<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
February 14, 2000
Date of Report (Date of earliest event reported)
TUT SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 0-25291 94-2958543
- ------------------------------ ------------------------------- -------------------------------
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation) Identification No.)
</TABLE>
2495 ESTAND WAY
PLEASANT HILL, CALIFORNIA 94523
(Address of principal executive offices, including zip code)
(925) 682-6510
(Registrant's telephone number, including area code)
N/A
(Former name or address, if changed since last report)
<PAGE>
Item 2. Acquisition or Disposition of Assets
------------------------------------
Pursuant to an Agreement and Plan of Reorganization dated as of November
16, 1999 (the "Agreement") among Tut Systems, Inc., a Delaware corporation
("Tut"), Fortress Acquisition Corporation, a Delaware corporation and a wholly
owned subsidiary of Tut ("Sub"), FreeGate Corporation ("FreeGate"), U.S. Bank
Trust, as Escrow Agent and, with respect to Article VII only, James Mongiello,
as Stockholder Representative, on February 14, 2000 (the "Closing"), Tut
acquired FreeGate by means of a merger of FreeGate with and into Sub (the
"Merger"). As a result of the Merger, each share of FreeGate capital stock was
converted into shares of Tut Common Stock according to the following exchange
ratios: 0.017617 shares of Tut Common Stock for each share of FreeGate common
stock, 0.001516 shares of Tut Common Stock for each share of Series A Preferred
Stock, 0.009476 shares of Tut Common Stock for each share of Series B Preferred
Stock, 0.021478 shares of Tut Common Stock for each share of Series C Preferred
Stock, 0.037903 shares of Tut Common Stock for each share of Series D Preferred
Stock. All options and warrants to purchase shares of FreeGate capital stock
were cancelled upon the Closing. The Company issued options to purchase Tut
Common Stock in substitution for 1,113,000 cancelled options at an exchange
ratio of 0.017617 shares of Tut Common Stock for each one share of FreeGate
common stock subject to those options. At the Closing, ten percent of the
shares issued pursuant to the Merger were deposited into an escrow account to
secure the indemnification obligations of FreeGate (the "Escrow Fund"). The
Escrow fund is to be governed by the terms set forth in the Agreement at Tut's
cost and expense. The Escrow Fund shall be the sole source of funds available
for the fulfillment of any indemnification obligations of FreeGate to Tut and
Sub.
The provisions of the Agreement described in this report are qualified in
their entirety by reference to the actual text of that agreement, included as an
exhibit to this report.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
The audited financial statements for the years ended December 31, 1998
and 1999 of Freegate Corporation.
(b) Pro Forma Financial Information.
The unaudited pro forma combined statement of operations for the year
ended December 31, 1999 gives effect to the transaction as if it had taken place
on January 1, 1999. The unaudited pro forma combined balance sheet as of
December 31, 1999 gives effect to the transaction as if it had taken place on
December 31, 1999. The unaudited pro forma financial information is not
necessarily indicative of the results or financial position that would actually
have been reported had the sale and purchase transactions underlying the pro
forma adjustments actually been consummated on such dates nor is it necessarily
indicative of future operating results or financial position.
(c) Exhibits.
The following exhibits are filed herewith:
<PAGE>
2.1 Agreement and Plan of Reorganization dated as of November 16,
1999, as amended, by and among Tut Systems, Inc., Fortress
Acquisition Corporation, FreeGate Corporation, U.S. Bank Trust,
as Escrow Agent, and, with respect to Article VII only, James
Mongiello, as stockholder representative.*
______________________
* Certain exhibits to, and schedules delivered in connection with, the
Agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Tut
agrees to supplementally furnish to the Commission a copy of any such exhibit
or schedule upon request.
-2-
<PAGE>
Item 7(a) Financial Statements of Business Acquired:
FREEGATE CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants.......................................... F-2
Independent Auditors' Report............................................... F-3
Balance Sheets............................................................. F-4
Statements of Operations................................................... F-5
Statements of Stockholder's Equity (Deficit)............................... F-6
Statements of Cash Flows................................................... F-7
Notes to Financial Statements.............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
FreeGate Corporation
In our opinion, the accompanying balance sheet as of December 31, 1999 and
the related statements of operations, of cash flows, and of stockholders'
equity (deficit) present fairly, in all material respects, the financial
position of FreeGate Corporation at December 31, 1999, and the results of its
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
San Jose, California
February 14, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors of
FreeGate Corporation
We have audited the accompanying balance sheet of FreeGate Corporation (the
"Company") as of December 31, 1998, and the related statements of operations,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FreeGate Corporation as of
December 31, 1998, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred net losses and negative operating cash
flows since inception that cause substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. Continuation of the Company as a going concern is
dependent upon management's ability to obtain additional financing and the
successful development and marketing of its products. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
Mountain View, California
April 23, 1999, except
as to Note 7, which is
as of November 1, 1999
F-3
<PAGE>
FREEGATE CORPORATION
BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 6,120 $ 130
Accounts receivable, net of allowance for doubtful
accounts of $201 and $132, respectively ................. 557 403
Inventory ................................................ 497 210
Prepaid expenses and other current assets ................ 80 224
-------- --------
Total current assets ................................... 7,254 967
Property and equipment, net ................................ 661 394
Other assets ............................................... 50 52
-------- --------
Total assets ........................................... $ 7,965 $ 1,413
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ......................................... $ 306 $ 465
Accrued liabilities ...................................... 690 734
Notes payable ............................................ -- 895
Capital lease obligations ................................ 281 323
Deferred revenue ......................................... 112 418
-------- --------
Total current liabilities .............................. 1,389 2,835
Capital lease obligations, net of current portion .......... 547 279
Deferred revenue, net of current portion.................... 220 134
-------- --------
Total liabilities ...................................... 2,156 3,248
-------- --------
Commitments and contingencies (Note 5)
Stockholders' equity (deficit):
Convertible preferred stock, $0.0001 par value:
Series A: 2,500 shares authorized; 2,500 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $300 ......................... -- --
Series B: 5,200 shares authorized; 5,067 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $3,800 ....................... -- --
Series C: 5,000 shares authorized; 4,706 shares issued
and outstanding as of December 31, 1998 and 1999;
liquidation preference of $8,000........................ -- --
Series D: 5,000 shares authorized; 4,442 shares issued
and outstanding as of December 31, 1998 and 1999,
respectively; liquidation preference of $13,325 ........ -- --
Restricted common stock, $0.0001 par value; 35,000 shares
authorized; 9,272 and 10,048 shares issued and
outstanding as of December 31, 1998 and 1999,
respectively ............................................ -- --
Additional paid-in capital ............................... 25,779 26,443
Notes receivable from stockholders ....................... (143) (275)
Accumulated deficit ...................................... (19,827) (28,003)
-------- --------
Total stockholders' equity (deficit).................... 5,809 (1,835)
-------- --------
Total liabilities and stockholders' equity (deficit).. $ 7,965 $ 1,413
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Revenue ................................................... $ 2,824 $ 2,134
Cost of revenue ........................................... 1,819 1,159
-------- -------
Gross profit .............................................. 1,005 975
-------- -------
Operating expenses:
Sales and marketing ..................................... 5,771 3,636
Research and development ................................ 4,178 3,899
General and administrative .............................. 1,807 1,406
Noncash expense.......................................... 17 221
-------- -------
Total operating expenses .............................. 11,773 9,162
-------- -------
Loss from operations ...................................... (10,768) (8,187)
Interest expense........................................... (100) (62)
Interest income............................................ 207 76
-------- -------
Loss before income taxes .................................. (10,661) (8,173)
Income taxes .............................................. 1 3
-------- -------
Net loss .................................................. $(10,662) $(8,176)
======== =======
Net loss per share, basic and diluted ................... $ (1.73) $ (1.03)
======== =======
Shares used in computing basic and diluted net loss per
share..................................................... 6,149 7,964
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1998 AND 1999
(in thousands)
<TABLE>
<CAPTION>
Convertible Preferred Stock
-------------------------------------------------------
Restricted Notes
Series A Series B Series C Series D common stock Additional Receivable
------------- ------------- ------------- ------------- -------------- Paid-In from Accumulated
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital Stockholders Deficit
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ---------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1997............ 2,500 $ -- 5,067 $ -- 4,706 $ -- -- $ -- 8,963 $ -- $12,338 $ -- $ (9,165)
Issuance of
Series D
preferred stock,
net of issuance
costs of $90.... -- -- -- -- -- -- 4,442 -- -- -- 13,235 -- --
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (790) -- (72) -- --
Issuance of
common stock--
options
exercised....... -- -- -- -- -- -- -- -- 964 -- 221 -- --
Issuance of
common stock in
exchange for
legal services.. -- -- -- -- -- -- -- -- 135 -- 40 -- --
Warrants issued
in connection
with capital
lease........... -- -- -- -- -- -- -- -- -- -- 17 -- --
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- -- -- -- -- (143) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- (10,662)
----- ---- ----- ---- ----- ---- ----- ---- ------ ---- ------- ----- --------
Balances,
December 31,
1998............ 2,500 -- 5,067 -- 4,706 -- 4,442 -- 9,272 -- 25,779 (143) (19,827)
Repurchase of
common stock.... -- -- -- -- -- -- -- -- (400) -- (49) -- --
Issuance of
common stock--
options
exercised....... -- -- -- -- -- -- -- -- 886 354 -- --
Issuance of
common stock in
exchange for
services........ -- -- -- -- -- -- -- -- 290 -- 69 -- --
Warrants issued
under capital
lease........... -- -- -- -- -- -- -- -- -- -- 17 -- --
Warrants issued
under financing
activity........ -- -- -- -- -- -- -- -- -- -- 273 -- --
Issuance of
notes receivable
from
stockholders.... -- -- -- -- -- -- -- -- -- -- -- (132) --
Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- (8,176)
----- ---- ----- ---- ----- ---- ----- ---- ------ ---- ------- ----- --------
Balances,
December 31,
1999............ 2,500 $ -- 5,067 $ -- 4,706 $ -- 4,442 $ -- 10,048 $ -- $26,443 $(275) $(28,003)
===== ==== ===== ==== ===== ==== ===== ==== ====== ==== ======= ===== ========
<CAPTION>
Total
Stockholders'
Equity
(Deficit)
-------------
<S> <C>
Balances,
December 31,
1997............ $ 3,173
Issuance of
Series D
preferred stock,
net of issuance
costs of $90.... 13,235
Repurchase of
common stock.... (72)
Issuance of
common stock--
options
exercised....... 221
Issuance of
common stock in
exchange for
legal services.. 40
Warrants issued
in connection
with capital
lease........... 17
Issuance of
notes receivable
from
stockholders.... (143)
Net loss........ (10,662)
-------------
Balances,
December 31,
1998............ 5,809
Repurchase of
common stock.... (49)
Issuance of
common stock--
options
exercised....... 354
Issuance of
common stock in
exchange for
services........ 69
Warrants issued
under capital
lease........... 17
Warrants issued
under financing
activity........ 273
Issuance of
notes receivable
from
stockholders.... (132)
Net loss........ (8,176)
-------------
Balances,
December 31,
1999............ $(1,835)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FREEGATE CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------
1998 1999
-------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................. $(10,662) $(8,176)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................ 352 418
Noncash warrant expense .................................. 17 221
Common stock issued for services ......................... 40 69
Changes in operating assets and liabilities:
Accounts receivable ..................................... (390) 154
Inventory ............................................... (359) 287
Prepaid expenses and other assets ....................... -- (146)
Accounts payable ........................................ 58 159
Accrued liabilities ..................................... 211 44
Deferred revenue ........................................ 314 220
-------- -------
Net cash used in operating activities .................. (10,419) (6,750)
-------- -------
Cash flows from investing activities:
Purchase of property and equipment ........................ (369) (151)
Notes receivable from stockholders ........................ 200 (10)
-------- -------
Net cash used in investing activities .................. (169) (161)
-------- -------
Cash flows from financing activities:
Proceeds from sale of equipment under sale/leaseback
arrangement .............................................. 378 55
Proceeds from sale of preferred stock ..................... 13,235 --
Proceeds from exercise of stock options ................... 78 222
Principal payments of capital leases ...................... (152) (226)
Repurchase of common stock ................................ (72) (49)
Proceeds from bridge loan financing ....................... -- 919
-------- -------
Net cash provided by financing activities 13,467 921
-------- -------
Net increase (decrease) in cash and cash equivalents ....... 2,879 (5,990)
Cash and cash equivalents at beginning of year ............. 3,241 6,120
-------- -------
Cash and cash equivalents at end of year ................... $ 6,120 $ 130
======== =======
Supplemental disclosure of cash flow information:
Cash paid during year for interest ........................ $ 92 $ 79
======== =======
Noncash financing activity:
Warrants issued in connection with bridge loan............ $ -- $ 273
======== =======
Warrants issued in connection with capital lease.......... $ 17 $ 17
======== =======
Common stock issued for services ......................... $ 40 $ 69
======== =======
Stock options issued in exchange for notes receivable .... $ 143 $ 132
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of business
FreeGate Corporation (the "Company") was incorporated in the state of
Delaware on December 26, 1995. FreeGate Corporation provides "all-in-one"
Internet and Intranet connectivity solutions for small to medium sized
businesses and branch offices. These solutions combine E-mail, web access and
publishing, electronic file transfer, remote access, virtual private
networking, firewall security, and LAN/router capabilities in an affordable,
reliable turnkey system for a nontechnical audience.
Beyond this integrated Internet and Intranet functionality, the Company
provides a remote provisioning and management system that opens up business
opportunities for value-added Internet applications and services, with
increased security and reliability.
(b) Basis of presentation
The Company has incurred net losses and negative operating cash flows since
inception that raise substantial doubt about its ability to continue as a going
concern. The accompanying financial statements have been prepared assuming the
Company continues in existence as a going concern. Continuation of the Company
as a going concern is dependent upon the successful conclusion of the merger
agreement signed in November 1999 (see Note 7).
(c) Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported results of operations during the reporting period. Actual results
could differ from those estimates.
(d) Revenue recognition
On October 1, 1997, the Company adopted Statement of Position (SOP) 97-2,
Software Revenue Recognition. The adoption of SOP 97-2 did not have a material
effect on the Company's operating results. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements to be allocated to
each element based on the relative fair values of the elements. The fair value
of an element must be based on evidence that is specific to the vendor. If a
vendor does not have evidence of the fair value of all elements in a multiple-
element arrangement, all revenue from the arrangement is deferred until such
evidence exists or until all elements are delivered.
Product revenue is generally recognized upon delivery or if sales are made to
a distributor, with right of return, upon sell through, provided the Company
deems the receivable to be collectible. Revenue allocated to maintenance is
recognized ratably over the maintenance term.
(e) Concentrations of credit risk
Financial instruments that subject the Company to concentrations of credit
risk consist primarily of cash and cash equivalents, accounts receivable, and a
note receivable. The Company maintains all of its cash with one financial
institution in the United States. Cash equivalents are comprised of money
market funds. The Company's policy limits the amount of credit exposure in any
one-debt issue. Management believes the financial risks associated with these
financial instruments are minimal. The notes receivable are due from
stockholders of the Company and management believes that the risk of credit
loss is low. With respect to accounts receivable, the Company performs credit
evaluations of its customers and maintains reserves for potential credit
losses.
F-8
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Significant customer information is as follows:
<TABLE>
<CAPTION>
Percentage
of
Total Accounts
Revenues Receivable
------------- -------------
1998 1999 1998 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Customer A................................. 46% 19% -- --
Customer B................................. 10% -- 21% --
Customer C................................. -- 16% -- 41%
</TABLE>
(f) Capitalized software
Costs related to the research and development for new software products and
enhancements to existing software products are expensed as incurred until
technological feasibility of the product has been established, at which time
such costs are capitalized subject to expected recoverability. As of December
31, 1999, the Company had not capitalized any development costs related to
software products.
(g) Inventory
Inventory as of December 31, 1999, consisted of finished goods and raw
materials valued at the lower of cost, using the first in first out method, or
market.
(h) Property and equipment
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is calculated using the straight-line method over
the estimated useful lives of the equipment, generally three years. Assets
under capital leases are amortized over the shorter of the lease terms or the
estimated useful lives of the assets.
(i) Income taxes
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A
valuation allowance is recorded to reduce deferred tax assets to an amount that
is more likely than not to be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
(j) Stock-based compensation
The Company accounts for its employee stock option plan in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeds the exercise price. Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, permits entities to recognize as expense over the vesting period
the fair value of all stock-based awards on the date of grant. Alternatively,
SFAS No. 123 allows entities to continue to apply the provisions of APB Opinion
No. 25 and provide pro forma net income or loss disclosures for employee
options granted as if the fair value-based method defined in SFAS No. 123 had
been applied. The Company has elected to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
F-9
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(k) Accumulated other comprehensive income
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 establishes standards of
reporting and display of comprehensive income and its components of net income
and "Other Comprehensive Income" in a full set of general-purpose financial
statements. Other comprehensive income refers to revenues, expenses, gains, and
losses that are not included in net income but rather are recorded directly in
stockholders' equity. SFAS No. 130 was adopted by the Company in 1998 but the
Company has no elements of other comprehensive income.
(l) Impairment of long-lived assets
In accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, management evaluates the
Company's long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. As of December 31, 1999, the Company does not consider any assets
to be impaired.
(m) Net loss per share
Basic net loss per share is computed using the weighted-average number of
vested outstanding shares of common stock. Diluted net loss per share is
computed using the weighted-average number of shares of vested common stock
outstanding and when dilutive, unvested common stock outstanding, potential
common shares from options and warrants to purchase common and preferred stock
using the treasury stock method and from convertible securities using the as-
if-converted basis. All potential common shares have been excluded from the
computation of diluted net loss per share for all periods presented because the
effect would be antidilutive.
Diluted net loss per share does not include the effect of the following (in
thousands):
<TABLE>
<CAPTION>
1998 1999
------- -------
<S> <C> <C>
Shares issuable under common stock options.................... 1,563 1,839
Shares of unvested common stock subject to repurchase......... 2,017 2,579
Shares issuable pursuant to warrants to purchase common and
convertible preferred stock.................................. 89 426
Shares of convertible preferred stock on an "as-if-converted"
basis........................................................ 16,715 16,715
</TABLE>
The weighted-average exercise price of stock options outstanding was $0.24
and $0.53 as of December 31, 1998 and 1999, respectively. The weighted-average
purchase price of unvested stock was $0.11 and $0.41 as of December 31, 1998
and 1999, respectively. The weighted-average exercise price of warrants was
$1.14 and $2.61 as of December 31, 1998 and 1999, respectively.
(n) Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. FreeGate is required to adopt SFAS No. 133
in fiscal 2001. SFAS No. 133 establishes methods of accounting for derivative
financial instruments and hedging activities related to those instruments as
well as other hedging activities. To date, the Company has not entered into any
derivative financial instruments or hedging activities.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements filed with the SEC. SAB 101
F-10
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. Management
believes that the impact of SAB 101 will not have a material effect on the
financial position or results of the operations of the Company.
2. BALANCE SHEET COMPONENTS
(a) Cash and cash equivalents
The Company considers all highly liquid investments with an original maturity
of 90 days or less to be cash equivalents. Cash equivalents as of December 31,
1998 and 1999, consisted of money market funds totaling $5,961,043 and nil,
respectively.
(b) Inventory
Inventory consisted of the following as of December 31, 1998 and 1999 (in
thousands)
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Finished goods................................................... $400 $164
Raw materials.................................................... 97 46
---- ----
$497 $210
==== ====
</TABLE>
(c) Property and Equipment
Property and equipment consisted of the following as of December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
<S> <C> <C>
Property and equipment, net:
Computer equipment and purchased software................ $1,007 $1,158
Office equipment......................................... 229 229
------ ------
1,236 1,387
Less: Accumulated depreciation and amortization.......... (575) (993)
------ ------
$ 661 $ 394
====== ======
</TABLE>
Computer equipment and purchased software as of December 31, 1998 and 1999,
included equipment under capital leases of approximately $1,037,000 and
$1,191,000 respectively, and related accumulated amortization of approximately
$283,000 and $847,000, respectively.
(d) Accrued liabilities
Accrued liabilities consisted of the following as of December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
December
31,
---------
1998 1999
---- ----
<S> <C> <C>
Accrued compensation............................................ $146 $119
Accrued warranty................................................ 64 149
Legal and professional fees..................................... 135 199
Other........................................................... 345 267
---- ----
$690 $734
==== ====
</TABLE>
F-11
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. STOCKHOLDERS' EQUITY
(a) Convertible preferred stock
The rights, preferences, and privileges of the holders of Series A, B, C, and
D convertible preferred stock are as follows:
. The holders of Series D convertible preferred stock shall be entitled to
receive dividends, at a rate of $0.18 per share, per annum in preference
to holders of Series A, B, and C convertible preferred stock payable when
and if declared by the Company's Board of Directors. The holders of
Series A, B, and C convertible preferred stock are entitled to receive
dividends at the rate of $0.0075, $0.045, and $0.102, per share,
respectively, per annum, payable when and if declared by the Company's
Board of Directors in preference and priority to any payments of
dividends to holders of the Company's common stock. The dividend rights
are not cumulative.
. The holders of Series D convertible preferred stock have a liquidation
preference of $3.00 per share in preference to the holders of Series A,
B, and C convertible preferred stock. Subject to Series D rights, the
holders of Series A, B, and C convertible preferred stock have a
liquidation preference of $0.12, $0.75, and $1.70 per share,
respectively. After payment of the liquidation preference, all remaining
assets of the Company shall be distributed among holders of convertible
preferred stock and common stock pro rata on an "as-if-converted" basis.
Distributions to holders of convertible preferred stock are limited to an
aggregate of $0.24, $1.50, $3.40, and $6.00 per share to holders of
Series A, B, C, and D convertible preferred stock, respectively. After
payment of the maximum liquidation distribution to holders of convertible
preferred stock, any remaining assets of the Company will be distributed
pro rata to holders of common stock.
. Each share of convertible preferred stock is convertible into one share
of common stock. Conversion will occur automatically upon an initial
public offering with a price of not less than $4.50 per share and
proceeds in excess of $30,000,000.
. Holders of Series A, B, C, and D convertible preferred stock vote equally
with shares of common stock on an "as-if-converted" basis.
. Holders of Series A, B, C, and D convertible preferred stock possess
certain registration rights and the right to participate in future
financings.
No dividends have been declared or paid on convertible preferred stock or
common stock since inception of the Company.
(b) Common stock
During 1996, the Company issued 6,000,000 shares of common stock to the
Company's founders in exchange for certain rights and services. The fair value
assigned to the rights and services was equivalent to the fair value of the
common stock on the issuance date as determined by the Board of Directors. Upon
issuance, the Company had the right to repurchase 50% of these shares at $0.005
per share. Subject to continued employment of the founders, the repurchase
right expired in December 1996 for 25% of the shares and, for the remaining
shares, expired ratably over 36 months through December 1999. Under certain
circumstances, the shares may immediately vest upon a change in control of the
Company.
Stock issued to the founders, as well as stock issued upon exercise of stock
options under the 1996 Stock Option Plan, is subject to vesting. The Company
reserves the right of first refusal to purchase all vested shares of common
stock. All unvested shares of common stock may be repurchased by the Company at
the original issuance price upon an employee's termination of employment. The
repurchase right expires when the Company's stock becomes publicly traded or
upon a change in control of the Company. As of December 31, 1998 and 1999,
2,017,832 and 2,579,419 shares of outstanding common stock, respectively, are
unvested and, therefore, subject to repurchase by the Company.
F-12
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
By decision of the Board of Directors in November 1999, however, these
options will vest immediately on the closing date of the merger of the Company.
(c) 1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Plan") authorizes the granting of
incentive and nonstatutory common stock options to employees and nonemployees
at exercise prices no less than 85% of the fair market value of the common
stock on the grant date, as determined by the Board of Directors. The options
may be exercised immediately upon issuance and generally have a term of 10
years. The common stock issued upon the exercise of stock options vests 25%
after one year of service and thereafter ratably over 36 months of service.
Upon termination of service, an employee's unvested shares may be repurchased
by the Company at the option exercise price. Approximately 5,000,000 shares of
common stock have been reserved for issuance under the Plan.
(d) Accounting for stock-based compensation
Under APB Opinion No. 25, the Company has recorded no compensation costs
related to its stock option plan for the year ended December 31, 1999, because
the exercise price of each employee option equals or exceeds the market value
of the underlying common stock as of the grant date for each employee stock
option. Had compensation cost for the Company's plans been determined
consistent with the fair value approach enumerated in SFAS No. 123, the
Company's pro forma net loss would have been as follows (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1998 1999
------- ------
<S> <C> <C>
Net loss attributable to common stockholders--as
reported............................................... $10,662 $8,176
Net loss attributable to common stockholders--pro
forma.................................................. 10,677 8,408
Net loss per share attributable to common stockholders--
as reported............................................ (1.73) (1.03)
Net loss per share attributable to common stockholders--
pro forma.............................................. (1.74) (1.06)
</TABLE>
The fair value of employee options granted was estimated on the date of grant
using the minimum-value method. The fair value of nonemployee options granted
was estimated on the date of grant using the Black-Scholes option-pricing
model. There were no nonemployee options granted in 1998. The following
weighted-average assumptions were used in these calculations: risk-free
interest rate of approximately 5.3% and 6.1% for the years ended 1998 and 1999,
respectively; expected life of five years and ten years for the years ended
December 31, 1998 and 1999, respectively; no dividends and expected volatility
of 0% and 65% for employee and nonemployee options, respectively.
The weighted average fair values of options granted in 1998 and 1999 was
$0.07 and $0.24, respectively.
F-13
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity under the Company's option plan for the period from
January 1, 1998 to December 31, 1999, is presented below (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
Options
Outstanding
----------------
Weighted
Options Average
Available Exercise
for Grant Shares Price
--------- ------ --------
<S> <C> <C> <C>
Balances as of January 1, 1998 ...................... 805 1,232 $0.15
Granted ........................................... (1,286) 1,286 0.30
Exercised ......................................... -- (444) 0.18
Canceled .......................................... 511 (511) 0.23
Unvested stock repurchased ........................ 790 -- 0.09
------ ------
Balances as of December 31, 1998..................... 820 1,563 0.24
Granted ........................................... (2,554) 2,554 0.46
Exercised ......................................... -- (941) 0.19
Canceled .......................................... 1,337 (1,337) 0.29
Unvested stock repurchased ........................ 400 -- 0.13
------ ------
Balances as of December 31, 1999..................... 3 1,839 $0.53
====== ======
</TABLE>
In addition to the 1996 stock option plan, the Company granted options of
475,000 and 235,000 for the years ended December 31, 1998 and 1999,
respectively.
A breakdown of the Company's outstanding options as of December 31, 1999 is
presented below (in thousands, except per share data):
<TABLE>
<CAPTION>
Outstanding Exercisable
-------------------------------------- ---------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Contractual Exercise of Exercise
Price Shares Life (Years) Price Shares Price
------------- ------ ------------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
$0.075 69 6.68 $0.075 69 $0.075
$0.170 71 7.55 $0.170 71 $0.170
$0.300 586 9.31 $0.300 586 $0.300
$0.700 1,113 9.92 $0.700 1,113 $0.700
----- -----
$0.075-$0.700 1,839 9.51 $0.529 1,839 $0.529
===== =====
</TABLE>
F-14
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(e) Warrants
Warrants outstanding are as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
Warrants Outstanding
------------------------------
Weighted Average
Shares Exercise Price Amount
------ ---------------- ------
<S> <C> <C> <C>
Balance at December 31, 1997................. 75 $1.03 $ 77
Warrants granted............................. 14 1.70 25
--- ------
Balance at December 31, 1998................. 89 1.14 102
Warrants granted............................. 337 3.00 1,012
--- ------
Balance at December 31, 1999................. 426 $2.61 $1,114
=== ======
</TABLE>
The Company issued warrants in 1996 and 1997 for the purchase of 52,668
shares of Series B convertible preferred stock and 22,058 shares of Series C
convertible preferred stock, respectively. The Series B convertible preferred
stock warrants will expire on the later of June 17, 2003, or three years from
the effective date of an initial public offering. The Series C preferred stock
warrants will expire on the later of September 1, 2004, or three years from the
effective date of an initial public offering. In addition, the warrants expire
immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $3.40 or higher, or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with a credit facility, the Company issued warrants in 1998 for
the purchase of 14,706 shares of Series C convertible stock at an exercise
price of $1.70 per share. The fair value of the preferred stock warrants at the
date of grant was $1.17 and will expire on the later of February 1, 2005 or
three years from the effective date of an initial offering. In addition, the
warrants expire immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $4.50 or higher,or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with a capital lease, the Company issued warrants in 1999 for
the purchase of 8,333 shares of Series D convertible preferred stock at an
exercise price of $3.00 per share. The fair value of the Series D convertible
preferred stock warrants at the date of grant was $2.07. The Company determined
the fair value of Series D warrants using the Black-Scholes model with the
following assumptions: risk free interest rate of 6.1%; expected life of seven
years; volatility of 65%; and no dividend yield. The Series D preferred stock
warrants will expire on the later of January 1, 2006 or three years from the
effective date of an initial public offering. In addition, the warrants expire
immediately upon either of the following:
. An initial public offering whereby the per share sale price to the public
is $3.40 or higher, or if requested by the underwriter.
. A merger or sale of substantially all of the Company's assets.
In connection with short-term note payable agreements entered into during
1999, the Company issued 329,079 Series D preferred stock warrants at a price of
$3.00 per share. The fair value of preferred stock warrants at the date of the
grant was $0.67. The Company determined the fair value of the Series D warrants
using the Black-Scholes model with the following assumptions: risk free interest
rate of 6.1%; expected life of seven years; volatility of 65% and no
F-15
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
dividend yield. The warrants are immediately exercisable and expire on the
earliest of (i) September 23, 2000; (ii) the effective date of the Company,
completing an initial public offering; (iii) on a sale or transfer by the
Company of all or substantially all of its assets; or (iv) the acquisition of
the Company by another entity.
4. INCOME TAXES
Income tax expense for the years ended December 31, 1998 and 1999, consisted
of state income tax. The difference between the statutory income tax rate of
34% and the Company's effective tax rate is primarily due to the valuation
allowance provided for deferred tax assets. The Company has provided a
valuation allowance due to the uncertainty of generating future taxable income
that would allow for the realization of such deferred tax assets.
The types of temporary differences that give rise to significant portions of
the deferred tax assets and liabilities as of December 31, 1998 and 1999 are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Deferred tax assets:
Accruals and reserves................................. $ 356 $ 422
Deferred start-up costs............................... 667 643
Deferred revenue...................................... 141 54
Research credit carryforwards......................... 722 957
Net operating loss carryforwards...................... 7,406 9,549
Fixed assets.......................................... 9 9
------- --------
Total gross deferred tax assets..................... 9,301 11,634
Less: Valuation allowance............................. (9,301) (11,634)
------- --------
Total deferred tax assets $ -- $ --
======= ========
</TABLE>
The change in valuation allowance for the years ended December 31, 1998 and
1999, was $5,038,000 and $2,333,000 respectively.
The Company has net operating loss carryforwards for federal and state tax
purposes of approximately $24,000,000 and $20,500,000, respectively. The
federal carryforwards expire from 2010 to 2018. The state net operating loss
carryforwards expire in 2003. The Company also has tax credit carryforwards of
approximately $591,000 and $366,000 for federal and state tax purposes,
respectively, which expire from 2001 to 2003.
The Internal Revenue Code of 1986, and applicable state tax laws, impose
substantial restrictions on the ability of the Company to utilize net operating
loss and tax credit carryforwards in the event of an ownership change, as
defined. During 1997, the Company underwent an ownership change, and, as a
result, the federal and state tax losses and tax credit carryovers incurred
through that date are subject to an annual limitation.
5. COMMITMENTS AND CONTINGENCIES
Lease Obligations
The Company leases certain equipment and its facilities under various
noncancelable operating leases. In addition, the Company has entered into
capital lease arrangements for certain office and computer equipment.
F-16
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under operating and capital leases as of
December 31, 1999, are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ending December 31, Capital Leases Operating Leases
------------------------- -------------- ----------------
<S> <C> <C>
2000....................................... $359 $469
2001....................................... 230 482
2002....................................... 71 352
----- ------
Total minimum lease payments............... 660 $1,303
======
Less: Amount representing interest......... (58)
-----
Present value of minimum lease payments.... 602
Less: Current portion...................... (323)
-----
Long-term lease obligations.............. $ 279
=====
</TABLE>
Rent expense was $452,184 and $467,439 for the years ended December 31, 1998
and 1999, respectively.
Notes payable
The Company entered into short-term note payable agreements with various
lenders on September 23, 1999 for $987,000. The notes bear interest of 10% and
are payable in full on March 23, 2000. The principal amount outstanding on
these notes at December 31, 1999 is $895,000.
6. SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, Disclosure about
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for reporting information about operating segments. The method for
determining what information to report is based on the way that management
organizes the operating segments within the Company for making operating
decisions and assessing financial performance. The Company's chief operating
decision-maker is considered to be the Company's Chief Executive Officer (CEO).
The consolidated financial information reviewed by the CEO is identical to the
information presented in the accompanying statements of operations. Therefore,
the Company operates in a single operating segment.
The CEO does not receive discrete financial information about individual
components of the Company's operations. The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information
about revenue by geographic region for purposes of making operating decisions
and assessing financial performance.
Information regarding product revenue and geographic areas for the years
ended December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------ ------
<S> <C> <C>
Product and service:
Product.................................................... $2,747 1,880
Maintenance................................................ 77 254
------ ------
$2,824 $2,134
====== ======
Geographic:
United States.............................................. $1,219 $1,605
Japan...................................................... 1,303 425
Canada..................................................... 266 40
Other...................................................... 36 64
------ ------
$2,824 $2,134
====== ======
</TABLE>
F-17
<PAGE>
FREEGATE CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. SUBSEQUENT EVENTS
On November 16, 1999, the Company entered into a definitive merger agreement
with Tut Systems, Inc. in which the stockholders of the Company received
common stock of the acquiring company in exchange for all of the outstanding
shares of preferred stock, common stock, shares issuable under common stock
options, and shares issuable under warrants for common stock and preferred
stock. In accordance with the definitive agreement, the Company's stockholders
are to receive 510,931 shares of the acquirer's common stock and approximately
19,600 options to acquire Tut Systems, Inc. common stock. The acquirer has
also agreed to pay for all investment banking fees and related closing costs
of approximately $1,200,000. The acquisition closed on February 14, 2000.
F-18
<PAGE>
Item 7(b) Pro Forma Financial Information:
TUT SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial statements for Tut
Systems, Inc. (the "Company") consist of the Unaudited Pro Forma Combined
Statement of Operations for the year ended December 31, 1999 and the Unaudited
Pro Forma Combined Balance Sheet as of December 31, 1999. This pro forma
financial information gives effect to Tut's acquisition of FreeGate
Corporation ("FreeGate") in a business combination to be accounted for as a
purchase, which was consummated on February 14, 2000. In exchange for the
acquisition of all of FreeGate's outstanding capital stock, Tut issued
FreeGate stockholders 510,931 shares of its common stock and reserved
approximately 19,600 additional shares for issuance upon the exercise of stock
options of FreeGate which will be converted into options to purchase shares of
Tut stock.
The unaudited pro forma combined balance sheet gives effect to this
acquisition as if it had occurred on December 31, 1999, by consolidating the
balance sheet of FreeGate with the balance sheet of Tut, at December 31, 1999.
The unaudited pro forma combined statement of operations gives effect to this
acquisition as if it had occurred on January 1, 1999, by consolidating the
results of operations of FreeGate for the year ended December 31, 1999 with the
results of operations of Tut for the year ended December 31, 1999.
The unaudited pro forma combined statement of operations is not necessarily
indicative of the operating results that would have been achieved had the
transactions been in effect as of the beginning of the periods presented and
should not be construed as being representative of future operating results.
The historical financial statements of the Company and FreeGate are included
elsewhere in this Prospectus and the unaudited pro forma combined financial
information presented herein should be read in conjunction with those financial
statements and related notes.
F-19
<PAGE>
TUT SYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999
--------------------------------------------
Tut FreeGate Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........ $ 13,405 $ 130 $ -- $ 13,535
Short-term investments .......... 18,831 -- -- 18,831
Accounts receivable, net ........ 11,742 403 -- 12,145
Inventories ..................... 8,401 210 -- 8,611
Prepaid expenses and other ...... 3,746 224 -- 3,970
-------- -------- -------- --------
Total current assets .......... 56,125 967 -- 57,092
Property and equipment, net ....... 3,476 394 -- 3,870
Intangible assets, net ............ 1,774 -- 25,409 (A) 27,183
Other assets ...................... 3,981 52 -- 4,033
-------- -------- -------- --------
Total assets .................. $ 65,356 $ 1,413 $ 25,409 $ 92,178
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................ $ 5,859 $ 465 $ -- $ 6,324
Accrued expenses and other
payables ....................... 3,551 734 1,200 (A) 5,485
Lines of credit ................. 1,529 -- -- 1,529
Notes payable.................... -- 895 -- 895
Capital lease obligations ....... -- 323 -- 323
Deferred revenue ................ 770 418 -- 1,188
-------- -------- -------- --------
Total current liabilities ..... 11,709 2,835 1,200 15,744
Capital lease obligations, net of
current portion .................. -- 279 -- 279
Deferred revenue, net of current
portion .......................... 2,125 134 -- 2,259
-------- -------- -------- --------
Total liabilities ............. 13,834 3,248 1,200 18,282
-------- -------- -------- --------
Stockholders' equity (deficit):
Common stock .................... 12 -- 1 (A) 13
Additional paid in capital ...... 108,969 26,443 (26,443)(A) 132,417
23,448 (A)
Notes receivable from
stockholders ................... -- (275) -- (275)
Deferred stock compensation ..... (972) -- -- (972)
Accumulated deficit ............. (56,487) (28,003) 28,003 (A) (57,287)
(800)(A)
-------- -------- -------- --------
Total stockholders' equity
(deficit) .................... 51,522 (1,835) 24,209 73,896
-------- -------- -------- --------
Total liabilities and
stockholders' equity
(deficit)................... $ 65,356 $ 1,413 $ 25,409 $ 92,178
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
F-20
<PAGE>
TUT SYSTEMS
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------
Tut FreeGate Adjustments Pro Forma
-------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product .......................... $ 26,266 $ 2,134 $ -- $ 28,400
License and royalty .............. 1,541 -- -- 1,541
-------- ------- -------- ---------
27,807 2,134 -- 29,941
Cost of goods sold ................. 15,459 1,159 680(B) 17,298
-------- ------- -------- ---------
Gross margin ....................... 12,348 975 (680) 12,643
-------- ------- -------- ---------
Operating expenses:
Sales and marketing .............. 10,523 3,636 -- 14,159
Research and development ......... 7,618 3,899 -- 11,517
General and administrative ....... 4,429 1,406 -- 5,835
In-process research and
development ..................... 2,600 -- -- 2,600
Amortization of intangibles ...... 52 -- 4,602(B) 4,654
Noncash compensation expense ..... 455 221 -- 676
-------- ------- -------- ---------
Total operating expenses ....... 25,677 9,162 4,602 39,441
-------- ------- -------- ---------
Loss from operations ............... (13,329) (8,187) (5,282) (26,798)
Interest expense ................... (608) (62) -- (670)
Interest income .................... 2,203 76 -- 2,279
Other income, net .................. 1 -- -- 1
-------- ------- -------- ---------
Loss before income taxes ........... (11,733) (8,173) (5,282) (25,188)
Income tax expense ................. 1 3 -- 4
-------- ------- -------- ---------
Net loss ........................... (11,734) (8,176) (5,282) (25,192)
Dividend accretion on preferred
stock ............................. (235) -- -- (235)
-------- ------- -------- ---------
Net loss attributable to common
stockholders ...................... $(11,969) $(8,176) $ (5,282) $ (25,427)
======== ======= ======== =========
Net loss per share attributable to
common stockholders, basic and
diluted ........................... $ (1.12) $ (1.03) $ (2.26)
======== ======= =========
Shares used in computing net loss
per share attributable to common
stockholders, basic and diluted.... 10,729 7,964 511 11,240
======== ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these unaudited combined
financial statements.
F-21
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
(in thousands)
NOTE 1--BASIS OF PRESENTATION:
The pro forma financial information gives effect to Tut's acquisition of
FreeGate, consummated on February 14, 2000 in a business combination to be
accounted for as a purchase. All the outstanding common and preferred stock of
FreeGate was converted into shares of Tut common stock, and all outstanding
stock options to purchase shares of FreeGate common shares and options to be
issued to FreeGate stockholders and options holders.
The pro forma financial information has been prepared on the basis of
assumptions described in the following notes and include assumptions relating
to the allocation of the consideration paid for the assets and liabilities of
FreeGate based on preliminary estimates of their fair value. The actual
allocation of such consideration may differ from that reflected in the pro
forma financial statements after valuations after the closing of the FreeGate
acquisition have been completed. Tut does not expect that the final allocation
of the purchase price will differ materially from the preliminary allocation.
The Unaudited Pro Forma Combined Statement of Operations for the year ended
December 31, 1999 gives effect to this transaction as if it had taken place on
January 1, 1999. The Unaudited Pro Forma Combined Balance Sheet as of December
31, 1999 gives effect to the transaction as if it had taken place on December
31, 1999.
The pro forma financial information is not necessarily indicative of what the
actual financial results would have been had the transaction taken place on
January 1, 1999 and do not purport to indicative the results of future
operations.
NOTE 2--PURCHASE PRICE ALLOCATION:
The unaudited pro forma combined information reflects a total purchase price
of $24.7 million from 510,931 shares of common stock, approximately 19,600
options to acquire common stock and acquisition related expenses, consisting
primarily of investment advisory, legal and other professional fees. The
Company valued the options using the Black-Scholes option pricing model,
applying an average expected life of 4 years, a weighted average risk free
rate of 6%, an expected dividend yield of zero percent, a volatility of 80%
and a deemed fair value of common stock of $41.81.
The Company's allocation of aggregate purchase price to the tangible and
identifiable assets acquired in connection with this acquisition has been based
on a preliminary analysis by the Company and the goodwill, patents and current
technology are being amortized over an estimated useful life of five years and
assembled workforce is being amortized over an estimated useful life of three
years. The allocation is summarized below (in thousands):
<TABLE>
<S> <C>
Net liabilities assumed.......................................... $(1,560)
Current technology............................................... 2,900
In-process research and development.............................. 800
Assembled workforce.............................................. 1,500
Patents.......................................................... 500
Goodwill......................................................... 20,509
-------
Total purchase price........................................... $24,649
=======
FreeGate's liabilities assumed are derived as follows:
Total stockholders' deficit...................................... $(1,835)
Receivable from stockholders..................................... 275
-------
Total.......................................................... $(1,560)
=======
</TABLE>
F-22
<PAGE>
TUT SYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION--(Continued)
(in thousands)
The amount allocated to in-process research and development represents the
purchased in-process technology for projects that, as of the date of the
acquisition, had not yet reached technological feasibility and had no
alternative future use. Based on preliminary assessments, the value of these
projects was determined by using the income approach, which discounts expected
future cash flows to present value. The discount rate used in the present value
calculations were typically derived from a weighted average cost of capital
analysis adjusted upwards to reflect additional risks inherent in the
development life cycle. These risk factors are reflected in the discount rate
used of 30%. Tut expects that the pricing model for products and intellectual
property licenses related to the acquisition of FreeGate will be considered
standard within the high-technology communications industry. Tut does not
expect, however, to achieve expense reductions as a result of integrating the
acquired in-process technology. Therefore, the valuation assumptions do not
include any anticipated cost savings. Tut expects that products incorporating
the acquired technology from this acquisition will be completed and begin to
generate cash flows over a six to nine month period after integration.
Development of these technologies, however, remains a significant risk due to
the remaining effort to achieve technical viability, rapidly changing customer
markets, uncertain standards for new products and significant competitive
threats from numerous companies. Efforts to develop the acquired technology into
commercially viable products consists principally of planning, designing and
testing activities necessary to determine that the product can meet market
expectations, including functionality and technical requirements. Failure to
bring these products to market in a timely manner could result in a loss of
market share, or a lost opportunity to capitalize on emerging markets, and could
harm our business and operating results.
The amounts allocated to in-process research and development will be charged
to the statement of operations in the period the acquisition is consummated.
NOTE 3--UNAUDITED PRO FORMA COMBINED NET LOSS PER SHARE:
The net loss per share and shares used in computing the net loss per share
for the year ended December 31, 1999 are based upon the Tut historical weighted
average common shares outstanding together with the shares issued in the
transaction as if such shares were issued January 1, 1999. Common stock
issuable upon the exercise of Tut stock options and warrants has been excluded
as the effect would be anti-dilutive. In addition to the shares used in
computing the net loss per share above, pro forma net loss per share is
calculated using the convertible preferred stock outstanding as if such shares
were converted to common stock at the time of issuance or January 1, 1999 for
the stock issued in the transaction.
NOTE 4--PURCHASE ADJUSTMENTS:
The following adjustments were applied to the combined financial statements:
(A) To reflect the issuance of shares in the acquisition and to record
estimated transaction costs and other assets and liabilities at their
fair values.
(B) To record amortization of goodwill and other intangibles.
The amount allocated to in-process research and development has not been
included in the unaudited pro forma combined statement of operations as it is
nonrecurring. This amount will be expensed in the period the acquisition is
consummated.
F-23
<PAGE>
SIGNATURE
Pursuant to requirements of the Securities Exchange Act of 1934, Tut
Systems, Inc. has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TUT SYSTEMS, INC.
Dated: February 18, 2000 By: /s/ Nelson B. Caldwell
----------------------
Nelson B. Caldwell, Vice President and
Chief Financial Officer
<PAGE>
EXHIBIT 2.1
[EXECUTION COPY]
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
TUT SYSTEMS, INC.,
FREEGATE CORPORATION,
FORTRESS ACQUISITION CORPORATION,
AND, WITH RESPECT TO ARTICLE VII ONLY,
JAMES MONGIELLO,
AS STOCKHOLDER REPRESENTATIVE,
AND
U.S. BANK TRUST,
AS ESCROW AGENT
Dated as of November 16, 1999
<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 List of Employees Offered Employment Pursuant to At-Will Offer
Letter
Exhibit D-1 List of Persons Signing Noncompetition Agreements
Exhibit D-2 Form of Non-Competition Agreement
Exhibit E-1 List of Company Stockholders signing Support Agreement
Exhibit E-2 Form of Support Agreement
Exhibit F Escrow Agent Fee Schedule
Exhibit G Form of Certificate of Amendment of Certificate of Incorporation
of the Company
Exhibit H-1 List of Company Options to be Substituted
Exhibit H-2 Form of Stock Option Substitution Agreement
Exhibit I Form of Merger Certificate
<PAGE>
TABLE OF CONTENTS
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ARTICLE I - The Merger................................................. 2
1.1 The Merger.................................................... 2
1.2 Effective Time................................................ 2
1.3 Effect of the Merger.......................................... 2
1.4 Certificate of Incorporation; Bylaws.......................... 2
1.5 Directors and Officers........................................ 3
1.6 Effect on Capital Stock....................................... 3
1.7 Dissenting Shares............................................. 5
1.8 Surrender of Certificates..................................... 6
1.9 No Further Ownership Rights in Company Capital Stock.......... 8
1.10 Dissenting Shares After Payment of Fair Value................. 8
1.11 Tax and Accounting Consequences............................... 8
1.12 Hart-Scott-Rodino Filings..................................... 8
1.13 Taking of Necessary Action; Further Action.................... 8
ARTICLE II - Representations and Warranties of the Company............. 9
2.1 Organization of the Company................................... 9
2.2 Company Capital Structure..................................... 9
2.3 Subsidiaries.................................................. 10
2.4 Authority..................................................... 10
2.5 No Conflict................................................... 10
2.6 Consents...................................................... 11
2.7 Company Financial Statements.................................. 11
2.8 No Undisclosed Liabilities.................................... 12
2.9 No Changes.................................................... 12
2.10 Tax Matters................................................... 14
2.11 Restrictions on Business Activities........................... 15
2.12 Title of Properties; Absence of Liens and Encumbrances;
Condition of Equipment........................................ 16
2.13 Intellectual Property......................................... 16
2.14 Agreements, Contracts and Commitments......................... 19
2.15 Interested Party Transactions................................. 20
2.16 Governmental Authorization.................................... 21
2.17 Litigation.................................................... 21
2.18 Accounts Receivable........................................... 21
2.19 Minute Books.................................................. 21
2.20 Environmental Matters......................................... 22
2.21 Brokers' and Finders' Fees; Third Party Expenses.............. 23
2.22 Employee Benefit Plans and Compensation....................... 23
2.23 No Interference or Conflict................................... 26
2.24 Insurance..................................................... 27
2.25 Compliance with Laws.......................................... 27
2.26 Complete Copies of Materials.................................. 27
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(continued)
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2.27 Year 2000 Compliance.......................................... 27
2.28 Representations Complete...................................... 28
ARTICLE III - Representations and Warranties of Parent and Sub......... 28
3.1 Organization, Standing and Power............................. 28
3.2 Authority.................................................... 28
3.3 Capital Structure............................................ 29
3.4 SEC Documents; Parent Financial Statements................... 29
3.5 Litigation................................................... 30
3.6 Ownership of the Company..................................... 30
3.7 Brokers' and Finders' Fees................................... 30
3.8 No Material Adverse Change................................... 30
3.9 Consents..................................................... 30
3.10 Information Supplied......................................... 30
3.11 Other Matters................................................ 31
ARTICLE IV - Conduct Prior to the Effective Time....................... 31
4.1 Conduct of Business of the Company............................ 31
4.2 No Solicitation............................................... 33
ARTICLE V - Additional Agreements...................................... 34
5.1 Preparation of Permit Application, Hearing Request, Hearing
Notice and Information Statement.............................. 34
5.2 Meeting of the Company Stockholders........................... 34
5.3 Regulatory Approvals.......................................... 35
5.4 Access to Information......................................... 35
5.5 Confidentiality............................................... 36
5.6 Expenses...................................................... 36
5.7 Public Disclosure............................................. 36
5.8 Consents...................................................... 37
5.9 FIRPTA Compliance............................................. 37
5.10 Reasonable Efforts............................................ 37
5.11 Notification of Certain Matters............................... 37
5.12 Business Arrangements......................................... 37
5.13 Affiliate Agreements.......................................... 38
5.14 Company Restated Certificate of Incorporation................. 38
5.15 Notice to Holders of Company Options and Company Rights....... 38
5.16 Company Dissenting Shares..................................... 38
5.17 Certain Employee Benefits..................................... 38
5.18 Company Benefit Plans......................................... 39
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(continued)
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5.19 Additional Documents and Further Assurances................... 39
5.20 Tax Free Reorganization....................................... 39
5.21 Proprietary Information and Confidentiality Agreements........ 39
5.22 Indemnification and Directors' and Officers' Insurance........ 39
ARTICLE VI - Conditions to the Merger.................................... 40
6.1 Conditions to Obligations of Each Party to Effect the Merger.. 40
6.2 Additional Conditions to Obligations of the Company........... 41
6.3 Additional Conditions to the Obligations of Parent and Sub.... 41
ARTICLE VII - Survival of Representations and Warranties; Escrow......... 44
7.1 Survival of Representations and Warranties.................... 44
7.2 Escrow Arrangements........................................... 44
7.3 Stockholder Representative.................................... 50
7.4 Exclusive Remedy.............................................. 51
ARTICLE VIII - Termination, Amendment and Waiver......................... 52
8.1 Termination................................................... 52
8.2 Effect of Termination......................................... 53
8.3 Amendment..................................................... 53
8.4 Extension; Waiver............................................. 53
ARTICLE IX - General Provisions.......................................... 53
9.1 Notices....................................................... 53
9.2 Interpretation................................................ 55
9.3 Counterparts.................................................. 55
9.4 Entire Agreement; Assignment.................................. 55
9.5 Severability.................................................. 55
9.6 Other Remedies................................................ 55
9.7 Governing Law................................................. 56
9.8 Rules of Construction......................................... 56
</TABLE>
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AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made and
entered into as of November 16, 1999 among Tut Systems, Inc., a Delaware
corporation ("Parent"), Fortress Acquisition Corporation, a Delaware corporation
and a wholly owned subsidiary of Parent ("Sub"), Freegate Corporation, a
Delaware corporation (the "Company"), and, with respect to Article VII only,
James Mongiello, as Stockholder 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 stockholders 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 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. Concurrently with the execution of this Agreement, and as a condition
and inducement to Parent's willingness to enter into this Agreement, Company and
each of the stockholders of the Company listed on Exhibit E-1 (collectively, the
"Principal Stockholders") shall execute and deliver a Support Agreement in
substantially the form attached hereto as Exhibit E-2 (the "Support Agreement")
agreeing to vote in favor of this Agreement and the Merger.
G. The Company, 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 Delaware General Corporation Law (the "Delaware 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 a Certificate of Merger (or like instrument)
substantially in the form of Exhibit I (the "Merger Certificate") with the
Secretary of State of Delaware, in accordance with the relevant provisions of
applicable law (the time of acceptance by the Secretary of State of Delaware of
such filing, or such other time as may be agreed upon by the parties and set
forth in the Merger Certificate, 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 Delaware 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 Certificate of Incorporation; Bylaws.
(a) Unless otherwise determined by Parent prior to the Effective Time,
at the Effective Time, the Certificate of Incorporation of Sub shall be the
Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law and such Certificate of Incorporation; provided,
however, that Article I of the Certificate of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the corporation
is Freegate Corporation."
(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 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 Sub, the Company or the holders of
any of the following securities:
(a) Conversion of the Company Capital Stock. Each share of Series A
Preferred Stock, $.0001 par value per share, of the Company (the "Company Series
A Stock") issued and outstanding immediately prior to the Effective Time, other
than shares, if any, for which dissenters rights have been or may be perfected
in compliance with applicable law, will be canceled and extinguished and be
converted automatically into the right to receive that number of shares (the
"Series A Exchange Ratio") of the common stock, par value $0.001 per share, of
Parent ("Parent Common Stock") determined by dividing (i) $.06 by (ii) the
Parent Closing Price (as defined below). Each share of Series B Preferred
Stock, $.0001 par value per share, of the Company (the "Company Series B Stock")
issued and outstanding immediately prior to the Effective Time, other than
shares, if any, for which dissenters rights have been or may be perfected in
compliance with applicable law, will be canceled and extinguished and be
converted automatically into the right to receive that number of shares (the
"Series B Exchange Ratio") of Parent Common Stock determined by dividing (i)
$.375 by (ii) the Parent Closing Price. Each share of Series C Preferred Stock,
$.0001 par value per share, of the Company (the "Company Series C Stock") issued
and outstanding immediately prior to the Effective Time, other than shares, if
any, for which dissenters rights have been or may be perfected in compliance
with applicable law, will be canceled and extinguished and be converted
automatically into the right to that number of shares (the "Series C Exchange
Ratio") of Parent Common Stock determined by dividing (i) $.85 by (ii) the
Parent Closing Price. Each share of Series D Preferred Stock, $.0001 par value
per share, of the Company (the "Company Series D Stock") issued and outstanding
immediately prior to the Effective Time, other than shares, if any, for which
dissenters rights have been or may be perfected in compliance with applicable
law, will be canceled and extinguished and be converted automatically into the
right to receive that number of shares (the "Series D Exchange Ratio") of Parent
Common Stock determined by dividing (i) $1.50 by (ii) the Parent Closing Price.
Each share of common stock, $.0001 par value per share, of the Company (the
"Company Common Stock") issued and outstanding immediately prior to the
Effective Time, other than shares, if any, for which dissenters rights have been
or may be perfected in compliance with applicable law, will be canceled and
extinguished and be converted automatically into the right to receive that
number of shares (the "Common Exchange Ratio") of Parent Common Stock determined
by dividing (i) the Remaining Parent Shares to Be Issued (as defined below) by
(ii) the Common Shares Outstanding (as defined below). The Company Common Stock,
Company Series A Stock, Company Series B Stock, Company Series C Stock and the
Company Series D Stock shall hereinafter collectively be referred to as the
"Company Capital Stock." The Common Exchange Ratio, Series A Exchange Ratio,
Series B Exchange Ratio, Series C Exchange Ratio and Series D Exchange Ratio
shall hereinafter collectively be referred to as the "Exchange Ratio." The
shares of Parent Common Stock issued
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<PAGE>
pursuant to this Section 1.6(a) are referred to as the "Merger Shares."
Notwithstanding anything to the contrary contained in this Agreement, in no
event shall Parent be obligated to issue, pursuant to this Section 1.6(a) or
Section 1.6(d) below, any shares of Parent Common Stock in excess of the Total
Parent Shares to be Issued (as defined in subsection (c) below).
(b) Shares Outstanding. The "Series A Shares Outstanding" shall equal
the total number of shares of Company Series A Stock issued and outstanding at
the Effective Time. The "Series B Shares Outstanding" shall equal the total
number of shares of Company Series B Stock issued and outstanding at the
Effective Time. The "Series C Shares Outstanding" shall equal the total number
of shares of Company Series C Stock issued and outstanding at the Effective
Time. The "Series D Shares Outstanding" shall equal the total number of shares
of Company Series D Stock issued and outstanding at the Effective Time. The
"Common Shares Outstanding" shall equal the total number of shares of Company
Common Stock issued and outstanding at the Effective Time plus the total number
of shares of Company Common Stock issuable upon exercise of all Company Options
listed on Exhibit H-1 attached hereto and outstanding at the Effective Time.
"Total Parent Shares to be Issued" shall equal (A) $21,000,000 divided by (B)
the average closing price as quoted on the Nasdaq National Market and as
reported in the Wall Street Journal of one share of Parent Common Stock for the
ten trading days prior to and including the trading day ending one day prior to
the date of this Agreement (the "Parent Closing Price"). "Remaining Parent
Shares to be Issued" shall equal (A) the Total Parent Shares to be Issued minus
(B) the sum of (i) the Series A Shares Outstanding multiplied by the Series A
Exchange Ratio, plus (ii) the Series B Shares Outstanding multiplied by the
Series B Exchange Ratio, plus (iii) the Series C Shares Outstanding multiplied
by the Series C Exchange Ratio, plus (iv) the Series D Shares Outstanding
multiplied by the Series D Exchange Ratio.
(c) Shares Owned by Parent, etc. Each share of the 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.
(d) Company Options, Warrants, etc. At the Effective Time, each
outstanding option to purchase shares of Company Capital Stock (each a "Company
Option") and each outstanding warrant or other right to purchase shares of the
Company Capital Stock (each a "Company Right"), whether vested or unvested,
shall be canceled and extinguished. Parent shall issue in substitution for each
Company Option listed on Exhibit H-1 hereto 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 Common Stock covered by such Company Option
immediately prior to the Effective Time and as set forth on Exhibit H-1,
multiplied by the Common Exchange Ratio, rounded down 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 Common Stock specified for each such Company Option under
the applicable option agreement immediately
-4-
<PAGE>
prior to the Effective Time and as set forth on Exhibit H-1, by the Common
Exchange Ratio, rounding the resulting exercise price up to the nearest whole
cent. Parent shall reserve for issuance a sufficient number of shares of Parent
Common Stock for delivery upon the exercise of each Substitute Stock Option.
Each Substitute Stock Option shall be issued pursuant to and subject to the
terms and conditions of Parent's 1998 Stock Plan. No cash will be paid in lieu
of fractional shares which are rounded down pursuant to this section. It is the
intention of the parties hereto that, prior to the Effective Time, all
outstanding Company Options and Company Rights, other than those listed on
Exhibit H-1 hereto, will be exercised by the holders thereof.
(e) Capital Stock of Sub. Each share of common stock, $.0001 par value
per share, 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.
(f) Adjustments to Exchange Ratio. The Exchange Ratio shall be
adjusted to reflect fully the effect of any stock split, reverse split, stock
dividend (including any dividend or distribution of securities convertible into
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, except
for any anticipated recapitalization expressly contemplated by this Agreement.
(g) Fractional Shares. No fractional shares of Parent Common Stock
shall be issued in the Merger. In lieu thereof, each holder of shares of the
Company Capital Stock (each, a "Company Stockholder") 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), receive from Parent, promptly after the Effective Time, an amount of
cash equal to Parent Closing Price multiplied by the fraction of a share of
Parent Common Stock to which such holder would otherwise be entitled.
1.7 Dissenting Shares. Notwithstanding any provision of this Agreement to
the contrary, any shares of the Company Capital Stock that are outstanding
immediately prior to the Effective Time and that are held by Company
Stockholders who have not voted such shares in favor of the approval and
adoption of this Agreement and who shall have delivered a written demand for
appraisal of such shares in accordance with Section 262 of Delaware Law
("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 Delaware Law; provided, however, that (i) if any holder of Dissenting
Shares shall subsequently deliver a written withdrawal of his demand for
appraisal of such shares (with the written approval of the Surviving
Corporation, if such withdrawal is not tendered within 60 days after the
Effective Time), or (ii) if any holder fails to perfect or loses his appraisal
rights as provided under Delaware Law, or (iii) if any holder of Dissenting
Shares fails to demand payment within the time period provided under Delaware
Law, such holder shall forfeit the right to appraisal of such
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shares and such shares shall thereupon be deemed to have been converted into and
to have become exchangeable for, as of the Effective Time, 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 the Company Capital Stock, withdrawals of such
demands, and any other instruments served pursuant to Delaware Law and received
by the Company and (b) the opportunity to direct 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 the Company
Capital Stock; provided, however, that, on behalf of the Company Stockholders,
pursuant to Section 7.2 hereof, Parent shall deposit into an escrow account 10%
of the Merger Shares issued to the Escrow Agent on behalf of the Company
Stockholders pursuant to Section 1.6(a) (the "Escrow Amount"). The portion of
the Escrow Amount contributed on behalf of each Company Stockholder shall be in
proportion to the aggregate number of Merger Shares which such Company
Stockholder would otherwise be entitled to receive in the Merger by virtue of
ownership of outstanding shares of Company Capital Stock.
(c) Exchange Procedures. Promptly after the Effective Time, the
Surviving Corporation shall cause to be mailed or provided at the Closing to
each Company Stockholder (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 the 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; provided,
however, that such letter of transmittal shall be substantially in the form and
substance of a letter of transmittal and instructions approved by counsel for
the Company at or before the Closing. 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, duly completed
and validly executed in accordance with the instructions thereto, a Company
Stockholder 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 Stockholder is entitled
pursuant to Section 1.6, and the Certificate so surrendered shall forthwith be
canceled. As soon as practicable after the Effective
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Time, and subject to and in accordance with the provisions of Article VII
hereof, Parent shall cause to be distributed to the Escrow Agent 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 the 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 the 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 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 the 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.
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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 the
Company Capital Stock in accordance with the terms hereof shall be deemed to be
full satisfaction of all rights pertaining to such shares of the Company Capital
Stock, and there shall be no further registration of transfers on the records of
the Surviving Corporation of shares of the 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 made pursuant to the Delaware
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 Hart-Scott-Rodino Filings. Each of Parent and the Company will
promptly prepare and file the applicable notices (if any) required to be filed
by it under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR
Act"), and comply promptly with any requests to it from the Federal Trade
Commission or United States Department of Justice for additional information.
1.13 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any such further action is necessary or desirable to carry out
the purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges, powers
and franchises of the Company and Sub, the officers and directors of the Company
and Sub are fully authorized in the name of their respective corporations or
otherwise to take, and will take, all such lawful and necessary action.
ARTICLE II
Representations and Warranties of the Company
The Company represents and warrants to Parent and Sub, subject to such
exceptions as are specifically disclosed in the Disclosure Schedule (referencing
the appropriate section and paragraph numbers) supplied by the Company to Parent
(the "Disclosure Schedule") and dated as of the date hereof, as set forth below.
"To the knowledge of the Company" means to the actual knowledge, after due
inquiry, of the officers of the Company.
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
Delaware. The Company has the corporate power to own its properties and to carry
on its business as now being conducted. The
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Company is duly qualified to do business and in good standing as a foreign
corporation in each jurisdiction in which the failure to be so qualified would
have a material adverse effect on the business, assets (including intangible
assets), financial condition, results of operations or prospects of the Company
(hereinafter referred to as a "Material Adverse Effect"). The Company has
delivered a true and correct copy of its Certificate of Incorporation and
Bylaws, each as amended to date, to Parent. Section 2.1 of the Disclosure
Schedule 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 55,000,000
shares, 35,000,000 shares of which are designated as Common Stock, of which
9,505,148 shares are issued and outstanding on the date hereof, 2,500,000 shares
of Series A Stock, of which 2,500,000 shares are issued and outstanding on the
date hereof, 5,200,000 shares of Series B Stock, of which 5,066,666 shares are
issued and outstanding on the date hereof, 5,000,000 shares of Series C Stock,
of which 4,705,882 shares are issued and outstanding on the date hereof, and
5,000,000 shares of Series D Stock, of which 4,441,666 shares are issued and
outstanding on the date hereof. The Company Capital Stock is held by the
Company Stockholders, with the domicile addresses and in the amounts set forth
on Schedule 2.2(a) of the Disclosure Schedule. 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
Certificate 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 Company Options to purchase 2,324,172
shares of the Company Common Stock issued under the Company's Stock Option Plan
(the "Stock Plan") and listed in Section 2.2(b) of the Disclosure Schedule,
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, Parent 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.
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
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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, without limitation, the Support Agreement, the
Affiliate Agreements, the Employment Agreements, the Non-Competition Agreements
and the Stock Option Substitution Agreements.
2.5 No Conflict. 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 of its properties or assets are
subject, or (iii) any judgment, order, decree, statute, law, ordinance, Rule or
regulation applicable to the Company or its properties or assets.
2.6 Consents. No consent, waiver, approval, order or authorization of, or
registration, declaration or filing with, any court, administrative agency or
commission or other federal, state, county, local or other foreign governmental
authority, instrumentality, agency or commission ("Governmental Entity") or any
third party, including a party to any agreement with the Company (so as not to
trigger any Conflict), is required by or with respect to the Company in
connection with the execution and delivery of this Agreement and any Related
Agreements 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 Schedule
sets forth the Company's audited balance sheet as of December 31, 1997, the
audited income statements and cash flows for the years ended December 31, 1996
and 1997 (collectively, the "Audited Financials"), and the Company's unaudited
balance sheets as of December 31, 1998 and September 30, 1999 and unaudited
income statement and cash flow for the year ended December 31, 1998 and for the
period from January 1, 1999 through September 30, 1999 (collectively, the
"Unaudited Financials" and, together with the Audited Financials, the "Financial
Statements"). The Financial Statements (a) are in accordance with the books and
records of the Company, (b) have been prepared in accordance with generally
accepted accounting principles ("GAAP"), applied on a
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basis consistent throughout the periods indicated and consistent with each
other, provided that the Unaudited Financials do not contain footnotes in
accordance with GAAP, and (c) fairly and accurately represent the financial
condition of the Company at the respective dates specified therein and the
results of operations for the respective periods specified 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 September 30, 1999 shall be referred to as the "Current Balance Sheet."
The Company has no material debt, liability or obligation of any nature, whether
accrued, absolute, contingent or otherwise, and whether due or to become due,
that is not reflected, reserved against or disclosed in the Financial Statements
or Section 2.7 of the Disclosure Schedule, except for those that may have been
incurred after the date of the Current Balance Sheet in the ordinary course of
the Company's business, consistent with past practice. When delivered pursuant
to Section 5.23 of this Agreement, the audited balance sheet as of December 31,
1998 and the audited income statements and cash flows for the year ended
December 31, 1998 (the "1998 Audited Financials") and the unaudited balance
sheet as of September 30, 1999 and the unaudited income statements and cash
flows for the nine months ended September 30, 1999 (the "Nine Month
Financials"): (a) will be in accordance with the books and records of the
Company, (b) will have been prepared in accordance with generally accepted
accounting principles ("GAAP"), applied on a basis consistent throughout the
periods indicated and consistent with each other and (c) will fairly and
accurately represent the financial condition of the Company at the date
specified therein and the results of operations for the period specified
therein, subject in the case of the Nine Month Financials, to normal year-end
adjustments, which will not be material in amount or significance.
2.8 No Undisclosed Liabilities. The Company does not have any liability,
indebtedness, obligation, expense, claim, deficiency, guaranty or endorsement of
any type, whether accrued, absolute, contingent, matured, unmatured or other
(whether or not required to be reflected in financial statements 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. Since September 30, 1999, there has not been, occurred or
arisen any:
(a) transaction by the Company involving in excess of $10,000, 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 $25,000;
(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 $25,000;
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(e) labor trouble or claim of wrongful discharge or other unlawful
labor practice or action;
(f) change in accounting methods or practices (including any change in
depreciation or amortization policies or rates) by the Company;
(g) revaluation by the Company of any of its assets;
(h) declaration, setting aside or payment of a dividend or other
distribution with respect to the Company Capital Stock, or any direct or
indirect redemption, purchase or other acquisition by the Company of any of its
Common Stock;
(i) increase in the salary or other compensation payable or to become
payable by the Company to any of its 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, either individually or in the aggregate, $25,000;
(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 $10,000, 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 $25,000;
(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;
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(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 or could
reasonably be expected to have a Material Adverse Effect on the Company; or
(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.
(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 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
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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 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.
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(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. 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, 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 Schedule 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 Schedule 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.
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(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; (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 Schedule 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, or has
exclusive license to use, each item of the Company Intellectual Property,
including all Company Registered Intellectual Property listed on Section 2.13(b)
of the Disclosure Schedule, 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) 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
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of, all Intellectual Property in such work, material or invention by operation
of law or by valid assignment.
(e) 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, 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 the 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 the 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
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agreements substantially in the Company's standard forms, and 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.
(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) To the Company's knowledge, no (i) product, service or publication
of the Company, (ii) material published or distributed by the Company or (iii)
conduct or statement of the Company, constitutes obscene material or a
defamatory statement or material.
2.14 Agreements, Contracts and Commitments.
(a) 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 $25,000;
(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 $25,000;
(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
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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;
(viii) any agreement, contract or commitment relating to capital
expenditures and involving future payments in excess of $25,000;
(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 $25,000 or more;
(xii) any construction contracts;
(xiii) any distribution, joint marketing or development
agreement; or
(xiv) any other agreement, contract or commitment that involves
$25,000 or more or is not cancelable without penalty within thirty (30) days.
(b) The Company is in compliance with and has not breached, violated
or defaulted under, or received notice that it has breached, violated or
defaulted under, any of the terms or conditions of any agreement, contract,
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, 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. No officer, director or stockholder of
the Company (nor any ancestor, sibling, descendant or spouse of any of such
persons, or any trust, partnership or
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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, 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 Schedule
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. 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. To the Company's knowledge,
there is no investigation pending or 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, to the Company's knowledge, 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 stockholders or actions by written consent since
the incorporation of the Company.
2.20 Environmental Matters.
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(a) Hazardous Material. The Company has not: (i) operated any
underground storage tanks at any property that the Company has at any time
owned, operated, occupied or leased; or (ii) illegally released any material
amount of any substance that has been designated by any Governmental Entity or
by applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise a danger to health or the environment, including, without limitation,
PCBs, asbestos, petroleum, and urea-formaldehyde and all substances listed as
hazardous substances pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, or defined as a hazardous
waste pursuant to the United States Resource Conservation and Recovery Act of
1976, as amended, and the regulations promulgated pursuant to said laws (a
"Hazardous 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, to the Company's
knowledge, 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. 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 Schedule sets forth the principal terms and conditions of any
agreement, written or oral, with respect to such fees. Section 2.21 of the
Disclosure Schedule sets forth the Company's current reasonable estimate of all
Third Party Expenses (as defined in Section 5.6 of this Agreement) expected to
be incurred by the Company in
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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:
(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) "COBRA" shall mean the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended;
(iii) "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, each "employee benefit plan," within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA") which
is or has been maintained, contributed to, or required to be contributed to, by
the Company or any Affiliate for the benefit of any Employee (as defined below),
and pursuant to which the Company or any Affiliate has or may have any
liability, contingent or otherwise;
(iv) "Employee" shall mean any current, former, or retired
employee, consultant, officer, or director of the Company or any Affiliate;
(v) "Employee Agreement" shall refer to each employment,
severance, consulting or similar agreement or contract between the Company or
any Affiliate and any Employee;
(vi) "FMLA" shall mean the Family Medical Leave Act of 1993, as
amended;
(vii) "International Plan" shall mean each Company Employee Plan
that has been adopted or maintained by the Company or any Affiliate, whether
informally or formally, or with respect to which the Company or any Affiliate
will or may have any liability, for the benefit of Employees who perform
services outside the United States;
(viii) "IRS" shall mean the Internal Revenue Service;
(ix) "Multiemployer Plan" shall mean any "Pension Plan" (as
defined below) which is a "multiemployer plan," as defined in Section 3(37) of
ERISA;
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(x) "PBGC" shall mean the Pension Benefit Guaranty Corporation;
and
(xi) "Pension Plan" shall mean each Company Employee Plan which
is an "employee pension benefit plan," within the meaning of Section 3(2) of
ERISA.
(b) Schedule. Section 2.22(b) of the Disclosure Schedule 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 adopt
or 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 all related trust documents and
copies of all forms of agreement and enrollment used therewith; (ii) the most
recent annual actuarial valuations, if any, prepared for each Employee Plan;
(iii) the three most recent annual reports (Series 5500 and all schedules
thereto), if any, required under ERISA or the Code in connection with each
Employee Plan or related trust; (iv) 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, the Department of Labor
("DOL") or any other governmental agency, 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;
(viii) all communications material to any Employee or Employees relating to any
Employee Plan and any proposed Employee Plan, in each case, relating to any
amendments, terminations, establishments, increases or decreases in benefits,
acceleration of payments or vesting schedules or other events which would result
in any liability to the Company and (ix) all COBRA forms and related notices (or
such forms and notices as required under comparable law); (x) all policies
pertaining to fiduciary liability insurance covering the fiduciaries for each
Company Employee Plan; (xi) the three (3) most recent plan years discrimination
tests for each Company Employee Plan; and (xii) all registration statements,
annual reports (Form 11-K and all attachments thereto) and prospectuses prepared
in connection with each Company Employee Plan.
(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
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Section 501(a) of the Code has either received a favorable determination,
opinion, notification or advisory 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 letter and make any
amendments necessary to obtain a favorable determination as to the qualified
status of each such Employee Plan; (iii) no "prohibited transaction," within the
meaning of Section 4975 of the Code or Sections 406 or 407 of ERISA, and not
otherwise exempt under Section 4975 of the Code or Section 408 of ERISA (or any
administrative class exemption issued thereunder) 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 502(i) of ERISA or Section 4975
through 4980 of the Code.
(e) Pension Plans. Neither the Company nor any Affiliate has ever
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 and Multiple Employer Plans. At no time has the
Company contributed to or been obligated to contribute to any Multiemployer
Plan. Neither the Company nor any Affiliate has at any time ever maintained,
established, sponsored, participated in, or contributed to any multiple employer
plan, as described in Section 413(c) of the Code.
(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) or any other person
that such Employee(s) or any other person 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) Health Care Compliance. Neither the Company nor any Affiliate
has, prior to the Effective Time and in any material respect, violated any of
the health care continuation requirements of COBRA, the requirements of FMLA,
the requirements of the Health Insurance Portability and Accountability Act of
1996, the requirements of the Women's Health and Cancer Rights Act, the
requirements of the Newborns' and Mothers' Health Protection Act of 1996, or any
amendment to each such Act, or any similar provisions of state law applicable to
its Employees.
(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
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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. 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).
There are no pending, threatened or reasonably anticipated claims or actions
against the Company under any worker's compensation policy or long-term
disability plan.
(k) Labor. No work stoppage or labor strike against the Company is
pending, threatened or reasonably anticipated. The Company does not know of any
activities or proceedings of any labor union to organize any Employees. 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.
(l) International Plan. The Company does not now, nor has it ever had
the obligation to, maintain, establish, sponsor, participate in, or contribute
to any International Plan.
2.23 No Interference or Conflict. To the knowledge of the Company, no
stockholder, 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 Schedule lists all
insurance policies and fidelity bonds covering the assets, business, equipment,
properties, operations, employees, officers
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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 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 Year 2000 Compliance. The Company has conducted a reasonable review
of all of its software products and all material operating codes, programs,
utilities and other software, as well as all hardware and systems, utilized by
it (collectively, "Systems") to determine whether such software products and
Systems are designed to record, store, process and present millennial dates in
the same manner, and with the same functionality, as provided on or before
December 31, 1999, and are designed to not lose functionality or degrade in
performance as a consequence of such software operating at a millennial date
(such design and performance being referred to as "Y-2000 Compliant"). To the
extent such review identified software products or Systems that are not Y-2000
Compliant, (a) the Company has taken appropriate corrective action with respect
to such software products and Systems, and to the knowledge of the Company, as
of the date hereof, the costs of such corrective action do not exceed, in the
aggregate, $50,000, and (b) such software products and Systems and the related
appropriate corrective action is described in Section 2.27 of the Disclosure
Schedule. To the knowledge of the Company, all suppliers of technology or other
critical products or services to Company are Y-2000 Compliant. Except as set
forth in the Company's standard terms and conditions of sale, a copy of which is
attached to Section 2.27 of the Disclosure Schedule, the Company has not
provided to its customers (i) any express warranties, including any warranties
related to Y-2000 Compliant issues, regarding the software products and services
it provides to such customers or (ii) rights to obtain refunds with respect to
such products or services.
2.28 Representations Complete. None of the representations or warranties
made by the Company (as modified by the Disclosure Schedule), 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 Stockholders 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.
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ARTICLE III
Representations and Warranties of Parent and Sub
Parent and Sub represent and warrant to the Company, subject to such
exceptions as are specifically disclosed in the Disclosure Schedule (referencing
the appropriate section and paragraph numbers) supplied by Parent to the Company
(the "Parent Disclosure Schedule") and dated as of the date hereof, as set forth
below:
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 Delaware. 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 the boards of directors of Parent and Sub and by Parent as the sole
stockholder of Sub, and no other corporate proceedings on the part of Parent or
Sub are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Parent and Sub and constitutes the valid and binding obligations of Parent and
Sub, enforceable in accordance with its terms, except as such enforceability may
be limited by principles of public policy and subject to the laws of general
application relating to bankruptcy, insolvency and the relief of debtors and
rules of law governing specific performance, injunctive relief or other
equitable remedies.
3.3 Capital Structure.
(a) The authorized stock of Parent consists of 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.
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3.4 SEC Documents; Parent Financial Statements. Parent has furnished the
Company, and will furnish the Company Stockholders 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 stockholders covering the
fiscal year ended December 31, 1998, (ii) its Proxy Statement to its
stockholders for its 1999 annual meeting and (iii) its quarterly report on Form
10-Q for the quarter ended September 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 Litigation. To the knowledge of Parent, there is no suit, claim,
action, proceeding or investigation pending or threatened against Parent or any
of its subsidiaries or any of their respective properties or assets before any
Governmental Entity that could reasonably be expected to result in a Material
Adverse Effect on Parent.
3.6 Ownership of the Company. As of the date hereof, neither Parent nor
Sub, nor any subsidiary of Parent, is the beneficial owner of any shares of
Company Capital Stock.
3.7 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.
3.8 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.
3.9 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
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(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.
3.10 Information Supplied. None of the information supplied or to be
supplied by Parent or Sub for inclusion or incorporation by reference in any
documents to be provided to the Company Stockholders in connection with the
transaction contemplated under the terms of this Agreement will, at the date
mailed to such Company Stockholders and at the times of the meeting or meetings
of Company Stockholders to be held in connection with the Merger, contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein in
light of the circumstances under which they are made not misleading.
Notwithstanding the foregoing, neither Parent nor Sub makes any representation,
warranty or covenant with respect to any information supplied or required to be
supplied by the Company that is contained in or omitted from such documents.
3.11 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 keep available the services of the Company's present
officers and key employees, preserve intact the Company's present business
organization, 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 Schedule;
(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) Except, in each case for borrowing under existing lines of credit
in the ordinary course of business consistent with past practice, but not to
exceed $100,000 in the aggregate, 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; provided, however, that the
Company may grant severance or termination pay, in an amount not to exceed six
(6) weeks of base salary in effect for such employee, to any employee who has
not been offered employment with Parent following the Merger or any employee
listed on Exhibit C-1 of this Agreement.
(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 $10,000 (in
any one case) or $20,000 (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
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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 or (d) make or
authorize any statement, recommendation or solicitation in support of any
possible acquisition of the Company or any of its subsidiaries (whether by way
of merger, purchase of capital stock, purchase of assets or otherwise) or any
material portion of its or their capital stock or assets by any person, other
than by Parent. 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 Preparation of Permit Application, Hearing Request, Hearing Notice and
Information Statement. As promptly as practicable after any determination by
Parent or its legal counsel of the unavailability of Rule 506 as an exemption
from registration under the Securities Act for the issuance of Parent Common
Stock in connection with the Merger, Parent and the Company shall prepare and
file with the California Commissioner of Corporations the documents required by
the California Corporate Securities Law of 1968, as amended (the "CCSL")
including, but not limited to, any required "Permit Application," "Hearing
Request," and "Hearing Notice", pursuant to Sections 25121 and 25142 of the CCSL
(collectively, the "Notice Materials"), in connection with the Merger, in order
to perfect the exemption from registration provided by Section 3(a)(10) of the
Securities Act. Each of Parent and the Company shall use reasonable efforts to
have the Permit Application, Hearing Request and Hearing Notice declared
effective under the CCSL as promptly as practicable after such filing. In
addition, Company and Parent will prepare and the Company will distribute an
information statement or proxy statement (the "Information Statement") along
with the Notice Materials, as may be required by California Law, at the earliest
practicable date to submit this Agreement, the Merger and related matters for
the consideration and approval of the Company Stockholders, which approval will
be recommended by Company's Board of Directors and management. Such Information
Statement will contain information, and will be solicited, in compliance with
applicable law. Each of Parent and the Company will promptly provide all
information relating to their respective business and operations necessary for
inclusion in the Notice Materials to satisfy all requirements of applicable
state and federal securities laws. Each of Parent and the Company shall be
solely responsible for any statement, information or omission in the Notice
Materials relating to it or its affiliates based upon written information
furnished by it.
5.2 Meeting of the Company Stockholders.
(a) Company will take all action necessary in accordance with the
Delaware Law, the California Corporations Code ("California Law") and its
Certificate of Incorporation and Bylaws to call, notice, convene and hold the
Company Stockholders' Meeting to be held as promptly
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as practicable, and in any event (to the extent permissible under applicable
law) no more than ten (10) days after the California Commissioner of
Corporations has issued a permit declaring the Permit Application, Hearing
Request and Hearing Notice with respect to the Merger effective, for the purpose
of voting upon approval of this Agreement and the Merger. The Company will
solicit from its stockholders proxies in favor of the approval of this Agreement
and the Merger, and will use its commercially reasonable efforts to take all
other action necessary or advisable to secure the vote or consent of its
stockholders required by the rules of California Law and Delaware Law to obtain
such approvals. Notwithstanding anything to the contrary contained in this
Agreement, Company may adjourn or postpone the Company Stockholders' Meeting if
as of the time for which the Company Stockholders' Meeting is originally
scheduled there are insufficient shares of the Company Capital Stock represented
(either in person or by proxy) to constitute a quorum necessary to conduct the
business of the Company Stockholders' Meeting. The Company will use its
commercially reasonable efforts to ensure that all proxies solicited by Company
in connection with the Company Stockholders' Meeting are solicited in compliance
with the Delaware Law, California Law, its Certificate of Incorporation and
Bylaws, and all other applicable legal requirements. The Company's obligation to
call, give notice of, convene, hold and conduct the Company Stockholders'
Meeting in accordance with this Section 5.3(a) shall not be limited to or
otherwise affected by the commencement, disclosure, announcement or submission
to Company of any proposal by a third party to acquire the Company, or by any
withdrawal, amendment or modification of the recommendation of the Board of
Directors of the Company to the Company Stockholders to approve this Agreement
and the Merger.
(b) The Board of Directors of the Company shall recommend that the
Company Stockholders vote in favor of and approve this Agreement and the Merger
at the Company Stockholders' Meeting, the Information Statement shall include a
statement to the effect that the Board of Directors of the Company has
recommended that the Company Stockholders vote in favor of and approve this
Agreement and the Merger at the Company Stockholders' Meeting, and neither the
Board of Directors of the Company nor any committee thereof shall withdraw,
amend or modify, or propose or resolve to withdraw, amend or modify in a manner
adverse to Parent, the recommendation of the Board of Directors of the Company
that Company's stockholders vote in favor of and approve this Agreement and the
Merger.
5.3 Regulatory Approvals. The Company will execute and file, or join in
the execution and filing, of any application or other document that may be
necessary in order to obtain the authorization, approval or consent of any
governmental body, federal, state, local or foreign, which may be reasonably
required, or which Parent may reasonably request, in connection with the
consummation of the transactions provided for in this Agreement. The Company
will use all reasonable efforts to obtain or assist Parent in obtaining all such
authorizations, approvals and consents.
5.4 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
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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 5.4 shall affect or be deemed to modify any representation or
warranty contained herein or the conditions to the obligations of the parties to
consummate the Merger.
5.5 Confidentiality.
(a) Each of the parties hereto hereby agrees that the information
obtained in any investigation pursuant to Section 5.4, 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").
(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.
5.6 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. Parent agrees that if the Merger is consummated,
Parent will guarantee the payment of all Third Party Expenses which are
described in Section 2.21 of the Disclosure Schedule and which are incurred and
accrued for but not paid by the Company prior to the Effective Time.
5.7 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.
5.8 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 Schedule) so as to preserve all rights of, and benefits to,
the Company thereunder.
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5.9 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).
5.10 Reasonable Efforts. Subject to the terms and conditions provided in
this Agreement, each of the parties hereto shall use commercially reasonable
efforts to take promptly, or cause to be taken, all actions, and to do promptly,
or cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated hereby, to obtain all necessary waivers, consents and approvals and
to effect all necessary registrations and filings and to remove any injunctions
or other impediments or delays, legal or otherwise, in order to consummate and
make effective the transactions contemplated by this Agreement for the purpose
of securing to the parties hereto the benefits contemplated by this Agreement;
provided, 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.
5.11 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 5.11 shall not limit or
otherwise affect any remedies available to the party receiving such notice.
5.12 Business Arrangements. In anticipation of the Closing, Parent and the
Company agree to negotiate in good faith a strategic alliance arrangement
pursuant to which the business operations of Parent and the Company will be
integrated to the greatest extent mutually agreeble to Parent and the Company.
It is the parties intentions that the final terms of such strategic alliance
arrangement will adequately protect each of the Company's and Parent's
intellectual property, assets, confidential information and other relevant
property and relationships in the event that this Agreement is terminated and
the Closing does not occur. In addition to the strategic alliance arrangement
discussed above, Parent agrees to use its best efforts to lend, on terms
comparable to lending terms available to the Company from commercial lenders and
to be negotiated in good faith between Parent and the Company, in an amount
necessary to meet the Company's needs for working capital during the period
prior to the earlier to occur of the Closing Date or the termination of this
Agreement.
5.13 Affiliate Agreements. Section 5.13 of the Disclosure Schedule 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
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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.
5.14 Company Restated Certificate of Incorporation. The Company shall
cause the Company Restated Certificate to be filed with and accepted by the
Delaware Secretary of State.
5.15 Notice to Holders of Company Options and Company Rights. The Company
shall give notice of the transactions contemplated hereby to holders of Company
Options and Company Rights in accordance with the terms of such Company Options
and Company Rights or otherwise obtain the written waiver of such notice
obligations.
5.16 Company Dissenting Shares. As promptly as practicable after the date
the Information Statement is distributed to Company Stockholders and prior to
the Closing Date, Company shall furnish Parent with the name and address of each
Company Stockholder who has up to such time dissented and the number of shares
owned by such Company Stockholders.
5.17 Certain Employee Benefits. As soon as practicable after the execution
of this Agreement, the Company and Parent shall confer and work together in good
faith to agree upon mutually acceptable employee benefit and compensation
arrangements for the Company's employees following the Merger. The Company and
its Affiliates, as applicable, shall take such actions as are necessary to
terminate such Employee Plans as are requested by Parent to be terminated. The
Company and its Affiliates, as applicable, each agrees to terminate any and all
group severance, separation, retention and salary continuation plans, programs
or arrangements that are covered under ERISA immediately prior to the Closing.
Parent shall receive from the Company evidence that the Company's and each
Affiliate's (as applicable) plan(s) has been terminated pursuant to resolution
of each such entity's Board of Directors (the form and substance of which
resolutions shall be subject to review and approval of Parent), effective as of
the day immediately preceding the Effective Time.
5.18 Company Benefit Plans. The Board of Directors of the Company and its
Affiliates, as applicable, shall take all actions necessary to terminate the
Company 401(k) Plan effective upon as of the day immediately preceding the
Effective Time. Parent shall receive from the Company evidence that the
Company's and each Affiliate's (as applicable) plan(s) has been terminated
pursuant to resolution of each such entity's Board of Directors (the form and
substance of which resolutions shall be subject to review and approval of
Parent), effective as of the day immediately preceding the Closing Date.
5.19 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.
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5.20 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 5.16.
5.21 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.
5.22 Indemnification and Directors' and Officers' Insurance.
(a) From and after the Effective Time, Parent shall cause the
Surviving Corporation to fulfill and honor in all respects the obligations of
the Company pursuant to any indemnification agreements entered into between the
Company and its directors and officers as of or prior to the date hereof in the
Company's customary form previously provided to Parent and any indemnification
provisions under the Company's Certificate of Incorporation or bylaws in effect
immediately prior to the Effective Time.
(b) For a period of three (3) years from the Effective Time, Parent
will maintain or cause the Surviving Corporation to maintain in effect, if
available, directors and officers' liability insurance covering those persons
who, as of immediately prior to the Effective Time, are covered by the Company's
directors' and officers' liability insurance policy (the "Insured Parties") on
terms no less favorable to the Insured Parties than those of the Company's
present directors' and officers' liability insurance policy; provided, however,
that in no event shall Parent or the Company be required to expend on an annual
basis in excess of 200% of the current $11,000 annual premium currently paid by
the Company for such coverage; provided further, that, in lieu of maintaining
such existing insurance as provided above, Parent, at its election, may cause
coverage to be provided under any policy maintained for the benefit of Parent or
any of its subsidiaries, so long as the terms are not materially less
advantageous to the intended beneficiaries thereof than such existing insurance.
5.23 Delivery of Financial Statements. The Company shall deliver the Nine
Month Financials including footnotes prepared in accordance with GAAP as soon as
possible following the date of this Agreement and the Company shall use its best
efforts to cause KPMG Peat Marwick to deliver the 1998 Audited Financials as
soon as possible following the date of this Agreement.
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:
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(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) Permit. The California Commissioner of Corporations shall have
issued a permit declaring the Permit Application, Hearing Request and Hearing
Notice with respect to the Merger effective or the issuance of the Parent Common
Stock in connection with the Merger shall have been registered pursuant to a
registration statement declared effective by the SEC.
(c) Hart-Scott-Rodino Compliance. All applicable waiting periods under
the HSR Act shall have expired or early termination shall have been granted by
both the Federal Trade Commission and the United States Department of Justice.
6.2 Additional Conditions to Obligations of the 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 were true and correct when
made and, except for Section 3.8, 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, results of operations or
prospects of Parent and its subsidiaries, taken as a whole.
(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; provided, that none of the following shall
be deemed, either alone or in combination, to constitute a Material Adverse
Effect with respect to Parent: (i) events affecting the industry in which Parent
operates as a whole; (ii) a failure by Parent to meet internal earnings or
revenue projections; or (iii) any disruptions of customer or supplier
relationships arising out of or resulting from actions contemplated by the
parties in connection with, or which are attributable to, the execution and
announcement of this Agreement by, or to the identity of the Company.
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(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 in this Agreement were true and correct when made
and 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 Schedule shall have been obtained.
(d) Legal Opinion. Parent shall have received a legal opinion from
Bay Venture Counsel, LLP, 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, and the
persons listed on Exhibit D-1 shall each have executed and delivered to Parent a
Non-Competition Agreement in substantially the form attached hereto as Exhibit
D-2, and such Employment Agreements and Non-Competition Agreements shall be in
full force and effect.
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(f) No Material Adverse Changes. There shall not have occurred any
material adverse change in the business, assets (including intangible assets),
results of operations, liabilities (contingent or accrued), financial condition
or prospects of the Company since December 31, 1998; provided that none of the
following shall be deemed, either alone or in combination, to constitute a
Material Adverse Effect with respect to the Company: (i) events affecting the
LAN networking industry as a whole (ii) a failure by the Company to meet
internal earnings or revenue projections; or (iii) any disruptions of customer
or supplier relationships arising out of or resulting from actions contemplated
by the parties in connection with, or which are attributable to, the execution
and announcement of this Agreement by, or to the identity of, Parent.
(g) Stockholder Approval. (i) Company Stockholders holding at least
95% of the Company Capital Stock shall have approved this Agreement, the Merger
and the transactions contemplated thereby, and holders of not more than 5% of
the 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; (ii) the requisite number of
disinterested Company Stockholders shall have approved any payments as a result
of the consummation of the transactions contemplated hereby which would
otherwise constitute "excess parachute payments" within the meaning of Section
280G of the Code; and (iii) the requisite number of Company Stockholders shall
have approved the Certificate of Amendment of Amended and Restated Certificate
of Incorporation of the Company (the "Company Restated Certificate") in the form
attached as Exhibit G.
(h) Affiliate Agreements. Each of the persons listed in Section 5.12
of the Disclosure Schedule shall have executed an Affiliate Agreement in
substantially the form attached as Exhibit A.
(i) 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.
(j) Resignation of the Company Directors. Each of the directors of
the Company shall have delivered to Parent a letter of resignation from the
Board of Directors of the Company effective as of the Closing.
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(k) Company Restated Certificate. The Company Restated Certificate
shall have been accepted for filing by the Secretary of State of the State of
Delaware and shall be in full force and effect immediately prior to the Closing.
(l) Termination of Warrants. All outstanding warrants to purchase
Company Capital Stock shall have been exercised in full or terminated in writing
to the satisfaction of Parent and its legal counsel.
(m) Financial Statements. The Company shall have delivered the 1998
Audited Financials and the Nine Month Financials to Parent at least three (3)
business days prior to the Closing.
(n) Stock Option Substitution Agreements. Each person listed in
Exhibit H-1 shall have executed a Stock Option Substitution Agreement
substantially in the form attached as Exhibit H-2.
(o) Termination of Rights. Any registration rights, rights of first
refusal, rights to any liquidation preference, or preemptive or redemption
rights of any Company Stockholder shall have been terminated or waived as of the
Closing.
(p) 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.
(q) Employment Offers. Seventy-five percent (75%) of the persons
listed on Exhibit C-3 hereto shall each have accepted an offer of employment
from Parent pursuant to the terms of the offer letter presented to them and
shall be employed by the Company immediately prior to the Effective Time.
(r) Securities Laws. Parent shall be reasonably satisfied regarding
the exemption of the issuance of the Merger Shares from the registration
requirements of the Securities Act by virtue of Section 3(a)(10) of the
Securities Act.
(s) Termination of 401(k) Plan. The Board of Directors of the Company
shall have taken all necessary steps to terminate the Company's 401(k) Plan
effective as of the day immediately preceding the Effective Time.
(t) Unanimous Board Approval. The Board of Directors of the Company
shall not have revoked or modified its unanimous approval of this Agreement, the
Merger and the transactions contemplated hereby.
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ARTICLE VII
Survival of Representations and Warranties; Escrow
7.1 Survival of Representations and Warranties. All of the Company's
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive the Merger and continue until 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. Except for the representations and warranties contained in
Article 2 of this Agreement, the Company makes no other express or implied
representation or warranty to Parent or Sub. Parent and Sub acknowledge that, in
entering into this Agreement, they have not relied on any representations or
warranties of the Company other than the representations and warranties of the
Company set forth in Article 2 of this Agreement.
7.2 Escrow Arrangements.
(a) Escrow Fund. As security for the indemnity provided for in this
Section 7.2 and by virtue of this Agreement, the Company Stockholders 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 Stockholder. As soon as practicable after
the Effective Time, the Escrow Amount, without any act of any Company
Stockholder, will be deposited with U.S. Bank Trust (or other institution
acceptable to Parent and the Company Stockholders) 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 Stockholder shall be in proportion to the aggregate Parent Common
Stock which such holder would otherwise be entitled under Section 1.6(a). The
Company and the Company Stockholders 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 Stockholders 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 Stockholders 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 for any breach of any representation,
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warranty or covenant if the Merger does not close for reasons other than
Parent's breach of its obligations hereunder; but the Company Stockholders shall
not be personally liable therefor. Parent may not receive any shares from the
Escrow Fund unless and until an Officer's Certificate (as defined in paragraph
(d) below) identifying Losses has 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 the reasonable judgement of
Parent, subject to the objection of the Stockholder Representative (as defined
in Section 7.3 below) and the subsequent arbitration of the matter in the manner
provided in 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 Stockholders the remaining portion of the Escrow Fund not required to
satisfy such claims. Deliveries of Escrow Amounts to the Company Stockholders
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 Stockholder shall have voting rights with
respect to the shares of Parent Common Stock contributed to the Escrow Fund by
such Company Stockholder (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"):
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(A) stating that Parent has paid or properly accrued or reasonably anticipates
that it will have to pay or accrue Losses, and (B) specifying in reasonable
detail the individual items of Losses included in the amount so stated, the date
each such item was paid or properly accrued, or the basis for such anticipated
liability, and the nature of the misrepresentation, breach of warranty or
covenant to which such item is related, the Escrow Agent shall, subject to the
provisions of Section 7.2(e) hereof, deliver to Parent out of the Escrow Fund,
as promptly as practicable, shares of Parent Common Stock held in the Escrow
Fund with a value equal to such Losses; provided, however, that Parent may not
receive any shares from the Escrow Fund unless and until one or more Officer's
Certificatesi identifying Losses in excess of Fifty Thousand Dollars ($50,000)
in the aggreate (the "Basket Amount") has or have been delivered to the Escrow
Agent as provided in this Article VII, in which case Parent shall be entitled to
recover all Losses so identified, including without limitation, the Basket
Amount.
(ii) For the purposes of determining the number of shares of
Parent Common Stock to be delivered to Parent out of the Escrow Fund as
indemnity pursuant to Section 7.2(d)(i) hereof, the shares of Parent Common
Stock shall be valued at the Parent Closing Price.
(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 Stockholder 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 Stockholder 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 Stockholder 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 Stockholder Representative shall object in
writing to any claim or claims made in any Officer's Certificate, the
Stockholder 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
Stockholder 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 Stockholder 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
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arbitrator mutually agreeable to Parent and the Stockholder Representative. In
the event that within forty-five (45) days after submission of any dispute to
arbitration, Parent and the Stockholder Representative cannot mutually agree on
one arbitrator, Parent and the Stockholder 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 same 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 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 San Francisco County, 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 Stockholder Representative of such claim, and the
Company Stockholders 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
Stockholder 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 Stockholder Representative has consented to any such
settlement, the Company Stockholders 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 Stockholder 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
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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.
(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
shall hold all documents and shares of Parent Common Stock and shall 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,
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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.
(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
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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 Stockholder Representative.
(a) In the event that the Merger is approved, effective upon such
vote, and without further act of any Company Stockholder, James Mongiello shall
be appointed as agent and attorney-in-fact (the "Stockholder Representative")
for each Company Stockholder, for and on behalf of the Company Stockholders, to
give and receive notices and communications, to authorize delivery to Parent of
shares of Parent Common Stock from the Escrow Fund in satisfaction of claims by
Parent, to object to such deliveries, to agree to, negotiate, enter into
settlements and compromises of, and demand arbitration and comply with orders of
courts and awards of arbitrators with respect to such claims, and to take all
actions necessary or appropriate in the judgment of the Stockholder
Representative for the accomplishment of the foregoing. Such agency may be
changed by the Company Stockholders from time to time upon not less than thirty
(30) days prior written notice to Parent; provided, however, that the
Stockholder 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 Stockholder 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 Stockholder Representatives, and a
Stockholder Representative shall not receive compensation for his or her
services. Notices or communications to or from the Stockholder Representatives
shall constitute notice to or from each of the Company Stockholder.
(b) The Stockholder Representative shall not be liable for any act
done or omitted hereunder as Stockholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Stockholders on
whose behalf the Escrow Amount was contributed to the Escrow Fund shall
severally indemnify the Stockholder Representative and hold the Stockholder
Representative harmless against any loss, liability or expense incurred without
negligence or bad faith on the part of the Stockholder Representative and
arising out of or in connection with the acceptance or administration of the
Stockholder Representative's duties hereunder, including the reasonable fees and
expenses of any legal counsel retained by the Stockholder Representative.
(c) A decision, act, consent or instruction of the Stockholder
Representative shall constitute a decision of all Company Stockholders 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
Stockholders, and the Escrow Agent and Parent may rely upon any such decision,
act, consent or instruction of the Stockholder Representatives as being the
decision, act, consent or instruction of each and every such Company
Stockholder. 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 Stockholder Representative.
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
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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 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; provided, however, that, unless such Company Stockholder was
personally aware that such breach was knowing and intentional or fraudulent,
such Company Stockholder shall not have liability under the preceding clause in
an amount greater than the aggregate Merger Shares to be issued to such Company
Stockholder pursuant to Section 1.6 of this Agreement, nor shall any liability
be asserted against such Company Stockholder after November 16, 2001 for any
such knowing and intentional or fraudulent actual breach of the representations
and warranties or covenants of the Company contained in any Article of this
Agreement.
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 March 31, 2000, or by June 30, 2000 in the event that a Registration
Statement on Form S-4 is required under the Securities Act in order to
consummate the Merger; (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;
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(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; or
(f) by Parent if the required approval of the Company Stockholders
contemplated by this Agreement shall not have been obtained by reason of the
failure of the Principal Stockholders to fulfill their obligations under the
Support Agreement.
Where action is taken to terminate this Agreement pursuant to this Section
8.1, it shall be sufficient for such action to be authorized by the Board of
Directors (as applicable) of the party taking such action.
8.2 Effect of Termination. In the event of termination of this Agreement
as provided in Section 8.1, this Agreement shall forthwith become void and there
shall be no liability or obligation on the part of Parent, Sub, the Company, or
their respective officers, directors or stockholders; 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 5.5, 5.6,
5.7 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:
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Tut Systems, Inc.
2495 Estand Way
Pleasant Hill, CA 94523
Attention: Sal D'Auria
Telephone No.: (925) 682-6510
Facsimile No: (925) 682-1841
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:
Freegate Corporation
1208 E. Arques Ave.
Sunnyvale, CA 94086
Telephone No.: (408) 617-1078
Facsimile No.: (408) 617-1250
Attention: Sheryl McCoy
with a copy to:
Bay Venture Counsel, LLP
1999 Harrison Street, Suite 1300
Oakland, California 94612
Telephone No.: (510) 273-8750
Facsimile No.: (510) 834-7440
Attention: Greg Beattie, Esq.
(c) if to the Stockholder Representative, to:
James Mongiello
C/o FreeGate Corporation
1208 E. Arques Avenue
Sunnyvale, CA 94086
Telephone No.: (408) 617-1078
Facsimile No.: (408) 617-1250
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(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) 273-4532
Facsimile No.: (415) 273-4590
Attention: Ann Gadsby
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 Schedule, 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
-52-
<PAGE>
the exclusive jurisdiction and venue of any court within Santa Clara County,
California, in connection with any matter based upon or arising out of this
Agreement or the matters contemplated herein, agrees that process may be served
upon them in any manner authorized by the laws of the State of California for
such persons and waives and covenants not to assert or plead any objection which
they might otherwise have to such jurisdiction, venue and such process.
9.8 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or Rule of
construction providing that ambiguities in an agreement or other document will
be construed against the party drafting such agreement or document.
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<PAGE>
IN WITNESS WHEREOF, Parent, Sub, the Company, the Stockholder
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. FREEGATE CORPORATION
By: /s/ Nelson Caldwell By: /s/ Sandy Benett
--------------------------- -------------------------------------
Nelson B. Caldwell Sandy Benett
Vice President, Finance and President and Chief Operating Officer
Chief Financial Officer
STOCKHOLDER REPRESENTATIVE FORTRESS ACQUISITION CORPORATION
(As to the provisions of Article
VII only)
/s/ James Mongiello By: /s/ Nelson Caldwell
- -------------------------------- -------------------------------------
JAMES MONGIELLO Nelson B. Caldwell
Chief Financial Officer and Secretary
U.S. BANK TRUST
(As to the provisions of Article
VII only)
By: /s/ Susan Vargas
-------------------------------
Sue Vargas, V.P. for Ann Gadsby
Name: Ann Gadsby
-----------------------------
Title: Vice President
----------------------------
[Signature Page to Agreement and Plan of Reorganization]
<PAGE>
EXHIBIT A
---------
Form of Affiliate Agreement
---------------------------
<PAGE>
EXHIBIT B-1
-----------
Form of Legal Opinion of Counsel to Parent
------------------------------------------
<PAGE>
EXHIBIT B-2
-----------
Form of Legal Opinion of Counsel to Company
-------------------------------------------
<PAGE>
EXHIBIT C-1
-----------
List of Employees Signing Employment Agreements
-----------------------------------------------
<PAGE>
EXHIBIT C-2
-----------
Form of Employment Agreement
----------------------------
<PAGE>
EXHIBIT C-3
-----------
List of Employees Offered Employment
------------------------------------
Pursuant to Form of At-Will Offer Letter
----------------------------------------
<PAGE>
EXHIBIT D-1
-----------
List of Employees Signing Noncompetition Agreements
---------------------------------------------------
<PAGE>
EXHIBIT D-2
-----------
Form of Noncompetition Agreement
--------------------------------
<PAGE>
EXHIBIT E-1
-----------
List of Company Stockholders Signing Stockholder Support Agreements
-------------------------------------------------------------------
<PAGE>
EXHIBIT E-2
-----------
Form of Stockholder Support Agreement
-------------------------------------
<PAGE>
EXHIBIT F
---------
Escrow Agent Fee Schedule
-------------------------
<PAGE>
EXHIBIT G
---------
Form of Certificate of Amendment of
-----------------------------------
Amended and Restated Certificate of Incorporation
-------------------------------------------------
<PAGE>
EXHIBIT H-1
-----------
List of Company Options to be Substituted
-----------------------------------------
<PAGE>
EXHIBIT H-2
-----------
Form of Stock Option Substitution Agreement
-------------------------------------------
<PAGE>
EXHIBIT I
----------
Form of Merger Certificate
--------------------------
<PAGE>
AMENDMENT TO
AGREEMENT AND PLAN OF REORGANIZATION
This Amendment to Agreement and Plan of Reorganization (the "Amendment") is
---------
made this 20th day of December 1999, by and between Tut Systems, Inc., a
Delaware corporation. ("Parent"), FreeGate Corporation ("Company"), Fortress
------
Acquisition Corporation, a Delaware corporation ("Sub"), U.S. Bank Trust, as
Escrow Agent, and James Mongiello ("Stockholder Representative").
WHEREAS, the parties hereto are parties to that certain Agreement and Plan
of Reorganization dated November 16, 1999 (the "Agreement"); and
---------
WHEREAS, as a material inducement to certain shareholders of the Company to
vote in favor of the Merger, the parties hereto desire to amend the Agreement as
set forth herein;
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the Company and the Executive agree that the Agreement shall be
deemed amended as necessary to provide as follows.
1. Amendment of Article VII, Section 7.3(b). Section 7.3(b) of the
----------------------------------------
Agreement shall be amended and restated to read in its entirety as follows:
"(b) The Stockholder Representative shall not be liable for any act
done or omitted hereunder as Stockholder Representative while acting in good
faith and in the exercise of reasonable judgment. The Company Stockholders on
whose behalf the Escrow Amount was contributed to the Escrow Fund shall jointly
and pro rata calculated with respect to their interest in the Escrow Fund
indemnify the Stockholder Representative and hold the Stockholder Representative
harmless against any loss, liability or expense incurred without negligence or
bad faith on the part of the Stockholder Representative and arising out of or in
connection with the acceptance or administration of the Stockholder
Representative's duties hereunder, including the reasonable fees and expenses of
any legal counsel retained by the Stockholder Representative."
2. Amendment of Article VII, Section 7.3(c). Section 7.3(c) of the
----------------------------------------
Agreement shall be amended and restated to read in its entirety as follows:
"(c) A decision, act, consent or instruction solely with respect to
the shares deposited in the Escrow Fund of the Stockholder Representative shall
constitute a decision of all Company Stockholders 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 Stockholders,
and the Escrow Agent and Parent may rely upon any such decision, act, consent or
instruction of the Stockholder Representatives as being the decision, act,
consent or instruction of each and every such Company Stockholder. 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 Stockholder Representative."
3. Agreement. To the extent not expressly amended hereby, the
---------
Agreement remains in full force and effect.
4. Entire Agreement. This Amendment, taken together with the
----------------
Agreement (to the extent not expressly amended hereby), represents the entire
agreement of the parties and shall supersede any and all
[Signature Page to Amendment to Agreement and Plan of Reorganization]
<PAGE>
previous contracts, arrangements or understandings between the parties with
respect to the acquisition of the Company by Parent.
IN WITNESS WHEREOF, Parent, Sub, the Company, the Stockholder
Representative and the Escrow Agent have caused this Amendment to be signed by
their duly authorized respective officers, all as of the date first written
above.
TUT SYSTEMS, INC. FREEGATE CORPORATION
By: /s/ Nelson B. Caldwell By: /s/ Sandy Benett
____________________________ _____________________________
Nelson B. Caldwell Sandy Benett
Vice President, Finance and President and Chief Operating
Chief Financial Officer Officer
STOCKHOLDER REPRESENTATIVE FORTRESS ACQUISITION CORPORATION
/s/ JAMES MONGIELLO By: /s/ Nelson B. Caldwell
_______________________________ ____________________________
JAMES MONGIELLO Nelson B. Caldwell
Chief Financial Officer and
Secretary
U.S. BANK TRUST
By: /s/ Ann Gadsley
_______________________
Name: Ann Gadsley
_____________________
Title: Vice President
____________________
[Signature Page to Amendment to Agreement and Plan of Reorganization]
