquire that number of shares of Parent Common Shares (as defined below)
equal to (A) the number of Shares subject to the Assumed Option immediately
prior to the Effective Time, multiplied by (B) the Exchange Ratio (as defined
below), rounded down to the nearest whole share, at a price per Parent Common
Share equal to (1) the exercise price of the Assumed Option immediately prior
to the Effective Time, divided by (2) the Exchange Ratio, rounded up to the
nearest whole cent. Parent shall take all action necessary for the Parent
Common Shares to rank pari passu in all respects with all other Parent Common
Shares then in issue and to be listed and issuable upon exercise of the
Assumed Options to be freely tradeable on the London Stock Exchange.
The Company is required to take all actions necessary to provide that at or
immediately prior to the Effective Time, (i) each outstanding option under the
Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan") shall
automatically be exercised and (ii) in lieu of the issuance of certificates
representing Shares, each option holder shall receive an amount in cash
(subject to applicable withholding tax) equal to the product of (x) the number
of Shares otherwise issuable upon such exercise and (y) the Offer Price in
cash without interest thereon. The Company is required to use all reasonable
efforts to effectuate the foregoing, including amending the Stock Purchase
Plan and obtaining any necessary consents. The Company is required to take all
necessary actions to provide that as of the Effective Time no holder of
Options under the Stock Plans will have any right to receive shares of common
stock of the Surviving Corporation upon exercise of any such Option.
"Cash-Out Options" means each option outstanding at the Effective Time to
purchase Shares (an "Option") granted under (A) the Company's 1990 Stock
Option Plan, 1994 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan, or Stock Option Plan for Non-Employee
Directors, (B) the Manzanita Software Systems 1985 Stock Option Plan or (C)
any other stock-based incentive plan or arrangement of the Company excluding
any options granted under the Company's 1997 Employee Stock Purchase Plan (the
"Stock Plans") that is not an Assumed Option.
"Assumed Options" means those options or portions thereof granted under the
Company's 1990 Stock Option Plan or 1994 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plan that will not have vested and
become exercisable as of the Effective Time having an aggregate exercise price
on the date hereof in an amount not materially less than $5 million as
designated by the Company. To the extent any options or portions thereof
cannot be assumed by Parent, such options or portions thereof shall be treated
as Cash-Out Options and shall be cancelled as of the Effective Time in
consideration for a cash payment.
"Exchange Ratio" means the quotient of (x) the Offer Price multiplied by the
average of the mid-point of the bid and ask price of the rate of currency
exchange of pounds sterling for U.S. dollars quoted in The Financial Times for
each of the business days in a consecutive twenty business period ending two
business days prior to the Effective Time and (y) the average per Share
closing price of the ordinary shares of 1 pence each in the capital of Parent
(a "Parent Common Share") as reported on the London Stock Exchange on each of
the ten trading days immediately preceding the Effective Time.
I-13
<PAGE>
Indemnification
The Merger Agreement provides that for six years after the Effective Time,
the Surviving Corporation (or any successor to the Surviving Corporation)
shall indemnify, defend and hold harmless, the present and former officers and
directors of the Company and its subsidiaries, and any persons who become any
of the foregoing prior to the Effective Time (each, an "Indemnified Party")
against all losses, claims, damages, liabilities costs, fees and expenses
(including reasonable fees, disbursements of counsel and judgments, fines,
losses, claims, liabilities and amounts paid in settlement (provided that any
such settlement is effected with the written consent of Parent or the
Surviving Corporation)) arising out of the actions or omissions occurring at
or prior to the Effective Time to the fullest extent permissible under
applicable provisions of the General Corporation Law of California ("GCL"),
the terms of the Company's Articles of Incorporation or the By-Laws, and under
any agreements as in effect at the date of the Merger Agreement. The Merger
Agreement also provides that Parent or the Surviving Corporation will maintain
the Company's existing officers' and directors' liability insurance ("D&O
Insurance") for a period of not less than six years after the Effective Time,
provided, that if the aggregate annual premiums for such D&O Insurance at any
time shall exceed 150% of the average per annum rate of premium paid by the
Company for such insurance in 1996 and 1997, as adjusted for any increase in
the Consumer Price Index following the date of the Merger Agreement, then
Parent will cause the Company or the Surviving Corporation to provide the
maximum coverage then available at an annual premium equal to 150% of such
rate.
The Company's Articles of Incorporation and the Articles of Incorporation of
Manzanita Software Systems, Inc. ("Manzanita"), a subsidiary of the Company,
provide that the liability of the directors of each entity for monetary
damages will be eliminated to the fullest extent permissible under California
law and that each entity is authorized to provide indemnification of agents in
excess of the indemnification otherwise permitted under the GCL subject to
certain limitations under the GCL.
The Company's bylaws and the bylaws of Manzanita provide that each entity
will indemnify, to the maximum extent permitted by the GCL, each of its agents
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred in connection with any proceeding arising by reason of the
fact that any such person is or was an agent of the corporation.
The Company intends to enter into indemnification agreements (each an
"Indemnification Agreement" and collectively, the "Indemnification
Agreements") with each executive officer and director (each an "Indemnittee")
of the Company prior to the consummation of the Offer. Pursuant to the
Indemnification Agreements, the Company will indemnify each Indemnitee if
Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director or officer or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement (if such settlement is approved in advance by the Company,
which approval will not be unreasonably withheld) actually and reasonably
incurred by Indemnitee in connection with such action, suit or proceeding if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed
to be in or not opposed to the best interests of the Company, and, with
respect cause to believe Indemnitee's conduct was unlawful.
In addition, the Indemnification Agreements provide that the Company will
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or
proceeding by or in the right of the Company or any subsidiary of the Company
to procure a judgment in its favor by reason of the fact that Indemnitee is or
was a director, officer, employee or agent of the Company, or any subsidiary
of the Company, by reason of any action or inaction on the part of Indemnitee
while a director of officer or by reason of the fact that Indemnitee is or was
serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against
I-14
<PAGE>
expenses (including attorneys' fees) and, to the fullest extent permitted by
law, amounts paid in settlement, in each case to the extent actually and
reasonably incurred by Indemnitee in connection with the defense or settlement
of such action, suit or proceeding if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company and its shareholders, except that no indemnification
will be made in respect of any claim, issue or matter as to which Indemnitee
will have been adjudged to be liable to the Company in the performance of
Indemnitee's duty to the Company and its shareholders unless and only to the
extent that the court in which such action, suit or proceeding is or was
pending will determine upon application that, in view of all the circumstances
of the case, Indemnitee is fairly and reasonably entitled to indemnity for
expenses and then only to the extent that the court will determine.
COMPLIANCE WITH SECTION 16(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons beneficially owning more than 10% of the
outstanding Common Stock of the Company to file reports of ownership and
changes in ownership with the SEC. Officers, directors and greater than 10%
holders of Common Stock are required by SEC regulation to furnish the Company
with copies of all Section 16(a) forms they file.
Based solely on copies of such forms furnished as provided above, or written
representations that no forms were required, the Company believes that for the
fiscal year ended December 31, 1997, all Section 16(a) filing requirements
applicable to its officers, directors and owners of greater than 10% of its
Common Stock were complied with.
I-15
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Agreement and Plan of Merger, dated January 27, 1998, by and among
The Sage Group plc, Rose Acquisition Corp., and State Of The Art,
Inc.
2 Stock Option Agreement, dated January 27, 1998, by and among The
Sage Group plc, Rose Acquisition Corp., and State Of The Art, Inc.
3 Shareholder Agreement, dated January 27, 1998, by and among The Sage
Group plc, Rose Acquisition Corp., and each of David W. Hanna,
George Reviere and Jeffrey E. Gold
4 Letter to Shareholders of State Of The Art, Inc., dated February 2,
1998.
5 Press Release issued by State Of The Art, Inc., dated January 27,
1998.
6 Fairness Opinion of UBS Securities LLC, dated January 26, 1998.
7 Confidentiality Agreement, dated January 14, 1998, by and between
The Sage Group plc and State of The Art, Inc.
8 Severance Agreement, dated March 17, 1997, by and between James R.
Eckstaedt and State Of The Art, Inc.
9 Severance Agreement, dated September 22, 1997, by and between
Gregory G. Davidson and State Of The Art, Inc.
10 Severance Agreement, dated October 17, 1997, by and between Richard
G. Lull and State Of The Art, Inc.
11 Severance Agreement, dated January 24, 1995, by and between Jeffrey
E. Gold and State Of The Art, Inc.
12 Severance Agreement, dated March 4, 1996, by and between James P.
Moore and State Of The Art, Inc.
13 Severance Agreement, dated January 24, 1995, by and between George
Riviere and State Of The Art, Inc.
14 Executive Severance/Change of Control Agreement, dated March 16,
1996, by and between David R. Butler and State Of The Art, Inc.
15 Form of Indemnification Agreement.
16 Form of Amendment to the Executive Severance/Change of Control
Agreement.
17 Employment Agreement, dated May 1, 1997, by and between Michael F.
King and Sybex, Ltd.
18 Pages 6-13 of the Proxy Statement for State Of The Art, Inc., dated
April 4,1997, for the Annual Shareholder meeting on May 29, 1997
and the 1997 Employee Stock Purchase Plan attached as an exhibit
thereto.
19 Conditions of the Offer.
</TABLE>
<PAGE>
Exhibit 1
AGREEMENT AND PLAN OF MERGER
by and among
THE SAGE GROUP PLC
ROSE ACQUISITION CORP.
and
STATE OF THE ART, INC.
dated
January 27, 1998
<PAGE>
<TABLE>
<CAPTION>
Index of Defined Terms
----------------------
Defined Term Section No.
- ------------ -----------
<S> <C>
Acquisition Proposal........................................................ 5.1
Acquisition Proposal Interest............................................... 5.1
Admission................................................................6.12(b)
Agreement...............................................................Recitals
Appointment Date.............................................................5.2
Articles of Incorporation....................................................1.4
Assumed Options.......................................................2.4(a)(ii)
Audit....................................................................3.10(b)
Average Premium...........................................................6.8(b)
Benefit Plans.............................................................3.9(a)
By-Laws......................................................................1.4
Cash-Out Options.......................................................2.4(a)(i)
Certificates..............................................................2.3(b)
Closing......................................................................1.6
Closing Date.................................................................1.6
Code......................................................................3.9(b)
Common Stock..............................................................3.2(a)
Commonly Controlled Entity................................................3.9(b)
Company.................................................................Recitals
Company Agreements...........................................................3.4
Company Board of Directors..............................................Recitals
Company Disclosure Schedule..........................................Article III
Company Material Adverse Change...........................................3.1(a)
Company Material Adverse Effect...........................................3.1(a)
Company SEC Documents........................................................3.5
Confidentiality Agreement.................................................5.3(b)
D&O Insurance.............................................................6.8(b)
December 1997 Financial Statements...........................................3.5
Dissenting Shares............................................................2.2
Effective Time...............................................................1.5
Encumbrances..............................................................3.2(b)
Environmental Claims.....................................................3.16(b)
Environmental Laws.......................................................3.16(a)
ERISA.....................................................................3.9(b)
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Exchange Act..............................................................1.1(a)
Exchange Ratio.......................................................2.4(a)(iii)
Financial Statements.........................................................3.5
Financing....................................................................4.7
Financing Documents..........................................................4.7
GAAP.........................................................................3.5
GCL.....................................................................Recitals
Governmental Entity..........................................................3.4
HSR Act......................................................................3.4
Indemnified Party.........................................................6.8(a)
Independent Directors.....................................................1.3(c)
Initial Expiration Date...................................................1.1(a)
Intellectual Property Rights................................................3.13
London Stock Exchange........................................................6.7
Materials of Environmental Concern.......................................3.16(a)
Merger.......................................................................1.4
Merger Agreement.........................................................Annex I
Merger Consideration......................................................2.1(c)
Minimum Condition........................................................Annex I
New Shares...............................................................6.12(b)
Offer...................................................................Recitals
Offer Documents...........................................................1.1(b)
Offer Price.............................................................Recitals
Offer to Purchase.........................................................1.1(a)
Option.................................................................2.4(a)(i)
Option Agreement........................................................Recitals
Parachute Gross-Up Payment................................................3.9(g)
Parent..................................................................Recitals
Parent Common Share..................................................2.4(a)(iii)
Paying Agent..............................................................2.3(a)
Pension Plans.............................................................3.9(b)
Person.......................................................................9.5
Preferred Stock...........................................................3.2(a)
Proxy Statement......................................................1.10(a)(ii)
Purchaser...............................................................Recitals
Purchaser Common Stock.......................................................2.1
Real Property............................................................3.12(a)
Revised Minimum Number....................................................1.1(d)
Schedule 14D-l............................................................1.1(b)
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Schedule 14D-9............................................................1.2(b)
SEC.......................................................................1.1(b)
Secretary of State...........................................................1.5
Securities Act...............................................................3.5
Shareholder.............................................................Recitals
Shareholder Agreement...................................................Recitals
Shares..................................................................Recitals
Special Meeting.......................................................1.10(a)(i)
Stock Plans...............................................................2.4(a)
Stock Purchase Plan.......................................................2.4(f)
Subsidiary................................................................3.1(a)
Substitute Financing......................................................1.1(a)
Superior Proposal.........................................................5.3(b)
Surviving Corporation........................................................1.4
Tax......................................................................3.10(b)
Tax Authority............................................................3.10(b)
Tax Returns..............................................................3.10(b)
Taxes....................................................................3.10(b)
Termination Fee...........................................................8.2(b)
Transactions..............................................................1.2(a)
Transmittal Documents.....................................................2.3(b)
Voting Debt...............................................................3.2(a)
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
ARTICLE I
THE OFFER AND MERGER
<S> <C> <C>
Section 1.1 The Offer...................................................... 2
Section 1.2 Company Actions................................................ 6
Section 1.3 Directors...................................................... 7
Section 1.4 The Merger..................................................... 9
Section 1.5 Effective Time................................................. 9
Section 1.6 Closing........................................................ 10
Section 1.7 Directors and Officers of the Surviving Corporation............ 10
Section 1.8 Effects of the Merger.......................................... 10
Section 1.9 Subsequent Actions............................................. 10
Section 1.10 Shareholders' Meeting.......................................... 11
Section 1.11 Merger Without Meeting of Shareholders......................... 11
Section 1.12 Earliest Consummation.......................................... 12
<CAPTION>
ARTICLE II
CONVERSION OF SECURITIES
<S> <C> <C>
Section 2.1 Conversion of Capital Stock.................................... 12
Section 2.2 Dissenting Shares.............................................. 13
Section 2.3 Surrender of Shares; Stock Transfer Books...................... 13
Section 2.4 Company Stock Plans............................................ 15
<CAPTION>
ARTICLE III
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
<S> <C> <C>
Section 3.1 Organization................................................... 19
Section 3.2 Capitalization................................................. 20
Section 3.3 Authorization; Validity of Agreement; Company Action........... 22
Section 3.4 Consents and Approvals; No Violations.......................... 22
Section 3.5 SEC Reports and Financial Statements........................... 23
Section 3.6 Absence of Certain Changes..................................... 24
Section 3.7 No Undisclosed Liabilities..................................... 24
</TABLE>
1
<PAGE>
<TABLE>
<S> <C> <C>
Section 3.8 Litigation..................................................... 25
Section 3.9 Employee Benefit Plans; ERISA.................................. 25
Section 3.10 Taxes.......................................................... 28
Section 3.11 Contracts...................................................... 29
Section 3.12 Real Property.................................................. 29
Section 3.13 Intellectual Property.......................................... 30
Section 3.14 Labor Matters.................................................. 31
Section 3.15 Compliance with Laws........................................... 32
Section 3.16 Environmental Matters.......................................... 32
Section 3.17 Product Warranties............................................. 33
Section 3.18 Information in Proxy Statement................................. 33
Section 3.19 Related Party Transactions..................................... 34
Section 3.20 Opinion of Financial Advisor................................... 34
Section 3.21 Insurance...................................................... 34
Section 3.22 State Takeover Statutes; Required Vote......................... 34
Section 3.23 Brokers........................................................ 34
Section 3.24 Full Disclosure................................................ 35
<CAPTION>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
<S> <C> <C>
Section 4.1 Organization................................................... 35
Section 4.2 Authorization; Validity of Agreement; Necessary Action......... 35
Section 4.3 Consents and Approvals; No Violations.......................... 36
Section 4.4 Information in Proxy Statement................................. 37
Section 4.5 Interim Operations of the Purchaser............................ 37
Section 4.6 Brokers........................................................ 37
Section 4.7 Financing...................................................... 37
Section 4.8 Share Ownership................................................ 38
<CAPTION>
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
<S> <C> <C>
Section 5.1 Acquisition Proposals.......................................... 38
Section 5.2 Interim Operations of the Company.............................. 39
Section 5.3 No Solicitation................................................ 42
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
ARTICLE VI
ADDITIONAL AGREEMENTS
<S> <C> <C>
Section 6.1 Proxy Statement................................................ 44
Section 6.2 Meeting of Shareholders of the Company......................... 44
Section 6.3 Additional Agreements.......................................... 44
Section 6.4 Notification of Certain Matters................................ 44
Section 6.5 Access; Confidentiality........................................ 45
Section 6.6 Consents and Approvals......................................... 46
Section 6.7 Publicity...................................................... 46
Section 6.8 Directors' and Officers' Insurance and Indemnification......... 47
Section 6.9 Purchaser Compliance........................................... 48
Section 6.10 Commercially Reasonable Efforts................................ 48
Section 6.11 State Takeover Laws............................................ 49
Section 6.12 Financing Related Efforts...................................... 49
<CAPTION>
ARTICLE VII
CONDITIONS
<S> <C> <C>
Section 7.1 Conditions to Each Party's Obligations to Effect the Merger.... 50
<CAPTION>
ARTICLE VIII
TERMINATION
<S> <C> <C>
Section 8.1 Termination.................................................... 51
Section 8.2 Effect of Termination.......................................... 52
<CAPTION>
ARTICLE IX
MISCELLANEOUS
<S> <C> <C>
Section 9.1 Amendment and Modification..................................... 54
Section 9.2 Non-survival of Representations and Warranties................. 54
Section 9.3 Expenses....................................................... 54
Section 9.4 Notices........................................................ 54
Section 9.5 Interpretation................................................. 56
Section 9.6 Counterparts................................................... 56
Section 9.7 Entire Agreement; No Third Party Beneficiaries................. 56
Section 9.8 Severability................................................... 57
Section 9.9 Governing Law.................................................. 57
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
Section 9.10 Assignment.................................................... 57
</TABLE>
4
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (hereinafter referred to as this
"Agreement"), dated January 27, 1998, by and among The Sage Group plc, a company
- ----------
organized under the laws of England ("Parent"), Rose Acquisition Corp., a
------
Delaware corporation and a direct and indirect wholly owned subsidiary of Parent
(the "Purchaser"), and State Of The Art, Inc., a California corporation (the
---------
"Company").
- --------
WHEREAS, the Board of Directors of each of Parent, the Purchaser and
the Company has approved, and deems it advisable and in the best interests of
its respective shareholders to consummate, the acquisition of the Company by
Parent upon the terms and subject to the conditions set forth herein;
WHEREAS, in furtherance thereof, it is proposed that Purchaser make a
cash tender offer (the "Offer") to acquire all shares (the "Shares") of the
----- ------
issued and outstanding common stock, no par value, of the Company, for $22.00
per share, net to the seller in cash (such price, or any such higher price per
Share as may be paid in the Offer, being referred to herein as the "Offer
-----
Price");
- -----
WHEREAS, also in furtherance of such acquisition, the Board of
Directors of each of Parent, Purchaser and the Company have each approved the
Merger (as defined below) following the Offer in accordance with the General
Corporation Law of the State of California (the "GCL") and upon the terms and
---
subject to the conditions set forth herein, whereby each issued and outstanding
Share not owned directly or indirectly by Parent, the Purchaser or the Company
will be converted into the right to receive an amount equal to the Offer Price
in cash;
WHEREAS, the Board of Directors of the Company (the "Company Board of
----------------
Directors") has determined that the consideration to be paid for each Share in
- ---------
the Offer and the Merger is fair to the holders of such Shares and has resolved
to recommend that the holders of such Shares accept the Offer and approve this
Agreement and each of the transactions contemplated hereby upon the terms and
subject to the conditions set forth herein;
WHEREAS, as a condition and further inducement to Parent and the
Purchaser to enter into this Agreement and incurring the obligations set forth
herein, certain shareholders (each a "Shareholder") concurrently herewith is
-----------
entering into a
<PAGE>
Shareholder Agreement (the "Shareholder Agreement"), dated as of the date
---------------------
hereof, with Parent and the Purchaser, in the form attached hereto as Exhibit A,
pursuant to which each Shareholder has agreed, among other things, to tender the
Shares held by each in the Offer and to grant Parent a proxy with respect to the
voting of such Shares in favor of the Merger upon the terms and subject to the
conditions set forth therein;
WHEREAS, as a condition and further inducement to Parent and the
Purchaser to enter into this Agreement and incurring the obligations set forth
herein, concurrently with the execution and delivery of this Agreement,
Purchaser and the Company are entering into an Option Agreement in the form of
Exhibit B hereto (the "Option Agreement"), pursuant to which among other things,
----------------
the Company has granted the Purchaser an option to purchase certain newly-issued
shares of Common Stock (as hereinafter defined), subject to certain conditions;
WHEREAS, the Company, Parent and Purchaser desire to make certain
representations, warranties, covenants and agreements in connection with the
Offer and Merger and also to prescribe to certain various conditions to the
Offer and the Merger.
NOW, THEREFORE, in consideration of the foregoing and the mutual
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE OFFER AND MERGER
Section 1.1 The Offer.
---------
(a) Provided that this Agreement shall not have been terminated in
accordance with Section 8.1 hereof and none of the events set forth in Annex I
shall have occurred and be existing, as promptly as practicable (but in no event
later than five business days after the public announcement of the execution of
this Agreement), Purchaser shall commence (within the meaning of Rule 14d-2
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) the
------------
Offer at the Offer Price. The obligations of the Purchaser to accept for
payment and to pay for any Shares validly tendered on or prior to the expiration
of the Offer and not
2
<PAGE>
withdrawn shall be subject only to the conditions set forth in Annex I hereto.
The Offer shall be made by means of an offer to purchase (the "Offer to
--------
Purchase") subject to the conditions set forth in Annex I hereto. Except as
- --------
provided in Section 1.1(d), Purchaser shall not, without the prior written
consent of the Company, (i) decrease the Offer Price or change the form of
consideration payable in the Offer, (ii) decrease the number of Shares sought to
be purchased in the Offer (except as otherwise set forth in Section 1.1(d)
hereof), (iii) impose conditions to the Offer in addition to those set forth in
Annex I, (iv) amend any condition of the Offer set forth in Annex I, (v) extend
the initial expiration date (the "Initial Expiration Date") of the Offer,
-----------------------
except as required by law and except that in the event that any condition to the
Offer is not satisfied or waived on the Initial Expiration Date, the Purchaser
shall, and shall continue to, extend the Offer from time to time until a date
not later than March 26, 1998 (it being understood that the Purchaser may
determine the interim expiration dates of any extension of the Offer during such
extension period), or (vi) amend any other term of the Offer in any manner
adverse to any holders of the Shares; provided, however that in the event that
-------- -------
any condition to the Offer is not satisfied on a date following the Initial
Expiration Date on which the Offer is scheduled to expire, (i) Purchaser may,
from time to time, in its sole discretion, extend the expiration date of the
Offer until a date not later than July 31, 1998 and (ii) at the written request
of the Company delivered no later than March 26, 1998, the Purchaser shall, and
shall continue to, extend the Offer from time to time for the period commencing
on the date of the notice referred to above until a date not later than July 31,
1998 (it being understood that the Purchaser may determine the interim
expiration dates of any extension of the Offer during such extension period);
provided, further, that in the event that the Purchaser extends the expiration
- -------- -------
date of the Offer in accordance with such request: (A) Annex I shall be deemed
to be amended to provide an additional condition that the Purchaser shall not be
required to accept for payment or pay for any tendered Shares unless and until
Parent and the Purchaser shall have obtained sufficient financing (the
"Substitute Financing") in replacement, if necessary, of the Financing (as
--------------------
defined below) in order to permit Parent and the Purchaser to acquire all of the
Shares in the Offer and the Merger and to pay the anticipated expenses in
connection therewith, (B) the condition set forth in paragraph (h) of Annex I
shall be amended and replaced with the condition set forth in clause (A) above,
(C) from and after such time Parent shall not be subject to Section 6.12 and (D)
Parent shall use all commercially reasonable efforts to secure the Substitute
Financing prior to July 31, 1998 and to provide funds to the Purchaser to permit
it to perform its obligations hereunder and in the Offer (provided that Parent
shall not be required to obtain Substitute Financing on economic terms
materially less favorable to it than the Financing). Purchaser shall, on the
terms and
3
<PAGE>
subject to the prior satisfaction or waiver of the conditions of the Offer,
accept for payment and pay for Shares tendered as soon as it is legally
permitted to do so under applicable law. Parent shall provide or cause to be
provided to the Purchaser on a timely basis the funds necessary to accept for
payment, and pay for, any Shares that the Purchaser becomes obligated to accept
for payment, and pay for, pursuant to the Offer.
(b) Concurrently with the commencement of the Offer, Parent and the
Purchaser shall file with the United States Securities and Exchange Commission
(the "SEC") a Tender Offer Statement on Schedule 14D-1 with respect to the Offer
---
(together with all amendments and supplements thereto and including the exhibits
thereto, the "Schedule 14D-l"). The Schedule 14D-1 will include, as exhibits,
--------------
the Offer to Purchase and a form of letter of transmittal and summary
advertisement (collectively, together with any amendments and supplements
thereto, the "Offer Documents") Parent and Purchaser agree that the Offer
---------------
Documents will comply in all material respects with the provisions of applicable
Federal securities laws and, on the date filed with the SEC and on the date
first published or sent to the Company's shareholders, shall not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements made therein,
in light of the circumstances under which they were made, not misleading, except
that no representation is made by Parent or the Purchaser with respect to
information furnished by the Company expressly for inclusion in the Offer
Documents. The information supplied by the Company expressly for inclusion in
the Offer Documents and by Parent or the Purchaser expressly for inclusion in
the Schedule 14D-9 (as hereinafter defined) will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading. No
representation, warranty or covenant is made or shall be made herein by the
Company with respect to information contained in the Offer Documents other than
information supplied by the Company in writing expressly for inclusion in the
Offer Documents.
(c) Each of Parent and the Purchaser will take all steps necessary to
cause the Offer Documents to be filed with the SEC and to be disseminated to
holders of the Shares, in each case as and to the extent required by applicable
federal securities laws. Each of Parent and the Purchaser, on the one hand, and
the Company, on the other hand, will promptly correct any information provided
by it for use in the Schedule 14D-1 or the Offer Documents if and to the extent
that it shall have become false or misleading in any material respect, and the
Purchaser further will
4
<PAGE>
take all steps necessary to cause the Schedule 14D-1 or the Offer Documents as
so corrected to be filed with the SEC and to be disseminated to holders of the
Shares, in each case as and to the extent required by applicable federal
securities laws. The Company and its counsel shall be given the reasonable
opportunity to review the initial Schedule 14D-1 (as well as all amendments or
supplements thereto) before any such document is filed with the SEC. In
addition, Parent and the Purchaser will provide the Company and its counsel with
any comments or other communications, whether written or oral, Parent, the
Purchaser or their counsel may receive from time to time from the SEC or its
staff with respect to the Offer Documents promptly after the receipt of such
comments or other communications.
(d) Subject to the limitations set forth in Section 1.1(a), in the
event the Minimum Condition (as defined in Annex I) is not satisfied on the
Initial Expiration Date, the Purchaser may either (i) extend the Offer pursuant
to clause (v) of Section 1.1(a) for a period or periods not to exceed, in the
aggregate ten (10) business days, or (ii) amend the Offer to provide that, in
the event (x) the Minimum Condition is not satisfied at the next scheduled
expiration date of the Offer (without giving pro forma effect to the potential
issuance of any Shares issuable upon exercise of the Option Agreement) and (y)
the number of Shares tendered pursuant to the Offer and not withdrawn as of such
next scheduled expiration date is more than 50% of the then outstanding Shares,
the Purchaser shall waive the Minimum Condition and amend the Offer to reduce
the number of Shares subject to the Offer to a number of Shares that when added
to the Shares then owned by the Purchaser will equal 49.9999% of the Shares then
outstanding (the "Revised Minimum Number") and, if a greater number of Shares is
----------------------
tendered into the Offer and not withdrawn, purchase, on a pro rata basis, the
Revised Minimum Number of Shares (it being understood that the Purchaser may,
but shall not in any event be required to, accept for payment, or pay for any
Shares if less than the Revised Minimum Number of Shares are tendered pursuant
to the Offer and not withdrawn at the applicable expiration date); provided,
--------
further, that in the event the Minimum Condition is not satisfied on or before
- -------
the ten (10) business day period referred to in paragraph (d)(i) above, the
Purchaser shall waive the Minimum Condition and amend the Offer to reduce the
number of Shares subject to the Offer to the Revised Minimum Number of Shares.
Notwithstanding any other provision of this Agreement, in the event that the
Purchaser purchases a number of Shares equal to the Revised Minimum Number,
without the prior written consent of the Purchaser prior to the termination of
this Agreement, the Company shall take no action whatsoever to increase the
number of Shares owned by the Purchaser in excess of the Revised Minimum Number.
5
<PAGE>
Section 1.2 Company Actions.
---------------
(a) The Company represents that the Company Board of Directors, at a
meeting duly called and held has (i) unanimously determined that each of the
Agreement, the Offer, the Merger and the Option Agreement (as hereinafter
defined) are fair to and in the best interests of the shareholders of the
Company, (ii) duly approved this Agreement, the Option Agreement and the
transactions contemplated hereby and thereby, including the Offer and the Merger
(collectively, the "Transactions"), and duly approved the Offer and the Merger
------------
in accordance with Section 1101 of the GCL, and (iii) resolved to recommend that
the shareholders of the Company accept the Offer and tender their shares
thereunder to the Purchaser and approve and adopt this Agreement and the Merger
(provided, however, that subject to and in accordance with the provisions of
Section 5.3, such recommendation may be withdrawn, modified or amended in
connection with a Superior Proposal (as defined in Section 5.3)).
(b) As soon as practicable on or after the date the Offer is
commenced, the Company shall file with the SEC a Solicitation/Recommendation
Statement on Schedule 14D-9 (together with all amendments or supplements thereto
and including the exhibits thereto, the "Schedule 14D-9") which shall, subject
--------------
to the provisions of Section 5.3(c) contain the recommendation referred to in
clause (iii) of Section 1.2(a) hereof. The Schedule 14D-9 will comply in all
material respects with the provisions of applicable federal securities laws and,
on the date filed with the SEC and on the date first published or sent to the
Company's shareholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements made therein, in light of the
circumstances under which they were made, not misleading, except that no
representation is made by the Company with respect to information furnished by
Parent or the Purchaser expressly for inclusion in the Schedule 14D-9. No
representation, warranty or covenant is made or shall be made herein by Parent
or the Purchaser with respect to information contained in the Schedule 14D-9
other than the information supplied by Parent or the Purchaser in writing
expressly for inclusion in the Schedule 14D-9. The Company further agrees to
take all steps necessary to cause the Schedule 14D-9 to be filed with the SEC
and to be disseminated to holders of the Shares, in each case, as and to the
extent required by applicable federal securities laws. The Company shall mail,
or cause to be mailed, such Schedule 14D-9 to the shareholders of the Company at
the same time the Offer Documents are first mailed to the shareholders of the
Company together with such Offer Documents. Each of the Company, on the one
hand, and Parent and the Purchaser, on the other
6
<PAGE>
hand, agrees promptly to correct any information provided by it for use in the
Schedule 14D-9 if and to the extent that it shall have become false or
misleading in any material respect and the Company further agrees to take all
steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the
SEC and to be disseminated to holders of the Shares, in each case, as and to the
extent required by applicable federal securities laws. Parent and its counsel
shall be given the opportunity to review the Schedule 14D-9 before it is filed
with the SEC. In addition, the Company agrees to provide Parent, the Purchaser
and their counsel with any comments, whether written or oral, that the Company
or its counsel may receive from time to time from the SEC or its staff with
respect to the Schedule 14D-9 promptly after the receipt of such comments or
other communications.
(c) In connection with the Offer, the Company will promptly furnish or
cause to be furnished to the Purchaser mailing labels, security position
listings and any available listing or computer file containing the names and
addresses of all record holders of Shares, each as of a recent date, and shall
promptly furnish the Purchaser with such additional information (including, but
not limited to, updated mailing labels, security position listings and available
listings or computer files containing the names and addresses of all
record holders of Shares).
Section 1.3 Directors.
---------
(a) Subject to compliance with applicable law, promptly upon the
purchase of and payment for any Shares by the Purchaser pursuant to the Offer,
and from time to time thereafter as Shares are acquired by the Purchaser, Parent
shall be entitled to designate such number of directors, rounded up to the next
whole number, on the Company Board of Directors as is equal to the product of
the total number of directors on such Board (determined after giving effect to
the directors designated by Parent pursuant to this sentence) multiplied by the
percentage that the aggregate number of Shares which Purchaser or any affiliate
of the Purchaser owns beneficially bears to the total number of Shares then
outstanding. In furtherance thereof, the Company shall, upon the request of
Parent, promptly secure the resignations of such number of its incumbent
directors as is necessary to enable Parent's designees to be elected to the
Company Board of Directors and shall take all actions available to the Company
to cause Parent's designees to be so elected. At such time, the Company shall,
if requested by Parent, also cause persons designated by Parent to constitute at
least the same percentage (rounded up to the next whole number) as is on the
Company Board of Directors of (i) each committee of the Company Board of
Directors, (ii) each board of directors (or similar body) of each Subsidiary (as
7
<PAGE>
hereinafter defined) of the Company and (iii) each committee (or similar body)
of each such board.
(b) The Company shall promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and Rule 14f-l promulgated thereunder in order
to fulfill its obligations under Section 1.3(a) hereof, and shall include in the
Schedule 14D-9 mailed to shareholders promptly after the commencement of the
Offer (or an amendment thereof or an information statement pursuant to Rule 14f-
1 if the Purchaser has not theretofore designated directors) such information
with respect to the Company and its officers and directors as is required under
Section 14(f) and Rule 14f-1 in order to fulfill its obligations under Section
1.3(a). Parent or the Purchaser shall supply the Company information with
respect to either of them and their nominees, officers, directors and affiliates
required by such Section 14(f) and Rule 14f-1. The provisions of this Section
1.3 are in addition to and shall not limit any rights which the Parent,
Purchaser or any of their affiliates may have as a holder or beneficial owner of
Shares as a matter of law with respect to the election of directors or
otherwise.
(c) In the event that Parent's designees are elected to the Company
Board of Directors, subject to the other terms of this Agreement and until the
Effective Time, the Company Board of Directors shall have at least two directors
who are directors on the date hereof and neither of whom is an officer of the
Company (other than the present Chief Executive Officer of the Company) nor a
designee, shareholder, affiliate or associate (within the meaning of the federal
securities laws) of Parent (one or more of such directors, the "Independent
-----------
Directors"), provided that, in such event, if the number of Independent
- --------- -------- ----
Directors shall be reduced below two for any reason whatsoever, any remaining
Independent Director shall be entitled to designate persons to fill such
vacancies who shall be deemed Independent Directors for purposes of this
Agreement or, if no Independent Director then remains, the other directors shall
designate one person to fill one of the vacancies who shall not be a
shareholder, affiliate or associate of Parent or the Purchaser and such person
shall be deemed to be an Independent Director for purposes of this Agreement.
Notwithstanding anything in this Agreement to the contrary, in the event that
Parent's designees are elected to the Company Board of Directors, after the
acceptance for payment of Shares pursuant to the Offer and prior to the
Effective Time (as hereinafter defined), the affirmative vote of a majority of
the Independent Directors shall be required to (a) amend or terminate this
Agreement on behalf of the Company, (b) exercise or waive any of the Company's
rights, benefits or remedies hereunder, (c) extend the time for performance of
the Purchaser's obligations
8
<PAGE>
hereunder or (d) take any other action by the Company Board of Directors under
or in connection with this Agreement; provided, however, that if there shall be
-------- -------
no such directors, such actions may be effected by unanimous vote of the entire
Company Board of Directors.
Section 1.4 The Merger. Upon the terms and subject to satisfaction
----------
or waiver of the conditions of this Agreement, and in accordance with the
applicable provisions of this Agreement and the GCL, at the Effective Time, the
Company and the Purchaser shall consummate a merger (the "Merger") pursuant to
------
which (a) the Purchaser shall be merged with and into the Company and the
separate corporate existence of the Purchaser shall thereupon cease, (b) the
Company shall be the successor or surviving corporation in the Merger (sometimes
hereinafter referred to as the "Surviving Corporation") and shall continue to be
---------------------
governed by the laws of the State of California, and (c) the separate corporate
existence of the Company with all of its rights, privileges, immunities, powers
and franchises shall continue unaffected by the Merger, except as set forth in
this Section 1.4. Pursuant to the Merger, (x) the Articles of Incorporation of
the Company (the "Articles of Incorporation"), shall be amended in its entirety
-------------------------
to read as the Articles of Incorporation of the Purchaser in effect immediately
prior to the Effective Time, except that Article I thereof shall read as
follows: "The name of the Corporation is STATE OF THE ART, INC." and , as so
amended, shall be the articles of incorporation of the Surviving Corporation
until thereafter amended as provided by law and such Articles of Incorporation
and (y) the By-Laws of the Purchaser (the "By-Laws"), as in effect immediately
-------
prior to the Effective time (as hereinafter defined), shall be the By-Laws of
the Surviving Corporation until thereafter amended as provided by law, by such
Articles of Incorporation or by such By-Laws.
Section 1.5 Effective Time. As soon as practicable after the
--------------
satisfaction or waiver of the conditions set forth in Article VII hereof,
Parent, the Purchaser and the Company shall cause to be executed and filed on
the Closing Date (as hereinafter defined) (or on such other date as Parent and
the Company may agree) with the Secretary of State of the State of California
(the "Secretary of State") in the manner required by the GCL an agreement of
------------------
merger together with an officer's certificate of the Company and the Purchaser,
and the parties shall take such other and further actions as may be required by
law to make the merger effective. The time the Merger becomes effective in
accordance with applicable law is hereinafter referred to as the "Effective
---------
Time."
- ----
9
<PAGE>
Section 1.6 Closing. The closing of the Merger (the "Closing") shall
------- -------
take place at 10:00 a.m. on a date to be specified by the parties, which shall
be no later than the second business day after satisfaction or waiver of all of
the conditions set forth in Article VII hereof (the "Closing Date"), at the
------------
offices of Skadden, Arps, Slate, Meagher & Flom LLP, Four Embarcadero Center,
Suite 3800, San Francisco, California, unless another date or place is agreed to
in writing by the parties hereto.
Section 1.7 Directors and Officers of the Surviving Corporation.
---------------------------------------------------
Subject to applicable law, the directors of the Purchaser and the officers of
the Company at the Effective Time shall, from and after the Effective Time, be
the directors and officers of the Surviving Corporation until their successors
shall have been duly elected or appointed or qualified or until their earlier
death, resignation or removal in accordance with the Articles of Incorporation
and the By-laws. If, at the Effective Time, a vacancy shall exist on the
Company Board of Directors or in any office of the Surviving Corporation, such
vacancy may thereafter be filled in the manner provided by law.
Section 1.8 Effects of the Merger. At the Effective Time, the Merger
---------------------
shall have the effects set forth in Section 1107 of the GCL. Without limiting
the generality of the foregoing, and subject thereto, at the Effective Time all
the property, rights, privileges, powers and franchises of the Company and the
Purchaser shall vest in the Surviving Corporation, and all debts, liabilities
and duties of the Company and the Purchaser shall become the debts, liabilities
and duties of the Surviving Corporation.
Section 1.9 Subsequent Actions. If at any time after the Effective
------------------
Time the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Company or the Purchaser acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of either the Company or the Purchaser, all
such deeds, bills of sale, assignments and assurances and to take and do, in the
name and on behalf of each of such corporations or otherwise, all such other
actions and things as may be necessary or desirable to vest, perfect or confirm
any and all rights, title and interest in, to and under such rights, properties
or assets in the Surviving Corporation or otherwise to carry out this Agreement.
10
<PAGE>
Section 1.10 Shareholders' Meeting.
---------------------
(a) If required by the Articles of Incorporation and/or applicable law
in order to consummate the Merger, the Company, acting through its Board of
Directors, shall, in accordance with applicable law:
(i) duly call, give notice of, convene and hold a special
meeting of its shareholders (the "Special Meeting") as promptly as
---------------
practicable following the acceptance for payment and purchase of Shares by
the Purchaser pursuant to the Offer for the purpose of considering and
taking action upon the approval of the Merger and the adoption of this
Agreement;
(ii) prepare and file with the SEC a preliminary proxy or
information statement relating to the Merger and this Agreement and use its
commercially reasonable efforts (x) to obtain and furnish the information
required to be included by the SEC in the Proxy Statement (as hereinafter
defined) and, after consultation with Parent, to respond promptly to any
comments made by the SEC with respect to the preliminary proxy or
information statement and cause a definitive proxy or information
statement, including any amendment or supplement thereto (the "Proxy
-----
Statement") to be mailed to its shareholders, provided that no amendment or
---------
supplement to the Proxy Statement will be made by the Company without
consultation with Parent and its counsel and (y) to obtain the necessary
approvals of the Merger and this Agreement by its shareholders; and
(iii) subject to the fiduciary obligations of the Board of
Directors of the Company under applicable law, include in the Proxy
Statement the recommendation of the Board of Directors that shareholders of
the Company vote in favor of the approval of the Merger and the adoption of
this Agreement.
(b) Parent will provide the Company with the information concerning
Parent and the Purchaser required to be included in the Proxy Statement. Parent
shall vote, or cause to be voted, all of the Shares then owned by it, the
Purchaser or any of its other subsidiaries and affiliates in favor of the
approval of the Merger and the approval and adoption of this Agreement.
Section 1.11 Merger Without Meeting of Shareholders. Notwithstanding
--------------------------------------
Section 1.10 hereof, in the event that Parent, the Purchaser and any other
11
<PAGE>
Subsidiaries of Parent shall have acquired in the aggregate at least 90% of the
outstanding Shares pursuant to the Offer or otherwise (including as a result of
the exercise of the Option Agreement), the parties hereto shall take all
necessary and appropriate action to cause the Merger to become effective as soon
as practicable after the acceptance for payment of and payment for Shares by the
Purchaser pursuant to the Offer, without a meeting of shareholders of the
Company, in accordance with Section 1110 of the GCL.
Section 1.12 Earliest Consummation. Each party hereto shall use its
---------------------
commercially reasonable efforts to consummate the Merger as soon as practicable.
If the conditions set forth in Annex I hereto are satisfied, or waived, the
Purchaser shall consummate the Offer and accept for payment Shares tendered
therein and thereafter effectuate the Merger as soon as practicable after the
Purchaser accepts the Shares for payment pursuant to the Offer.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.1 Conversion of Capital Stock. As of the Effective Time,
---------------------------
by virtue of the Merger and without any action on the part of the holders of any
Shares or holders of any class or series of common stock, par value $.01 per
share, of the Purchaser (the "Purchaser Common Stock"):
----------------------
(a) Each issued and outstanding share of Purchaser Common Stock shall
be converted into and become one validly issued, fully paid and nonassessable
share of common stock of the Surviving Corporation.
(b) All Shares owned by Parent, the Purchaser or any other wholly
owned subsidiary of Parent shall be cancelled and retired, and shall cease to
exist other than shares in Section 2.1(d) and no consideration shall be
delivered in exchange therefor.
(c) Each issued and outstanding Share immediately before the Effective
Time (other than any Shares to be cancelled pursuant to Section 2.1(b) and any
Dissenting Shares (as hereinafter defined)) shall be cancelled and extinguished
and be converted into the right to receive the Offer Price in cash, payable to
the holder thereof, without interest (the "Merger Consideration"), upon
--------------------
surrender of the
12
<PAGE>
certificate formerly representing such Share in the manner provided in Section
2.3 hereof.
(d) Each share of Purchaser Common Stock, issued and outstanding
immediately before the Effective Time shall thereafter represent one validly
issued, fully paid and nonassessable share of common stock, par value $.01 per
share, of the Surviving Corporation.
Section 2.2 Dissenting Shares.
-----------------
Notwithstanding anything in this Agreement to the contrary, Shares
outstanding immediately prior to the Effective Time and held by a holder who has
not voted in favor of the Merger or consented thereto in writing and who has
demanded appraisal for such shares in accordance with Section 1300 of the GCL,
if such Section 1300 provides for appraisal rights for such Shares in the Merger
("Dissenting Shares"), shall not be converted into the right to receive the
-----------------
Merger Consideration as provided in Section 2.1, unless and until such holder
fails to perfect or withdraws or otherwise loses his right to appraisal and
payment under the GCL. If, after the Effective Time, any such holder fails to
perfect or withdraws or loses his right to appraisal, then such Dissenting
Shares shall thereupon be treated as if they had been converted as of the
Effective Time into the right to receive the Merger Consideration, if any, to
which such holder is entitled, without interest or dividends thereon. The
Company shall give Parent prompt notice of any demands received by the Company
for appraisal of Shares and, prior to the Effective Time, Parent shall have the
right to participate in all negotiations and proceedings with respect to such
demands. Prior to the Effective Time, the Company shall not, except with the
prior written consent of Parent, make any payments with respect to or settle or
offer to settle, any such demands.
Section 2.3 Surrender of Shares; Stock Transfer Books.
-----------------------------------------
(a) Before the Effective Time, the Purchaser shall designate a bank or
trust company reasonably acceptable to the Company to act as agent for the
holders of Shares in connection with the Merger (the "Paying Agent") to receive
------------
the funds necessary to make the payments contemplated by Section 2.1(a). At the
Effective Time, the Purchaser shall deposit, or cause to be deposited, in trust
with the Paying Agent for the benefit of holders of Shares the aggregate
consideration to which such holders shall be entitled at the Effective Time
pursuant to Section 2.1(a). Such funds shall be invested as directed by Parent
or the Surviving Corporation
13
<PAGE>
pending payment thereof by the paying agent to holders of the Shares. Earnings
from such investments shall be the sole and exclusive property of the Purchaser
and the Surviving Corporation and no part thereof shall accrue to the benefit of
the holders of the Shares. If for any reason (including losses) such funds are
inadequate to pay the amounts to which holders of Shares shall be entitled under
this Section 2.3, Parent shall in any event be liable for payment thereof. Such
funds deposited with the Paying Agent pursuant to this Section 2.3 shall not be
used for any purpose except as expressly provided in this Agreement. From time
to time at or after the Effective Time, Parent shall take all lawful action
necessary to make the appropriate cash payments, if any, to holders of
Dissenting Shares. Prior to the Effective Time, Parent shall enter into
appropriate commercial arrangements to ensure effectuation of the immediately
preceding sentence.
(b) As soon as reasonably practicable after the Effective Time, the
Paying Agent shall mail to each holder of record of a certificate or
certificates, which immediately prior to the Effective Time represented
outstanding Shares (the "Certificates"), whose Shares were converted pursuant to
------------
Section 2.1 into the right to receive the Merger Consideration (i) a letter of
transmittal (which shall specify that delivery shall be effected and that the
risk of loss of and title to the Certificates shall pass, only upon delivery of
the Certificates to the Paying Agent and shall be in such form and have such
other provisions not inconsistent with this Agreement as Parent may specify) and
(ii) instructions for use in effecting the surrender of Certificates in exchange
for payment of the Merger Consideration (together, the "Transmittal Documents").
---------------------
Upon surrender of a Certificate for cancellation to the Paying Agent or to such
other agent or agents as may be appointed by Parent, together with such letter
of transmittal, duly executed, the holder of such Certificate shall be entitled
to receive in exchange therefor the Merger Consideration for each Share formerly
represented by such Certificate, and the Certificate so surrendered shall
forthwith be cancelled. If payment of the Merger Consideration is to be made to
a person other than the person in whose name the surrendered Certificate is
registered, it shall be a condition of payment that the Certificate so
surrendered shall be properly endorsed or shall otherwise be in proper form for
transfer and that the person requesting such payment shall have paid any
transfer and other taxes required by reason of the payment of the Merger
Consideration to a person other than the registered holder of the Certificate
surrendered or shall have established to the satisfaction of the Surviving
Corporation that such tax either has been paid or is not applicable. Until
surrendered as contemplated by this Section 2.3, each Certificate shall be
deemed at any time after the Effective Time to represent only the right to
receive the Merger Consideration in cash as contemplated by this Section 2.3.
Upon the surrender of
14
<PAGE>
Certificates in accordance with the terms and instructions contained in the
Transmittal Documents, the Purchaser shall cause the Paying Agent to pay the
holder of such certificates in exchange therefor cash in an amount equal to the
Merger Consideration multiplied by the number of Shares represented by such
Certificate (other than Certificates representing Dissenting Shares and
Certificates representing Shares held by the Purchaser).
(c) At the Effective Time, the stock transfer books of the Company
shall be closed and there shall not be any further registration of transfers of
shares of any shares of capital stock thereafter on the records of the Company.
From and after the Effective Time, the holders of certificates evidencing
ownership of the Shares outstanding immediately prior to the Effective Time
shall cease to have any rights with respect to such Shares, except as otherwise
provided for herein or by applicable law. If, after the Effective Time,
Certificates are presented to the Surviving Corporation, they shall be cancelled
and exchanged for cash as provided in this Article II. No interest shall accrue
or be paid on any cash payable upon the surrender of a Certificate or
Certificates which immediately before the Effective Time represented outstanding
Shares.
(d) Promptly following the date which is one year after the Effective
Time, the Surviving Corporation shall be entitled to require the Paying Agent to
deliver to it any cash (including any interest received with respect thereto),
Certificates and other documents in its possession relating to the transactions
contemplated hereby, which had been made available to the Paying Agent and which
have not been disbursed to holders of Certificates, and thereafter such holders
shall be entitled to look to the Surviving Corporation (subject to abandoned
property, escheat or similar laws) only as general creditors thereof with
respect to the Merger Consideration payable upon due surrender of their
Certificates, without any interest thereon. Notwithstanding the foregoing,
neither the Surviving Corporation nor the Paying Agent shall be liable to any
holder of a Certificate for Merger Consideration delivered to a public official
pursuant to any applicable abandoned property, escheat or similar law.
(e) The Merger Consideration paid in the Merger shall be net to the
holder of Shares in cash, subject to reduction only for any applicable Federal
withholding taxes or, as set forth in Section 2.3(b), stock transfer taxes
payable by such holder.
Section 2.4 Company Stock Plans.
-------------------
15
<PAGE>
(a) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
(i) "Cash-Out Options" shall mean each option outstanding at the
----------------
Effective Time to purchase Shares (an "Option") granted under (A) the Company's
------
1990 Stock Option Plan, 1994 Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan, or Stock Option Plan for Non-Employee
Directors, (B) the Manzanita Software Systems 1985 Stock Option Plan or (C) any
other stock-based incentive plan or arrangement of the Company excluding any
options granted under the Company's 1997 Employee Stock Purchase Plan (the
"Stock Plans") that is not an Assumed Option (as defined below).
- ------------
(ii) "Assumed Options" shall mean those Options or portions there
---------------
of as identified on Schedule 2.4(a) granted under the Company's 1990 Stock
Option Plan or 1994 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan that will not have vested and become exercisable
as of the Effective Time as identified on Section 2.4(a) of the Company
Disclosure Schedule having an aggregate exercise price on the date hereof in an
amount not materially less than $5 million. To the extent any Options or
portions thereof, as identified on Schedule 2.4(a), cannot be assumed by Parent,
such Options or portions thereof shall be treated as Cash-Out Options and shall
be cancelled as of the Effective Time in consideration for a cash payment in
accordance with Section 2.4(b).
(iii) "Exchange Ratio" shall mean the quotient of (x) the Offer
--------------
Price multiplied by the average of the mid-point of the bid and ask price of the
rate of currency exchange of pounds sterling for U.S. dollars quoted in The
Financial Times for each of the business days in a consecutive twenty business
period ending two business days prior to the Effective Date and (y) the average
per Share closing price of the ordinary shares of 1 pence each in the capital of
Parent (a "Parent Common Share") as reported on the London Stock Exchange on
-------------------
each of the ten trading days immediately preceding the Effective Time.
(b) The Company shall take all actions necessary to provide that at
the Effective Time, (i) each Cash-Out Option shall be cancelled and (ii) in
consideration of such cancellation, each holder of a Cash-Out Option shall
receive in consideration thereof an amount (subject to any applicable
withholding tax) in cash equal to the product of (x) the excess, if any, of the
Offer Price over the per Share exercise price of such Cash-Out Option and (y)
the number of Shares subject to such Cash-Out Option. The Company shall use all
commercially reasonable efforts to
16
<PAGE>
effectuate the foregoing, including without limitation amending the Stock Plans
and obtaining any necessary consents from holders of Cash-Out Options.
(c) At the Effective Time, each Assumed Option shall be assumed by
Parent (and Parent shall take all action necessary under applicable law, to
cause such result or equivalent result without disadvantage to the Option
holders) and shall thereupon constitute an option to acquire that number of
Parent Common Shares equal to (i) the number of Shares subject to the Assumed
Option immediately prior to the Effective Time, multiplied by (ii) the Exchange
Ratio, rounded down to the nearest whole share, at a price per Parent Common
Share equal to (x) the exercise price of the Assumed Option immediately prior to
the Effective Time, divided by (y) the Exchange Ratio, rounded up to the nearest
whole cent. Other than as described in the immediately preceding sentence, the
Assumed Options shall be subject to the same terms and conditions as applicable
immediately prior to the Effective Time; provided, however, that the terms of
-------- -------
the Stock Plans shall be amended as necessary to comply with all applicable
securities laws and laws of the jurisdiction of the Parent (but without
disadvantage to the option holder). As soon as reasonably practicable following
the Effective Time, Parent shall deliver to each holder of an Assumed Option an
appropriate notice setting forth the terms of such assumption. With respect to
any Assumed Option that is an incentive stock option (within the meaning of
Section 422 of the Code) immediately prior to the Effective Time, such
assumption shall, to the extent reasonably practicable, conform to the
requirements of Section 424(a) of the Code. Parent shall take all action
necessary for the Parent Common Shares to rank pari passu in all respects with
all other Parent Common Shares then in issue and to be listed and issuable upon
exercise of the Assumed Options so that such Assumed Options shall be freely
tradeable on the London Stock Exchange. Notwithstanding the foregoing
provisions of this Section 2.4(c), to the extent any Option or portion thereof
is not assumed pursuant to this Section 2.4(c), such Options or portion thereof
shall be treated as a Cash-Out Option.
(d) Except as may be otherwise agreed to by Parent or the Purchaser
and the Company or as otherwise contemplated or required to effectuate this
Section 2.4, the Stock Plans shall terminate as of the Effective Time and the
provisions in any other plan, program or arrangement providing for the issuance
or grant of any other interest in respect of the capital stock of the Company or
any of its Subsidiaries shall be deleted as of the Effective Time.
(e) The Company shall take all necessary actions to provide that as of
the Effective Time no holder of Options under the Stock Plans will have any
17
<PAGE>
right to receive shares of common stock of the Surviving Corporation upon
exercise of any such Option.
(f) The Company shall take all actions necessary to provide that at or
immediately prior to the Effective Time, (i) each then outstanding option under
the Company's 1997 Employee Stock Purchase Plan (the "Stock Purchase Plan")
-------------------
shall automatically be exercised and (ii) in lieu of the issuance of
Certificates, each option holder shall receive an amount in cash (subject to any
applicable withholding tax) equal to the product of (x) the number of Shares
otherwise issuable upon such exercise and (y) the Merger Consideration. The
Company shall use all reasonable efforts to effectuate the foregoing, including
without limitation amending the Stock Purchase Plan and obtaining any necessary
consents from holders of Options. The Company (i) shall not permit the
commencement of any new offering period under the Stock Purchase Plan following
the date hereof, (ii) shall not permit any optionee to increase his or her rate
of contributions under the Stock Purchase Plan following the date hereof, (iii)
shall terminate the Stock Purchase Plan as of the Effective Time, and (iv) shall
take any other actions necessary to provide that as of the Effective Time no
holder of options under the Stock Purchase Plan will have any right to receive
shares of common stock of the Surviving Corporation upon exercise of any such
option.
(g) Notwithstanding anything in this Agreement to the contrary, a vote
of a majority of the Independent Directors shall be required to amend this
Section 2.4 in any manner adverse to the holders of Options described herein.
(h) In the event that an employee of the Company who is a holder of
Cash-Out Options is terminated by the Company without cause after the
consummation of the Offer but prior to the Effective Time, such employee shall
receive on the Effective Date with respect to all Cash-Out Options held by such
employee as of the date of such termination of employment the cash payment
determined in accordance with Section 2.4(b) that such employee would have
received had such employee been employed as of the Effective Date.
18
<PAGE>
ARTICLE III
REPRESENTATIONS AND
WARRANTIES OF THE COMPANY
Except as set forth in the schedule delivered to Parent prior to the
execution of this Agreement (the "Company Disclosure Schedule") of exceptions to
---------------------------
the Company's representations and warranties set forth herein, the Company
represents and warrants to Parent and the Purchaser as set forth below. Each
exception set forth in the Company Disclosure Schedule is identified by
reference to, or has been grouped under a heading referring to, a specific
individual section of this Agreement.
Section 3.1 Organization.
------------
(a) Each of the Company and its Subsidiaries (as defined below) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation or organization and has all requisite
corporate power or other and authority and all necessary governmental approvals
to own, lease and operate its properties and to carry on its business as now
being conducted, except where the failure to be so organized, existing and in
good standing or to have such power, authority, and governmental approvals would
not, individually or in the aggregate, have a Company Material Adverse Effect
(as hereinafter defined). As used in this Agreement, the term "Subsidiary"
----------
shall mean, with respect to any party, any corporation or other organization,
whether incorporated or unincorporated or domestic or foreign to the United
States of which (i) such party or any other Subsidiary of such party is a
general partner (excluding such partnerships where such party or any Subsidiary
of such party do not have a majority of the voting interest in such partnership)
or (ii) at least a majority of the securities or other interests having by their
terms ordinary voting power to elect a majority of the board of directors or
others performing similar functions with respect to such corporation or other
organization is directly or indirectly owned or controlled by such party or by
any one or more of its Subsidiaries, or by such party and one or more of its
Subsidiaries. As used in this Agreement, "Company Material Adverse Change" or
-------------------------------
"Company Material Adverse Effect" means any change or effect that is materially
-------------------------------
adverse to (i) the business, operations, properties (including intangible
properties), financial condition, results of operations or assets of the Company
and its Subsidiaries, taken as a whole, or (ii) the ability of the Company to
consummate any of the Transactions or to perform its obligations under this
Agreement or the Option Agreement, other than changes or effects which are or
result from occurrences relating to the economy
19
<PAGE>
in general or such entity's industry in general and not specifically relating to
such entity, the delay or cancellation of orders for the Company's products
directly attributable to the announcement of this Agreement or stockholder
litigation brought or threatened against the Company or any member of its Board
of Directors in respect to this Agreement, the Offer, or the Merger, including
all costs and expenses in connection therewith and other fees and expenses
incurred by the Company in connection with the Transactions as contemplated
hereby. The Company Disclosure Schedule sets forth in Section 3.1(a) a complete
list of the Company's Subsidiaries.
(b) The Company and each of its Subsidiaries is duly qualified or
licensed to do business and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not individually
or in the aggregate have a Company Material Adverse Effect. Except as set forth
in Section 3.1(b) of the Company Disclosure Schedule, other than its
Subsidiaries, the Company does not own any significant equity interest in any
corporation or other entity.
Section 3.2 Capitalization.
--------------
(a) The authorized capital stock of the Company consists of (i)
25,000,000 shares of common stock, no par value per share (the "Common Stock")
------------
and (ii) 1,000,000 shares of preferred stock (the "Preferred Stock"). As of
---------------
December 31, 1997, (i) 11,173,945 Shares are issued and outstanding, (ii) no
shares of Preferred Stock are issued and outstanding, (iii) pursuant to
California law no Shares are issued and held in the treasury of the Company, and
(iv) a total of 1,709,227 Shares are reserved for issuance pursuant to the Stock
Plans, of which (A) 260,550 Shares are reserved for issuance pursuant to
outstanding Options and 33,670 Shares are reserved for issuance pursuant to
future awards, in each case under the Company's 1990 Stock Option Plan, (B)
1,284,736 Shares are reserved for issuance pursuant to outstanding Options, no
Shares have been issued as shares of restricted stock that have not vested as of
the date hereof, and 408,479 Shares are reserved for issuance pursuant to future
awards, in each case under the Company's 1994 Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan, (C) 145,000 Shares
are reserved for issuance pursuant to outstanding Options, and 55,000 Shares are
reserved for issuance pursuant to future awards, in each case under the
Company's Stock Plan for Non-Employee Directors, and (D) 18,941 Shares are
reserved for issuance pursuant to outstanding Options, and 635 shares are
reserved for issuance pursuant to future awards, in each case under the 1985
Manzanita Stock
20
<PAGE>
Option Plan, and (v) assuming that the Effective Date were to occur on or about
March 26, 1998, approximately 6,515 Shares would be issuable upon the exercise
of options outstanding under the Company's 1997 Employee Stock Purchase Plan at
a price of $13.8125 per Share. All the outstanding shares of the Company's
capital stock are, and all Shares which may be issued pursuant to the exercise
of outstanding Options will be, when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and non-assessable. There
are no bonds, debentures, notes or other indebtedness having general voting
rights (or convertible into securities having such rights) ("Voting Debt")
-----------
of the Company or any of its Subsidiaries issued and outstanding. Except as
disclosed in this Section 3.2 or as set forth in Section 3.2(a) of the Company
Disclosure Schedule, other than pursuant to the Option Agreement, (i) there are
no shares of capital stock of the Company authorized, issued or outstanding,
(ii) there are no existing options, warrants, calls, pre-emptive rights,
subscriptions or other rights, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of the Company or
any of its Subsidiaries, obligating the Company or any of its Subsidiaries to
issue, transfer or sell or cause to be issued, transferred or sold any shares of
capital stock or Voting Debt of, or other equity interest in, the Company or any
of its Subsidiaries or securities convertible into or exchangeable for such
shares or equity interests, or obligating the Company or any of its Subsidiaries
to grant, extend or enter into any such option, warrant, call, subscription or
other right, agreement, arrangement or commitment, and (iii) except as set forth
in Section 3.2(a) of the Company Disclosure Schedule, there are no outstanding
contractual obligations of the Company or any of its Subsidiaries to repurchase,
redeem or otherwise acquire any Shares, or the capital stock of the Company or
any Subsidiary or affiliate of the Company or to provide funds to make any
investment (in the form of a loan, capital contribution or otherwise) in any
Subsidiary or any other entity.
(b) All of the outstanding shares of capital stock of each of the
Subsidiaries are beneficially owned by the Company, directly or indirectly, and
all such shares have been validly issued and are fully paid and nonassessable
and are owned by either the Company or one of its Subsidiaries free and clear of
all liens, charges, security interests, options, claims, mortgages, pledges, or
other encumbrances and restrictions of any nature whatsoever ("Encumbrances").
------------
(c) There are no voting trusts or other agreements or understandings
to which the Company or any of its Subsidiaries is a party with respect to the
voting of the capital stock of the Company or any of the Subsidiaries.
21
<PAGE>
Section 3.3 Authorization; Validity of Agreement; Company Action.
----------------------------------------------------
(a) The Company has full corporate power and authority to execute and
deliver this Agreement, the Option Agreement and to consummate the Transactions.
The execution, delivery and performance by the Company of this Agreement and the
Option Agreement, and the consummation by it of the Transactions, have been duly
and validly authorized by its Board of Directors and, no other corporate action
on the part of the Company is necessary (other than, with respect to the Merger,
the approval and adoption of the Merger and this Agreement by holders of the
Shares to the extent required by the Company's articles of incorporation and by
applicable law) to authorize the execution and delivery by the Company of this
Agreement and the Option Agreement, and the consummation by it of the
Transactions contemplated hereby. Each of this Agreement and the Option
Agreement has been duly executed and delivered by the Company and, assuming due
and valid authorization, execution and delivery hereof by Parent and the
Purchaser, is a valid and binding obligation of the Company enforceable against
the Company in accordance with its terms except that (i) such enforcement may be
subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceedings therefor may be brought.
Section 3.4 Consents and Approvals; No Violations. Except as set
-------------------------------------
forth in Section 3.4 of the Company Disclosure Schedule, none of the execution,
delivery or performance of this Agreement by the Company, the consummation by
the Company of the Transactions or compliance by the Company with any of the
provisions hereof will (i) conflict with or result in any breach of any
provision of the Articles of Incorporation, the By-laws or similar
organizational documents of the Company or any of its Subsidiaries, state
securities laws or blue sky laws and the GCL, (ii) require any filing by the
Company with, or permit, authorization, consent or approval of, any court,
arbitral tribunal, administrative agency or commission or other governmental or
other regulatory authority or agency, foreign or domestic (a "Governmental
------------
Entity") (except for (A) compliance with any applicable requirements of the
- ------
Exchange Act, (B) the filing of an agreement of merger together with an
officer's certificate of the Company and the Purchaser pursuant to the GCL, (C)
filings, permits, authorizations, consents and approvals as may be required
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"HSR Act"), (D) the filing with the SEC and the Nasdaq Stock Market, Inc. of (1)
-------
the Schedule 14D-9, (2) a proxy statement relating to shareholder approval, if
such
22
<PAGE>
approval is required by law and (3) such reports under Section 13(a) of the
Exchange Act as may be required in connection with this Agreement and the
transactions contemplated by this Agreement or (E) such filings and approvals as
may be required by any applicable state securities, "blue sky" or takeover
laws), (iii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default (or give rise to any right of
termination, amendment, cancellation or acceleration) under, any of the terms,
conditions or provisions of any note, bond, mortgage, indenture, lease, license,
contract, agreement or other instrument or obligation to which the Company or
any of its Subsidiaries is a party or by which any of them or any of their
properties or assets may be bound (the "Company Agreements") or (iv) violate any
------------------
order, writ, injunction, decree, statute, rule or regulation applicable to the
Company, any of its Subsidiaries or any of their properties or assets, except in
the case of clause (ii), (iii) or (iv) where failure to obtain such permits,
authorizations, consents or approvals or to make such filings, or where such
violations, breaches or defaults which would not, individually or in the
aggregate, have a Company Material Adverse Effect.
Section 3.5 SEC Reports and Financial Statements. The Company has
------------------------------------
filed with the SEC all forms, reports, schedules, statements and other documents
required to be filed by it since December 31, 1995 under the Exchange Act or the
Securities Act of 1933, as amended (the "Securities Act") (as such documents
--------------
have been amended since the time of their filing, collectively, the "Company SEC
-----------
Documents"). As of their respective dates, or if amended, as of the date of the
- ---------
last such amendment, the Company SEC Documents (a) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements made therein, in
light of the circumstances under which they were made, not misleading and (b)
complied in all material respects with the applicable requirements of the
Exchange Act and the Securities Act, as the case may be, and the applicable
rules and regulations of the SEC thereunder. None of the Company's Subsidiaries
is required to file any forms, reports or other documents with the SEC. The
financial statements included in the Company SEC Documents and the Company's
condensed consolidated statement of income for the year ended and condensed
consolidated balance sheet at December 31, 1997 (the "December 1997 Financial
-----------------------
Statements") (other than for the absence of footnotes, in the case of the
- ----------
December 1997 Financial Statements and interim financial statements)
(collectively, the "Financial Statements") (i) have been prepared from and are
--------------------
in accordance with, the books and records of the Company and its consolidated
Subsidiaries, (ii) comply in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC
23
<PAGE>
with respect thereto, (iii) have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
----
during the periods involved (except as may be indicated in the notes thereto and
except, in the case of the unaudited interim statements, as may be permitted
under Form 10-Q of the Exchange Act) and (iv) fairly present the consolidated
financial position and the consolidated results of operations and cash flows
(subject, in the case of unaudited interim financial statements, to normal year-
end adjustments) of the Company and its consolidated Subsidiaries as of the
times and for the periods referred to therein. A true, correct and complete
(other than the absence of footnotes) copy of the December 1997 Financial
Statements has been previously provided to Parent. The audited consolidated
financial statements of the Company for the year ended December 31, 1997 will
not be inconsistent with the December 1997 Financial Statements in any material
respect which is adverse.
Section 3.6 Absence of Certain Changes. Except as contemplated by
--------------------------
this Agreement and except as set forth in Section 3.6 of the Company Disclosure
Schedule or in the Company SEC Documents filed prior to the date hereof, since
December 31, 1997, the Company and its Subsidiaries have conducted their
respective businesses only in the ordinary and usual course. From December 31,
1997 through the date of this Agreement, there has not occurred (i) any event,
change or effect (including the incurrence of any liabilities of any nature,
whether or not accrued, contingent or otherwise) having, individually or in the
aggregate, a Company Material Adverse Effect, or (ii) any declaration, setting
aside or payment of any dividend or other distribution (whether in cash, stock
or property) with respect to the equity to the equity interests of the Company
or any of its Subsidiaries in accounting principles or methods, except insofar
as may be required by a change GAAP. Since December 31, 1997 neither the
Company nor any of its Subsidiaries has taken any of the actions prohibited by
Section 5.2 hereof.
Section 3.7 No Undisclosed Liabilities. Except (a) as recognized
--------------------------
or disclosed in the Financial Statements or the Company SEC Reports and (b) for
liabilities and obligations (i) incurred in the ordinary course of business
December 31, 1997, (ii) pursuant to the terms of this Agreement or (iii) as
disclosed in Section 3.7 of the Company Disclosure Schedule, (iv) as disclosed
in Section 3.8 of the Company Disclosure Schedule, or (v) as would not have a
Company Material Adverse Effect, neither the Company nor any of its Subsidiaries
has incurred any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise required by GAAP to be recognized or disclosed
on a consolidated balance sheet of the Company and its Subsidiaries or in the
notes thereto. Section 3.7 of the
24
<PAGE>
Company Disclosure Schedule sets forth the amount of principal and unpaid
interest outstanding under each instrument evidencing any material amount of
indebtedness for borrowed money of the Company and its Subsidiaries which will
accelerate or become due or result in a right of redemption or repurchase on the
part of the holder of such indebtedness (with or without due notice or lapse of
time) as a result of this Agreement, the Merger or the other transactions
contemplated hereby or thereby.
Section 3.8 Litigation. Except as set forth in Section 3.8 of the
----------
Company Disclosure Schedule or in the Company SEC Documents, as of the date
hereof, there is no suit, claim, action, proceeding, including, without
limitation, arbitration proceeding or alternative dispute resolution proceeding,
or investigation pending or, to the knowledge of the Company, threatened against
or affecting, the Company or any of its Subsidiaries before any Governmental
Entity as to which there is a reasonable possibility of an adverse determination
and that, either individually or in the aggregate, if adversely determined,
would have a Company Material Adverse Effect.
Section 3.9 Employee Benefit Plans; ERISA.
-----------------------------
(a) Except as disclosed in the Company SEC Documents, since the
audited financial statements for the year ended December 31, 1996 until the date
hereof, there has not been any adoption or amendment (or an agreement to adopt
or amend) in any material respect by the Company or any of its subsidiaries of
any material employment or collective bargaining agreement or any bonus,
pension, profit sharing, deferred compensation, incentive compensation, stock
ownership, stock purchase, stock option, phantom stock, stock appreciation right
or other stock-based incentive, retirement, vacation, severance, change in
control or termination pay, disability, death benefit, hospitalization, medical
or other insurance or any other plan, program, agreement, arrangement or
understanding (whether or not legally binding) providing benefits to any current
or former employee, officer or director of the Company or any Subsidiary
(collectively, the "Benefit Plans"). Except as disclosed in the Company SEC
-------------
Documents or in Section 3.9(a) of the Company Disclosure Schedule, there exist,
as of the date hereof, no material employment, severance, termination or
indemnification agreements, arrangements or understandings between the Company
or any of its Subsidiaries, and any current or former employee, officer or
director of the Company.
(b) Section 3.9(b) of the Company Disclosure Schedule contains a list
and brief description of all "employee pension benefit plans" (as defined in
25
<PAGE>
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")) (sometimes referred to herein as "Pension Plans"), "employee welfare
----- -------------
benefit plans" (as defined in Section 3(1) of ERISA) and all other material
Benefit Plans sponsored, maintained, contributed to or required to be
contributed to, by the Company or any of its Subsidiaries or any person or
entity that, together with the Company and its Subsidiaries, is treated as a
single employer under Section 414(b), (c), (m) or (o) of the Internal Revenue
Code of 1986, as amended (the "Code") (the Company and each such other person or
----
entity, a "Commonly Controlled Entity") for the benefit of any current or former
--------------------------
employees, officers or directors of the Company or any of its Subsidiaries. The
Company has made available to Parent true, complete and correct copies of (1)
each Benefit Plan (or, in the case of any unwritten Benefit Plans, descriptions
thereof), (2) the most recent annual report on Form 5500 filed with the Internal
Revenue Service with respect to each Benefit Plan (if any such report was
required), (3) the most recent summary plan description for each Benefit Plan
for which such summary plan description is required (together with all Summaries
of Material Modification issued with respect thereto), (4) each trust agreement
and group annuity contract relating to any Benefit Plan and (5) all material
contracts and employee communications relating to each Benefit Plan. Each
Benefit Plan has been administered materially in accordance with its terms. The
Company, each of its Subsidiaries and all the Benefit Plans are all in material
compliance with applicable provisions of ERISA, the Code and other applicable
laws.
(c) All Pension Plans have been the subject of determination, opinion,
notification or advisory letters from the Internal Revenue Service to the effect
that such Pension Plans are qualified and exempt from Federal income taxes under
Sections 401(a) and 501(a), respectively, of the Code, a true, complete and
correct copy of each such determination letter has been made available to
Parent, and no such determination, opinion, notification or advisory letter has
been revoked nor has any event occurred since the date of the most recent
determination letter or application therefor for each Pension Plan that would
adversely affect its qualification or materially increase its costs.
(d) Neither the Company, nor any of its Subsidiaries, nor any Commonly
Controlled Entity has at any time maintained, contributed or been obligated to
contribute to any Benefit Plan that is subject to Title IV of ERISA, including
without limitation any "multiemployer plan" (as defined in Section 4001(a)(3) of
ERISA).
26
<PAGE>
(e) Except as set forth in Section 3.9(e) of the Company Disclosure
Schedule, no employee of the Company or any of its Subsidiaries will be entitled
to any additional compensation or benefits or any acceleration of the time of
payment or vesting or any other enhancement of any compensation or benefits
under any Benefit Plan as a result of the transactions contemplated by this
Agreement.
(f) The deduction of any amount payable pursuant to the terms of the
Benefit Plans will not be subject to disallowance under Section 162(m) of the
Code.
(g) No amount that could be received (whether in cash or property or
the vesting of property) by any employee, officer or director of the Company or
any of its Subsidiaries under any employment, severance or termination
agreement, other compensation arrangement or other Benefit Plan currently in
effect would be an "excess parachute payment" (as such term is defined in
Section 28OG(b)(1) of the Code). No such person is entitled to receive any
additional payment from the Company or any of its Subsidiaries, the Surviving
Corporation or any other person (a "Parachute Gross-Up Payment") in the event
--------------------------
that the excise tax of Section 4999(a) of the Code is imposed on such person.
The Board of Directors of the Company has not granted to any officer, director
or employee of the Company any right to receive any Parachute Gross-Up Payment.
(h) No Benefit Plan provides benefits, including without limitation
death or medical benefits (whether or not insured), with respect to current or
former employees of the Company, its Subsidiaries or any Commonly Controlled
Entity after retirement or other termination of service, other than (i) coverage
mandated by applicable law, (ii) death benefits or retirement benefits under any
Pension Plan, (iii) deferred compensation benefits accrued as liabilities on the
books of the Company, the Subsidiary or any Commonly Controlled Entity, (iv)
benefits, the full cost of which is borne by the current or former employee,
officer or director (or his beneficiary), except in the event that a separation
or severance plan program or arrangement provides otherwise, (v) life insurance
benefits for which the employee dies while in service with the Company, or (vi)
any employee stock options which may be exercised after termination of
employment.
(i) There are no pending or, to the Company's knowledge, threatened or
anticipated claims by or on behalf of any Benefit Plan, by any employee or
beneficiary under any Benefit Plan or otherwise involving any Benefit Plan
(other than routine claims for benefits).
27
<PAGE>
(j) Neither the Company, the Subsidiary, any Commonly Controlled
Entity, any of the Benefit Plans, any trust created thereunder nor any trustee
or administrator thereof has engaged in a transaction or has taken or failed to
take any action in connection with which any such person or entity or any party
dealing with the Benefit Plans or any such trust could be subject to either a
civil penalty assessed pursuant to section 409 or 502(i) or ERISA or a tax
imposed pursuant to section 4975, 4976, or 4980B of the Code.
Section 3.10 Taxes.
-----
(a) Except as set forth in Section 3.10 of the Company Disclosure
Schedule:
(i) the Company and its Subsidiaries (x) have duly filed (or
there have been filed on their behalf) with the appropriate Tax Authorities
(as hereinafter defined) all material Tax Returns (as hereinafter defined)
required to be filed by them, and, to the knowledge and belief of the
Company, such Tax Returns are true, correct and complete in all material
respects, and (y) duly paid in full (or there has been paid on their
behalf), or have established reserves (in accordance with GAAP) as
reflected on the Financial Statements, all material Taxes (as hereinafter
defined) that are due and payable;
(ii) there are no material liens for Taxes upon any property or
assets of the Company or any Subsidiary thereof, except for liens for Taxes
not yet due or for which adequate reserves have been established in
accordance with GAAP;
(iii) as of the date hereof, no material Federal, state, local
or foreign Audits are pending with regard to any material Taxes or material
Tax Returns of the Company or its Subsidiaries and to the best knowledge of
the Company and its Subsidiaries no such Audit is threatened;
(iv) the United States federal income Tax Returns of the Company
and its Subsidiaries have been examined by the applicable Tax Authorities
(or the applicable statutes of limitation for the assessment of Taxes for
such periods have expired) for all periods through and including December
31, 1993, and as of the date hereof no material adjustments have been
asserted as a result of such examinations which have not been (I)
28
<PAGE>
resolved and fully paid, or (II) reserved on the Financial Statements in
accordance with GAAP;
(b) "Audit" means any audit, assessment, or other examination relating
-----
to Taxes by any Tax Authority or any judicial or administrative proceedings
relating to Taxes. "Tax" or "Taxes" means all Federal, state, local, and
--- -----
foreign taxes, and other assessments of a similar nature (whether imposed
directly or through withholding), including any interest, additions to tax, or
penalties applicable thereto, imposed by any Tax Authority. "Tax Authority"
-------------
means the Internal Revenue Service and any other domestic or foreign
governmental authority responsible for the administration of any Taxes. "Tax
---
Returns" mean all Federal, state, local and foreign tax returns, declarations,
- -------
statements, reports, schedules, forms, and information returns and any
amendments thereto.
Section 3.11 Contracts. Each Company Agreement is valid, binding
---------
and enforceable and in full force and effect, except where failure to be valid,
binding and enforceable and in full force and effect would not have a Company
Material Adverse Effect, and there are no defaults thereunder, except those
defaults that would not have a Company Material Adverse Effect. Section 3.11 of
the Company Disclosure Schedule sets forth a true and complete list of (i) all
material Company Agreements (defined as any agreement required to be filed as an
Exhibit to an Annual Report on Form 10-K of the Company pursuant to Item
601(b)(10) of Regulation S-K) entered into by the Company or any of its
Subsidiaries since December 31, 1996 and all amendments to any Company
Agreements included as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1996 and (ii) all non-competition
agreements imposing restrictions on the ability of the Company or any of its
Subsidiaries to conduct business in any jurisdiction or territory.
Section 3.12 Real Property.
-------------
(a) Section 3.12 of the Company Disclosure Schedule sets forth a
complete list of all real property owned by the Company or its Subsidiaries (the
"Real Property"). Except as set forth in Section 3.12 of the Company Disclosure
-------------
Schedule, the Company or its Subsidiaries has good and marketable title to the
Real Property, free and clear of all Encumbrances. Copies of (i) all deeds,
title insurance policies and surveys of the Real Property and (ii) all documents
evidencing all Encumbrances upon the Real Property have been furnished to
Parent. Except as disclosed in Section 3.12 of the Company Disclosure Schedule,
the Company is not a
29
<PAGE>
party to any lease, assignment or similar arrangement under which the Company is
a lessor, assignor or otherwise makes available for use by any third party any
portion of the Real Property.
(b) The Company has not received any notice of or other writing
referring to any requirements or recommendations by any insurance company that
has issued a policy covering any part of the Real Property or by any board of
fire underwriters or other body exercising similar functions, requiring or
recommending any repairs or work to be done on any part of the Real Property.
The plumbing, electrical, heating, air conditioning, ventilating and all other
structural or material mechanical systems in the buildings upon the Real
Property are in good working order and working condition, so as to be adequate
for the operation of the business of the Company as heretofore conducted, and
the roof, basement and foundation walls of all buildings on the Real Property
are free of leaks and other material defects, except for any matter otherwise
covered by this sentence which does not have, individually or in the aggregate,
a Company Material Adverse Effect.
(c) The Company has obtained all appropriate licenses, permits,
easements and rights of way, including proofs of dedication, required to use and
operate the Real Property in the manner in which the Real Property is currently
being used and operated, except for such licenses, permits or rights of way the
failure of which to have obtained does not have, individually or in the
aggregate, a Company Material Adverse Effect.
(d) The Company has not received notification that the Company is in
violation of any applicable building, zoning, anti-pollution, health or other
law, ordinance or regulation in respect of the Real Property or structures or
their operations thereon and no such violation exists.
Section 3.13 Intellectual Property. Other than as would not have a
---------------------
Company Material Adverse Effect, the Company and its Subsidiaries own free and
clear of all liens and encumbrances, or are validly licensed or otherwise have
the right to use, all trademarks, trade secrets, trademark rights, trade names,
trade name rights, service marks, service mark rights, and copyrights, and to
the Company's knowledge, all patents and patent applications, and other
proprietary intellectual property rights which are used in the conduct of the
business of the Company and its Subsidiaries either individually or taken as a
whole (collectively, "Intellectual Property Rights"). Except as would not have
----------------------------
a Company Material Adverse Effect, to the knowledge of the Company, all patents,
copyrights, and trademarks, and all
30
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registrations and applications relating thereto (i) have been duly maintained
(including the proper, sufficient and timely submission of all necessary filings
and fees), (ii) have not lapsed, expired or been abandoned, and (iii) are not
the subject of any opposition, interference, cancellation or other proceeding
before any governmental registration or other authority in any jurisdiction.
Except as would not have Company Material Adverse Effect, (x) the Company will
continue to own or be licensed to the Intellectual Property Rights after
consummation of the Offer and the Merger (consistent with their ownership and
license rights prior to said consummation) and (y) the consummation of the Offer
and Merger will not result in the material breach of any license, sublicense or
other agreement relating to the Intellectual Property Rights. Except as would
not have Company Material Adverse Effect, to the knowledge of the Company, no
claim, suit, action or proceeding involving any infringement of, or conflict
with, any intellectual property rights of any third party has been made or
asserted against the Company or any of its Subsidiaries in respect of the
operation of the Company's or any Subsidiary's business, nor is there any basis
for such. Except as would not have Company Material Adverse Effect, to the
knowledge of the Company, no person is infringing, or taking any action in
conflict with, the rights of the Company or any Subsidiary with respect to any
Intellectual Property Right. Except as would not have a Company Material Adverse
Effect, to the knowledge of the Company, neither the Company nor any Subsidiary
has licensed, or otherwise granted, to any third party, any rights in or to any
material Intellectual Property Rights other than in the ordinary course of the
Company's business of licensing applications software to resellers and end-
users.
Except where such disclosure would not have a Company Material Adverse
Effect, no trade secret, know-how or other confidential information relating to
the Company or its Subsidiaries has been disclosed or authorized to be disclosed
to any third party, other than pursuant to a standard non-disclosure agreement.
Section 3.14 Labor Matters. The Company and each of its
-------------
Subsidiaries has good labor relations and there are no controversies pending, or
to the knowledge of the Company, threatened between the Company and any of its
Subsidiaries and any of their respective employees, which failure to have good
labor relations or controversies would have, individually or in the aggregate, a
Company Material Adverse Effect. There are no collective bargaining or other
labor union agreements to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound. Since
December 31, 1996, neither the Company nor any of its Subsidiaries has
encountered any labor union organizing
31
<PAGE>
activity, nor had any actual or threatened employee strikes, work stoppages,
slowdowns or lockouts.
Section 3.15 Compliance with Laws. The Company and its Subsidiaries
--------------------
have complied in a timely manner and in all material respects with all laws,
rules and regulations, ordinances, judgments, decrees, orders, writs and
injunctions of all United States federal, state, local, foreign governments and
agencies thereof which affect the business, properties or assets of the Company
and its Subsidiaries, except for instances of possible noncompliance that
individually or in the aggregate would not have Company material Adverse Effect,
and no notice, charge, claim, action or assertion has been received by the
Company or any of its Subsidiaries or has been filed, commenced or, to the
Company's knowledge, threatened against the Company or any of its Subsidiaries
alleging any violation of any of the foregoing, except for instances of possible
noncompliance that individually or in the aggregate would not have Company
Material Adverse Effect. All licenses, permits and approvals required under such
laws, rules and regulations are in full force and effect except where the
failure to be in full force and effect would not have a Company Material Adverse
Effect.
Section 3.16 Environmental Matters. Except as set forth in Section
---------------------
3.16 of the Company Disclosure Schedule, (a) the Company and its Subsidiaries
are in compliance in all material respects with federal, state, local and
foreign laws and regulations relating to pollution or protection or preservation
of human health or the environment, including, without limitation, laws and
regulations relating to emissions, discharges, releases or threatened releases
of toxic or hazardous substances or hazardous waste, petroleum and petroleum
products, asbestos or asbestos-containing materials, polychlorinated biphenyls,
radon, or lead or lead-based paints or materials ("Materials of Environmental
--------------------------
Concern"), or otherwise relating to the generation, storage, containment
- -------
(whether above ground or underground), disposal, transport or handling of
Materials of Environmental Concern, or the preservation of the environment or
mitigation of adverse effects thereon (collectively, "Environmental Laws"), and
------------------
including, but not limited to, compliance with any permits or other governmental
authorizations or the terms and conditions thereof, except where noncompliance
is not reasonably likely to have a Company Material Adverse Effect; (b) neither
the Company nor any of its Subsidiaries has received any communication or
notice, whether from a governmental authority or otherwise, alleging any
violation of or noncompliance with any Environmental Laws by any of the Company
or its Subsidiaries or for which the any of them is responsible, and there is no
pending or, to the Company's knowledge, no threatened claim, action,
investigation or notice by any
32
<PAGE>
person or entity alleging potential liability for investigatory, cleanup or
governmental response costs, or natural resources or property damages, or
personal injuries, attorney's fees or penalties relating to (i) the presence, or
release into the environment, of any Materials of Environmental Concern at any
location owned or operated by the Company or its Subsidiaries, now or in the
past, or (ii) any violation, or alleged violation, of any Environmental Law
(collectively, "Environmental Claims"), except where such notices,
--------------------
communications or Environmental Claims would not have a Company Material Adverse
Effect; and (c) to the Company's knowledge, there are no past or present facts
or circumstances that are reasonably likely to form the basis of any
Environmental Claim against the Company or its Subsidiaries or against any
person or entity whose liability for any Environmental Claim the Company or its
Subsidiaries have retained or assumed either contractually or by operation of
law, except where such Environmental Claim, if made, would not have a Company
Material Adverse Effect.
Section 3.17 Product Warranties. Except as described in Section
------------------
3.17 of the Company Disclosure Schedule, all products are sold or licensed by
the Company pursuant to terms that provide (i) the Company's disclaimer of all
warranties, express or implied, including those of merchantability and fitness
for a particular purpose; (ii) the Company's disclaimer of all consequential
damages arising from the use or possession of the product, regardless of whether
such liability is based in tort, contract or otherwise; and (iii) language
stating that if the foregoing disclaimers are held to be unenforceable, the
Company's maximum liability shall not exceed the amount of money(ies) paid for
such product(s), except, in each case, where the failure so to provide would not
have a Company Material Adverse Effect.
Section 3.18 Information in Proxy Statement. The Proxy Statement,
------------------------------
if any (or any amendment thereof or supplement thereto), at the date mailed to
Company shareholders and at the time of the meeting of Company shareholders to
be held in connection with the Merger, will not contain any untrue statement of
a material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to statements made therein
based on information supplied in writing by Parent or the Purchaser expressly
for inclusion in the Proxy Statement. The Proxy Statement will comply in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder.
33
<PAGE>
Section 3.19 Related Party Transactions. Except as set forth in
--------------------------
the Company SEC Documents or on Schedule 3.19 hereto, no director, officer, or
"affiliate" (as such term is defined in Rule 12b-2 under the Exchange Act) of
the Company (i) has outstanding any indebtedness or other similar obligations to
the Company or any of its Subsidiaries, other than ordinary course of business
travel advances or (ii) other than employment related benefits agreements
contemplated by or disclosed in this Agreement, is a party to any legally
binding contract, commitment or obligation to, from or with the Company or any
Subsidiary of the Company.
Section 3.20 Opinion of Financial Advisor. The Company has
----------------------------
received the written opinion of UBS, dated the date hereof, to the effect that,
as of such date, the consideration to be received in the Offer and the Merger by
the Company's shareholders is fair to the Company's shareholders from a
financial point of view, a copy of which opinion has been delivered to Parent
and the Purchaser.
Section 3.21 Insurance. The Company and each of its Subsidiaries
---------
have policies of insurance and bonds of the type and in amounts customarily
carried by persons conducting businesses or owning assets similar to those of
the Company and its Subsidiaries. Except as disclosed in Section 3.21 of the
Company Disclosure Schedule, there is no material claim pending under any of
such policies or bonds as to which coverage has been questioned, denied or
disputed by the underwriters of such policies or bonds. All premiums due and
payable under all such policies and bonds have been paid and the Company and its
Subsidiaries, to the knowledge of the Company, are otherwise in compliance in
all material respects with the terms of such policies and bonds. The Company
has no knowledge of any threatened termination of, or material premium increase
with respect to, any of such policies. This Section 3.21 shall not apply to any
insurance providing for employee benefits.
Section 3.22 State Takeover Statutes; Required Vote. Except for
--------------------------------------
Section 1101 of the GCL, no California takeover statute or similar statute
applies or purports to apply to the Offer or the Merger, or to this Agreement,
the Option Agreement or the Shareholder Agreements or the transactions
contemplated hereby or thereby. Subject to Section 1101 of GCL, in the event
the Shareholders' Meeting is required to approve the Merger and the adoption of
this Agreement the approval by the holders of a majority of the outstanding
Shares is the only vote required to approve the Merger and the adoption of this
Agreement.
Section 3.23 Brokers. No brokers, investment bankers, financial
-------
advisors or other persons, the fees and expenses of which will be paid by
Company,
34
<PAGE>
are or will be entitled in the aggregate to any broker's, finder's, financial
advisor's or other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company other than amounts not in excess of the amount contemplated by the
engagement and related fee letter between the Company and UBS, true, correct and
complete copies of which have been delivered to Parent.
Section 3.24 Full Disclosure. To the knowledge of the Company, the
---------------
representations and warranties by the Company in this Agreement and the
documents referred to herein (including the Schedules and Exhibits hereto),
taken together with all the other information provided to the Parent or its
counsel in connection with the transactions contemplated hereby, do not contain
any untrue statements of a material fact or omit to state any material fact
necessary, in order to make the statements made herein or therein, in light of
the circumstances under which they were made, not misleading.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF PARENT AND THE PURCHASER
Parent and the Purchaser represent and warrant to the Company as
follows:
Section 4.1 Organization. Each of Parent and the Purchaser is a
------------
corporation duly organized and validly existing under the laws of the
jurisdiction of its incorporation or organization and has all requisite
corporate power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as now being
conducted, except where the failure to be so organized and existing or to have
such power, authority, and governmental approvals would not, individually or in
the aggregate, impair in any material respect the ability of each of Parent and
the Purchaser to perform its obligations under this Agreement, as the case may
be, or prevent or materially delay the consummation of any of the Transactions.
Section 4.2 Authorization; Validity of Agreement; Necessary Action.
------------------------------------------------------
Each of Parent and the Purchaser has full corporate power and authority to
execute and deliver this Agreement and to consummate the Transactions. The
execution,
35
<PAGE>
delivery and performance by Parent and the Purchaser of this Agreement and the
consummation of the Merger and of the Transactions have been duly authorized by
the boards of directors of the Purchaser and Parent and by Parent and a wholly
owned Subsidiary of Parent as the sole shareholders of the Purchaser, and no
other corporate authority or approval on the part of Parent or the Purchaser is
necessary to authorize the execution and delivery by Parent and the Purchaser of
this Agreement and the consummation of the Transactions. This Agreement has been
duly executed and delivered by Parent and the Purchaser and, assuming due and
valid authorization, execution and delivery hereof by the Company, is a valid
and binding obligation of each of Parent and the Purchaser enforceable against
each of them in accordance with its terms, except that (i) such enforcement may
be subject to applicable bankruptcy, insolvency or other similar laws, now or
hereafter in effect, affecting creditors' rights generally, and (ii) the remedy
of specific performance and injunctive and other forms of equitable relief may
be subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
Section 4.3 Consents and Approvals; No Violations. None of the
-------------------------------------
execution, delivery or performance of this Agreement by Parent or the Purchaser,
the consummation by Parent or the Purchaser of the Transactions or compliance by
Parent or the Purchaser with any of the provisions hereof will (i) conflict with
or result in any breach of any provision of the organizational documents of
Parent or the Certificate of Incorporation or By-Laws of the Purchaser, (ii)
require any filing by Parent or the Purchaser with, or permit, authorization,
consent or approval of, any Governmental Entity (except for (i) compliance with
any applicable requirements of the Exchange Act, (ii) the filing of an agreement
of merger together with an officer's certificate of the Company and the
Purchaser pursuant to the GCL, (iii) filings, permits, authorizations, consents
and approvals as may be required under, the HSR Act, (iv) the filing with the
SEC and the Nasdaq Stock Market, Inc. of (A) the Schedule 14D-1, (B) a proxy
statement relating to shareholder approval, if such approval is required by law
and (C) such reports under Section 13(a) as may be required in connection with
this Agreement and the transactions contemplated by this Agreement or (iv) such
filings and approvals as may be required by any applicable state securities,
"blue sky" or takeover laws), (iii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under, any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, contract, agreement or other instrument or obligation to which
Parent, or any of its Subsidiaries or the Purchaser is a party or by which any
of them or any of their respective properties or assets may be bound, or (iv)
violate any order, writ, injunc-
36
<PAGE>
tion, decree, statute, rule or regulation applicable to Parent, any of its
Subsidiaries or any of their properties or assets, except in the case of clause
(ii), (iii) or (iv) such violations, breaches or defaults which would not,
individually or in the aggregate, impair in any material respect the ability of
each of Parent and the Purchaser to perform its obligations under this
Agreement, as the case may be, or prevent the consummation of any the
Transactions.
Section 4.4 Information in Proxy Statement. None of the information
------------------------------
supplied by Parent or the Purchaser in writing expressly for inclusion or
incorporation by reference in the Proxy Statement (or any amendment thereof or
supplement thereto) will, at the date mailed to shareholders and at the time of
the meeting of shareholders to be held in connection with the Merger, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements made
therein, in light of the circumstances under which they are made, not
misleading.
Section 4.5 Interim Operations of the Purchaser. The Purchaser was
-----------------------------------
formed solely for the purpose of engaging in the Transactions, has engaged in no
other business activities other than in connection with the Transaction as
contemplated hereby.
Section 4.6 Brokers. No broker, investment banker, financial
-------
advisor or other person, other than BT Alex.Brown and J Henry Schroder & Company
Limited, the fees and expenses of which will be paid by Parent, is entitled to
any broker's, finder's, financial advisor's or other similar fee or commission
in connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or Purchaser.
Section 4.7 Financing. Purchaser has, or will have available to it
---------
upon the consummation of the Offer, sufficient funds to consummate the
Transactions , including payment in full for all Shares validly tendered into
the Offer or outstanding at the Effective Time. Parent and the Purchaser have
received, and have furnished to the Company, true and complete copies of (i) the
Vendor Placing Agreement, dated January 27, 1998, between Parent and J. Henry
Schroder & Co. Limited and (ii) the Facilities Agreement, dated January 27,
1998, among Parent, the Purchaser, the Banks and Financial Institutions named in
Schedule 1 thereto, Lloyds Bank plc Capital Markets Group, as arranger, and
Lloyds Bank plc Capital Markets Group as agent (collectively, the "Financing
---------
Documents") with respect to the financing of the acquisition of the Shares in
- ---------
the Offer and the Merger (the "Financ-
------
37
<PAGE>
ing"). The aggregate proceeds of the Financing, together with internal corporate
- ---
funds of Parent or the Purchaser, are sufficient to acquire all of the Shares in
the Offer and the Merger and to pay anticipated expenses in connection
therewith. The Financing Documents are valid, binding and enforceable in
accordance with their terms and have not been revoked as of the date hereof.
Nothing has come to the attention of Parent or the Purchaser which would cause
either Parent or the Purchaser to believe that the proceeds of the Financing
will not be available to them by the Initial Expiration Date. Parent will not
enter into any amendments or supplements to the Financing Documents that would
materially reduce the likelihood of obtaining the Financing or any other
commitments and agreements from third parties to provide financing to Parent or
to the Purchaser without the prior written consent of the Company, which will
not be unreasonably withheld.
Section 4.8 Share Ownership. Neither Parent nor the Purchaser are
---------------
the beneficial owner of any shares of capital stock of the Company.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
Section 5.1 Acquisition Proposals. The Company will notify the
---------------------
Purchaser promptly if any proposals are received by, any information is
requested from, or any negotiations or discussions are sought to be initiated or
continued with the Company or its officers, directors, employees, investment
bankers, attorneys, accountants or other agents, in each case in connection with
any Acquisition Proposal (as hereinafter defined) or the possibility or
consideration of making an Acquisition Proposal ("Acquisition Proposal
--------------------
Interest") indicating, in connection with such notice, the name of the Person
- --------
indicating such Acquisition Proposal Interest and the material terms and
conditions of any proposals or offers. The Company agrees that it will
immediately cease and cause to be terminated any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any Acquisition Proposal Interest. The Company agrees that it shall keep
Parent informed, on a current basis, of the status and terms of any Acquisition
Proposal Interest. As used in this Agreement, "Acquisition Proposal" shall
--------------------
mean any tender or exchange offer involving the Company, any proposal for a
merger, consolidation or other business combination involving the Company, any
proposal or offer to acquire in any manner a substantial equity interest in, or
a substantial portion of the business or assets of, the Company (other than
immaterial or insubstantial assets or inventory in the ordinary course of
business or assets held for sale), any proposal or
38
<PAGE>
offer with respect to any recapitalization or restructuring with respect to the
Company or any proposal or offer with respect to any other transaction similar
to any of the foregoing with respect to the Company other than pursuant to the
transactions to be effected pursuant to this Agreement.
Section 5.2 Interim Operations of the Company. The Company covenants
---------------------------------
and agrees that, except (i) as expressly contemplated by this Agreement or the
Option Agreement, (ii) as set forth in Section 5.2 of the Company Disclosure
Schedule, (iii) in the ordinary course of business consistent with past practice
or (iv) as agreed in writing by Parent, after the date hereof, and prior to the
earlier of (x) the termination of this Agreement in accordance with Article VIII
hereof and (y) the time the designees of Parent have been elected to, and shall
constitute a majority of, the Board of Directors of the Company pursuant to
Section 1.3 hereof (the "Appointment Date"):
----------------
(a) the business of the Company and its Subsidiaries shall be
conducted only in the ordinary course consistent with past practice and each of
the Company and its Subsidiaries shall use its commercially reasonable efforts
to preserve its present business organization intact and maintain its
satisfactory relations with customers, suppliers, employees, contractors,
distributors and others having business dealings with it;
(b) the Company will not, directly or indirectly, (i) except upon
exercise of the Options or other rights to purchase shares of Common Stock
pursuant to the Stock Plans outstanding on the date hereof, issue, sell,
transfer or pledge or agree to sell, transfer or pledge any capital stock of any
of its Subsidiaries beneficially owned by it, (ii) amend its Articles of
Incorporation or By-laws or similar organizational documents; or (iii) split,
combine or reclassify the outstanding Shares or any outstanding capital stock of
the Company;
(c) neither the Company nor any of its Subsidiaries shall: (i)
declare, set aside or pay any dividend or other distribution payable in cash,
stock or property with respect to its capital stock; (ii) issue, sell, pledge,
dispose of or encumber any additional shares of, or securities convertible into
or exchangeable for, or options, warrants, calls, commitments or rights of any
kind to acquire, any shares of capital stock of any class of the Company or its
Subsidiaries, other than Shares reserved for issuance on the date hereof
pursuant to the exercise of the Options outstanding on the date hereof and
except with respect to any sales in accordance with the Stock Purchase Plan;
(iii) transfer, lease, license, sell, mortgage, pledge,
39
<PAGE>
dispose of, or encumber any of its material assets, or incur or modify any
material indebtedness or other liability, other than in the ordinary and usual
course of business and consistent with past practice; or (iv) redeem, purchase
or otherwise acquire any shares of any class or series of its capital stock, or
any instrument or security which consists of or includes a right to acquire such
shares except as permitted by Section 5.2(b) and other than in connection with
the exercise of options or rights under the Stock Plans and except with respect
to any sales in accordance with the Stock Purchase Plan;
(d) neither the Company nor any of its Subsidiaries shall make any
change in the compensation payable or to become payable to any of its officers,
directors, employees, agents or consultants (other than general increases in
wages to employees who are not directors or affiliates in the ordinary course
consistent with past practice), or to persons providing management services,
enter into or amend any employment, severance, consulting, termination or other
agreement or employee benefit plan or make any loans to any of its officers,
directors, employees, affiliates, agents or consultants or make any change in
its existing borrowing or lending arrangements for or on behalf of any of such
persons pursuant to an employee benefit plan or otherwise;
(e) neither the Company nor any of its Subsidiaries shall pay or make
any accrual or arrangement for payment of any pension, retirement allowance or
other employee benefit pursuant to any existing plan, agreement or arrangement
to any officer, director, employee or affiliate or pay or agree to pay or make
any accrual or arrangement for payment to any officers, directors, employees or
affiliates of the Company of any amount relating to unused vacation days, except
payments and accruals made in the ordinary course consistent with past practice;
adopt or pay, grant, issue, accelerate or accrue salary or other payments or
benefits pursuant to any pension, profit-sharing, bonus, extra compensation,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or other employee
benefit plan, agreement or arrangement, or any employment or consulting
agreement with or for the benefit of any director, officer, employee, agent or
consultant, whether past or present; or amend in any material respect any such
existing plan, agreement or arrangement in a manner inconsistent with the
foregoing;
(f) the Company shall not, in any material respect, modify, amend or
terminate any of the Company Agreements, and neither the Company nor
40
<PAGE>
any of its Subsidiaries shall waive, release or assign any material rights on
claims under any of the Company Agreements;
(g) neither the Company nor any of its Subsidiaries will (i) incur or
assume any long-term debt or any short-term indebtedness; (ii) assume,
guarantee, endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person; (iii) make
any loans, advances or capital contributions to, or investments in, any other
person; or (iv) enter into any material commitment or transaction (including,
but not limited to, any material borrowing, capital expenditure or purchase,
sale or lease of assets or real estate);
(h) neither the Company nor any of its Subsidiaries will (i) change
any of the accounting methods used by it materially affecting its assets,
liabilities or business, except for such changes required by GAAP or (ii) make
any material Tax election or change any material Tax election already made,
enter into any closing agreement or settle any material Tax Audit;
(i) neither the Company nor any of its Subsidiaries will pay,
discharge or satisfy any claims, liabilities or obligations (whether absolute,
accrued, contingent or otherwise), other than the payment, discharge or
satisfaction of any such claims, liabilities or obligations, in the ordinary
course of business and consistent with past practice, or of claims, liabilities
or obligations reflected or reserved against in, or contemplated by, the
consolidated financial statements (or the notes thereto) of the Company;
(j) except as otherwise permitted pursuant to Section 5.3, neither the
Company nor any of its Subsidiaries will adopt a plan of complete or partial
liquidation, dissolution, merger, consolidation, restructuring, recapitalization
or other reorganization of the Company or any of its Subsidiaries (other than
the Merger);
(k) neither the Company nor any of its Subsidiaries will take, or
agree in writing or otherwise to take, any action that would or is reasonably
likely to result in any of the conditions to the Merger set forth in Article VII
or any of the conditions to the Offer set forth in Annex I not being satisfied,
or would make many representation or warranty of the Company contained herein
inaccurate in any material respect at, or as of any time prior to, the Effective
Time, or that would materially impair the ability of the Company to consummate
the Merger in accordance with the terms hereof or materially delay such
consummation; and
41
<PAGE>
(l) subject to the exceptions and qualifications set forth above,
neither the Company nor any of its Subsidiaries will enter into any written
agreement, contract, commitment or arrangement to do any of the foregoing, or
authorize, recommend, propose, in writing or announce an intention to do any of
the foregoing.
Section 5.3 No Solicitation.
---------------
(a) Except as provided in Section 5.3(b) below, the Company, from the
date of this Agreement until the earlier of termination of this Agreement or
the Effective Time, will not nor shall it authorize or permit its officers,
directors, employees, investment bankers, attorneys, accountants and other
agents to (and, at the further request of Parent, will use reasonable efforts to
ensure that such persons do not) directly or indirectly (i) initiate, solicit or
knowingly encourage, or knowingly take any action to facilitate the making of,
any offer or proposal which constitutes or is reasonably likely to lead to any
Acquisition Proposal, (ii) enter into any agreement with respect to any
Acquisition Proposal, or (iii) in the event of an unsolicited Acquisition
Proposal for the Company engage in negotiations or discussions with, or provide
any information or data to, any Person (other than Parent, any of its affiliates
or representatives) relating to any Acquisition Proposal; provided, however,
-------- -------
that nothing contained in this Section 5.3 or any other provision hereof shall
prohibit the Company or the Company Board of Directors from (i) taking and
disclosing to the Company's shareholders its position with respect to tender or
exchange offer by a third party pursuant to Rules 14d-9 and 14e-2 promulgated
under the Exchange Act, (ii) making such disclosure to the Company's
shareholders as, in the good faith judgment of the Board of Directors, after
receipt of advice from outside legal counsel to the Company is necessary for the
Company Board of Directors to comply with its fiduciary duties to the Company's
shareholders under applicable law or (iii) otherwise complying with their
fiduciary duties to shareholders.
(b) Notwithstanding the foregoing, prior to the acceptance of Shares
pursuant to the Offer, the Company may furnish information concerning its
business, properties or assets to any Person pursuant to a confidentiality
agreement with terms no less favorable to the Company than those contained in
the Confidentiality Agreement, dated January 14, 1998 entered into between
Parent and the Company (the "Confidentiality Agreement") and may negotiate and
-------------------------
participate in discussions and negotiations with such Person concerning an
Acquisition Proposal if (x) such entity or group has on an unsolicited basis
submitted a bona fide written proposal to the Company relating to any such
transaction which the Board of Directors deter-
42
<PAGE>
mines in good faith, after receiving advice from a nationally recognized
investment banking firm, represents a superior transaction to the Offer and the
Merger which is not conditioned upon obtaining additional financing the
certainty of closing of which is less certain than the satisfaction of condition
set forth in paragraph (h) of Annex I and in Section 1.1(a) on conditions less
favorable to the Company than the Financing and (y) in the opinion of the
Company Board of Directors, only after receipt of advice from outside legal
counsel to the Company, the failure to provide such information or access or to
engage in such discussions or negotiations would cause the Board of Directors to
violate its fiduciary duties to the Company's shareholders under applicable law
(an Acquisition Proposal which satisfies clauses (x) and (y) being referred to
herein as a "Superior Proposal"). The Company shall promptly, and in any event
-----------------
within one business day following receipt of a Superior Proposal, notify Parent
of the receipt of the same and prior to providing any such party with any
material non-public information. The Company shall promptly provide to Parent
any material non-public information regarding the Company provided to any other
party which was not previously provided to Parent.
(c) Except as set forth herein, neither the Board of Directors of the
Company nor any committee thereof shall (i) withdraw or modify, or propose to
withdraw or modify, in a manner adverse to Parent or the Purchaser, the approval
or recommendation by such Board of Directors or any such committee of the Offer,
this Agreement or the Merger, (ii) approve or recommend or propose to approve or
recommend, any Acquisition Proposal or (iii) enter into any agreement with
respect to any Acquisition Proposal. Notwithstanding the foregoing, prior to
the time of acceptance for payment of Shares in the Offer, the Board of
Directors of the Company may (subject to the terms of this and the following
sentence) withdraw or modify its approval or recommendation of the Offer, this
Agreement or the Merger, approve or recommend a Superior Proposal, or enter into
an agreement with respect to a Superior Proposal, in each case at any time after
the fifth business day following the Company's delivery to Parent of written
notice advising Parent that the Board of Directors has received a Superior
Proposal, specifying the material terms and conditions of such Superior Proposal
and identifying the person making such Superior Proposal; provided that the
Company shall not enter into an agreement with respect to a Superior Proposal
unless the Company also shall have furnished Parent with written notice that it
intends to enter into such agreement.
43
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ARTICLE VI
ADDITIONAL AGREEMENTS
Section 6.1 Proxy Statement. As promptly as practicable after the
---------------
consummation of the Offer and if required by the Exchange Act, the Company shall
prepare and file with the SEC, and shall use all commercially reasonable efforts
to respond promptly to any comments made by the SEC, and promptly thereafter
shall mail to shareholders, the Proxy Statement. In such event, the Proxy
Statement shall contain the recommendation of the Board of Directors in favor of
the Merger.
Section 6.2 Meeting of Shareholders of the Company. At the Special
--------------------------------------
Meeting, if any, the Company shall use its commercially reasonable efforts to
solicit from Shareholders of the Company proxies in favor of the Merger and
shall take all other action necessary or, in the reasonable opinion of the
Purchaser, advisable to secure any vote or consent of shareholders required by
the GCL to effect the Merger. The Purchaser agrees that it shall vote, or cause
to be voted, in favor of the Merger all Shares directly or indirectly
beneficially owned by it.
Section 6.3 Additional Agreements. Subject to the terms and
---------------------
conditions as herein provided, the Company, Parent and Purchaser will each
comply in all material respects with all applicable laws and with all applicable
rules and regulations of any governmental authority to achieve the satisfaction
of the Minimum Condition and all conditions set forth in Annex I attached hereto
and Article VII hereof, and to consummate and make effective the Merger and the
other transactions contemplated hereby. Each of the parties hereto agrees to
use all commercially reasonable efforts to obtain in a timely manner all
necessary waivers, consents and approvals and to effect all necessary
registrations and filings, and to use all reasonable efforts to take, or cause
to be taken, all other actions and to do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective as promptly as
practicable the transactions contemplated by this Agreement. In case at any
time after the Effective Time any further action is necessary or desirable to
carry out the purposes of this Agreement, the proper officers and directors of
the Company, Parent and the Purchaser shall use all reasonable efforts to take,
or cause to be taken, all such necessary actions.
Section 6.4 Notification of Certain Matters. The Company shall give
-------------------------------
prompt notice to the Purchaser and the Purchaser shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence of any event whose occurrence,
or
44
<PAGE>
non-occurrence would be likely to cause either (x) any representation or
warranty contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Effective Time or (y) any
condition set forth in Annex I to be unsatisfied in any material respect at any
time from the date hereof to the date the Purchaser purchases Shares pursuant to
the Offer (except to the extent it refers to a specific date) and (ii) any
material failure of the Company, the Purchaser or Parent, as the case may be, or
any officer, director, employee or agent thereof, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
-------- -------
Section 6.4 shall not limit or otherwise affect the remedies available hereunder
to the party receiving such notice or the representations or warranties of the
parties or the conditions to the obligations of the parties hereto.
Section 6.5 Access; Confidentiality. From the date hereof to the
-----------------------
Effective Time, upon reasonable notice and subject to the terms of the
Confidentiality Agreement, the Company shall (and shall cause each of its
Subsidiaries to) afford to the officers, employees, accountants, counsel,
financing sources and other representatives of Parent, reasonable access, during
normal business hours during the period prior to the Appointment Date, to all
its properties, books, contracts, commitments and records and, during such
period, the Company shall (and shall cause each of its Subsidiaries to), subject
to any limitations imposed by law with respect to records of employees, furnish
promptly to the Parent (a) a copy of each report, schedule, registration
statement and other document filed or received by it during such period pursuant
to the requirements of federal securities laws and (b) all other information
concerning its business, properties and personnel as Parent may reasonably
request. Access shall include the right to conduct such environmental studies
and tests as Parent, in its reasonable discretion, shall deem appropriate,
subject to any limitations of, and within the rights to the Company, under the
Company's leases. Prior to conducting any such studies and test, Parent shall
submit to Company the names of the persons conducting the evaluations, the scope
of the evaluations, and other material information concerning such studies for
the Company's approval, which shall not be unreasonably withheld or delayed.
After the Appointment Date, the Company shall provide Parent and such persons as
Parent shall designate with all such information as is in Company's possession
or control and as Parent shall reasonably request, at such time as Parent shall
reasonably request. Unless otherwise required by law or regulation (including
stock exchange rules) and until the Appointment Date, Parent and Purchaser will
hold any such information which is non-public in confidence in accordance with
the terms of the Confidentiality Agreement (except as may be required by law or
by any listing agreement with or by the listing rules of the London
45
<PAGE>
Stock Exchange) and, in the event this Agreement is terminated for any reason,
Parent shall promptly return or destroy such information in accordance with
paragraph (6) of the Confidentiality Agreement. No investigation pursuant to
this Section 6.6 shall affect any representation or warranty made by the parties
hereunder.
Section 6.6 Consents and Approvals.
----------------------
(a) Each of Parent, the Purchaser and the Company will take all
reasonable actions necessary to comply promptly with all legal requirements
which may be imposed on it with respect to this Agreement and the Transactions
(which actions shall include, without limitation, furnishing all information
required under the HSR Act and in connection with approvals of or filings with
any other Governmental Entity) and will promptly cooperate with and, subject to
such confidentiality agreements as may be reasonably necessary or requested,
furnish information to each other or their counsel in connection with any such
requirements imposed upon any of them or any of their Subsidiaries in connection
with this Agreement and the Transactions. Each of the Company, Parent and the
Purchaser will, and will cause its Subsidiaries to, take all reasonable actions
necessary to obtain (and will cooperate with each other in obtaining) any
consent, authorization, order or approval of, or any exemption by, any
Governmental Entity or other public or private third party required to be
obtained or made by Parent, the Purchaser, the Company or any of their
Subsidiaries in connection with the Transactions or the taking of any action
contemplated thereby or by this Agreement.
(b) Each of the Company, the Purchaser and Parent shall take all
reasonable actions necessary to file as soon as practicable notifications under
the HSR Act, or under comparable merger notification laws of non-U.S.
jurisdictions and to respond as promptly as practicable to any inquiries
received from the Federal Trade Commission and the Antitrust Division of the
Department of Justice or the authorities of such other jurisdiction for
additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other Governmental Entity in connection with antitrust matters.
Section 6.7 Publicity. The initial press release with respect to
---------
the execution of this Agreement shall be a joint press release acceptable to
Parent and the Company. Thereafter, so long as this Agreement is in effect,
neither the Company, Parent nor any of their respective affiliates shall issue
or cause the publication of any press release or other announcement with respect
to the Merger, this Agreement or the other Transactions without the prior
consultation of the other party, except as such
46
<PAGE>
party believes, after receiving the advice of outside counsel, may be required
by law or by any listing agreement with or listing rules of a national
securities exchange or trading market or by the listing rules of The London
Stock Exchange (the "London Stock Exchange").
---------------------
Section 6.8 Directors' and Officers' Insurance and Indemnification.
------------------------------------------------------
(a) For six years after the Effective Time, the Surviving Corporation
(or any successor to the Surviving Corporation) shall indemnify, defend and hold
harmless the present and former officers and directors of the Company and its
Subsidiaries, and persons who become any of the foregoing prior to the Effective
Time (each an "Indemnified Party") against all losses, claims, damages,
-----------------
liabilities, costs, fees and expenses (including reasonable fees and
disbursements of counsel and judgments, fines, losses, claims, liabilities and
amounts paid in settlement (provided that any such settlement is effected with
the written consent of the Parent or the Surviving Corporation which consent
shall not unreasonably be withheld)) arising out of actions or omissions
occurring at or prior to the Effective Time to the full extent permissible under
applicable provisions of the GCL, the terms of the Company's Articles of
Incorporation or the By-laws, and under any agreements as in effect at the date
hereof (true and correct copies of which have been previously provided to
Parent); provided that, in the event any claim or claims are asserted or made
-------- ----
within such six-year period, all rights to indemnification in respect of any
such claim or claims shall continue until disposition of any and all such
claims.
(b) Parent or the Surviving Corporation shall maintain the Company's
existing officers' and directors' liability insurance ("D&O Insurance") for a
-------------
period of not less than six years after the Effective Time; provided, that the
-------- ----
Parent may substitute therefor policies of substantially equivalent coverage and
amounts containing terms no less favorable to such former directors or officers;
provided, further, if the existing D&O Insurance expires, is terminated or
- -------- -------
cancelled during such period, Parent or the Surviving Corporation will use all
reasonable efforts to obtain substantially similar D&O Insurance; provided,
--------
further, however, that in no event shall Parent be required to pay aggregate
- ------- -------
premiums for insurance under this Section 6.8(b) in excess of 150% of the
average of the aggregate premiums paid by the Company in 1996 and 1997 on an
annualized basis for such purpose, as adjusted for any increase in the Consumer
Price Index following the date of this Agreement, (the "Average Premium"), which
---------------
true and correct amounts are set forth in Section 6.8(b) of the Company
Disclosure Schedule; and provided, further, that if the Parent or the Surviving
-------- -------
Corporation is unable to obtain the amount of insurance required by this
47
<PAGE>
Section 6.8(b) for such aggregate premium, Parent or the Surviving Corporation
shall obtain as much insurance as can be obtained for an annual premium not in
excess of 150% of the Average Premium.
Section 6.9 Purchaser Compliance. Parent shall cause the Purchaser
--------------------
to comply with all of its obligations under this Agreement.
Section 6.10 Commercially Reasonable Efforts.
-------------------------------
(a) Prior to the Closing, upon the terms and subject to the conditions
of this Agreement, the Purchaser and the Company, agree to use their respective
commercially reasonable efforts to take, or cause to be taken, all actions, and
to do, or cause to be done, all things reasonably necessary and appropriate,
under any applicable laws to consummate and make effective the transactions
contemplated by this Agreement as promptly as practicable including, but not
limited to (i) the preparation and filing of all forms, registrations and
notices required to be filed to consummate the transactions contemplated by this
Agreement and the taking of such actions as are necessary to obtain any
requisite approvals, consents, orders, exemptions or waivers by any third party
or Governmental Entity, and (ii) the satisfaction of the other parties'
conditions to Closing. In addition, no party hereto shall take any action after
the date hereof that would reasonably be expected to materially delay the
obtaining of, or result in not obtaining, any permission, approval or consent
from any Governmental Entity necessary to be obtained prior to the acceptance
for payment, and payment for, the Shares in the Offer or the Closing.
(b) Prior to the Closing, each party shall promptly consult with the
other parties hereto with respect to and subject to such confidentiality
agreements as may be reasonably necessary or requested, provide any necessary
information with respect to and provide the other (or its counsel) copies of,
all filings made by such party with any Governmental Entity or any other
information supplied by such party to a Governmental Entity in connection with
this Agreement and the transactions contemplated by this Agreement. Each party
hereto shall promptly inform the other of any communication from any
Governmental Entity regarding any of the transactions contemplated by this
Agreement unless otherwise prohibited by law. If any party hereto or affiliate
thereof receives a request for additional information or documentary material
from any such Government Entity with respect to the transactions contemplated by
this Agreement, then such party will endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request. To the
48
<PAGE>
extent that transfers of permits or Environmental Permits are required as a
result of execution of this Agreement or consummation of the transactions
contemplated hereby, the Company shall use its commercially reasonable efforts
to effect such transfers.
(c) Notwithstanding the foregoing, nothing in this Agreement shall be
deemed to require the Purchaser to defend against any litigation brought by any
Governmental Entity seeking to prevent the consummation of the transactions
contemplated hereby.
Section 6.11 State Takeover Laws. The Company shall, upon the
-------------------
request of the Purchaser, take all commercially reasonable steps to assist in
any challenge by the Purchaser to the validity or applicability to the
transactions contemplated by this Agreement and the Option Agreements, including
the Offer and the Merger and the Shareholder Agreements, of any state takeover
law.
Section 6.12 Financing Related Efforts.
-------------------------
(a) Parent shall use all commercially reasonable efforts to cause the
Financing to be consummated and to provide funds to the Purchaser to permit it
to perform its obligations hereunder and in the Offer.
(b) Parent shall use all commercially reasonable efforts to obtain the
admission of the shares of Capital Stock of Parent to be issued in connection
with the Financing (the "New Shares") to the Official List of the London Stock
----------
Exchange Limited (such admission to have become effective in accordance with the
Listing Rules of the London Stock Exchange Limited) (the "Admission") by the
---------
Initial Expiration Date, and shall take all actions as may be necessary or
desirable to obtain the Admission including, but not limited to, the following:
(i) Parent shall apply, within two days after the date hereof,
for the New Shares to be admitted to the Official List of the London
Stock Exchange Limited and shall not withdraw, or permit to be
withdrawn, such application, or do, or permit to be done (or omit, or
permit to be omitted), anything which may prejudice, preclude or
adversely affect the Admission by the Initial Expiration Date;
(ii) Parent shall, and shall cause its Subsidiaries and
affiliates and its listing agent, to supply all information, give all
undertakings,
49
<PAGE>
execute all documents, pay all fees and do, or cause to be done, all
such things as may be necessary or desirable, or required by the
London Stock Exchange Limited, for the purpose of obtaining the
Admission by the Initial Expiration Date; and
(iii) Parent shall immediately inform the Company in writing of
any and all developments with respect to the Admission.
(c) Parent will provide the Company with true, correct and complete
copies of all amendments and supplements to the Financing Documents as well as
true, correct and complete copies of all other commitments and agreements with
respect to the transaction contemplated by this Agreement and any amendments or
supplements thereto from third parties to provide financing to the Parent or to
the Purchaser.
ARTICLE VII
CONDITIONS
Section 7.1 Conditions to Each Party's Obligations to Effect the
----------------------------------------------------
Merger. The respective obligations of each party to effect the Merger shall be
- ------
subject to the satisfaction on or prior to the Closing Date of each of the
following conditions, any and all of which may be waived in whole or in part by
Parent, the Purchaser and the Company, as the case may be, to the extent
permitted by applicable law:
(a) Shareholder Approval. The Merger and this Agreement shall have
--------------------
been approved and adopted by the requisite vote of the holders of the Shares, to
the extent required pursuant to the requirements of the Articles of
Incorporation and the GCL.
(b) Statutes; Court Orders. No statute, rule, regulation or order
----------------------
shall have been enacted, promulgated or issued by any United States or United
Kingdom Governmental Entity which prohibits the consummation of the Merger; and
there shall be no order or injunction of a court of competent jurisdiction in
effect preventing consummation of the Merger; and
(c) Purchase of Shares in Offer. The Purchaser shall have purchased,
---------------------------
or caused to be purchased, the Shares pursuant to the Offer; provided, that
--------
50
<PAGE>
this condition shall be deemed to have been satisfied with respect to the
obligation of Parent and the Purchaser to effect the Merger if the Purchaser
fails to accept for payment or pay for Shares pursuant to the Offer in violation
of the terms of the Offer or of this Agreement; and
(d) HSR Approval. The applicable waiting period under the HSR Act
------------
shall have expired or been terminated.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated and the
-----------
transactions contemplated herein may be abandoned at any time before the
Effective Time, whether before or after shareholder approval thereof (provided,
however, that if Shares are purchased pursuant to the Offer, Parent may not in
any event terminate this Agreement):
(a) By mutual written consent of Parent and the Company; or
(b) By Parent if the Offer shall have expired without any Shares being
purchased thereunder by the Purchaser and without the Purchaser having had an
obligation under Section 1.1(a) of this Agreement to extend the Offer; provided,
however, that Parent shall not be entitled to terminate this Agreement pursuant
to this Section 8.1(b) if it or the Purchaser is in material breach of its
representations and warranties, covenants or other obligations under this
Agreement; or
(c) By either Parent or the Company (i) if a court of competent
jurisdiction or other Governmental Entity shall have issued an order, decree or
ruling or taken any other action, in each case permanently restraining,
enjoining or otherwise prohibiting the transactions contemplated by this
Agreement or (ii) prior to the purchase of Shares pursuant to the Offer, if
there has been a willful breach by the other party of any representation,
warranty, covenant or agreement set forth in this Agreement, which breach shall
result in any condition set forth in Annex I (other than clause (i) thereof) not
being satisfied (and such breach is not reasonably capable of being cured and
such condition satisfied within thirty (30) days after the receipt of notice
thereof); or
51
<PAGE>
(d) By the Company to allow the Company to enter into an agreement in
accordance with Section 5.3(b) with respect to a Superior Proposal which the
Board of Directors has determined is more favorable to the shareholders of the
Company than the transactions contemplated hereby; provided, however, that it
-------- -------
has complied with all provisions thereof, including the notice provision
therein, and that it makes simultaneous payment of the Termination Fee, plus any
amounts then due as a reimbursement of expenses; or
(e) By Parent, at any time prior to the purchase of the Shares
pursuant to the Offer, if (i) the Company Board of Directors shall have
withdrawn, modified, or changed its recommendation in respect of this Agreement
or the Offer in a manner adverse to the Purchaser, or (ii) the Company Board of
Directors shall have recommended any proposal other than by Parent or the
Purchaser in respect of an Acquisition Proposal, (iii) the Company shall have
exercised a right with respect to an Acquisition Proposal referenced in Section
5.3(b) and shall, directly or through its representatives, continue discussions
with any third party concerning an Acquisition Proposal for more than ten
business days after the date of receipt of such Acquisition Proposal, or (iv) an
Acquisition Proposal that is publicly disclosed shall have been commenced,
publicly proposed or communicated to the Company which contains a proposal as to
price (without regard to whether such proposal specifies a specific price or a
range of potential prices) and the Company shall not have rejected such proposal
within ten business days of its receipt or, if sooner, the date its existence
first becomes publicly disclosed; or
(f) By the Company, if the Offer shall have expired without any Shares
being purchased thereunder by the Purchaser and without the Company having the
right to extend the Offer pursuant to this Agreement (unless Parent shall have
timely extended the Offer in accordance with its rights under this Agreement);
provided, however, that the Company shall not be entitled to terminate this
Agreement pursuant to this Section 8.1(f) if it is in material breach of its
representations, warranties, covenants or other obligations under this
Agreement.
Section 8.2 Effect of Termination.
---------------------
(a) In the event of the termination of this Agreement as provided in
Section 8.1 hereof, written notice thereof shall forthwith be given to the other
party or parties specifying the provision hereof pursuant to which such
termination is made, and this Agreement shall forthwith become null and void and
there shall be no liability on the part of Parent, the Purchaser or the Company,
except (i) as set forth in
52
<PAGE>
Sections 6.5(a), 8.2 and 9.3 hereof and (ii) nothing herein shall relieve any
party from liability for any breach of this Agreement.
(b) If (i) Parent shall have terminated this Agreement pursuant to
Section 8.1(e)(i) or Section 8.1(e)(ii), (ii) (x) Parent shall have terminated
this Agreement pursuant to Section 8.1(c)(ii), Section 8.1(e)(iii) or Section
8.1(e)(iv) and (y) following the date hereof but prior to such termination there
shall have been an Acquisition Proposal Interest and (z) the Company shall have
entered into a definitive agreement with respect to an Acquisition Proposal or
consummated an Acquisition Proposal with respect to the Company within one year
after the termination by Parent pursuant to Section 8.1(c)(ii), Section
8.1(e)(iii) or Section 8.1(e)(iv) or (iii) the Company shall have terminated
this Agreement pursuant to Section 8.1(d), then the Company shall pay (A)
simultaneously with such termination if pursuant to Section 8.1(d), (B)
promptly, but in no event later than two business days after the date of such
termination if pursuant to Section 8.1(e)(i) or Section 8.1(e)(ii), or (C) upon
execution of a definitive agreement with respect to a Acquisition Proposal or
upon the consummation of an Acquisition Proposal with respect to the Company if
pursuant to Section 8.1(c)(ii), Section 8.1(e)(iii) or Section 8.1(e)(iv), to
Parent a termination fee (the "Termination Fee") of $8,000,000 plus an amount,
---------------
not in excess of $1,250,000, equal to the Purchaser's reasonable actual and
documented out-of-pocket expenses incurred by Parent and the Purchaser in
connection with the Offer, the Merger, this Agreement and the consummation of
the transactions contemplated hereby, which amount shall be payable by wire
transfer to such account as Parent may designate in writing to the Company.
(c) If this Agreement is terminated, and at any time on or prior to
March 26, 1998, all of the conditions set forth on Annex I have been fulfilled
except (i) the condition set forth in paragraph (h) of Annex I and (ii) any
other conditions that are not fulfilled as a result, directly or indirectly, of
a breach by Parent or the Purchaser or any representation, warranty, covenant or
agreement set forth in this Agreement, then promptly, but in no event later than
two business days after the date of such termination, Parent shall pay to the
Company a termination fee of $8,000,000 plus an amount, not in excess of
$1,250,000, equal to the Company's reasonable actual and documented out-of-
pocket expenses incurred by the Company in connection with the Offer, the
Merger, this Agreement and the consummation of the transactions contemplated
hereby, which amount shall be payable by wire transfer to such account as the
Company may designate in writing to Parent.
53
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ARTICLE IX
MISCELLANEOUS
Section 9.1 Amendment and Modification. Subject to applicable law
--------------------------
and except as otherwise provided in the Agreement, this Agreement may be
amended, modified and supplemented in any and all respects, whether before or
after any vote of the shareholders of the Company contemplated hereby, by
written agreement of the parties hereto, by action taken by their respective
Boards of Directors or equivalent governing bodies, but, after the purchase of
Shares pursuant to the Offer, no amendment shall be made which decreases the
Merger Consideration and, after the approval of this Agreement by the
shareholders, no amendment shall be made which by law requires further approval
by such shareholders without obtaining such further approval. This Agreement
may not be amended except by an instrument in writing signed on behalf of each
of the parties hereto.
Section 9.2 Non-survival of Representations and Warranties. None of
----------------------------------------------
the representations and warranties in this Agreement or in any schedule,
instrument or other document delivered pursuant to this Agreement shall survive
the acceptance for payment, and payment for, the Shares by the Purchaser
pursuant to the Offer.
Section 9.3 Expenses. Except as expressly set forth in Section
--------
8.2(b), all fees, costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be paid by the party incurring
such fees, costs and expenses except any transfer, stamp or similar taxes shall
be borne by Parent.
Section 9.4 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or sent by a nationally recognized overnight
courier service, such as Federal Express (providing proof of delivery), to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
54
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(a) if to Parent or the Purchaser, to:
The Sage Group plc
Sage House
Benton Park Road
Newcastle Upon Tone , NE7 7LZ
Attention: Paul Walker
Telephone No.: (191) 255-3003
Telecopy No.: (191) 255-0306
with a copy to:
Rose Acquisition Corp.
C/O The Sage Group plc
Sage House
Benton Park Road
Newcastle Upon Tone , NE7 7LZ
Attention: Paul Walker
Telephone No.: (191) 255-3003
Telecopy No.: (191) 255-0306
and
Skadden, Arps, Slate, Meagher & Flom LLP
Four Embarcadero Center, Suite 3800
San Francisco, California 94111-4114
Attention: Kenton J. King, Esq.
Telephone No.: (415) 984-6483
Telecopy No.: (415) 984-2698
and
55
<PAGE>
(b) if to the Company, to:
State Of The Art, Inc.
56 Technology Drive
Irvine, California 92618
Attention: David W. Hanna
Telephone No.: (714) 450-3880
Telecopy No.: (714) 753-1596
with a copy to:
Wilson Sonsini Goodrich and Rosati, P.C.
650 Page Mill Road
Palo Alto, CA 94304-1050
Attention: John A. Fore, Esq.
Telephone No.: (650) 493-9300
Telecopy No.: (650) 493-6811
Section 9.5 Interpretation. When a reference is made in this
--------------
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. Whenever the words "include", "includes" or
"including" are used in this Agreement they shall be deemed to be followed by
the words "without limitation." As used in this Agreement, the term
"affiliates" shall have the meaning set forth in Rule 12b-2 of the Exchange Act.
As used in this Agreement, the term "Person" shall mean a natural person,
------
partnership, corporation, limited liability company, business trust, joint stock
company, trust, unincorporated association, joint venture, Governmental Entity
or other entity or organization.
Section 9.6 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties.
Section 9.7 Entire Agreement; No Third Party Beneficiaries. This
----------------------------------------------
Agreement and the Confidentiality Agreement:
(a) constitute the entire agreement among the parties with respect to
the subject matter hereof and thereof and supersedes all other prior agreements
and understandings, both written and oral, among the parties or any of them with
respect
56
<PAGE>
to the subject matter hereof and thereof (provided that the provisions of this
Agreement shall supersede any conflicting provisions of the Confidentiality
Agreement), and
(b) except as provided in Sections 2.4 and 6.8 is not intended to
confer upon any person other than the parties hereto any rights or remedies
hereunder.
Section 9.8 Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by rule of law or
public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
adverse to any party. Upon such determination that any term or other provision
is invalid, illegal or incapable of being enforced, the parties hereto shall
negotiate in good faith to modify this Agreement so as to effect the original
intent of the parties as closely as possible in an acceptable manner to the end
that transactions contemplated hereby are fulfilled to the extent possible.
Section 9.9 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California without giving
effect to the principles of conflicts of law thereof.
Section 9.10 Assignment. This Agreement shall not be assigned by
----------
any of the parties hereto (whether by operation of law or otherwise) without the
prior written content of the other parties, except that the Purchaser may
assign, in its sole discretion, any or all of its rights, interests and
obligations hereunder to Parent or to any direct or indirect wholly owned
Subsidiary of Parent. Subject to the preceding sentence, but without relieving
any party hereto of any obligation hereunder, this Agreement will be binding
upon, inure to the benefit of and be enforceable by the parties and their
respective successors and assigns.
57
<PAGE>
IN WITNESS WHEREOF, Parent, the Purchaser and the Company have caused
this Agreement to be signed by their respective officers thereunto duly
authorized as of the date first written above.
THE SAGE GROUP PLC
By /s/ Michael Jackson
------------------------------
Name: Michael Jackson
Title: Chairman
ROSE ACQUISITION CORP.
By /s/ Paul Walker
------------------------------
Name: Paul Walker
Title: Chief Executive
STATE OF THE ART, INC.
By /s/ David W. Hanna
------------------------------
Name: David W. Hanna
Title: President, C.E.O. and
Chairman of the Board
<PAGE>
ANNEX I
Notwithstanding any other provisions of the Offer, the Purchaser shall
not be required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating
to the Purchaser's obligation to pay for or return tendered Shares promptly
after termination or withdrawal of the Offer), pay for, and may delay the
acceptance for payment of or, subject to the restriction referred to above, the
payment for, any tendered Shares unless there are validly tendered and not
withdrawn prior to the expiration date for the Offer that number of Shares
which, when added to the Shares owned by the Purchaser, will represent at least
90% of the outstanding Shares on a fully diluted basis (without giving pro forma
effect to the potential issuance of any Shares issuable under the Option
Agreement) on the date of purchase (the "Minimum Condition"); provided, however,
----------------- -------- -------
that the Minimum Condition must be waived by the Purchaser and the Revised
Minimum Number substituted therefor as contemplated, and to the extent required,
by Section 1.1(d) of the Merger Agreement. Furthermore, notwithstanding any
other provisions of the Offer, the Purchaser shall not be required to accept for
payment or pay for any tendered Shares if, at the scheduled expiration date, (i)
any applicable waiting period under the HSR Act has not expired or terminated
prior to termination of the Offer, or (ii) any of the following events shall
have occurred and be continuing:
(a) there shall be pending any suit, action or proceeding by any
United States or United Kingdom Governmental Entity against the Purchaser,
Parent, the Company or any Subsidiary of the Company (i) seeking to prohibit or
impose any material limitations on Parent's or the Purchaser's ownership or
operation (or that of any of their respective Subsidiaries or affiliates) of all
or a material portion of the business or assets of Parent and its Subsidiaries,
taken as a whole, or all or a material portion of the business or assets of the
Company and its Subsidiaries, taken as a whole, or to compel Parent or the
Purchaser or their respective Subsidiaries and affiliates to dispose of or hold
separate any material portion of the business or assets of the Company or Parent
and their respective Subsidiaries, in each case taken as a whole, (ii)
challenging the acquisition by Parent or the Purchaser of any Shares under the
Offer or seeking to restrain or prohibit the making or consummation of the Offer
or the Merger, (iii) seeking to impose material limitations on the ability of
the Purchaser, or render the Purchaser unable, to accept for payment, pay for or
purchase some or all of the Shares pursuant to the Offer and the Merger, or (iv)
subject to the limitations under Section 1101(e) of the California General
Corporation Law,
A-1
<PAGE>
seeking to impose material limitations on the ability of Purchaser or Parent
effectively to exercise full rights of ownership of the Shares, including,
without limitation, the right to vote the Shares purchased by it on all matters
properly presented to the Company's shareholders;
(b) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable
(pursuant to an authoritative interpretation by or on behalf of a Government
Entity, to the Offer or the Merger) or any other action shall be taken by any
Governmental Entity, other than the application to the Offer or the Merger of
applicable waiting periods under HSR Act, that is likely to result in any of the
consequences referred to in clauses (i) through (iv) of paragraph (a) above;
(c) there shall have occurred (i) any general suspension of trading
in, or limitation on prices for, securities on the London Stock Exchange, the
New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market
for a period in excess of 24 hours (excluding suspensions or limitations
resulting solely from physical damage or interference with such exchanges not
related to market conditions), (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or the United
Kingdom (whether or not mandatory), (iii) a commencement of a war, armed
hostilities or other international or United States or United Kingdom calamity
directly or indirectly involving the United States or the United Kingdom (other
than an action involving solely U.N. personnel or support of U.N. personnel),
(iv) any limitation (whether or not mandatory) by any United States or United
Kingdom Governmental Entity on the extension of credit generally by banks or
other financial institutions, or (v) a change in general financial, bank or
capital market conditions which materially and adversely affects the ability of
financial institutions in the United States to extend credit or syndicate loans,
which, in the case any of the foregoing, in the reasonable judgment of Parent,
makes it impractical to proceed with the acceptance of Shares for payment
pursuant to the Offer or the payment therefor;
(d) the representations and warranties of the Company set forth in the
Merger Agreement that are not qualified by reference to Company Material Adverse
Effect were not true and correct in any respect, or any other such
representations or warranties were not true and correct in any respect that
(when taken together with all other such representations and warranties not true
and correct) would likely have a Company Material Adverse Effect (i) in the case
of any representation or warranty which addresses matters as of a particular
date, as of such date, or (ii) in the
A-2
<PAGE>
case of all other representations and warranties, as of the date of this
Agreement and as of the scheduled expiration of the Offer.
(e) since the date of this Agreement, there shall have occurred any
change that constitutes (or that would likely constitute) a Company Material
Adverse Change;
(f) the Board of Directors of the Company or any committee thereof
shall have withdrawn or materially modified in a manner adverse to Parent or the
Purchaser or its recommendation of the Offer, the Merger or the Merger
Agreement, or approved or recommended any Acquisition Proposal;
(g) the Company shall have failed to perform or to comply in any
material respect with any agreement or covenant to be performed or complied with
by it under this Agreement;
(h) The London Stock Exchange shall have failed to admit to the
Official List of the London Stock Exchange the New Shares or such admission
shall have not become effective in accordance with paragraph 7.1 of the listing
rules of the London Stock Exchange ; provided, however, that this condition to
-------- -------
the Offer shall be deemed to have been met if, assuming the Purchaser had
accepted the Shares for payment in the Offer, such Admission would be
substantially certain to occur; and
(i) the Merger Agreement shall have been terminated in accordance with
its terms.
The foregoing conditions are for the sole benefit of Parent and the
Purchaser, may be asserted by Parent or the Purchaser regardless of the
circumstances giving rise to such condition and may be waived by Parent or the
Purchaser in whole or in part at any time and from time to time in the sole
discretion of Parent or the Purchaser, subject in each case to the terms of this
Agreement. The failure by Parent or the Purchaser at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
The capitalized terms used in this Annex I shall have the meanings set
forth in the Agreement to which it is annexed, except that the term "Merger
------
Agreement" shall be deemed to refer to the Agreement to which this Annex I is
- ---------
appended.
A-3
<PAGE>
Exhibit 2
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated January 27, 1998 (this "Agreement"), by
and among The Sage Group plc, a company organized under the laws of England
("Parent"), Rose Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent (the "Purchaser"), and State of the Art, Inc., a California
corporation (the "Company").
W I T N E S S E T H:
WHEREAS, concurrently with the execution and delivery of this
Agreement, Parent, the Purchaser and the Company are entering into an Agreement
and Plan of Merger (as such agreement may hereafter be amended from time to
time, the "Merger Agreement"; capitalized terms used but not defined in this
Agreement shall have the meanings ascribed to them in the Merger Agreement),
which provides, upon the terms and subject to the conditions thereof, for (i)
the commencement by the Purchaser of a tender offer (the "Offer") to purchase
all of the issued and outstanding shares of the common stock, no par value, of
the Company ("Common Stock") at the applicable Offer Price and (ii) the
subsequent merger of the Purchaser with and into the Company (the "Merger"),
whereby each share of Common Stock, other than shares owned directly or
indirectly by Parent, the Purchaser or the Company and other than dissenting
shares, will be converted into the right to receive in cash the Offer Price
applicable thereto; and
WHEREAS, as a condition to the willingness of Parent and the Purchaser
to enter into the Merger Agreement, Parent and the Purchaser have required that
the Company agree, and in order to induce Parent and the Purchaser to enter into
the Merger Agreement, the Company has agreed, to grant the Purchaser an option
to purchase shares of Common Stock, upon the terms and subject to the conditions
of this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth in this
Agreement and in the Merger Agreement, the parties hereto agree as follows:
ARTICLE I
THE TOP-UP STOCK OPTION
SECTION 1.1. Grant of Top-Up Stock Option. Subject to the terms and
----------------------------
conditions set forth herein, the Company hereby grants to the Purchaser an
irrevocable option (the "Top-Up Stock Option") to purchase that number of shares
of Common Stock (the "Top-Up Option Shares") equal to the number of shares of
Common Stock that, when added to the number of shares of Common Stock owned by
the Purchaser and its affiliates immediately following consummation of
<PAGE>
the Offer, shall constitute 90% of the shares of Common Stock then outstanding
on a fully diluted basis (assuming the issuance of the Top-Up Option Shares) at
a purchase price per Top-Up Option Share equal to the Offer Price; provided,
--------
however, that the Top-Up Stock Option shall not be exercisable if the number
- -------
of shares of Common Stock subject thereto exceeds the number of authorized
shares of Common Stock available for issuance. The Company agrees to provide
Parent and the Purchaser with information regarding the number of shares of
Common Stock available for issuance on an ongoing basis.
SECTION 1.2. Exercise of Top-Up Stock Option. (a) Subject to the
-------------------------------
conditions set forth in Section 2.1 and any additional requirements of law, the
Top-Up Stock Option may be exercised by the Purchaser, in whole but not in part,
at any one time after the occurrence of a Top-Up Exercise Event (as defined
below) and prior to the Top-Up Termination Date (as defined below).
(b) A "Top-Up Exercise Event" shall occur for purposes of this
Agreement upon the Purchaser's acceptance for payment pursuant to the Offer of
shares of Common Stock constituting more than 50% but less than 90% of the
shares of Common Stock then outstanding on a fully diluted basis.
(c) Except as provided in the last sentence of this Section 1.2.(c),
the "Top-Up Termination Date" shall occur for purposes of this Agreement upon
the earliest to occur of:
(i) the Effective Time;
(ii) the date which is ten (10) business days after the
occurrence of a Top-Up Exercise Event;
(iii) the termination of the Merger Agreement; and
(iv) the date on which the Purchaser waives the Minimum Condition
and accepts for payment the Revised Minimum Number of
Shares.
Notwithstanding the occurrence of the Top-Up Termination Date, the Purchaser
shall be entitled to purchase the Top-Up Option Shares if it has exercised the
Top-Up Stock Option in accordance with the terms hereof prior to such
occurrence, and the occurrence of the Top-Up Termination Date shall not affect
any rights hereunder which by their terms do not terminate or expire prior to or
as of such date.
(d) In the event the Purchaser wishes to exercise the Top-Up Stock
Option, the Purchaser shall send to the Company a written notice (a "Top-Up
Exercise Notice", the date of which notice is referred to herein as the "Top-Up
Notice Date") specifying the denominations of the certificate or certificates
evidencing the Top-Up Option Shares which the Purchaser wishes to receive, the
place for the closing of the purchase and sale pursuant to the Top-Up Stock
Option (the "Top-Up Closing") and a date not earlier than three (3) business
days nor later than ten (10) business
-2-
<PAGE>
days from the Top-Up Notice Date for the Top-Up Closing (the "Top-Up Closing
Date"); provided, however, that (i) if the Top-Up Closing cannot be consummated
-------- -------
by reason of any applicable laws or orders, the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which
such restriction on consummation has expired or been terminated and (ii) without
limiting the foregoing, if prior notification to or approval of any Governmental
Entity is required in connection with such purchase, the Purchaser and the
Company shall promptly file the required notice or application for approval and
shall cooperate in the expeditious filing of such notice or application, and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which, as the case may be, (A) any required
notification period has expired or been terminated or (B) any required approval
has been obtained, and in either event, any requisite waiting period has expired
or been terminated. The Company shall, within two (2) business days after
receipt of the Top-Up Exercise Notice, deliver written notice to the Purchaser
specifying the number of Top-Up Option Shares and the aggregate purchase price
therefor.
ARTICLE II
CLOSING
SECTION 2.1. Conditions to Closing. The obligation of the Company
---------------------
to deliver Top-Up Option Shares upon the exercise of the Top-Up Stock Option is
subject to the following conditions:
(a) All waiting periods, if any, under the HSR Act applicable to the
issuance of the Top-Up Option Shares hereunder shall have expired or have
been terminated; and
(b) There shall be no preliminary or permanent injunction or other
final, non-appealable judgment by a court of competent jurisdiction
preventing or prohibiting the exercise of the Top-Up Stock Option or the
delivery of the Top-Up Option Shares in respect of such exercise.
SECTION 2.2. Closing. (a) At the Top-Up Closing, (i) the Company
-------
shall deliver to the Purchaser a certificate or certificates evidencing the
applicable number of Top-Up Option Shares (in the denominations specified in the
Top-Up Exercise Notice), and (ii) the Purchaser shall purchase each Top-Up
Option Share from the Company at the Offer Price. Payment by the Purchaser of
the Offer Price for the Top-Up Option Shares shall be made by delivery of a
promissory note, (adequately secured by collateral other than the Shares
acquired), in form and substance reasonably satisfactory to the Company and in a
principal face amount equal to the aggregate amount of the purchase price, as
determined in accordance with Section 1.1., which promissory note shall bear
interest at a rate equal to 6% per annum (or such level of interest rate that is
adequate to prevent imputed income under applicable regulations) and shall be
payable in full with accrued interest upon the earlier to occur of (i) five (5)
business days after the Closing hereunder, and (ii) two (2) business
-3-
<PAGE>
days following written demand given by the Company to the Purchaser at any time
following the Effective Time.
(b) The Company shall pay all expenses, and any and all Federal, state
and local taxes and other charges, that may be payable in connection with the
preparation, issuance and delivery of stock certificates under this Section 2.2.
(c) Certificates evidencing Top-Up Option Shares delivered hereunder
may include legends legally required including the legend in substantially the
following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE
REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE.
It is understood and agreed that the foregoing legend shall be removed by
delivery of substitute certificate(s) without such legend upon the sale of the
Top-Up Option Shares pursuant to a registered public offering or Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"), or any other sale
as a result of which such legend is no longer required.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and the Purchaser
(except as otherwise may be prohibited, restricted or limited by law or any rule
or regulation of a regulatory entity) as follows:
SECTION 3.1. Organization; Authority Relative to this Agreement.
--------------------------------------------------
The Company is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. The Company has all
requisite corporate power and authority to execute and deliver this Agreement,
to perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions contemplated
hereby have been duly and validly authorized by all necessary corporate action
on the part of the Company. This Agreement has been duly and validly executed
and delivered by the Company and, assuming the due and valid authorization,
execution and delivery by Parent and the Purchaser, constitutes a valid and
binding obligation of the Company enforceable against the Company in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar laws
affecting creditors' rights generally, and by general equitable principles.
-4-
<PAGE>
SECTION 3.2. Authority to Issue Shares. The Company has taken all
-------------------------
necessary corporate action to authorize and reserve and permit it to issue, and
at all times from the date hereof through the Top-Up Termination Date shall have
reserved, all the Top-Up Option Shares issuable pursuant to this Agreement. All
of the shares of Common Stock issuable under the Top-Up Stock Option, upon their
issuance and delivery in accordance with the terms of this Agreement, will be
duly authorized, validly issued, fully paid and nonassessable, will be delivered
free and clear of all security interests, liens, claims, pledges, options,
rights of first refusal, agreements, limitations on the Purchaser's voting
rights, charges, adverse rights and other encumbrances of any nature whatsoever
(other than this Agreement) and will not be subject to any preemptive rights.
SECTION 3.3. No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by the Company does not, and the
performance by the Company of its obligations hereunder and the consummation of
the transactions contemplated hereby will not, (i) conflict with or violate the
articles of incorporation or bylaws of the Company, (ii) assuming that all
consents and filings described in Section 3.3(b) have been obtained or made,
conflict with or violate any law applicable to the Company or by which any
property or asset of the Company is bound or affected or (iii) result in any
violation pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise or other instrument or obligation to which the
Company is a party or by which the Company or any of its properties may be bound
or affected.
(b) No consent of, or filing with, any Governmental Entity is required
by the Company in connection with the execution and delivery of this Agreement,
the performance by the Company of its obligations hereunder or the consummation
by the Company of the transactions contemplated hereby, except for (i)
compliance with the HSR Act and (ii) consents or filings the failure of which to
be obtained or made would not, individually or in the aggregate, prevent or
materially delay the consummation of the transactions contemplated hereby or the
performance by the Company of any of its obligations hereunder.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND THE PURCHASER
Parent and the Purchaser hereby represent and warrant to the Company
as follows:
SECTION 4.1. Organization; Authority Relative to this Agreement.
--------------------------------------------------
Each of Parent and the Purchaser is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation. Each of Parent and the Purchaser has all requisite corporate
power and authority to execute and deliver this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by Parent and the Purchaser and the
consummation by Parent and the Purchaser of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action on the
part of Parent and the Purchaser. This Agreement has been duly and validly
-5-
<PAGE>
executed and delivered by Parent and the Purchaser and, assuming the due and
valid authorization, execution and delivery by the Company, constitutes a valid
and binding obligation of Parent and the Purchaser, enforceable against each of
Parent and the Purchaser in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and by general equitable principles.
SECTION 4.2. No Conflict; Required Filings and Consents. (a) The
------------------------------------------
execution and delivery of this Agreement by Parent and the Purchaser do not, and
the performance by Parent and the Purchaser of their obligations hereunder and
the consummation of the transactions contemplated hereby will not, (i) conflict
with or violate the articles of incorporation or bylaws or equivalent
organizational documents of Parent or the Purchaser, (ii) assuming that all
consents and filings described in Section 4.2(b) have been obtained or made,
conflict with or violate any law applicable to Parent or the Purchaser or by
which any property or asset of Parent or the Purchaser is bound or affected or
(iii) result in any violation pursuant to, any note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Parent or the Purchaser is a party or by which Parent or the
Purchaser or any of their respective properties may be bound or affected.
(b) No consent of, or filing with, any Governmental Entity is required
by Parent or the Purchaser in connection with the execution and delivery of this
Agreement, the performance by Parent or the Purchaser of any of its obligations
hereunder or the consummation by Parent or the Purchaser of the transactions
contemplated hereby, except for (i) compliance with the HSR Act and (ii)
consents or filings the failure of which to be obtained or made would not,
individually or in the aggregate, prevent or materially delay the consummation
of the transactions contemplated hereby or the performance by Parent or the
Purchaser of any of their respective obligations hereunder.
ARTICLE V
COVENANTS OF THE PURCHASER
SECTION 5.1. Distribution. The Purchaser shall acquire the Top-Up
------------
Option Shares for investment purposes only (and, only for the purpose of
effecting a short-form merger with the Company) and not with a view to any
distribution thereof in violation of the Securities Act.
-6-
<PAGE>
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. Amendment. This Agreement may not be amended except by
---------
an instrument in writing signed by the parties hereto.
SECTION 6.2. Waiver. Any party hereto may (a) extend the time for
------
or waive compliance with the performance of any obligation or other act of any
other party hereto or (b) waive any inaccuracy in the representations and
warranties contained herein or in any document delivered pursuant hereto. Any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed by the party or parties to be bound thereby. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of those rights.
SECTION 6.3. Fees and Expenses. All costs, fees and expenses
-----------------
incurred in connection with this Agreement shall be paid by the party incurring
such expenses.
SECTION 6.4. Notices. All notices, requests, claims, demands and
-------
other communications hereunder shall be in writing and shall be deemed given if
delivered personally or sent by telecopy or by overnight courier (providing
proof of delivery) to the respective parties at their addresses as specified in
Section 9.4 of the Merger Agreement.
SECTION 6.5. Severability. If any term or other provision of this
------------
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in a mutually acceptable
manner to the fullest extent permitted by applicable law in order that the
transactions contemplated hereby may be consummated as originally contemplated
to the fullest extent possible.
SECTION 6.6. Assignment; Binding Effect; Benefit. Neither this
-----------------------------------
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned, in whole or in part, by operation of law or otherwise, by any of the
parties hereto without the prior written consent of the other parties, except
that the Purchaser may assign, in its discretion, any or all of its rights,
interests and obligations hereunder to Parent or any direct or indirect
subsidiary of Parent, but no such assignment shall relieve the Purchaser of any
of its obligations hereunder. Subject to the preceding sentence, this Agreement
shall be binding upon, inure to the benefit of, and be enforceable by, the
parties hereto and their respective successors and permitted assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing in
this Agreement, express or implied, is intended to confer on any person other
than the parties hereto or their respective successors and
-7-
<PAGE>
permitted assigns any rights, remedies, obligations or liabilities under or by
reason of this Agreement.
SECTION 6.7. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California, without giving
effect to the principles of conflicts of laws thereof.
SECTION 6.8. Headings. The descriptive headings contained in this
--------
Agreement are included for reference purposes only and shall not affect in any
way the meaning or interpretation of this Agreement.
SECTION 6.9. Counterparts. This Agreement may be executed and
------------
delivered (including by facsimile transmission) in one or more counterparts, all
of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
SECTION 6.10. Entire Agreement. This Agreement constitutes the
----------------
entire agreement, and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter of this
Agreement.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, all as of
the date first written above.
THE SAGE GROUP PLC
By: /s/ Paul Walker
--------------------------------
Name: Paul Walker
Title: Chief Executive Officer
ROSE ACQUISITION CORP.
By: /s/ Paul Walker
--------------------------------
Name: Paul Walker
Title: Vice President and Secretary
STATE OF THE ART, INC.
By: /s/ David W. Hanna
--------------------------------
Name: David W. Hanna
Title: President, Chief Executive Officer
and Chairman of the Board
-9-
<PAGE>
Exhibit 3
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT (this "Agreement"), dated January 27, 1998, by
---------
and among The Sage Group plc, a company organized under the laws of England
("Parent"), Rose Acquisition Corp., a Delaware corporation and a direct and
- --------
indirect wholly-owned subsidiary of Parent (the "Purchaser") and each of David
---------
W. Hanna, George Riviere and Jeffrey E. Gold (each in his individual capacity,
the "Shareholder", and collectively, the "Shareholders").
----------- ------------
WHEREAS, each of the Shareholders is, as of the date hereof, the
record and beneficial owner of the shares of common stock, no par value (the
"Common Stock"), of State of the Art, Inc., a California corporation (the
------------
"Company") set forth on Annex I hereto;
-------
WHEREAS, Parent, the Purchaser and the Company concurrently herewith
are entering into an Agreement and Plan of Merger, dated as of the date hereof
(the "Merger Agreement"), which provides, among other things, for the
----------------
acquisition of the Company by Parent by means of a cash tender offer (the
"Offer") for all of the outstanding shares of Common Stock and for the
-----
subsequent merger (the "Merger") of the Purchaser with and into the Company upon
------
the terms and subject to the conditions set forth in the Merger Agreement; and
WHEREAS, as a condition to the willingness of Parent and the Purchaser
to enter into the Merger Agreement, and in order to induce Parent and the
Purchaser to enter into the Merger Agreement, the Shareholders have agreed to
enter into this Agreement.
NOW, THEREFORE, in consideration of the execution and delivery by
Parent and the Purchaser of the Merger Agreement and the foregoing and the
mutual representations, warranties, covenants and agreements set forth herein
and therein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
<PAGE>
SECTION 1. Representations and Warranties of the Shareholder. Each
-------------------------------------------------
of the Shareholders hereby represents and warrants to Parent and the Purchaser,
severally and not jointly, as follows:
(a) Such Shareholder is the record and beneficial owner of the shares
of Common Stock (as may be adjusted from time to time pursuant to Section 6
hereof, the "Shares") set forth opposite his name on Annex I to this Agreement.
------
(b) Such Shareholder has the legal capacity to execute and deliver
this Agreement and to consummate the transactions contemplated hereby.
(c) This Agreement has been validly executed and delivered by such
Shareholder and constitutes the legal, valid and binding obligation of such
Shareholder, enforceable against such Shareholder in accordance with its terms,
except (i) as limited by applicable bankruptcy, insolvency, reorganization,
moratorium and other laws of general application affecting enforcement of
creditors' rights generally, and (ii) the availability of the remedy of specific
performance or injunctive or other forms of equitable relief may be subject to
equitable defenses and would be subject to the discretion of the court before
which any proceeding therefor may be brought.
(d) Neither the execution and delivery of this Agreement nor the
consummation by such Shareholder of the transactions contemplated hereby will
violate any other agreement to which such Shareholder is a party.
(e) The Shares and the certificates representing the Shares owned by
such Shareholder are now and at all times during the term hereof will be held by
such Shareholder, or by a nominee or custodian for the benefit of such
Shareholder, free and clear of all liens, claims, security interests, proxies,
voting trusts or agreements, understandings or arrangements or any other
encumbrances whatsoever, except for any such encumbrances or proxies arising
hereunder.
2
<PAGE>
SECTION 2. Representations and Warranties of Parent and the
------------------------------------------------
Purchaser. Each of Parent and the Purchaser hereby, jointly and severally,
- ---------
represents and warrants to the Shareholder as follows:
(a) Parent is a corporation duly organized, validly existing and in
good standing under the laws of England, the Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, and each of Parent and the Purchaser has all requisite corporate
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby, and has taken all necessary corporate action
to authorize the execution, delivery and performance of this Agreement.
(b) This Agreement has been duly authorized, executed and delivered
by each of Parent and the Purchaser and constitutes the legal, valid and binding
obligation of each of Parent and the Purchaser, enforceable against each of them
in accordance with its terms, except (i) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally and (ii) the availability
of the remedy of specific performance or injunctive or other forms of equitable
relief may be subject to equitable defenses and would be subject to the
discretion of the court before which any proceeding therefor may be brought.
(c) Neither the execution and delivery of this Agreement nor the
consummation by each of Parent and the Purchaser of the transactions
contemplated hereby will result in a violation of, or a default under, or
conflict with, any contract, trust, commitment, agreement, understanding,
arrangement or restriction of any kind to which each of Parent and the Purchaser
is a party or bound. The consummation by each of Parent and the Purchaser of
the transactions contemplated hereby will not violate, or require any consent,
approval, or notice under, any provision of any judgment, order, decree,
statute, law, rule or regulation applicable to either Parent or the Purchaser,
except for any necessary filing under the HSR Act or state takeover laws.
SECTION 3. Purchase and Sale of the Shares. Each of the Shareholders
-------------------------------
hereby agrees that it shall
3
<PAGE>
tender the Shares into the Offer promptly, and in any event no later than the
tenth business day following the commencement of the Offer pursuant to Section
1.1 of the Merger Agreement, and that such Shareholder shall not withdraw any
Shares so tendered unless the Offer is terminated or has expired. The Purchaser
hereby agrees to purchase all the Shares so tendered at a price per Share equal
to $22.00 per Share or any higher price that may be paid in the Offer; provided,
--------
however, that the Purchaser's obligation to accept for payment and pay for the
- -------
Shares in the Offer is subject to all the terms and conditions of the Offer set
forth in the Merger Agreement and Annex I thereto.
SECTION 4. Transfer of the Shares. Prior to the termination of this
----------------------
Agreement, except as otherwise provided herein, none of the Shareholders shall:
(i) transfer (which term shall include, without limitation, for the purposes of
this Agreement, any sale, gift, pledge or other disposition), or consent to any
transfer of, any or all of the Shares; (ii) enter into any contract, option or
other agreement or understanding with respect to any transfer of any or all of
the Shares or any interest therein; (iii) grant any proxy, power-of-attorney or
other authorization or consent in or with respect to the Shares; (iv) deposit
the Shares into a voting trust or enter into a voting agreement or arrangement
with respect to the Shares or (v) take any other action that would in any way
restrict, limit or interfere with the performance of such Shareholder's
obligations hereunder or the transactions contemplated hereby.
SECTION 5. Grant of Irrevocable Proxy; Appointment of Proxy.
------------------------------------------------
(a) Each of the Shareholders hereby irrevocably grants to, and
appoints, Parent and any nominee thereof, its proxy and attorney-in-fact (with
full power of substitution), for and in the name, place and stead of such
Shareholder, to vote the Shares, or grant a consent or approval in respect of
the Shares, in connection with any meeting of the Shareholders of the Company
(i) in favor of the Merger, and (ii) against any action or agreement which would
impede, interfere with or prevent the Merger, including any other extraordinary
corporate transaction, such as a merger, reorganization or liquidation involving
the Company and a third party or
4
<PAGE>
any other proposal of a third party to acquire the Company; provided, however,
-------- -------
that such irrevocable proxy shall be immediately revoked if, in accordance with
Section 1.1(d) of the Merger Agreement, the Purchaser waives the Minimum
Condition (as defined in the Merger Agreement) and accepts for payment the
Revised Minimum Number of Shares (as defined in the Merger Agreement).
(b) Such Shareholder represents that any proxies heretofore given in
respect of the Shares, if any, are not irrevocable, and that such proxies are
hereby revoked.
(c) Such Shareholder hereby affirms that the irrevocable proxy set
forth in this Section 5 is given in connection with the execution of the Merger
Agreement, and that such irrevocable proxy is given to secure the performance of
the duties of such Shareholder under this Agreement. Such Shareholder hereby
further affirms that the irrevocable proxy is coupled with an interest and,
except as set forth in Section 8 hereof, is intended to be irrevocable in
accordance with the provisions of Section 705 of the California General
Corporation Law.
SECTION 6. Certain Events. In the event of any stock split, stock
--------------
dividend, merger, reorganization, recapitalization or other change in the
capital structure of the Company affecting the Common Stock or the acquisition
of additional shares of Common Stock or other securities or rights of the
Company by the Shareholder, the number of Shares shall be adjusted
appropriately, and this Agreement and the obligations hereunder shall attach to
any additional shares of Common Stock or other securities or rights of the
Company issued to or acquired by each of the Shareholders.
SECTION 7. Certain Other Agreements. Each of the Shareholders will
------------------------
notify the Purchaser immediately if any proposals are received by, any
information is requested from, or any negotiations or discussions are sought to
be initiated or continued with such Shareholder or its officers, directors,
employees, investment bankers, attorneys, accountants or other agents, if any,
in each case in connection with any Acquisition Proposal or Acquisition Proposal
Interest (as such terms are defined in the Merger Agreement) indicating, in
connection with
5
<PAGE>
such notice, the name of the person indicating such Acquisition Proposal
Interest and the terms and conditions of any proposals or offers. Each of the
Shareholders agrees that it will immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal Interest. Such Shareholder
agrees that it shall keep Parent informed, on a current basis, of the status and
terms of any Acquisition Proposal Interest. Such Shareholder agrees that it will
not, directly or indirectly: (i) initiate, solicit or encourage, or take any
action to facilitate the making of, any offer or proposal which constitutes or
is reasonably likely to lead to any Acquisition Proposal, or (ii) in the event
of an unsolicited written Acquisition Proposal engage in negotiations or
discussions with, or provide any information or data to, any person (other than
Parent, any of its affiliates or representatives and except for information
which has been previously publicly disseminated by the Company) relating to any
Acquisition Proposal.
SECTION 8. Further Assurances. Each of the Shareholders shall, upon
------------------
request of Parent or the Purchaser, execute and deliver any additional documents
and take such further actions as may reasonably be deemed by Parent or the
Purchaser to be necessary or desirable to carry out the provisions hereof and to
vest the power to vote the Shares as contemplated by Section 5 hereof in Parent.
SECTION 9. Termination. Subject to Section 5(a) hereof, this
-----------
Agreement, and all rights and obligations of the parties hereunder, shall
terminate immediately upon the earlier of (a) six months following the
termination of the Merger Agreement in accordance with its terms or (b) the
Effective Time (as defined in the Merger Agreement); provided, however, that
-------- -------
Sections 8 and 10 shall survive any termination of this Agreement.
SECTION 10. Expenses. All fees and expenses incurred by any one
--------
party hereto shall be borne by the party incurring such fees and expenses.
SECTION 11. Public Announcements. Each of the Shareholders, the
--------------------
Parent and the Purchaser agrees that it will not issue any press release or
otherwise make any
6
<PAGE>
public statement with respect to this Agreement or the transactions contemplated
hereby without the prior consent of the other party, which consent shall not be
unreasonably withheld or delayed; provided, however, that such disclosure can be
-------- -------
made without obtaining such prior consent if (i) the disclosure is required by
law, and (ii) the party making such disclosure has first used its best efforts
to consult with the other party about the form and substance of such disclosure.
SECTION 12. Miscellaneous.
-------------
(a) Capitalized terms used and not otherwise defined in this
Agreement shall have the respective meanings assigned to such terms in the
Merger Agreement.
(b) All notices and other communications hereunder shall be in
writing and shall be deemed given upon (i) transmitter's confirmation of a
receipt of a facsimile transmission, (ii) confirmed delivery by a standard
overnight carrier or when delivered by hand or (iii) the expiration of five
business days after the day when mailed in the United States by certified or
registered mail, postage prepaid, addressed at the following addresses (or at
such other address for a party as shall be specified by like notice):
(A) if to the Shareholders, to:
State of the Art, Inc.
56 Technology Drive
Irvine, California 92618-2301
Telephone:(714)753-1222 x3800
Facsimile:(714)753-1596
Attention: David W. Hanna
with a copy to:
Fenwick & West
Two Palo Alto Square
Palo Alto, California 94306
Telephone: (650)494-0600
Facsimile: (650)494-1417
Attention: Scott Spector
7
<PAGE>
State of the Art, Inc.
56 Technology Drive
Irvine, California 92618-2301
Telephone: (714) 450-3857
Facsimile: (714) 753-7884
Attention: George Riviere
with a copy to:
Fenwick & West
Two Palo Alto Square
Palo Alto, California 94306
Telephone: (650)494-0600
Facsimile: (650)494-1417
Attention: Scott Spector
5085 Grosvenor Circle
Granite Bay, California 95746
Telephone: (916) 791 7738
Facsimile: (916) 791-2683
Attention: Jeffrey E. Gold
with a copy to:
Fenwick & West
Two Palo Alto Square
Palo Alto, California 94306
Telephone: (650)494-0600
Facsimile: (650)494-1417
Attention: Scott Spector
and
(B) if to Parent or the Purchaser, to:
The Sage Group plc
Sage House
Benton Park Road
Newcastle Upon Tyne
NE7 7LZ
Telephone: 191-255-3000
Facsimile: 191-255-0306
Attention: Paul A. Walker
8
<PAGE>
with a copy to:
Skadden, Arps, Slate, Meagher
& Flom LLP
Four Embarcadero Center, Suite 3800
San Francisco, California 94111-4114
Telephone: (415) 984-6400
Facsimile: (415) 984-2698
Attention: Kenton J. King, Esq.
(c) The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
(d) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall be considered one
and the same agreement.
(e) This Agreement (including the Merger Agreement and any other
documents and instruments referred to herein) constitutes the entire agreement,
and supersedes all prior agreements and understandings, whether written and
oral, among the parties hereto with respect to the subject matter hereof.
(f) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of California without giving effect to the
principles of conflicts of laws thereof.
(g) Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto (whether by
operation of law or otherwise) without the prior written consent of the other
parties. Subject to the preceding sentence, this Agreement will be binding
upon, inure to the benefit of and be enforceable by, the parties and their
respective successors and assigns, and the provisions of this Agreement are not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
(h) If any term, provision, covenant or restriction herein is held by
a court of competent juris-
9
<PAGE>
diction or other authority to be invalid, void or unenforceable or against its
regulatory policy, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
(i) Each of the parties hereto acknowledges and agrees that in the
event of any breach of this Agreement, each non-breaching party would be
irreparably and immediately harmed and could not be made whole by monetary
damages. It is accordingly agreed that the parties hereto (i) will waive, in
any action for specific performance, the defense of adequacy of a remedy at law
and (ii) shall be entitled, in addition to any other remedy to which they may be
entitled at law or in equity, to compel specific performance of this Agreement
in any action instituted in any state or federal court sitting in San Francisco,
California. The parties hereto consent to personal jurisdiction in any such
action brought in any state or federal court sitting in San Francisco,
California and to service of process upon it in the manner set forth in Section
12(b) hereof.
(j) No amendment, modification or waiver in respect of this Agreement
shall be effective against any party unless it shall be in writing and signed by
such party.
10
<PAGE>
IN WITNESS WHEREOF, Parent, the Purchaser and the Shareholders have
caused this Agreement to be duly executed and delivered as of the date first
written above.
THE SAGE GROUP PLC
By: /s/ Paul Walker
----------------------------------
Name: Paul Walker
Title: Chief Executive Officer
ROSE ACQUISITION CORP.
By: /s/ Paul Walker
----------------------------------
Name: Paul Walker
Title: Vice President and Secretary
DAVID W. HANNA
/s/ David W. Hanna
-------------------------------------
GEORGE RIVIERE
/s/ George Riviere
-------------------------------------
JEFFREY L. GOLD
/s/ Jeffrey L. Gold
-------------------------------------
11
<PAGE>
ANNEX I
Ownership of Company Common Stock
<TABLE>
<CAPTION>
<S> <C> <C>
1. David W. Hanna 110,811 Shares
2. George Riviere 700,221 Shares
3. Jeffrey E. Gold 479,836 Shares
</TABLE>
12
<PAGE>
EXHIBIT 4
[LOGO OF STATE OF THE ART APPEARS HERE]
February 2, 1998
To Our Shareholders:
On behalf of the Board of Directors of State Of The Art, Inc. (the
"Company"), I am pleased to inform you that on January 27, 1998 the Company
entered into a definitive Agreement and Plan of Merger (the "Merger
Agreement") with The Sage Group plc and Rose Acquisition Corp., its wholly
owned subsidiary, pursuant to which the Rose Acquisition Corp. has commenced
today a tender offer to purchase all of the outstanding shares (the "Shares")
of common stock of the Company at $22 per share in cash (the "Offer").
Following the successful completion of the Offer, upon approval by a
shareholder vote, if required, Rose Acquisition Corp. will be merged with and
into the Company (the "Merger"), and all Shares not purchased pursuant to the
Offer will be converted into the right to receive $22 per share in cash
without interest (except any Shares as to which the holders have properly
perfected their dissenter's rights under California law).
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT EACH OF THE OFFER
AND MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE SHAREHOLDERS OF THE
COMPANY AND RECOMMENDS THAT THE SHAREHOLDERS OF THE COMPANY ACCEPT THE OFFER
AND TENDER ALL OF THEIR SHARES PURSUANT TO THE OFFER.
In arriving at its recommendation, the Board of Directors gave careful
consideration to a number of factors described in the attached
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
that is being filed with the Securities and Exchange Commission. Among other
things, the Board of Directors considered the opinion of its financial
advisor, UBS Securities LLC, that the consideration to be received by the
holders of Shares pursuant to the Offer and the Merger is fair, from a
financial point of view, to such holders.
In addition to the attached Schedule 14D-9, enclosed also is the Offer to
Purchase, dated February 2, 1998, together with related materials, including a
Letter of Transmittal, to be used for tendering your Shares in the Offer.
These documents state the terms and conditions of the Offer and the Merger and
provide instructions as to how to tender your Shares. I urge you to read these
documents carefully in making your decision with respect to tendering your
Shares pursuant to the Offer.
Sincerely,
/s/ David W. Hanna
David W. Hanna
President and Chief Executive
Officer
56 TECHNOLOGY DRIVE
IRVINE, CA 92618
714/753-1222 . 800/854-3415
HTTP://WWW/SOTA.COM
<PAGE>
Exhibit 5
[LETTERHEAD OF STATE OF THE ART APPEARS HERE]
Company Contact:
----------------
James R. Eckstaedt
Chief Financial Officer
714/753-1222 x3805
FOR IMMEDIATE RELEASE
- ---------------------
The Sage Group plc to Acquire State Of The Art, Inc.
IRVINE, Calif., -- January 27, 1998 -- State Of The Art, Inc.(NASDAQ:SOTA),
a leading mid-range accounting software provider, and The Sage Group plc
(Reuters: SGE.L), of Newcastle upon Tyne, England, the world's leading supplier
of personal computer accounting software to small- and medium-sized businesses,
jointly today announced that they have signed a definitive merger agreement,
pursuant to which Sage will acquire all of the outstanding stock of State Of The
Art at $22.00 per share, or approximately $263 million. To implement the
agreement Sage will commence a cash tender offer within five business days. The
completion of the offer is subject to a number of customary conditions.
The offer of $22.00 per share represents a premium of 33% over State Of The
Art's closing price on January 26, 1998. Under the terms of the agreement, State
Of The Art will become a wholly owned subsidiary of The Sage Group.
With this acquisition, Sage gains market leadership of the U.S. mid-range
accounting software market, complementing similar market positions in the United
Kingdom, France and Germany. This combination is another important step in
Sage's strategy to build a global franchise in the accounting software market.
-more-
<PAGE>
NEWS RELEASE STATE OF THE ART, INC.
Page 2 The Sage Group plc to Acquire State Of The Art, Inc.
"This acquisition brings important benefits to our customers, channel
partners and our employees," said David Hanna, president and chief executive
officer of State Of The Art. "For our 90,000 U.S. customers, this combination
offers exciting opportunities for new products, higher levels of service and
support, and a broader product functionality. For channel partners, there are
additional opportunities for growth and profits. For our employees, this is the
next step in strengthening our market leadership position on a global basis. In
addition, our shareholders obtain an attractive cash buyout."
"The acquisition of State Of The Art provides The Sage Group with a much
enhanced strategic presence in the U.S. State Of The Art has an excellent
product range, a strong value added reseller network, and a substantial customer
base," said Paul Walker, chief executive of Sage. "In the United States, our
combined product lines have virtually no overlap. We see opportunities to
increase sales by marketing products and services to our expanded customer base.
State Of The Art is a profitable, well-run company whose experienced management
team will greatly contribute to the success of our Sage U.S. operation."
When the acquisition is complete, State Of The Art will join the group
of U.S. software companies owned by Sage called Sage U.S. Group; its other
members include DacEasy, Inc., Timeslips, Inc., and Telemagic Inc. The State Of
The Art management team, led by David W. Hanna, will remain in place after the
transaction closes.
Consummation of the merger is conditioned on, among other things, the
tender of at least 90% of the outstanding shares of State Of The Art, on a fully
diluted basis, in the tender offer.
-more-
<PAGE>
NEWS RELEASE STATE OF THE ART, INC.
Page 3 The Sage Group plc to Acquire State Of The Art, Inc.
About State Of The Art
- ----------------------
State Of The Art is a leader in providing accounting software for small- to
medium-sized businesses. The company develops and markets Acuity Financials/TM/
accounting software, a client-server solution optimized for Microsoft(R) Windows
NT(R)/SQL Server/TM/ platforms; MAS 90(R) accounting software, which offers a
broad range of applications for virtually any type of business; and Business
Works (R) accounting software for small and growing businesses. State Of The Art
reported revenues for its fiscal year ending December 31, 1997, of $64.0
million, an increase of 23% over 1996 revenues.
About The Sage Group
- --------------------
Sage is the world's leading supplier of mainstream PC accounting software.
Sage's product offerings encompass accounting, payroll, time and billing, and
contact management software, for the entire spectrum of users; from small
entrepreneurial businesses, to large multination corporations. Sage's revenues
for its fiscal year ending September 30, 1997 were (Pounds)152.1 million ($250
million).
###
State Of The Art, Acuity Financials, MAS 90, and Business Works are trademarks
and registered trademarks of State Of The Art, Inc. Microsoft, Windows NT and
Microsoft SQL Server are either trademarks or registered trademarks of Microsoft
Corporation in the U.S. and/or other countries. All other trademarks and
registered trademarks are the property of their respective owners.
UBS Securities acted as a financial advisor to State Of The Art, Inc.
<PAGE>
Exhibit 6
[Letterhead of UBS Securities LLC]
January 26, 1998
Board of Directors
State of The Art, Inc.
56 Technology Drive
Irvine, CA 92618
Members of the Board of Directors:
You have requested our opinion as to the fairness, from a financial point
of view, to the shareholders of State of The Art, Inc., a California corporation
(the "Company"), of the consideration to be received by such holders pursuant to
the terms of that certain Agreement and Plan of Merger, to be dated January 27,
1998 (the "Merger Agreement"), by and among The Sage Group plc, a company
organized under the laws of England ("Parent"), Rose Acquisition Corp., a
Delaware corporation and a direct and indirect wholly owned subsidiary of Parent
("Purchaser"), and the Company. The Merger Agreement provides, among other
things, for a tender offer (the "Offer") by Purchaser to acquire all of the
issued and outstanding shares of common stock, no par value, of the Company (the
"Company Common Stock") pursuant to which Purchaser will pay to the holders of
such shares of Company Common Stock $22.00 per share in cash for each share of
Company Common Stock accepted, and following completion of the Offer, Purchaser
will be merged with and into the Company and each outstanding share of Company
Common Stock (other than shares of Company Common Stock already owned by Parent
or Purchaser) will be converted into the right to receive $22.00 in cash
(together with the Offer, the "Transaction"). The terms and conditions of the
Transaction are more fully set forth in the Merger Agreement.
UBS Securities LLC ("UBS"), as part of its investment banking business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. In the ordinary course of our
business, we and our affiliates actively trade the securities of the Company and
Parent for our own account and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
We are acting as exclusive financial advisor to the Company in connection with
the Transaction and will receive a fee from the Company for our services
pursuant to the terms of our engagement letter with the Company, dated as of
January 12, 1998 (the "Engagement Letter").
In connection with our opinion, we have reviewed and considered such
financial and other matters as we have deemed relevant, including, among other
things: (i) a substantially final draft of the Merger Agreement; (ii) certain
publicly available information for the Company, including the annual report of
the Company filed on Form 10-K for the year ended December 31, 1996, and the
quarterly report of the Company filed on Form 10-Q for the quarter ended
September 30, 1997; (iii) certain internal financial analyses, financial
forecasts, reports and other information concerning the Company prepared by the
management of the Company; (iv) discussions we have had with certain members of
the management of the Company concerning the historical and current business
<PAGE>
State of The Art, Inc.
January 26, 1998
Page 2
operations, financial condition and prospects of the Company and such other
matters we deemed relevant; (v) the reported price and trading history of the
shares of the Company Common Stock as compared to the reported price and trading
histories of certain publicly traded companies we deemed relevant; (vi) the
financial condition of the Company as compared to the financial condition of
certain other companies we deemed relevant; (vii) certain financial terms of the
Transaction as compared to the financial terms of selected other business
combinations we deemed relevant; and (viii) such other information, financial
studies, analyses and investigations and such other factors that we deemed
relevant for the purposes of this opinion.
In conducting our review and arriving at our opinion, we have, with your
consent, assumed and relied, without independent investigation, upon the
accuracy and completeness of all financial and other information provided to us
by the Company or publicly available, and we have not undertaken any
responsibility for the accuracy, completeness or reasonableness of, or
independently to verify, such information. We have, with your consent, assumed
that the financial forecasts which we examined were reasonably prepared by the
management of the Company on bases reflecting the best currently available
estimates and good faith judgments of such management as to the competitive,
operating and regulatory environments and the related financial performance of
the Company for the relevant periods. We have not made or obtained any
independent evaluations, valuations or appraisals of the assets or liabilities
of the Company, nor have we been furnished with such materials. Our services to
the Company in connection with the Transaction have been comprised solely of
financial advisory services, as described in the Engagement Letter. Our opinion
is necessarily based upon economic and market conditions and other circumstances
as they exist and can be evaluated by us on the date hereof. Additionally, we
have not been authorized or requested to, and did not, solicit alternative
offers for the Company or its assets, nor have we investigated any other
alternative transactions that may be available to the Company.
It is understood that this letter is intended for the benefit and use of
the Board of Directors of the Company in its consideration of the Transaction
and may not be used for any other purpose or reproduced, disseminated, quoted or
referred to at any time, in any manner or for any purpose without our prior
written consent; provided, however, that this letter may be disclosed if
required by law and may be included in its entirety and referred to in any
filing with the Securities and Exchange Commission of the
Solicitation/Recommendation Statement of the Company relating to the
Transaction. Our opinion does not address the underlying decision by the Company
to engage in the Transaction and does not constitute a recommendation to any
shareholder of the Company as to whether such stockholder should tender his or
her shares of the Company Common Stock in the Offer or how such shareholder
should vote with respect to the merger or to take any other action in connection
with the Transaction or otherwise.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date hereof,
the consideration to be received by the holders of shares of the Company Common
Stock (other than Parent, Purchaser and any affiliates thereof) in the
Transaction is fair, from a financial point of view, to such holders.
Very truly yours,
UBS SECURITIES LLC
<PAGE>
Exhibit 7
State of the Art, Inc.
56 Technology Drive
Irvine, CA 92618
U.S.A.
January 7, 1998
The Sage Group plc
Sage House
Benton Park Road
Newcastle upon Tyne
NE7 7LZ
United Kingdom
Attention: P. A. Walker, Chief Executive
CONFIDENTIALITY AGREEMENT
-------------------------
Gentlemen:
In connection with your consideration of a possible business
transaction (a "Transaction") with State Of The Art, Inc. (the "Company"), the
Company and you expect to make available to one another certain nonpublic
information concerning their respective business, financial condition,
operations, assets and liabilities. As a condition to such information being
furnished to each party and its directors, officers, employees, agents or
advisors, including, without limitation, attorneys, accountants, consultants,
bankers and financial advisors) (collectively, "Representatives"), each party
agrees to treat any nonpublic information concerning the other party (whether
prepared by the disclosing party, its advisors or otherwise and irrespective of
the form of communication) which is furnished hereunder to a party or to its
Representatives now or in the future by or on behalf of the disclosing party
(herein collectively referred to as the "Evaluation Material") in accordance
with the provisions of this Agreement, and to take or abstain from taking
certain other actions hereinafter set forth.
<PAGE>
1. Evaluation Material. The term "Evaluation Material" also shall be
-------------------
deemed to include all notes, analyses, compilations, studies, interpretations or
other documents prepared by each party or its Representatives which contain,
reflect or are based upon, in whole or in part, the information furnished to
such party or its Representatives pursuant hereto which is not available to the
general public. The term "Evaluation Material" does not include information on
which (i) is or becomes generally available to the public other than as a result
of a breach of this Agreement by the receiving party or its Representatives (ii)
was within the receiving party's possession prior to its being furnished to the
receiving party by or on behalf of the disclosing party, provided that the
source of such information was not know by the receiving party to be bound by a
confidentiality agreement with or other contractual, legal or fiduciary
obligation of confidentiality to the disclosing party, (iii) is or becomes
available to the receiving party on a non-confidential basis from a source other
than the disclosing party or any of its Representatives, provided that such
source was not known by the receiving party to be bound by a confidentiality
agreement with or other contractual, legal or fiduciary obligation of
confidentiality to the disclosing party or any other party with respect to such
information, (iv) is disclosed by the disclosing party to a third party without
a duty of confidentiality, (v) is independently developed by the recipient
without use of Evaluation Material, (vi) is disclosed under operation of law, or
(vii) is disclosed by the recipient or its Representatives with the discloser's
prior written approval.
2. Purpose of Disclosure of Evaluation Material. It is understood
--------------------------------------------
and agreed to by each party that any exchange of information under this
Agreement shall be solely for the purpose of evaluating a Transaction between
the parties and not to affect, in any way, each party's relative competitive
position to each party or to other entities. It is further agreed, that the
information to be disclosed to each other shall only be that information which
is reasonably necessary to a Transaction and that information which is not
reasonably necessary for such purposes shall not be disclosed or exchanged. For
purposes of determining when information is reasonably necessary for such
purpose. legal counsel to each party shall agree, in advance, to review
information requests so as to comply with such standard. In addition, review of
competitively sensitive information such as information concerning product
development or marketing plans, product prices or pricing plans, cost data,
customer or similar information which has been determined to be reasonably
necessary to a Transaction, shall be limited only to those senior executives and
Representatives who are involved in evaluating or negotiating a Transaction or
approving the value of a Transaction.
2
<PAGE>
3. Use of Evaluation Material. Each party hereby agrees that it and
--------------------------
its Representatives shall use the other's Evaluation Material solely for the
purpose of evaluating a possible Transaction between the parties, and that the
disclosing party's Evaluation Material will be kept confidential and each party
and its Representatives will not disclose or use for purposes other than the
evaluation of a Transaction any of the other's Evaluation Material in any manner
whatsoever; provided, however, that (i) the receiving party may make any
disclosure of such information to which the disclosing party gives its prior
written consent and (ii) any of such information may be disclosed to the
receiving party's Representatives who need to know such information for the sole
purpose of evaluating a possible Transaction between the parties, who are
provided with a copy of this Agreement and who are directed by the receiving
party to treat such information confidentially. Each party is aware, and will
advise its Representatives who are informed of the matters that are the subject
of this Agreement, of the restrictions imposed by the United States securities
laws on the purchase or sale of securities by any person who has received
material, nonpublic information from the issuer of such securities and on the
communication of such information to any other person when it is reasonably
foreseeable that such other person is likely to purchase or sell such securities
in reliance upon such information.
4. Non-Disclosure. In addition, each party agrees that, without the
--------------
prior written consent of the other party, its Representatives will not disclose
to any other person the fact that any Evaluation Material has been made
available hereunder, that discussions or negotiations are taking place
concerning a Transaction involving the parties or any of the terms, conditions
or other facts with respect thereto (including the status thereof), provided
that you may make such disclosure to the London Stock Exchange on a confidential
basis in order to seek a waiver of shareholder approval of the Transaction and
provided further that a party may make such disclosure if in the written opinion
of a party's outside counsel, such disclosure is necessary to avoid committing a
violation of law. In such event, the disclosing party shall use its best
efforts to give advance notice to the other party.
5. Required Disclosure. In the event that a party or its
-------------------
Representatives are requested or required (by oral questions, interrogatories,
requests for information or documents in legal proceedings, subpoena, civil
investigative demand or other similar process) to disclose any of the other
party's Evaluation Material, the party requested or required to make the
disclosure shall provide the other party with prompt notice of any such request
or requirement so that the other party may seek a protective order or other
appropriate remedy and/or waive compliance with the
3
<PAGE>
provisions of this Agreement. If, in the absence of a protective order or other
remedy or the receipt of a wavier by such other party, the party requested or
required to make the disclosure or any of its Representatives are nonetheless,
in the opinion of counsel, legally compelled to disclose the other party's
Evaluation Material to any tribunal, the party requested or required to make the
disclosure or its Representative may, without liability hereunder, disclose to
such tribunal only that portion of the other party's Evaluation Material which
such counsel advises is legally required to be disclosed, provided that the
party requested or required to make the disclosure exercises its reasonable
efforts to preserve the confidentiality of the other party's Evaluation
Material, including, without limitation, by cooperating with the other party to
obtain an appropriate protective order or other reliable assurance that
confidential treatment will be accorded the other party's Evaluation Material by
such tribunal.
6. Termination of Discussion. If either party decides that it does
-------------------------
not wish to proceed with a transaction with the other party, the party so
deciding will promptly inform the other party of that decision by giving a
written notice of termination. In that case, or at any time upon the request of
either disclosing party for any reason, each receiving party will promptly
deliver to the disclosing party or destroy all written Evaluation Material (and
all copies thereof and extracts therefrom) furnished to the receiving party or
its Representatives by or on behalf of the disclosing party pursuant hereto. In
the event of such a decision or request, all other Evaluation Material prepared
by the requesting party shall be destroyed and no copy thereof shall be
retained, and in no event shall either party be obligated to disclose or provide
the Evaluation Material prepared by it or its Representatives to the other
party. Notwithstanding the return or destruction of the Evaluation Material,
each party and its Representatives will continue to be bound by its obligations
of confidentiality and other obligations hereunder.
7. No Representation of Accuracy. Each party understands and
-----------------------------
acknowledges that neither party nor any of its Representatives makes any
representation or warranty, expressed or implied, as to the accuracy or
completeness of the Evaluation Material made available by it or to it. Each
party agrees that neither party nor any of its Representatives shall have any
liability to the other party or to any of its Representatives relating to or
resulting from the use of or reliance upon such other party's Evaluation
Material or any errors therein or omissions therefrom. Only those
representations or warranties which are made in a final definitive agreement
regarding the Transaction, when, as and if executed, and subject to such
limitations and restrictions, as may be specified therein, will have any legal
effect.
4
<PAGE>
8. Definitive Agreements. Each party understands and agrees that no
---------------------
contract or agreement providing for any Transaction involving the parties shall
be deemed to exist between the parties unless and until a final definitive
agreement has been executed and delivered. Each party also agrees that unless
and until a final definitive agreement regarding a Transaction between the
parties has been executed and delivered, neither party will be under any legal
obligation of any kind whatsoever with respect to such a Transaction by virtue
of this Agreement, except for the matters specifically agreed to herein. Both
parties further acknowledge and agree that each party reserves the right, in its
sole discretion, to provide or not provide Evaluation Material to the receiving
party under this Agreement, to reject any and all proposals made by the other
party or any of its Representatives with regard to a Transaction between the
parties, and to terminate discussions and negotiations at any time.
9. Waiver. It is understood and agreed that no failure or delay by
------
either party in exercising any right, power or privilege hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise thereof preclude
any other or future exercise thereof or the exercise of any other right, power
or privilege hereunder.
10. Miscellaneous. Each party agrees to be reasonable for any breach
-------------
of this Agreement by any of its Representatives. No failure or delay by either
party or any of their respective Representatives in exercising any right, power
or privileges under this Agreement shall operate as a waiver thereof nor shall
any single or partial exercise thereof preclude any other or further exercise of
any right, power or privilege hereunder. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions of this Agreement shall not in any
way be affected or impaired thereby.
11. Injunctive Relief. It is further understood and agreed that
-----------------
money damages would not be a sufficient remedy for any breach of this Agreement
by either party or any of its Representatives and that the non-breaching party
shall be entitled to equitable relief, including injunction and specific
performance, as a remedy for any such breach. Such remedies shall not be deemed
to be the exclusive remedies for a breach of this Agreement but shall be in
addition to all other remedies available at law or equity. In the event of
litigation relating to this Agreement, if a court of competent jurisdiction
determines that either party or any of its Representatives have breached this
Agreement, then the breaching party shall be liable and pay
5
<PAGE>
to the non-breaching party the reasonable legal fees incurred in connection with
such litigation, including an appeal therefrom.
12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA, THE UNITED STATES OF
AMERICA, APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED WITHIN SUCH STATE.
13. Term. This Agreement shall terminate three years from the date
----
first set forth above.
14. Standstill. For a period of one year from the date of this
----------
Agreement, each party and its Affiliates (as defined under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), will not (and each party
and its Affiliates will not assist or encourage others to, directly or
indirectly, unless specifically requested to do so in writing in advance by the
other party's Board of Directors:
a. acquire or agree, offer, seek or propose to acquire, or cause to
be acquired ownership (including, but not limited to, beneficial
ownership as defined in Rule 13d-3 under the Exchange Act) of any
of the other party's or its subsidiaries' assets (other than in
the ordinary course of business) or business or any voting
securities issued by the other party which are, or may be,
entitled to vote in the election of the other party's directors
("Voting Securities"), or any rights or options to acquire such
ownership, including from a third party; or
b. make, or in any way participate in, any solicitation of proxies
or consents with respect to any Voting Securities of the other
party, become a participant in any proxy context with respect to
the other party; or seek to advise, encourage or influence any
person or entity with respect to the voting of any Voting
Securities, or demand a copy of the other party's stock ledger,
list of its stockholders or other books and records, or call or
attempt to call any meeting of the stockholders of the other
party, or
6
<PAGE>
c. enter into any discussions, negotiations, arrangements or
understandings with any third party with respect to any of the
matters described in (a) or (b) above.
15. Non-Solicitation. The Company and you agree that, for a period
----------------
of one year from the date of the Agreement, the Company and you will not,
directly or indirectly, solicit for employment any employee of you (or any
subsidiary of you) or the Company (or any subsidiary of the Company),
respectively, or with whom the Company or you, respectively, have had contact or
who became known to the Company or you, respectively, in connection with the
Company's or your, respectively, consideration of the Transaction except for a
general solicitation not aimed at such employees.
16. Counterparts. This Agreement may be executed in two
------------
counterparts, which together shall be considered one and the same agreement and
shall become effective when such counterparts have been signed by each party and
delivered to the other party, it being understood that all parties need not sign
the same counterpart.
7
<PAGE>
Please confirm your agreement with the foregoing by signing and
returning one copy of this Agreement to the undersigned, whereupon this
Agreement shall become a binding agreement between you and the Company.
Very truly yours,
State of the Art, Inc.
By: /s/ David W. Hanna
----------------------------------
David W. Hanna, Chairman, President
Chief Executive Officer
Accepted and Agreed as of
the date first written above
The Sage Group plc
By: /s/ Paul Walker
------------------------------
Name: Paul Walker
Title: Chief Executive Officer
8
<PAGE>
EXHIBIT 8
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made and entered into
effective as of March 17, 1997 (the "Effective Date"), by and between JAMES R.
ECKSTAEDT, an individual, whose address is 7946 East Elderwood Avenue, Orange,
California 92869 (the "Employee"), and STATE OF THE ART, INC., a California
corporation, of 56 West Technology Drive, Irvine, California 92618-2301 (the
"Company").
RECITALS
--------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and the Company's shareholders to assure
that the Company will have the continued dedication and objectivity of the
Employee, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the position
--------
of Vice President of Finance and Chief Financial Officer, with such duties,
responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board or the Chief Executive Officer of the Company
(the "CEO") shall have the right to revise such responsibilities and
compensation from time to time as the Board or the CEO may deem necessary or
appropriate. If any such revision constitutes "Involuntary Termination" as
defined in this Agreement, the Employee shall be entitled to benefits upon such
Involuntary Termination as provided under this Agreement.
<PAGE>
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement. The terms of this
Agreement shall terminate upon the earlier of (i) the date that all obligations
of the parties hereunder have been satisfied or (ii) two years after the
Effective Date; provided, however, that until such time as notice of non-renewal
--------
or termination of this Agreement is given by either the Company or the Employee
to the other, beginning one year after the Effective Date, this Agreement shall
automatically be extended by one month effective as of the end of each month so
that the remaining outstanding term of the Agreement is approximately one year;
provided further that in no event shall the term of this Agreement be so
- -------- -------
extended to a date more than five years after the Effective Date.
Notwithstanding the foregoing, this Agreement may be extended for an additional
period or periods by mutual written agreement of the Company and the Employee.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of One Hundred
Sixty Thousand Dollars ($160,000.00). Such salary shall be reviewed at least
annually and shall be adjusted from time to time. Such salary shall be paid
periodically in accordance with normal Company payroll. The annual compensation
specified in this Section 3(a), as adjusted from time to time, is referred to in
this Agreement as "Base Compensation."
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company of general applicability to other key executives of the Company,
including (without limitation) retirement plans, savings or profit-sharing
plans, deferred compensation plans, supplemental
<PAGE>
retirement or excess-benefit plans, stock option, incentive or other bonus
plans, life, disability, health, accident and other insurance programs, paid
vacations, and similar plans or programs, subject in each case to the generally
applicable terms and conditions of the plan or program in question and to the
determination of the Board or any committee or Company employee administering
such plan or program.
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
------------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under the Company's
then existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Benefits; Misc. In the event the Employee is entitled to
--------------
severance benefits pursuant to subsection 4(a)(i), then in addition to such
severance benefits, the Employee shall receive 100% Company-paid health, dental
and life insurance coverage as provided to such employee immediately prior to
the Employee's termination (the "Company-Paid Coverage"). If such coverage
included the Employee's dependents immediately prior to the Employee's
termination, such dependents shall also be covered at Company expense. Company-
Paid Coverage shall continue for
-3-
<PAGE>
twelve (12) months following termination until (and to the extent) the Employee
becomes covered under another employer's group health, dental or life insurance
plan. In addition, (i) the Company shall pay the Employee any unpaid base salary
due for periods prior to the Termination Date; (ii) the Company shall pay the
Employee all of the Employee's accrued and unused vacation through the
Termination Date; and (iii) following submission of proper expense reports by
the Employee, the Company shall reimburse the Employee for all expenses
reasonably and necessarily incurred by the Employee in connection with the
business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(c) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of thirty-six (36) months following such termination, for
the period prescribed in such option plans.
5. Limitation on Payments and Benefits.
-----------------------------------
(a) Limitation. To the extent that any of the payments and benefits
----------
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related Change of Control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the Company. As part of such notice,
Employee shall also advise the Company of the amount of reduction, if any, that
Employee has, in good faith, determined to be necessary to comply with the
provisions of Section 5(a) hereof. Failure by Employee to provide this notice
within the time allowed will be treated as acceptance by Employee of the amount
of reduction determined by the Company. If any differences regarding the amount
of the reduction have not been resolved by mutual agreement with sixty (60) days
after Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, the amount of reduction determined by Employee will be conclusive and
-4-
<PAGE>
binding on both parties unless, prior to the expiration of such sixty (60) day
period, the Company notifies Employee in writing of the Company's intention to
have the matter submitted to arbitration for resolution and proceeds to do so
promptly. If the Company gives no notice to Employee of a required reduction as
provided in Section 5(b) hereof, Employee may unilaterally determine the amount
of reduction required, if any, and upon written notice to the Company, that
amount will be conclusive and binding on both parties.
(d) Determination of Payments Reduced. If a reduction in the payments
---------------------------------
and benefits that would otherwise be paid or provided to Employee under the
terms of this Agreement is necessary to comply with the provisions of Section
5(a) hereof, Employee shall be entitled to select which payments or benefits
will be reduced (so long as the requirements of Section 5(a) hereof are met).
Within thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of Section
5(c) hereof, Employee will notify the Company in writing regarding which
payments or benefits are to be reduced. If no notification is given by
Employee, the Company will determine which amounts to reduce. If, as a result
of the reductions required by Section 5(a) hereof, the amounts previously paid
to Employee exceed the amount to which Employee is entitled, Employee will
promptly return the excess amount to the Company. In the event such excess
amount (or any portion thereof) is determined (by a final determination by the
IRS or a court decision or a binding agreement with the IRS) to be subject to
the excise tax imposed by Section 4999 of the Code notwithstanding the return of
such excess amount by Employee to the Company in accordance with the preceding
sentence, the Company shall promptly return such excess amount (or portion
thereof) to Employee. The Company shall have no obligation (as between Employee
and the Company) to pay any excise tax imposed on Employee by Section 4999 of
the Code with respect to any payments and benefits provided in this Agreement
which constitute "parachute payments" within the meaning of Section 280G of the
Code (other than to the extent the Company has withheld any such amounts).
6. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in wrongful or illegal
conduct which is injurious to the Company or its affiliates;
-5-
<PAGE>
(iii) Employee being convicted of a felony, or committing an act
of dishonesty or fraud against, or the misappropriation of property belonging
to, the Company or its affiliates;
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee breaching in any material respect the terms of
this Agreement (or any other agreement with the Company);
(vi) Employee's commencement of employment with another
employer while he is an employee of the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
-6-
<PAGE>
(c) Disability. "Disability" shall mean that the Employee has been or
----------
will be unable to perform his duties under this Agreement for a period of three
or more months due to illness, accident or other physical or mental incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position with the
Company, for a period of 30 days after notice thereof from Employee to the Chief
Executive Officer of the Company setting forth in reasonable detail the respects
in which Employee believes such assignments or duties are substantially
inconsistent with the level of Employee's position;
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus)is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the earlier of: (A) the date on which the Employee delivers the
notice of termination to the Company, or (B) the date of the Company's
confirmation of the Employee's resignation given orally or by conduct.
7. Successors.
----------
-7-
<PAGE>
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mails,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 8 of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). In
the event of a voluntary resignation by Employee not communicated by Employee in
writing, the Company shall confirm the Company's acceptance of the Employee's
resignation by written notice given to Employee within two business days from
the date of the Employee's tender of his or her resignation. Absent exceptional
circumstances rendering Employee unable to respond, the Employee's failure to
give written notice to the Company disputing the Company's confirmation of the
resignation, within five business days from the date of the Company's notice to
Employee, shall be deemed conclusive evidence that Employee has resigned. Any
dispute regarding whether Employee's resignation was a voluntary resignation
shall be subject to resolution exclusively by binding arbitration as provided in
this Agreement. This section shall only apply during the 12 months following a
Change of Control.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall
-8-
<PAGE>
be decided by arbitration by the American Arbitration Association in accordance
with the rules and regulations of that Association. By entering into this
Agreement, the Company and the Employee expressly waive any right to (1) a jury
trial of any dispute or controversy subject to arbitration under this Agreement;
(2) any award of punitive damages; and (3) judicial review of any arbitration
award hereunder, except to the extent expressly provided by this Agreement.
The arbitrator shall be selected as follows: In the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select an independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place in Orange County, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained by
the arbitrators in secrecy under seal, available for the inspection only of the
Company or the Employee and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrator, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary and/or a permanent injunction, and shall also be able to
award damages, with or without an accounting and costs, provided that punitive
damages shall not be awarded. The decree or judgment of an award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
The arbitrator's authority shall be limited to considering and deciding
disputes or controversies arising from or respecting this Agreement, and to
awarding relief specifically provided for by Sections 3 and 4 of this Agreement.
The arbitrator shall not have authority to alter or waive provisions of this
Agreement, to award relief not expressly permitted by this Agreement, or to
modify existing policies or procedures of the Employer. The arbitrator's
decision shall be in writing and shall set forth the facts and reasons
supporting it. The arbitrator shall not have the power to commit errors of law
or legal reasoning, and the award may be vacated or corrected pursuant to
California Code of Civil Procedure section 1286.2 or 1286.6 for any such error.
The arbitrator's decision/award shall be final binding on all parties.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such manner as the law
shall require.
10. Miscellaneous Provisions.
------------------------
-9-
<PAGE>
(a) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, notwithstanding choice of law rules.
(d) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(e) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection shall be
void.
(f) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(g) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(h) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
-10-
<PAGE>
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
--------------------------------------
David W. Hanna
President & Chief Executive Officer
EMPLOYEE: JAMES R. ECKSTAEDT
By: /s/ James R. Eckstaedt
--------------------------------------
James R. Eckstaedt
-11-
<PAGE>
EXHIBIT 9
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made and entered into
effective as of September 22, 1997 (the "effective Date"), by and between
GREGORY G. DAVIDSON, an individual, whose address is 5762 Algonquin Court, Troy,
Michigan 48098 (the "Employee"), and STATE OF THE ART, INC., a California
corporation, of 56 West Technology Drive, Irvine, California 92618-2301 (the
"Company").
R E C I T A L S
---------------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and the Company's shareholders to assure
that the Company will have the continued dedication and objectivity of the
Employee, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change Of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change Of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change Of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In consideration of the mutual covenants herein contained, and
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the position
--------
of Vice President, Client-Server Division, with such duties, responsibilities
and compensation as in effect as of the Effective Date; provided, however, that
the Board or the Chief Executive Officer of the Company (the "CEO") shall have
the right to revise such responsibilities and compensation from time to time as
the Board or the CEO may deem necessary or appropriate. If any such revision
constitutes "Involuntary Termination" as defined in this Agreement, the Employee
shall be entitled to benefits upon such Involuntary Termination as provided
under this Agreement.
<PAGE>
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement. The terms of this
Agreement shall terminate upon the Earlier of (i) the date that all obligation
of the parties hereunder have been satisfied or (ii) two years after the
Effective Date; provided, however, that until such time as notice of non-renewal
--------
or termination of this agreement is given by either the Company or the Employee
to the other, beginning one year after the Effective Date, this Agreement shall
automatically be extended by one month effective as of the end of each month so
that the remaining outstanding term of the Agreement is approximately one year;
provided further that in no event shall the term of this Agreement be so
- -------- -------
extended to a date more than five years after the Effective Date.
Notwithstanding the foregoing, this Agreement may be extended for an additional
period or periods by mutual written agreement of the Company and the Employee.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
--------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of Once Hundred
Twenty Thousand Dollars ($120,000.00). Such salary shall be reviewed at least
annually and shall be adjusted from time to time. Such salary shall be paid
periodically in accordance with normal Company payroll. The annual compensation
specified in this Section 3(a), as adjusted from time to time, is referred to in
this Agreement as "Base Compensation.
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefits plans and executive compensation programs maintained by
the Company of general applicability to other key executives of the Company,
including (without limitation) retirement plans, savings or profit-sharing
plans, deferred compensation plans, supplemental retirement or excess-benefit
plans, stock option, incentive or other bonus plans, life, disability,
<PAGE>
health, accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determination of the
Board or any committee or Company employee administering such plan or program.
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change Of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which termination occurs, and the
denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and it is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under the Company's
then existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Benefits; Misc. In the event the Employee is entitled to
--------------
severance benefits pursuant to subsection 4(a)(i), then in addition to such
severance benefits, the Employee shall receive 100% Company-paid health, dental
and life insurance coverage as provided to such employee immediately prior to
the Employee's termination (the "Company Paid Coverage"). If such coverage
included the Employee's dependents immediately prior to the Employee's
termination, such dependents shall also be covered at Company expense. Company-
Paid Coverage shall continue for twelve (12) months following termination until
(and to the extent) the Employee becomes covered
-3-
<PAGE>
under another employer's group health, dental or life insurance plan. In
addition, (i) the Company shall pay the Employee any unpaid base salary due for
periods prior to the Termination Date; (ii) the Company shall pay the Employee
all of the Employee's accrued and unused vacation through the Termination Date;
and (iii) following submission of proper expense reports by the Employee, the
Company shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to
termination. These payments shall be made promptly upon termination and within
the period of time mandated by law.
(c) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of thirty-six (36) months following such termination, for
the period prescribed in such option plans.
5. Limitation on Payments and Benefits.
-----------------------------------
(a) Limitation. To the extent that any of the payments and benefits
----------
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 time Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related Change Of Control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30 days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the Company. As part of such notice,
Employee shall also advise the Company of the amount of reduction, if any, that
Employee has, in good faith, determined to be necessary to comply with the
provisions of Section 5(a) hereof. Failure by Employee to provide this notice
within the time allowed will be treated as acceptance by Employee of the amount
of reduction determined by the Company. If any difference regarding the amount
of the reduction have not been resolved by mutual agreement within sixty (60)
days after Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, the amount of reduction determined by Employee will be conclusive and
binding on both parties unless, prior to the expiration of such sixty (60) day
period, the Company notifies Employee in writing of the Company's intention to
have the matter submitted to arbitration
-4-
<PAGE>
for resolution and proceeds to do so promptly. If the Company gives no notice to
Employee of a required reduction as provided in Section 5(b) hereof, Employee
may unilaterally determine the amount of reduction required, if any, and, upon
written notice to the Company, that amount will be conclusive and binding on
both parties.
(d) Determination of Payments Reduced. If a reduction in the
---------------------------------
payments and benefits that would otherwise be paid or provided to Employee under
the terms of this Agreement is necessary to comply with the provisions of
Section 5(a) hereof, Employee shall be entitled to select which payments or
benefits will be reduced (so long as the requirements of Section 5(a) hereof are
met). Within thirty (30) days after the amount of any required reduction of
payments and benefits is finally determined in accordance with the provisions of
Section 5(c) hereof, Employee will notify the Company in writing regarding which
payments of benefits are to be reduced. If no notification is given by Employee,
the Company will determine which amounts to reduce. If, as a result of the
reductions required by Section 5(a) hereof, the amounts previously paid to
Employee exceed the amount to which Employee is entitled, Employee will promptly
return the excess amount to the Company. In the event such excess amount (or any
portion therefor) is determined (by a final determination by the IRS or a court
decision or a binding agreement with the IRS) to be subject to the excise tax
imposed by Section 4999 of the Code notwithstanding the return of such excess
amount by Employee to the Company in accordance with the preceding sentence, the
Company shall promptly return such excess amount (or portion thereof) to
Employee. The Company shall have no obligation (as between Employee and the
Company) to pay any excise tax imposed on Employee by Section 4999 of the Code
with respect to any payments and benefits provided in this Agreement which
constitute "parachute payments" within the meaning of Section 280G of the Code
(other than to the extent the Company has withheld any such amounts).
6. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in wrongful or illegal
conduct which is injurious to the Company or its affiliates;
(iii) Employee being convicted of a felony, or committing an act
of dishonesty or fraud against, or the misappropriation of property belonging
to, the Company or its affiliates;
-5-
<PAGE>
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee breaching in any material respect the terms of
this Agreement (or any other agreement with the Company);
(vi) Employee's commencement of employment with another
employer while he is an employee of the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include and individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or being converted into voting securities of the surviving
entity) at least 50 percent (50%) of the total voting power represented by the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been
----------
or will be unable to perform his duties under this Agreement for a period of
three or more months due to illness, accident or other physical or mental
incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
-6-
<PAGE>
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position within the
Company, for a period of 30 days after notice thereof from Employee to the Chief
Executive Officer of the Company setting forth in reasonable detail the respects
in which Employee believes such assignments or duties are substantially
inconsistent with the level of Employee's position;
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level
of employee benefits (other than salary or bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material
provision of this Agreement which continues uncured for thirty days following
notice thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the earlier of: (A) the date on which the Employee delivers the notice
of termination to the Company, or (B) the date of the Company's confirmation of
the Employee's resignation given orally or by conduct.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligation
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any
-7-
<PAGE>
successor to the Company's business and/or assets which executes and delivers
the assumption agreement described in this subsection (a) or which becomes bound
by the terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all
---------------------
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
successors, heirs, distributees, devisees and legatees.
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 8 of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice). In
the event of a voluntary resignation by Employee not communicated by Employee in
writing, the Company shall confirm the Company's acceptance of the Employee's
resignation by written notice given to Employee within two business days from
the date of the Employee's tender of his or her resignation. Absent exceptional
circumstance rendering Employee unable to respond, the Employee's failure to
give written notice to the Company disputing the Company's confirmation of the
resignation, within five business days from the date of the Company's notice to
Employee, shall be deemed conclusive evidence the Employee has resigned. Any
dispute regarding whether Employee's resignation was a voluntary resignation
shall be subject to resolution exclusively by binding arbitration as provided in
this Agreement. This section shall only apply during the 12 months following a
Change Of Control.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of the
Association. By entering into this Agreement, the Company and the Employee
expressly waive any right to (1) a jury trial of any dispute or controversy
subject to arbitration under this Agreement; (2) any award of punitive damages;
and (3) judicial review of any arbitration award hereunder, except to the extent
expressly provided by this Agreement.
-8-
<PAGE>
The arbitrator shall be selected as follows: In the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrator so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place in Orange County, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained by
the arbitrators in secrecy under seal, available for the inspection only of the
Company or the Employee and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrator, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary and/or a permanent injunction, and shall also be able to
award damages, with or without an accounting and costs, provided that punitive
damages shall not be awarded. The decree or judgement of an award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
The arbitrator's authority shall be limited to considering and deciding
disputes or controversies arising from or respecting this Agreement, and to
awarding relief specifically provided for by Sections 3 and 4 of this Agreement.
The arbitrator shall not have authority to alter or waive provisions of this
Agreement, to award relief not expressly permitted by this Agreement, or to
modify existing policies or procedures of the Employer. The arbitrator's
decision shall be in writing and shall set forth the facts and reasons
supporting it. The arbitrator shall not have the power to commit errors of law
or legal reasoning, and the award may be vacated or corrected pursuant to
California Code of Civil Procedure section 1286.2 or 1286.6 for any such error.
The arbitrator's decision/award shall be final binding on all parties.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by the law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearing in such manner as the
law shall require.
10. Miscellaneous Provisions.
------------------------
(a) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
-9-
<PAGE>
(b) Whole Agreement. No agreements, representations or understanding
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, not withstanding choice of law rules.
(d) Severability. The invalidity or unenforceability of any
------------
provision or provisions of the Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(e) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection shall be
void.
(f) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(g) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(h) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly assigned officer, as of the day and year first
written above.
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
---------------------------------
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<PAGE>
David W. Hanna
President and Chief Executive Officer
EMPLOYEE: GREGORY G. DAVIDSON
By: /s/ Gregory G. Davidson
-------------------------------------
Gregory G. Davidson
-11-
<PAGE>
Exhibit 10
SEVERANCE AGREEMENT
This Severance Agreement (the "Agreement") is made and entered into
effective as of October 17, 1997 (the "Effective Date"), by and between
RICHARD G. LULL, an individual, whose address is 1301 East Balboa Boulevard,
Balboa, California 92661 (the "Employee"), and STATE OF THE ART, INC., a
California corporation, of 56 West Technology Drive, Irvine, California 92618-
2301 (the "Company").
RECITALS
A. It is expected that the company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee
to consider alternative employment opportunities. The Board has determined
that it is in the best interests of the Company and the Company's shareholders
to assure that the Company will have the continued dedication and objectivity
of the Employee, notwithstanding the possibility, threat or occurrence of a
Change of Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of
a Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section 6
below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
(a) Position. The Company shall employ the Employee in the position of
Vice President of Marketing, with such duties, responsibilities and
compensation as in effect as of the Effective Date; provided, however, that
the Board or the Chief Executive Officer of the Company (the "CEO") shall
have the right to revise such responsibilities and compensation from time
to time as the Board or the CEO may deem necessary or appropriate. If any
such revision constitutes "Involuntary Termination" as defined in this
Agreement, the Employee shall be entitled to benefits upon such Involuntary
Termination as provided under this Agreement.
(b) Obligations. The Employee shall devote his full business efforts and
time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do
not interfere or conflict with his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement. The terms of this
Agreement shall terminate upon the earlier of (i) the date that all
obligations of the parties hereunder have been satisfied or (ii) two years
after the Effective Date; provided, however, that until such time as notice of
non-renewal or termination of this Agreement is given by either the Company or
the Employee to the other, beginning one year after the Effective Date, this
Agreement shall automatically be extended by one month effective as of the end
of each month so that the remaining outstanding
<PAGE>
term of the Agreement is approximately one year; provided further that in no
event shall the term of this Agreement be so extended to a date more than five
years after the Effective Date. Notwithstanding the foregoing, this Agreement
may be extended for an additional period or periods by mutual written
agreement of the Company and the Employee. A termination of the terms of this
Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or
provision of compensation or benefits on account of a termination of
employment occurring prior to the termination of the terms of this Agreement.
3. Compensation and Benefits.
(a) Base Compensation. The Company shall pay the Employee as compensation
for services a base salary at the annualized rate of One Hundred Fifty
Thousand Dollars ($150,000.00). Such salary shall be reviewed at least
annually and shall be adjusted from time to time. Such salary shall be paid
periodically in accordance with normal Company payroll. The annual
compensation specified in this Section 3(a), as adjusted from time to time,
is referred to in this Agreement as "Base Compensation."
(b) Bonus. Beginning with the Company's current fiscal year and for each
fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus
payable hereunder shall be payable in accordance with the Company's normal
practices and policies.
(c) Employee Benefits. The Employee shall be eligible to participate in
the employee benefit plans and executive compensation programs maintained
by the Company of general applicability to other key executives of the
Company, including (without limitation) retirement plans, savings or
profit-sharing plans, deferred compensation plans, supplemental retirement
or excess-benefit plans, stock option, incentive or other bonus plans,
life, disability, health, accident and other insurance programs, paid
vacations, and similar plans or programs, subject in each case to the
generally applicable terms and conditions of the plan or program in
question and to the determination of the Board or any committee or Company
employee administering such plan or program.
4. Severance Benefits.
(a) Termination Following A Change of Control. If the Employee's
employment with the Company terminates at any time within twelve (12)
months after a Change of Control, then, subject to Section 5, the Employee
shall be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment terminates
as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base
Compensation of the Employee at the time of such termination (without
giving effect to any reduction in Base Compensation that resulted in
such Involuntary Termination). In addition, the Employee shall be
entitled to a payment of a pro-rata portion of the Target Bonus
determined by multiplying the Target Bonus by a fraction, the numerator
of which shall be the number of days in which the Employee was employed
by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal
year, such payment to be made in a lump sum within ten (10) business
days after the Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the Employee's
employment terminates by reason of the Employee's voluntary resignation
(and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to
receive severance or other benefits except for those (if any) as may
then be established (and applicable) under the Company's then existing
severance and benefits plans and policies at the time of such
termination.
(iii) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established (and applicable)
under the Company's then existing severance and benefits plans and
policies at the time of such Disability or death.
2
<PAGE>
(b) Benefits; Misc. In the event the Employee is entitled to severance
benefits pursuant to subsection 4(a)(i), then in addition to such severance
benefits, the Employee shall receive 100% Company-paid health, dental and
life insurance coverage as provided to such employee immediately prior to
the Employee's termination (the "Company-Paid Coverage"). If such coverage
included the Employee's dependents immediately prior to the Employee's
termination, such dependents shall also be covered at Company expense.
Company-Paid Coverage shall continue for twelve (12) months following
termination until (and to the extent) the Employee becomes covered under
another employer's group health, dental or life insurance plan. In
addition, (i) the Company shall pay the Employee any unpaid base salary due
for periods prior to the Termination Date; (ii) the Company shall pay the
Employee all of the Employee's accrued and unused vacation through the
Termination Date; and (iii) following submission of proper expense reports
by the Employee, the Company shall reimburse the Employee for all expenses
reasonably and necessarily incurred by the Employee in connection with the
business of the Company prior to termination. These payments shall be made
promptly upon termination and within the period of time mandated by law.
(c) Options. In the event the Employee is entitled to severance benefits
pursuant to subsection 4(a)(i), upon such termination, in addition to any
portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become
exercisable as to an additional amount as though the Employee had remained
continuously employed for a period of thirty-six (36) months following such
termination, for the period prescribed in such option plans.
5. Limitation on Payments and Benefits.
(a) Limitation. To the extent that any of the payments and benefits
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but
for this Section 5, would be subject to the excise tax imposed by Section
4999 of the Code, the aggregate amount of such payments and benefits shall
be reduced such that the present value thereof (as determined under the
Code and applicable regulations) is equal to 2.99 times Employee's "base
amount" (as defined in the Code).
(b) Company Notice. Within thirty (30) days after the later of
Termination or the related Change of Control, the Company shall notify
Employee in writing if it believes that any reduction in the payments and
benefits that would otherwise be paid or provided to the Employee under the
terms of this Agreement is required to comply with the provisions of
Section 5(a) hereof. If the Company determines that any such reduction is
required, it will provide Employee with copies of the information used and
calculations made by the Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days after
the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees
with the amount of reduction determined by the Company. As part of such
notice, Employee shall also advise the Company of the amount of reduction,
if any, that Employee has, in good faith, determined to be necessary to
comply with the provisions of Section 5(a) hereof. Failure by Employee to
provide this notice within the time allowed will be treated as acceptance
by Employee of the amount of reduction determined by the Company. If any
differences regarding the amount of the reduction have not been resolved by
mutual agreement within sixty (60) days after Employee's receipt of the
Company's notice pursuant to Section 5(b) hereof, the amount of reduction
determined by Employee will be conclusive and binding on both parties
unless, prior to the expiration of such sixty (60) day period, the Company
notifies Employee in writing of the Company's intention to have the matter
submitted to arbitration for resolution and proceeds to do so promptly. If
the Company gives not notice to Employee of a required reduction as
provided in Section 5(b) hereof, Employee may unilaterally determine the
amount of reduction required, if any, and, upon written notice to the
Company, that amount will be conclusive and binding on both parties.
(d) Determination of Payments Reduced. If a reduction in the payments and
benefits that wold otherwise be paid or provided to Employee under the
terms of this Agreement is necessary to comply with the provisions of
Section 5(a) hereof, Employee shall be entitled to select which payments or
benefits will be reduced (so long as the requirements of Section 5(a)
hereof are met). Within thirty (30) days after the
3
<PAGE>
amount of any required reduction in payments and benefits is finally
determined in accordance with the provisions of Section 5(c) hereof,
Employee will notify the Company in writing regarding which payments or
benefits are to be reduced. If no notification is given by Employee, the
Company will determine which amounts to reduce. If, as a result of the
reductions required by Section 5(a) hereof, the amounts previously paid to
Employee exceed the amount to which Employee is entitled, Employee will
promptly return the excess amount to the Company. In the event such excess
amount (or any portion thereof) is determined (by a final determination by
the IRS or a court decision or a binding agreement with the IRS) to be
subject to the excise tax imposed by Section 4999 of the Code
notwithstanding the return of such excess amount (or portion thereof) to
Employee. The Company shall have no obligation (as between Employee and the
Company) to pay any excise tax imposed on Employee by Section 4999 of the
Code with respect to any payments and benefits provided in this Agreement
which constitute "parachute payments" within the meaning of Section 280G of
the Code (other than to the extent the Company has withheld any such
amounts).
6. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:
(a) Cause. "Cause" shall mean:
(i) Employee's continued failure to substantially perform his duties
or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the
Company to Employee setting forth in reasonable detail the respects in
which the Company believes Employee has not substantially performed his
duties or responsibilities hereunder;
(ii) Employee personally engaging in wrongful or illegal conduct
which is injurious to the Company or its affiliates;
(iii) Employee being convicted of a felony, or committing an act of
dishonesty or fraud against, or the misappropriation of property
belonging to, the Company or its affiliates;
(iv) The performance by Employee of those acts identified in Section
2924 of the California Labor Code;
(v) Employee breaching in any material respect the terms of this
Agreement (or any other agreement with the Company);
(vi) Employee's commencement of employment with another employer
while he is an employee of the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence of
any of the following events:
(i) Any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said
Act), directly or indirectly, of securities of the Company representing
30% or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer
than a majority of the directors are Incumbent Directors. "Incumbent
Directors" shall mean directors who either (A) are directors of the
Company as of the date hereof, or (B) are elected, or nominated for
election, to the Board of Directors of the Company with the affirmative
votes of at least a majority of the Incumbent Directors at the time of
such election or nomination (but shall not include an individual whose
election or nomination is in connection with an actual or threatened
proxy contest relating to the election of directors to the Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into
voting securities of the surviving entity) at least fifty percent
4
<PAGE>
(50%) of the total voting power represented by the voting securities of
the Company or such surviving entity outstanding immediately after such
merger or consolidation, or the stockholders of the Company approve a
plan of complete liquidation of the Company or an agreement for the
sale or disposition by the Company of all or substantially all the
Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been or
will be unable to perform his duties under this Agreement for a period of
three or more months due to illness, accident or other physical or mental
incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which
is substantially inconsistent with the level of Employee's position
with the Company, for a period of 30 days after notice thereof from
Employee to the Chief Executive Officer of the Company setting forth in
reasonable detail the respects in which Employee believes such
assignments or duties are substantially inconsistent with the level of
Employee's position;
(ii) a material reduction in Employee's salary, other than any such
reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Employee is
entitled immediately prior to such reduction with the result that
Employee's overall benefits package (other than salary and bonus) is
substantially reduced (other than any such reduction applicable to
officers of the Company generally);
(iv) the relocation of Employee's principal place for the rendering
of the services to be provided by him hereunder to a location more than
fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material provision of
this Agreement which continues uncured for 30 days following notice
thereof;
provided that none of the foregoing shall constitute Involuntary Termination
to the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the Employee's
employment is terminated by the Company for Disability, thirty (30) days
after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's
duties on a full-time basis during such thirty (30) day period), (ii) if
the Employee's employment is terminated by the Company for any other
reason, the date on which a notice of termination is given, or (iii) if the
Agreement is terminated by the Employee, the earlier of: (A) the date on
which the Employee delivers the notice of termination to the Company, or
(B) the date of the Company's confirmation of the Employee's resignation
given orally or by conduct.
7. Successors.
(a) Company's Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, lease, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same
manner and to the same extent as the Company would be required to perform
such obligations in the absence of a succession. For all purposes under
this Agreement, the term "Company" shall include any successor to the
Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the
terms of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights of
the Employee shall inure to the benefit of, and be enforceable by, the
Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
5
<PAGE>
8. Notice.
(a) General. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified
mail, return receipt requested and postage prepaid. In the case of the
Employee, mailed notices shall be addressed to him at the home address
which he most recently communicated to the Company in writing. In the case
of the Company, mailed notices shall be addressed to its corporate
headquarters, and all notices shall be directed to the attention of its
Secretary.
(b) Notice of Termination. Any termination by the Company for Cause or by
the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 8 of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify
the termination date (which shall be not more than 30 days after the giving
of such notice). In the event of a voluntary resignation by Employee not
communicated by Employee in writing, the Company shall confirm the
Company's acceptance of the Employee's resignation by written notice given
to Employee within two business days from the date of the Employee's tender
of his or her resignation. Absent exceptional circumstances rendering
Employee unable to respond, the Employee's failure to give written notice
to the Company disputing the Company's confirmation of the resignation,
within five business days from the date of the Company's notice to
Employee, shall be deemed conclusive evidence that Employee has resigned.
Any dispute regarding whether Employee's resignation was a voluntary
resignation shall be subject to resolution exclusively by binding
arbitration as provided in this Agreement. This section shall only apply
during the 12 months following a Change of Control.
9. Arbitration. At the option of either party, any and all disputes or
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association. By entering into this Agreement, the Company and the Employee
expressly waive any right to (1) a jury trial of any dispute or controversy
subject to arbitration under this Agreement; (2) any award of punitive
damages; and (3) judicial review of any arbitration award hereunder, except to
the extent expressly provided by this Agreement.
The arbitrator shall be selected as follows: In the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by
such arbitrator. In the event the Company and the Employee do not so agree,
the Company and the Employee shall each select one independent, qualified
arbitrator and the two arbitrators so selected shall select the third
arbitrator. The Company reserves the right to object to any individual
arbitrator who shall be employed by or affiliated with a competing
organization.
Arbitration shall take place in Orange County, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained
by the arbitrators in secrecy under seal, available for the inspection only of
the Company or the Employee and their respective attorneys and their
respective experts who shall agree in advance and in writing to receive all
such information confidentially and to maintain such information in secrecy
until such information shall become generally known. The arbitrator, who shall
act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary and/or a permanent injunction, and shall also
be able to award damages, with or without an accounting and costs, provided
that punitive damages shall not be awarded. The decree or judgment of an award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof.
The arbitrator's authority shall be limited to considering and deciding
disputes or controversies arising from or respecting this Agreement, and to
awarding relief specifically provided for by Sections 3 and 4 of this
Agreement. The arbitrator shall not have authority to alter or waive
provisions of this Agreement, to award relief not expressly permitted by this
Agreement, or to modify existing policies or procedures of the Employer. The
6
<PAGE>
arbitrator's decision shall be in writing and shall set forth the facts and
reasons supporting it. The arbitrator shall not have the power to commit
errors of law or legal reasoning, and the award may be vacated or corrected
pursuant to California Code of Civil Procedure section 1286.2 or 1286.6 for
any such error. The arbitrator's decision/award shall be final and binding on
all parties.
Reasonable notice of the time and place of arbitration shall be given to all
persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as
the law shall require.
10. Miscellaneous Provisions.
(a) Waiver. No provision of this Agreement shall be modified, waived or
discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee or by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach
of, or of compliance with, any condition or provision of this Agreement by
the other party shall be considered a waiver of any other condition or
provision or of the same condition or provision at another time.
(b) Whole Agreement. No agreements, representations or understandings
(whether oral or written and whether express or implied) which are not
expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(c) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California, notwithstanding choice of law rules.
(d) Severability. The invalidity or unenforceablity of any provision or
provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
(e) No Assignment of Benefits. The rights of any person to payments or
benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation
of law, including (without limitation) bankruptcy, garnishment, attachment
or other creditor's process, and any action in violation of this subsection
shall be void.
(f) Employment Taxes. All payments made pursuant to this Agreement will
be subject to withholding of applicable income and employment taxes.
(g) Assignment by Company. The Company may assign its rights under this
Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of
assignment. In the case of any such assignment, the term "Company" when
used in a section of this Agreement shall mean the corporation that
actually employs the Employee.
(h) Counterparts. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year
first above written.
COMPANY: Statue of the Art, Inc.
By: /s/ David W. Hanna
-----------------------------------
David W. Hanna
President & Chief Executive Officer
EMPLOYEE: Richard G. Lull
By: /s/ Richard G. Lull
-----------------------------------
Richard G. Lull
7
<PAGE>
EXHIBIT 11
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made and entered into
effective as of January 24, 1995 (the "Effective Date"), by and between Jeffrey
E. Gold (the "Employee") and State Of The Art, Inc. (the "Company").
RECITALS
--------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the position
--------
of Vice President-Entry Systems Development, with such duties, responsibilities
and compensation as in effect as of the Effective Date; provided, however, that
the Board and the Chief Executive Officer of the Company (the "CEO") shall have
the right to revise such responsibilities and compensation from time to time as
the Board or the CEO may deem necessary or appropriate. If any such revision
constitutes "Involuntary Termination" as defined in Section 6(d) of this
Agreement, the Employee shall be entitled to benefits upon such Involuntary
Termination as provided under this Agreement.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from
<PAGE>
engaging in such activities and services as do not interfere or conflict with
his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall terminate upon the earlier of (i) the date that
all obligations of the parties hereunder have been satisfied or (ii) two years
after the Effective Date; provided, however, that until such time as notice of
--------
non-renewal or termination of this Agreement is given by either the Company or
the Employee to the other, beginning one year after the Effective Date, this
Agreement shall automatically be extended by one month effective as of the end
of each month so that the remaining outstanding term of the Agreement is
approximately one year; provided further that in no event shall the term of this
-------- -------
Agreement be so extended to a date more than five years after the Effective
Date. Notwithstanding the foregoing, this Agreement may be extended for an
additional period or periods by mutual written agreement of the Company and the
Employee. A termination of the terms of this Agreement pursuant to the
preceding sentence shall be effective for all purposes, except that such
termination shall not affect the payment or provision of compensation or
benefits on account of a termination of employment occurring prior to the
termination of the terms of this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of $115,000. Such
salary shall be reviewed at least annually and shall be adjusted from time to
time. Such salary shall be paid periodically in accordance with normal Company
payroll. The annual compensation specified in this Section 3(a), as adjusted
from time to time, is referred to in this Agreement as "Base Compensation."
(b) Bonus. Beginning with the Company's current fiscal year and
-----
for each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company of general applicability to other key executives of the Company,
including (without limitation) retirement plans, savings or profit-sharing
plans, deferred compensation plans, supplemental retirement or excess benefit
plans, stock option, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans or
programs, subject in each case to the
-2-
<PAGE>
generally applicable terms and conditions of the plan or program in question and
to the determination of the Board or any committee administering such plan or
program.
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under the Company's
then existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Termination Apart from Change of Control. If, within two (2)
----------------------------------------
years of the Effective Date, the Employee's employment with the Company
terminates, either prior to the occurrence of a Change of Control or in the
absence of a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to
-3-
<PAGE>
twelve (12) months Base Compensation of the Employee at the time of such
termination (without giving effect to any reduction in Base Compensation that
resulted in such Involuntary Termination). In addition, the Employee shall be
entitled to a payment of a pro-rata portion of the Target Bonus determined by
--------
multiplying the Target Bonus by a fraction, the numerator of which shall be the
number of days in which the Employee was employed by the Company in the fiscal
year in which such termination occurs, and the denominator of which shall be the
number of days in such fiscal year, such payment to be made in a lump sum within
ten (10) business days after the Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then-existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under Company's then-
existing severance and benefits plans and policies at the time of such
Disability or death.
(c) Benefits; Misc. In the event the Employee is entitled to
---------------
severance benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in
addition to such severance benefits, the Employee shall receive 100% Company-
paid health, dental and life insurance coverage as provided to such employee
immediately prior to the Employee's termination (the "Company-Paid Coverage").
If such coverage included the Employee's dependents immediately prior to the
Employee's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for twelve (12) months following
termination until (and to the extent) the Employee becomes covered under another
employer's group health, dental or life insurance plan. In addition, (i) the
Company shall pay the Employee any unpaid base salary due for periods prior to
the Termination Date; (H) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Employee, the Company
shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to
termination. These payments shall be made promptly upon termination and within
the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become exercisable as
to an additional amount as though the Employee had remained continuously
-4-
<PAGE>
employed for a period of thirty-six (36) months following such termination, for
the period prescribed in such option plans.
5. Limitation on Payments and Benefit.
----------------------------------
(a) Limitation. To the extent that any of the payments and benefits
----------
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related change of control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the Company. As part of such notice,
Employee shall also advise the Company of the amount of reduction, if any, that
Employee has, in good faith, determined to be necessary to comply with the
provisions of Section 5(a) hereof. Failure by Employee to provide this notice
within the time allowed will be treated as acceptance by Employee of the amount
of reduction determined by the Company. If any differences regarding the amount
of the reduction have not been resolved by mutual agreement within sixty (60)
days after Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, the amount of reduction determined by Employee will be conclusive and
binding on both parties unless, prior to the expiration of such sixty (60) day
period, the Company notifies Employee in writing of the Company's intention to
have the matter submitted to arbitration for resolution and proceeds to do so
promptly. If the Company gives no notice to Employee of a required reduction as
provided in Section 5(b) hereof, Employee may unilaterally determine the amount
of reduction required, if any, and, upon written notice to the Company, that
amount will be conclusive and binding on both parties.
(d) Determination of Payments Reduced. If a reduction in the
---------------------------------
payments and benefits that would otherwise be paid or provided to Employee under
the terms of this Agreement is necessary to comply with the provisions of
Section 5(a) hereof, Employee shall be entitled to select which payments or
benefits will be reduced (so long as the requirements of Section 5(a) hereof are
met). Within thirty (30) days after the amount of any required reduction in
payments and benefits is finally determined in accordance with the provisions of
Section 5(c) hereof, Employee
-5-
<PAGE>
will notify the Company in writing regarding which payments or benefits are to
be reduced. If no notification is given by Employee, the Company will determine
which amounts to reduce. If, as a result of the reductions required by Section
5(a) hereof, the amounts previously paid to Employee exceed the amount to which
Employee is entitled, Employee will promptly return the excess amount to the
Company. In the event such excess amount (or any portion thereof) is determined
(by a final determination by the IRS or a court decision or a binding agreement
with the IRS) to be subject to the excise tax imposed by Section 4999 of the
Code notwithstanding the return of such excess amount by Employee to the Company
in accordance with the preceding sentence, the Company shall promptly return
such excess amount (or portion thereof) to Employee. The Company shall have no
obligation (as between Employee and the Company) to pay any excise tax imposed
on Employee by Section 4999 of the Code with respect to any payments and
benefits provided in this Agreement which constitute "parachute payments" within
the meaning of Section 280G of the Code (other than to the extent the Company
has withheld any such amounts).
6. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in knowing and intentional
illegal conduct which is seriously injurious to the Company or its affiliates;
(iii) Employee being convicted of a felony, or committing an act
of dishonesty or fraud against, or the misappropriation of property belonging
to, the Company or its affiliates;
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee knowingly and intentionally breaching in any
material respect the terms of this Agreement (or any confidentiality agreement
or invention or proprietary information agreement with the Company);
(vi) Employee's commencement of employment with another
employer while he is an employee of the Company; or
-6-
<PAGE>
(vii) any material breach by Employee of any material provision
of this Agreement which continues uncured for 30 days following notice thereof.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" or "group" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been
----------
or will be unable to perform his duties under this Agreement for a period of
three or more months due to illness, accident or other physical or mental
incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position with the
Company, for a period of 30 days after notice thereof from Employee to the Chief
Executive Officer of the Company setting forth in reasonable detail the respects
in which Employee believes such assignments or duties are substantially
inconsistent with the level of Employee's position;
-7-
<PAGE>
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level
of employee benefits (other than salary and bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of Manzanita Software Systems; or
(v) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (H) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all
---------------------
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
-8-
<PAGE>
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8 of this Agreement. Such notice shall
indicate the specific termination provision in this Agreement relied upon, shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination under the provision so indicated, and shall specify the
termination date (which shall be not more than 30 days after the giving of such
notice). The failure by the Employee to include in the notice any fact or
circumstance which contributes to a showing of Involuntary Termination shall not
waive any right of the Employee hereunder or preclude the Employee from
asserting such fact or circumstance in enforcing his rights hereunder.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association.
The arbitrator shall be selected as follows: In the event the Company
and the Employee agree on one arbitrator, the arbitration shall be conducted by
such arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place in Orange County, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in the utmost secrecy; in such
case all documents, testimony and records shall be received, heard and
maintained by the arbitrators in secrecy under seal, available for the
inspection only of the Company or the Employee and their respective attorneys
and their respective experts who shall agree in advance and in writing to
receive all such information confidentially and to maintain such information in
secrecy until such information shall become generally known. The arbitrator, who
shall act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary and/or a permanent injunction, and shall also be
able to award damages, with or without an accounting and
-9-
<PAGE>
costs, provided that punitive damages shall not be awarded. The decree or
judgment of an award rendered by the arbitrators may be entered in any court
having jurisdiction thereof.
Reasonable notice of the time and place of arbitration shall be given
to all persons, other than the parties, as shall be required by law, in which ca
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration hearings in such manner as the law
shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(d) Severance Provisions in Other Agreements. The Employee
----------------------------------------
acknowledges and agrees that the severance provisions set forth in this
Agreement shall supersede any such provisions in any employment agreement
entered into between the Employee and the Company.
(e) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(f) Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(g) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
-10-
<PAGE>
(h) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(i) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.
(j) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
-----------------------------------------------
David W. Hanna
Title: President, C.E.O. and Chairman of the Board
--------------------------------------------
EMPLOYEE: /s/ Jeffrey E. Gold
---------------------------------------------------
Jeffrey E. Gold
-11-
<PAGE>
EXHIBIT 12
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made and entered into effective as
of March 4, 1996 (the "Effective Date"), by and between JAMES P. MOORE, an
individual, whose address is 29 Queensgrove Road, Scarborough, Ontario M1N 3A9,
Canada (the "Employee") and STATE OF THE ART, INC., a California corporation, of
56 West Technology Drive, Irvine, California 92718-2301, United States Of
America (the "Company").
RECITALS
--------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the company and the Company's shareholders to assure
that the Company will have the continued dedication and objectivity of the
Employee, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In consideration of the mutual covenants herein contained, and in consideration
of the continuing employment of Employee by the Company, the parties agree as
follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the
--------
position of Vice President of Customer Support, with such duties,
responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board or the Chief Executive Officer of the Company
(the "CEO") shall have the right to revise such responsibilities and
compensation from time to time as the Board or the CEO may deem necessary or
appropriate. If any such revision constitutes "Involuntary Termination" as
<PAGE>
defined in Section 6(d) of this Agreement, the Employee shall be entitled to
benefits upon such Involuntary Termination as provided under this Agreement.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any Payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall terminate upon the earlier of (i) the date that
all obligations of the parties hereunder have been satisfied or (ii) two years
after the Effective Date; provided, however, that until such time as notice of
--------
non-renewal or termination of this Agreement is given by either the Company or
the Employee to the other, beginning one year after the Effective Date, this
Agreement shall automatically be extended by one month effective as of the end
of each month so that the outstanding term of the Agreement is approximately one
year; provided further that in no event the term of this Agreement be so
-------- -------
extended to a date more than five years after the Effective Date.
Notwithstanding the foregoing, this Agreement may be extended for an additional
period or periods by mutual written agreement of the Company and the Employee.
A termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of One Hundred
Ten Thousand Dollars ($110,000.00). Such salary shall be reviewed at least
annually and shall be adjusted from time to time. Such salary shall be paid
periodically in accordance with normal Company payroll. The annual compensation
specified in this Section 3(a), as adjusted from time to time, is referred to in
this Agreement as "Base Compensation."
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
-2-
<PAGE>
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company of general applicability to other key executives of the Company,
including (without limitation) retirement plans, savings or profit-sharing
plans, deferred compensation plans, supplemental retirement or excess benefit
plans, stock option, incentive or other bonus plans, life, disability, health,
accident and other insurance programs, paid vacations, and similar plans or
programs, subject in each case to the generally applicable terms and conditions
of the plan or program in question and to the determination of the Board or any
committee or Company employee administering such plan or program.
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established (and applicable) under the Company's then
existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Termination Apart from Change of Control. If, within two (2)
----------------------------------------
years of
-3-
<PAGE>
the Effective Date, the Employee's employment with the Company terminates,
either prior to the occurrence of a Change of Control or in the absence of a
Change of Control, then, subject to Section 5, the Employee shall be entitled to
receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then-existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established (and applicable) under the Company's then-
existing severance and benefits plans and policies at the time of such
Disability or death.
(c) Benefits; Misc. In the event the Employee is entitled to
--------------
severance benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in
addition to such severance benefits, the Employee shall receive 100% Company-
paid health, dental and life insurance coverage as provided to such employee
immediately prior to the Employee's termination (the "Company-Paid Coverage").
If such coverage included the Employee's dependents immediately prior to the
Employee's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for twelve (12) months following
termination until (and to the extent) the Employee becomes covered under another
employer's group health, dental or life insurance plan. In addition, (i) the
Company shall pay the Employee any unpaid base salary due for periods prior to
the Termination Date; (ii) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Employee, the Company
shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior
-4-
<PAGE>
to termination. These payments shall be made promptly upon termination and
within the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of thirty-six (36) months following such termination, for
the period prescribed in such option plans.
5. Limitation on Payments and Benefits.
-----------------------------------
(a) Limitation. To the extent that any of the payments and benefits
----------
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related change of control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the company. As part of such notice,
Employee shall also advise the Company of the amount of reduction, if any, that
Employee has, in good faith, determined to be necessary to comply with the
provisions of Section 5(a) hereof. Failure by Employee to provide this notice
within the time allowed will be treated as acceptance by Employee of the amount
of reduction determined by the Company. If any differences regarding the amount
of the reduction have not been resolved by mutual agreement within sixty (60)
days after Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, the amount of reduction determined by Employee will be conclusive and
binding on both parties unless, prior to the expiration of such sixty (60) day
period, the Company notifies Employee in writing of the Company's intention to
have the matter submitted to arbitration for resolution and proceeds to do so
promptly. If the Company gives no notice to Employee of a required reduction as
provided in Section 5(b) hereof Employee may
-5-
<PAGE>
unilaterally determine the amount of reduction required, if any, and, upon
written notice to the Company, that amount will be conclusive and binding on
both Parties.
(d) Determination of Payments Reduced. If a reduction in the payments
---------------------------------
and benefits that would otherwise be paid or provided to Employee under the
terms of this Agreement is necessary to comply with the provisions of Section
5(a) hereof, Employee shall be entitled to select which payments or benefits
will be reduced (so long as the requirements of Section 5(a) hereof are met).
Within thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of Section
5(c) hereof, Employee will notify the Company in writing regarding which
payments or benefits are to be reduced. If no notification is given by
Employee, the Company will determine which amounts to reduce. If, as a result
of the reductions required by Section 5(a) hereof, the amounts previously paid
to Employee exceed the amount to which Employee is entitled, Employee will
promptly return the excess amount to the Company. In the event such excess
amount (or any portion thereof) is determined (by a final determination by the
IRS or a court decision or a binding agreement with the IRS) to be subject to
the excise tax imposed by Section 4999 of the Code notwithstanding the return of
such excess amount by Employee to the Company in accordance with the preceding
sentence, the Company shall promptly return such excess amount (or portion
thereof) to Employee. The Company shall have no obligation (as between Employee
and the Company) to pay any excise tax imposed on Employee by Section 4999 of
the Code with respect to any payments and benefits provided in this Agreement
which constitute "parachute payments" within the meaning of Section 280G of the
Code (other than to the extent the Company has withheld any such amounts).
6. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in wrongful or illegal conduct
which is injurious to the Company or its affiliates;
(iii) Employee being convicted of a felony, or committing an act
of dishonesty or fraud against, or the misappropriation of property belonging
to, the Company or its affiliates;
-6-
<PAGE>
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee breaching in any material respect the term of this
Agreement (or any other agreement with the Company);
(vi) Employee's commencement of employment with another employer
while he is an employee of the Company.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" or "group" (as such terms are used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule l3d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of winch fewer than
a majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been
----------
or will be unable to perform his duties under this Agreement for a period of
three or more months due to illness, accident or other physical or mental
incapacity.
-7-
<PAGE>
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position with the
Company, for a period of 30 days after notice thereof from Employee to the Chief
Executive Officer of the Company setting forth in reasonable detail the respects
in which Employee believes such assignments or duties are substantially
inconsistent with the level of Employee's position;
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the earlier of: (A) the date on which the Employee delivers the notice
of termination to the Company, or (B) the date of the Company's confirmation of
the Employee's resignation given orally or by conduct.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations
-8-
<PAGE>
under this Agreement and agree expressly to perform the obligations under this
Agreement in the same manner and to the same extent as the Company would be
required to perform such obligations in the absence of a succession. For all
purposes under this Agreement, the term "Company" shall include any successor to
the Company's business and/or assets which executes and delivers the assumption
agreement described in this subsection (a) or which becomes bound by the terms
of this Agreement by operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mad,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 8 of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice).
The failure by the Employee to include in the notice any fact or circumstance
which contributes to a showing of Involuntary Termination shall not waive any
right of the Employee hereunder or preclude the Employee from asserting such
fact or circumstance in enforcing his rights hereunder. In the event of a
voluntary resignation by Employee not communicated by Employee in writing, the
Company shall confirm the Company's acceptance of the Employee's resignation by
written notice given to Employee within two business days from the date of the
Employee's tender of his or her resignation. Absent exceptional circumstances
rendering Employee unable to respond, the Employee's failure to give written
notice to the Company disputing the Company's confirmation of the resignation,
within five business days from the date of the Company's notice to Employee,
shall be deemed conclusive evidence that Employee has resigned. Any dispute
regarding whether Employee's resignation was a voluntary resignation shall be
subject to resolution exclusively by binding arbitration as provided in this
Agreement.
-9-
<PAGE>
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association. By entering into this Agreement, the Company and the Employee
expressly waive any right to (1) a jury trial of any dispute or controversy
subject to arbitration under this Agreement; (2) any award of punitive damages;
and (3) judicial review of any arbitration award hereunder, except to the extent
expressly provided by this Agreement.
The arbitrator shall be selected as follows: In the event the Company and
the Employee agree on one arbitrator, the arbitration shall be conducted by such
arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place in Orange County, California, or any other
location mutually agreeable to the parties. At the request of either party,
arbitration proceedings will be conducted in the utmost secrecy; in such case
all documents, testimony and records shall be received, heard and maintained by
the arbitrators in secrecy under seal, available for the inspection only of the
Company or the Employee and their respective attorneys and their respective
experts who shall agree in advance and in writing to receive all such
information confidentially and to maintain such information in secrecy until
such information shall become generally known. The arbitrator, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary and/or a permanent injunction, and shall also be able to
award damages, with or without an accounting and costs, provided that punitive
damages shall not be awarded. The decree or judgment of an award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
The arbitrator's authority shall be limited to considering and deciding
disputes or controversies arising from or respecting this Agreement, and to
awarding relief specifically provided for by Sections 3 and 4 of this Agreement.
The arbitrator shall not have authority to alter or waive provisions of this
Agreement, to award relief not expressly permitted by this Agreement, or to
modify existing policies or procedures of the Employer. The arbitrator's
decision shall be in writing and shall set forth the facts and reasons
supporting it. The arbitrator shall not have the power to commit errors of law
or legal reasoning, and the award may be vacated or corrected pursuant to
California Code of Civil Procedure section 1286.2 or 1286.6 for any such error.
The arbitrator's decision/award shall be final binding on all parties.
Reasonable notice of the time and place of arbitration shall be given to
all persons, other than the parties, as shall be required by law, in which case
such persons or those authorized representatives shall have the right to attend
and/or participate in all the arbitration
-10-
<PAGE>
hearings in such manner as the law shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California, notwithstanding choice of law rules.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(h) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
-11-
<PAGE>
(i) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
[SIGNATURE PAGE FOLLOWS]
-12-
<PAGE>
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year first
above written.
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
-----------------------------------------
David W. Hanna
President and Chief Executive Officer
EMPLOYEE: JAMES P. MOORE
By: /s/ James P. Moore
-----------------------------------------
James P. Moore
-13-
<PAGE>
EXHIBIT 13
SEVERANCE AGREEMENT
-------------------
This Severance Agreement (the "Agreement") is made and entered into
effective as of January 24, 1995 (the "Effective Date"), by and between George
Riviere (the "Employee") and State Of The Art, Inc. (the "Company").
RECITALS
--------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its shareholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.
B. The Board believes that it is in the best interests of the Company
and its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in
Section 6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment.
------------------------------
(a) Position. The Company shall employ the Employee in the
--------
position of Vice President-Research and Design, with such duties,
responsibilities and compensation as in effect as of the Effective Date;
provided, however, that the Board and the Chief Executive Officer of the Company
(the "CEO") shall have the right to revise such responsibilities and
compensation from time to time as the Board or the CEO may deem necessary or
appropriate. If any such revision constitutes "Involuntary Termination" as
defined in Section 6(d) of this Agreement, the Employee shall be entitled to
benefits upon such Involuntary Termination as provided under this Agreement.
(b) Obligations. The Employee shall devote his full business
-----------
efforts and time to the Company and its subsidiaries. The foregoing, however,
shall not preclude the Employee from engaging in such activities and services as
do not interfere or conflict with his responsibilities to the Company.
<PAGE>
2. At-Will Employment. The Company and the Employee acknowledge that
------------------
the Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the,
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall terminate upon the earlier of (i) the date that
all obligations of the parties hereunder have been satisfied or (ii) two years
after the Effective Date; provided, however, that until such time as notice of
--------
non-renewal or termination of this Agreement is given by either the Company or
the Employee to the other, beginning one year after the Effective Date, this
Agreement shall automatically be extended by one month effective as of the end
of each month so that the remaining outstanding term of the Agreement is
approximately one year; provided further that in no event shall the term of this
-------- -------
Agreement be so extended to a date more than five years after the Effective
Date. Notwithstanding the foregoing, this Agreement may be extended for an
additional period or periods by mutual written agreement of the Company and the
Employee. A termination of the terms of this Agreement pursuant to the preceding
sentence shall be effective for all purposes, except that such termination shall
not affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of $137,500. Such
salary shall be reviewed at least annually and shall be adjusted from time to
time. Such salary shall be paid periodically in accordance with normal Company
payroll. The annual compensation specified in this Section 3(a), as adjusted
from time to time, is referred to in this Agreement as "Base Compensation."
(b) Bonus. Beginning with the Company's current fiscal year and
-----
for each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to
-----------------
participate in the employee benefit plans and executive compensation programs
maintained by the Company of general applicability to other key executives of
the Company, including (without limitation) retirement plans, savings or profit-
sharing plans, deferred compensation plans, supplemental retirement or excess
benefit plans, stock option, incentive or other bonus plans, life, disability,
health, accident and other insurance programs, paid vacations, and similar plans
or programs, subject in each case to the generally applicable terms and
conditions of the plan or program in question and to the determination of the
Board or any committee administering such plan or program.
-2-
<PAGE>
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under the Company's
then existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Termination Apart from Change of Control. If, within two (2)
----------------------------------------
years of the Effective Date, the Employee's employment with the Company
terminates, either prior to the occurrence of a Change of Control or in the
absence of a Change, of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus
-3-
<PAGE>
determined by multiplying the Target Bonus by a fraction, the numerator of which
shall be the number of days in which the Employee was employed by the Company in
the fiscal year in which such termination occurs, and the denominator of which
shall be the number of days in such fiscal year, such payment to be made in a
Jump sum within ten (10) business days after the Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then-existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the
-----------------
Employee's employment as a result of the Employee's Disability, or such
Employee's employment is terminated due to the death of the Employee, then the
Employee shall not be entitled to receive severance or other benefits except for
those (if any) as may then be established (and applicable) under the Company's
then-existing severance and benefits plans and policies at the time of such
Disability or death.
(c) Benefits; Misc. In the event the Employee is entitled to
--------------
severance benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in
addition to such severance benefits, the Employee shall receive 100% Company-
paid health, dental and life insurance coverage as provided to such employee
immediately prior to the Employee's termination (the "Company-Paid Coverage").
If such coverage included the Employee's dependents immediately prior to the
Employee's termination, such dependents shall also be covered at Company
expense. Company-Paid Coverage shall continue for twelve (12) months following
termination until (and to the extent) the Employee becomes covered under another
employer's group health, dental or life insurance plan. In addition, (i) the
Company shall pay the Employee any unpaid base salary due for periods prior to
the Termination Date; (ii) the Company shall pay the Employee all of the
Employee's accrued and unused vacation through the Termination Date; and (iii)
following submission of proper expense reports by the Employee, the Company
shall reimburse the Employee for all expenses reasonably and necessarily
incurred by the Employee in connection with the business of the Company prior to
termination. These payments shall be made promptly upon termination and within
the period of time mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately become exercisable as
to an additional amount as though the Employee had remained continuously
employed for a period of thirty-six (36) months following such termination, for
the period prescribed in such option plans.
-4-
<PAGE>
5. Limitation on Payments and Benefits.
-----------------------------------
(a) Limitation. To the extent that any of the payments and
----------
benefits provided for in this Agreement c "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related change of control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the Company. As part of such notice,
Employee shall also advise the Company of the amount of reduction, if any, that
Employee has, in good faith, determined to be necessary to comply with the
provisions of Section 5(a) hereof. Failure by Employee to provide this notice
within the time allowed will be treated as acceptance by Employee of the amount
of reduction determined by the Company. If any differences regarding the amount
of the reduction have not been resolved by mutual agreement within sixty (60)
days after Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, the amount of reduction determined by Employee will be conclusive and
binding on both parties unless, prior to the expiration of such sixty (60) day
period, the Company notifies Employee in writing of the Company's intention to
have the matter submitted to arbitration for resolution and proceeds to do so
promptly. If the Company gives no notice to Employee of a required reduction as
provided in Section 5(b) hereof, Employee may unilaterally determine the amount
of reduction required, if any, and, upon written notice to the Company, that
amount will be conclusive and binding on both parties.
(d) Determination of Payments Reduced. If a reduction in the
---------------------------------
payments and benefits that would otherwise be paid or provided to Employee under
the terms of this Agreement is necessary to comply with the provisions of
Section 5(a) hereof, Employee shall be entitled to select which payments or
benefits will be reduced (so long as the requirements of Section 5(a) hereof are
met). Within thirty (30) days after the amount of any required reduction in
payments and benefits is finally determined in accordance with the provisions of
Section 5(c) hereof, Employee will notify the Company in writing regarding which
payments or benefits are to be reduced. If no notification is given by Employee,
the Company will determine which amounts to reduce. If, as a result of the
reductions required by Section 5(a) hereof, the amounts previously paid to
Employee
-5-
<PAGE>
exceed the amount to which Employee is entitled, Employee will promptly return
the excess amount to the Company. In the event such excess amount (or any
portion thereof) is determined (by a final determination by the IRS or a court
decision or a binding agreement with the IRS) to be subject to the excise tax
imposed by Section 4999 of the Code notwithstanding the return of such excess
amount by Employee to the Company in accordance with the preceding sentence, the
Company shall promptly return such excess amount (or portion thereof) to
Employee. The Company shall have no obligation (as between Employee and the
Company) to pay any excise tax imposed on Employee by Section 4999 of the Code
with respect to any payments and benefits provided in this Agreement which
constitute "parachute payments" within the meaning of Section 280G of the Code
(other than to the extent the Company has withheld any such amounts).
6. Definition of Term. The following terms referred to in this
------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in knowing and intentional
illegal conduct which is seriously injurious to the Company or its affiliates;
(iii) Employee being convicted of a felony, or committing an
act of dishonesty or fraud against, or the misappropriation of property
belonging to, the Company or its affiliates;
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee knowingly and intentionally breaching in any
material respect the terms of this Agreement (or any confidentiality agreement
or invention or proprietary information agreement with the Company);
(vi) Employee's commencement of employment with another
employer while he is an employee of the Company; or
(vii) any material breach by Employee of any material provision
of this Agreement which continues uncured for 30 days following notice thereof.
-6-
<PAGE>
(b) Change of Control. "Change of Control" shall mean the
-----------------
occurrence of any of the following events:
(i) Any "person" or "group" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of
the Company occurring within a two-year period, as a result of which fewer than
a majority of the directors me Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been
----------
or will be unable to perform his duties under this Agreement for a period of
three or more months due to illness, accident or other physical or mental
incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position with the
Company, for a period of 30 days after notice thereof from Employee to the Chief
Executive Officer of the Company setting forth in reasonable detail the respects
in which Employee believes such assignments or duties are substantially
inconsistent with the level of Employee's position;
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
-7-
<PAGE>
(iii) a material reduction by the Company in the kind or level
of employee benefits (other than salary and bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material
provision of this Agreement which continues uncured for 30 days following notice
thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all
---------------------
rights of the Employee hereunder shall inure to the benefit of, and be
enforceable by, the Employee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
-8-
<PAGE>
8. Notice.
------
(a) General. Notices and all other c contemplated by this
-------
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by U.S. registered or certified mail, return
receipt requested and postage prepaid. In the case of the Employee, mailed
notices shall be addressed to him at the home address which he most recently
communicated to the Company in writing. In the case of the Company, mailed
notices shall be addressed to its corporate headquarters, and all notices shall
be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for
---------------------
Cause or by the Employee as a result of a voluntary resignation or an
Involuntary Termination shall be communicated by a notice of termination to the
other party hereto given in accordance with Section 8 of this Agreement. Such
notice shall indicate the specific termination provision in this Agreement
relied upon, shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination under the provision so indicated, and
shall specify the termination date (which SMU be not more than 30 days after the
giving of such notice). The failure by the Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Employee hereunder or preclude the Employee
from asserting such fact or circumstance in enforcing his rights hereunder.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association.
The arbitrator shall be selected as follows: In the event the Company
and the Employee agree on one arbitrator, the arbitration shall be conducted by
such arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select One independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
Arbitration shall take place in Orange County, California, or any
other location Mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in the utmost secrecy; in such
case all documents, testimony and records shall be received, heard and
maintained by the arbitrators in secrecy under seal, available for the
inspection only of the Company or the Employee and their respective attorneys
and their respective experts who shall agree in advance and in writing to
receive all such information and to maintain such information in secrecy until
such information shall become generally known. The arbitrator, who shall act by
majority vote, shall be able to decree any and all relief of an equitable
nature, including but not limited to such relief as a temporary restraining
order, a temporary and/or a permanent injunction, and shall also be able to
award damages, with or without an accounting and
-9-
<PAGE>
costs, provided that punitive damages shall not be awarded. The decree or
judgment of an award rendered by the arbitrators may be entered in any court
having Jurisdiction thereof.
Reasonable notice of de time and place of arbitration shall be given
to all persons, other than the parties, as shall be required by law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as the
law shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified,
------
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
---------------
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full force
and effect.
(f) No Assignment of Benefits. The rights of any person to
-------------------------
payments or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
-10-
<PAGE>
(h) Assignment by Company. Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case of
any such assignment, the term "Company" when used in a section of this Agreement
shall mean the corporation that actually employs the Employee.
(i) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
-----------------------------------
David W. Hanna
Title: President, C.E.O. and Chairman of the Board
---------------------------------
EMPLOYEE: /s/ George Riviere
---------------------------------------
George Riviere
-11-
<PAGE>
EXHIBIT 14
EXECUTIVE SEVERANCE/CHANGE OF CONTROL AGREEMENT
-----------------------------------------------
This Executive Severance/Change of Control Agreement (the "Agreement") is
made and entered into effective as March 18, 1996 (the "Effective Date"), by and
between David R. Butler, an individual, of 1295 Brangwyn Way, Laguna Beach,
California 92651, (the "Employee") and STATE OF THE ART, INC., a California
corporation, of 56 West Technology Drive, Irvine, California 92718-2301 (the
"Company").
RECITALS
--------
A. It is expected that the Company may from time to time consider the
possibility of an acquisition by another company or other change of control.
The Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and the Company's shareholders to assure
that the Company will have the continued dedication and objectivity of the
Employee, notwithstanding the possibility, threat or occurrence of a Change of
Control (as defined below) of the Company.
B. The Board believes that it is in the best interests of the Company and
its shareholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its shareholders.
C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon the Employee's termination of employment
following a Change of Control or otherwise which provides the Employee with
enhanced financial security and provides efficient incentive and encouragement
to the Employee to remain with the Company notwithstanding the possibility of a
Change of Control.
D. Certain capitalized terms used in the Agreement are defined in Section
6 below.
In consideration of the mutual covenants herein contained, and in
consideration of the continuing employment of Employee by the Company, the
parties agree as follows:
1. Duties and Scope of Employment
------------------------------
(a) Position. The Company shall employ the Employee in the position
--------
of Vice President of Sales, with such duties, responsibilities and compensation
as in effect as of the Effective Date; provided, however, that the Board and the
Chief Executive Officer of the Company (the "CEO") shall have the right to
revise such responsibilities and compensation from time to time as the Board or
the CEO may deem necessary or appropriate. If any such revision constitutes
"Involuntary
<PAGE>
Termination" as defined in Section 6(d) of this Agreement, the Employee shall be
entitled to benefits upon such Involuntary Termination as provided under this
Agreement.
(b) Obligations. The Employee shall devote his full business efforts
-----------
and time to the Company and its subsidiaries. The foregoing, however, shall not
preclude the Employee from engaging in such activities and services as do not
interfere or conflict with his responsibilities to the Company.
2. At-Will Employment. The Company and the Employee acknowledge that the
------------------
Employee's employment is and shall continue to be at-will, as defined under
applicable law. If the Employee's employment terminates for any reason, the
Employee shall not be entitled to any payments, benefits, damages, awards or
compensation other than as provided by this Agreement, or as may otherwise be
available in accordance with the Company's established employee plans and
practices or other agreements with the Company at the time of termination. The
terms of this Agreement shall terminate upon the earlier of (i) the date that
all obligations of the parties hereunder have been satisfied or (ii) two years
after the Effective Date; provided, however, that until such time Employee to
--------
the other, beginning one year after the Effective Date, this Agreement shall
automatically be extended by one month effective as of the end of each month so
that the remaining outstanding term of the agreement is approximately one year;
provided further that in no event shall the term of this Agreement be so
- -------- -------
extended to a date more than five years after the Effective Date.
Notwithstanding the foregoing, this Agreement may be extended for an additional
period or periods by mutual written agreement of the Company and the Employee. A
termination of the terms of this Agreement pursuant to the preceding sentence
shall be effective for all purposes, except that such termination shall not
affect the payment or provision of compensation or benefits on account of a
termination of employment occurring prior to the termination of the terms of
this Agreement.
3. Compensation and Benefits.
-------------------------
(a) Base Compensation. The Company shall pay the Employee as
-----------------
compensation for services a base salary at the annualized rate of One Hundred
Thirty Five Thousand Dollars ($135,000.00). Such salary shall be reviewed at
least annually and shall be adjusted from time to time. Such salary shall be
paid periodically in accordance with normal Company payroll. The annual
compensation specified in this Section 3(a), as adjusted from time to time, is
referred to in this Agreement as "Base Compensation".
(b) Bonus. Beginning with the Company's current fiscal year and for
-----
each fiscal year thereafter during the term of this Agreement, the Employee
shall be eligible to receive an annual bonus (the "Bonus") based upon an
earnings target approved by the Board (the "Target Bonus"). The Bonus payable
hereunder shall be payable in accordance with the Company's normal practices and
policies.
(c) Employee Benefits. The Employee shall be eligible to participate
-----------------
in the employee benefit plans and executive compensation programs maintained by
the Company of general applicability to other key executives of the Company,
including (without limitation)
<PAGE>
retirement plans, savings or profit-sharing plans, deferred compensation plans,
supplemental retirement or excess benefit plans, stock option, incentive or
other bonus plans, life, disability, health, accident and other insurance
programs, paid vacations, and similar plans or programs, subject in each case to
the generally applicable terms and conditions of the plan or program in question
and to the determination of the Board or any committee administering such plan
or program.
4. Severance Benefits.
------------------
(a) Termination Following A Change of Control. If the Employee's
-----------------------------------------
employment with the Company terminates at any time within twelve (12) months
after a Change of Control, then, subject to Section 5, the Employee shall be
entitled to receive severance benefits as follows:
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination For Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established (and applicable) under the Company's then
existing severance and benefits plans and policies at the time of such
Disability or death.
(b) Termination Apart from Change of Control. If, within two (2)
----------------------------------------
years of the Effective Date, the Employee's employment with the Company
terminates, either prior to the occurrence of a Change of Control or in the
absence of a Change of Control, then, subject to Section 5, the Employee shall
be entitled to receive severance benefits as follows:
-3-
<PAGE>
(i) Involuntary Termination. If the Employee's employment
-----------------------
terminates as a result of Involuntary Termination other than for Cause, then the
Company shall pay the Employee within ten (10) business days after the
Termination Date a lump sum amount equal to twelve (12) months Base Compensation
of the Employee at the time of such termination (without giving effect to any
reduction in Base Compensation that resulted in such Involuntary Termination).
In addition, the Employee shall be entitled to a payment of a pro-rata portion
--------
of the Target Bonus determined by multiplying the Target Bonus by a fraction,
the numerator of which shall be the number of days in which the Employee was
employed by the Company in the fiscal year in which such termination occurs, and
the denominator of which shall be the number of days in such fiscal year, such
payment to be made in a lump sum within ten (10) business days after the
Termination Date.
(ii) Voluntary Resignation; Termination for Cause. If the
--------------------------------------------
Employee's employment terminates by reason of the Employee's voluntary
resignation (and is not an Involuntary Termination), or if the Employee is
terminated for Cause, then the Employee shall not be entitled to receive
severance or other benefits except for those (if any) as may then be established
(and applicable) under the Company's then existing severance and benefits plans
and policies at the time of such termination.
(iii) Disability; Death. If the Company terminates the Employee's
-----------------
employment as a result of the employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established (and applicable) under the Company's then-
existing severance and benefits plans and policies at the time of such
Disability or death.
(c) Benefits; Miscellaneous. In the event the Employee is entitled to
-----------------------
severance benefits pursuant to subsection 4(a)(i) or subsection 4(b)(i), then in
addition to such severance benefits, the Employee shall receive 100% Company-
paid health, dental and life insurance coverage as provided to such employee
immediately prior to the Employee's termination (the "Company-Paid Coverage").
If such coverage included the Employee's dependents immediately prior to the
Employee's termination, such dependents shall also be covered at Company
expense. Company-Paid Employee becomes covered under another employer's group
health, dental, or life insurance plan. In addition, (i) the Company shall pay
the Employee any unpaid base salary due for periods prior to the Termination
Date; (ii) the Company shall pay the Employee all of the Employee's accrued and
unused vacation through the Termination Date; and (iii) following submission of
proper expense reports by the Employee, the Company shall reimburse the Employee
for all expenses reasonably and necessarily incurred by the Employee in
connection with the business of the Company prior to termination. These
payments shall be made promptly upon termination and within the period of time
mandated by law.
(d) Options. In the event the Employee is entitled to severance
-------
benefits pursuant to subsection 4(a)(i), upon such termination, in addition to
any portion of the Employee's stock options that were exercisable immediately
prior to such termination, such options shall immediately
-4-
<PAGE>
become exercisable as to an additional amount as though the Employee had
remained continuously employed for a period of thirty-six (36) months following
such termination, for the period prescribed in such option plans.
5. Limitation on Payments and Benefits.
-----------------------------------
(a) Limitation. To the extent that any of the payments and benefits
----------
provided for in this Agreement constitute "parachute payments" within the
meaning of Section 280G of the Internal Revenue Code (the "Code") and, but for
this Section 5, would be subject to the excise tax imposed by Section 4999 of
the Code, the aggregate amount of such payments and benefits shall be reduced
such that the present value thereof (as determined under the Code and applicable
regulations) is equal to 2.99 times Employee's "base amount" (as defined in the
Code).
(b) Company Notice. Within thirty (30) days after the later of
--------------
Termination or the related change of control, the Company shall notify Employee
in writing if it believes that any reduction in the payments and benefits that
would otherwise be paid or provided to the Employee under the terms of this
Agreement is required to comply with the provisions of Section 5(a) hereof. If
the Company determines that any such reduction is required, it will provide
Employee with copies of the information used and calculations made by the
Company to determine the amount of such reduction.
(c) Employee Response; Dispute Resolution. Within thirty (30) days
-------------------------------------
after the Employee's receipt of the Company's notice pursuant to Section 5(b)
hereof, Employee shall notify the Company in writing if Employee disagrees with
the amount of reduction determined by the Company. As part of such notice,
Employee shall also advise the Company of the amount of provisions of Section
5(a) hereof. Failure by Employee to provide this notice within the time allowed
will be treated as acceptance by Employee of the amount of reduction determined
by the Company. If any differences regarding the amount of the reduction have
not been resolved by mutual agreement within sixty (60) days after Employee's
receipt of the company's notice pursuant to Section 5(b) hereof, the amount of
reduction determined by Employee will be conclusive and binding on both parties
unless, prior to the expiration of such sixty (60) day period, the Company
notifies Employee in writing of the Company's intention to have the matter
submitted to arbitration for resolution and proceeds to do so promptly. If the
Company gives no notice to Employee of a required reduction as provided in
Section 5(b) hereof, Employee may unilaterally determine the amount of reduction
required, if any, and, upon written notice to the Company, that amount will be
conclusive and binding on both parties.
(d) Determination of Payments Reduced. If a reduction in the payments
---------------------------------
and benefits that would otherwise be paid or provided to Employee under the
terms of this Agreement is necessary to comply with the provisions of Section
5(a) hereof, Employee shall be entitled to select which payments or benefits
will be reduced (so long as the requirements of Section 5(a) hereof are met).
Within thirty (30) days after the amount of any required reduction in payments
and benefits is finally determined in accordance with the provisions of Section
5(c) hereof, Employee will notify the
-5-
<PAGE>
Company in writing regarding which payments or benefits are to be reduced. If no
notification is given by Employee, the Company will determine which amounts to
reduce. If, as a result of the reductions required by Section 5(a) hereof, the
amounts previously paid to Employee exceed the amount to which Employee is
entitled, Employee will promptly return the excess amount to the Company. In the
event such excess amount (or any portion thereof) is determined (by a final
determination by the IRS or a court decision or a binding agreement with the
IRS) to be subject to the excise tax imposed by Section 4999 of the Code
notwithstanding the return of such excess amount by Employee to the Company in
accordance with the preceding sentence, the Company shall promptly return such
excess amount (or portion thereof) to Employee. The Company shall have no
obligation (as between Employee and the Company) to pay any excise tax imposed
on Employee by Section 4999 of the Code with respect to any payments and
benefits provided in this Agreement which constitute "parachute payments" within
the meaning of Section 280G of the Code (other than to the extent the Company
has withheld any such amounts).
6. Definition of Terms. The following terms referred to in this
-------------------
Agreement shall have the following meanings:
(a) Cause. "Cause" shall mean:
-----
(i) Employee's continued failure to substantially perform his
duties or responsibilities hereunder for a period of 30 days after notice
thereof from the Board of Directors or Chief Executive Officer of the Company to
Employee setting forth in reasonable detail the respects in which the Company
believes Employee has not substantially performed his duties or responsibilities
hereunder;
(ii) Employee personally engaging in knowing and intentional
illegal conduct which is seriously injurious to the Company and its affiliates;
(iii) Employee being convicted of a felony, or committing an act
of dishonesty or fraud against, or the misappropriation of property belonging
to, the Company or its affiliates;
(iv) The performance by Employee of those acts identified in
Section 2924 of the California Labor Code;
(v) Employee knowingly and intentionally breaching in any
material respect the terms of this Agreement (or any confidentiality agreement
or invention or proprietary information agreement with the Company);
(vi) Employee's commencement of employment with another employer
while he is an employee of the Company; or
-6-
<PAGE>
(vii) any material breach by Employee of any material provision of
this Agreement which continues uncured for 30 days following notice hereof.
(b) Change of Control. "Change of Control" shall mean the occurrence
-----------------
of any of the following events:
(i) Any "person" or "group" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) is or
becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act),
directly or indirectly, of securities of the Company representing 30% or more of
the total voting power represented by the Company's then outstanding voting
securities; or
(ii) A change in the composition of the Board of Directors of the
Company occurring within a two-year period, as a result of which fewer than a
majority of the directors are Incumbent Directors. "Incumbent Directors" shall
mean directors who either (A) are directors of the Company as of the date
hereof, or (B) are elected, or nominated for election, to the Board of Directors
of the Company with the affirmative votes of at least a majority of the
Incumbent Directors at the time of such election or nomination (but shall not
include an individual whose election or nomination is in connection with an
actual or threatened proxy contest relating to the election of directors to the
Company); or
(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least fifty percent (50%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets (other than to a subsidiary or subsidiaries).
(c) Disability. "Disability" shall mean that the Employee has been or
----------
will be unable to perform his duties under this Agreement for a period of three
or more months due to illness, accident or other physical or mental incapacity.
(d) Involuntary Termination. "Involuntary Termination" shall mean:
-----------------------
(i) the continued assignment to Employee of any duties or the
continued significant reduction of Employee's duties, either of which is
substantially inconsistent with the level of Employee's position with the
Company, for a period of 30 days after notice thereof from respects in which
Employee believes such assignments or duties are substantially inconsistent with
the level of Employee's position;
-7-
<PAGE>
(ii) a material reduction in Employee's salary, other than any
such reduction which is part of, and generally consistent with, a general
reduction of officer salaries;
(iii) a material reduction by the Company in the kind or level of
employee benefits (other than salary and bonus) to which Employee is entitled
immediately prior to such reduction with the result that Employee's overall
benefits package (other than salary and bonus) is substantially reduced (other
than any such reduction applicable to officers of the Company generally);
(iv) the relocation of Employee's principal place for the
rendering of the services to be provided by him hereunder to a location more
than fifty (50) miles from the present location of the principal executive
office of the Company; or
(v) any material breach by the Company of any material provision
of this Agreement which continues uncured for 30 days following notice thereof;
provided that none of the foregoing shall constitute Involuntary Termination to
the extent Employee has agreed thereto.
(e) Termination Date. "Termination Date" shall mean (i) if the
----------------
Employee's employment is terminated by the Company for Disability, thirty (30)
days after notice of termination is given to the Employee (provided that the
Employee shall not have returned to the performance of the Employee's duties on
a full-time basis during such thirty (30) day period), (ii) if the Employee's
employment is terminated by the Company for any other reason, the date on which
a notice of termination is given, or (iii) if the Agreement is terminated by the
Employee, the date on which the Employee delivers the notice of termination to
the Company.
7. Successors.
----------
(a) Company's Successors. Any successor to the Company (whether
--------------------
direct or indirect and whether by purchase, lease, merger, consolidation,
liquidation or otherwise) to all or substantially all of the Company's business
and/or assets shall assume the obligations under this Agreement and agree
expressly to perform the obligations under this Agreement in the same manner and
to the same extent as the Company would be required to perform such obligations
in the absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this
subsection (a) or which becomes bound by the terms of this Agreement by
operation of law.
(b) Employee's Successors. The terms of this Agreement and all rights
---------------------
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.
-8-
<PAGE>
8. Notice.
------
(a) General. Notices and all other communications contemplated by
-------
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, and all notices
shall be directed to the attention of its Secretary.
(b) Notice of Termination. Any termination by the Company for Cause
---------------------
or by the Employee as a result of an Involuntary Termination shall be
communicated by a notice of termination to the other party hereto given in
accordance with Section 8 of this Agreement. Such notice shall indicate the
specific termination provision in this Agreement relied upon, shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination under the provision so indicated, and shall specify the termination
date (which shall be not more than 30 days after the giving of such notice).
The failure by the Employee to include in the notice any fact or circumstance
which contributes to a showing of Involuntary Termination shall not waive any
right of the Employee hereunder or preclude the Employee from asserting such
fact or circumstance in enforcing his rights hereunder. In the event of a
voluntary resignation by Employee not communicated by Employee in writing, the
Company shall confirm its acceptance of the Employee's resignation by written
notice given to Employee within two business days from the date of the
Employee's tender of his or her resignation. Absent exceptional circumstances
rendering Employee unable to respond, the Employee's failure to give written
notice to the Company disputing the Company's confirmation of the resignation
within five business days from the date of the Company's notice to Employee,
shall be deemed conclusive evidence that Employee has resigned. Any dispute
regarding whether Employee's resignation was a voluntary resignation shall be
subject to resolution exclusively by binding arbitration as provided in this
Agreement.
9. Arbitration. At the option of either party, any and all disputes or
-----------
controversies whether of law or fact and of any nature whatsoever arising from
or respecting this Agreement shall be decided by arbitration by the American
Arbitration Association in accordance with the rules and regulations of that
Association. By entering into this Agreement, the Company and the Employee
expressly waive any right to (1) a jury trial of any dispute or controversy
subject to arbitration under this Agreement; (2) any award of punitive damages;
and (3) judicial review of any arbitration award hereunder, except to the extent
expressly provided by this Agreement.
The arbitrator shall be selected as follows: In the event the Company
and the Employee agree on one arbitrator, the arbitration shall be conducted by
such arbitrator. In the event the Company and the Employee do not so agree, the
Company and the Employee shall each select one independent, qualified arbitrator
and the two arbitrators so selected shall select the third arbitrator. The
Company reserves the right to object to any individual arbitrator who shall be
employed by or affiliated with a competing organization.
-9-
<PAGE>
Arbitration shall take place in Orange County, California, or any
other location mutually agreeable to the parties. At the request of either
party, arbitration proceedings will be conducted in the utmost secrecy; in such
case all documents, testimony and records shall be received, heard and
maintained by the arbitrators in secrecy under seal, available for the
inspection only of the Company or the Employee and their respective attorneys
and their respective experts who shall agree in advance and in writing to
receive all such information confidentially and to maintain such information in
secrecy until such information shall become generally known. The arbitrator,
who shall act by majority vote, shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a temporary and/or a permanent injunction, and shall also be
able to award damages, with or without an accounting and costs, provided that
punitive damages shall not be awarded. The decree or judgment of an award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof.
The arbitrator's authority shall be limited to considering and
deciding disputes or controversies arising from or respecting this Agreement,
and to awarding relief specifically provided for by Sections 3 and 4 of this
Agreement. The arbitrator shall not have authority to alter or waive provisions
of this Agreement, to award relief not expressly permitted by this Agreement, or
to modify existing policies or procedures of the Employer. The arbitrator's
decision shall be in writing and shall set forth the facts and reasons
supporting it. The arbitrator shall not have the power to commit errors of law
or legal reasoning, and the award may be vacated or corrected pursuant to
California Code of Civil Procedure section 1286.2 or 1286.6 for any such error.
The arbitrator's decision/award shall be final binding on all parties.
Reasonable notice of the time and place of arbitration shall be given
to all persons, other than the parties, as shall be required by law, in which
case such persons or those authorized representatives shall have the right to
attend and/or participate in all the arbitration hearings in such manner as the
law shall require.
10. Miscellaneous Provisions.
------------------------
(a) No Duty to Mitigate. The Employee shall not be required to
-------------------
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.
(b) Waiver. No provision of this Agreement shall be modified, waived
------
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than Employee). No waiver by the either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.
-10-
<PAGE>
(c) Whole Agreement. No agreements, representations or understandings
---------------
(whether oral or written and whether express or implied) which are not expressly
set forth in this Agreement have been made or entered into by either party with
respect to the subject matter hereof.
(d) Choice of Law. The validity, interpretation, construction and
-------------
performance of this Agreement shall be governed by the laws of the State of
California.
(e) Severability. The invalidity or unenforceability of any provision
------------
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.
(f) No Assignment of Benefits. The rights of any person to payments
-------------------------
or benefits under this Agreement shall not be made subject to option or
assignment, either by voluntary or involuntary assignment or by operation of
law, including (without limitation) bankruptcy, garnishment, attachment or other
creditor's process, and any action in violation of this subsection (f) shall be
void.
(g) Employment Taxes. All payments made pursuant to this Agreement
----------------
will be subject to withholding of applicable income and employment taxes.
(h) Assignment by Company. The Company may assign its rights under
---------------------
this Agreement to an affiliate, and an affiliate may assign its rights under
this Agreement to another affiliate of the Company or to the Company; provided,
however, that no assignment shall be made if the net worth of the assignee is
less than the net worth of the Company at the time of assignment. In the case
of any such assignment, the term "Company" when used in a section of this
Agreement shall mean the corporation that actually employs the Employee.
(i) Counterparts. This Agreement may be executed in counterparts,
------------
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
COMPANY: STATE OF THE ART, INC.
By: /s/ David W. Hanna
-------------------------------------------
David W. Hanna
President and Chief Executive Officer
-11-
<PAGE>
EMPLOYEE: DAVID R. BUTLER
By: /s/ David R. Butler
-------------------------------------------
David R. Butler
-12-
<PAGE>
EXHIBIT 15
[FORM OF INDEMNIFICATION AGREEMENT]
STATE OF THE ART, INC.
INDEMNIFICATION AGREEMENT
-------------------------
This Indemnification Agreement ("Agreement") is effective as of the _____
day of ___________ 1998 by and between State Of The Art, Inc., a California
corporation (the "Company"), and _____________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors and officers
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited;
WHEREAS, Indemnitee does not regard the current protection available as
adequate under the present circumstances, and Indemnitee and other directors and
officers of the Company may not be willing to continue to serve as directors and
officers without additional protection; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as directors and officers of
the Company and to indemnify its directors and officers so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
---------------
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
-----------------------
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Company) by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director or officer or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld) actually and
<PAGE>
reasonably incurred by Indemnitee in connection with such action, suit or
proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action, suit or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
---------------
presumption that (i) Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, or (ii) with respect to any criminal action, suit or proceeding,
Indemnitee had reasonable cause to believe that Indemnitee's conduct was
unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
---------------------------------------------
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit or proceeding by or
in the right of the Company or any subsidiary of the Company to procure a
judgment in its favor by reason of the fact that Indemnitee is or was a
director, officer, employee or agent of the Company, or any subsidiary of the
Company, by reason of any action or inaction on the part of Indemnitee while a
director or officer or by reason of the fact that Indemnitee is or was serving
at the request of the Company as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) and, to the fullest extent
permitted by law, amounts paid in settlement, in each case to the extent
actually and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action, suit or proceeding if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in or not opposed to the
best interests of the Company and its shareholders, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which Indemnitee shall have been adjudged to be liable to the Company in the
performance of Indemnitee's duty to the Company and its shareholders unless and
only to the extent that the court in which such action, suit or proceeding is or
was pending shall determine upon application that, in view of all the
circumstances of the case, Indemnitee is fairly and reasonably entitled to
indemnity for expenses and then only to the extent that the court shall
determine.
2. Expenses; Indemnification Procedure.
-----------------------------------
(a) Advancement of Expenses. The Company shall advance all expenses
-----------------------
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any
such action, suit or proceeding). Indemnitee hereby undertakes to repay such
amounts advanced only if, and to the extent that, it shall ultimately be
determined that Indemnitee is not entitled to be indemnified by the Company as
authorized hereby. The advances to be made hereunder shall be paid by the
Company to Indemnitee within twenty (20) days following delivery of a written
request therefor by Indemnitee to the Company.
-2-
<PAGE>
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
--------------------------------
condition precedent to Indemnitee's right to be indemnified under this
Agreement, give the Company notice in writing as soon as practicable of any
claim made against Indemnitee for which indemnification will or could be sought
under this Agreement. Notice to the Company shall be directed to the Chief
Executive Officer of the Company at the address shown on the signature page of
this Agreement (or such other address as the Company shall designate in writing
to Indemnitee). Notice shall be deemed received three business days after the
date postmarked if sent by domestic certified or registered mail, properly
addressed; otherwise notice shall be deemed received when such notice shall
actually be received by the Company. In addition, Indemnitee shall give the
Company such information and cooperation as it may reasonably require and as
shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
---------
Section 1 and this Section 2 shall be made no later than forty-five (45) days
after receipt of the written request of Indemnitee. If a claim under this
Agreement, under any statute, or under any provision of the Company's Articles
of Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within forty-five (45) days after a written request for payment
thereof has first been received by the Company, Indemnitee may, but need not, at
any time thereafter bring an action against the Company to recover the unpaid
amount of the claim and, subject to Section 13 of this Agreement, Indemnitee
shall also be entitled to be paid for the expenses (including attorneys' fees)
of bringing such action. It shall be a defense to any such action (other than
an action brought to enforce a claim for expenses incurred in connection with
any action, suit or proceeding in advance of its final disposition) that
Indemnitee has not met the standards of conduct which make it permissible under
applicable law for the Company to indemnify Indemnitee for the amount claimed,
but the burden of proving such defense shall be on the Company and Indemnitee
shall be entitled to receive interim payments of expenses pursuant to Subsection
2(a) unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its shareholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including its Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its shareholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
------------------
a claim pursuant to Section 2(b) hereof, the Company has directors' and
officers' liability insurance in effect, the Company shall give prompt notice of
the commencement of such proceeding to
-3-
<PAGE>
the insurers in accordance with the procedures set forth in the respective
policies. The Company shall thereafter take all necessary or desirable action to
cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as
a result of such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
--------------------
under Section 2(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, which approval shall
not be unreasonably withheld, upon the delivery to Indemnitee of written notice
of its election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company will not be liable to Indemnitee under this Agreement for any fees of
counsel subsequently incurred by Indemnitee with respect to the same proceeding,
provided that (i) Indemnitee shall have the right to employ counsel in any such
proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by
Indemnitee has been previously authorized by the Company, (B) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense, or (C) the Company
shall not, in fact, have employed counsel to assume the defense of such
proceeding, then the fees and expenses of Indemnitee's counsel shall be at the
expense of the Company.
3. Additional Indemnification Rights; Nonexclusivity.
-------------------------------------------------
(a) Scope. Notwithstanding any other provision of this Agreement, the
-----
Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification may not be
specifically authorized by the other provisions of this Agreement, the Company's
Articles of Incorporation, the Company's Bylaws or by statute. In the event of
any change, after the date of this Agreement, in any applicable law, statute or
rule which expands the right of a California corporation to indemnify a member
of its Board of Directors, an officer or other corporate agent, such changes
shall be ipso facto, within the purview of Indemnitee's rights and Company's
---- -----
obligations, under this Agreement. In the event of any change in any applicable
law, statute or rule which narrows the right of a California corporation to
indemnify a member of its Board of Directors, an officer or other corporate
agent, such changes, to the extent not otherwise required by such law, statute
or rule to be applied to this Agreement shall have no effect on this Agreement
or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
--------------
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Articles of Incorporation, its Bylaws, any agreement, any
vote of shareholders or disinterested directors, the California General
Corporation Law or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to
-4-
<PAGE>
Indemnitee for any action taken or not taken while serving in an indemnified
capacity even though he may have ceased to serve in such capacity at the time of
any action, suit or other covered proceeding.
4. Partial Indemnification. If Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for a portion of
the expenses, judgments, fines or penalties actually or reasonably incurred by
him in the investigation, defense, appeal or settlement of any civil or criminal
action, suit or proceeding, but not, however, for the total amount thereof, the
Company shall nevertheless indemnify Indemnitee for the portion of such
expenses, judgments, fines or penalties to which Indemnitee is entitled.
5. Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
---------------------
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
6. Directors' and Officers' Liability Insurance. The Company shall, from
--------------------------------------------
time to time, make the good faith determination whether or not it is practicable
for the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the directors and officers of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among
other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all
policies of directors' and officers' liability insurance, Indemnitee shall be
named as an insured in such a manner as to provide Indemnitee the same rights
and benefits as are accorded to the most favorably insured of the Company's
directors, if Indemnitee is a director; or of the Company's officers, if
Indemnitee is not a director of the Company but is an officer; or of the
Company's key employees, if Indemnitee is not an officer or director but is a
key employee. Notwithstanding the foregoing, the Company shall have no
obligation to obtain or maintain such insurance if the Company determines in
good faith that such insurance is not reasonably available, if the premium costs
for such insurance are disproportionate to the amount of coverage provided, if
the coverage provided by such insurance is limited by exclusions so as to
provide an insufficient benefit, or if Indemnitee is covered by similar
insurance maintained by a subsidiary or parent of the Company.
7. Severability. Nothing in this Agreement is intended to require or
------------
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 7. If this Agreement or any
-5-
<PAGE>
portion hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the
full extent permitted by any applicable portion of this Agreement that shall not
have been invalidated, and the balance of this Agreement not so invalidated
shall be enforceable in accordance with its terms.
8. Exceptions. Any other provision herein to the contrary
----------
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Excluded Acts. To indemnify Indemnitee for any acts or omissions
-------------
or transactions from which a director may not be relieved of liability under the
California General Corporation Law; or
(b) Claims Initiated by Indemnitee. To indemnify or advance expenses
------------------------------
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
Section 317 of the California General Corporation Law, but such indemnification
or advancement of expenses may be provided by the Company in specific cases if
the Board of Directors has approved the initiation or bringing of such suit; or
(c) Lack of Good Faith. To indemnify Indemnitee for any expenses
------------------
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(d) Insured Claims. To indemnify Indemnitee for expenses or
--------------
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Company; or
(e) Claims Under Section 16(b). To indemnify Indemnitee for expenses
--------------------------
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
9. Effectiveness of Agreement. This Agreement shall be effective as of
--------------------------
the date set forth on the first page and may apply to acts or omissions of
Indemnitee which occurred prior to such date if Indemnitee was an officer,
director, employee or other agent of the company, or was serving at the request
of the Company as a director, officer, employee or
-6-
<PAGE>
agent of another corporation, partnership, joint venture, trust or other
enterprise, at the time such act or omission occurred.
10. Construction of Certain Phrases.
-------------------------------
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, employees or agents, so that if
Indemnitee is or was a director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, Indemnitee shall stand in the same
position under the provisions of this Agreement with respect to the resulting or
surviving corporation as Indemnitee would have with respect to such constituent
corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries.
(c) For purposes of this Agreement, if Indemnitee acted in good faith
and in a manner Indemnitee reasonably believed to be in the best interests of
the participants and beneficiaries of an employee benefit plan, Indemnitee shall
be deemed to have acted in a manner "not opposed to the best interests of the
Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall constitute an original.
12. Successors and Assigns. This Agreement shall be binding upon the
----------------------
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
---------------
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee
-7-
<PAGE>
as a basis for such action were not made in good faith or were frivolous. In the
event of an action instituted by or in the name of the Company under this
Agreement or to enforce or interpret any of the terms of this Agreement,
Indemnitee shall be entitled to be paid all costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee in defense of such action
(including with respect to Indemnitee's counterclaims and cross-claims made in
such action), unless as a part of such action the court determines that each of
Indemnitee's material defenses to such action was made in bad faith or was
frivolous.
14. Notice. All notices, requests, demands and other communications under
------
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
-----------------------
irrevocably consents to the jurisdiction of the courts of the State of
California for all purposes in connection with any action, suit or proceeding
that arises out of or relates to this Agreement and agrees that any action
instituted under this Agreement shall be brought only in the state courts of the
State of California.
16. Choice of Law. This Agreement shall be governed by and its provisions
-------------
construed in accordance with the laws of the State of California, as applied to
contracts between California residents entered into and to be performed entirely
within California.
17. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such subrogation rights and to enable
the corporation effectively to bring suit to enforce such rights.
18. Continuation of Indemnification. All agreements and obligations of
-------------------------------
the Company contained herein shall continue during the period that Indemnitee is
a director, officer or agent of the Company and shall continue thereafter so
long as Indemnitee shall be subject to any possible claim or threatened, pending
or completed action, suit or proceeding, whether civil, criminal, arbitrational,
administrative or investigative, by reason of the fact that Indemnitee had
previously served in the capacity referred to herein.
19. Amendment and Termination. No amendment, modification, termination or
-------------------------
cancellation of this Agreement shall be effective unless in writing signed by
both parties hereto.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Indemnification
Agreement as of the date first above written.
STATE OF THE ART, INC.
By:
-----------------------------------------
David W. Hanna, President
AGREED TO AND ACCEPTED:
INDEMNITEE:
- -------------------------------------
(signature)
Address:
------------------------------
------------------------------
-9-
<PAGE>
EXHIBIT 16
FORM
OF
AMENDMENT
AMENDMENT, dated as of ________ ___, 1998 (the "Amendment"), to the
Executive Severance/Change of Control Agreement, dated _______________, between
State Of The Art, Inc., a California corporation and ____________________ (the
"Employee") (the "Severance Agreement").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the parties hereto desire to amend certain provisions of the
Severance Agreement as provided herein;
NOW, THEREFORE, in consideration of the premises and mutual agreements
contained herein, and for other valuable consideration the receipt of which is
hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Amendment of Section 4(d). Section 4(d) of the Employment
-------------------------
Agreement is hereby amended in its entirety to read as follows:
4. Severance Benefits. (d) Options. In the event Employee's employment
------------------ -------
with the Company terminates as a result of an Involuntary Termination other
than for Cause after a Change of Control and during the time period in
which any options granted to Employee on or prior to January 27, 1998 are
unvested (the "Subject Options"), then upon such termination, in addition
to any portion of the Subject Options that were exercisable immediately
prior to such termination, all Subject Options shall immediately become
fully vested and exercisable, for the period prescribed in such option
plans.
SECTION 2. Counterparts. This Amendment may be signed in any number of
------------
counterparts, all of which counterparts, taken together, shall constitute one
and the same instrument.
SECTION 3. Governing Law. This Amendment and the rights and obligations
-------------
of the parties hereto shall be governed by, and construed and interpreted in
accordance with, the law of the State of California.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their proper and duly authorized officers as of
the day and year first above written.
STATE OF THE ART, INC.
By: _________________________________
Name:
Title:
___________________________________
Acknowledged and accepted as of
the date first set forth above.
THE SAGE GROUP, plc
By: _________________________
Name:
Title:
SIGNATURE PAGE OF AMENDMENT TO THE SEVERANCE AGREEMENT
<PAGE>
EXHIBIT 17
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made this first day of May, 1997,
by and between MICHAEL F. KING, an individual ("Employee"), and SYBEX, LTD.,
an Ontario corporation ("Company"), with reference to the following facts:
RECITALS:
A. Employee has been employed as an officer of Sybex Ltd. and BBicon Inc.
both Ontario corporations ("BBI").
B. Pursuant to those certain Share Purchase Agreements, dated May 15, 1997,
between State of the Art, Inc., a California corporation ("SOTA"), and the
respective shareholders of BBI (as defined therein) (the "Purchase
Agreements"), the parties to the Purchase Agreements intend that all of BBI's
capital stock be purchased by SOTA.
C. The Purchase Agreements contemplate, among other things, that, as a
condition precedent to the closing thereunder, the Company and Employee will
enter into this Agreement in connection with such purchases.
D. The Company desires to employ Employee on the terms and subject to the
conditions set forth herein, and Employee desires to accept such employment.
AGREEMENT
In consideration of the foregoing recitals and the covenants and agreements
of the parties contained herein, the parties do hereby agree as follows:
A. Employment
1. Effective upon the Closing as defined in the Purchase Agreements,
Company shall hire Employee, and Employee shall accept employment as the
Company's Vice President and General Manager of the ProvideX Division. In
such capacity, Employee shall report to the President of SOTA and shall
perform such duties and render such services as are reasonably requested by
that President.
2. Employment Term. The period of Employee's employment hereunder shall
commence on the date hereof and shall continue until and terminate on the
third anniversary hereof unless earlier terminated pursuant to this
Agreement (the "Employment Period").
3. Place of Employment. During the Employment Period, Employee shall
render his services principally at the offices of the Company or an
affiliate of the Company not more than 50 miles from Markham, Ontario,
although such duties will also require Employee to render such services
from time to time at the Company's or its affiliates other offices.
4. Employee shall devote all his working time, attention, and energies to
the performance of this duties hereunder and he shall discharge his duties
in a proper and diligent manner.
B. Compensation.
As compensation for his services to be performed hereunder, Company shall
provide Employee with the following compensation and benefits:
1. Base Salary. Employee's initial base salary shall be $159,850 Canadian
dollars per year. Employee's base salary shall continue at such amount,
subject to adjustment by the mutual agreement of the parties. Employee's
base salary shall be payable in accordance with Company's payroll practices
in effect from time to time, and subject to such withholding as is required
by law.
<PAGE>
2. Bonus Plan. In addition to the base salary, Employee shall be eligible
to participate in bonus plans as the Company shall determine from time to
time. Employee's bonus under such plans shall be based on criteria set
forth or established pursuant to any such plan. The Company shall set
Employee's total bonus at $34,750.00 Canadian Dollars for the Employee's
first calendar year.
3. Options. Subject to approval by the Compensation Committee of the
Board of Directors of SOTA, upon the commencement of Employee's employment,
Employee shall be granted an option to purchase an aggregate of 25,000
shares of SOTA's common stock, at an exercise price equal to the last
reported sale price of SOTA's common stock on the date of grant as reported
on The Nasdaq National Market. Such shares subject to such option shall
vest in equal amounts each year over a three year period. The foregoing
shall not constitute any commitment or agreement by SOTA to continue to
employ Employee for any specified term. Such option shall be granted under
one of SOTA's existing stock option plans. Upon such grant, Employee agrees
to execute SOTA's standard form of stock option agreement, which contains
additional terms and conditions relating to such options. Company shall
have no obligation under this Section if the Compensation Committee of the
Board of Directors does not approve such options or if Employee fails to
execute such form of stock option agreement.
C. Benefits.
1. Vacation. Employee shall be entitled to three (3) weeks paid vacation
during each year of his employment by the Company, which shall be
administered according to the Company's standard employment policies as in
effect from time to time.
2. Business Expenses. The Company shall reimburse Employee for all
reasonable business expenses incurred by Employee in the course of
performing services for the Company, in accordance with the company's
expense reimbursement policy as in effect from time to time.
3. Other Benefits. The Company shall provide Employee with such other
employment benefits, including, without limitation, medical insurance, as
is provided by Company to its other employees.
4. At-Will Employment. The parties expressly agree that employee shall be
an "at will" employee, and Employee's continued employment by the Company
shall be by the mutual consent of Employee and Company, subject to
termination at the will of either party, with or without cause, at any
time.
D. Termination and Severance.
1. Termination of Employment With Cause. Employee's employment by Company
may be terminated for "cause," at any time and in the event of termination
for cause, or in the event Employee voluntarily terminates his employment,
the Company shall have no obligation to pay any severance or termination
pay to Employee. For purposes of this Section, the term "cause," shall
mean:
(a) Conviction of a crime involving moral turpitude;
(b) The death or permanent disability of Employee, with the term
"permanent disability" defined as meaning a total or partial physical
or mental disability continuing for a period of not less than three (3)
consecutive months, which prevents Employee from substantially
discharging his duties and responsibilities as set forth herein;
(c) Employee's neglect of his duties hereunder after written
notification thereof by the Company, which notice shall specify the
alleged instances of neglect of his duty, and shall provide Employee
with 15 days in which to remedy such neglect, if it is subject to being
remedied;
(d) Employee's breach of this Agreement, Employee's breach of the
Company's Employee Nondisclosure and Invention Assignment Agreement or
malfeasance in connection with his employment;
(e) Employee personally engaging in knowing and intentional illegal
conduct which is seriously injurious to the Company or its affiliates;
or
2
<PAGE>
(f) Employee breaches any of his obligations, representations or
warranties under the Purchase Agreements.
2. Termination Without Cause. In the event Employee's employment is
terminated by the Company without cause during the Employment Period,
Employee shall receive immediately upon termination, as severance pay, a
cash payment equal to twelve month's base salary then being paid to
Employee. Employee agrees to accept the Company's payment under this
Section in full and complete settlement for all of Employee's claims and
damages, if any, resulting from such termination without cause.
3. Withholding, Etc. The Company may make such deductions, withholdings
and other payments from all sums payable to Employee pursuant to this
Agreement which are required by law or as Employee requests for taxes and
other charges.
4. Deliverables. Upon any termination or expiration of this Agreement,
Employee shall promptly deliver to Company (without retaining any copies)
all the forms, brochures, project materials, sales materials, letterhead,
business cards, and all other written, printed, and computer stored
materials relating to the business of the Company and its affiliates in
Employee's possession.
E. Confidentiality and Nondisclosure.
1. Confidentiality, Nondisclosure and Intellectual Property
Agreements. Employee agrees to execute, deliver and perform, during the
term of his employment with the Company and thereafter, all
confidentiality, nondisclosure and intellectual property agreements
(including the Company's Employee Nondisclosure and Invention Assignment
Agreement and any similar invention and copyright assignment agreements),
concerning the Company, its affiliates and their products, which have been
executed by other key employees and executives of the Company and its
affiliates, and any such reasonable modifications thereof which are deemed
necessary by the Company to protect its intellectual property rights.
2. Exclusive Service. Employee agrees that so long as he remains employed
by the Company, and for a period of two years thereafter the termination of
his employment by the Company, he will not, except with the written
approval of the Company, engage in or be employed in any business
competitive with that of the Company, within Canada or the United States,
either actively or as a passive investor, and will otherwise do nothing
inconsistent with his duties hereunder including, but not limited to, using
any of the Company's, or the Company's affiliates', trade secrets, patents,
trademarks, trade names, copyrights, secret processes, plans of business
operation, customer lists or other intangible assets of the Company or its
affiliates, whether presently owned or hereafter acquired, other than in
connection with his employment by the Company. The holding and trading of
publicly traded stocks of competitive companies, as long as the total
amount of stock in any one company does exceed 5% of that company's
outstanding shares is excepted.
3. Confidentiality Policies. Employee acknowledges that the Company is a
publicly held corporation and that as such, it is legally obligated to
maintain certain policies concerning the disclosure of nonpublic material
information concerning the Company, the Company's affiliates, their
products, operations and business. Employee agrees to comply with all of
such policies as may be adopted by the Company from time to time hereafter,
or as may be presently existing. Employee further agrees to fully comply
with all laws, rules and regulations of the United States Securities and
Exchange Commission, its Canadian counterpart, any state or provincial
securities authority, any court or other regulatory authority or agency
relating to or affecting transactions in the Company's or the Company's
affiliates' securities and specifically agrees not to purchase or sell
securities of the Company while in possession of material nonpublic
information concerning the Company or its affiliates.
4. Trade Secrets and Confidential Information of Prior
Employers. Employee agrees to abide by all confidentiality, trade secret,
proprietary information, invention, copyright and other intellectual
property agreements or policies relating to his prior employment. He agrees
NOT to: (a) disclose to the Company or any of its agents or employees; (b)
use in the course of his employment by the Company; (c) use as a basis
3
<PAGE>
for or component of any Company products; or (d) incorporate in any
products he designs on behalf of the Company, any trade secret information,
ideas, designs, programs, algorithms or other intellectual property
information which are proprietary to any other person or entity. Employee
further represents and warrants that he does not have possession or control
of any manuals, documents, written plans, computer disks or other memory
devices, or any other physical materials which contain proprietary,
nonpublic information of any other person or entity.
5. Survival. Employee's agreements under this Section shall survive the
termination of his employment.
F. Miscellaneous.
1. Arbitration. If any dispute between the parties arises out of this
agreement, such dispute shall be finally resolved by binding arbitration
conducted in Orange County, California by Judicial Arbitration and
Mediation Services, Inc., or if such entity no longer exists, by an
arbitrator reasonably acceptable to both of the parties. Any such
arbitration shall be conducted before a single arbitrator. Judgment upon
the award rendered by the arbitrator may be entered in any court having
jurisdiction thereof.
2. Assignment. This Agreement shall inure to the benefit of and shall be
binding upon the successors and the assigns of the Company. This Agreement
is personal to Employee and may not be assigned by him.
3. Severability. If any provision of the Agreement shall be found invalid
by any court of competent jurisdiction, such findings shall not affect the
validity of the other provisions hereof and the invalid provisions shall be
deemed to have been severed herefrom.
4. Waiver of Breach. The waiver by any party of the breach, of any
provision of this Agreement by the other party or the failure of any party
to exercise any right granted to it hereunder shall not operate or be
construed as the waiver of any subsequent breach by such other party nor
the waiver of the right to exercise any such right.
5. Entire Agreement. This Agreement, the Purchase Agreements, the
Company's Employee Nondisclosure and Invention Assignment Agreement
referred to above, the Company's employee manual(s) and all agreements
entered into in connection with the grant of stock options above contain
the entire agreement of the parties concerning the subject matter hereof,
and supersede all prior agreements or understandings, whether written or
oral. This Agreement may not be changed orally, but only by an agreement in
writing signed by the parties. Employee acknowledges that no
representation, inducement, promise or agreement, oral or otherwise, has
been made by the Company or its officers or agents to induce Employee to
enter into this Agreement.
6. Notices. Any notice required or permitted to be given hereunder shall
be in writing and may be personally served or sent by United States mail,
and shall be deemed to have given when personally served or five days after
having been deposited in the United States mail, if mailed first-class
mail, postage prepaid and properly addressed as follows. For the purposes
hereof, the addresses of the parties hereto (until notice of a change
thereof is given as provided in this Section shall be as follows:
If to Employee: Michael King
5135 Cherry St.
Stouffville, Ontario L4A 7X4
If to the Company: State of the Art, Inc.
56 Technology Drive.
Irivine, CA 92618
Attention: President
cc: Matt Cavanaugh
7. Applicable Law. This Agreement is entered into and executed in the
State of California and shall be governed by the laws of such State.
4
<PAGE>
8. Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
9. Headings. The paragraph and subparagraph headings herein are for
convenience only and shall not affect the construction hereof.
10. Further Assurances. Each of the parties hereto shall, from time to
time, and without charge to the other parties, take such additional actions
and execute, deliver and file such additional instruments as may be
reasonably required to give effect to the transactions contemplated hereby.
11. Attorney's Fees. In the event any party hereto commences arbitration
or legal action to enforce this Agreement, the prevailing party shall be
entitled to its reasonable attorney's fees, costs and expenses incurred in
such action.
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of
the day and year first above written.
SYBEX LTD.
By: /s/ James R. Eckstaedt
--------------------------------
James R. Eckstaedt
Chief Financial Officer
EMPLOYEE
By: /s/ Michael F. King
--------------------------------
Michael F. King
5
<PAGE>
EXHIBIT 18
EXECUTIVE COMPENSATION
The following table sets forth information as to the Chief Executive
Officer, the four most highly compensated executive officers of the Company
for the last three fiscal years and officers that earned more than $100,000 in
1996 (the "Named Officers") who were not officers of the Company at December
31, 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION
COMPENSATION(1) AWARDS
---------------------- ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION(2)
- --------------------------- ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
David W. Hanna(3).......... 1996 $250,000 $137,000 -0- $ -0-
Chairman of the Board, 1995 250,000 75,000 100,000 -0-
President and 1994 312,794 50,000 400,000 -0-
Chief Executive Officer
George Riviere(4).......... 1996 146,875 55,625 50,000 2,707
Vice President--Midrange 1995 143,636 40,547 -0- 1,330
products Engineering 1994 142,231 29,250 -0- 1,370
Joseph R. Armstrong(5)..... 1996 134,375 62,375 25,000 5,595
Chief Financial Officer, 1995 132,615 75,000 -0- 3,309
Vice President--Finance 1994 109,346 65,000 100,000 2,207
and Secretary
J. Russell Olson(6)........ 1996 68,939 -0- -0- 136,906
Vice President-- 1995 152,027 32,500 -0- 2,236
Engineering 1994 116,423 43,000 100,000 -0-
Jeffrey E. Gold(7)......... 1996 125,275 39,375 -0- 5,765
Vice President-- 1995 115,500 27,125 -0- 3,548
Development 1994 113,050 30,000 50,000 5,307
Daniel M. Shapero(8)....... 1996 118,822 48,490 15,000 131,715
Vice President-- 1995 71,058 41,700 50,000 -0-
Client/Server Division 1994 -0- -0- -0- -0-
</TABLE>
- --------
(1) Amounts shown include compensation deferred pursuant to Section 401(k) of
the Internal Revenue Code of 1986, as amended. No amounts of other annual
compensation were paid to the Named Officers in the fiscal years shown. In
addition, no grants of restricted stock and no payouts pursuant to long
term incentive plans, were made to the Named Officers in the fiscal years
shown.
(2) Where indicated, amounts shown include premiums paid by the Company on
term life insurance policies for the benefit of the Named Officers and
Company contributions pursuant to the Company's 401(k) Profit Sharing
Plan. Life insurance policies have no cash surrender value.
(3) Mr. Hanna was appointed Chairman and CEO on November 22, 1993. The amount
shown under "Salary" in 1994 includes $94,525 in consulting fees prior to
his entering into an employment agreement with the Company. On February
17, 1994, Mr. Hanna was appointed President and he and the Company entered
into an employment agreement, described below.
(4) The amounts shown under "AR Other Compensation" for 1996, 1995 and 1994
represent $2,052, $675 and $716, respectively, in Company matching
contributions to the Company s 401(k) Plan, and premiums of $655, $655 and
$655, respectively, paid by the Company on term life insurance policies
for the benefit of Mr. Riviere.
(5) The amounts shown under "All Other Compensation" for 1996, 1995 and 1994
represent $4,750, $2,464 and $1,366, respectively, in Company matching
contributions to the Company's 401(k) Plan, and premiums Of $945, $845 and
$845, respectively, paid by the Company on term life insurance policies
for the benefit of Mr. Armstrong. Effective March 17, 1997, Mr. Armstrong
retired from the Company.
1
<PAGE>
(6) Mr. Olson became an executive officer of the Company in April 1994. The
amounts shown under "All Other Compensation" for 1996 includes a payment
in the amount of $135,000 related to the departure of Mr. Olson from the
Company effective May 9, 1996. In addition to this payment, the Company
paid $1,906 and $2,236 in Company matching contributions to the Company's
401(k) Plan in 1996 and 1995, respectively.
(7) Mr. Gold became an executive officer of the Company in December 1994;
prior thereto Mr. Gold was an officer of Manzanita Software which merged
with STATE OF THE ART in December 1994. The amounts shown under "AD Other
Compensation" for 1996, 1995 and 1994 represent $4,670, $3,548 and $5,307,
respectively, in Company matching contributions to the Company's 401(k)
Plan. In addition, in 1996 the Company paid $1,095 for premiums on term
life insurance policies for the benefit of Mr. Gold.
(8) Mr. Shapero became an executive officer of the Company in September 1995.
The amount shown under "All Other Compensation" for 1996 includes a
payment in the amount of $131,715 related to the departure of Mr. Shapero
from the Company in January 1997.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning individual grants of
stock options made during the last completed fiscal year to the Named Officers
of the Company as specified below.
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS OPTIONS GRANTED EXERCISE
GRANTED TO EMPLOYEES IN PRICE(1) EXPIRATION (2) (2)
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------- --------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
G. Riviere....... 50,000 10.26% $12.00 4/09/01 $165,769 $366,306
J.R. Armstrong... 25,000 5.13% $12.00 4/09/01 $ 82,884 $183,153
D.M. Shapero..... 15,000 3.08% $12.00 4/09/01 $ 49,731 $109,892
</TABLE>
- --------
(1) All grants were made at either market price or above market price at date
of grant.
(2) Represents potential realizable value at assumed annual rates of stock
price appreciation for option term.
OPTION EXERCISES AND FISCAL YEAR-END VALUES
The following table sets forth information with respect to the Named
Officers concerning the exercise of options under the Company's 1990 and 1994
Stock Option Plans during the last fiscal year and unexercised options held as
of the end of the fiscal year.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NO. OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT FY-END(#) OPTIONS AT FY-END($)(2)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
D.W. Hanna.............. -0- $ -0- 433,333 66,667 $2,182,355 $261,394
G. Riviere.............. -0- -0- 8,333 41,667 3,125 15,625
J.R. Armstrong.......... 15,000 144,063 67,084 42,916 355,367 139,009
J. Russel Olson......... 100,000 1,121,875 -0- -0- -0- -0-
Jeffrey Gold............ -0- -0- 36,006 16,666 215,307 91,663
D.M. Shapero............ 6,250 23,125 8,750 50,000 11,875 121,875
</TABLE>
- --------
(1) Market value of the underlying securities on the date of exercise, minus
the exercise price.
(2) Market value of the underlying securities at year-end, minus the exercise
price.
2
<PAGE>
EMPLOYMENT AGREEMENTS:
The Company entered into an Employment Agreement with Mr. Hanna that became
effective February 17, 1994. The agreement may be terminated by the Company at
any time. The material features of the Agreement are summarized below, but
such description is subject to, and qualified in its entirety by, the complete
text of the Agreement. The Agreement provides for an annual base salary of
$250,000, with a bonus to be determined by mutual agreement between Mr. Hanna
and the Company. In January, 1997 Mr. Hanna's salary was adjusted to an annual
base salary of $325,000. Pursuant to the Agreement, Mr. Hanna was also granted
options under the Company's 1994 Incentive Stock Option, Nonqualified Stock
Option and Restricted Stock Purchase Plan to purchase an aggregate of 400,000
shares of the Company's Common Stock. With respect to 300,000 of such shares,
the option exercise price is the fair market value of the Common Stock on the
date of grant, and with respect to the remaining 100,000 shares the option
exercise price is 125% of such fair market value. Twenty-five percent of the
option shares were fully vested on the date of grant, and the remaining shares
vest pro rata on a monthly basis over 36 months commencing December 21, 1993.
Mr. Hanna's Employment Agreement provides that if Mr. Hanna's employment is
terminated by the Company without cause, or if such employment is terminated
by Mr. Hanna for good reason, the Company is required to pay him severance pay
equal to: (i) 12 months' base salary, plus (ii) a pro rata portion of bonuses
payable under the then effective bonus formula, using the actual financial
results through the date of termination (provided that if a bonus formula has
not been established for the year in which the termination occurs, the Company
will pay a pro rata portion of the prior year's bonus). For purposes of the
Agreement, "cause" is defined as the employee's willful breach of, habitual
neglect of, or continued incapacity to perform, duties in the course of
employment, and "good reason" is defined as any significant diminution of
position or responsibilities of the employee, substantial reduction in
facilities or perquisites provided to the employee, material reduction in
benefits unless such reduction is applicable to employees of the Company
generally, relocation of the employee to a location outside Southern
California, or material breach of the Agreement by the Company.
In addition, Mr. Hanna's Employment Agreement provides that if Mr. Hanna's
employment is terminated for any reason following a change of control, the
Company is required to pay him severance pay equal to: (i) 18 months' base
salary, plus (ii) the accrued bonuses, if any, payable through the date of
termination, plus (iii) an amount equal to the aggregate bonus for the
preceding year. In the event that Mr. Hanna's employment is terminated by the
Company without cause, or if such employment is terminated by Mr. Hanna for
good reason, or if such employment is terminated for any reason following a
change of control, then an additional number of the option shares granted
under the Agreement equal to the remaining balance of unvested shares or
100,000 shares, whichever is less, shall vest upon such termination.
The Company entered into an employment agreement with Mr. Olson that became
effective April 12, 1994, and was terminated by mutual agreement in June 1996.
Under the termination of the agreement Mr. Olson received one year's payment
of base salary, a moving allowance and accelerated stock vesting of all
remaining stock options granted during his employment with the Company.
On January 24, 1995, the Company entered into severance agreements with Mr.
Armstrong, Mr. Olson, Mr. Riviere, and Mr. Gold. The agreements remain in
effect for an initial period of one year. After January 24, 1996, unless the
Company or the employee provides a non-renewal notice to the other party, then
each agreement will automatically be extended by one month at the end of each
month, so that the remaining term of the agreement is one year from the date
of extension. Notwithstanding the foregoing, the agreements terminate on
January 24, 2000. The agreements provide the employee with an annual base
salary and an annual target bonus. If the employee is involuntarily terminated
other than for cause within 12 months following a change of control, then
pursuant to the agreement, the employee will be entitled to the following: (i)
12 months' base salary, (ii) a pro-rata portion of the target bonus for the
year, (iii) Company-paid insurance for one year and (iv) immediate vesting of
options held by the employee that would become exercisable if the employee
remained employed by the Company for a period of 36 months. The agreements
also provide that if the employee is involuntarily terminated prior to or in
the absence of a change of control within two years of the effective date of
the
3
<PAGE>
agreements, then the employee is entitled to receive the following: (i) 12
months' base salary, (ii) a pro-rata portion of the target bonus for the year
and (iii) Company-paid insurance for one year. Finally, if at any time the
employee voluntarily resigns or is terminated for cause, death, or disability,
then the employee shall not be entitled to receive any severance benefits
under the agreements. These agreements are the basis for new agreements
entered into with new officers or vice presidents of the Company. During 1995
and 1996 the Company entered into similar agreements with Mr. Shapero, Vice
President, Marketing, and Mr. Moore, Vice President, Customer Service and Mr.
Butler, Vice President, Sales. On December 30, 1996 Mr. Shapero's agreement
was terminated by mutual consent between the Company and Mr. Shapero as a
result of a reorganization of the Company's Client/Server Division. Mr.
Shapero received one year's base salary and a bonus payment under the
Company's Management Incentive Plan and accelerated vesting of 10,000 shares
of stock.
COMPENSATION COMMITTEE REPORT TO SHAREHOLDERS
The Compensation Committee of the Board of Directors (the "Committee")
establishes the compensation level for the Company's Chief Executive Officer
("CEO") and other executive officers based upon the Committee's discretion,
taking into account factors it deems appropriate, such as competitive factors,
attainment of established Company financial performance criteria and
individual performance goals and the implementation of key strategic programs
and products.
In making its compensation decisions for the Company's CEO and other
executive officers, the Committee establishes programs and goals designed to
motivate and retain management. The Committee's programs are based upon a
compensation mix of base salaries coupled with a bonus program. The Company
has implemented a formal Management Incentive Plan ("MIP") for executive
officers of the Company, which allows them participation in earning bonuses
based upon achievement of both Company and personal goals. Company performance
goals in 1996 were weighted evenly between achievement of growth in revenue,
control of operating expenses and attainment of profitability goals. The
Committee believes that revenue and profitability are crucial factors in
establishing the Company as a recognized leader within its industry and for
enhancing shareholder value. In addition to the Company's financial
performance, the Committee, along with recommendations and input from the CEO,
reviews and makes an evaluation in its discretion of the progress and
attainment of each executive officer's individual goals, including the
implementation of strategic plans and product development that can enhance
sales growth and competitive position in future periods. The allocation of
bonus achievement is split evenly between achievement of Company goals and
individual goals. The Committee at its discretion can adjust Company and/or
individual goals based upon unforeseen factors.
In 1996, the Company achieved record revenue volume resulting in a 13%
increase in revenue over the prior year. While profitability for the Company
in 1996 was less than in 1995 due to the anticipated launch and development
expense associated with MAS 90 for Windows and Acuity Financials, the
Committee weighted the years profitability goals to fourth quarter results. In
the Committee's determination, the Company achieved 75% of its financial goals
for the year. For the year ended December 31, 1996 David Hanna, the Company's
CEO was paid a bonus of $137,000, an increase of $62,000 or 82% over the bonus
paid to him in 1995. The bonus included a $25,000 payment associated with the
successful shipment of the two new product lines.
The Committee meets without the CEO present and employs its discretion in
evaluating his performance and reports on that evaluation to the Board. The
Committee's recommendations for the Company's other executive officers'
bonuses are determined in the Committee's discretion based upon a combination
of factors described above related to Company performance and individual
performance, along with information received from the CEO of the Company. The
bonus plan for each named executive officer is reviewed and approved by this
Committee. For the year ended December 31, 1996 the Committee determined on an
individual basis the percentage achievement that was attained for both
individual and Company performance goals for the year, and paid a bonus amount
consistent with the percentage achievement of goals.
The Company's policy is not to disclose target levels with respect to
specific quantitative or qualitative performance-related factors, or factors
considered to involve confidential business information, because their
disclosure would have an adverse effect on the Company.
4
<PAGE>
Qualification of compensation under Section 162(m) of the Internal Revenue
Code requires that compensation be "performance-based" and that the
shareholders of the Company approve the material terms of the compensation
plan. The Company can deduct compensation paid (or deemed paid) to each named
executive officer in the tax year concerned to the maximum amount of
$1,000,000 unless additional compensation qualifies for deductibility under
Section 162(m). Both the 1990 and 1994 Incentive Stock Option, Nonqualified
Stock Option and Restricted Stock Purchase Plans qualify for deductibility
under Section 162(m).
All amounts paid or accrued during fiscal 1996 under the above described
plans and programs are included in the tables above.
COMPENSATION COMMITTEE
Susan L. Rasinski W. Frank King
DIRECTORS FEES
The Company pays non-employee Directors an annual retainer of $5,000, plus
the amount of $1,000 per Board meeting attended, plus reimbursement for
reasonable expenses incurred in attending meetings. No additional fees are
paid for participation in committee meetings. Directors who are officers of
the Company receive no additional compensation for Board service. Therefore,
Mr. Hanna and Mr. Riviere received no additional compensation for Board
service in 1996.
5
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT, NOMINEES
AND PRINCIPAL SECURITY HOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of December 31, 1996 for (i) each
person known to the Company to be the beneficial owner of more than five
percent of the outstanding Common Stock, (ii) each Director and nominee, (iii)
each of the Named Officers, and (iv) all Directors and executive officers of
the Company as a group. Except as may be indicated in the footnotes to the
table, each such person has the sole voting and investment power with respect
to the shares owned, subject to applicable community property laws.
<TABLE>
<CAPTION>
SHARES OF
COMMON STOCK PERCENTAGE
BENEFICIALLY OF CLASS
NAME POSITION WITH THE COMPANY OWNED OWNED(1)
---- ------------------------- ------------ ----------
<S> <C> <C> <C>
GeoCapital Corporation.. -- 838,483(2) 7.4%
767 Fifth Avenue
New York, NY 10153
Nevis Capital 802,162 7.1%
Management.............
1119 Saint Paul Street
Baltimore, Maryland
21202
David W. Hanna.......... Chairman of the Board, Chief 560,811(3) 3.9%
56 Technology Executive Officer and President
Irvine, CA 92618
George Riviere.......... Director and Vice President, 700,221(4) 6.2%
56 Technology Midrange Products Engineering
Irvine, CA 92618
Susan L. Rasinski....... Director 17,500(5) *
W. Frank King........... Director 31,500(6) *
James H. Clement, Jr.... Director 108,277(7) *
Joseph R. Armstrong..... Vice President, Finance Chief 11,789(8) *
Financial Officer, and Secretary
Jeffrey L. Gold......... Vice President, Development 471,125(9) 4.2%
Daniel M. Shapero....... Vice President, Client/Server Div 18,750(10) *
All Officers and
Directors as a group
(10 persons)........... 2,046,099(11) 18.1%
</TABLE>
- --------
* Represents less than 1% of the outstanding shares.
(1) Percentages based on shares actually owned or which the individual
possesses a right to acquire within 60 days as of December 31, 1996.
(2) Four employees of GeoCapital Corporation, Seth Lieber, Jonathan Lieber,
Wilma J. Engel and Jeanne E. Flaherty individually own 2,000, 1,000, 500
and 500 shares, respectively, of the Common Stock, in addition to the
shares owned by GeoCapital Corporation.
(3) Includes 450,000 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. Hanna under the Company's stock plans.
Shares owned by Mr. Hanna are held by him as trustee of the David W.
Hanna Trust.
(4) Includes 10,417 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. Riviere under the Company's stock
plans.
(5) Includes 17,500 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Ms. Rasinski under the Company's stock
plans.
(6) Includes 25,500 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. King under the Company's stock plans.
(7) Includes 31.208 shares as to which Mr. Clement shares voting power as a
co-trustee of various family trusts and 10,000 shares subject to options
exercisable within 60 days of December 31, 1996, granted to Mr. Clement
under the Company's stock plans.
(8) Includes I 10,000 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. Armstrong under the Company's stock
plans.
(9) Includes 38,784 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. Gold under the Company's stock plans.
(10) Includes 18,750 shares subject to options exercisable within 60 days of
December 31, 1996, granted to Mr. Shapero under the Company's stock
plans.
(11) Includes 698,660 shares subject to options exercisable within 60 days of
December 31, 1996.
PROPOSAL 2
ADOPTION OF
THE COMPANY'S 1997 EMPLOYEE STOCK PURCHASE PLAN
The Company's management has developed and proposed, and the Company's board
of directors has approved, the Company's 1997 Employee Stock Purchase Plan
(the "Plan"). The purpose of the Plan is to attract, retain, and motivate
employees of the Company by providing them an equity participation in the
Company.
If approved by shareholders, the proposed Plan will become effective July 1,
1997, and up to 1,000,000 shares of Company capital stock will be used for the
Plan. The Plan will have a duration of twenty years, subject to earlier
termination by the Board of Directors.
The proposed Plan permits employees to purchase Company stock through
payroll deductions during consecutive annual offerings, beginning January 1,
1998. Eligible employees on each offering date may purchase stock one share at
a time through payroll deductions of up to 20% of compensation. The price an
employee pays is 85% of the market price on the first or last day of each
offering period, whichever day the market price of the Company's stock is
lower. Eligibility will be extended to all regular employees of the Company
and of its subsidiaries, as defined in the Plan.
For federal income tax purposes, an employee does not realize income at the
time of entry into the Plan or purchase of a share. If no disposition of the
stock is made within two years from the first day of the relevant offering
period, and one year from the date the share was transferred to the employee,
upon subsequent disposition of the stock, ordinary income will be realized to
the extent of the lesser of (1) 15% of the average market value on the first
day of the relevant offering period or (2) the amount by which the net
proceeds of sale exceeds the price paid. Any further gain is taxed at long-
term capital gains rates. No income tax deduction will be allowed the Company
for shares transferred to an employee, provided such shares are held for the
required periods described above.
The new Plan will be administered by the Board of Directors of the Company
or a committee appointed by the Board. The Plan may be amended by the Board of
Directors. The proceeds of the sale of stock under the Plan will constitute
general funds of the Corporation and may be used by it for any purpose. The
Plan provides for proportionate adjustments to reflect stock splits, stock
dividends, or other changes in the capital stock.
Management intends to purchase shares to be used for the Plan in the open
market.
The only consideration the Company will receive for grants under the Plan
are the services rendered for the Company or any subsidiary thereof by the
participants. As of March 3, 1997, the market value of a share of Common Stock
was $12.625 as reported by NASDAQ. As proposed, 1,000,000 shares of Common
Stock under the 1994 Plan would have an aggregate market value on such date of
$12,625,000.
VOTE REQUIRED; BOARD OF DIRECTORS' RECOMMENDATION
The affirmative vote of the holders of a majority of the shares of Common
Stock present in person or represented by proxy at the Annual Meeting is
required to approve this proposal. The Board believes that adopting the Plan
is in the best interests of the Company, because adoption of the Plan will
enhance the ability of the Company to attract, motivate, and retain well
qualified officers and employees. THE BOARD OF DIRECTORS RECOMMENDS THAT
SHAREHOLDERS VOTE FOR APPROVAL OF THE PLAN'S ADOPTION. Management will vote
proxy Forms that management solicited FOR approving the Plan's adoption,
unless a vote against the proposal is specifically indicated. An abstention,
broker non-vote or other failure to vote by a shareholder present or
represented at the Annual Meeting will have no effect.
STATE OF THE ART, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the Employee Stock Purchase Plan
of State of the Art, Inc.
1. Purpose. The purpose of the Plan is to provide employees of the Company
and its Designated Subsidiaries with an opportunity to purchase Common Stock
of the Company. It is the intention of the Company to have the Plan qualify as
an "Employee Stock Purchase Plan" under Section 423 of the Internal Revenue
Code of 1986, as amended. The provisions of the Plan shall, accordingly, be
construed so as to extend and limit participation in a manner consistent with
the requirements of that section of the Code.
2. Definitions.
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the Common Stock, no par value, of the
Company.
(d) "Company" shall mean State of the Art, Inc., a California corporation.
(e) "Compensation" shall mean all regular straight time gross earnings
excluding payments for overtime, shift premium, incentive compensation,
incentive payments, bonuses, commissions and other compensation.
(f) "Continuous Status As An Employee" shall mean the absence of any
interruption or termination of service as an Employee. Continuous Status as an
Employee shall not be considered interrupted in the case of a leave of absence
agreed to in writing by the Company, provided that such leave is for a period
of not more than 90 days or reemployment upon the expiration of such leave is
guaranteed by contract or statute.
(g) "Contributions" shall mean all amounts credited to the account of a
participant pursuant to the Plan.
(h) "Designated Subsidiaries" shall mean the Subsidiaries which have been
designated by the Board from time to time in its sole discretion as eligible
to participate in the Plan.
(i) "Employee" shall mean any person, including an officer, who is
customarily employed for at least twenty (20) hours per week and more than
five (5) months in a calendar year by the Company or one of its Designated
Subsidiaries.
(j) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
(k) "Exercise Date" shall mean the last day of each Offering Period of the
Plan.
(l) "Offering Date" shall mean the first business day of each Offering
Period of the Plan, except that in the case of an individual who becomes an
eligible Employee after the first business day of an Offering Period but prior
to the first business day of the last calendar quarter of such Offering
Period, the term "Offering Date" shall mean the first business day of the
calendar quarter coinciding with or next succeeding the day on which that
individual becomes an eligible Employee.
Options granted after the first business day of an Offering Period will be
subject to the same terms as the options granted on the first business day of
such Offering Period except that such options will have a different grant date
(and thus, potentially, a different exercise price) and, because they expire
at the same time as the options granted on the first business day of such
Offering Period, a shorter term.
(m) "Offering Period" shall mean a specific period of twelve (12) months.
(n) "Plan" shall mean this Employee Stock Purchase Plan.
(o) "Subsidiary" shall mean a corporation, domestic or foreign, of which not
less than 50% of the voting shares are held by the Company or a Subsidiary,
whether or not such corporation now exists or is hereafter organized or
acquired by the Company or a Subsidiary.
3. Eligibility.
(a) Any person who has been continuously employed as an Employee for three
(3) months as of the Offering Date of a given Offering Period shall be
eligible to participate in such Offering Period under the Plan, provided that
such person was not eligible to participate in such Offering Period as of any
prior Offering Date, and further, subject to the requirements of paragraph
5(a) of this Plan and the limitations imposed by Section 423(b) of the Code.
(b) Any provisions of the Plan to the contrary notwithstanding, no Employee
shall be granted an option under the Plan (i) if, immediately after the grant,
such Employee (or any other person whose stock would be attributed to such
Employee pursuant to Section 424(d) of the Code) would own stock and/or hold
outstanding options to purchase stock possessing five percent (5%) or more of
the total combined voting power or value of all classes of stock of the
Company or of any subsidiary of the Company, or (ii) which permits the
Employee's rights to purchase stock under all employee stock purchase plans
(described in Section 423 of the Code) of the Company and its Subsidiaries to
accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) of fair
market value of such stock (determined at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by a series of Offering
Periods, with a new Offering Period commencing on January 1 of each year (or
at such other time or times as may be determined by the Board of Directors).
The Plan shall continue until terminated in accordance with paragraph 19
hereof. The Board of Directors of the Company shall have the power to change
the duration and/or the frequency of Offering Periods with respect to future
offerings without stockholder approval if such change is announced at least
fifteen (15) days prior to the scheduled beginning of the first Offering
Period to be affected.
5. Participation.
(a) An eligible Employee may become a participant in the Plan by completing
a subscription agreement on the form provided by the Company and filing it
with the Company's Office of Human Resources prior to the applicable Offering
Date, unless a later time for filing the subscription agreement is set by the
Board for all eligible Employees with respect to a given offering. The
subscription agreement shall set forth the percentage of the participant's
Compensation (which shall be not more than 20%) to be paid as Contributions
pursuant to the Plan.
(b) Payroll deductions shall commence on the first payroll following the
Offering Date, and shall end on the last payroll paid on or prior to the
Exercise Date of the offering to which the subscription agreement is
applicable, unless sooner terminated by the participant as provided in
paragraph 10.
6. Method of Payment of Contributions.
(a) The participant shall elect to have payroll deductions made on each
payday during the Offering Period in an amount not more than twenty percent
(20%) of such participant's Compensation on each such payday; provided that
the aggregate of such payroll deductions during the Offering Period shall not
exceed twenty percent (20%) of the participant's aggregate Compensation during
said Offering Period. All payroll deductions made by a participant shall be
credited to his or her account under the Plan. A participant may not make any
additional payments into such account.
(b) A participant may discontinue his or her participation in the Plan as
provided in paragraph 10, or, on one occasion only during any Offering Period,
may decrease, but may not increase, the rate of his or her Contributions during
the Offering Period by completing and filing with the Company a new subscription
agreement within the ten (10) day period immediately preceding the beginning of
any calendar quarter during the Offering Period. The change in rate shall be
effective as of the beginning of the calendar quarter following the date of
filing of the new subscription agreement.
(c) Notwithstanding the foregoing, to the extent necessary to comply with
Section 423(b)(8) of the Code and paragraph 3(b) herein, any participant's
payroll deductions may be decreased by the Company to 0%, at such time during
any Offering Period which is scheduled to end during the then-current calendar
year, that the aggregate of all of that Employee's payroll deductions related
to this Plan accumulated with respect to such Offering Period and any other
Offering Period ending within the same calendar year equal or exceed $21,250.
Payroll deductions shall recommence at the rate provided in such participant's
subscription agreement at the beginning of the first Offering Period which is
scheduled to end in the following calendar year, unless terminated by the
participant as provided in paragraph 10.
7. Grant of Option.
(a) Effective on the Offering Date of each Offering Period, each eligible
Employee participating in such Offering Period shall be granted, by the
Company, an option to purchase on the Exercise Date during such Offering
Period a number of shares of the Company's Common Stock determined by dividing
such Employee's Contributions accumulated prior to such Exercise Date and
retained in the Employee's account as of the Exercise Date by the lower of (i)
eighty-five percent (85%) of the fair market value of a share of the Company's
Common Stock on the Offering Date, or (ii) eighty-five percent (85%) of the
fair market value of a share of the Company's Common Stock on the Exercise
Date; provided however, that the maximum number of shares an Employee may
purchase during each Offering Period shall be determined at the Offering Date
by dividing $25,000 by the fair market value of a share of the Company's
Common Stock on the Offering Date, and provided further that such purchase
shall be subject to the limitations set forth in Sections 3(b) and 12 hereof.
The fair market value of a share of the Company's Common Stock shall be
determined as provided in Section 7(b) herein.
(b) The option price per share of the shares offered in a given Offering
Period shall be the lower of: (i) 85% of the fair market value of a share of
the Common Stock of the Company on the Offering Date; or (ii) 85% of the
fair market value of a share of the Common Stock of the Company on the
Exercise Date. The fair market value of the Company's Common Stock on a given
date shall be determined by the Board in its discretion based on the closing
price of the Common Stock for such date (or, in the event that the Common
Stock is not traded on such date, on the immediately preceding trading date),
as reported by the National Association of Securities Dealers Automated
Quotation (NASDAQ) National Market System.
8. Exercise of Option. Unless a participant withdraws from the Plan as
provided in paragraph 10, that Employee's option for the purchase of shares
will be exercised automatically on the Exercise Date of the Offering Period,
and the maximum number of full shares subject to option will be purchased for
him or her at the applicable option price with the accumulated Contributions
in his or her account. the shares purchased upon exercise of an option
hereunder shall be deemed to be transferred to the participant on the Exercise
Date. During his lifetime, a participant's option to purchase shares hereunder
is exercisable only by him or her.
9. Delivery. As promptly as practicable after the Exercise Date of each
Offering Period, the Company shall arrange the delivery to each participant,
as appropriate, of a certificate representing the shares purchased upon
exercise of his or her option. Any cash remaining to the credit of a
participant's account under the Plan after a purchase by him or her or shares
at the termination of each Offering Period, or which is insufficient to
purchase a full share of Common Stock of the Company, shall be returned to
said participant.
10. Withdrawal; Termination of Employment.
(a) A participant may withdraw all (but not less than all) of the
Contributions credited to his or her account under the Plan at any time prior
to the Exercise Date of the Offering Period by giving written notice to the
Company. All of the participant's Contributions credited to his or her account
will be paid to him or her promptly after receipt of his or her notice of
withdrawal, and his or her option for the current period will be automatically
terminated, and no further Contributions for the purchase of shares will be
made during the Offering Period.
(b) Upon termination of the participant's Continuous Status as an Employee
prior to the Exercise Date of the Offering Period for any reason, including
retirement or death, the Contributions credited to his or her account will be
returned to her or her or, in the case of his or her death, to the person or
persons entitled thereto under paragraph 14, and his or her option under this
Plan will be automatically terminated.
(c) In the event an Employee fails to remain in Continuous Status as an
Employee of the Company for at least twenty (20) hours per week during the
Offering Period in which the employee is a participant, he or she will be
deemed to have elected to withdraw from the Plan and the Contributions
credited to his or her account will be returned to him or her and his or her
option under this Plan will be terminated.
(d) A participant's withdrawal from an offering will not have any effect
upon his or her eligibility to participate in a succeeding offering or in any
similar plan which may hereafter be adopted by the Company.
11. Interest. No interest shall accrue on the Contributions of a participant
in the Plan.
12. Stock.
(a) The maximum number of shares of the Company's Common Stock which shall
be made available for sale under the Plan shall be one million shares, subject
to adjustment upon changes in capitalization of the Company as provided in
paragraph 18. If the total number of shares which would otherwise be subject
to options granted pursuant to Section 7(a) hereof on the Offering Date of an
Offering Period exceeds the number of shares then available under the Plan
(after deduction of all shares for which options have been exercised or are
then outstanding), the Company shall make a pro rata allocation of the shares
remaining available for option grant, among all then-current participants, in
as uniform a manner as shall be practicable and as it shall determine to be
equitable. Any amounts remaining in an Employee's account not applied to the
purchase of stock pursuant to this Section 12 shall be refunded on or promptly
after the Exercise Date. In such event, the Company shall give written notice
of such reduction of the number of shares subject to the option to each
Employee affected thereby and shall similarly reduce the rate of
Contributions, if necessary.
(b) The participant will have no interest or voting right in shares covered
by his or her option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan will be
registered in the name of the participant or in the name of the participant
and his or her spouse.
13. Administration. The Board, or a committee named by the Board, shall
supervise and administer the Plan and shall have full power to adopt, amend
and rescind any rules deemed desirable and appropriate for the administration
of the Plan and not inconsistent with the Plan, to construe and interpret the
Plan, and to make all other determinations necessary or advisable for the
administration of the Plan. The composition of the committee shall be in
accordance with the requirements to obtain or retain any available exemption
from the operation of Section 16(b) of the Exchange Act, pursuant to Rule 16b-
3 promulgated thereunder.
14. Designation of Beneficiary.
(a) A participant may file a written designation of a beneficiary who is to
receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of the
Offering Period but prior to delivery to him or her of such shares and cash.
In addition, a participant may file a written designation of a beneficiary who
is to receive any cash from the participant's account under the Plan in the
event of such participant's death prior to the Exercise Date of the Offering
Period. If a participant is married and the designated beneficiary is not the
spouse, spousal consent shall be required for such designation to be
effective.
(b) Such designation of beneficiary may be changed by the participant (and
his or her spouse, if any) at any time by appropriate written notice. In the
event of the death of a participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
participant's death, the Company shall deliver such shares and/or cash to the
executor or administrator of the estate of the participant, or if no such
executor or administrator has been appointed (to the knowledge of the
Company), the Company, in its discretion, may deliver such shares and/or cash
to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. Transferability. Neither Contributions credited to a participant's
account nor any rights with regard to the exercise of an option or to receive
shares under the Plan may be assigned, transferred, pledged or otherwise
disposed of in any way (other than by will, the laws of descent and
distribution, or as provided in paragraph 14 hereof) by the participant. Any
such attempt at assignment, transfer, pledge or other disposition shall be
without effect, except that the Company may treat such act as an election to
withdraw funds in accordance with paragraph 10.
16. Use of Funds. All Contributions received or held by the Company under
the Plan may be used by the Company for any corporate purpose, and the Company
shall not be obligated to segregate such Contributions.
17. Reports. Individual accounts will be maintained for each participant in
the Plan. Statements of account will be given to participating Employees
promptly following the relevant Exercise Date, which statements will set forth
the amounts of Contributions, the per share purchase price, the number of
shares purchased and the remaining cash balance, if any.
18. Adjustments Upon Changes in Capitalization. Subject to any required
action by the stockholders of the Company, the number of shares of Common
Stock covered by each option under the Plan which has not yet been exercised
and the number of shares of Common Stock which have been authorized for
issuance under the Plan but have not yet been placed under option
(collectively, the "Reserves"), as well as the price per share of Common Stock
covered by each option under the Plan which has not yet been exercised, shall
be proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock, or
any other increase or decrease in the number of shares of Common Stock
effected without receipt of consideration by the Company; provided, however,
that conversion of any convertible securities of the Company shall not be
deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect
shall be final, binding and conclusive. Except as expressly provided herein,
no issue by the Company of shares of stock of any class, or securities
convertible into shares of stock of any class, shall affect, and no adjustment
by reason thereof shall be made with respect to, the number or price of shares
of Common Stock subject to an option.
In the event of the proposed dissolution or liquidation of the Company, the
then-current Offering Period will terminate immediately prior to the
consummation of such proposed action, unless otherwise provided by the Board.
In the event of a proposed sale of all or substantially all of the assets of
the Company, or the merger of the Company with or into another corporation,
each option under the Plan shall be assumed or an equivalent option shall be
substituted by such successor corporation or a parent or subsidiary of such
successor corporation, unless the Board determines, in the exercise of its
sole discretion and in lieu of such assumption or substitution, to shorten the
Offering Period then in progress by setting a new Exercise Date (the "New
Exercise Date"). If the Board shortens the Offering Period then in progress in
lieu of assumption or substitution in the event of a merger or sale of assets,
the Board shall notify each participant in writing, at least ten (10) calendar
days prior to the New Exercise Date, that the Exercise Date for his or her
option has been changed to the New Exercise Date and that his or her option
will be exercised automatically on the New Exercise Date, unless prior to such
date he or she has withdrawn from this Plan as to that Offering Period as
provided in paragraph 10. For purposes of this paragraph, an option granted
under the Plan shall be deemed to be assumed if, following the sale of assets
or merger, the option confers the right to purchase, for each share of option
stock subject to the option immediately prior to the sale of assets or merger,
the consideration (whether stock, cash or other securities or property) received
in the sale of assets or merger by holders of Common Stock for each share of
Common Stock held on the effective date of the transaction (and if such holders
were offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares of Common Stock); provided,
however, that if such consideration received in the sale of assets or merger was
not solely common stock of the successor corporation or its parent (as defined
in Section 424(e) of the Code), the Board may, with the consent of the successor
corporation and the participant, provide for the consideration to be received
upon exercise of the option to be solely common stock of the successor
corporation or its parent equal in fair market value to the per share
consideration received by holders of Common Stock in the sale of assets or
merger.
The Board may, if it so determines in the exercise of its sole discretion,
also make provision for adjusting the Reserves, as well as the price per share
of Common Stock covered by each outstanding option, in the event that the
Company effects one ore more reorganizations, recapitalizations, rights
offerings or other increases or reductions of shares of its outstanding Common
Stock, and in the event of the Company being consolidated with or merged into
any other corporation.
19. Amendment or Termination. The Board of Directors of the Company may at
any time terminate or amend the Plan. Except as provided in paragraph 18, no
such termination may affect options previously granted, nor may an amendment
make any change in any option theretofore granted which adversely affects the
right of any participant. In addition, to the extent necessary to comply with
Rule 16b-3 under the Exchange Act, or under Section 423 of the Code (or any
successor rule or provision or any applicable law or regulation), the Company
shall obtain stockholder approval in such a manner and to such a degree as so
required.
20. Notices. All notices or other communications by a participant to the
Company under or in connection with the Plan shall be deemed to have been duly
given when received in the form specified by the Company at the location, or
by the person, designated by the Company for the receipt thereof.
21. Conditions Upon Issuance of Shares. Shares shall not be issued with
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Exchange Act, the rules and
regulations promulgated thereunder, and the requirements of any stock exchange
upon which the shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an option, the Company may require the
person exercising such option to represent and warrant at the time of any such
exercise that the shares are being purchased only for investment and without
any present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned applicable provisions of law.
22. Term of Plan. The Plan became effective July 1, 1997, and shall continue
in effect for a term of twenty (20) years, unless sooner terminated under
paragraph 19.
23. Additional Restrictions of Rule 16b-3. The terms and conditions of
options granted hereunder to, and the purchase of shares by, persons subject
to Section 16 of the Exchange Act shall comply with the applicable provisions
of Rule 16b-3. This Plan shall be deemed to contain, and such options shall
contain, and the shares issued upon exercise thereof shall be subject to, such
additional conditions and restrictions as may be required by Rule 16b-3 to
qualify for the maximum exemption from Section 16 of the Exchange Act with
respect to Plan transactions.
24. Severability. With respect to persons subject to Section 16 of the
Exchange Act, transactions under this Plan are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the Exchange Act.
To the extent any provision of the Plan or any action by the administrator of
the Plan fails to so comply, it shall be deemed null and void, to the extent
permitted by law and deemed advisable by the administrator of the Plan.
New Election
Change of Election
STATE OF THE ART, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
1. I, hereby elect to participate in the State of the
---------------------
Art, Inc., 1997 Employee Stock Purchase Plan (the "Plan") for the Offering
Period 19 , to , 19 , and subscribe to
------------------ -- -------------- --
purchase shares of the Company's Common Stock in accordance with this
Subscription Agreement and the Plan.
2. I elect to have Contributions in the amount of % of my Compensation,
----
as those terms are defined in the Plan, applied to this purchase. I understand
that his amount must not be more than 20% of my Compensation during the
Offering Period. (Please note that no fractional percentages are permitted.)
3. I hereby authorize payroll deductions from each paycheck during the
Offering Period at the rate stated in Item 2 of this Subscription Agreement. I
understand that all payroll deductions made by me shall be credited to my
account under the Plan and that I may not make any additional payments into
such account. I understand that all payments made by me shall be accumulated
for the purchase of shares of Common Stock at the applicable purchase price
determined in accordance with the Plan. I further understand that, except as
otherwise set forth in the Plan, shares will be purchased for me automatically
on the Exercise Date of the Offering Period unless I otherwise withdraw from
the Plan by giving written notice to the Company for such purpose.
4. I understand that I may discontinue at any time prior to the Exercise
Date my participation in the Plan as provided in paragraph 10 of the Plan. I
also understand that on one occasion only during the Offering Period I may
increase or decrease the rate of my Contributions during the Offering Period
by completing and filing with the Company a new Subscription Agreement. The
change in rate shall be effective as of the beginning of the calendar quarter
following the date of filing of the new Subscription Agreement.
5. I have received a copy of the Company's most recent description of the
Plan and a copy of the complete "State of the Art, Inc., 1997 Employee Stock
Purchase Plan." I understand that my participation in the Plan is in all
respects subject to the terms of the Plan.
6. Shares purchased for me under the Plan should be issued in the name(s) of
(name of employee or employee and spouse only):
---------------------------
---------------------------
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due to me under the Plan:
NAME: (Please print)
--------------------------------------------------------
(First) (Last)
(Middle)
- --------------------- --------------------------------------------------------
(Relationship) (Address)
--------------------------------------------------------
8. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the Offering Date (the first day of the Offering
Period during which I purchased such shares) or within 1 year after the date
of the end of the Offering Period, I will be treated for federal income tax
purposes as having received ordinary compensation income at the time of such
disposition in an amount equal to the excess of the fair market value of the
shares at the time such shares were transferred to me over the price which I
paid for the shares, regardless of whether I disposed of the shares at a price
less than their fair market value at transfer. The remainder of the gain or
loss, if any, recognized on such disposition will be treated as capital gain
or loss.
I hereby agree to notify the Company in writing within 30 days after the
date of any such disposition, and I will make adequate provision for federal,
state or other tax withholding obligations, if any, which arise upon the
disposition of the Common Stock. The Company may, but will not be obligated
to, withhold from my compensation the amount necessary to meet any applicable
withholding obligation including any withholding necessary to make available
to the Company any tax deductions or benefits attributable to the sale or
early disposition of Common Stock by me.
9. If I dispose of such shares at any time after expiration of the 2-year
and 1-year holding periods, I understand that I will be treated for federal
income tax purposes as having received compensation income only to the extent
of an amount equal to the lesser of (1) the excess of the fair market value of
the shares at the time of such disposition over the purchase price which I
paid for the shares under the option, or (2) 15% of the fair market value of
the shares on the Offering Date. The remainder of the gain or loss, if any,
recognized on such disposition will be treated as capital gain or loss.
I understand that this tax summary is only a summary and is subject to
change.
10. I hereby agree to be bound by the terms of the Plan. The effectiveness
of this Subscription Agreement is dependent upon my eligibility to participate
in the Plan.
SIGNATURE:
---------------------------
SOCIAL SECURITY #:
-------------------
DATE:
--------------------------------
SPOUSE'S SIGNATURE (necessary
if beneficiary is not spouse):
- --------------------------------------
(Signature)
- --------------------------------------
(Print name)
STATE OF THE ART, INC.
1997 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I, , hereby elect to withdraw my
---------------------------------
participation in the State of the Art, Inc., 1997 Employee Stock Purchase Plan
(the "Plan") for the Offering Period beginning . This
------------------------
withdrawal covers all Contributions credited to my account and is effective on
the date designated below.
I understand that all Contributions credited to my account will be paid to
me within ten (10) business days of receipt by the Company of this Notice of
Withdrawal and that my option for the current period will automatically
terminate, and that no further Contributions for the purchase of shares can be
made by me during the Offering Period.
The undersigned further understands and agrees that he or she shall be
eligible to participate in succeeding offering periods only by delivering to
the Company a new Subscription Agreement.
If the undersigned is an officer or director of State of the Art, Inc. or
other person subject to Section 16 of the Securities Exchange Act of 1934, the
undersigned further understands that under rules promulgated by the U.S.
Securities and Exchange Commission he or she may not re-enroll in the Plan for
a period of six (6) months after withdrawal.
Dated:
------------------------- ---------------------------------------
Signature of Employee
---------------------------------------
Social Security Number
6
<PAGE>
EXHIBIT 19
ANNEX I
Notwithstanding any other provisions of the Offer, the Purchaser shall
not be required to accept for payment or, subject to any applicable rules and
regulations of the SEC, including Rule 14e-l(c) under the Exchange Act (relating
to the Purchaser's obligation to pay for or return tendered Shares promptly
after termination or withdrawal of the Offer), pay for, and may delay the
acceptance for payment of or, subject to the restriction referred to above, the
payment for, any tendered Shares unless there are validly tendered and not
withdrawn prior to the expiration date for the Offer that number of Shares
which, when added to the Shares owned by the Purchaser, will represent at least
90% of the outstanding Shares on a fully diluted basis (without giving pro forma
effect to the potential issuance of any Shares issuable under the Option
Agreement) on the date of purchase (the "Minimum Condition"); provided, however,
----------------- -------- -------
that the Minimum Condition must be waived by the Purchaser and the Revised
Minimum Number substituted therefor as contemplated, and to the extent required,
by Section 1.1(d) of the Merger Agreement. Furthermore, notwithstanding any
other provisions of the Offer, the Purchaser shall not be required to accept for
payment or pay for any tendered Shares if, at the scheduled expiration date, (i)
any applicable waiting period under the HSR Act has not expired or terminated
prior to termination of the Offer, or (ii) any of the following events shall
have occurred and be continuing:
(a) there shall be pending any suit, action or proceeding by any
United States or United Kingdom Governmental Entity against the Purchaser,
Parent, the Company or any Subsidiary of the Company (i) seeking to prohibit or
impose any material limitations on Parent's or the Purchaser's ownership or
operation (or that of any of their respective Subsidiaries or affiliates) of all
or a material portion of the business or assets of Parent and its Subsidiaries,
taken as a whole, or all or a material portion of the business or assets of the
Company and its Subsidiaries, taken as a whole, or to compel Parent or the
Purchaser or their respective Subsidiaries and affiliates to dispose of or hold
separate any material portion of the business or assets of the Company or Parent
and their respective Subsidiaries, in each case taken as a whole, (ii)
challenging the acquisition by Parent or the Purchaser of any Shares under the
Offer or seeking to restrain or prohibit the making or consummation of the Offer
or the Merger, (iii) seeking to impose material limitations on the ability of
the Purchaser, or render the Purchaser unable, to accept for payment, pay for or
purchase some or all of the Shares pursuant to the Offer and the Merger, or (iv)
subject to the limitations under Section 1101(e) of the California General
Corporation Law,
A-1
<PAGE>
seeking to impose material limitations on the ability of Purchaser or Parent
effectively to exercise full rights of ownership of the Shares, including,
without limitation, the right to vote the Shares purchased by it on all matters
properly presented to the Company's shareholders;
(b) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable
(pursuant to an authoritative interpretation by or on behalf of a Government
Entity, to the Offer or the Merger) or any other action shall be taken by any
Governmental Entity, other than the application to the Offer or the Merger of
applicable waiting periods under HSR Act, that is likely to result in any of the
consequences referred to in clauses (i) through (iv) of paragraph (a) above;
(c) there shall have occurred (i) any general suspension of trading
in, or limitation on prices for, securities on the London Stock Exchange, the
New York Stock Exchange, the American Stock Exchange or the Nasdaq Stock Market
for a period in excess of 24 hours (excluding suspensions or limitations
resulting solely from physical damage or interference with such exchanges not
related to market conditions), (ii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or the United
Kingdom (whether or not mandatory), (iii) a commencement of a war, armed
hostilities or other international or United States or United Kingdom calamity
directly or indirectly involving the United States or the United Kingdom (other
than an action involving solely U.N. personnel or support of U.N. personnel),
(iv) any limitation (whether or not mandatory) by any United States or United
Kingdom Governmental Entity on the extension of credit generally by banks or
other financial institutions, or (v) a change in general financial, bank or
capital market conditions which materially and adversely affects the ability of
financial institutions in the United States to extend credit or syndicate loans,
which, in the case any of the foregoing, in the reasonable judgment of Parent,
makes it impractical to proceed with the acceptance of Shares for payment
pursuant to the Offer or the payment therefor;
(d) the representations and warranties of the Company set forth in the
Merger Agreement that are not qualified by reference to Company Material Adverse
Effect were not true and correct in any respect, or any other such
representations or warranties were not true and correct in any respect that
(when taken together with all other such representations and warranties not true
and correct) would likely have a Company Material Adverse Effect (i) in the case
of any representation or warranty which addresses matters as of a particular
date, as of such date, or (ii) in the
A-2
<PAGE>
case of all other representations and warranties, as of the date of this
Agreement and as of the scheduled expiration of the Offer.
(e) since the date of this Agreement, there shall have occurred any
change that constitutes (or that would likely constitute) a Company Material
Adverse Change;
(f) the Board of Directors of the Company or any committee thereof
shall have withdrawn or materially modified in a manner adverse to Parent or the
Purchaser or its recommendation of the Offer, the Merger or the Merger
Agreement, or approved or recommended any Acquisition Proposal;
(g) the Company shall have failed to perform or to comply in any
material respect with any agreement or covenant to be performed or complied with
by it under this Agreement;
(h) The London Stock Exchange shall have failed to admit to the
Official List of the London Stock Exchange the New Shares or such admission
shall have not become effective in accordance with paragraph 7.1 of the listing
rules of the London Stock Exchange ; provided, however, that this condition to
-------- -------
the Offer shall be deemed to have been met if, assuming the Purchaser had
accepted the Shares for payment in the Offer, such Admission would be
substantially certain to occur; and
(i) the Merger Agreement shall have been terminated in accordance with
its terms.
The foregoing conditions are for the sole benefit of Parent and the
Purchaser, may be asserted by Parent or the Purchaser regardless of the
circumstances giving rise to such condition and may be waived by Parent or the
Purchaser in whole or in part at any time and from time to time in the sole
discretion of Parent or the Purchaser, subject in each case to the terms of this
Agreement. The failure by Parent or the Purchaser at any time to exercise any
of the foregoing rights shall not be deemed a waiver of any such right and each
such right shall be deemed an ongoing right which may be asserted at any time
and from time to time.
The capitalized terms used in this Annex I shall have the meanings set
forth in the Agreement to which it is annexed, except that the term "Merger
------
Agreement" shall be deemed to refer to the Agreement to which this Annex I is
- ---------
appended.
A-3
