<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission File Number: 000-25291
TUT SYSTEMS, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 94-2958543
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2495 Estand Way, Pleasant Hill, California 94523
------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (925) 682-6510
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of October 31, 1999, 11,699,187 shares of the Registrant's Common Stock,
$0.001 par value per share, were issued and outstanding.
<PAGE>
TUT SYSTEMS, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements (unaudited):
Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998........ 1
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 1999 and September 30, 1998................................. 2
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 1999 and September 30, 1998............................................. 3
Notes to Unaudited Condensed Consolidated Financial Statements.............................. 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................................. 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk.................................. 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................... 21
Item 2. Changes in Securities....................................................................... 21
Item 3. Defaults Upon Senior Securities............................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders......................................... 21
Item 5. Other Information........................................................................... 21
Item 6. Exhibits and Reports on Form 8-K............................................................ 21
</TABLE>
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,977 $ 4,452
Short-term investments 23,442 -
Accounts receivable, net of allowance for doubtful accounts
of $260 and $115 in 1999 and 1998, respectively 8,663 3,194
Inventories 4,784 3,787
Prepaid expenses and other 1,440 499
------- --------
Total current assets 55,306 11,932
Property and equipment, net 2,924 1,790
Deferred offering costs - 955
Other assets 2,340 580
------- --------
Total assets $60,570 $ 15,257
======= ========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND WARRANT, AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 3,166 $ 2,421
Accrued liabilities 2,015 1,758
Line of credit 1,452 -
Deferred revenue 770 580
------- --------
Total current liabilities 7,403 4,759
Lines of credit, net of current portion - 4,262
Deferred revenue, net of current portion 2,310 2,080
------- --------
Total liabilities 9,713 11,101
------- --------
Redeemable convertible preferred stock, $0.001 par value,
7,531 shares authorized, none and 6,355 shares issued and
outstanding in 1999 and 1998, respectively - 43,895
Redeemable convertible preferred stock warrant - 2,100
------- --------
- 45,995
------- --------
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value,
5,000 shares authorized, none and 1,098 shares issued and
outstanding in 1999 and 1998, respectively - 1,567
Common stock, $0.001 par value, 100,000 shares authorized,
11,670 and 347 shares issued and outstanding in
1999 and 1998, respectively 12 -
Additional paid in capital 104,256 2,455
Deferred compensation (1,085) (1,427)
Accumulated deficit (52,326) (44,434)
------- --------
Total stockholders' equity (deficit) 50,857 (41,839)
------- --------
Total liabilities and stockholders' equity (deficit) $60,570 $ 15,257
======= ========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
<PAGE>
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------- -------- -------- -------
<S> <C> <C> <C> <C>
Revenues:
Product $ 7,579 $ 2,490 $ 15,887 $ 6,585
License and royalty 685 200 1,278 618
------- ------- -------- --------
Total revenues 8,264 2,690 17,165 7,203
------- ------- -------- --------
Cost of goods sold:
Product 4,341 1,351 9,501 3,733
License and royalty - 31 3 52
------- ------- -------- --------
Total cost of goods sold 4,341 1,382 9,504 3,785
------- ------- -------- --------
Gross margin 3,923 1,308 7,661 3,418
------- ------- -------- --------
Operating Expenses:
Sales and marketing 2,678 2,337 7,536 6,265
Research and development 2,008 1,965 5,367 4,729
General and administrative 1,108 682 3,110 2,106
Noncash compensation expense 114 114 342 1,119
------- ------- -------- --------
Total operating expenses 5,908 5,098 16,355 14,219
------- ------- -------- --------
Loss from operations (1,985) (3,790) (8,694) (10,801)
Interest expense (152) (10) (467) (33)
Other income 571 66 1,587 300
------- ------- -------- --------
Loss before income taxes (1,566) (3,734) (7,574) (10,534)
Income tax expense - - 1 1
------- ------- -------- --------
Net loss (1,566) (3,734) (7,575) (10,535)
Dividend accretion on preferred stock - 661 235 1,923
------- ------- -------- --------
Net loss attributable to common stockholders $(1,566) $(4,395) $ (7,810) $(12,458)
======= ======= ======== ========
Net loss per share attributable to common stockholders,
basic and diluted (Note 3) $ (0.13) $(14.70) $ (0.75) $ (50.53)
======= ======= ======== ========
Shares used in computing net loss attributable to common
stockholders, basic and diluted (Note 3) 11,670 299 10,360 247
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-2-
<PAGE>
TUT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
---------------------------
1999 1998
--------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,575) $ (10,535)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 594 441
Provision for allowance for doubtful accounts 145 14
Provision for excess and obsolete inventory 513 -
Amortization of discounts on investments (233) (185)
Noncash compensation expense 342 1,119
Change in assets and liabilities:
Accounts receivable (5,614) (1,251)
Inventories (1,510) (1,315)
Prepaid expenses and other assets (1,244) 96
Accounts payable 745 401
Deferred revenue 420 1,492
Accrued liabilities 257 (146)
-------- -------
Net cash used in operating activities (13,160) (9,869)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment (1,728) (938)
Purchase of short-term investments (29,709) (1,765)
Purchase of long-term investment (500) -
Proceeds from maturities and sale of short-term investments 6,500 6,840
Net cash acquired in business combination 76 -
-------- -------
Net cash (used in) provided by investing activities (25,361) 4,137
-------- -------
Cash flows from financing activities:
Payment on lines of credit (2,844) (224)
Proceeds from lines of credit 34 222
Proceeds from issuances of common and preferred stock, net 53,856 3,756
-------- -------
Net cash provided by financing activities 51,046 3,754
-------- -------
Net increase (decrease) in cash and cash equivalents 12,525 (1,978)
Cash and cash equivalents, beginning of period 4,452 5,395
-------- -------
Cash and cash equivalents, end of period $ 16,977 $ 3,417
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
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<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
1. The Company:
Tut Systems, Inc. (the "Company") was founded in 1983 and began operations
in August 1991. The Company designs, develops and markets advanced
communications products which enables data to be transmitted at high speeds over
the copper wires used by telephone companies, as well as the copper telephone
wires found in homes, businesses and other buildings. The Company's products
incorporate our proprietary FastCopper technology which allows these products to
exploit the underutilized bandwidth, or capacity, of copper telephone wires.
2. Basis of Presentation:
The accompanying condensed consolidated financial statements as of
September 30, 1999 and 1998 and for the three months and the nine months ended
September 30, 1999 and 1998 are unaudited. The unaudited interim condensed
consolidated financial statements have been prepared on the same basis as the
annual financial statements and, in the opinion of management, reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the Company's financial position, results of operations and cash
flows as of and for the nine months ended September 30, 1999 and 1998. These
condensed consolidated financial statements and notes thereto are unaudited and
should be read in conjunction with the Company's audited financial statements
included in the Company's Prospectus, filed with the Securities and Exchange
Commission on January 28, 1999. The balance sheet as of December 31, 1998 was
derived from audited financial statements, but does not include all required
disclosures required by generally accepted accounting principles. The results
for the nine months ended September 30, 1999 are not necessarily indicative of
the expected results for any other interim period or the year ending December
31, 1999.
-4-
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -(Continued)
(in thousands, except per share amounts)
(unaudited)
3. Summary of Significant Accounting Policies:
Net Loss Per Share and Unaudited Pro Forma Net Loss Before Dividend
Accretion:
The Company computes net loss per share in accordance with SFAS No.128,
"Earnings per Share." Under the provision of SFAS No. 128, basic and diluted net
loss per share is computed by dividing the net loss available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Options, warrants and preferred stock were not
included in the computation of diluted net loss per share because the effect
would be antidilutive.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss per share attributable to common stockholders,
basic and diluted:
Net loss attributable to common stockholders $ (1,566) $ (4,395) $ (7,810) $ (12,458)
=========== ========== ========== ==========
Net loss per share attributable to common stockholders,
basic and diluted $ (0.13) $ (14.70) $ (0.75) $ (50.53)
=========== ========== ========== ==========
Shares used in computing net loss attributable to common
stockholders, basic and diluted 11,670 299 10,360 247
=========== ========== ========== ==========
Antidilutive securities including options, warrants and
preferred stock not included in net loss per share
attributable to common stockholders calculations 1,455 9,123 1,455 9,123
=========== ========== ========== ==========
</TABLE>
Pro forma net loss per share before dividend accretion has been
computed as described above except that it assumes the conversion of preferred
stock outstanding into common stock during the relevant periods.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ----------------------------------
1999 1998 1999 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Pro forma net loss per share before dividend accretion:
Net loss attributable to common stockholders $ (1,566) $ (4,395) $ (7,810) $ (12,458)
Dividend accretion on redeemable convertible preferred
stock - 661 235 1,923
----------- --------- --------- ----------
Pro forma net loss before dividend accretion on redeemable
convertible preferred stock $ (1,566) $ (3,734) $ (7,575) $ (10,535)
=========== ========= ========= ==========
Shares used in computing net loss attributable to common
stockholders, basic and diluted 11,670 299 10,360 247
Adjustment to reflect the assumed conversion of preferred
stock - 8,120 792 8,119
----------- --------- --------- ---------
Shares used in computing pro forma net loss before
dividend accretion on preferred stock, basic and diluted 11,670 8,419 11,152 8,366
----------- --------- --------- ---------
Pro forma net loss per share, before dividend accretion,
basic and diluted $ (0.13) $ (0.44) $ (0.68) $ (1.26)
----------- --------- --------- ---------
</TABLE>
<PAGE>
TUT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(in thousands, except per share amounts)
(unaudited)
3. Summary of Significant Accounting Policies, continued:
Impact of Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Standard Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS
130). FAS 130 requires that all items that are to be required to be recognized
under accounting standards as components of comprehensive financial statements.
FAS 130 is effective for fiscal years beginning after December 15, 1997. To
date, the Company has not had any transactions that are required to be reported
in comprehensive income.
During June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information" (FAS 131). FAS 131 replaces FAS 14,
"Financial Reporting for Segments of a Business Enterprise" and changes the way
the public companies report segment information. FAS 131 is effective for
fiscal years beginning after December 15, 1997. The Company has determined that
it does not have any separately reportable business segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company believes the adoption of SOP 98-1 will not have
a material impact on its financial statements and related disclosures.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5 "Reporting on the Costs of Start-Up
Activities" (SOP 98-5). This standard requires companies to expense the costs
of start-up activities and organization costs as incurred. In general, SOP 98-5
is effective for fiscal years beginning after December 15, 1998. The Company
believes the adoption of SOP 98-5 will not have a material impact on its results
of operations.
4. Initial Public Offering and Conversion of Redeemable Convertible Preferred
Stock and Warrant:
In January 1999, the Company completed its initial public offering and issued
2,875 shares of its common stock at a price of $18.00 per share. The Company
received approximately $47.0 million in cash, net of underwriting discounts,
commissions and other offering costs. Additionally, prior to the initial public
offering, a warrant to purchase 667 shares of Series G convertible preferred
stock at an exercise price of $10.00 per share was exercised for approximately
$6.7 million. Simultaneously with the closing of the initial public offering,
all of the Company's convertible preferred stock and redeemable convertible
preferred stock was automatically converted into an aggregate of 8,120 shares of
common stock.
5. Royalty Obligation
The Company has acquired the rights, title and interests in two patents
from a founder and stockholder of the Company. Under a previous agreement, the
Company was required to pay on-going royalties based on the net sales price of
products sold utilizing the patented technology. In February 1999, the Company
paid the founder $2.5 million as a lump sum payment for all its future royalty
obligations. This payment, net of the current portion, is included in other
assets at September 30, 1999. The Company amortizes the amount ratably over
five years. This period represents the estimated life of the patented
technology.
-6-
<PAGE>
6. Inventories:
<TABLE>
<CAPTION>
Inventories consist of the following: September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods $ 3,082 $ 1,856
Work in process 629 1,616
Raw material 1,073 315
------- -------
$ 4,784 $ 3,787
======= =======
</TABLE>
7. Significant Customer and Geographic Information:
The Company structures its business activity in only one operating segment
which encompasses the design, development and marketing of advanced
communications products. Revenue by geographic region is as follows:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
------------------------ ------------------------
<S> <C> <C> <C> <C>
United States $ 4,177 $ 2,262 $ 11,462 $ 6,030
Foreign 4,087 428 5,703 1,173
------- ------- -------- --------
$ 8,264 $ 2,690 $ 17,165 $ 7,203
======= ======= ======== ========
</TABLE>
For the three months and the nine months ended September 30, 1999, one
customer accounted for more than 10% of the Company's revenue. Two reseller
customers accounted for approximately 14% and 12%, respectively, of the
Company's revenue for the three months and the nine months ended September 30,
1998.
8. Business Combinations:
In June 1999, the Company acquired PublicPort, Inc. ("PublicPort"), a
company that designs and develops subscriber management systems. The Company
issued 168,679 shares of its common stock all of the outstanding common stock of
PublicPort.
The acquisition was accounted for as a pooling of interests. The
historical results of operations and financial position of PublicPort were not
significant in relation to those of the Company. As such, historical results of
operations of the Company have not been restated to consolidate the results of
operations of PublicPort for periods prior to the acquisition date.
In September 1999, the Company acquired an 11% interest in Vintel
Communications, Inc. ("Vintel") for a purchase price of $500,000. Vintel is a
networking company that specializes in developing high-performance integrated
service routers. This investment is carried at cost and is included in other
assets at September 30, 1999.
On October 15, 1999 the Company signed a definitive agreement to acquire
the remaining 89% interest in Vintel. The Company will issue up to 156,280
shares of its common stock or options to purchase common stock for all of the
outstanding shares of common stock and outstanding options of Vintel. The
Company intends to account for this acquisition as a purchase.
-7-
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF DISCONTINUED OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Financial
Statements and the related Notes thereto included elsewhere in this Form 10-Q.
This discussion contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from the results discussed in the forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below, as well as those discussed in the
Company's Registration Statement on Form S-1. The Company disclaims any
obligation to update information contained in any forward-looking statement.
Overview
Tut Systems designs, develops and markets advanced communications products
which enable high-speed data access over the copper infrastructure of telephone
companies, as well as the copper telephone wires in homes, businesses and other
buildings. The Company's Expresso and XL products include high-bandwidth access
multiplexers, associated modems and routers, Ethernet extension products and
integrated network management software.
The Company generates revenues primarily from the sale of products and, to
a lesser extent, through the licensing of its HomeRun technology. The Company
generally recognizes revenues from product sales upon shipment. Estimated sales
returns and warranty costs, based on historical experience by product, are
recorded at the time revenues are recognized. License and royalty revenues
consist of non-refundable up-front license fees, some of which may offset
initial royalty payments, and royalties. Currently, the majority of license and
royalty revenues are comprised of non-refundable license fees paid in advance.
Such revenues are recognized ratably over the period during which post-contract
customer support is expected to be provided or upon delivery and transfer of
agreed upon technical specifications in contracts where essentially no further
support obligations exist. Future license and royalty revenues are expected to
consist primarily of royalties based on products sold by the Company's
licensees. The Company does not expect that such license and royalty revenues
will constitute a substantial portion of the Company's revenues in future
periods.
Sales price reductions on some of the Company's products may be necessary
to remain competitive. Although the Company has been historically able to
offset most price declines with reductions in its manufacturing costs, there can
be no assurance that the Company will be able to offset further price declines
with cost reductions. In addition, certain of the Company's licensees may sell
products based on the Company's technology to competitors or potential
competitors of the Company. There can be no assurance that the Company's
HomeRun technology will be successfully deployed on a widespread basis or that
such licensing will not result in an erosion of the potential market for the
Company's products. See "Risk Factors."
Sales to customers outside of the United States accounted for approximately
33.0% and 16.0% of revenues for the first nine months of 1999 and 1998,
respectively. The Company expects international sales to increase on average in
the future. To date, substantially all sales have been denominated in U.S.
dollars.
Tut Systems expects to continue to evaluate product line expansion and new
product opportunities, engage in extensive research, development and engineering
activities and focus on cost-effective design of its products. Accordingly, the
Company will continue to make significant expenditures on sales and marketing
and research and development activities.
In June 1999, the Company acquired PublicPort, Inc. ("PublicPort").
PublicPort designs and develops subscriber management systems which enable
businesses, such as the hospitality industry, to allow mobile computer users,
using laptop computers equipped with an Ethernet interface, to access the public
internet or private corporate networks without having to reconfigure their
laptop's network access software. The Company intends to continue additional
design and development and to market such products as part of its Expresso MDU
product line.
In September 1999, the Company acquired an 11% interest in Vintel
Communications, Inc. ("Vintel"). Vintel designs and develops high-performance
integrated service routers to allow service providers to offer bundles of
services including voice-over-IP and high-speed Internet services over a common
IP infrastructure for customers in the multi-dwelling unit ("MDU") markets.
-8-
<PAGE>
In October 1999, the Company entered into a definitive agreement with
Vintel to acquire the remaining 89% interest. This transaction is expected to be
consummated in early November 1999. The Company intends to continue additional
design and development and to market Vintel's products as part of its Expresso
MDU product line.
The Company has generated net operating losses to date and, as of September
30, 1999, had an accumulated deficit of $52.3 million. The ability of the
Company to generate income from operations will be primarily dependent on
increases in sales volume, reductions in certain manufacturing costs and the
growth of high-speed data access solutions in the service provider and multiple
tenant unit ("MTU") markets which encompasses the MDU market and the multiple
commercial unit ("MCU") market. The MCU market includes shared-tenant buildings,
retail centers and business parts. In view of the Company's limited history of
product revenues from new markets, reliance on growth in deployment of high-
speed data access solutions and the unpredictability of orders and subsequent
revenues, the Company believes that period to period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. Failure to generate significant revenues
from new products, whether due to lack of market acceptance, competition,
technological change or otherwise, or the inability to reduce manufacturing
costs, will have a material adverse effect on the Company's business, financial
condition and results of operations.
Results of Operations
The following table sets forth certain items from the Company's statements
of operations as a percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
--------------------------- -----------------------------
1999 1998 1999 1998
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenues 100.0 % 100.0 % 100.0 % 100.0 %
Total cost of goods sold 52.5 51.4 55.4 52.5
----- ----- ----- -----
Gross margin 47.5 48.6 44.6 47.5
Operating expenses:
Sales and marketing 32.4 86.9 43.9 87.0
Research and development 24.3 73.0 31.3 65.7
General administrative 13.4 25.4 18.1 29.2
Noncash compensation expenses 1.4 4.2 2.0 15.6
----- ----- ----- -----
Total operating expenses 71.5 189.5 95.3 197.5
----- ----- ----- -----
Loss from operation (24.0) (140.9) (50.7) (150.0)
Other income (expense), net 5.1 2.1 6.5 3.7
----- ----- ----- -----
Loss before income taxes (18.9) (138.8) (44.2) (146.3)
Income tax expense - - - -
----- ----- ----- -----
Net loss (18.9)% (138.8)% (44.2)% (146.3)%
===== ===== ===== =====
</TABLE>
-9-
<PAGE>
Three Months and Nine months Ended September 30, 1999 and 1998
Revenues. The Company generates revenues primarily from the sale of
products and, to a lesser extent, through the licensing of its HomeRun
technology. The Company's total revenues increased to $8.3 million and $17.2
million for the three months and the nine months ended September 30, 1999,
respectively, from $2.7 million and $7.2 million, respectively, for the same
periods ended September 30, 1998. The increase in 1999 was primarily due to an
increase in sales of Expresso GS products and Expresso MDU products. Expresso
MDU products were introduced in the third quarter of 1998. License and royalty
revenues were $0.7 million and $1.3 million for the three months and the nine
months ended September 30, 1999, respectively, compared to $0.2 million and
$0.6 million, respectively, for the same periods of 1998. License and royalty
revenues to date consist primarily of the currently recognized portion of fees
from total license contracts of $5.1 million. Approximately $3.1 million and
$1.5 million of such fees were deferred at September 30, 1999 and 1998,
respectively.
Cost of Goods Sold/Gross Margin. Cost of goods sold consists of raw
materials, contract manufacturing, personnel costs, test and quality assurance
for products, and cost of licensed technology included in the products. The
Company's cost of goods sold increased to $4.3 million and $9.5 million for the
three months and the nine months ended September 30, 1999, respectively, from
$1.4 million and $3.8 million, respectively, for the same periods ended
September 30, 1998. The increase in 1999 was primarily due to increased
production of the Company's Expresso GS products and new production of its
Expresso MDU products. The Company's gross margin on an absolute basis increased
to $3.9 million and $7.7 million for the three months and the nine months ended
September 30, 1999, respectively, up from $1.3 million and $3.4 million,
respectively, for the same periods ended September 30, 1998. Gross margin as a
percentage of revenues decreased to 47.5% and 44.6% of revenues for the three
months and the nine months ended September 30, 1999, respectively, down from
48.6% and 47.5% of revenues, respectively, for the same periods ended September
30, 1998. The decrease in gross margin as a percent of revenues in 1999 was
primarily due to the change in product mix to include Expresso products which
have lower average gross margins than XL products. Increased costs of raw
materials and contract manufacturing associated with initial Expresso MDU
introductions also contributed to this decrease in gross margins.
Sales and Marketing. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs related to customer support,
travel, trade-shows, promotions and outside services. The Company's sales and
marketing expenses increased to $2.7 million and $7.5 million for the three
months and the nine months ended September 30, 1999, respectively from $2.3
million and $6.3 million, respectively, for the same periods ended September 30,
1998. The increase in 1999 was primarily due to increased hiring of sales and
marketing personnel, expansion of travel and attendance at trade shows,
increases in personnel related to customer support activities and expanded
efforts in international markets. The Company intends to increase sales and
marketing expenses as it adds personnel to support its domestic and
international sales and customer support efforts.
Research and Development. Research and development expenses primarily
consist of personnel costs related to engineering and technical support,
contract consultants, outside testing services, equipment and supplies
associated with enhancing existing products and developing new products.
Research and development costs are expensed as incurred. The Company's research
and development expenses were $2.0 million and $5.4 million for the three months
and the nine months ended September 30, 1999, respectively, compared to $2.0
million and $4.7 million, respectively, for the same periods ended September 30,
1998. The year-to-date increase in 1999 was primarily due to increased
expenditures from further development of the Expresso GS and Expresso MDU
products, development of HomeRun-related products, enhancement of certain XL
products, and continued development of the subscriber management system
portion of the Expresso MDU product line. The research and development expenses
of PublicPort, Inc. were consolidated with the Company's expenses for the period
subsequent to the acquisition date on June 8, 1999 and represented 11.0% of the
expenses for the three months ended September 30, 1999. The Company intends to
increase investment in research and development programs in future periods for
the purpose of enhancing current products for domestic and international
markets, reducing the cost of current products and developing and acquiring new
products.
General and Administrative. General and administrative expenses primarily
consist of personnel costs for administrative officers and support personnel,
and legal, accounting and consulting fees. The Company's general and
administrative expenses increased to $1.1 million and $3.1 million for the three
months and the nine months ended September 30, 1999, respectively, from $0.7
million and $2.1 million, respectively, for the same periods ended September 30,
1998. The increase in 1999 was primarily due to increased costs related to the
Company's growth, including additions of administrative personnel. The Company
intends to increase general and administrative expenditures and infrastructure
costs as the Company expands its business.
Noncash Compensation Expense. Noncash compensation expense primarily
consists of expenses related to the grant of a warrant to purchase up to 666,836
shares of common stock in consideration for technology endorsement, marketing
and certain development support by Microsoft with respect to the Company's
HomeRun technology and related products. Noncash compensation expense also
consists of the recognition of expense related to certain employee stock option
grants, based on the difference between the deemed fair value of common stock
and the option exercise price at the date of grant. The Company's noncash
compensation expense was $0.1 million and $0.3 million for the three months and
the nine months ended September 30, 1999, respectively, compared to $0.1 million
and $1.1 million, respectively, for the same periods of 1998. The decrease in
1999 is due to the initial expense of $0.9 million for noncash compensation
recognized in the nine months ended September 30, 1998. The Company intends to
recognize $1.1 million in additional expenses related to employee stock options
ratably over the remaining vesting period of the related options. Such deferred
expense has been recorded as a reduction of equity in the balance sheet.
Other Income (Expense), Net. Other income (expense), net consists of
interest income on cash balances, offset by interest expense associated with
credit facilities. The Company's other income (expense), net was $0.4 million
and $1.1 million for the three months and the nine months ended September 30,
1999, respectively, and $0.1 million and $0.3 million for the same periods ended
September 30, 1998. The increase in 1999 was primarily due to increased balances
in cash, cash equivalents and short-term investments following the Company's
initial public offering.
-10-
<PAGE>
Liquidity and Capital Resources
Since its inception, the Company has financed its operations primarily
through the sale of preferred equity securities for an aggregate of $46.0
million net of offering costs. In January 1999, the Company completed its
initial public offering and issued 2,875,000 shares of its common stock at a
price of $18.00. The Company received approximately $47.0 million in cash, net
of underwriting discounts, commissions and other offering costs. The Company
also received approximately $6.7 million as a result of the exercise of a
warrant to purchase 666,836 shares of Series G convertible preferred stock at a
price of $10.00 per share.
The Company has a credit facility to borrow up to $7.5 million. The credit
facility is composed of two revolvers: a formula revolver of up to the lesser of
$3.0 million or 85% of qualified accounts receivable bearing interest at prime
plus 2.0% per annum; a non-formula revolver of up to $4.5 million bearing
interest at prime plus 3.5% per annum. The credit facility requires a minimum
monthly interest payment of $10,000. The term of the credit facility is 18
months ending on June 30, 2000 and is automatically renewed for additional terms
of one year unless 60 days' written notice is given by either party. The Company
has approximately $1.5 million borrowed against the credit facility as of
September 30, 1999.
At September 30, 1999, the Company had cash, cash equivalents and short-
term investments of $40.4 million.
Net cash used by operating activities was $13.2 million for the nine months
ended September 30, 1999, compared to $9.9 million for the same period of 1998.
The increase in 1999 was primarily due to the $2.5 million payment to purchase
certain intellectual property previously subject to ongoing royalties.
Net cash used in investing activities was $25.3 million for the nine months
ended September 30, 1999, compared to $4.1 million of cash provided for the same
period of 1998. The increase in 1999 was primarily due to the purchase of
short-term investments.
In June 1999, the Company acquired PublicPort as a wholly-owned subsidiary.
The Company issued 168,679 shares of common stock. The acquisition has been
accounted for as a pooling of interests resulting in a business combination, net
of cash acquired, of approximately $0.1 million.
In September 1999, the Company acquired an 11% interest in Vintel
Communications, Inc. ("Vintel") for a cash investment of $0.5 million. In
October 1999, the Company entered into a definitive agreement to acquire the
remaining 89% interest in Vintel. The Company will issue up to 156,280 shares of
its common stock or options to purchase common stock for all of the outstanding
common stock and outstanding options of Vintel. The Company intends to account
for the acquisition as a purchase.
Net cash provided by financing activities was $51.0 million for the nine
months ended September 30, 1999, compared to $3.8 million for the same period of
1998. The increase in 1999 was primarily due to the Company's initial public
offering of 2,875,000 shares of its common stock for which the Company received
approximately $47.0 million in cash. Additionally, the Company received
approximately $6.7 million as a result of the exercise of a warrant to purchase
666,836 shares of Series G convertible preferred stock at an exercise price of
$10.00 per share. The Company used $2.9 million of cash to pay down its
borrowings under a credit facility entered into in 1998.
In future periods, the Company generally anticipates significant increases
in working capital on a period to period basis primarily as a result of planned
increased product sales and higher relative levels of inventory. The Company
will also continue to expend significant amounts on property and equipment
related to the expansion of systems infrastructure and office equipment to
support Company growth and lab and test equipment to support on-going research
and development efforts.
During the nine months ended September 30, 1999 and 1998, the Company
incurred non-cash expenses related to the amortization of stock compensation and
other non-cash items. The table below sets forth supplemental information
concerning the impact of certain non-cash items on losses from operations. The
statements of operations data has been derived from the Company's unaudited
condensed interim financial statements, which, in Management's opinion, have
been prepared on substantially the same basis as the audited annual financial
statements necessary for a fair presentation of the periods presented. The
operating results in any quarter are not necessarily indicative of the results
that may be expected for any future period.
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<PAGE>
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------
1999 1998 1999 1998
---------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total revenues $ 8,264 $ 2,690 $17,165 $ 7,203
------- ------- ------- --------
Gross margin 3,923 1,308 7,661 3,418
Operating expenses 5,908 5,098 16,355 14,219
------- ------- ------- -------
Loss from operations $(1,985) $(3,790) $(8,694) $(10,801)
------- ------- ------- --------
Supplemental loss information (1):
Historical loss from operations $(1,985) $(3,790) $(8,694) $(10,801)
Add back certain non-cash charges:
Amortization of non-cash compensation (2) 114 114 342 1,119
Depreciation 228 186 594 441
------- ------- ------- --------
Supplemental loss from operations excluding certain
non-cash charges $(1,643) $(3,490) $(7,758) $ (9,241)
======= ======= ======= ========
</TABLE>
(1) The accompanying supplemental financial information is presented for
informational purposes only and should not be considered as a substitute
for the historical financial information presented in accordance with
generally accepted accounting principles.
(2) Expense associated with the amortization of non-cash compensation consists
primarily of the recognition of expense related to certain employee stock
option grants, based on the difference between fair value of common stock
and the option exercise price at the date of grant.
The Company believes that its cash, cash equivalents and short-term
investment balances and funds available under its credit facility will be
sufficient to satisfy its cash requirements for at least the next 12 months.
Forward Looking Statements
The statements contained in this Report that are not historical facts are
"forward-looking statements" (as such term is defined in Section 27A of the
Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934),
which can be identified by the use of forward-looking terminology such as
"estimated," "projects," "anticipated," "expects," "intends," "believes," or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy that involve risks and uncertainties. These forward-
looking statements, such as the Company intends to increase investment in
research and development to meet rapid technological changes, we plan to devote
substantial resources to expand market penetration into the MTU markets, we
expect to increase international sales, statements regarding development of the
Company's business, future operating results, the Company's anticipated capital
availability of additional financing, and other statements contained in this
Report regarding matters that are not historical facts, are only estimates or
predictions and cannot be relied upon. No assurance can be given that future
results will be achieved; actual events or results may differ materially as a
result of risks facing the Company or actual results differing from the
assumption underlying such statements. Such risks and assumptions include, but
are not limited to, the Company's ability to successfully market its products to
current and new customers, generate customer demand for its products in the
particular regions where it plans to market products, access additional debt or
equity financing in the future, achieve acceptable pricing for its products,
respond to increasing competition, manage growth of the Company's operations, as
well as developments that could cause actual results to vary materially from the
future results indicated, expressed, or implied in such forward-looking
statements. All written and oral forward-looking statements made in connection
with this Report which are attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the "Risk Factors" and other
cautionary statements and disclosures regarding the Company's business included
herein and in the Company's Registration Statement on Form S-1 (Commission File
No. 333-60419). The Company disclaims any obligation to update information
contained in any forward-looking statement.
-12-
<PAGE>
Risk Factors
We have a history of losses.
We have incurred substantial net losses and experienced negative cash flow
each fiscal quarter since our inception. We incurred net losses attributable to
common stockholders of $7.8 million for the nine months ended September 30, 1999
and $12.5 million for the nine months ended September 30, 1998. As of September
30, 1999, we had an accumulated deficit of $52.3 million. We expect that we
will continue to incur losses through 1999.
We cannot predict our future profitability.
We may never achieve or sustain profitability. We have spent substantial
amounts of money on the development of our Expresso products and our HomeRun
technology. We intend to continue increasing certain of our operating
expenditures, including our sales and marketing, research and development and
general and administrative expenditures. We cannot assure you that we will
generate a sufficient level of revenue to offset these expenditures, or that we
will be able to adjust spending in a timely manner to respond to any
unanticipated decline in revenue due to the fact that our expenditures for sales
and marketing, research and development, and general administrative functions
are, in the short term, relatively fixed. We derive approximately two-thirds of
our revenue from sales of our Expresso products and approximately one-third of
our revenue from sales of our XL products. Our ability to increase revenues or
achieve profitability in the future will primarily depend on our ability to
increase sales of our Expresso GS and Expresso MDU products, reduce
manufacturing costs, and successfully introduce and sell enhanced versions of
our existing products and new products. In particular, the success of our
Expresso MDU products depends, in part, on the widespread adoption of our
HomeRun technology as an embedded technology in integrated circuits and consumer
products.
Our operating results are likely to fluctuate in future periods and may fail to
meet the expectations of securities analysts or investors.
Our annual and quarterly operating results have fluctuated in the past and
may fluctuate significantly in the future as a result of numerous factors, some
of which are outside of our control. These factors include:
. market acceptance of our products;
. competitive pressures, including pricing pressures from our partners and
competitors;
. the timing or cancellation of orders from, or shipments to, existing and
new customers;
. the timing of new product and service introductions by us, our
customers, our partners or our competitors;
. variations in our sales or distribution channels;
. variations in the mix of products offered by us;
. changes in the pricing policies of our suppliers;
. the availability and cost of key components; and
. the timing of personnel hiring.
We may also experience substantial period to period fluctuations in future
operating results and declines in gross margin as a result of the erosion of
average selling prices for high-speed data access products and services due to a
number of factors, including competition and rapid technological change. We
anticipate that average selling prices for our products will decrease over time
due to competitive pressures and volume pricing agreements. Decreasing average
selling prices could cause us to experience decreased revenues despite an
increase in the number of units sold. We cannot assure you that we will be able
to sustain or improve our gross margins in the future, or that we will be able
to offset future price declines with cost reductions.
As a result of these and other factors, it is possible that in some future
period our operating results will be below the expectations of securities
analysts and investors. In that event, the trading price of our common stock
would likely decline.
Difficulties in forecasting product sales could negatively impact our business.
We base our expense levels in part upon our expectations concerning future
revenue and these expense levels are relatively fixed in the short-term.
However, orders for our products may vary from quarter to quarter. In some
circumstances, customers may delay purchasing our current products in favor of
next-generation products. In addition, our new products are generally subject
to technical evaluations which typically last 60 to 90 days. If orders
forecasted for a specific customer for a particular quarter do not occur in that
quarter, our revenues for that quarter would be reduced. If we
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<PAGE>
have lower revenue in a quarter than expected, we may not be able to reduce our
spending in the short-term in response to this shortfall and reduced revenues
would have a direct impact on our results of operations for that quarter.
Further, we purchase components and contract manufacture our products based on
forecasts of sales. If orders for products exceed our forecasts, we may have
difficulty meeting customers orders in a timely manner which could damage our
reputation or result in lost sales.
Our market is subject to rapid technological change.
The markets for high-speed data access products are characterized by rapid
technological developments, frequent enhancements to existing products and new
product introductions, changes in end user requirements and evolving industry
standards. In addition, the market for high-speed data access products is
dependent in large part on the increased use of the Internet. Certain issues
concerning the use of the Internet, including security, lost or delayed packets,
and quality of service, remain unresolved and may negatively affect the
development of the market for our products. If we do not address these
technological changes and challenges by regularly introducing new products, our
product line will become obsolete which would have a material adverse effect on
our business, financial condition and results of operations. We cannot assure
you that we will be able to respond quickly and effectively to technological
change.
Our success depends on our ability to continually introduce new products that
achieve broad market acceptance.
We must also continually improve the performance, features and reliability
of our products, particularly in response to competitive product offerings. To
remain competitive we need to introduce products in a timely manner that
incorporate or are compatible with these new technologies as they emerge. We
may have only a limited amount of time to penetrate certain markets, and we
cannot assure you that we will be successful in achieving widespread acceptance
of our products before competitors offer products and services similar or
superior to our products. Any delay in product introduction could adversely
affect our ability to compete and cause our operating results to be below our
expectations or the expectations of public market analysts or investors. In
addition, when we announce new products or product enhancements that have the
potential to replace or shorten the life cycle of our existing products,
customers may defer purchasing our existing products. These actions could
materially adversely affect our operating results by unexpectedly decreasing
sales, increasing our inventory levels of older products and exposing us to
greater risk of product obsolescence.
Our success depends on continued market acceptance of our Expresso products.
We must devote a substantial amount of human and capital resources in order
to maintain commercial acceptance of our Expresso MDU and Expresso GS products
in the MTU markets and the service provider and to further penetrate these
markets. Our success depends on our ability to educate existing and potential
customers and end users about the benefits of our FastCopper technology,
including HomeRun, and the development of new products to meet changing demands
of service providers, MTUs and corporate customers. The continued success of our
Expresso products will also depend on the ability of our customers to market and
sell high-speed data services to end users. We cannot assure you that our
Expresso products will achieve or maintain broad commercial acceptance by
service providers, MTUs and corporate customers or in any other market we enter.
Copper-wire based solutions face severe competition from other technologies.
The market for high-speed data access products and services is
characterized by several competing technologies, including fiber optic cables,
coaxial cables, satellites and other wireless facilities, that offer competing
solutions which provide fast access, high reliability and are cost-effective for
some users. Since all of our products are based on the use of copper telephone
wire, and since there are physical limits to the speed and distance over which
data can be transmitted over this wire, our products may not be a viable
solution for customers requiring service at performance levels beyond the
current limits of copper telephone wire. To the extent that telecommunications
service providers choose to install fiber optic cable or other transmission
media in the last mile, or to the extent that homes and businesses install other
transmission media within buildings, we expect that demand for our products
which are based on copper telephone wires will decline. Commercial acceptance
of any one of these competing solutions or any technological advancement or
product introduction that provides faster access, greater reliability, increased
cost-effectiveness or other advantages over technologies that utilize existing
telephone copper wires could decrease the demand for our products and reduce
average selling prices and gross margins associated with our products. The
occurrence of any one or more of these events could materially adversely affect
our business, financial condition and results of operations.
-14-
<PAGE>
Manufacturing or design defects in our products could cause harm to our
reputation and business.
Any defect or deficiency in our products could reduce the functionality,
effectiveness or marketability of our products. These defects or deficiencies
could cause orders for our products to be canceled or delayed, reduce revenues,
or render our product designs obsolete. In that event, we would be required to
devote substantial financial and other resources for a significant period of
time in order to develop new product designs. We cannot assure you that we
would be successful in addressing any manufacturing or design defects in our
products or in developing new product designs in a timely manner, if at all.
Any of these events, individually or in the aggregate, could have a material
adverse effect on our business, financial condition and results of operations.
The markets in which we operate are highly competitive, and we may not be able
to compete effectively.
The markets for high-speed Internet and network access products are
intensely competitive, and expect that these markets will become increasingly
competitive in the future. Our most immediate competitors are: PairGain,
Paradyne, Cisco, Lucent Technologies, Copper Mountain, and a number of other
public and private companies. Many of these competitors are offering, or may
offer, technologies and services that directly compete with some or all of our
high-speed access products.
Many of our competitors and potential competitors have substantially
greater name recognition and technical, financial and marketing resources than
we do, and we can give you no assurance that we will be able to compete
effectively in our target markets. As a result, they may be able to undertake
more extensive marketing campaigns, adopt more aggressive pricing policies and
devote substantially more resources to developing new products than we can. In
addition, our licensees may sell products based on our technology to our
competitors or potential competitors. This licensing may cause an erosion in
the potential market for our products. We cannot assure you that we will have
the financial resources, technical expertise or marketing, manufacturing,
distribution and support capabilities to compete successfully. This competition
could result in price reductions, reduced profit margins and loss of market
share, which could materially and adversely affect our business, financial
condition and results of operations.
We depend on third parties for increased market penetration of HomeRun.
We have established relationships with several strategic partners,
including our collaborative arrangement through the Home Phoneline Network
Alliance, or the Home PNA, with leading semiconductor, computer hardware and
consumer electronics manufacturers. We have also licensed our HomeRun
technology to members of the Home PNA and others. In this regard, the
widespread market acceptance of our HomeRun technology for home networking
applications is dependent on the development and marketing of HomeRun-enabled
integrated circuits and consumer products by our licensees and their customers.
We cannot assure you that our HomeRun technology will continue to be
successfully deployed on a widespread basis and future sales of products
containing our HomeRun technology cannot be predicted. The amount and timing of
resources which our licensees devote to developing and marketing HomeRun-enabled
products is not within our control. We cannot assure you that these licensees
will develop and market products as expected or that significant license and
royalty revenues will be forthcoming in the future. If any of our licensees
fails to develop, commercialize or market products incorporating HomeRun
technology, our revenues would not grow as expected and we may be required to
undertake unforeseen additional responsibilities or to devote additional
resources to development, commercialization or marketing of HomeRun, all of
which could have a material adverse effect on our business, financial condition
and results of operations.
Changing industry standards may adversely affect demand for our products and our
stock price.
We will not be competitive unless we continually introduce new products and
product enhancements that changing industry standards. The emergence of new
industry standards, whether through adoption by official standards committees or
widespread use by telephone companies or other service providers, could require
redesign of our products. If these standards become widespread and our products
are not in compliance, our customers and potential customers may not purchase
our products, which would materially adversely affect our business, financial
condition and results of operations. The rapid development of new standards
increases the risk that competitors could develop products that make our
products obsolete. Any failure by us to develop and introduce new products or
enhancements directed at new industry standards could have a material adverse
effect on our business, financial condition and results of operations. In
addition, selection of competing technologies as standards by standards setting
bodies such as the Home PNA could negatively affect our reputation in the market
regardless of whether our products are standard compliant or demand for our
products does not decline. This
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<PAGE>
selection could be interpreted by the press and others as having a negative
impact on our business which could negatively impact the market price of our
stock.
If a key distributor or value-added reseller discontinues purchasing our
product, our revenues may decline and the price of our stock may fall.
In the first nine months of 1999, we derived approximately 24.7% of our
revenues from combined sales to Tech Data, Rycom CCI, Inc. and Ingram Micro,
three independent distributors and/or value-added resellers of our products.
These independent distributors are not contractually bound to purchase our
products and therefore could discontinue carrying our products at any time in
favor of competitive products or for any other reason. In addition, we remain
subject to the risk of product returns from these and other customers. We expect
that the sale of our products to a limited number of distributors and
value-added resellers, including Tech Data, Rycom CCI Inc. and Ingram Micro, may
continue to account for a substantial percentage of revenues for the foreseeable
future. Any reduction, delay or loss of orders from Tech Data, Rycom CCI, Inc.
or Ingram Micro could have a material adverse effect on our revenues and on our
business, financial condition and results of operations.
We depend on contract manufacturers to manufacture all of our products.
We do not manufacture any of our products, but instead rely on contract
manufacturers to assemble, test and package our products. We cannot assure you
that these contract manufacturers and suppliers will be able to meet our future
requirements for manufactured products, components and subassemblies. Any
interruption in the operations of one or more of these contract manufacturers
would adversely affect our ability to meet our scheduled product deliveries to
customers. We also intend to regularly introduce new products and product
enhancements, which will require that we rapidly achieve volume production by
coordinating our efforts with those of our suppliers and contract manufacturers.
The inability of our contract manufacturers to provide us with adequate supplies
of high-quality products or the loss of a current contract manufacturer would
cause a delay in our ability to fulfill customer orders while we obtain a
replacement manufacturer and would have a material adverse effect on our
business, operating results and financial condition. In addition, our inability
to accurately forecast the actual demand for our products could result in
supply, manufacturing or testing capacity constraints. These constraints could
result in delays in the delivery of our products or the loss of existing or
potential customers, either of which could have a material adverse effect on our
business, operating results or financial condition.
We currently purchase most of our raw materials and components used in our
products through our contract manufacturers. Components are purchased pursuant
to purchase orders based on forecasts, but we or our contract manufacturers have
no guaranteed supply arrangements with these suppliers. The availability of
many of these components is dependent in part on our ability to provide our
contract manufacturers and their suppliers with accurate forecasts of our future
needs. If we or our manufacturers were unable to obtain a sufficient supply of
components from current sources, we could experience difficulties in obtaining
alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
customer relationships and could adversely affect our business, financial
condition or results of operations. In addition, any increases in component
costs could increase the costs of our products and reduce demand for our
products.
We rely on third parties to test all of our products.
Substantially all of our products are assembled and tested by our contract
manufacturers. Although we perform random spot testing on manufactured
products, we rely on our contract manufacturers for assembly and primary testing
of our products. Any quality assurance problems could increase the costs of
manufacturing, assembling or testing of our products and could have a material
adverse effect on our business, financial condition and results of operation.
Moreover, defects in products which are not discovered in the quality assurance
process could damage customer relationships and result in product returns or
liability claims, each of which could have a materially adversely affect our
business, financial condition and results of operations
We purchase several key components from single or limited sources and could lose
sales if these sources fail to fill our needs.
We currently purchase most of our raw materials and components used in our
products through our contract manufacturers. In procuring components, our
contract manufacturers rely on some suppliers that are the sole source of those
components, and we are dependent upon supply from these sources to meet our
needs. For example, all of the field programmable gate array supplies used in
our products are purchased from Xilinx. Our Expresso products are also
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<PAGE>
dependent on various sole source offerings from Metalink US, Motorola, Oki
Semiconductor, Osicom Technologies, RELTEC, SaRonix, and Wind River Systems.
Certain of our XL products are dependent on offerings from Globespan
Semiconductor and Level One Communications. If there is any interruption in the
supply of any of the key components currently obtained from a single or limited
source, obtaining these components from other sources could take a substantial
period of time, could cause us to redesign our products and could disrupt our
operations and have a material adverse effect on our business in any given
period.
We may not be able to manage our growth effectively.
Our growth has placed, and in the future may continue to place, a
significant strain on our engineering, managerial, administrative, operational,
financial and marketing resources, and increased demands on our systems and
controls. To exploit the market for our products, we must develop new and
enhanced products while managing anticipated growth in sales by implementing
effective planning and operating processes. To manage our anticipated growth,
we must, among other things, continue to implement and improve our operational,
financial and management information systems, hire and train additional
qualified personnel, continue to expand and upgrade core technologies and
effectively manage multiple relationships with various customers, suppliers and
other third parties. We cannot assure you that our systems, procedures or
controls will be adequate to support our operations or that our management will
be able to achieve the rapid execution necessary to exploit fully the market for
our products or systems. If we are unable to manage our growth effectively
could have a material adverse effect on our business, financial condition and
results of operations.
We depend on international sales for a significant portion of our revenues.
Sales to customers outside of the United States accounted for approximately
33.0% and 16.0% of revenues for the first nine months of 1999 and 1998,
respectively. There are a number of risks arising from our international
business, including:
. longer receivables collection periods;
. increased exposure to bad debt write-offs;
. risk of political and economic instability;
. difficulties in enforcing agreements through foreign legal systems;
. unexpected changes in regulatory requirements;
. import or export licensing requirements;
. reduced protection for intellectual property rights in some countries;
and
. currency fluctuations.
We expect sales to customers outside of the United States to increase on
average in the future and our success is dependent on increased international
sales. We can give you no assurance that foreign markets for our products will
not develop more slowly than currently anticipated. Any failure to increase
sales to customers outside of the United States could materially adversely
affect our business, financial condition and results of operations.
We also expend product development and other resources in order to meet
regulatory and technical requirements of foreign countries. We are depending on
sales of our products in these foreign markets in order to recoup the costs
associated with developing products for these markets.
We are subject to fluctuations in currency exchange rates.
All of our foreign sales are invoiced in U.S. dollars. As a result,
fluctuations in currency exchange rates could cause our products to become
relatively more expensive for international customers and reduce demand for our
products. We anticipate that foreign sales will generally continue to be
invoiced in U.S. dollars. Accordingly, we do not plan to engage in foreign
currency hedging transactions. However, as we expand our current international
operations, we may allow payment in foreign currencies and exposure to losses in
foreign currency transactions may increase. We may choose to limit our exposure
through the purchase of forward foreign exchange contracts or other hedging
strategies. We cannot assure you that any currency hedging strategy would be
successful in avoiding exchange related losses.
Our limited ability to protect our intellectual property may adversely affect
our ability to compete.
Our future success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of copyright, patent,
trademark and trade secrets laws and nondisclosure agreements to establish and
protect our
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<PAGE>
proprietary technology. We currently hold 14 United States patents and have 13
United States patent applications pending. However, we cannot assure you that
patents will be issued with respect to pending or future patent applications or
that our patents will be upheld as valid or will prevent the development of
competitive products or that any actions we have taken will adequately protect
our intellectual property rights.
We generally enter into confidentiality agreements with our employees,
consultants, resellers, customers and potential customers, strictly limit access
to and distribution of our software, and further limit the disclosure and use of
other proprietary information. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain or use our
products or technology. We also cannot assure you that our competitors will not
independently develop technologies that are substantially equivalent or superior
to our technology. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States.
We are also subject to the risk of adverse claims and litigation alleging
infringement of the intellectual property rights of others. We cannot assure
you that third parties will not assert infringement claims in the future with
respect to our current or future products. Any such assertion, regardless of
its merit, could require us to pay damages or settlement amounts and could
require us to develop non-infringing technology or acquire licenses to the
technology that is the subject of asserted infringement. This litigation or
potential litigation could result in product delays, increased costs or both.
In addition, the cost of any litigation and the resulting distraction of our
management resources could have a material adverse effect on our business,
results of operations or financial condition. We also cannot assure you that
any licenses of technology necessary for our business will be available or that,
if available, these licenses can be obtained on commercially reasonable terms.
Our failure to obtain these licenses could have a material adverse effect on our
business, results of operations and financial condition.
Our products must comply with complex government regulations or our products may
not be sold.
We and our customers are subject to varying degrees of federal, state and
local regulation. Our products must comply with various regulations and
standards defined by the Federal Communications Commission. The FCC has issued
regulations that set installation and equipment standards for communications
systems. Our products are also required to meet certain safety requirements.
For example, certain of our products must be certified by Underwriters
Laboratories in order to meet federal safety requirements relating to electrical
appliances to be used inside the home. In addition, certain products must be
Network Equipment Building Standard certified before they may be deployed by
certain of our customers. Any delay in or failure to obtain these approvals
could have a material adverse effect on our business, financial condition or
results of operations. Outside of the United States, our products are subject
to the regulatory requirements of each country in which our products are
manufactured or sold. These requirements are likely to vary widely. If we do
not obtain timely domestic or foreign regulatory approvals or certificates we
would not be able to sell our products where these regulations apply, which may
prevent us from sustaining our revenues or achieving profitability.
In addition, regulation of our customers may adversely impact our business,
operating results and financial condition. For example, FCC regulatory policies
affecting the availability of data and Internet services and other terms on
which telecommunications companies conduct their business, may impede our
penetration of certain markets. In addition, the increasing demand for
communications systems has exerted pressure on regulatory bodies worldwide to
adopt new standards, generally following extensive investigation of competing
technologies. The delays inherent in this governmental approval process may
cause the cancellation, postponement or rescheduling of the installation of
communications systems by our customers, which in turn may have a material
adverse effect on the sale of products by us to these customers.
Our success is dependent on our ability to provide adequate customer support.
Our ability to achieve our planned sales growth and retain current and
future customers will depend in part upon the quality of our customer support
operations. Our customers generally require significant support and training
with respect to our products, particularly in the initial deployment and
implementation stage. We have limited experience with widespread deployment of
our products to a diverse customer base, and we cannot assure you that we will
have adequate personnel to provide the levels of support that our customers may
require during initial product deployment or on an ongoing basis. In addition,
we rely on a third party for a substantial portion of our customer support
functions. Our failure to provide sufficient support to our customers could
delay or prevent the successful deployment of our products. Failure to provide
adequate support could also have an adverse impact on our reputation and
relationship with our customers, could prevent us from gaining new customers and
could have a material adverse effect on our business, financial condition or
results of operations.
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Our success depends on our retention of certain key personnel and our ability to
hire additional key personnel.
We depend on the performance of Matthew Taylor, our Chairman of the Board
and Chief Technical Officer, and Salvatore D'Auria, our President and Chief
Executive Officer, and on other senior management and technical personnel with
experience in the data communications, telecommunications and high-speed data
access industries, and the loss of any one of them could have a material adverse
effect on our ability to execute our business strategy. Additionally, we do not
have employment contracts with any of our executive officers and we only
maintain a "key person" life insurance policy on Matthew Taylor. We believe
that our future success will depend in large part upon our continued ability to
identify, hire, retain and motivate highly skilled employees, who are in great
demand. We cannot assure you that we will be able to do so.
Our failure or the failure of our key suppliers and customers to be year 2000
compliant could negatively impact our business.
Software that records only the last two digits of the calendar year may not
be able to distinguish whether "00" means 1900 or 2000. This may result in
software failures or the creation of erroneous results, which could adversely
impact our operations. The following are risks of the year 2000 issue:
. potential warranty or other claims from our customers or payment of
compensatory or other damages;
. loss or delay in market acceptance of our products or services;
. disruptions in systems we use to run our business;
. disruptions in systems used by our suppliers; and
. potential reduced spending by other companies on networking solutions as
a result of significant information systems spending on year 2000
remediation
We generally warrant and represent to our customers that our products are
free from year 2000 defects. Since all customer situations cannot be
anticipated, we may see an increase in warranty and other claims as a result of
the year 2000 transition. In addition, litigation regarding year 2000
compliance issues is expected to escalate. For these reasons, the impact of
customer claims could have a material adverse impact on our operating results or
financial condition.
Within the past twelve months, we have been upgrading components of our own
internal computer and related information and operational systems and continue
to assess the need for further system redesign. We believe we are taking the
appropriate steps to ensure year 2000 compliance. Based on information
currently available, we believe that the costs associated with year 2000
compliance, and the consequences of incomplete or untimely resolution of the
year 2000 problem, will not have a material adverse effect on our business,
financial condition and results of operations in any given year. However, even
if our internal systems are not materially affected by the year 2000 problem,
our business, financial condition and results of operations could be materially
adversely affected through disruption in the operation of the enterprises with
which we interact. We cannot assure you that third party computer products used
by us are year 2000 compliant. Further, even though we believe that our current
products are year 2000 compliant, we cannot assure you that under actual
conditions these products will perform as expected or that future products will
be year 2000 compliant. Any failure of our products to be year 2000 compliant
could result in the loss of or delay in market acceptance of our products and
services, increased service and warranty costs to us or payment by us of
compensatory or other damages which could have a material adverse effect on our
business, financial condition and results of operations.
We may engage in future acquisitions of companies, technologies or products.
As a part of our business strategy, we expect to make acquisitions of, or
significant investments in, complementary companies, products or technologies,
although no acquisitions or investments are currently pending. For example, in
June 1999, we acquired Public Port, Inc. and in October 1999, we signed a
definitive agreement to acquire Vintel Communications, Inc. Any future
acquisitions would be accompanied by the risks commonly encountered in
acquisitions of companies. These risks include:
. difficulties in assimilating the operations and personnel of the acquired
companies;
. diversion of management's attention from ongoing business concerns;
. our potential inability to maximize our financial and strategic position
through the successful incorporation of acquired technology and rights
into our products and services;
. additional expense associated with amortization of acquired intangible
assets;
. maintenance of uniform standards, controls, procedures and policies; and
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. impairment of existing relationships with employees, suppliers and
customers as a result of the integration of new management personnel.
We cannot assure you that we will be able to successfully integrate any
business, products, technologies or personnel that we might acquire in the
future, and our failure to do so could materially adversely affect our business,
operating results and financial condition.
Our stock price has been and is likely to continue to be volatile.
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:
. actual or anticipated variations in operating results;
. announcements of technological innovations, new products or new services
by us or by our partners, competitors or customers;
. changes in financial estimates or recommendations by stock market
analysts regarding us or our competitors;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of key personnel;
. future equity or debt offerings or our announcements of these offerings;
and
. general market and general economic conditions.
In addition, in recent years, the stock market in general, and the Nasdaq
National Market and the securities of Internet and technology companies in
particular, have experienced extreme price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
results. In addition, trading prices of the stocks of many technology companies
are at or near historic highs and reflect price-earnings ratios substantially
above historic levels. These trading prices and price-earnings rations may not
be sustained.
Our charter and bylaws and Delaware law contain provisions with certain anti-
takeover effects.
Certain provisions of our charter and bylaws may have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from attempting to acquire, control of us. These provisions could limit the
price that certain investors might be willing to pay in the future for shares of
our common stock. Our charter and bylaws provide for a classified board of
directors, eliminate cumulative voting in the election of directors, restrict
our stockholders from acting by written consent and calling special meetings,
and provide for procedures for advance notification of stockholder nominations
and proposals. In addition, our board of directors has the authority to issue
up to 5,000,000 shares of preferred stock and to determine the price, rights,
preferences, privileges and restrictions, including voting rights, of those
shares without any further vote or action by the shareholders. The issuance of
preferred stock, while providing flexibility in connection with possible
financings or acquisitions or other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of our
outstanding voting stock. These provisions, as well as Section 203 of the
Delaware General Corporation Law to which we are subject, could discourage
potential acquisition proposals, delay or prevent a change of control and
prevent changes in our management.
Future sales of our common stock may depress our stock price.
Sales of a substantial number of shares of our common stock in the public
market, or the appearance that these shares are available for sale, could
materially and adversely affect the market price of our common stock. These
sales also might make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that we deem
appropriate. As of October 31, 1999, we had 11,699,187 shares outstanding. Of
these shares, 10,863,672 shares of common stock are currently available for sale
in the public market, some of which are subject to volume and other limitations
under securities laws. However, 835,515 shares are not currently available for
sale in the public market but will be as follows:
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Date of Availability For Sale Number
----------------------------- ------
February 3, 2000 666,836 shares
June 8, 2000 168,679 shares
We have agreed, subject to certain conditions, to use our best efforts to
register as soon as possible the 168,679 shares which will otherwise become
available for sale on June 8, 2000. In addition, we have 55,000 shares
underlying an outstanding warrant that will be eligible for resale in the public
market upon expiration of the warrant holder's one-year holding period under
Rule 144, which will begin upon the date of exercise. However, to the extent
that the warrant holder effects a "cashless" exercise of our warrant, the
underlying shares will be eligible for sale in the public market beginning on
December 21, 1999. Finally, in November 1999, we expect to issue up to 156,280
additional shares of common stock or options to purchase common stock upon the
consummation of the acquisition of Vintel. The shares of common stock issued
will not be registered and will not be tradeable for at least one year unless
registered.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
three to twelve months. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
--------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
10.1 Agreement and Plan of Reorganization dated October 15, 1999,
by and among Registrant, Vintel Communications, Inc., a California
corporation, Vintel Acquisition Corporation, a California
corporation, and with respect to Article VII only, Peter C. Vinsel
as Shareholder Representative, and U.S. Bank Trust, as Escrow
Agent.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUT SYSTEMS, INC.
Date: November 5, 1999
/s/ Nelson Caldwell
--------------------------------------------
Nelson Caldwell
Vice President, Finance and Chief
Financial Officer (Principal Financial
and Accounting Officer and Duly
Authorized Officer)
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Exhibit Index
-------------
10.1 Agreement and Plan of Reorganization dated October 15, 1999, by and
among Registrant, Vintel Communications, Inc., a California corporation
Vintel Acquisition Corporation, a California corporation, and with respect
to Article VII only, Peter C. Vinsel as Shareholder Representative, and
U.S. Bank Trust, as Escrow Agent.
27.1 Financial Data Schedule
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AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
TUT SYSTEMS, INC.,
VINTEL COMMUNICATIONS, INC.
VINTEL ACQUISITION CORPORATION,
PETER C. VINSEL,
AND, WITH RESPECT TO ARTICLE VII ONLY,
[________________]
AS SHAREHOLDER REPRESENTATIVE,
AND
U.S. BANK TRUST,
AS ESCROW AGENT
Dated as of October ___, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I The Merger.......................................................................... 2
1.1 The Merger.................................................................. 2
1.2 Effective Time.............................................................. 2
1.3 Effect of the Merger........................................................ 2
1.4 Articles of Incorporation; Bylaws........................................... 2
1.5 Directors and Officers...................................................... 3
1.6 Effect on Capital Stock..................................................... 3
1.7 Dissenting Shares........................................................... 4
1.8 Surrender of Certificates................................................... 4
1.9 No Further Ownership Rights in Company Capital Stock........................ 6
1.10 Dissenting Shares After Payment of Fair Value............................... 6
1.11 Tax and Accounting Consequences............................................. 6
1.12 Taking of Necessary Action; Further Action.................................. 6
ARTICLE II Representations and Warranties of the Company and the Principal Shareholder........ 7
2.1 Organization of the Company................................................. 7
2.2 Company Capital Structure................................................... 7
2.3 Subsidiaries................................................................ 7
2.4 Authority................................................................... 8
2.5 No Conflict................................................................. 8
2.6 Consents.................................................................... 8
2.7 Company Financial Statements................................................ 8
2.8 No Undisclosed Liabilities.................................................. 9
2.9 No Changes.................................................................. 9
2.10 Tax Matters................................................................. 11
2.11 Restrictions on Business Activities......................................... 12
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment................................................................... 13
2.13 Intellectual Property....................................................... 13
2.14 Agreements, Contracts and Commitments....................................... 16
2.15 Interested Party Transactions............................................... 17
2.16 Governmental Authorization.................................................. 18
2.17 Litigation.................................................................. 18
2.18 Accounts Receivable......................................................... 18
2.19 Minute Books................................................................ 18
2.20 Environmental Matters....................................................... 18
2.21 Brokers' and Finders' Fees; Third Party Expenses............................ 19
2.22 Employee Benefit Plans and Compensation..................................... 19
2.23 No Interference or Conflict................................................. 22
2.24 Insurance................................................................... 22
2.25 Compliance with Laws........................................................ 23
</TABLE>
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TABLE OF CONTENTS
(continued)
<TABLE>
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2.26 Complete Copies of Materials................................................ 23
2.27 Representations Complete.................................................... 23
ARTICLE III Representations and Warranties of Parent and Sub.................................. 23
3.1 Organization, Standing and Power............................................ 23
3.2 Authority................................................................... 23
3.3 Capital Structure........................................................... 24
3.4 SEC Documents; Parent Financial Statements.................................. 24
3.5 Brokers' and Finders' Fees.................................................. 24
3.6 No Material Adverse Change.................................................. 25
3.7 Consents.................................................................... 25
3.8 Other Matters............................................................... 25
ARTICLE IV Conduct Prior to the Effective Time................................................ 25
4.1 Conduct of Business of the Company.......................................... 25
4.2 No Solicitation............................................................. 27
ARTICLE V Additional Agreements............................................................... 28
5.1 Sale of Shares.............................................................. 28
5.2 Access to Information....................................................... 28
5.3 Confidentiality............................................................. 28
5.4 Expenses.................................................................... 29
5.5 Public Disclosure........................................................... 29
5.6 Consents.................................................................... 29
5.7 FIRPTA Compliance........................................................... 29
5.8 Reasonable Efforts.......................................................... 29
5.9 Notification of Certain Matters............................................. 30
5.10 Affiliate Agreements........................................................ 30
5.11 Additional Documents and Further Assurances................................. 30
5.12 Tax Free Reorganization..................................................... 30
5.13 Shareholder Approval........................................................ 30
5.14 Proprietary Information and Confidentiality Agreements...................... 31
ARTICLE VI Conditions to the Merger........................................................... 31
6.1 Conditions to Obligations of Each Party to Effect the Merger................ 31
6.2 Additional Conditions to Obligations of Company............................. 31
6.3 Additional Conditions to the Obligations of Parent and Sub.................. 32
ARTICLE VII Survival of Representations and Warranties; Escrow................................ 33
7.1 Survival of Representations and Warranties.................................. 33
7.2 Escrow Arrangements......................................................... 34
</TABLE>
-ii-
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TABLE OF CONTENTS
(continued)
<TABLE>
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<S> <C>
7.3 Shareholder Representative.................................................. 39
7.4 Exclusive Remedy............................................................ 40
ARTICLE VIII Termination, Amendment and Waiver................................................ 41
8.1 Termination................................................................. 41
8.2 Effect of Termination....................................................... 42
8.3 Amendment................................................................... 42
8.4 Extension; Waiver........................................................... 42
ARTICLE IX General Provisions................................................................. 42
9.1 Notices..................................................................... 42
9.2 Interpretation.............................................................. 44
9.3 Counterparts................................................................ 44
9.4 Entire Agreement; Assignment................................................ 44
9.5 Severability................................................................ 44
9.6 Other Remedies.............................................................. 44
9.7 Governing Law............................................................... 44
9.8 Rules of Construction....................................................... 45
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of October __, 1999 among Tut Systems, Inc., a Delaware
corporation ("Parent"), Vintel Acquisition Corporation, a California corporation
and a wholly owned subsidiary of Parent ("Sub"), Vintel Communications, Inc., a
California corporation (the "Company") Peter C. Vinsel (the "Principal
Shareholder") and, with respect to Article VII only, ____________, as
Shareholder Representative, and U.S. Bank Trust, as Escrow Agent.
RECITALS
A. The Boards of Directors of each of the Company, Parent and Sub believe
it is in the best interests of each company and the shareholders of each company
that Parent acquire the Company through the statutory merger of Sub with and
into the Company (the "Merger") and, in furtherance thereof, have approved the
Merger.
B. Pursuant to the Merger, among other things, all of the issued and
outstanding shares of capital stock of the Company (the "Company Capital Stock")
and all options, warrants and other rights to acquire any shares of the Company
shall be converted into the right to receive shares of Common Stock of Parent.
C. A portion of the shares of Common Stock of Parent otherwise payable by
Parent in connection with the Merger shall be placed in escrow by Parent, the
release of which amount shall be contingent upon certain events and conditions.
D. It is intended by the parties hereto that the Merger shall constitute
a reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "Code").
E. The Company, the Principal Shareholder, Parent and Sub desire to make
certain representations, warranties, covenants and other agreements in
connection with the Merger.
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable consideration,
the parties agree as follows:
<PAGE>
ARTICLE I
The Merger
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of the California Corporations Code (the "California
Law"), Sub shall be merged with and into the Company, the separate corporate
existence of Sub shall cease and the Company shall continue as the surviving
corporation and as a wholly owned subsidiary of Parent. The surviving
corporation after the Merger is hereinafter sometimes referred to as the
"Surviving Corporation."
1.2 Effective Time. Unless this Agreement is earlier terminated pursuant
to Section 8.1, the closing of the Merger (the "Closing") will take place as
promptly as practicable, but no later than five (5) business days following
satisfaction or waiver of the conditions set forth in Article VI, at the offices
of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California,
or by exchange of original documentation by each of the respective parties'
attorneys via Federal Express or similar overnight courier service, unless
another place, manner or time is agreed to in writing by Parent and the Company.
The date upon which the Closing actually occurs is herein referred to as the
"Closing Date." On the Closing Date, the parties hereto shall cause the Merger
to be consummated by filing of this Agreement, or a merger agreement as
contemplated by Section 1101 of the California Law (the "Merger Agreement") with
the Secretary of State of California, in accordance with the relevant provisions
of applicable law (the time of acceptance by the Secretary of State of
California of such filing being referred to herein as the "Effective Time").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in the applicable provisions of California Law. Without
limiting the generality of the foregoing, and subject thereto, at the Effective
Time, all the property, rights, privileges, powers and franchises of the Company
and Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties of
the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective
Time, at the Effective Time, the Articles of Incorporation of Sub shall be the
Articles of Incorporation of the Surviving Corporation until thereafter amended
as provided by law and such Articles of Incorporation; provided, however, that
Article I of the Articles of Incorporation of the Surviving Corporation shall be
amended to read as follows: "The name of the corporation is Vintel
Communications, Inc."
(b) The Bylaws of Sub, as in effect immediately prior to the
Effective Time, shall be the Bylaws of the Surviving Corporation until
thereafter amended.
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1.5 Directors and Officers. The director(s) of Merger Sub immediately
prior to the Effective Time shall be the initial director(s) of the Surviving
Corporation, each to hold office in accordance with the Certificate of
Incorporation and Bylaws of the Surviving Corporation. The officers of Sub
immediately prior to the Effective Time shall be the initial officers of the
Surviving Corporation, each to hold office in accordance with the Bylaws of the
Surviving Corporation.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the
Merger and without any action on the part of Merger Sub, the Company or the
holders of any of the following securities:
(a) Conversion of Company Capital Stock. Each share of common stock,
no par value, of the Company (the "Company Capital Stock") issued and
outstanding immediately prior to the Effective Time will be canceled and
extinguished and be converted automatically into the right to receive 0.0540
shares (the "Exchange Ratio") of common stock, par value $0.001 per share, of
Parent ("Parent Common Stock"). The shares of Parent Common Stock issued
pursuant to this Section 1.6(a) are referred to as the "Merger Shares."
(b) Shares Owned by Parent, etc. Each share of Company Capital Stock
issued and outstanding and owned by Parent, Sub or any of their subsidiaries
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, cease to be outstanding,
be canceled and retired without payment of any consideration therefor and cease
to exist.
(c) Substitution of Company Options. At the Effective Time, each
outstanding option to purchase shares of Company Capital Stock (each a "Company
Option"), whether vested or unvested, shall be canceled and extinguished and
Parent shall issue in substition therefor a new option of equal remaining tenor
(a "Substitute Stock Option" and collectively "Substitute Stock Options") to
purchase a number of shares of Parent Common Stock equal to the product of the
number of shares of Company Capital Stock covered by such Company Option
immediately prior to the Effective Time multiplied by the Exchange Ratio,
rounded to the nearest whole number of shares of Parent Common Stock. Each
Substitute Stock Option shall have a per share exercise price for the Parent
Common Stock issuable upon the exercise thereof equal to the quotient determined
by dividing the exercise price per share of Company Capital Stock specified for
each such Company Option under the applicable option agreement immediately prior
to the Effective Time by the Exchange Ratio, rounding the resulting exercise
price down to the nearest whole cent. Each Substitute Stock Option shall be
issued pursuant to and subject to the terms and conditions of Parent's 1998
Stock Plan.
(d) Capital Stock of Sub. Each share of common stock, no par value,
of Sub issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for one validly issued, fully paid and
nonassessable share of common stock, no par value, of the Surviving Corporation.
Each stock certificate of Sub evidencing ownership of any such shares shall
continue to evidence ownership of such shares of capital stock of the Surviving
Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or
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<PAGE>
distribution of securities convertible into Parent Common Stock or Company
Capital Stock), reorganization, recapitalization or other like change with
respect to Parent Common Stock or Company Capital Stock occurring after the date
hereof and prior to the Effective Time.
(f) Fractional Shares. No fractional shares of Parent Common Stock
shall be issued in the Merger. In lieu thereof, each holder of shares of Company
Capital Stock (each, a "Company Shareholder") who would otherwise be entitled to
a fraction of a share of Parent Common Stock, shall (after aggregating all
fractional shares of Parent Common Stock to be received by such holder) have
such fraction rounded up to the nearest whole share of Parent Common Stock.
1.7 Dissenting Shares. Notwithstanding any provision of this Agreement to
the contrary, any shares of capital stock of the Company that are outstanding
immediately prior to the Effective Time and that are held by Company
Shareholders who have exercised dissenters' rights for such shares in accordance
with California Law and who, as of the Effective Time, has not effectively
withdrawn or lost such dissenters' rights ("Dissenting Shares"), shall not be
converted into or represent the right to receive the Parent Common Stock as
provided in Section 1.6 of this Agreement, but the holders of such shares shall
only be entitled to such rights as are granted by California Law; provided,
however, that (i) if any holder of Dissenting Shares shall effectively withdraw
or lose (through failure to perfect or otherwise) his dissenters' rights, then
as of the Effective Time or the occurrence of such event, such holder's shares
shall automatically be converted into and represent only the right to receive
Parent Common Stock as provided in Section 1.6 of this Agreement and in
accordance with Section 1.8 of this Agreement. The Company shall give Parent (i)
prompt notice of any written demands received by the Company to require the
Company to purchase shares of Company Capital Stock, withdrawals of such
demands, and any other instruments served pursuant to California Law and
received by the Company and (b) the opportunity to participate in all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of Parent, voluntarily make any
payment with respect to any such demands or offer to settle or settle any such
demands.
1.8 Surrender of Certificates.
(a) Exchange Agent. American Stock Transfer & Trust shall serve as
exchange agent (the "Exchange Agent") in the Merger.
(b) Parent to Provide Common Stock. Promptly after the Effective
Time, Parent shall make available to the Exchange Agent for exchange in
accordance with this Article I the shares of Parent Common Stock issuable
pursuant to Section 1.6(a) in exchange for outstanding shares of Company Capital
Stock; provided, however, that, on behalf of the Company Shareholders, pursuant
to Section 7.2 hereof, Parent shall deposit into an escrow account 5% of the
Merger Shares issued to the Escrow Agent on behalf of the Company Shareholders
pursuant to Section 1.6(a) and 5% of the Substitute Options issued to the Escrow
Agent on behalf of the recipients of Substitute Options (collectively, the
"Escrow Amount"). The portion of the Escrow Amount contributed on behalf of each
Company Shareholder shall be in proportion to the aggregate number of Merger
Shares which such Company Shareholder would otherwise be entitled to receive in
the Merger by virtue of ownership of outstanding shares of Company Capital
Stock.
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(c) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed or provided at the Closing to
each Company Shareholder (i) a letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the certificates (the
"Certificates"), which immediately prior to the Effective Time represented
outstanding shares of Company Capital Stock whose shares were converted into the
right to receive Merger Shares pursuant to Section 1.6(a), shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such form and
have such other provisions consistent herewith as Parent may reasonably specify)
and (ii) instructions for use in effecting the surrender of the Certificates in
exchange for certificates representing Merger Shares. Upon surrender of a
Certificate for cancellation to the Exchange Agent or to such other agent or
agents as may be appointed by Parent, together with such letter of transmittal
and a Shareholder Certificate in the form of Exhibit G hereto, duly completed
and validly executed in accordance with the instructions thereto, a Company
Shareholder shall be entitled to receive in exchange therefor a certificate
representing the number of whole Merger Shares (less the number of shares of
Parent Common Stock to be deposited in the Escrow Fund on such holder's behalf
pursuant to paragraph (b) above) to which such Company Shareholder is entitled
pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective Time, and subject to and in
accordance with the provisions of Article VII hereof, Parent shall cause to be
distributed to the Escrow Agent (as defined in Article VII) a certificate or
certificates representing that number of shares of Parent Common Stock equal to
the Escrow Amount, which shall be registered in the name of the Escrow Agent.
Such shares shall be beneficially owned by the holders on whose behalf such
shares were deposited in the Escrow Fund and shall be available to compensate
Parent as provided in Article VII. Until so surrendered, each outstanding
Certificate that, prior to the Effective Time, represented shares of Company
Capital Stock will be deemed from and after the Effective Time, for all
corporate purposes, other than the payment of dividends, to evidence the
ownership of the number of full shares of Parent Common Stock into which such
shares of Company Capital Stock shall have been so converted.
(d) Distributions With Respect to Unexchanged Shares. No dividends or
other distributions declared or made after the Effective Time with respect to
Parent Common Stock with a record date after the Effective Time will be paid to
the holder of any unsurrendered Certificate with respect to the shares of Parent
Common Stock represented thereby until the holder of record of such Certificate
shall surrender such Certificate. Subject to applicable law, following surrender
of any such Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore paid with respect to such whole shares of Parent Common Stock.
(e) Transfers of Ownership. If any certificate for shares of Parent
Common Stock is to be issued in a name other than that in which the certificate
surrendered in exchange therefor is registered, it will be a condition of the
issuance thereof that the certificate so surrendered will be properly endorsed
and otherwise in proper form for transfer and that the person requesting such
exchange will have paid to Parent or any agent designated by it any transfer or
other taxes required by reason of the issuance of a certificate for shares of
Parent Common Stock in any name other than
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that of the registered holder of the certificate surrendered, or established to
the satisfaction of Parent or any agent designated by it that such tax has been
paid or is not payable.
(f) Lost, Stolen or Destroyed Certificates. In the event any
certificates evidencing shares of Company Capital Stock shall have been lost,
stolen or destroyed, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificates, upon the making of an affidavit of that fact
by the holder thereof, such shares of Parent Common Stock; provided, however,
that Parent may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificates to
deliver a bond in such sum as it may reasonably direct as indemnity against any
claim that may be made against Parent or the Exchange Agent with respect to the
certificates alleged to have been lost, stolen or destroyed.
(g) No Liability. Notwithstanding anything to the contrary in this
Section 1.8, none of the Exchange Agent, the Surviving Corporation or any party
hereto shall be liable to a holder of shares of Parent Common Stock or Company
Capital Stock for any amount properly paid to a public official pursuant to any
applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Company Capital Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of shares of Company
Capital Stock in accordance with the terms hereof shall be deemed to be full
satisfaction of all rights pertaining to such shares of Company Capital Stock,
and there shall be no further registration of transfers on the records of the
Surviving Corporation of shares of Company Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Article I.
1.10 Dissenting Shares After Payment of Fair Value. Dissenting Shares, if
any, after payments in respect thereto have been pursuant to the California Law,
shall be canceled.
1.11 Tax and Accounting Consequences. It is intended by the parties hereto
that the Merger shall constitute a reorganization within the meaning of Section
368 of the Code and constitute a purchase for accounting purposes. Each party
has consulted with its own tax advisors and accountants with respect to the tax
and accounting consequences, respectively, of the Merger.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the Company
and Sub are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action.
ARTICLE II
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Representations and Warranties of the Company
and the Principal Shareholder
The Company and the Principal Shareholder, jointly and severally, represent
and warrant to Parent and Sub, subject to such exceptions as are specifically
disclosed in the disclosure letter (referencing the appropriate section and
paragraph numbers) supplied by the Company to Parent (the "Disclosure Letter")
and dated as of the date hereof, as set forth below.
2.1 Organization of the Company. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. The Company has the corporate power to own its properties and to
carry on its business as now being conducted. The Company is duly qualified to
do business and in good standing as a foreign corporation in each jurisdiction
in which the failure to be so qualified would have a material adverse effect on
the business, assets (including intangible assets), financial condition or
results of operations of the Company (hereinafter referred to as a "Material
Adverse Effect"). The Company has delivered a true and correct copy of its
Certificate of Incorporation and Bylaws, each as amended to date, to Parent.
Section 2.1 of the Disclosure Letter lists the directors and officers of the
Company. The operations now being conducted by the Company have not been
conducted under any other name.
2.2 Company Capital Structure.
(a) The authorized capital stock of the Company consists of 4,000,000
shares of Common Stock, of which 2,518,125 shares are issued and outstanding on
the date hereof. The Company Capital Stock is held by the Company Shareholders,
with the domicile addresses and in the amounts set forth on Schedule 2.2(a). All
outstanding shares of the Company's Capital Stock are duly authorized, validly
issued, fully paid and non-assessable and not subject to preemptive rights
created by statute, the Articles of Incorporation or Bylaws of the Company or
any agreement to which the Company is a party or by which it is bound.
(b) Except for outstanding options to purchase 750,000 shares of
Company Capital Stock, there are no options, warrants, calls, rights,
commitments or agreements of any character, written or oral, to which the
Company is a party or by which it is bound obligating the Company to issue,
deliver, sell, repurchase or redeem, or cause to be issued, delivered, sold,
repurchased or redeemed, any shares of the capital stock of the Company or
obligating the Company to grant, extend, accelerate the vesting of, change the
price of, otherwise amend or enter into any such option, warrant, call, right,
commitment or agreement. As a result of the transactions contemplated by the
Agreement, the Buyer will be the record and beneficial owner of all outstanding
capital stock of the Company and rights to acquire capital stock of the Company.
2.3 Subsidiaries. The Company does not have, and never has had, any
subsidiaries or affiliated companies and does not otherwise own, and has not
otherwise owned, any shares in the capital of or any interest in, or control,
directly or indirectly, any other corporation, partnership, association, joint
venture or other business entity.
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2.4 Authority. The Company has all requisite power and authority to enter
into this Agreement and any Related Agreements (as hereinafter defined) to which
it is a party and to consummate the transactions contemplated hereby and
thereby. The execution and delivery of this Agreement and any Related Agreements
to which it is a party and the consummation of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate action
on the part of the Company, and no further action is required on the part of the
Company to authorize the Agreement, any Related Agreements to which it is a
party and the transactions contemplated hereby and thereby. This Agreement and
any Related Agreements to which the Company is a party have been duly executed
and delivered by the Company, and, assuming the due authorization, execution and
delivery by the other parties hereto and thereto, constitute the valid and
binding obligation of the Company, enforceable in accordance with their
respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and to rules of law governing
specific performance, injunctive relief or other equitable remedies. The
"Related Agreements" shall mean all such ancillary agreements required in this
Agreement to be executed and delivered in connection with the transactions
contemplated hereby, including the Affiliate Agreements, the Employment
Agreements and the Non-competition Agreements.
2.5 No Conflict. Except as set forth in Section 2.5 of the Disclosure
Letter, the execution and delivery by the Company of this Agreement and any
Related Agreements to which it is a party do not, and the consummation of the
transactions contemplated hereby and thereby will not, conflict with, or result
in any violation of, or default under (with or without notice or lapse of time,
or both), or give rise to a right of termination, cancellation, modification or
acceleration of any obligation or loss of any benefit under (any such event, a
"Conflict") (i) any provision of the Certificate of Incorporation and Bylaws of
the Company, (ii) any mortgage, indenture, lease, contract or other agreement or
instrument, permit, concession, franchise or license to which the Company or any
Principal Shareholder or any of their respective properties or assets are
subject, or (iii) any judgment, order, decree, statute, law, ordinance, rule or
regulation applicable to the Company or any Principal Shareholder or their
respective properties or assets.
2.6 Consents. Except as disclosed in Section 2.6 of the Disclosure Letter,
no consent, waiver, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other federal, state, county, local or other foreign governmental authority,
instrumentality, agency or commission ("Governmental Entity") or any third
party, including a party to any agreement with the Company (so as not to trigger
any Conflict), is required by or with respect to the Company in connection with
the execution and delivery of this Agreement and any Related Agreements to which
the Company is a party or the consummation of the transactions contemplated
hereby and thereby, except for (i) such consents, waivers, approvals, orders,
authorizations, registrations, declarations and filings as may be required under
applicable securities laws thereby, and (ii) the filing of the Merger
Certificate with the Secretary of State of the State of Delaware.
2.7 Company Financial Statements. Section 2.7 of the Disclosure Letter
sets forth the Company's balance sheets as of August 31, 1999 and the related
statements of income and cash flow for the period from inception to August 31,
1999 (the "Unaudited Financials"). The Unaudited
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Financials are correct in all material respects and have been prepared in
accordance with generally accepted accounting principles consistent with the
reporting practices and principles used by Parent from time to time for
preparing its public filings under the Securities Exchange Act of 1934, as
amended ("GAAP"), applied on a basis consistent throughout the periods indicated
and consistent with each other. The Unaudited Financials present fairly the
financial condition, operating results and cash flows of the Company as of the
dates and during the periods indicated therein, subject in the case of the
Unaudited Financials, to normal year-end adjustments, which will not be material
in amount or significance. The Company's unaudited balance sheet as of August
31, 1999 shall be referred to as the "Current Balance Sheet."
2.8 No Undisclosed Liabilities. Except as set forth in Section 2.8 of the
Disclosure Letter, the Company does not have any liability, indebtedness,
obligation, expense, claim, deficiency, guaranty or endorsement of any type,
whether accrued, absolute, contingent, matured, unmatured or other (whether or
not required to be reflected in financial statements in accordance with GAAP),
which individually or in the aggregate (i) has not been reflected in the Current
Balance Sheet, or (ii) has not arisen in the ordinary course of business
consistent with past practices.
2.9 No Changes. Except as set forth in Section 2.9 of the Disclosure
Letter, since August 31, 1999, there has not been, occurred or arisen any:
(a) transaction by the Company involving in excess of $5,000, except
in the ordinary course of business as conducted on that date and consistent with
past practices;
(b) amendments or changes to the Certificate of Incorporation or
Bylaws of the Company;
(c) capital expenditure or commitment by the Company, either
individually or in the aggregate, exceeding $5,000;
(d) destruction of, damage to or loss of any material assets, business
or customer of the Company (whether or not covered by insurance), either
individually or in the aggregate, in excess of $5,000;
(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
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(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its officer, directors, employees or advisors,
or the declaration, payment or commitment or obligation of any kind for the
payment, by the Company, of a bonus or other additional salary or compensation
to any such person;
(j) any agreement, contract, lease or commitment or any extension or
modification the terms of any such agreement, contract, lease or commitment,
involving in excess of $5,000, individually, or $10,000, in the aggregate;
(k) sale, lease, license or other disposition of any of the assets or
properties of the Company, or any creation of any security interest in such
assets or properties, in excess of $5,000, except in the ordinary course of
business as conducted on that date and consistent with past practices;
(l) amendment or termination of any material contract, agreement or
license to which the Company is a party or by which it is bound;
(m) loan by the Company to any person or entity, incurring by the
Company of any indebtedness, guaranteeing by the Company of any indebtedness,
issuance or sale of any debt securities of the Company or guaranteeing of any
debt securities of others, except for advances to employees for travel and
business expenses in the ordinary course of business, consistent with past
practices;
(n) waiver or release of any right or claim of the Company, including
any write-off or other compromise of any account receivable of the Company,
either individually or in the aggregate, exceeding $5,000;
(o) the commencement or notice or threat of commencement of any
lawsuit or proceeding against investigation of the Company or its affairs;
(p) notice of any claim of ownership by a third party of any Company
Intellectual Property (as defined in Section 2.13 below) or of infringement by
the Company of any third party's Intellectual Property rights;
(q) issuance or sale, or contract to issue or sell, by the Company of
any of its shares of capital stock, or securities exchangeable, convertible or
exercisable therefor, or of any other of its securities;
(r) material change in pricing or royalties set or charged by the
Company to its customers or licensees or in pricing or royalties set or charged
by persons who have licensed Intellectual Property (as defined in Section 2.13
below) to the Company;
(s) any event or condition of any character that has had a Material
Adverse Effect on the Company; or
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(t) negotiation or agreement by the Company or any officer or
employees thereof to do any of the things described in the preceding clauses (a)
through (s) (other than negotiations with Parent and its representatives
regarding the transactions contemplated by this Agreement).
2.10 Tax Matters.
(a) Definition of Taxes. For the purposes of this Agreement, "Tax"
or, collectively, "Taxes," means (i) any and all federal, state, local and
foreign taxes, assessments and other governmental charges, duties, impositions
and liabilities, including taxes based upon or measured by gross receipts,
income, profits, sales, use and occupation, and value added, ad valorem,
transfer, franchise, withholding, payroll, recapture, employment, excise and
property taxes, together with all interest, penalties and additions imposed with
respect to such amounts; (ii) any liability for the payment of any amounts of
the type described in clause (i) as a result of being a member of an affiliated,
consolidated, combined or unitary group for any period; and (iii) any liability
for the payment of any amounts of the type described in clause (i) or (ii) as a
result of any express or implied obligation to indemnify any other person or as
a result of any obligations under any agreements or arrangements with any other
person with respect to such amounts and including any liability for taxes of a
predecessor entity.
(b) Tax Returns and Audits. Except as set forth in Section 2.10 of
the Disclosure Letter:
(i) The Company as of the Effective Time will have prepared and
timely filed or made a timely request for extension for all required federal,
state, local and foreign returns, estimates, information statements and reports
("Returns") relating to any and all Taxes concerning or attributable to the
Company, or its operations and such Returns are true and correct and have been
completed in accordance with applicable law.
(ii) The Company as of the Effective Time (A) will have paid or
accrued all Taxes it is required to pay or accrue as shown on the Returns and
(B) will have withheld and timely remitted with respect to its employees all
income taxes and other Taxes required to be withheld and remitted.
(iii) The Company has not been delinquent in the payment of any
Tax nor is there any Tax deficiency outstanding, assessed or proposed against
the Company, nor has the Company executed any waiver of any statute of
limitations on or extending the period for the assessment or collection of any
Tax.
(iv) No audit or other examination of any Return of the Company
is presently in progress, nor has the Company been notified in writing of any
request for such an audit or other examination.
(v) The Company has no liabilities for unpaid federal, state,
local and foreign Taxes which have not been accrued or reserved against in
accordance with GAAP on the Current Balance Sheet, whether asserted or
unasserted, contingent or otherwise, and the Company
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has not incurred any liability for Taxes since the date of the Current Balance
Sheet other than in the ordinary course of business.
(vi) The Company has made available to Parent or its legal
counsel, copies of all foreign, federal and state income and all state sales and
use Returns filed for all years as to which any applicable statute of
limitations has not expired.
(vii) There are (and immediately following the Effective Time
there will be) no liens, pledges, charges, claims, restrictions on transfer,
mortgages, security interests or other encumbrances of any sort (collectively,
"Liens") on the assets of the Company relating to or attributable to Taxes other
than Liens for taxes not yet due and payable.
(viii) The Company has no knowledge of any basis for the
assertion of any claim relating or attributable to Taxes which, if adversely
determined, would result in any Lien on the assets of the Company.
(ix) As of the Effective Time, there will not be any contract,
agreement, plan or arrangement, including but not limited to the provisions of
this Agreement, covering any employee or former employee of the Company that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible by the Company as an expense under applicable law.
(x) The Company is not a party to any tax sharing,
indemnification or allocation agreement nor does the Company owe any amount
under any such agreement.
(xi) The Company's tax basis in its assets for purposes of
determining its future amortization, depreciation and other federal income tax
deductions is accurately reflected on the Company's tax books and records.
(xii) The Company is not, and has not been at any time, a
"United States Real Property Holding Corporation" within the meaning of Section
897(c)(2) of the Code.
(xiii) The Company is an accrual basis taxpayer and its tax basis
and its assets for purposes of determining its future amortization, depreciation
and other federal income tax deductions is accurately reflected on the Company's
tax books and records.
(c) Executive Compensation Tax. The Company does not have, or will
not have as a result of the transactions contemplated by this Agreement, any
liabilities for Taxes (for example under Section 280G of the Code) as a result
of the amount of remuneration paid or to be paid to its employees.
2.11 Restrictions on Business Activities. Except as set forth in Section
2.11 of the Disclosure Letter, there is no agreement (non-competition or
otherwise), commitment, judgment, injunction, order or decree to which the
Company is a party or otherwise binding upon the Company that has or may have
the effect of prohibiting or impairing any business practice of the Company,
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any acquisition of property (tangible or intangible) by the Company or the
conduct of business by the Company. Without limiting the foregoing, the Company
has not entered into any agreement under which the Company is restricted from
providing services to customers or potential customers or any class of
customers, in any geographic area, during any period of time or in any segment
of the market.
2.12 Title of Properties; Absence of Liens and Encumbrances; Condition of
Equipment.
(a) The Company does not own any real property, nor has it ever owned
any real property. Section 2.12(a) of the Disclosure Letter sets forth a list
of all real property currently leased by the Company, the name of the lessor,
the date of the lease and each amendment thereto and, with respect to any
current lease, the aggregate annual rental and/or other fees payable under any
such lease. All such current leases are in full force and effect in accordance
with their respective terms, and there is not, under any of such leases, any
existing material default or material event of default (or event which with
notice or lapse of time, or both, would constitute a material default).
(b) The Company has good and marketable title to, or, in the case of
leased properties and assets, enforceable leasehold interests in, all of its
tangible properties and assets used or held for use in its business, free and
clear of any Liens, except as reflected in the Current Balance Sheet and except
for liens for taxes not yet due and payable and such imperfections of title and
encumbrances, if any, which are not material in character, amount or extent, and
which do not materially detract from the value, or materially interfere with the
present use, of the property subject thereto or affected thereby.
(c) Section 2.12(c) of the Disclosure Letter lists all material items
of equipment (the "Equipment") owned or leased by the Company and such Equipment
is, (i) adequate for the conduct of the business of the Company as currently
conducted and (ii) in good operating condition, regularly and properly
maintained, subject to normal wear and tear.
(d) The Company has sole and exclusive ownership, free and clear of
any Liens, of all customer files and other customer information relating to the
Company's current customers (the "Customer Information"). No third party
possesses any claims or rights with respect to use of the Customer Information.
2.13 Intellectual Property.
(a) For the purposes of this Agreement, the following terms have the
following definitions:
"Intellectual Property" shall mean any or all of the following and all
rights in, arising out of, or associated therewith anywhere in the world: (i)
all United States, international and foreign patents and applications therefor
and all reissues, divisions, renewals, extensions, provisionals, continuations
and continuations-in-part thereof; (ii) all inventions (whether patentable or
not), invention disclosures, improvements, trade secrets, proprietary
information, know how, technology, technical data and customer lists, and all
documentation relating to any of the foregoing;
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(iii) all copyrights, copyrights registrations and applications therefor; (iv)
all industrial designs and any registrations and applications therefor
throughout the world; (v) all trade names, logos, common law trademarks and
service marks; trademark and service mark registrations and applications
therefor and all goodwill associated therewith throughout the world; (vi) all
databases and data collections and all rights therein throughout the world; and
(vii) all computer software including all source code, object code, firmware,
development tools, files, records and data, all media on which any of the
foregoing is recorded, (viii) any similar, corresponding or equivalent rights to
any of the foregoing and (ix) all documentation related to any of the foregoing.
"Company Intellectual Property" shall mean any Intellectual Property
that is owned by, or exclusively licensed to, the Company.
"Registered Intellectual Property" shall mean all United States,
international and foreign: (i) patents, patent applications (including
provisional applications); (ii) registered trademarks, applications to register
trademarks, intent-to-use applications, or other registrations or applications
related to trademarks; (iii) registered copyrights and applications for
copyright registration; and (iv) any other Company Intellectual Property that is
the subject of an application, certificate, filing, registration or other
document issued by, filed with, or recorded by, any state, government or other
public legal authority.
(b) Section 2.13(b) of the Disclosure Letter lists all Registered
Intellectual Property owned by, or filed in the name of, the Company (the
"Company Registered Intellectual Property").
(c) The Company (i) owns and has good and exclusive title to each item
of Company Intellectual Property, including all Company Registered Intellectual
Property listed on Section 2.13(b) of the Disclosure Letter, free and clear of
any Liens, (ii) is the exclusive owner of or has the permission of the owner to
use all trademarks and trade names used in connection with the operation or
conduct of the business of the Company, including the sale of any products or
the provision of any services by the Company and (iii) owns exclusively, and has
good title to, all copyrighted works that are Company products or other works of
authorship that the Company otherwise purports to own.
(d) Except as set forth in Section 2.13(d) of the Disclosure Letter,
to the extent that any work, invention or material has been developed or created
by a third party for the Company, the Company has a written agreement with such
third party with respect thereto and the Company thereby has obtained ownership
of, and is the exclusive owner of, all Intellectual Property in such work,
material or invention by operation of law or by valid assignment.
(e) Except as set forth in Section 2.13(e) of the Disclosure Letter,
the Company has not transferred ownership of, or granted any exclusive license
with respect to, any Intellectual Property that is or was Company Intellectual
Property, to any third party.
(f) The operation of the business of the Company as it currently is
conducted or is reasonably contemplated to be conducted, including to the extent
applicable the Company's design,
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development, manufacture and sale of the products (including products currently
under development) or services of the Company, does not infringe or
misappropriate the Intellectual Property of any other person, violate the rights
of any person (including rights to privacy or publicity), or constitute unfair
competition or trade practices under the laws of any jurisdiction, and the
Company has not received written notice from any person claiming that such
operation or any act, product or service of the Company infringes or
misappropriates the Intellectual Property of any third party or constitutes
unfair competition or trade practices under the laws of any jurisdiction.
(g) The Company owns or has the right to use all Intellectual Property
necessary to the conduct of its business as it is currently conducted or is
reasonably contemplated to be conducted, including, without limitation, the
design, development, manufacture and sale of all products currently manufactured
or sold by the Company or under development by the Company and the performance
of all services provided or contemplated to be provided by the Company.
(h) Each item of Company Registered Intellectual Property is valid and
subsisting, all necessary registration, maintenance and renewal fees in
connection with such Company Registered Intellectual Property have been paid and
all necessary documents and certificates in connection with such Company
Registered Intellectual Property have been filed with the relevant patent,
copyright, trademark or other authorities in the United States or foreign
jurisdictions, as the case may be, for the purposes of maintaining such Company
Registered Intellectual Property.
(i) There are no contracts, licenses and agreements between the
Company and any other person with respect to Company Intellectual Property under
which there is any dispute known to the Company regarding the scope of such
agreement, or performance under such agreement including with respect to any
payments to be made or received by the Company thereunder.
(j) To the knowledge of the Company, no person is infringing or
misappropriating any of Company Intellectual Property.
(k) The Company has taken all steps that are reasonably required to
protect the Company's rights in confidential information and trade secrets of
the Company or provided by any third party to the Company. Without limiting the
foregoing, the Company has, and enforces, a policy requiring each employee and
contractor to execute proprietary information and confidentiality agreements
substantially in the Company's standard forms, and, except as set forth in
Section 2.13(k) of the Disclosure Letter, all current employees and contractors
of the Company have executed such an agreement.
(l) There are no proceedings or actions instituted by the Company or
of which the Company has received written notice before any court, tribunal
(including the United States Patent and Trademark Office (the "PTO") or
equivalent authority anywhere in the world) related to any Company Intellectual
Property.
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(m) No Company Intellectual Property or product or service of the
Company is subject to any proceeding or outstanding decree, order, judgment,
agreement or stipulation that restricts in any manner the use, transfer or
licensing thereof by the Company or may affect the validity, use or
enforceability of such Company Intellectual Property.
(n) No (i) product, service or publication of the Company, (ii)
material published or distributed by the Company or (iii) conduct or statement
of Company, constitutes obscene material or a defamatory statement or material.
2.14 Agreements, Contracts and Commitments.
(a) Except as set forth on Section 2.14(a) of the Disclosure Letter,
the Company does not have, or is not bound by:
(i) any contract, license or agreement to which the Company is a
party (A) with respect to Company Intellectual Property licensed or transferred
to any third party or (B) pursuant to which a third party has licensed or
transferred any Intellectual Property to the Company, with a value or cost in
excess of $5,000;
(ii) any employment or consulting agreement, contract or
commitment with an employee or individual consultant or salesperson or
consulting or sales agreement, contract or commitment with a firm or other
organization;
(iii) any agreement or plan, including, without limitation, any
stock option plan, stock appreciation rights plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of which
will be accelerated, by the occurrence of any of the transactions contemplated
by this Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Agreement;
(iv) any fidelity or surety bond or completion bond;
(v) any lease of personal property with fixed annual rental
payments in excess of $5,000;
(vi) any contract, license or agreement between the Company and
any third party wherein or whereby the Company has agreed to, or assumed, any
obligation or duty to warrant, indemnify, hold harmless or otherwise assume or
incur any obligation or liability with respect to the infringement or
misappropriation by the Company or such third party of the Intellectual Property
of any third party;
(vii) any agreement, contract or commitment containing any
covenant limiting the freedom of the Company to engage in any line of business
or to compete with any person;
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(viii) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $5,000;
(ix) any agreement, contract or commitment relating to the
disposition or acquisition of assets or any interest in any business enterprise
outside the ordinary course of the Company's business;
(x) any mortgages, indentures, loans or credit agreements,
security agreements or other agreements or instruments relating to the borrowing
of money or extension of credit other than trade credit;
(xi) any purchase order or contract for the purchase of
materials involving $5,000 or more;
(xii) any construction contracts;
(xiii) any distribution, joint marketing or development
agreement; or
(xiv) any other agreement, contract or commitment that involves
$5,000 or more or is not cancelable without penalty within thirty (30) days.
(b) Except as disclosed in Section 2.14(b) of the Disclosure Letter,
the Company is in compliance with and has not breached, violated or defaulted
under, or received notice that it has breached, violated or defaulted under, any
of the terms or conditions of any agreement, contract, license or commitment to
which it is a party or by which it is bound (any such agreement, contract,
license or commitment, a "Contract"), and the Company is not aware of any event
that would constitute such a breach, violation or default with the lapse of
time, giving of notice or both. Each Contract is in full force and effect, and,
to the knowledge of the Company, except as otherwise disclosed in Section
2.14(b) of the Disclosure Letter, all other parties to each Contract are in
compliance with, and have not breached any term of, such Contract. The Company
has obtained or will obtain prior to the Closing Date, all necessary consents,
waivers and approvals of parties to any Contract as are required thereunder in
connection with the Merger or to remain in effect without modification after the
Closing. Following the Effective Time, the Company will be permitted to exercise
all of the Company's rights under the Contracts to the same extent the Company
would have been able to had the Merger not occurred and without the payment of
any additional amounts or consideration other than ongoing fees, royalties or
payments which the Company would otherwise be required to pay.
2.15 Interested Party Transactions. Except as disclosed in Section 2.15 of
the Disclosure Letter, no officer, director or shareholder of the Company (nor
any ancestor, sibling, descendant or spouse of any of such persons, or any
trust, partnership or corporation in which any of such persons has or has had an
interest), has or has had, directly or indirectly, (i) any interest in any
entity that furnished or sold, or furnishes or sells, services or products that
the Company furnishes or sells, or proposes to furnish or sell, or (ii) any
interest in any entity that purchases from or sells or furnishes to the Company
any goods or services or (iii) a beneficial interest in any Contract; provided,
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however, that ownership of no more than one percent (1%) of the outstanding
voting stock of a publicly traded corporation and no more than 5% of the
outstanding equity of any other entity shall not be deemed an "interest in any
entity" for purposes of this Section 2.15.
2.16 Governmental Authorization. Section 2.16 of the Disclosure Letter
accurately lists each material consent, license, permit, grant or other
authorization issued to the Company by a governmental entity (i) pursuant to
which the Company currently operates or holds any interest in any of its
properties or (ii) which is required for the operation of its business or the
holding of any such interest (herein collectively called "Company
Authorizations"). The Company Authorizations are in full force and effect and
constitute all Company Authorizations required to permit the Company to operate
or conduct its business or hold any interest in its properties or assets.
2.17 Litigation. Except as disclosed in Section 2.17 of the Disclosure
Letter, there is no action, suit or proceeding of any nature pending, or to the
Company's knowledge threatened, against the Company, its properties or any of
its officers or directors, nor, to the knowledge of the Company, is there any
reasonable basis therefor. There is no investigation pending or, to the
Company's knowledge threatened, against the Company, its properties or any of
its officers or directors (nor, to the best knowledge of the Company, is there
any reasonable basis therefor) by or before any governmental entity. No
governmental entity has at any time challenged or questioned the legal right of
the Company to conduct its operations as presently or previously conducted.
2.18 Accounts Receivable.
(a) The Company has made available to Parent a list of all accounts
receivable of the Company ("Accounts Receivable") as of September 30, 1999 along
with a range of days elapsed since invoice.
(b) All Accounts Receivable of the Company arose in the ordinary
course of business, are carried at values determined in accordance with GAAP
consistently applied and are collectible except to the extent of reserves
therefor set forth in the Current Balance Sheet. No person has any Lien on any
of such Accounts Receivable and no request or agreement for deduction or
discount has been made with respect to any of such Accounts Receivable.
2.19 Minute Books. The minute books of the Company made available to
counsel for Parent are the only minutes of the Company and contain a reasonably
accurate summary of all meetings of the Board of Directors (or committees
thereof) of the Company and its shareholders or actions by written consent since
the incorporation of the Company.
2.20 Environmental Matters.
(a) Hazardous Material. The Company has not: (i) operated any
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos,
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petroleum, and urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste pursuant
to the United States Resource Conservation and Recovery Act of 1976, as amended,
and the regulations promulgated pursuant to said laws (a "Hazardous Material"),
but excluding office and janitorial supplies properly and safely maintained. No
Hazardous Materials are present as a result of the deliberate actions of the
Company or, to the Company's knowledge, as a result of any actions of any third
party or otherwise, in, on or under any property, including the land and the
improvements, ground water and surface water thereof, that the Company has at
any time owned, operated, occupied or leased.
(b) Hazardous Materials Activities. The Company has not transported,
stored, used, manufactured, disposed of, released or exposed its employees or
others to Hazardous Materials in violation of any law in effect on or before the
Effective Time, nor has the Company disposed of, transported, sold, or
manufactured any product containing a Hazardous Material (any or all of the
foregoing being collectively referred to as "Hazardous Materials Activities") In
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. The Company currently holds all environmental approvals,
permits, licenses, clearances and consents (the "Environmental Permits")
necessary for the conduct of the Company's Hazardous Materials Activities and
other businesses of the Company as such activities and businesses are currently
being conducted.
(d) Environmental Liabilities. No action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to the
Company's knowledge, threatened concerning any Environmental Permit, Hazardous
Material or any Hazardous Materials Activity of the Company. The Company is not
aware of any fact or circumstance which could involve the Company in any
environmental litigation or impose upon the Company any environmental liability.
2.21 Brokers' and Finders' Fees; Third Party Expenses. Except as set forth
in Section 2.21 of the Disclosure Letter, the Company has not incurred, nor will
it incur, directly or indirectly, any liability for brokerage or finders' fees
or agents' commissions or any similar charges in connection with the Agreement
or any transaction contemplated hereby. Section 2.21 of the Disclosure Letter
sets forth the principal terms and conditions of any agreement, written or oral,
with respect to such fees. Section 2.21 of the Disclosure Letter sets forth the
Company's current reasonable estimate of all Third Party Expenses (as defined in
Section 5.4) expected to be incurred by the Company in connection with the
negotiation and effectuation of the terms and conditions of this Agreement and
the transactions contemplated hereby.
2.22 Employee Benefit Plans and Compensation.
(a) For purposes of this Section 2.22, the following terms shall have
the meanings set forth below:
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(i) "Affiliate" shall mean any other person or entity under
common control with the Company within the meaning of Section 414(b), (c), (m)
or (o) of the Code and the regulations thereunder.
(ii) "Employee Plan" shall refer to any plan, program, policy,
practice, contract, agreement or other arrangement providing for bonuses,
severance, termination pay, deferred compensation, pensions, profit sharing,
performance awards, stock or stock-related awards, fringe benefits or other
employee benefits of any kind, whether formal or informal, written or otherwise,
funded or unfunded and whether or not legally binding, including without
limitation, any plan which is or has been maintained, contributed to, or
required to be contributed to, by the Company or any Affiliate for the benefit
of any Employee (as defined below), and pursuant to which the Company or any
Affiliate has or may have any material liability, contingent or otherwise; and
(iii) "Employee" shall mean any current, former, or retired
employee, consultant, officer, or director of the Company or any Affiliate.
(iv) "Employee Agreement" shall refer to each employment,
severance, consulting or similar agreement or contract between the Company or
any Affiliate and any Employee;
(b) Schedule. Section 2.22(b) of the Disclosure Letter contains an
accurate and complete list of each Employee Plan and each Employee Agreement,
together with a schedule of all liabilities, whether or not accrued, under each
such Employee Plan or Employee Agreement. The Company does not have any plan or
commitment, whether legally binding or not, to establish any new Employee Plan
or Employee Agreement, to modify any Employee Plan or Employee Agreement (except
to the extent required by law or to conform any such Employee Plan or Employee
Agreement to the requirements of any applicable law, in each case as previously
disclosed to Parent in writing, or as required by this Agreement), or to enter
into any Employee Plan or Employee Agreement, nor does it have any intention or
commitment to do any of the foregoing.
(c) Documents. The Company has provided to Parent, (i) correct and
complete copies of all documents embodying each Employee Plan and each Employee
Agreement including all amendments thereto and copies of all forms of agreement
and enrollment used therewith; (ii) the most recent annual actuarial valuations,
if any, prepared for each Employee Plan; (iii) the three most recent annual
reports (Series 5500 and all schedules thereto), if any, required under the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") or the
Code in connection with each Employee Plan or related trust; (iv) the most
recent summary plan description together with the most recent summary of
material modifications, if any, required under ERISA with respect to each
Employee Plan; (v) all IRS determination letters and rulings relating to
Employee Plans and copies of all applications and correspondence to or from the
IRS or the Department of Labor ("DOL") with respect to any Employee Plan; (vi)
if the Employee Plan is funded, the most recent annual and periodic accounting
of Employee Plan assets; (vii) all material agreements and contracts relating to
each Employee Plan, including but not limited to, administrative service
agreements, group annuity contracts and group insurance contracts; and (viii)
all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plan, in each case, relating to
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any amendments, terminations, establishments, increases or decreases in
benefits, acceleration of payments or vesting schedules or other events which
would result in any liability to the Company.
(d) Employee Plan Compliance. (i) The Company has performed all
obligations required to be performed by it under each Employee Plan and each
Employee Plan has been established and maintained in accordance with its terms
and in compliance with all applicable laws, statutes, orders, rules and
regulations, including ERISA and the Code; (ii) each Employee Plan intended to
qualify under Section 401(a) of the Code and each trust intended to qualify
under Section 501(a) of the Code has either received a favorable determination
letter with respect to each such Employee Plan from the IRS or has remaining a
period of time under applicable Treasury regulations or IRS pronouncements in
which to apply for such a determination letter and make any amendments necessary
to obtain a favorable determination; (iii) no "prohibited transaction," within
the meaning of Section 4975 of the Code or Section 406 or 407 of ERISA, has
occurred with respect to any Employee Plan; (iv) there are no actions, suits or
claims pending, or, to the knowledge of the Company, threatened or anticipated
(other than routine claims for benefits), against any Employee Plan or against
the assets of any Employee Plan; (v) each Employee Plan can be amended,
terminated or otherwise discontinued after the Effective Time in accordance with
its terms, without liability to the Company, Parent, Sub or any Affiliate (other
than ordinary administration expenses typically incurred in a termination
event); (vi) there are no inquiries or proceedings pending or, to the knowledge
of the Company or any Affiliates, threatened by the IRS or DOL with respect to
any Employee Plan; and (vii) neither the Company nor any Affiliate is subject to
any penalty or tax with respect to any Employee Plan under Section 402(i) of
ERISA or Section 4975 through 4980 of the Code.
(e) Pension Plans. The Company does not now, and has never,
maintained, established, sponsored, participated in, or contributed to, any
pension plan which is subject to Part 3 of Subtitle B of Title I of ERISA, Title
IV of ERISA or Section 412 of the Code.
(f) Multiemployer Plans. At no time has the Company contributed to or
been requested to contribute to any multiemployer plan.
(g) No Post-Employment Obligations. No Employee Plan provides, or has
any liability to provide, life insurance, medical or other employee welfare
benefits to any Employee upon his or her retirement or termination of employment
for any reason, except as may be required by statute, and the Company has not
represented, promised or contracted (whether in oral or written form) to any
Employee (either individually or to Employees as a group) that such Employee(s)
would be provided with life insurance, medical or other employee welfare
benefits upon their retirement or termination of employment, except to the
extent required by statute.
(h) No COBRA Violation. Neither the Company nor any Affiliate has,
prior to the Effective Time and in any material respect, violated any of the
health care continuation requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended, or any similar provisions of state law
applicable to its employees.
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(i) Effect of Transaction. The execution of this Agreement and the
consummation of the transactions contemplated hereby will not (either alone or
upon the occurrence of any additional or subsequent events) constitute an event
under any Employee Plan, Employee Agreement, trust or loan that will or may
result in any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits or
obligation to fund benefits with respect to any Employee.
(j) Employment Matters. Except as set forth in Schedule 2.22(j), the
Company (i) is in compliance with all applicable laws, rules and regulations
respecting employment, employment practices, terms and conditions of employment
and wages and hours, in each case, with respect to Employees; (ii) has withheld
all amounts required by law or by agreement to be withheld from the wages,
salaries and other payments to Employees; (iii) is not liable for any arrears of
wages or any taxes or any penalty for failure to comply with any of the
foregoing; and (iv) is not liable for any payment to any trust or other fund or
to any governmental or administrative authority, with respect to unemployment
compensation benefits, social security or other benefits for Employees (other
than routine payments to be made in the normal course of business and consistent
with past practice).
(k) Labor. No work stoppage or labor strike against the Company is
pending, or to the knowledge of the Company, threatened. The Company is not
involved in or threatened with any labor dispute, grievance, or litigation
relating to labor, safety or discrimination matters involving any Employee,
including, without limitation, charges of unfair labor practices or
discrimination complaints, which, if adversely determined, would, individually
or in the aggregate, result in liability to the Company, Parent or Sub. The
Company has not engaged in any unfair labor practices which could, individually
or in the aggregate, directly or indirectly result in a liability to the
Company, Parent, Sub or any Affiliate. The Company is not presently, nor has it
in the past, been a party to, or bound by, any collective bargaining agreement
or union contract with respect to Employees and no collective bargaining
agreement is being negotiated by the Company.
2.23 No Interference or Conflict. To the knowledge of the Company, no
shareholder, officer or employee of the Company is obligated under any contract
or agreement or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with such person's efforts to
promote the interests of the Company or that would interfere with the Company's
business. Neither the execution nor delivery of this Agreement, nor the carrying
on of the Company's business as presently conducted nor any activity of such
officers or employees in connection with the carrying on of the Company's
business as presently conducted or proposed to be conducted in accordance with
the Business Plan, will, to the Company's knowledge, conflict with or result in
a breach of the terms, conditions or provisions of, or constitute a default
under, any contract or agreement under which any of such officers or employees
are currently bound.
2.24 Insurance. Section 2.24 of the Disclosure Letter lists all insurance
policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers and directors of the Company. There
is no claim by the Company pending under any of such policies or bonds as to
which coverage has been questioned, denied or disputed by the underwriters
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of such policies or bonds. All premiums due and payable under all such policies
and bonds have been paid, and the Company and its Affiliates are otherwise in
compliance with the terms of such policies and bonds (or other policies and
bonds providing substantially similar insurance coverage). The Company has no
knowledge of any threatened termination of, or premium increase with respect to,
any of such policies.
2.25 Compliance with Laws. The Company has complied with, is not in
violation of, and has not received any notices of violation with respect to, any
foreign, federal, state or local statute, law or regulation.
2.26 Complete Copies of Materials. The Company has delivered or made
available true and complete copies of each document (or summaries of same) that
has been reasonably requested by Parent or its counsel.
2.27 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Disclosure Letter), nor any statement
made in any schedule or certificate furnished by the Company pursuant to this
Agreement, or furnished in or in connection with documents mailed or delivered
to the Company Shareholders for use in soliciting their consent to this
Agreement and the Merger contains or will contain at the Effective Time, any
untrue statement of a material fact, or omits or will omit at the Effective Time
to state any material fact necessary in order to make the statements contained
herein or therein, in the light of the circumstances under which made, not
misleading.
ARTICLE III
Representations and Warranties of Parent And Sub
Parent and Sub represent and warrant to the Company as follows:
3.1 Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of California. Each of Parent and Sub has
the corporate power to own its properties and to carry on its business as now
being conducted and is duly qualified to do business and is in good standing in
each jurisdiction in which the failure to be so qualified would have a material
adverse effect on the ability of Parent and Sub to consummate the transactions
contemplated hereby.
3.2 Authority. Each of Parent and Sub has all requisite corporate power
and authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Parent and Sub. This Agreement
has been duly executed and delivered by Parent and Sub and constitutes the valid
and binding obligations of Parent and Sub, enforceable in accordance with its
terms, except as such
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enforceability may be limited by principles of public policy and subject to the
laws of general application relating to bankruptcy, insolvency and the relief of
debtors and rules of law governing specific performance, injunctive relief or
other equitable remedies.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 100,000,000 shares of
Common Stock, $.001 par value, of which 11,630,049 shares were issued and
outstanding as of June 30, 1999, and 5,000,000 shares of undesignated Preferred
Stock, $.001 par value. No shares of Preferred Stock are issued or outstanding.
Parent has also reserved (i) 1,437,500 shares of Common Stock for issuance to
employees and consultants pursuant to Parent's 1992 Stock Plan, (ii) 1,000,000
shares (subject to annual increases) of Common Stock for issuance to employees
and consultants pursuant to Parent's 1998 Stock Plan, and (iii) 250,000 shares
(subject to annual increases) of Common Stock for issuance under Parent's 1998
Employee Stock Purchase Plan.
(b) The shares of Parent Common Stock to be issued pursuant to the
Merger will be duly authorized, validly issued, fully paid, non-assessable and
free of preemptive rights.
3.4 Sec Documents; Parent Financial Statements. Parent has furnished the
Company, and will furnish the Company Shareholders prior to the Closing, with a
true and complete copy of the following filings with the Securities and Exchange
Commission (the "SEC"): (i) its Annual Report to its shareholders covering the
fiscal year ended December 31, 1998, (ii) its Proxy Statement to its
shareholders for its 1999 annual meeting and (iii) its quarterly report on Form
10-Q for the quarter ended June 30, 1999 (the "SEC Documents"). As of their
respective filing dates, the SEC Documents complied in all material respects
with the requirements of the Securities Act of 1933, as amended (the "Securities
Act") and the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as applicable and none of the SEC Documents contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements made therein, in light of the circumstances
in which they were made, not misleading, except to the extent corrected by a
subsequently filed document with the SEC. Parent has filed in a timely manner
all reports required to be filed during the preceding twelve calendar months
pursuant to the Exchange Act. The financial statements of Parent, including the
notes thereto, included in the SEC Documents (the "Parent Financial Statements")
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles consistently applied (except as may be indicated in the
notes thereto) and present fairly the consolidated financial position of Parent
at the dates thereof and of its operations and cash flows for the periods then
ended (subject, in the case of unaudited statements, to normal audit
adjustments).
3.5 Brokers' and Finders' Fees. Parent has not incurred, nor will it
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement or
any transaction contemplated hereby.
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3.6 No Material Adverse Change. No material adverse change in the
business, assets (including intangible assets), financial conditions or results
of operations of Parent and Sub, taken as a whole, has occurred since September
30, 1999.
3.7 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any Governmental Entity or any third
party, including a party to any agreement with Parent or Sub (so as not to
trigger any Conflict), is required by or with respect to Parent or Sub in
connection with the execution and delivery of this Agreement and any Related
Agreements to which Parent or Sub is a party or the consummation of the
transactions contemplated hereby and thereby, except for (i) such consents,
waivers, approvals, orders, authorizations, registrations, declarations and
filings as may be required under applicable securities laws thereby, (ii) the
filing of the Merger Certificate with the Secretary of State of the State of
Delaware and (iii) such consents, waivers, approvals, orders or authorizations
which if not obtained, or registrations, declarations or filings which if not
made, would not have a material adverse effect on the business, assets
(including intangible assets), financial conditions or results of operations of
Parent and Sub, taken as a whole.
3.8 Other Matters. Sub has been formed for the sole purpose of effecting
the Merger and, except as contemplated by this Agreement, Sub has not conducted
any business activities and does not have any material liabilities or
obligations.
ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business of the Company. During the period from the date of
this Agreement and continuing until the earlier of the termination of this
Agreement or the Effective Time, the Company agrees (except to the extent that
Parent shall otherwise consent in writing), to carry on the Company's business
in the usual, regular and ordinary course in substantially the same manner as
heretofore conducted, to pay their debts and Taxes before they become
delinquent, to pay or perform other obligations when due, and, to the extent
consistent with such business, use all reasonable efforts consistent with past
practice and policies to preserve intact the Company's present business
organization, keep available the services of the Company's present officers and
key employees and preserve the Company's relationships with customers,
suppliers, distributors, licensors, licensees, and others having business
dealings with it, all with the goal of preserving unimpaired the Company's
goodwill and ongoing business at the Effective Time. The Company shall promptly
notify Parent of any event or occurrence or emergency not in the ordinary course
of business of the Company, and any material event involving the Company. Except
as expressly contemplated by this Agreement, the Company shall not, without the
prior written consent of Parent:
(a) Enter into any commitment or transaction not in the ordinary
course of business;
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(b) Transfer to any person or entity any rights to the Company
Intellectual Property;
(c) Enter into or amend any agreements pursuant to which any other
party is granted marketing, distribution or similar rights of any type or scope
with respect to any products of the Company;
(d) Amend or otherwise modify (or agree to do so), except in the
ordinary course of business, or violate the terms of, any of the agreements set
forth or described in the Disclosure Letter;
(e) Commence any litigation;
(f) Declare, set aside or pay any dividends on or make any other
distributions (whether in cash, stock or property) in respect of any of its
capital stock, or split, combine or reclassify any of its capital stock or issue
or authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of capital stock of the Company, or repurchase,
redeem or otherwise acquire, directly or indirectly, any shares of its capital
stock (or options, warrants or other rights exercisable therefor);
(g) Issue, grant, deliver or sell or authorize or propose the
issuance, grant, delivery or sale of, or purchase or propose the purchase of,
any shares of its capital stock or securities convertible into, or
subscriptions, rights, warrants or options to acquire, or other agreements or
commitments of any character obligating it to issue any such shares or other
convertible securities;
(h) Cause or permit any amendments to its Certificate of
Incorporation or Bylaws;
(i) Acquire or agree to acquire by merging or consolidating with, or
by purchasing any assets or equity securities of, or by any other manner, any
business or any corporation, partnership, association or other business
organization or division thereof, or otherwise acquire or agree to acquire any
assets which are material, individually or in the aggregate, to its business;
(j) Sell, lease, license or otherwise dispose of any of its
properties or assets, except in the ordinary course of business and consistent
with past practices;
(k) Incur any indebtedness for borrowed money or guarantee any such
indebtedness or issue or sell any debt securities or guarantee any debt
securities of others other than trade debt;
(l) Grant any loans to others or purchase debt securities of others
or amend the terms of any outstanding loan agreement, except in the ordinary
course of business and consistent with past practices;
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(m) Grant any severance or termination pay (i) to any director or
officer or (ii) to any other employee except payments made pursuant to standard
written agreements outstanding on the date hereof;
(n) Adopt or amend any employee benefit plan, or enter into any
employment agreement, pay or agree to pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage rates
of its employees;
(o) Revalue any of its assets, including without limitation writing
down the value of inventory or writing off notes or accounts receivable other
than in the ordinary course of business;
(p) Take any action which could jeopardize the tax-free
reorganization hereunder;
(q) Pay, discharge or satisfy, in an amount in excess of $5,000 (in
any one case) or $15,000 (in the aggregate), any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other than
the payment, discharge or satisfaction in the ordinary course of business of
liabilities reflected or reserved against in the Current Balance Sheet;
(r) Make or change any material election in respect of Taxes, adopt
or change any accounting method in respect of Taxes, enter into any closing
agreement, settle any claim or assessment in respect of Taxes, or consent to any
extension or waiver of the limitation period applicable to any claim or
assessment in respect of Taxes;
(s) Enter into any strategic alliance or joint marketing arrangement
or agreement; or
Take, or agree in writing or otherwise to take, any of the
actions described in Sections 4.1(a) through (s) above, or any other action that
would prevent the Company from performing or cause the Company not to perform
its covenants hereunder.
4.2 No Solicitation. Until the earlier of the Effective Time or the date
of termination of this Agreement pursuant to the provisions of Section 8.1
hereof, the Company will not (nor will the Company permit any of the Company's
officers, directors, agents, representatives or affiliates to), without the
express written consent of Parent, directly or indirectly, take any of the
following actions with any party other than Parent and its designees: (a)
solicit, conduct discussions with or engage in negotiations with any person,
relating to the possible acquisition of the Company (whether by way of merger,
purchase of capital stock, purchase of assets or otherwise) or any material
portion of its or their capital stock or assets, (b) provide information with
respect to it to any person, other than Parent and Parent's counsel, accountants
and representatives, relating to the possible acquisition of the Company
(whether by way of merger, purchase of capital stock, purchase of assets or
otherwise) or any material portion of its or their capital stock or assets, (c)
enter into an agreement with any person, other than Parent, providing for the
acquisition of the Company (whether by way of merger, purchase of capital stock,
purchase of assets or otherwise) or any material portion of its or their capital
stock or assets or (d) make or authorize any statement, recommendation or
solicitation in support of any possible acquisition of the Company or any of its
subsidiaries (whether by way of
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merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its or their capital stock or assets by any person, other
than by Parent. In addition to the foregoing, if the Company receives prior to
the Effective Time or the termination of this Agreement any written offer or
proposal relating to any of the above, the Company shall immediately notify
Parent thereof, including information as to the identity of the offeror or the
party making any such offer or proposal and the specific terms of such offer or
proposal, as the case may be, and such other information related thereto as
Parent may reasonably request.
ARTICLE V
Additional Agreements
5.1 Sale of Shares. The parties hereto acknowledge and agree that the
shares of Parent Common Stock issuable to the Company Shareholders pursuant to
Section 1.6 hereof, shall constitute "restricted securities" within the meaning
of Rule 144 under the Securities Act. The certificates for the shares of Parent
Common Stock to be issued in the Merger shall bear appropriate legends to
identify such privately placed shares as being restricted under the Securities
Act, to comply with applicable state securities laws and, if applicable, to
notice the restrictions on transfer of such shares. It is acknowledged and
understood that Parent is relying upon certain written representations made by
the Company Shareholders in the Shareholder Certificates in substantially the
form attached hereto as Exhibit G.
5.2 Access to Information. The Company shall afford Parent and its
accountants, counsel and other representatives reasonable access during normal
business hours during the period prior to the Effective Time to (a) all of the
Company's properties, books, contracts, commitments and records, and (b) all
other information concerning the business, properties and personnel (subject to
restrictions imposed by applicable law) of the Company as Parent may reasonably
request. The Company agrees to provide to Parent and its accountants, counsel
and other representatives copies of internal financial statements promptly upon
request. Parent shall provide the Company with copies of such publicly available
information about Parent as the Company may request and shall provide the
Company with reasonable access to its executive officers in this regard. No
information or knowledge obtained in any investigation pursuant to this Section
5.2 shall affect or be deemed to modify any representation or warranty contained
herein or the conditions to the obligations of the parties to consummate the
Merger.
5.3 Confidentiality.
(a) Each of the parties hereto hereby agrees that the information
obtained in any investigation pursuant to Section 5.2, or pursuant to the
negotiation and execution of this Agreement or the effectuation of the
transaction contemplated hereby, shall be treated by the party receiving it as
confidential ("Confidential Information"); provided, however, that the foregoing
shall not apply to information or knowledge which (a) a party can demonstrate
was already lawfully in its possession prior to the disclosure thereof by the
other party, (b) is generally known to the public and
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did not become so known through any violation of law, (c) became known to the
public through no fault of such party, (d) is later lawfully acquired by such
party from other sources, (e) is required to be disclosed by order of court or
government agency without subpoena powers or (f) which is disclosed in the
course of any litigation between any of the parties hereto.
(b) If this Agreement is terminated (i) any Confidential Information
obtained by a party shall not be used in competition with the other parties and
(ii) each of the parties hereto shall, and shall cause its officers, employees,
representatives, advisors and agents to, destroy or deliver to the other parties
all Confidential Information of such parties.
5.4 Expenses. Whether or not the Merger is consummated, all fees and
expenses incurred in connection with the Merger including, without limitation,
all legal, accounting, financial advisory, consulting and all other fees and
expenses of third parties ("Third Party Expenses") incurred by a party in
connection with the negotiation and effectuation of the terms and conditions of
this Agreement and the transactions contemplated hereby, shall be the obligation
of the respective party incurring such fees and expenses; provided, however,
that the cost of any audit of the Company by Parent shall be borne exclusively
by Parent, unless this Agreement is terminated, in which case the cost of such
audit shall be borne equally by Parent and the Company. In the case of the
Company, all Third Party Expenses shall be either paid or accrued by the Company
prior to the Effective Time.
5.5 Public Disclosure. Unless otherwise required by law, prior to the
Effective Time, no disclosure (whether or not in response to an inquiry) of the
subject matter of this Agreement shall be made by any party hereto unless
approved by Parent and the Company prior to release; provided, however, that
such approval shall not be unreasonably withheld, subject, in the case of
Parent, to Parent's obligation to comply with applicable securities laws and the
rules and regulations of the National Association of Securities Dealers, Inc.
5.6 Consents. The Company shall use its best efforts to obtain the
consents, waivers and approvals under any of the Contracts as may be required in
connection with the Merger (all of such consents, waivers and approvals are set
forth in Disclosure Letter) so as to preserve all rights of, and benefits to,
the Company thereunder.
5.7 FIRPTA Compliance. On the Closing Date, the Company shall deliver to
Parent a properly executed statement in a form reasonably acceptable to Parent
for purposes of satisfying Parent's obligations under Treasury Regulation
Section 1.1445-2(c)(3).
5.8 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this
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Agreement; provided, however, that Parent shall not be required to agree to any
divestiture by Parent or the Company or any of Parent's subsidiaries or
affiliates of shares of capital stock or of any business, assets or property of
Parent or its subsidiaries or affiliates or of the Company, its affiliates, or
the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock.
5.9 Notification of Certain Matters. The Company shall give prompt notice
to Parent, and Parent shall give prompt notice to the Company, of (i) the
occurrence or non-occurrence of any event, the occurrence or non-occurrence of
which is likely to cause any representation or warranty of the Company and
Parent, respectively, contained in this Agreement to be untrue or inaccurate at
or prior to the Effective Time and (ii) any failure of the Company or Parent, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 5.9 shall not limit or otherwise
affect any remedies available to the party receiving such notice.
5.10 Affiliate Agreements. Section 5.10 of the Disclosure Letter sets forth
those persons who are or may be "affiliates" of the Company within the meaning
of Rule 145 (each such person an "Affiliate") promulgated under the Securities
Act ("Rule 145"). The Company shall provide Parent such information and
documents as Parent shall reasonably request for purposes of reviewing such
list. The Company shall deliver or cause to be delivered to Parent, concurrently
with the execution of this Agreement (and in any case prior to the Closing Date)
from each of the Affiliates of the Company, an executed Affiliate Agreement in
the form attached hereto as Exhibit A. Parent and Sub shall be entitled to place
appropriate legends on the certificates evidencing any Parent Common Stock to be
received by such Affiliates pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for Parent
Common Stock, consistent with the terms of such Affiliate Agreements.
5.11 Additional Documents and Further Assurances. Each party hereto, at the
request of another party hereto, shall execute and deliver such other
instruments and do and perform such other acts and things as may be necessary or
desirable for effecting completely the consummation of the transactions
contemplated hereby.
5.12 Tax Free Reorganization. The parties intend to adopt this Agreement
and the Merger as a tax-free plan of reorganization under the Code. The parties
shall not take a position on any tax return inconsistent with the intentions of
the parties set forth in this Section 5.12
5.13 Shareholder Approval. As promptly as practicable after the execution
of this Agreement, the Company shall submit this Agreement and the transactions
contemplated hereby to the Company Shareholders for approval and adoption as
provided by California Law and its Articles of Incorporation and Bylaws and such
other documents necessary in order to satisfy the requirements of Section 4(2)
of the Securities Act and Regulation D thereunder in connection with the
issuance and sale of Parent Common Stock in the Merger. The Company shall use
its best efforts to solicit and obtain the consent of its shareholders
sufficient to approve the Merger and this Agreement and to enable the Closing to
occur as promptly as practicable. The materials submitted to the Company
Shareholders shall be subject to review and approval by Parent and include
information regarding
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the Company, the terms of the Merger and this Agreement and the unanimous
recommendation of the Board of Directors of the Company regarding the Merger and
this Agreement.
5.14 Proprietary Information and Confidentiality Agreements. Prior to the
Effective Time, each current employee and consultant of the Company will execute
a proprietary information and confidentiality agreement in form reasonably
acceptable to Parent.
ARTICLE VI
Conditions to the Merger
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) No Injunctions or Restraints; Illegality. No temporary
restraining order, preliminary or permanent injunction or other order issued by
any court of competent jurisdiction or other legal restraint or prohibition
preventing the consummation of the Merger shall be in effect, nor shall any
proceeding brought by an administrative agency or commission or other
governmental authority or instrumentality, domestic or foreign, seeking any of
the foregoing be pending; nor shall there be any action taken, or any statute,
rule, regulation or order enacted, entered, enforced or deemed applicable to the
Merger, which makes the consummation of the Merger illegal.
(b) Litigation. There shall be no bona fide action, suit, claim or
proceeding of any nature pending, or overtly threatened, against Parent, Sub or
the Company, their respective properties or any of their officers or directors,
arising out of, or in any way connected with, the Merger or the other
transactions contemplated by the terms of this Agreement.
6.2 Additional Conditions to Obligations of Company. The obligations of
the Company to consummate and effect this Agreement and the transactions
contemplated hereby shall be subject to the satisfaction at or prior to the
Effective Time of each of the following conditions, any of which may be waived,
in writing, exclusively by the Company:
(a) Representations, Warranties and Covenants. The representations
and warranties of Parent and Sub in this Agreement shall be true and correct in
all material respects on and as of the Effective Time as though such
representations and warranties were made on and as of such time and each of
Parent and Sub shall have performed and complied in all material respects with
all covenants and obligations of this Agreement required to be performed and
complied with by it as of the Effective Time.
(b) Claims. There shall not have occurred any claims (whether or not
asserted in litigation) which may materially and adversely affect the
consummation of the transactions contemplated hereby or the business, assets
(including intangible assets), financial condition or results of operations of
Parent and its subsidiaries, taken as a whole.
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(c) No Material Adverse Changes. There shall not have occurred any
material adverse change in the business, assets (including intangible assets),
financial condition, results of operations of Parent and its subsidiaries, taken
as a whole, since September 30, 1999.
(d) Legal Opinion. The Company shall have received a legal opinion
from Wilson Sonsini Goodrich & Rosati, legal counsel to Parent, in substantially
the form of Exhibit B-1 hereto.
(e) Certificate of Parent. Company shall have been provided with a
certificate executed on behalf of Parent by an officer of Parent to the effect
that, as of the Effective Time:
(i) all representations and warranties made by Parent and Sub
in this Agreement are true and correct in all material respects;
(ii) all covenants and obligations of this Agreement to be
performed by Parent on or before such date have been so performed in all
material respects.
(iii) the conditions set forth in Section 6.2 (b) and (c) have
been satisfied.
6.3 Additional Conditions to the Obligations of Parent and Sub. The
obligations of Parent and Sub to consummate and effect this Agreement and the
transactions contemplated hereby shall be subject to the satisfaction at or
prior to the Effective Time of each of the following conditions, any of which
may be waived, in writing, exclusively by Parent:
(a) Representations, Warranties and Covenants. The representations
and warranties of the Company and the Principal Shareholder in this Agreement
shall be true and correct in all material respects on and as of the Effective
Time as though such representations and warranties were made on and as of the
Effective Time and the Company shall have performed and complied in all material
respects with all covenants and obligations of this Agreement required to be
performed and complied with it as of the Effective Time.
(b) Claims. There shall not have occurred any third-party claims
(whether or not asserted in litigation) which may materially and adversely
affect the consummation of the transactions contemplated hereby or may have a
Material Adverse Effect.
(c) Third Party Consents. Any and all consents, waivers, and
approvals listed in the Disclosure Letter shall have been obtained.
(d) Legal Opinion. Parent shall have received a legal opinion from
Weiss & Weissman, Inc., legal counsel to the Company, in substantially the form
of Exhibit B-2 hereto.
(e) Employment and Non-competition Agreements. The persons listed on
Exhibit C-1 shall each have executed and delivered to Parent an Employment
Agreement in substantially the form attached hereto as Exhibit C-2 or Exhibit
C-3 as indicated, and a Non-
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competition Agreement in substantially the form attached hereto as Exhibit D,
and such Employment Agreements and Non-competition Agreements shall be in full
force and effect.
(f) Shareholder Certificate. Each Company Shareholder shall have
executed and delivered to Parent a Shareholder Certificate in substantially the
form attached hereto as Exhibit E.
(g) No Material Adverse Changes. There shall not have occurred any
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued) or financial
condition of the Company since December 31, 1998.
(h) Shareholder Approval. Company Shareholders holding at least 95%
of Company Capital Stock shall have approved this Agreement, the Merger and the
transactions contemplated thereby, and holders of not more than 5% of Company
Capital Stock shall continue to have a right to exercise appraisal, dissenters
or similar rights under applicable law with respect to their Company Capital
Stock by virtue of the Merger.
(i) Affiliate Agreements. Each of the persons listed in Section 5.10
of the Disclosure Letter shall have executed an Affiliate Agreement in
substantially the form attached as Exhibit A.
(j) Certificate of the Company. Parent shall have been provided with
a certificate executed on behalf of the Company by its Chief Executive Officer
to the effect that, as of the Effective Time:
(i) all representations and warranties made by the Company in
this Agreement are true and correct in all material respects; and
(ii) all covenants and obligations of this Agreement to be
performed by the Company on or before such date have been so performed in all
material respects.
(iii) the provisions set forth in Section 6.3 (b), (c), (f)
and (g) have been satisfied.
(k) Each of the directors of the Company shall have delivered to
Parent a letter of resignation from the Board of Directors of the Company.
ARTICLE VII
Survival of Representations and Warranties; Escrow
7.1 Survival of Representations and Warranties. All of the Company's and
the Principal Shareholder's representations and warranties in this Agreement or
in any instrument delivered pursuant to this Agreement shall survive the Merger
and continue until the earlier of the date which is the date of the auditor's
report for the first audit of Parent's financial statements after
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the Closing Date or the date which is one year following the Closing Date (the
"Expiration Date"). All of Parent's and Sub's representations and warranties
contained herein or in any instrument delivered pursuant to this Agreement shall
terminate at the Expiration Date.
7.2 Escrow Arrangements.
(a) Escrow Fund. As security for the indemnity provided for in
Section 7.2 hereof and by virtue of this Agreement, the Company Shareholders
will be deemed to have received and deposited with the Escrow Agent (as defined
below) the Escrow Amount (plus any additional shares as may be issued upon any
stock split, stock dividend or recapitalization effected by Parent after the
Effective Time) without any act of any Company Shareholder. As soon as
practicable after the Effective Time, the Escrow Amount, without any act of any
Company Shareholder, will be deposited with U.S. Bank Trust (or other
institution acceptable to Parent and the Company Shareholders) as Escrow Agent
(the "Escrow Agent"), such deposit to constitute an escrow fund (the "Escrow
Fund") to be governed by the terms set forth herein. The Escrow Agent may
execute this Agreement following the date hereof and prior to the Effective
Time, and such later execution, if so executed after the date hereof, shall not
affect the binding nature of this Agreement as of the date hereof between the
other signatories hereto. The portion of the Escrow Amount contributed on
behalf of each Company Shareholder shall be in proportion to the aggregate
Parent Common Stock which such holder would otherwise be entitled under Section
1.6(a). The Company Shareholders jointly agree to indemnify and hold Parent and
its officers, directors and affiliates (the "Indemnified Parties") harmless
against all claims, losses, liabilities, damages, deficiencies, costs and
expenses, including reasonable attorneys' fees and expenses of investigation
(hereinafter individually a "Loss" and collectively "Losses") incurred by
Parent, its officers, directors, or affiliates (including the Surviving
Corporation) directly or indirectly as a result of (i) any inaccuracy or breach
of a representation or warranty of the Company contained in this Agreement, or
(ii) any failure by the Company to perform or comply with any covenant contained
in this Agreement; provided, however, that, except as set forth in Section 7.4,
the aggregate amount for which the Company Shareholders are required to
indemnify the Indemnified Parties shall not exceed the amount deposited in the
Escrow Fund. The Escrow Fund shall be available to compensate Parent and its
affiliates for any such Losses. The Company Shareholders shall not have any
right of contribution from the Company with respect to any Loss claimed by
Parent after the Effective Time. Nothing herein shall limit the liability of
the Company and the Principal Shareholder for any breach of any representation,
warranty or covenant if the Merger does not close for reasons other than
Parent's breach of its obligations hereunder. Parent may not receive any shares
from the Escrow Fund unless and until an Officer's Certificate (as defined in
paragraph (d) below) identify Losses have been delivered to the Escrow Agent as
provided in paragraph (d) below.
(b) Escrow Period; Distribution upon Termination of Escrow Periods.
Subject to the following requirements, the Escrow Fund shall be in existence
immediately following the Effective Time and shall terminate on the Expiration
Date (the "Escrow Period"); provided, however, that the Escrow Period shall not
terminate with respect to any amount which, in reasonable judgement of Parent,
subject to the objection of the Shareholder Representative (as defined in
Section 7.3 below) and the subsequent arbitration of the matter in the manner
provided in
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Section 7.2(f) hereof, is necessary to satisfy any unsatisfied claims specified
in any Officer's Certificate delivered to the Escrow Agent prior to termination
of such Escrow Period with respect to facts and circumstances existing prior to
the termination of such Escrow Period. As soon as all such claims have been
resolved, the Escrow Agent shall deliver to the Company Shareholders the
remaining portion of the Escrow Fund not required to satisfy such claims.
Deliveries of Escrow Amounts to the Company Shareholders pursuant to this
Section 7.2(b) shall be made in proportion to their respective original
contributions to the Escrow Fund.
(c) Protection of Escrow Fund.
(i) The Escrow Agent shall hold and safeguard the Escrow Fund
during the Escrow Period, shall treat such fund as a trust fund in accordance
with the terms of this Agreement and not as the property of Parent and shall
hold and dispose of the Escrow Fund only in accordance with the terms hereof.
(ii) Any shares of Parent Common Stock or other equity
securities issued or distributed by Parent (including shares issued upon a stock
split) ("New Shares") in respect of Parent Common Stock in the Escrow Fund which
have not been released from the Escrow Fund shall be added to the Escrow Fund
and become a part thereof. New Shares issued in respect of shares of Parent
Common Stock which have been released from the Escrow Fund shall not be added to
the Escrow Fund but shall be distributed to the record holders thereof. Cash
dividends on Parent Common Stock shall not be added to the Escrow Fund but shall
be distributed to the record holders thereof.
(iii) Each Company Shareholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Shareholder (and on any voting securities added to the Escrow Fund
in respect of such shares of Parent Common Stock).
(d) Claims Upon Escrow Fund.
(i) Upon receipt by the Escrow Agent at any time on or before
the last day of the Escrow Period of a certificate signed by any officer of
Parent (an "Officer's Certificate"): (A) stating that Parent has paid or
properly accrued or, with respect to third-party claims of which Parent, the
Company or the Surviving Corporation has received notice, reasonably anticipates
that it will have to pay or accrue Losses, and (B) specifying in reasonable
detail the individual items of Losses included in the amount so stated, the date
each such item was paid or properly accrued, or the basis for such anticipated
liability, and the nature of the misrepresentation, breach of warranty or
covenant to which such item is related, the Escrow Agent shall, subject to the
provisions of Section 7.2(e) hereof, deliver to Parent out of the Escrow Fund,
as promptly as practicable, shares of Parent Common Stock held in the Escrow
Fund with a value equal to such Losses.
(ii) For the purposes of determining the number of shares of
Parent Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to
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Section 7.2(d)(i) hereof, the shares of Parent Common Stock shall be valued at
the closing price of the Parent Common Stock on the Nasdaq Stock Market on the
Closing Date.
(e) Objections to Claims. At the time of delivery of any Officer's
Certificate to the Escrow Agent, a duplicate copy of such certificate shall be
delivered to the Shareholder Representatives, and for a period of thirty (30)
days after such delivery, the Escrow Agent shall make no delivery to Parent of
any Escrow Amounts pursuant to Section 7.2(d) hereof unless the Escrow Agent
shall have received written authorization from the Shareholder Representative to
make such delivery. After the expiration of such thirty (30) day period, the
Escrow Agent shall make delivery of shares of Parent Common Stock from the
Escrow Fund in accordance with Section 7.2(d) hereof; provided, however, that no
such payment or delivery may be made if the Shareholder Representative shall
object in a written statement to the claim made in the Officer's Certificate,
and such statement shall have been delivered to the Escrow Agent prior to the
expiration of such thirty (30) day period.
(f) Resolution of Conflicts; Arbitration.
(i) In case the Shareholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate, the
Shareholder Representative and Parent shall attempt in good faith to agree upon
the rights of the respective parties with respect to each of such claims. If the
Shareholder Representative and Parent should so agree, a memorandum setting
forth such agreement shall be prepared and signed by both parties and shall be
furnished to the Escrow Agent. The Escrow Agent shall be entitled to rely on any
such memorandum and distribute shares of Parent Common Stock from the Escrow
Fund in accordance with the terms thereof.
(ii) If no such agreement can be reached after good faith
negotiation, either Parent or the Shareholder Representative may demand
arbitration of the matter unless the amount of the damage or Loss is at issue in
pending litigation with a third party, in which event arbitration shall not be
commenced until such amount is ascertained or both parties agree to arbitration;
and in either such event the matter shall be settled by arbitration conducted by
one arbitrator mutually agreeable to Parent and the Shareholder Representative.
In the event that within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Shareholder Representative cannot mutually agree on
one arbitrator, Parent and the Shareholder Representative shall each select one
arbitrator, and the two arbitrators so selected shall select a third arbitrator.
The arbitrator or arbitrators, as the case may be, shall set a limited time
period and establish procedures designed to reduce the cost and time for
discovery while allowing the parties an opportunity, adequate in the sole
judgement of the arbitrator or majority of the three arbitrators, as the case
may be, to discover relevant information from the opposing parties about the
subject matter of the dispute. The arbitrator or a majority of the three
arbitrators, as the case may be, shall rule upon motions to compel or limit
discovery and shall have the authority to impose sanctions, including attorneys'
fees and costs, to the extent as a competent court of law or equity, should the
arbitrators or a majority of the three arbitrators, as the case may be,
determine that discovery was sought without substantial justification or that
discovery was refused or objected to without substantial justification. The
decision of the arbitrator or a majority of the three arbitrators, as the case
may be, as to the
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validity and amount of any claim in such Officer's Certificate shall be binding
and conclusive upon the parties to this Agreement. Such decision shall be
written and shall be supported by written findings of fact and conclusions which
shall set forth the award, judgment, decree or order awarded by the
arbitrator(s).
(iii) Judgment upon any award rendered by the arbitrator(s)
may be entered in any court having jurisdiction. Any such arbitration shall be
held in Palo Alto, California, under the rules then in effect of the American
Arbitration Association. The arbitrator(s) shall determine how all expenses
relating to the arbitration shall be paid, including without limitation, the
respective expenses of each party, the fees of each arbitrator and the
administrative fee of the American Arbitration Association.
(g) Third-Party Claims. In the event Parent becomes aware of a third-
party claim which Parent believes may result in a demand against the Escrow
Fund, Parent shall notify the Shareholder Representative of such claim, and the
Company Shareholders shall be entitled, at their expense, to participate in any
defense of such claim. Parent shall have the right in its sole discretion to
settle any such claim; provided, however, that except with the consent of the
Shareholder Representative, no settlement of any such claim with third-party
claimants shall be determinative of the amount of any claim against the Escrow
Fund. In the event that the Shareholder Representative has consented to any
such settlement, the Company Shareholders shall have no power or authority to
object under any provision of this Article VII to the amount of any claim by
Parent against the Escrow Fund with respect to such settlement.
(h) Escrow Agent's Duties.
(i) The Escrow Agent shall be obligated only for the
performance of such duties as are specifically set forth herein, and as set
forth in any additional written escrow instructions which the Escrow Agent may
receive after the date of this Agreement which are signed by an officer of
Parent and the Shareholder Representative, and may rely and shall be protected
in relying or refraining from acting on any instrument reasonably believed to be
genuine and to have been signed or presented by the proper party or parties. The
Escrow Agent shall not be liable for any act done or omitted hereunder as Escrow
Agent while acting in good faith and in the exercise of reasonable judgment, and
any act done or omitted pursuant to the advice of counsel shall be conclusive
evidence of such good faith.
(ii) The Escrow Agent is hereby expressly authorized to
disregard any and all warnings given by any of the parties hereto or by any
other person, excepting only orders or process of courts of law, and is hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case the Escrow Agent obeys or complies with any such order, judgment
or decree of any court, the Escrow Agent shall not be liable to any of the
parties hereto or to any other person by reason of such compliance,
notwithstanding any such order, judgment or decree being subsequently reversed,
modified, annulled, set aside, vacated or found to have been entered without
jurisdiction.
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(iii) The Escrow Agent shall not be liable in any respect on
account of the identity, authority or rights of the parties executing or
delivering or purporting to execute or deliver this Agreement or any documents
or papers deposited or called for hereunder.
(iv) The Escrow Agent shall not be liable for the expiration of any
rights under any statute of limitations with respect to this Agreement or any
documents deposited with the Escrow Agent.
(v) In performing any duties under the Agreement, the Escrow Agent
shall not be liable to any party for damages, losses, or expenses, except for
negligence or willful misconduct on the part of the Escrow Agent. The Escrow
Agent shall not incur any such liability for (A) any act or failure to act made
or omitted in good faith, or (B) any action taken or omitted in reliance upon
any instrument, including any written statement of affidavit provided for in
this Agreement that the Escrow Agent shall in good faith believe to be genuine,
nor will the Escrow Agent be liable or responsible for forgeries, fraud,
impersonations, or determining the scope of any representative authority. In
addition, the Escrow Agent may consult with the legal counsel in connection with
Escrow Agent's duties under this Agreement and shall be fully protected in any
act taken, suffered, or permitted by him/her in good faith in accordance with
the advice of counsel. The Escrow Agent is not responsible for determining and
verifying the authority of any person acting or purporting to act on behalf of
any party to this Agreement.
(vi) If any controversy arises between the parties to this
Agreement, or with any other party, concerning the subject matter of this
Agreement, its terms or conditions, the Escrow Agent will not be required to
determine the controversy or to take any action regarding it. The Escrow Agent
may hold all documents and shares of Parent Common Stock and may wait for
settlement of any such controversy by final appropriate legal proceedings or
other means as, in the Escrow Agent's discretion, the Escrow Agent may be
required, despite what may be set forth elsewhere in this Agreement. In such
event, the Escrow Agent will not be liable for damage. Furthermore, the Escrow
Agent may at its option, file an action of interpleader requiring the parties to
answer and litigate any claims and rights among themselves. The Escrow Agent is
authorized to deposit with the clerk of the court all documents and shares of
Parent Common Stock held in escrow, except all cost, expenses, charges and
reasonable attorney fees incurred by the Escrow Agent due to the interpleader
action and which the parties jointly and severally agree to pay. Upon initiating
such action, the Escrow Agent shall be fully released and discharged of and from
all obligations and liability imposed by the terms of this Agreement.
(vii) The parties and their respective successors and assigns
agree jointly and severally to indemnify and hold Escrow Agent harmless against
any and all losses, claims, damages, liabilities, and expenses, including
reasonable costs of investigation, counsel fees, including allocated costs of
in-house counsel and disbursements that may be imposed on Escrow Agent or
incurred by Escrow Agent in connection with the performance of his/her duties
under this Agreement, including but not limited to any litigation arising from
this Agreement or involving its subject matter other than arising out of its
negligence or willful misconduct.
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<PAGE>
(viii) The Escrow Agent may resign at any time upon giving at
least thirty (30) days written notice to the parties; provided, however, that no
such resignation shall become effective until the appointment of a successor
escrow agent which shall be accomplished as follows: the parties shall use their
best efforts to mutually agree on a successor escrow agent within thirty (30)
days after receiving such notice. If the parties fail to agree upon a successor
escrow agent within such time, the Escrow Agent shall have the right to appoint
a successor escrow agent authorized to do business in the state of California.
The successor escrow agent shall execute and deliver an instrument accepting
such appointment and it shall, without further acts, be vested with all the
estates, properties, rights, powers, and duties of the predecessor escrow agent
as if originally named as escrow agent. Upon appointment of a successor escrow
agent, the Escrow Agent shall be discharged from any further duties and
liability under this Agreement.
(i) Fees. All fees of the Escrow Agent for performance of its duties
hereunder shall be paid by Parent in accordance with the standard fee schedule
of the Escrow Agent, attached hereto as EXHIBIT F. It is understood that the
fees and usual charges agreed upon for services of the Escrow Agent shall be
considered compensation for ordinary services as contemplated by this Agreement.
In the event that the conditions of this Agreement are not promptly fulfilled,
or if the Escrow Agent renders any service not provided for in this Agreement,
or if the parties request a substantial modification of its terms, or if any
controversy arises, or if the Escrow Agent is made a party to, or intervenes in,
any litigation pertaining to the Escrow Fund or its subject matter, the Escrow
Agent shall be reasonably compensated for such extraordinary services and
reimbursed for all costs, attorney's fees, including allocated costs of in-house
counsel, and expenses occasioned by such default, delay, controversy or
litigation.
(j) Consequential Damages. In no event shall the Escrow Agent be
liable for special, indirect or consequential loss or damage of any kind
whatsoever (including but not limited to lost profits), even if the Escrow Agent
has been advised of the likelihood of such loss or damage and regardless of the
form of action.
(k) Successor Escrow Agents. Any corporation into which the Escrow
Agent in its individual capacity may be merged or converted or with which it may
be consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Escrow Agent in its individual capacity shall be a
party, or any corporation to which substantially all the corporate trust
business of the Escrow Agent in its individual capacity may be transferred,
shall be the Escrow Agent under this Escrow Agreement without further act.
7.3 Shareholder Representative.
(a) In the event that the Merger is approved, effective upon such
vote, and without further act of any Company Shareholder, _________ shall be
appointed as agent and attorney-in-fact (the "Shareholder Representative") for
each Company Shareholder, for and on behalf of the Company Shareholders, to give
and receive notices and communications, to authorize delivery to Parent of
shares of Parent Common Stock from the Escrow Fund in satisfaction of claims by
Parent, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to
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<PAGE>
such claims, and to take all actions necessary or appropriate in the judgment of
the Shareholder Representative for the accomplishment of the foregoing. Such
agency may be changed by the Company Shareholders from time to time upon not
less than thirty (30) days prior written notice to Parent; provided, however,
that the Shareholder Representative may not be removed unless holders of a two-
thirds interest in the Escrow Fund agree to such removal and to the identity of
the substituted agent. Any vacancy in the position of Shareholder Representative
may be filled by approval of the holders of a majority in interest in the Escrow
Fund. No bond shall be required of the Shareholder Representatives, and a
Shareholder Representative shall not receive compensation for his or her
services. Notices or communications to or from the Shareholder Representatives
shall constitute notice to or from each of the Company Shareholder.
(b) The Shareholder Representative shall not be liable for any act
done or omitted hereunder as Shareholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Shareholders on
whose behalf the Escrow Amount was contributed to the Escrow Fund shall
severally indemnify the Shareholder Representative and hold the Shareholder
Representative harmless against any loss, liability or expense incurred without
negligence or bad faith on the part of the Shareholder Representative and
arising out of or in connection with the acceptance or administration of the
Shareholder Representative's duties hereunder, including the reasonable fees and
expenses of any legal counsel retained by the Shareholder Representative.
(c) A decision, act, consent or instruction of the Shareholder
Representative shall constitute a decision of all Company Shareholders for whom
a portion of the Escrow Amount otherwise issuable to them are deposited in the
Escrow Fund and shall be final, binding and conclusive upon each of such Company
Shareholders, and the Escrow Agent and Parent may rely upon any such decision,
act, consent or instruction of the Shareholder Representatives as being the
decision, act, consent or instruction of each and every such Company
Shareholder. The Escrow Agent and Parent are hereby relieved from any liability
to any person for any acts done by them in accordance with such decision, act,
consent or instruction of the Shareholder Representatives.
7.4 Exclusive Remedy. The indemnity set forth in this Article VII and the
Escrow Fund provided for herein shall apply only to breaches by the Company of
any representation, warranty, covenant or agreement of the Company contained
herein, by reason of any misrepresentation by the Company made in or pursuant to
Article II of this Agreement, and, except as provided below, resort to the
Escrow Fund shall be the exclusive right and remedy of Parent for such breaches,
or for breaches of any Shareholder Certificate or otherwise under or in
connection with this Agreement, once the Closing occurs. Notwithstanding the
foregoing, the existence of this Article VII and of the rights and restrictions
set forth herein do not limit any other potential remedies of Parent with
respect to any knowing and intentional or fraudulent actual breaches of the
representations and warranties or covenants of the Company contained in any
Article of this Agreement or of any Company Shareholder contained in a
Shareholder Certificate.
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<PAGE>
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1 Termination. Except as provided in Section 8.2 below, this Agreement
may be terminated and the Merger abandoned at any time prior to the Effective
Time:
(a) by mutual consent of the Company and Parent;
(b) by Parent or the Company if: (i) the Effective Time has not
occurred by December 31, 1999; (ii) there shall be a final nonappealable order
of a federal or state court in effect preventing consummation of the Merger; or
(iii) there shall be any statute, rule, regulation or order enacted, promulgated
or issued or deemed applicable to the Merger by any Governmental Entity that
would make consummation of the Merger illegal;
(c) by Parent if there shall be any action taken, or any statute,
rule, regulation or order enacted, promulgated or issued or deemed applicable to
the Merger by any Governmental Entity, which would: (i) prohibit Parent's or
Sub's ownership or operation of any portion of the business of the Company or
(ii) compel Parent or the Company to dispose of or hold separate all or a
portion of the business or assets of the Company or Parent as a result of the
Merger;
(d) by Parent if it is not in material breach of its obligations under
this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of the
Company and such breach has not been cured within ten (10) calendar days after
written notice to the Company; provided, however, that, no cure period shall be
required for a breach which by its nature cannot be cured;
(e) by the Company if it is not in material breach of its obligations
under this Agreement and there has been a material breach of any representation,
warranty, covenant or agreement contained in this Agreement on the part of
Parent or Sub and such breach has not been cured within ten (10) calendar days
after written notice to Parent; provided, however, that, no cure period shall be
required for a breach which by its nature cannot be cured;
(f) by Parent or Sub if an event having a Material Adverse Effect on
the Company shall have occurred after the date of this Agreement;
(g) by the Company if an event having a material adverse effect on the
business, assets (including intangible assets), financial condition or results
of operations of Parent shall have occurred after the date of this Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
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<PAGE>
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub, the Company, or
their respective officers, directors or shareholders; provided, however, that
each party shall remain liable for any breaches of this Agreement prior to its
termination; and provided, further, that the provisions of Sections 5.3, 5.4,
5.5 and this Article VIII of this Agreement shall remain in full force and
effect and survive any termination of this Agreement.
8.3 Amendment. This Agreement may be amended by the parties hereto at any
time by execution of an instrument in writing signed on behalf of each of the
parties hereto.
8.4 Extension; Waiver. At any time prior to the Effective Time, Parent and
Sub, on the one hand, and the Company, on the other, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations of
the other party hereto, (ii) waive any inaccuracies in the representations and
warranties made to such party contained herein or in any document delivered
pursuant hereto, and (iii) waive compliance with any of the agreements or
conditions for the benefit of such party contained herein. Any agreement on the
part of a party hereto to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party.
ARTICLE IX
GENERAL PROVISIONS
9.1 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
messenger or courier service, or mailed by registered or certified mail (return
receipt requested) or sent via facsimile (with acknowledgment of complete
transmission) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Parent or Sub, to:
Tut Systems, Inc.
2495 Estrand Way
Pleasant Hill, CA 94538
Attention: Salvator D'Auria
Telephone No.: (925) 682-6510
Facsimile No: (925) 682-1841
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<PAGE>
with a copy to:
Wilson Sonsini Goodrich & Rosati
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304
Attention: Steven E. Bochner, Esq.
Telephone No.: (650) 493-9300
Facsimile No.: (650) 461-5375
(b) if to the Company, to:
Vintel Communications, Inc.
1330 Broadway, Suite 1532
Oakland, CA 94612
Telephone No.: (510) 286-2091
Facsimile No.: (510) 628-0475
Attention: Peter C. Vinsel
with a copy to:
Weiss & Weissman, Inc.
601 California Street, Suite 1307
San Francisco, CA 94108
Telephone No: (415) 352-0770
Facsimile No.: (415) 986-8930
Attention: Jeffrey M. Weiss
(c) if to the Shareholder Representative, to:
____________________
____________________
____________________
Telephone No.: _____________
Facsimile No.: _____________
Weiss & Weissman, Inc.
601 California Street, Suite 1307
San Francisco, CA 94108
Telephone No: (415) 352-0770
Facsimile No.: (415) 986-8930
Attention: Jeffrey M. Weiss
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<PAGE>
(d) if to the Escrow Agent, to:
U.S. Bank Trust National Association
One California Street, 4th Floor
San Francisco, CA 94111
Telephone No.: (415) 273-4534
Facsimile No.: (415) 273-4593
Attention: Cora Murphy
9.2 Interpretation. The words "include," "includes" and "including" when
used herein shall be deemed in each case to be followed by the words "without
limitation." The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
9.4 Entire Agreement; Assignment. This Agreement, the Exhibits hereto and
the Disclosure Letter, and the documents and instruments and other agreements
among the parties hereto referenced herein: (a) constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings both written and oral, among the parties
with respect to the subject matter hereof; (b) are not intended to confer upon
any other person any rights or remedies hereunder; and (c) shall not be assigned
by operation of law or otherwise except as otherwise specifically provided,
except that Parent and Sub may assign their respective rights and delegate their
respective obligations hereunder to their respective affiliates.
9.5 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent jurisdiction
to be illegal, void or unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the parties hereto. The parties further agree to replace such void or
unenforceable provision of this Agreement with a valid and enforceable provision
that will achieve, to the extent possible, the economic, business and other
purposes of such void or unenforceable provision.
9.6 Other Remedies. Except as otherwise provided herein, any and all
remedies herein expressly conferred upon a party will be deemed cumulative with
and not exclusive of any other remedy conferred hereby, or by law or equity upon
such party, and the exercise by a party of any one remedy will not preclude the
exercise of any other remedy.
9.7 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws that
might otherwise govern under applicable principles of conflicts of laws thereof.
Each of the parties hereto irrevocably consents to the exclusive jurisdiction
and venue of any court within Santa Clara County, California, in
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connection with any matter based upon or arising out of this Agreement or the
matters contemplated herein, agrees that process may be served upon them in any
manner authorized by the laws of the State of California for such persons and
waives and covenants not to assert or plead any objection which they might
otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company, the Principal Shareholder,
the Shareholder Representative and the Escrow Agent have caused this Agreement
to be signed by their duly authorized respective officers, all as of the date
first written above.
TUT SYSTEMS, INC. VINTEL COMMUNICATIONS, INC.
By:_______________________ By:_____________________________
Nelson B. Caldwell Peter C. Vinsel
Vice President and Chief Financial Officer President
SHAREHOLDER REPRESENTATIVE VINTEL ACQUISITION CORPORATION
(As to the provisions of Article VII only)
__________________________ By:_______________________________
Nelson B. Caldwell
Chief Financial Officer
and Secretary
U.S. BANK TRUST PRINCIPAL SHAREHOLDER
(As to the provisions of Article VII only)
By:_______________________ ________________________________
Peter C. Vinsel
Name:_____________________
Title:____________________
***REORGANIZATION AGREEMENT***
<PAGE>
INDEX OF EXHIBITS
Exhibit Description
- ------- -----------
Exhibit A Form of Company Affiliate Agreement
Exhibit B-1 Form of Legal Opinion of Counsel to Parent
Exhibit B-2 Form of Legal Opinion of Counsel to Company
Exhibit C-1 List of Employees Signing Employment and Non-competition
Agreements
Exhibit C-2 Form of Employment Agreement
Exhibit C-3 Form of At-Will Employment Offer
Exhibit D Form of Non-competition Agreement
Exhibit E Form of Shareholder Certificate
Exhibit F Escrow Agent Fee Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TUT SYSTEMS,
INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 16,977
<SECURITIES> 23,442
<RECEIVABLES> 8,923
<ALLOWANCES> (260)
<INVENTORY> 4,784
<CURRENT-ASSETS> 55,306
<PP&E> 4,707
<DEPRECIATION> 1,783
<TOTAL-ASSETS> 60,570
<CURRENT-LIABILITIES> 7,403
<BONDS> 0
0
0
<COMMON> 12
<OTHER-SE> 50,845
<TOTAL-LIABILITY-AND-EQUITY> 60,570
<SALES> 15,887
<TOTAL-REVENUES> 17,165
<CGS> 9,501
<TOTAL-COSTS> 9,503
<OTHER-EXPENSES> 16,355
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 467
<INCOME-PRETAX> (7,574)
<INCOME-TAX> 1
<INCOME-CONTINUING> (7,575)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,575)
<EPS-BASIC> (0.75)
<EPS-DILUTED> (0.75)
</TABLE>
