UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10 Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXHANGE ACT OF 1934
For the transition period from to
Commission File Number 0-21824
---------------
HOLLYWOOD ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in charter)
Oregon 93-0981138
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
9275 S.W. Peyton Lane, Wilsonville, Oregon 97070
(Address of principal executive office, including zip code)
(503) 570-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such short period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 11, 1998, there were 37,040,846 shares of the registrant's Common
Stock outstanding.
- --------------------------------------------------------------------------------
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
June 30, 1998
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -----------------------------
1998 1997 1998 1997
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Rental revenue $ 141,572 $ 93,035 $ 282,936 $ 184,715
Product sales 25,159 16,967 53,746 35,762
------------- ------------ ------------ ------------
166,731 110,002 336,682 220,477
------------- ------------ ------------ ------------
Operating cost and expenses:
Cost of product sales 16,227 10,828 34,675 22,429
Operating and selling 124,048 80,204 245,904 157,253
General and administrative 7,585 6,197 15,966 12,166
Amortization of intangibles 1,834 1,596 3,668 3,123
------------- ------------ ------------ ------------
149,694 98,825 300,213 194,971
------------- ------------ ------------ ------------
Income from operations 17,037 11,177 36,469 25,506
Nonoperating income (expense):
Interest income 5 26 88 108
Interest expense (7,431) (2,068) (14,175) (3,617)
Litigation settlement - - - (18,874)
------------- ------------ ------------ ------------
Income before income taxes 9,611 9,135 22,382 3,123
Provision for income taxes (3,957) (3,654) (9,065) (1,249)
------------- ------------ ------------ ------------
Net income $ 5,654 $ 5,481 $ 13,317 $ 1,874
============= ============ ============ ============
- ---------------------------------------------------------------------------------------------------------------
Net income per share:
Basic $ 0.15 $ 0.15 $ 0.36 $ 0.05
Diluted $ 0.15 $ 0.15 $ 0.36 $ 0.05
- ---------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 36,928 36,695 36,885 36,643
Diluted 37,678 37,577 37,513 37,465
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this financial statement.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands, except share amounts)
June 30, Dec. 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,968 $ 3,909
Accounts receivable 41,861 39,566
Merchandise inventories 58,965 61,482
Prepaid expenses and other current assets 8,403 6,488
------------- -------------
Total current assets 113,197 111,445
Videocassette rental inventory, net 267,712 226,051
Property and equipment, net 276,196 234,497
Goodwill, net 91,048 93,760
Deferred income tax 10,219 11,334
Other assets, net 11,376 12,036
------------- -------------
$ 769,748 $ 689,123
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 2,341 $ 2,341
Accounts payable 92,878 103,823
Accrued expenses 22,785 29,423
Accrued interest 8,519 8,256
Income taxes payable
8,279 -
------------- -------------
Total current liabilities 134,802 143,843
Long-term obligations, less current portion 302,476 231,155
Other liabilities 27,984 24,229
------------- -------------
465,262 399,227
Shareholders' equity:
Preferred stock, 25,000,000 shares authorized; no shares
issued and outstanding
Common stock, 100,000,000 shares authorized; and 36,974,196
and 36,786,396 shares issued and outstanding, respectively 249,140 247,950
Retained earnings 57,305 43,988
Intangible assets, net (1,959) (2,042)
------------- -------------
Total shareholders' equity 304,486 289,896
------------- -------------
$ 769,748 $ 689,123
============= =============
The accompanying notes are an integral part of this financial statement.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HOLLYWOOD ENTERTAINMENT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
June 30,
------------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Operating activities:
Net income $ 13,317 $ 1,874
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 96,083 61,811
Litigation settlement warrants - 9,000
Change in deferred rent 2,280 1,469
Change in deferred income taxes 2,250 (4,121)
Net change in operating assets and liabilities:
Accounts receivable (2,295) 1,993
Merchandise inventories 2,517 558
Accounts payable (10,945) (6,178)
Accrued interest 263 217
Other current assets and liabilities (274) (3,896)
------------- -------------
Cash provided by operating activities 103,536 62,727
------------- -------------
Investing activities:
Purchases of videocassette rental inventory, net (115,444) (87,501)
Purchases of property and equipment, net (60,332) (48,557)
Increase in intangibles and other assets (212) (1,343)
------------- -------------
Cash used in investing activities (175,988) (137,401)
------------- -------------
Financing activities:
Proceeds from the issuance of common stock, net - 4,695
Issuance of long-term obligations - 10,000
Repayments of long-term obligations (1,180) (754)
Tax benefit from exercise of stock options 43 2,252
Proceeds from exercise of stock options 1,147 3,414
Increase in revolving loan, net 72,501 48,000
------------- -------------
Cash provided by financing activities 72,511 67,607
------------- -------------
Increase (decrease) in cash and cash equivalents 59 (7,067)
Cash and cash equivalents at beginning of year 3,909 12,849
------------- -------------
Cash and cash equivalents at end of the second quarter $ 3,968 $ 5,782
============= =============
The accompanying notes are an integral part of this financial statement.
</TABLE>
5
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The unaudited consolidated financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. The information furnished reflects all
adjustments which are, in the opinion of management, necessary for a fair
statement of the results for the interim periods presented, and which are of a
normal, recurring nature. It is suggested that these financial statements be
read in conjunction with the financial statements and the notes thereto included
in the Company's Form 10-K, filed with the Securities and Exchange Commission on
March 31, 1998.
1. Accounting Policies
The consolidated financial statements included herein have been prepared in
accordance with the accounting policies described in Note 1 to the December 31,
1997 audited consolidated financial statements included in the Company's Form
10-K. Certain prior year amounts have been reclassified to conform to the
presentation used for the current year.
2. Statements of Changes in Shareholders' Equity
An analysis of the shareholders' equity amounts for the two quarters ended
June 30, 1998 is as follows:
<TABLE>
<CAPTION>
Common Stock
------------------------- Intangible Retained
(In thousands, except share amounts) Shares Amount Assets Earnings Total
------------ ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 36,786,396 $ 247,950 $ (2,042) $ 43,988 $ 289,896
Issuance of common stock under option plan 187,800 1,147 1,147
Tax benefit from exercise of stock options 43 43
Amortization on intangible assets 83 83
Net income 13,317 13,317
============ =========== ========== ========== ============
Balance at June 30, 1998 36,974,196 $ 249,140 $ (1,959) $ 57,305 $ 304,486
============ =========== ========== ========== ============
</TABLE>
3. Earnings per Share
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share" requires current and retroactive presentation of basic and diluted
earnings per share. Basic earnings per share are calculated based on income
available to common shareholders and the weighted-average number of common
shares outstanding during the reported period. Diluted earnings per share
includes additional dilution from the effect of potential common stock, such as
stock issuable pursuant to the exercise of stock option, warrants outstanding
and the conversion of debt.
6
<PAGE>
The following table is a reconciliation of the basic and diluted earnings
per share computations:
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1998
(In thousands, except per share amounts)
------------------------------------ ------------------------------------
1998 1997
------------------------------------ ------------------------------------
Per Per
Share Share
Income Shares Amounts Income Shares Amounts
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share: $ 13,317 36,885 $ 0.36 $ 1,874 36,643 $ 0.05
Effect of Dilutive Securities:
Stock options - 628 - 822
---------- ---------- ---------- ----------
Dilutive Earnings per share: $ 13,317 37,513 $ 0.36 $ 1,874 37,465 $ 0.05
========== ========== ========== ========== ========== ==========
</TABLE>
4. Comprehensive Income
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards, No. 130, "Reporting Comprehensive
Income." The Company has adopted the standard as of January 1, 1998. Total
comprehensive income was $5.7 million and $13.3 million for the second quarter
and current year two quarters, respectively, compared with $5.5 million and $1.9
million for the corresponding periods of the prior year.
5. Subsequent Event
On July 30, 1998, the Company announced that it had signed a definitive
agreement to acquire Reel.com, Inc., which operates the leading video-only store
on the Internet (www.reel.com). Reel.com offers access to over 85,000 movie
titles, proprietary movie information, and recommendations that help customers
discover movies they will enjoy. The value of the transaction is approximately
$100 million. Hollywood Entertainment will issue an aggregate of five million
shares of restricted Hollywood Entertainment common stock and redeemable
preferred stock, and $30.0 million in cash to stockholders of Reel.com.
Separate and concurrent with the acquisition, several of Reel.com's
stockholders will purchase an aggregate of five million additional shares of
restricted Hollywood Entertainment common stock at a price per share of $13.50.
The shares, together with the shares issued in the acquisition, will not be
transferable for one year after closing.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Summary Results of Operations
The Company's net income was $5.7 million and $13.3 million for the second
quarter and current year two quarters, respectively, compared with $5.5 million
and $1.9 million for the corresponding periods of the prior year.
The following table sets forth, for the periods indicated, (i) selected
statements of operations data expressed as a percentage of total revenue; and
(ii) the number of superstores open at the end of each period:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -----------------------
1998 1997 1998 1997
-------- --------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenue:
Rental revenue 84.9 84.6 84.0 83.8
Product sales 15.1 15.4 16.0 16.2
--------- --------- ------- ---------
100.0 100.0 100.0 100.0
--------- --------- ------- ---------
Operating costs and expenses:
Cost of product sales 9.7 9.8 10.3 10.2
Operating and selling 74.4 72.9 73.0 71.3
General and administrative 4.6 5.6 4.7 5.5
Amortization of intangibles 1.1 1.5 1.1 1.4
--------- --------- ------- ---------
89.8 89.8 89.1 88.4
Income from operations: 10.2 10.2 10.9 11.6
Nonoperating income (expense, net) (4.4) (1.9) (4.2) (10.2)
--------- --------- ------- ---------
Income before income taxes 5.8 8.3 6.7 1.4
Provision for income taxes (2.4) (3.3) (2.7) (0.5)
--------- --------- ------- ---------
Net income 3.4 5.0 4.0 0.8
========= ========= ======= =========
Number of superstores 1,066 661 1,066 661
</TABLE>
Revenue
Revenue increased by $56.7 million, or 52%, in the second quarter and
$116.2 million, or 53%, in the current year two quarters, compared with the
corresponding periods of the prior year, respectively, primarily due to the
opening of 405 new superstores in the twelve months ended June 30, 1998. The
Company ended the quarter with 1,066 stores in 43 states compared with 673
stores in 33 states at the end of the corresponding period of the prior year.
Revenue was also favorably impacted by an increase of 1% and 2% in comparable
store revenue in the second quarter and current year two quarters, respectively.
The Company's pricing of videocassette rentals and merchandise for sale has not
changed significantly in 1998.
8
<PAGE>
Operating Costs and Expenses
Cost of Product Sales
The cost of product sales as a percentage of product sales increased from
63.8% and 62.7%, in the prior year second quarter and prior year two quarters,
respectively, to 64.5% for both the current year second quarter and current year
two quarters. The Company's gross margin on product sales has been affected by
increasing pricing pressure on sell-through video merchandise from mass merchant
retailers, which use video sales as a loss leader in order to drive customer
traffic.
Operating and Selling
Operating and selling expenses, which consist principally of all store
expenses, including payroll, occupancy, advertising, depreciation and rental
revenue sharing, increased as a percentage of total revenue to 74.4% and 73.0%
for the second quarter and the current year two quarters, respectively, from
72.9% and 71.3% for the corresponding periods of the prior year. This increase
was due to lower average revenues per store in 1998, resulting primarily from
the addition of 393 new superstores during the last twelve months, which have
lower revenue per store than mature Hollywood Video stores. Since a portion of
store-level operating expenses is fixed, new stores generally have lower
operating margins in the first year of operation. In addition, pre-opening
expenses are charged to earnings in the first full month of a store's operation.
Therefore, the addition of a significant number of new stores to the Company's
existing store base has and will continue to have an adverse impact on the
Company's margin.
General Administrative
General and administrative expenses decreased as a percentage of total
revenue to 4.6% and 4.7% for the second quarter and current year two quarters,
respectively, compared with 5.6% and 5.5% for the corresponding periods of the
prior year. This decrease as a percentage of total revenue was due to the
increase in total revenue without a proportionate increase in corporate
overhead.
Amortization of Intangibles and Other Assets
Amortization of intangibles increased by $0.2 million in the current year
second quarter, and increased by $0.5 million in the current year two quarters,
compared with the corresponding periods of the prior year. The increase is
primarily due to the amortization of deferred financing costs associated with
the Company's senior subordinated notes and revolving credit facility.
Nonoperating Income (Expense), Net
Interest expense net of interest income was $7.4 million and $14.1 million
for the second quarter and current year two quarters, respectively, compared
with $2.0 million and $3.5 million for the corresponding periods of the prior
year. The increase in interest expense was primarily due to increased levels of
borrowings associated with the issuance of the senior subordinated notes
combined with increased borrowings under the Company's revolving credit
facility. The Company incurred a charge of $18.9 million in the first quarter of
1997 for the settlement of
9
<PAGE>
securities litigation (see Note 15 of Notes to Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission).
Income Taxes
The effective tax rate for the Company was a provision of 41.2% for the
second quarter and 40.5% for the current year two quarters, compared to a
provision of 40% for both the prior year second quarter and two quarters.
Liquidity and Capital Resources
The Company generates substantial operating cash flow because most of its
revenue is received in cash. The amount of cash generated from operations in the
current year two quarters significantly exceeded the current debt service
requirements of the Company's long-term obligations. The capital expenditures
(including purchases of videocassette inventory) of the Company are primarily
funded by the excess operating cash flow and through loans under a revolving
line of credit. The Company has a $300 million revolving line of credit
available to address the timing of certain working capital and capital
expenditure disbursements. The Company believes cash flow from operations,
supplemented by the availability of a revolving line of credit, will provide the
Company with adequate liquidity and the capital necessary to achieve its planned
expansion through at least 1999.
At June 30, 1998, the Company had cash and cash equivalents of $4.0 million
and a working capital deficit of $21.6 million. Videocassette rental inventories
are accounted for as non-current assets under Generally Accepted Accounting
Principles because they are not assets which are reasonably expected to be
completely realized in cash or sold in the normal business cycle. Although the
rental of this inventory generates a substantial portion of the Company's
revenue, the classification of these assets as non-current excludes them from
the computation of working capital. The acquisition cost of videocassette rental
inventories, however, is reported as a current liability until paid and,
accordingly, included in the computation of working capital. Consequently, the
Company believes working capital is not as significant a measure of financial
condition for companies in the video retail industry as it is for companies in
other industries. Because of the accounting treatment of videocassette rental
inventory as a non-current asset, the Company may, from time to time, operate
with a working capital deficit.
Cash Provided by Operating Activities
Net cash provided by operating activities increased by $40.8 million in the
current year two quarters compared with the corresponding period of the prior
year, primarily due to an increase in revenue and depreciation and amortization
expenses, combined with improved results of operations in the current year (see
"Results of Operations"), net of the non-cash impact of the litigation
settlement warrants.
Cash Used in Investing Activities
Net cash used in investing activities increased by $38.6 million in the
current year two quarters compared with the corresponding period of the prior
year, primarily due to increased
10
<PAGE>
purchases of videocassette rental inventory for new and existing stores and
capital expenditures with respect to new store construction, remodeling of
certain existing stores and for the continued development of information
management systems (see "Capital Expenditures").
Cash Provide by Financing Activities
Net cash provided by financing activities increased by $4.9 million in the
current year two quarters compared with the corresponding period of the prior
year as a result of additional borrowings under the Company's revolving credit
line. The Company has the availability of up to $300 million in revolving credit
loans. The Company may utilize the revolving credit facility as needed for
working capital, capital expenditures and general corporate purposes. As of June
30, 1998, $97.5 million was outstanding under the revolving credit agreement.
Capital Expenditures
The Company's capital expenditures include product for stores, store
equipment and fixtures, remodeling a certain number of existing stores,
implementing and upgrading office and store technology and opening new store
locations. Each new store opening requires initial capital expenditures,
including leasehold improvements, inventory, equipment and cost related to site
location, lease negotiations and construction permits, excluding leasehold
improvements that are customarily paid for by the property developer. These
capital expenditures will be funded primarily by cash generated from operations,
supplemented by the availability of a revolving line of credit or other forms of
equipment financing and/or leasing, if necessary.
11
<PAGE>
Part II OTHER INFORMATION
Item 1. Legal Proceedings
In April 1998 a complaint was filed against the Company,
entitled Rentrak Corporation v. Hollywood Entertainment et al., case
no. 98-04-02811, Circuit Court of the State of Oregon for the County
of Multnomah, Portland, Oregon. The plaintiff alleges that the
Company violated alleged contractual obligations requiring the
Company to obtain all of its leased videocassettes exclusively from
Rentrak and seeks injunctive relief and monetary damages. In
addition, the plaintiff alleges that an audit of the Company's stores
revealed audit and reporting violations. The Company believes this
suit is without merit and is vigorously defending the litigation. The
Company does not believe the ultimate outcome of the litigation will
have material effect on the Company.
Item 5. Other Information
In accordance with amendments adopted on May 21, 1998 to Rule
14a-4 under the Securities Exchange Act of 1934, if notice of a
shareholder proposal to be raised at the annual meeting of
shareholders is received at the principal executive offices of the
Company after March 7, 1999 (45 days prior to the date in 1999 annual
meeting), proxy voting on that proposal when and if raised at the
1999 annual meeting will be subject to the discretionary voting
authority of the designated proxy holders. Any shareholder proposal
to be considered for inclusion in proxy material for the Company's
1999 annual meeting must be receiving at the principal executive
offices of the Company no later than December 22, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number Description
------- -----------
2.1 Agreement and Plan of Merger and Reorganization among
Hollywood Entertainment Corporation, R Acquisition, Inc.
and Reel.com, Inc. dated as of July 30, 1998
10.1 Stock Purchase Agreement dated July 30, 1998 among
Hollywood Entertainment and certain stockholders of
Reel.com, Inc.
27.1 Financial data schedule
(b) Reports on Form 8-K
None
12
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOLLYWOOD ENTERTAINMENT CORPORATION
-----------------------------------
(Registrant)
August 14, 1998 /s/ SANJAY SOOD
- ------------------- -----------------------------------
(Date) Sanjay Sood
Vice President Corporate Controller
(Principal financial and accounting
officer of the registrant)
14
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION
among
CASCADE CORPORATION
R ACQUISITION, INC.
and
COAST, INC.
Dated as of July 30, 1998
<PAGE>
AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of July 30, 1998
(as amended, supplemented or otherwise modified from time to time, this
"Agreement"), among CASCADE CORPORATION, a corporation organized and existing
under the laws of the State of Oregon ("Parent"), R ACQUISITION CORPORATION, a
corporation organized and existing under the laws of the State of Delaware
("Merger Sub") and a direct wholly-owned subsidiary of Parent, and COAST, INC. a
corporation organized and existing under the laws of the State of Delaware (the
"Company");
W I T N E S S E T H:
WHEREAS, the boards of directors of Parent, Merger Sub and the Company
have each determined that it is consistent with and in furtherance of their
respective long-term business strategies and fair to and in the best interests
of their respective stockholders to combine the respective businesses of Parent
and the Company by means of a merger (the "Merger") of the Company with and into
Merger Sub upon the terms and subject to the conditions set forth herein and in
accordance with the General Corporation Law of the State of Delaware (the
"Business Corporation Act");
NOW, THEREFORE, in consideration of the foregoing and the representations,
warranties, covenants and agreements set forth herein, and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.01 Certain Defined Terms. Unless the context otherwise requires,
the following terms, when used in this Agreement, shall have the respective
meanings specified below (such meanings to be equally applicable to the singular
and plural number of the terms so defined, unless the context otherwise
requires):
"ACQUISITION DOCUMENTS" shall have the meaning specified in Section 10.01.
"AFFILIATE" shall have the meaning specified in Rule 144 promulgated under
the Securities Act.
"AGREEMENT" shall have the meaning specified in the preamble to this
Agreement.
"ALTERNATE MERGER" shall have the meaning specified in Section 2.01.
"BENEFICIAL OWNER" shall mean, with respect to any shares of capital stock,
a person who shall be deemed to be the beneficial owner of such shares (i) which
such person or any of its affiliates or associates (as such term is defined in
rule 12b-2 promulgated under the Exchange Act) beneficially owns, directly or
indirectly, (ii) which such person or any of its affiliates or associates has,
directly or indirectly, (A) the right to acquire (whether such right is
1.
<PAGE>
exercisable immediately or subject only to the passage of time), pursuant to any
agreement, arrangement or understanding or upon the exercise of consideration
rights, exchange rights, warrants or options, or otherwise, or (B) the right to
vote pursuant to any agreement, arrangement or understanding, or (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom such
person or any of its affiliates or associates or person with whom such person or
any of its affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
such shares of capital stock.
"BLUE SKY LAWS" shall mean state securities or "blue sky" laws.
"BUSINESS CORPORATION ACT" shall have the meaning specified in the recitals
to this Agreement.
"BUSINESS DAY" shall mean any day on which the principal offices of the SEC
in Washington, D.C. are open to accept filings, or, in the case of determining a
date when any payment is due, any day on which banks are not required or
authorized by law, regulation or executive order to close in New York, New York.
"CASH ELECTION" shall have the meaning specified in Section 3.02(a).
"CASH-OUT AMOUNT" means the aggregate amount of cash required to cash-out
Company Stock Options pursuant to Section 6.07 hereof.
"CERTIFICATE OF MERGER" shall have the meaning specified in Section 2.03.
"CLOSING" shall have the meaning specified in Section 2.02.
"CODE" shall mean the Internal Revenue Code of 1986, as amended through the
date hereof, and all rules and regulations promulgated thereunder.
"COMPANY" shall have the meaning specified in the preamble to this
Agreement.
"COMPANY BENEFIT PLANS" shall have the meaning specified in Section
4.09(a).
"COMPANY CAPITAL STOCK" shall mean the Company Common Stock, the Series A,
the Series B and the Series C.
"COMPANY COMMON STOCK" shall mean the common stock, par value $0.001 per
share, of the Company.
"COMPANY DISCLOSURE SCHEDULE" shall mean the disclosure schedule delivered
by the Company to Parent prior to the execution of this Agreement and forming a
part hereof.
"COMPANY MATERIAL ADVERSE EFFECT" shall mean any change in or effect on the
business of the Company and the Company Subsidiaries that is, or could
reasonably be expected to be, materially adverse to the business, prospects,
assets (including intangible assets),
2.
<PAGE>
liabilities (contingent or otherwise), condition (financial or otherwise) or
results of operations of the Company and the Company Subsidiaries taken as a
whole.
"COMPANY MATERIAL CONTRACT" shall have the meaning specified in Section
4.11.
"COMPANY PERMITS" shall have the meaning specified in Section 4.06.
"COMPANY STOCK OPTION" shall have the meaning specified in Section 3.06.
"COMPANY STOCK PLANS" shall mean the Company's 1998 Stock Plan.
"COMPANY SUBSIDIARIES" shall have the meaning specified in Section 4.01.
"COMPANY VOTING AGREEMENT" shall mean the Voting Agreement, dated as of
July 30, 1998, among the Company, Parent and the parties named therein.
"CONFIDENTIALITY AGREEMENT" shall mean the Confidentiality Agreement, dated
as of July 24, 1998, between Parent and the Company.
"4460 PRO-RATION" means, with respect to shares of Company Capital Stock
that have elected (or are deemed to have elected) to receive shares of Parent
Common Stock in the Merger, the number of shares of Redeemable Preferred
required to be issued in lieu of shares of Parent Common Stock such that a
stockholder vote of Parent's stockholders pursuant to NASDAQ Market rule 4460 is
not required, such determination to be made in good faith by Parent taking into
account (i) shares of Parent Common Stock to be issued hereunder (without regard
to 4460 Pro-Ration), (ii) shares of Parent Common Stock issuable pursuant to
Company options and warrants to be assumed hereunder, and (iii) shares of Parent
Common Stock to be issued in the Stock Purchase Transaction.
"DISSENTING SHARES" shall have the meaning specified in Section 3.01(d).
"$" shall mean United States Dollars.
"EFFECTIVE TIME" shall have the meaning specified in Section 2.03.
"ENVIRONMENTAL LAW" shall mean any Law and any enforceable judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to pollution or protection of the
environment or natural resources, including, without limitation, those relating
to the use, handling, transportation, treatment, storage, disposal, release or
discharge of Hazardous Material, as in effect as of the date hereof.
"ENVIRONMENTAL PERMIT" shall mean any permit, approval, identification
number, license or other authorization required under or issued pursuant to any
applicable Environmental Law.
3.
<PAGE>
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as amended,
together with the rules and regulations promulgated thereunder.
"EXCHANGE AGENT" shall have the meaning specified in Section 3.03.
"EXCHANGE FUND" shall have the meaning specified in Section 3.03.
"EXPENSES" shall mean, with respect to any party hereto, all reasonable
out-of-pocket expenses (including, without limitation, all reasonable fees and
expenses of counsel, accountants, investment bankers, experts and consultants to
a party hereto and its affiliates, but excluding any allocation of overhead)
incurred by such party or on its behalf in connection with or related to the
authorization, preparation, negotiation, execution and performance of its
obligations pursuant to this Agreement and the consummation of the Merger.
"FORM OF ELECTION" shall have the meaning specified in Section 3.02(b).
"GOVERNMENTAL ENTITY" shall mean any United States Federal, state or local
or any foreign governmental, regulatory or administrative authority, agency or
commission or any court, tribunal or arbitral body.
"GOVERNMENTAL ORDER" shall mean any order, writ, judgment, injunction,
decree, stipulation, determination or award entered by or with any Governmental
Entity.
"HAZARDOUS MATERIAL" shall mean (i) any petroleum, petroleum products,
by-products or breakdown products, radioactive materials, asbestos-containing
materials or polychlorinated biphenyls or (ii) any chemical, material or
substance defined or regulated as toxic or hazardous or as a pollutant or
contaminant or waste under any applicable Environmental Law.
"HOLDERS" shall have the meaning specified in Section 10.02.
"HOLDERS' REPRESENTATIVE" shall mean CMG@Ventures II, LLC.
"HSR ACT" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended through the date hereof, together with the rules and
regulations promulgated thereunder.
"IRS" shall mean the United States Internal Revenue Service.
"LAW" shall mean any Federal, state, foreign or local statute, law,
ordinance, regulation, rule, code, order, judgment, decree, other requirement or
rule of law of the United States or any other jurisdiction.
"MERGER" shall have the meaning specified in the recitals to this
Agreement.
4.
<PAGE>
"MERGER SUB" shall have the meaning specified in the preamble to this
Agreement.
"NASD" shall mean the National Association of Securities Dealers, Inc.
"NNM" shall mean the NASDAQ National Market.
"OTHER TRANSACTION" shall have the meaning specified in Section 6.05.
"PARENT" shall have the meaning specified in the preamble to this
Agreement.
"PARENT 1997 10-K" shall have the meaning specified in Section 5.02.
"PARENT COMMON STOCK" shall mean the Common Stock, no par value, of Parent.
"PARENT DISCLOSURE SCHEDULE" shall mean the disclosure schedule delivered
by Parent to the Company prior to the execution of this Agreement and forming a
part hereof.
"PARENT MATERIAL ADVERSE EFFECT" shall mean any change in or effect on the
business of Parent and the Parent Subsidiaries that is, or could reasonably be
expected to be, materially adverse to the business, prospects, assets (including
intangible assets), liabilities (contingent or otherwise), condition (financial
or otherwise) or results of operations of Parent and the Parent Subsidiaries
taken as a whole.
"PARENT PERMITS" shall have the meaning specified in Section 5.06.
"PARENT REPORTS" shall have the meaning specified in Section 5.07(a).
"PARENT STOCKHOLDERS' MEETING" shall have the meaning specified in Section
7.01(a).
"PARENT STOCK PLANS" shall mean Parent's 1993 Stock Incentive Plan and 1997
Employer Non-Qualified Stock Option Plan.
"PARENT SUBSIDIARIES" shall have the meaning specified in Section 5.01.
"PERSON" shall mean an individual, corporation, partnership, limited
partnership, limited liability company, syndicate, person (including, without
limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act),
trust, association, entity or government or political subdivision, agency or
instrumentality of a government.
"PREDECESSOR COMPANY" shall mean any and all predecessors of the Company
(including any limited liability company).
"PRESURRENDER DIVIDENDS" shall have the meaning specified in Section 3.03.
"PROPOSAL" shall have the meaning specified in Section 7.01(a).
"PROXY STATEMENT" shall have the meaning specified in Section 7.01(a).
5.
<PAGE>
"REDEEMABLE PREFERRED" shall mean the Series A Redeemable Preferred Stock
of Parent having the terms and provisions set forth on Exhibit A hereto.
"REGISTRATION RIGHTS AND DISPOSITION RESTRICTION AGREEMENT" shall mean the
Registration Rights and Disposition Restriction Agreement, dated as of July 30,
1998, among Parent and the persons named therein and attached hereto as Exhibit
B.
"REPRESENTATIVES" shall have the meaning specified in Section 6.04.
"SEC" shall mean the Securities and Exchange Commission.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended,
together with the rules and regulations promulgated thereunder.
"SERIES A" shall mean the Company's Series A Preferred Stock, $0.001 par
value per share, consisting of 4,781,869 authorized shares.
"SERIES B" shall mean the Company's Series B Preferred Stock, $0.001 par
value per share, consisting of 2,625,000 authorized shares.
"SERIES C" shall mean the Company's Series C Preferred Stock, $0.001 par
value per share, consisting of 9,000,000 authorized shares.
"SERIES C WARRANTS" shall mean the 143,429 warrants of the Company having
an exercise price of $2.11512 and exercisable for 143,429 shares of Series C.
"STOCK PURCHASE AGREEMENT" shall mean the Stock Purchase Agreement, dated
as of July 30, 1998, among Parent and the investors named therein and attached
hereto as Exhibit C.
"STOCK PURCHASE TRANSACTION" shall mean the sale by Parent of 5,000,000
shares of Parent Common Stock pursuant to the Stock Purchase Agreement.
"SUBSIDIARY" shall mean, with respect to any person, any corporation,
limited liability company, partnership, joint venture or other legal entity of
which such person (either alone or through or together with any other subsidiary
of such person) owns, directly or indirectly, a majority of the stock or other
equity interests, the holders of which are generally entitled to vote for the
election of the board of directors or other governing body of such corporation
or other legal entity.
"SURVIVING CORPORATION" shall have the meaning specified in Section 2.01.
"TAXES" shall mean any and all taxes, fees, levies, duties, tariffs,
imposts and other charges of any kind (together with any and all interest,
penalties, additions to tax and additional amounts imposed with respect thereto)
imposed by any Governmental Entity or taxing authority, including, without
limitation, taxes or other charges on or with respect to income, franchises,
windfall or other profits, gross receipts, property, sales, use, capital stock,
payroll, employment,
6.
<PAGE>
social security, workers' compensation, unemployment compensation or net worth;
taxes or other charges in the nature of excise, withholding, ad valorem, stamp,
transfer, value-added or gains taxes; license, registration and documentation
fees; and customers' duties, tariffs and similar charges.
"TAX RETURN" shall mean all returns, declarations, reports, forms,
estimates, information returns and statements required to be filed in respect of
any Taxes or to be supplied to a taxing authority in connection with any Taxes.
"TERMINATING COMPANY BREACH" shall have the meaning specified in Section
9.01(e).
"TERMINATING PARENT BREACH" shall have the meaning specified in Section
9.01(f).
"U.S. GAAP" shall mean United States generally accepted accounting
principles, applied on a consistent basis.
"WARRANT NUMBER" means, if all or a portion of the Series C Warrants have
not been exercised prior to the Effective Time, the number of shares of Series C
issuable under Series C Warrants that have not been so exercised.
ARTICLE II
THE MERGER
Section 2.01 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Business Corporation Act, at
the Effective Time, the Company shall be merged with and into Merger Sub. As a
result of the Merger, the separate corporate existence of the Company shall
cease and Merger Sub shall continue as the surviving corporation of the Merger
(the "Surviving Corporation"). Parent may, at its option, elect to amend this
Agreement to provide for a merger of Merger Sub with and into the Company or
Parent or one or more other affiliates of Parent (an "Alternative Merger");
provided, however, that (i) any such Alternative Merger shall not adversely
affect the tax or accounting treatment provided for herein and shall not
materially delay consummation of the transactions contemplated hereby, (ii) in
the event of any such election, the Company shall have the opportunity to update
the Company Disclosure Schedule to reflect additional items that are required to
be set forth therein only as a result of any differences between the Alternative
Merger structure and that of the Merger and (iii) Parent shall waive any failure
to satisfy Section 8.03(a) or 8.03(b) to the extent such non-compliance results
only from any differences between the Alternative Merger structure and that of
the Merger.
Section 2.02 Closing. Unless this Agreement shall have been terminated and
the Merger shall have been abandoned pursuant to Section 9.01, and subject to
the satisfaction or waiver of the conditions set forth in Article VIII, the
consummation of the Merger shall take place as promptly as practicable (and in
any event within three business days) after satisfaction or
7.
<PAGE>
waiver of the conditions set forth in Article VIII, at a closing (the "Closing")
to be held at the offices of Brobeck, Phleger & Harrison, One Market, Spear
Street Tower, San Francisco, California, unless another date, time or place is
agreed to by the Company and Parent.
Section 2.03 Effective Time. At the time of the Closing, the parties shall
cause the Merger to be consummated by filing a certificate of merger (the
"Certificate of Merger") with the Secretary of State of the State of Delaware in
such form as required by, and executed in accordance with the relevant
provisions of, the Business Corporation Act (the date and time of such filing,
or such later time as may be agreed to by the parties hereto and specified in
the Certificates of Merger, being the "Effective Time").
Section 2.04 Effect of The Merger. At the Effective Time, the effect of the
Merger shall be as provided in the applicable provisions of the Business
Corporation Act. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time, except as otherwise provided herein, all the
property, rights, privileges, powers and franchises of the Company and Merger
Sub shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
Section 2.05 Certificate of Incorporation; Bylaws; Directors and Officers
of Surviving Corporation. Unless otherwise agreed by the Company and Parent
prior to the Effective Time, at the Effective Time:
(a) the certificate of incorporation and bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, shall be the certificate of
incorporation and bylaws of the Surviving Corporation until thereafter amended
as provided by Law and such certificate of incorporation or bylaws;
(b) the officers of Merger Sub immediately prior to the Effective Time
shall be the initial officers of the Surviving Corporation until their
successors are elected or appointed and qualified or until their resignation or
removal; and
(c) the directors of Merger Sub immediately prior to the Effective
Time shall be the initial directors of the Surviving Corporation until their
successors are elected or appointed and qualified or until their resignation or
removal.
ARTICLE III
CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES
Section 3.01 Conversion of Securities. At the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, the
Company or the holders of any of the following securities:
8.
<PAGE>
(a) Capital Stock of Merger Sub. Each issued and outstanding share of
capital stock of Merger Sub shall be converted into and become one fully paid
and nonassessable share of common stock of the Surviving Corporation.
(b) Cancellation of Treasury Stock. Each share of Company Capital
Stock that is owned by the Company shall automatically be canceled and retired
and shall cease to exist, and no consideration shall be delivered in exchange
therefor.
(c) Conversion of Company Capital Stock. Except as otherwise provided
herein, each issued and outstanding share of Company Capital Stock (other than
shares to be canceled in accordance with Section 3.01(b) and other than
Dissenting Shares) shall be converted into the following (the "Merger
Consideration"):
(i) for each such share of Company Capital Stock with respect to
which an election to receive cash ("Cash Consideration") has been effectively
made and not revoked pursuant to Section 3.02 (determined on an as-converted
basis with respect to Series A, Series B and Series C, "Electing Shares"), the
right to receive in cash from Parent an amount equal to the quotient, rounded to
nearest thousandth, obtained by dividing $30,000,000 minus the Cash-Out Amount
by the number of Electing Shares (including Deemed Cash Electing Shares under
Section 3.02(f)) and Dissenting Shares (the "Cash Consideration"); and
(ii)for each such share of Company Capital Stock other than
Electing Shares, the right to receive from Parent a number of duly authorized,
validly issued, fully paid and nonassessable shares of Parent Common Stock, and,
if 4460 Pro-Ration is required, Redeemable Preferred (the "Stock Consideration")
equal to the Conversion Number. The "Conversion Number" means the quotient,
rounded to the nearest thousandth, or if there shall not be a nearest
thousandth, the next higher thousandth, obtained by dividing (A) 5,000,000 minus
the product of the Warrant Number times 0.5388 by (B) the number of non-Electing
Shares (determined on an as-converted basis with respect to Series A, Series B
and Series C) and Deemed Stock Electing Shares.
(d) Shares of Dissenting Shareholders. Notwithstanding anything in
this Agreement to the contrary, any issued and outstanding shares of Company
Capital Stock held by a person (a "Dissenting Shareholder") who shall not have
voted to adopt this Agreement or consented thereto in writing and who shall have
properly demanded appraisal for such shares in accordance with Section 262 of
the Business Corporation Act ("Dissenting Shares") shall not be converted as
described in Section 3.01(c), unless such holder fails to perfect or withdraws
or otherwise loses his right to appraisal. If, after the Effective Time, such
Dissenting Shareholder fails to perfect or withdraws or loses his right to
appraisal, such Dissenting Shareholder's shares of Company Capital Stock shall
no longer be considered Dissenting Shares for the purposes of this Agreement and
shall thereupon be deemed to have been converted into and to have been
exchangeable for, at the Effective Time, the right to receive for each such
share the amount in cash (and, if applicable, the number of shares of Parent
Common Stock), without interest, that a holder of a share who had not demanded
appraisal (a "Nondissenting Share") of Company Capital Stock and who had made a
Cash Election (as defined below) with respect to such
9.
<PAGE>
Nondissenting Share pursuant to Section 3.02 prior to the Election Date (as
defined below) would have received with respect to such Nondissenting Share
after giving effect to Sections 3.02(e) and (f) (it being understood that no
adjustment shall be made to the proration computation (if any) made following
the Election Date to give effect to the withdrawal of, or the failure to
perfect, the demand for appraisal with respect to such Dissenting Shares). The
Company shall give Parent (i) prompt notice of any demands for appraisal of
shares of Company Capital Stock received by the Company and (ii) the opportunity
to participate in and direct all negotiations and proceedings with respect to
any such demands. The Company shall not, without the prior written consent of
Parent, make any payment with respect to, settle, offer to settle or otherwise
negotiate, any such demands.
(e) Cancellation of Company Capital Stock. As of the Effective Time,
all shares of Company Capital Stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each holder of a
certificate that immediately prior to the Effective Time represented any such
shares of Company Capital Stock (a "Certificate") shall cease to have any rights
with respect thereto, except the right to receive the applicable Merger
Consideration and any cash in lieu of fractional shares to be issued or paid in
consideration therefor upon surrender of such Certificate in accordance with
Section 3.03 or 3.05, without interest, or, in the case of Dissenting
Shareholders, if any, the rights, if any, accorded under Section 262 of the
Business Corporation Act.
Section 3.02 Cash Elections
(a) Each person who, on or prior to the Election Date referred to in
Section 3.02(c) below, is a record holder of shares of Company Capital Stock
will be entitled, with respect to all or a portion of his shares, to make an
unconditional election (a "Cash Election") on or prior to such Election Date to
receive the Cash Consideration, on the basis hereinafter set forth.
(b) Parent shall prepare and deliver a form of election, which form
shall be substantially as set forth in Exhibit D hereto (the "Form of
Election"), to the record holders of Company Capital Stock as of July 30, 1998,
which Form of Election shall be used by each record holder of shares of Company
Capital Stock who wishes to elect to receive the Cash Consideration for any or
all shares of Company Capital Stock held by such holder. Any shareholder's
election to receive the Cash Consideration shall have been properly made only if
Parent shall have received at its designated office, by 5:00 p.m., San Francisco
time, August 20, 1998 (the "Election Date") a Form of Election properly
completed and signed.
(c) Any Form of Election may be revoked by the shareholder submitting
it to Parent only by written notice received by Parent prior to 5:00 p.m., San
Francisco time, on the Election Date.
(d) The determination by Parent of whether or not Cash Elections have
been properly made or revoked pursuant to this Section 3.02 and of when Cash
Elections and revocations were received by it shall be binding. If Parent
determines that any Cash Election was not properly made with respect to shares
of Company Capital Stock, such shares shall be
10.
<PAGE>
treated as shares that were not Electing Shares at the Effective Time, and such
shares shall be converted in the Merger into the right to receive Stock
Consideration pursuant to Section 3.01. The Parent shall also make all
computations as to the proration contemplated by Sections 3.03(e) and (f), and
any such computation shall be conclusive and binding on the holders of shares of
Company Capital Stock.
(e) Notwithstanding anything in this Agreement to the contrary, the
maximum aggregate amount of cash that may be paid to holders of Company Capital
Stock pursuant to this Article III (the "Cash Cap") shall be equal to
$30,000,000 minus the Cash-Out Amount and cash shall not be paid with respect to
more than 30% (the "Cash Percentage") of the outstanding shares of Company
Capital Stock. If the percentage of actual Electing Shares (the "Actual
Percentage") exceeds the Cash Percentage, then each Electing Share shall be
converted into the right to receive cash and shares of Parent Common Stock in
accordance with the terms of Section 3.01 in the following manner:
(i) a cash proration factor (the "Cash Proration Factor") shall
be determined by dividing the Cash Percentage by the Actual Percentage; and
(ii)each Electing Share shall be converted into the right to
receive (x) cash in an amount equal to the product of (A) what such Electing
Share would have received if Electing Shares equaled exactly the Cash Percentage
and (B) the Cash Proration Factor (such product, the "Prorated Cash Amount") and
(y) a number of shares of Parent Common Stock determined pursuant to Section
3.01(c)(ii) and subparagraph (f) below.
(f) Notwithstanding anything in this Agreement to the contrary, the
maximum number of shares of Parent Common Stock and Redeemable Preferred that
may be issued to holders of Company Capital Stock pursuant to this Article III
(the "Stock Cap") shall be equal to 5,000,000 minus the product of the Warrant
Number times 0.5388 and shall not be paid with respect to more than 70% (the
"Stock Percentage") of the outstanding shares of Company Capital Stock. If the
number of non-Electing Shares (the "Actual Stock Percentage") exceeds the Stock
Percentage then each non-Electing Share shall be converted into the right to
receive cash and shares of Parent Common Stock in accordance with the terms of
Section 3.01 in the following manner:
(i) a stock proration factor (the "Stock Proration Factor") shall
be determined by dividing the Stock Percentage by the Actual Stock Percentage;
and
(ii)each non-Electing Share shall be converted into the right to
receive (x) a number of shares of Parent Common Stock equal to the product of
(A) the number of shares of Parent Common Stock that such non-Electing Share
would have received under Section 3.01(c)(ii) if the Actual Stock Percentage
equaled the Stock Percentage and (B) the Stock Proration Factor (such product,
the "Prorated Stock Amount") and (y) cash in an amount determined pursuant to
Section 3.01(c)(i).
(g) The aggregation of the portion of Electing Shares that are subject
to proration under subsection (f) are referred to herein as "Deemed Stock
Electing Shares"; and the aggregate
11.
<PAGE>
of the portion of non-Electing Shares that are subject to proration under
subsection (e) are referred to herein as "Deemed Cash Electing Shares."
Section 3.03 Exchange Of Shares Other Than Treasury Shares And Dissenting
Shares. Parent will act as exchange agent to effect the exchange of shares of
Company Capital Stock (other than Dissenting Shares) for Parent Common Stock,
cash and Redeemable Preferred in accordance with the provisions of this Article
III (the "Exchange Agent"). From time to time after the Effective Time, Parent
shall deposit, or cause to be deposited, certificates representing Parent Common
Stock and Redeemable Preferred for conversion of shares of Company Capital Stock
(other than Dissenting Shares) in accordance with the provisions of Section 3.01
(such certificates, together with any dividends or distributions with respect
thereto, being herein referred to as the "Exchange Fund"). Commencing
immediately after the Effective Time, each holder of a certificate or
certificates theretofore representing shares of Company Capital Stock (other
than Dissenting Shares) may surrender the same to Parent. Such holder shall be
entitled upon such surrender to receive in exchange therefor the Merger
Consideration and a certificate or certificates representing the number of full
shares of Parent Common Stock (and Redeemable Preferred) into which the shares
of Company Capital Stock theretofore represented by the certificate or
certificates so surrendered shall have been converted in accordance with the
provisions of Section 3.01, together with a cash payment in lieu of fractional
shares, if any, in accordance with Section 3.05, and all such shares of Parent
Common Stock (and Redeemable Preferred) shall be deemed to have been issued at
the Effective Time. Until so surrendered and exchanged, each outstanding
certificate which, prior to the Effective Time, represented issued and
outstanding shares of Company Capital Stock shall be deemed for all corporate
purposes of Parent, other than the payment of dividends and other distributions,
if any, to evidence ownership of the number of full shares of Parent Common
Stock into which the shares of Company Capital Stock theretofore represented
thereby shall have been converted at the Effective Time. Unless and until any
such certificate theretofore representing shares of Company Capital Stock is so
surrendered, no dividend or other distribution, if any, payable to the holders
of record of Parent Common Stock as of any date subsequent to the Effective Time
shall be paid to the holder of such certificate in respect thereof. Upon the
surrender of any such certificate theretofore representing shares of Company
Capital Stock, however, the record holder of the certificate or certificates
representing shares of Parent Common Stock (or shares of Redeemable Preferred)
issued in exchange therefor shall receive from Parent, payment of the amount of
dividends and other distributions, if any, which as of any date subsequent to
the Effective Time and until such surrender shall have become payable with
respect to such number of shares of Parent Common Stock (or shares of Redeemable
Preferred) ("Presurrender Dividends"). No interest shall be payable with respect
to the payment of Presurrender Dividends upon the surrender of certificates
theretofore representing shares of Company Capital Stock. Notwithstanding the
foregoing provisions of this Section 3.03, risk of loss and title to such
certificates representing shares of Company Capital Stock (or Redeemable
Preferred) shall pass only upon proper delivery of such certificates to Parent,
and no party hereto shall be liable to a holder of shares of Company Capital
Stock for any Parent Common Stock (or Redeemable Preferred) or dividends or
distributions thereon delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law or to a transferee pursuant to
Section 3.04.
12.
<PAGE>
Section 3.04 Stock Transfer Books. At the Effective Time, each of the stock
transfer books of the Company with respect to shares of Company Capital Stock
shall be closed, and there shall be no further registration of transfers of
shares of Company Capital Stock thereafter on the records of any such stock
transfer books. In the event of a transfer of ownership of shares of Company
Capital Stock that is not registered in the stock transfer records of the
Company, at the Effective Time, a certificate or certificates representing the
number of full shares of Parent Common Stock into which such shares of Company
Capital Stock shall have been converted shall be issued to the transferee
together with the remainder of the Merger Consideration and a cash payment in
lieu of fractional shares, if any, in accordance with Section 3.05, and a cash
payment in the amount of Presurrender Dividends, if any, in accordance with
Section 3.03, if the certificate or certificates representing such shares of
Company Capital Stock is or are surrendered as provided in Section 3.03,
accompanied by all documents required to evidence and effect such transfer and
by evidence of payment of any applicable stock transfer tax.
Section 3.05 No Fractional Share Certificates. Unless Parent otherwise
determines, no scrip or fractional share certificates for Parent Common Stock
(or Redeemable Preferred) shall be issued upon the surrender for exchange of
certificates evidencing shares of Company Capital Stock, and an outstanding
fractional share interest shall not entitle the owner thereof to vote, to
receive dividends or to any rights of a stockholder of Parent or of the
Surviving Corporation with respect to such fractional share interest. In lieu of
fractional shares, each holder of shares of Company Capital Stock who, except
for the provisions of this Section 3.05, would be entitled to receive a
fractional share of Parent Common Stock (or Redeemable Preferred) shall, upon
surrender of the certificate or certificates representing shares of Company
Capital Stock, be entitled to receive an amount in cash (rounded to the nearest
whole cent), without interest, equal to the product obtained by multiplying (a)
the fractional share interest to which such holder would otherwise be entitled
(after taking into account all shares of Company Capital Stock held at the
Effective Time by such holder) by (b) the closing price for a share of Parent
Common Stock on the NNM on the first business day immediately prior to the
Effective Time
Section 3.06 Options And Warrants To Purchase Company Common Stock. At the
Effective Time, each option granted by the Company to purchase shares of Company
Common Stock (each, a "Company Stock Option") and Series C Warrant which is
outstanding and unexercised, and unvested in the case of Company Stock Options,
immediately prior to the Effective Time shall be assumed by Parent and converted
into an option or warrant to purchase shares of Parent Common Stock in such
number and at such exercise price as provided below and otherwise having the
same terms and conditions as in effect immediately prior to the Effective Time
(except to the extent that such terms, conditions and restrictions may be
altered in accordance with their terms as a result of the Merger):
(a) the number of shares of Parent Common Stock to be subject to the
new option or warrant shall be equal to the product of (i) the number of shares
of Company Common Stock subject to the original option or warrant and (ii)
0.5388;
13.
<PAGE>
(b) the exercise price per share of Parent Common Stock under the new
option or warrant shall be equal to the quotient of (i) the exercise price per
share of Company Common Stock under the original option or warrant divided by
(ii) 0.5388; and
(c) upon each exercise of options or warrants by a holder thereof, the
aggregate number of shares of Parent Common Stock deliverable upon such exercise
shall be rounded down, if necessary, to the nearest whole share and the
aggregate exercise price shall be rounded up, if necessary, to the nearest cent.
The adjustments provided herein with respect to any options which are
"incentive stock options" (as defined in Section 422 of the Code) shall be
effected in a manner consistent with the requirements of Section 424(a) of the
Code.
Section 3.07 Certain Adjustments. If between the date of this Agreement and
the Effective Time, the outstanding shares of Company Capital Stock or Parent
Common Stock shall be changed into a different number of shares by reason of any
reclassification, recapitalization, split-up, combination or exchange of shares,
or any dividend payable in stock or other securities shall be declared thereon
with a record date within such period, or the number of shares of Company
Capital Stock on a fully diluted basis is in excess of that specified in Section
4.03 and disclosed in 4.03 of the Company Disclosure Schedule (regardless of
whether such excess is a result of an additional issuance of capital stock or a
correction to such Sections), then the exchange ratios established pursuant to
the provisions of Section 3.01 shall be adjusted accordingly to provide to the
holders of Company Capital Stock the same economic effect as contemplated by
this Agreement prior to such reclassification, recapitalization, split-up,
combination, exchange, dividend or increase.
Section 3.08 Undistributed Amounts. Any portion of the Exchange Fund or the
Cash Deposit which remains undistributed for one year after the Effective Time
shall be delivered to Parent, and any holder of Company Capital Stock who has
not theretofore complied with the provisions of this Article III shall
thereafter look only to Parent for satisfaction of their claims for Parent
Common Stock or the Redeemable Preferred, as the case may be, or any cash in
lieu of fractional shares of Parent Common Stock and any Presurrender Dividends.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub that:
Section 4.01 Organization and Qualification; Subsidiaries.
(a) The Company and each directly and indirectly owned subsidiary of
the Company (the "Company Subsidiaries") has been duly organized and is validly
existing and in good standing (to the extent applicable) under the laws of the
jurisdiction of its incorporation or organization, as the case may be, and has
the requisite corporate power and authority and all necessary governmental
approvals to own, lease and operate its properties and to carry on its
14.
<PAGE>
business as it is now being conducted, except where the failure to be so
organized, existing or in good standing or to have such power, authority and
governmental approvals is not reasonably expected to have, individually or in
the aggregate, a Company Material Adverse Effect. The Company and each Company
Subsidiary is duly qualified or licensed to do business, and is in good standing
(to the extent applicable) in each jurisdiction where the character of the
properties owned, leased or operated by it or the nature of its business makes
such qualification or licensing necessary, except for such failures to be so
qualified or licensed and in good standing that are not reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
(b) Section 4.01 of the Company Disclosure Schedule sets forth, as of
the date of this Agreement, a true and complete list of each Company Subsidiary,
together with (i) the jurisdiction of incorporation or organization of each
Company Subsidiary and the percentage of each Company Subsidiary's outstanding
capital stock or other equity interests owned by the Company or another Company
Subsidiary and (ii) an indication of whether each Company Subsidiary is a
"Significant Subsidiary" as defined in Regulation S-X under the Exchange Act.
Except as set forth in Section 4.01 of the Company Disclosure Schedule, neither
the Company nor any Company Subsidiary owns an equity interest in any
partnership or joint venture arrangement or other business entity that is
material to the financial condition, results of operations, business or
prospects of the Company and the Company Subsidiaries, taken as a whole.
Section 4.02 Certificate of Incorporation and Bylaws. Except as set forth
in Section 4.02 of the Company Disclosure Schedule, the copies of the Company's
certificate of incorporation and bylaws that attached hereto as Annex A are
true, complete and correct copies thereof. Such certificate of incorporation and
bylaws are in full force and effect. The Company is not in violation of any of
the provisions of its certificate of incorporation or bylaws.
Section 4.03 Capitalization. The authorized capital stock of the Company
consists of 20,000,000 shares of Company Common Stock and 16,406,869 shares of
preferred stock. As of the date hereof (i) no shares of Company Common Stock are
issued and outstanding, (ii) no shares of Company Common Stock are held in the
treasury of the Company, (iii) no shares of Company Common Stock are held by the
Company Subsidiaries, (iv) no shares of Company Common Stock are reserved for
future issuance pursuant to employee stock options or stock incentive rights
granted under the Company Stock Plans, (v) 143,429 shares of Series C are
reserved for future issuance pursuant to outstanding warrants to purchase shares
of Series C, (vi) 2,648,121 shares of Series A are issued and outstanding, (vii)
2,625,000 of Series B are issued and outstanding, and (viii) 7,140,095 shares of
Series C are issued and outstanding. Except for shares of Company Common Stock
issuable pursuant to the Company Stock Plans or pursuant to agreements or
arrangements described in Section 4.03 of the Company Disclosure Schedule, there
are no options, warrants or other rights, agreements, arrangements or
commitments of any character to which the Company is a party or by which the
Company is bound relating to the issued or unissued capital stock of the Company
or any Company Subsidiary or obligating the Company or any Company Subsidiary to
issue or sell any shares of capital stock of, or other equity interests in, the
Company or any Company Subsidiary. Section 4.03 of the Company
15.
<PAGE>
Disclosure Schedule sets forth a complete and correct list as of the date hereof
of (w) the number of options to purchase Company Common Stock and warrants to
purchase Series C Warrants outstanding and the number of shares of Company
Common Stock or Series C issuable thereunder, (x) the exercise price of each
such outstanding stock option and warrant, (y) the vesting schedule of each such
outstanding stock option and (z) the grantee or holder of each such option and
warrant. All shares of Company Common Stock subject to issuance as aforesaid,
upon issuance prior to the Effective Time on the terms and conditions specified
in the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. Except in accordance with the
terms of the Series C Warrants, there are no outstanding contractual obligations
of the Company or any Company Subsidiary to repurchase, redeem or otherwise
acquire any shares of Company Capital Stock or any capital stock of any Company
Subsidiary. Each outstanding share of capital stock of each Company Subsidiary
is duly authorized, validly issued, fully paid and nonassessable and each such
share owned by the Company or another Company Subsidiary is free and clear of
all security interests, liens, claims, pledges, options, rights of first
refusal, agreements, limitations on the Company's or such other Company
Subsidiary's voting rights, charges and other encumbrances of any nature
whatsoever. Except as set forth in Section 4.03 of the Company Disclosure
Schedule, there are no material outstanding contractual obligations of the
Company or any Company Subsidiary to provide funds to, or make any material
investment (in the form of a loan, capital contribution or otherwise) in, any
Company Subsidiary or any other person.
Section 4.04 Authority Relative to This Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement
and the Company Voting Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by all
necessary corporate action, and, to the Company's knowledge, no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate such transactions except the approval of this Agreement and the
Merger by holders of a majority of the Company Capital Stock and a majority of
the Series B and Series C, voting together as a class, and for the filing and
recordation of the Certificate of Merger as required by the Business Corporation
Act. This Agreement has been duly executed and delivered by the Company and,
assuming the due authorization, execution and delivery by the other parties
hereto, constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The Company has
taken corporate action necessary under the Business Corporation Act to approve
the Company Voting Agreement.
Section 4.05 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do
not, and the performance by the Company of its obligations hereunder and the
consummation of the Merger will not, (i) conflict with or violate any provision
of the certificate of incorporation or bylaws of the Company or any equivalent
organizational documents of any Company Subsidiary, (ii) assuming that all
consents, approvals, authorizations and permits described in Section 4.05(b)
16.
<PAGE>
have been obtained and all filings and notifications described in Section
4.05(b) have been made, conflict with or violate any Law applicable to the
Company or any Company Subsidiary or by which any property or asset of the
Company or any Company Subsidiary is bound or affected or (iii) except as set
forth in Section 4.05(a) of the Company Disclosure Schedule, result in any
breach of or constitute a default (or an event which, with the giving of notice
or lapse of time or both, could reasonably be expected to become a default)
under, or give to others any right of termination, amendment, acceleration or
cancellation of, or result in the creation of a lien or other encumbrance on any
property or asset of the Company or any Company Subsidiary pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation, except, with respect to clauses
(ii) and (iii), for any such conflicts, violations, breaches, defaults or other
occurrences which are not reasonably expected, individually or in the aggregate,
(A) to have a Company Material Adverse Effect or (B) to prevent or materially
delay the performance by the Company of its obligations pursuant to this
Agreement or the consummation of the Merger.
(b) The execution and delivery of this Agreement by the Company do
not, and the performance by the Company of its obligations hereunder and the
consummation of the Merger will not, require any consent, approval,
authorization or permit of, or filing by the Company with or notification by the
Company to, any Governmental Entity, except the premerger notification
requirements of the HSR Act, if any, and the filing and recordation of the
Certificate of Merger as required by the Business Corporation Act, and as set
forth in Section 4.05(b) of the Company Disclosure Schedule.
Section 4.06 Permits; Compliance With Laws. The Company and the Company
Subsidiaries are in possession of (i) all franchises, grants, authorizations,
licenses, establishment registrations, product listings, permits, easements,
variances, exceptions, consents, certificates, identification and registration
numbers, approvals and orders of any Governmental Entity necessary for the
Company or any Company Subsidiary to own, lease and operate its properties or to
produce, store, distribute and market its products or otherwise to carry on its
business as it is now being conducted and (ii) agreements from all Federal,
state, foreign and local governmental agencies and accrediting and certifying
organizations having jurisdiction over such facility or facilities that are
required to operate the facility or facilities in the manner in which it or they
are currently operated (collectively, the "Company Permits"), except where the
failure to have, or the suspension or cancellation of, any of the Company
Permits could not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect, and, as of the date of this
Agreement, no suspension or cancellation of any of the Company Permits is
pending or, to the knowledge of the Company, threatened, except where the
failure to have, or the suspension or cancellation of, any of the Company
Permits are not reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect. Neither the Company nor any Company Subsidiary
is in conflict with, or in default or violation of, (i) any Law applicable to
the Company or any Company Subsidiary or by which any property or asset of the
Company or any Company Subsidiary is bound or affected or (ii) any Company
Permits, except in the case of clauses (i) and (ii) for any such conflicts,
defaults or violations that are not reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect. Neither the Company nor any
Company Subsidiary has received notice from the
17.
<PAGE>
regulatory authorities that enforce the statutory or regulatory provisions of
any pending or threatened investigations or surveys, and no such investigations
or surveys are pending or, to the knowledge of the Company, threatened or
imminent that are reasonably expected to have, individually or in the aggregate,
a Company Material Adverse Effect. Section 4.06 of the Company Disclosure
Schedule sets forth, as of the date of this Agreement, all actions, proceedings,
investigations or surveys pending or, to the knowledge of the Company,
threatened against the Company or any Company Subsidiary that could reasonably
be expected to result in (i) the loss or revocation of a Company Permit or (ii)
the suspension or cancellation of any other Company Permit. Except as set forth
in Section 4.06 of the Company Disclosure Schedule, since June 30, 1996, neither
the Company nor any Company Subsidiary has received from any Governmental Entity
any written notification with respect to possible conflicts, defaults or
violations of Laws, except for written notices relating to possible conflicts,
defaults or violations that are not reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
Section 4.07 Financial Statements.
(a) The Company has provided to Parent consolidated financial
statements for the fiscal year ended January 31, 1998, and for the periods ended
April 30, 1998 and June 30, 1998 (collectively and as amended, the "Company
Reports").
(b) Each of the consolidated financial statements (including, in each
case, any notes thereto) contained in the Company Reports was prepared in
accordance with U.S. GAAP applied on a consistent basis throughout the periods
indicated (except as may be indicated in the notes thereto) and each presented
fairly, in all material respects, the consolidated financial position of the
Company and the consolidated Company Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein, except as otherwise
noted therein (subject, in the case of unaudited statements, to normal and
recurring year-end adjustments which did not have and could not reasonably be
expected to have, individually or in the aggregate, a Company Material Adverse
Effect).
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of the Company and the Company Subsidiaries as
reported in the Company Reports, including the notes thereto, none of the
Company or any Company Subsidiary has any liabilities or obligations of any
nature (whether accrued, absolute, contingent or otherwise) that would be
required to be reflected on a balance sheet or in notes thereto prepared in
accordance with U.S. GAAP, except for liabilities or obligations incurred in the
ordinary course of business consistent with past practice since June 30, 1998
that have not had and could not reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
Section 4.08 Absence of Certain Changes or Events. Since June 30, 1998,
except as contemplated by or as disclosed in this Agreement or, as set forth in
Section 4.08 of the Company Disclosure Schedule , the Company and the Company
Subsidiaries have conducted their businesses only in the ordinary course
consistent with past practice and, since such date,
18.
<PAGE>
there has not been (i) any Company Material Adverse Effect, (ii) any event that
could reasonably be expected to prevent or materially delay the performance of
its obligations pursuant to this Agreement and the consummation of the Merger by
the Company, (iii) any material change by the Company in its accounting methods,
principles or practices, (iv) any declaration, setting aside or payment of any
dividend or distribution in respect of the shares of Company Capital Stock or
any redemption, purchase or other acquisition of any of the Company's securities
or (v) any increase in the compensation or benefits or establishment of any
bonus, insurance, severance, deferred compensation, pension, retirement, profit
sharing, stock option (including, without limitation, the granting of stock
options, stock appreciation rights, performance awards or restricted stock
awards), stock purchase or other employee benefit plan, or any other increase in
the compensation payable or to become payable to any executive officers of the
Company or any Company Subsidiary except in the ordinary course of business
consistent with past practice.
Section 4.09 Employee Benefit Plans; Labor Matters
(a) Section 4.09(a) of the Company Disclosure Schedule lists (i) all
employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus,
stock option, stock purchase, restricted stock, incentive, deferred
compensation, retiree medical or life insurance, supplemental retirement,
severance or other benefit plans, programs or arrangements, and all employment,
termination, severance or other contracts or agreements, whether legally
enforceable or not, to which the Company or any Company Subsidiary is a party,
with respect to which the Company or any Company Subsidiary has any obligation
or which are maintained, contributed to or sponsored by the Company or any
Company Subsidiary for the benefit of any current or former employee, officer or
director of the Company or any Company Subsidiary, (ii) each employee benefit
plan for which the Company or any Company Subsidiary could incur liability under
Section 4069 of ERISA in the event such plan has been or were to be terminated,
(iii) any plan in respect of which the Company or any Company Subsidiary could
incur liability under Section 4212(c) of ERISA and (iv) any contracts,
arrangements or understandings between the Seller or any of its affiliates and
any employee of the Company or of any Company Subsidiary, including, without
limitation, any contracts, arrangements or understandings relating to the sale
of the Company (collectively, the "Company Benefit Plans"). With respect to each
Company Benefit Plan, the Company has delivered or made available to Parent a
true, complete and correct copy of (i) such Company Benefit Plan and the most
recent summary plan description related to such Company Benefit Plan, if a
summary plan description is required therefor, (ii) each trust agreement or
other funding arrangement relating to such Company Benefit Plan, (iii) the most
recent annual report (Form 5500) filed with the IRS) with respect to such
Company Benefit Plan, (iv) the most recent actuarial report or financial
statement relating to such Company Benefit Plan and (v) the most recent
determination letter issued by the IRS with respect to such Company Benefit
Plan, if it is qualified under Section 401(a) of the Code. Except as disclosed
on Section 4.09(a) of the Company Disclosure Schedule, there are no other
employee benefit plans, programs, arrangements or agreements, whether formal or
informal, whether in writing or not, to which the Company or any Company
Subsidiary is a party, with respect to which the Company or any Company
Subsidiary has any obligation or which are maintained, contributed to or
sponsored by the Company or any Company Subsidiary for the benefit of any
current or former employee, officer or director of the Company or any Company
Subsidiary. Neither the Company
19.
<PAGE>
nor any Company Subsidiary has any express or implied commitment, whether
legally enforceable or not, (i) to create and incur liability with respect to or
cause to exist any other employee benefit plan, program or arrangement, (ii) to
enter into any contract or agreement to provide compensation or benefits to any
individual or (iii) to modify, change or terminate any Company Benefit Plan,
other than with respect to a modification, change or termination required by
ERISA or the Code.
(b) None of the Company Benefit Plans is a multiemployer plan (within
the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or
a single employer pension plan (within the meaning of Section 4001(a)(15) of
ERISA) for which the Company or any Company Subsidiary could incur liability
under Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). None of the
Company Benefit Plans provide for or promise retiree medical, disability or life
insurance benefits to any current or former employee, officer or director of the
Company or any Company Subsidiary.
(c) Each Company Benefit Plan has been administered in all material
respects in accordance with its terms, and all contributions required to be made
under the terms of any of the Company Benefit Plans as of the date of this
Agreement have been timely made or have been reflected on the most recent
consolidated balance sheet filed or incorporated by reference in the Company
Reports prior to the date of this Agreement. Except as set forth in Section
4.09(c) of the Company Disclosure Schedule, with respect to the Company Benefit
Plans, no event has occurred and, to the knowledge of the Company, there exists
no condition or set of circumstances in connection with which the Company or any
Company Subsidiary could be subject to any liability under the terms of such
Company Benefit Plans, ERISA, the Code or any other applicable Law which could
reasonably be expected to have, individually or in the aggregate, a Company
Material Adverse Effect. No legal action, suit or claim is pending or threatened
with respect to any Company Benefit Plan (other than claims for benefits in the
ordinary course).
(d) The Company on behalf of itself and all of the Company
Subsidiaries hereby represents that, other than as disclosed in Section 4.09(d)
of the Company Disclosure Schedule or where the failure of such representation
to be true could not reasonably be expected to have, individually or in the
aggregate, a Company Material Adverse Effect: (i) each Company Benefit Plan
which is intended to be qualified under Section 401(a) of the Code or Section
401(k) of the Code has received a favorable determination letter from the IRS
that it is so qualified and each trust established in connection with any
Company Benefit Plan which is intended to be exempt from federal income taxation
under Section 501(a) of the Code has received a determination letter from the
IRS that it is so exempt, and to the Company's knowledge no fact or event has
occurred since the date of such determination letter from the IRS to adversely
affect the qualified status of any such Company Benefit Plan or the exempt
status of any such trust; (ii) each trust maintained or contributed to by the
Company or any Company Subsidiary which is intended to be qualified as a
voluntary employees' beneficiary association and which is intended to be exempt
from federal income taxation under Section 501(c)(9) of the Code has received a
favorable determination letter from the IRS that it is so qualified and so
exempt, and to the Company's knowledge no fact or event has occurred since the
date of such determination by the IRS to adversely affect such qualified or
exempt status; (iii) to the Company's knowledge there
20.
<PAGE>
has been no prohibited transaction (within the meaning of Section 406 of ERISA
or Section 4975 of the Code) with respect to any Company Benefit Plan; (iv)
neither the Company nor any Company Subsidiary has incurred any liability for
any penalty or tax arising under Section 4971, 4972, 4980, 4980B or 6652 of the
Code or any liability under Section 502 of ERISA, and to the Company's knowledge
no fact or event exists which could give rise to any such liability; (v) no
complete or partial termination has occurred within the five years preceding the
date hereof with respect to any Company Benefit Plan; (vi) no reportable event
(within the meaning of Section 4043 of ERISA) has occurred or is expected to
occur with respect to any Company Benefit Plan subject to Title IV of ERISA;
(vii) no Company Benefit Plan had an accumulated funding deficiency (within the
meaning of Section 302 of ERISA or Section 412 of the Code), whether or not
waived, as of the most recently ended plan year of such Company Benefit Plan;
(viii) none of the assets of the Company or any Company Subsidiary is the
subject of any lien arising under Section 302(f) of ERISA or Section 412(n) of
the Code; neither the Company nor any Company Subsidiary has been required to
post any security under Section 307 of ERISA or Section 401(a)(29) of the Code;
and no fact or event exists which could give rise to any such lien or
requirement to post any such security; (ix) all contributions, premiums or
payments required to be made with respect to any Company Benefit Plan have been
made on or before their due dates; (x) all such contributions have been fully
deducted for income tax purposes and no such deduction has been challenged or
disallowed by any government entity and no fact or event exists which could give
rise to any such challenge or disallowance; and (xi) as of the Effective Time,
no Company Benefit Plan which is subject to Title IV of ERISA will have an
"unfunded benefit liability" (within the meaning of Section 4001(a)(18) of
ERISA).
(e) Except as set forth in Section 4.09(e) of the Company Disclosure
Schedule, to the Company's knowledge, the Company and the Company Subsidiaries
are in compliance with the requirements of the Americans With Disabilities Act.
(f) The Company and the Company Subsidiaries are in compliance with
the requirements of the Workers Adjustment and Retraining Notification Act
("WARN") and have no liabilities pursuant to WARN.
(g) Except as set forth in Section 4.09(g) of the Company Disclosure
Schedule, neither the Company nor any Company Subsidiary is a party to any
collective bargaining or other labor union contract applicable to persons
employed by the Company or any Company Subsidiary and no collective bargaining
agreement is being negotiated by the Company or any Company Subsidiary. As of
the date of this Agreement, there is no labor dispute, strike or work stoppage
against the Company or any Company Subsidiary pending or, to the knowledge of
the Company, threatened which may interfere with the respective business
activities of the Company or any Company Subsidiary, except where such dispute,
strike or work stoppage could not reasonably be expected to have a Company
Material Adverse Effect. As of the date of this Agreement, to the knowledge of
the Company, none of the Company, any Company Subsidiary, or any of their
respective representatives or employees has committed any unfair labor practice
in connection with the operation of the respective businesses of the Company or
any Company Subsidiary, and there is no charge or complaint against the Company
or any Company Subsidiary by the National Labor Relations Board or any
comparable Governmental Entity pending or
21.
<PAGE>
threatened in writing, except where such unfair labor practice, charge or
complaint could not reasonably be expected to have a Company Material Adverse
Effect.
(h) The Company has delivered to Parent true, complete and correct
copies of (i) all employment agreements with officers and all consulting
agreements of the Company and each Company Subsidiary providing for annual
compensation in excess of $100,000, (ii) all severance plans, agreements,
programs and policies of the Company and each Company Subsidiary with or
relating to their respective employees or consultants, and (iii) all plans,
programs, agreements and other arrangements of the Company and each Company
Subsidiary with or relating to their respective employees or consultants which
contain "change of control" provisions.
(i) The Company has approximately 75 full-time equivalent employees
and generally enjoys good employer-employee relations. The Company is not
delinquent in payments to any of its employees or consultants for any wages,
salaries, commissions, bonuses or other direct compensation for any services
performed by them to the date hereof or amounts required to be reimbursed to
such employees. Upon termination of the employment of any employees, neither the
Company nor Parent or the Surviving Corporation will by reason of the Merger or
anything done prior to the Effective Time be liable to any of such employees for
severance pay or any other payments (other than accrued salary, vacation or sick
pay in accordance with the Company's normal policies and as is provided in the
Company Disclosure Schedule). True and complete information as to all current
directors, officers, employees or consultants of the Company, including, in each
case, name, current job title, base salary, bonus potential, commissions and
termination obligations has been previously furnished to Parent.
(j) Section 4.09(j) of the Company Disclosure Schedule lists the name,
place of employment, the current annual salary rates, bonuses, deferred or
contingent compensation, pension, accrued vacation, "golden parachute" and other
like benefits paid or payable (in cash or otherwise) in 1996 and 1997 the date
of employment and a description of position and job function of each current
salaried employee, officer, director, consultant or agent of the Company or any
Company Subsidiary whose annual compensation exceeded (or, in 1998, expected to
exceed) $100,000.
Section 4.10 Certain Tax Matters. Except as disclosed in the Company
Reports, neither the Company nor, to the knowledge of the Company, any of its
affiliates has taken or agreed to take any action (other than actions
contemplated by this Agreement) that could reasonably be expected to prevent the
Merger from constituting a transaction qualifying under Section 368 of the Code.
The Company is not aware of any agreement, plan or other circumstances that
could reasonably be expected to prevent the Merger from so qualifying under
Section 368 of the Code.
Section 4.11 Contracts; Debt Instruments. Except as disclosed herein or in
Section 4.11 of the Company Disclosure Schedule, there is no contract or
agreement that is material to the business, financial condition or results of
operations of the Company and the Company Subsidiaries taken as a whole (each, a
"Company Material Contract"). Except as disclosed herein or in Section 4.11 of
the Company Disclosure Schedule, neither the Company nor any
22.
<PAGE>
Company Subsidiary is in violation of or in default under (nor does there exist
any condition which with the passage of time or the giving of notice could
reasonably be expected to cause such a violation of or default under) any loan
or credit agreement, note, bond, mortgage, indenture or lease, or any other
contract, license, agreement, arrangement or understanding to which it is a
party or by which it or any of its properties or assets is bound other than such
violation or default that could not reasonably be expected to result in a
Company Material Adverse Effect.
Section 4.12 Litigation. Except as disclosed in Section 4.12 of the Company
Disclosure Schedule, there is no suit, claim, action, proceeding or
investigation pending or, to the knowledge of the Company, threatened against
the Company or any Company Subsidiary before any Governmental Entity. Except as
disclosed in Section 4.12 of the Company Disclosure Schedule, neither the
Company nor any Company Subsidiary is subject to any outstanding order, writ,
injunction or decree which could reasonably be expected to have, individually or
in the aggregate, a Company Material Adverse Effect.
Section 4.13 Environmental Matters. Except as disclosed in Section 4.13 of
the Company Disclosure Schedule (i) the Company and the Company Subsidiaries are
in compliance with all applicable Environmental Laws; (ii) all past
noncompliance of the Company or any Company Subsidiary with Environmental Laws
or Environmental Permits has been resolved without any pending, ongoing or
future obligation, cost or liability; and (iii) neither the Company nor any
Company Subsidiary has released a Hazardous Material at, or transported a
Hazardous Material to or from, any real property currently or formerly owned,
leased or occupied by the Company or any Company Subsidiary, in violation of any
Environmental Law.
Section 4.14 Intellectual Property
(a) Company Intellectual Property. All patents, trademarks, trade
names, service marks, trade dress, Internet domain names, copyrights and any
renewal rights therefor, technology, supplier lists, trade secrets, know-how,
computer software programs or applications in both source and object code form,
technical documentation of such software programs ("Technical Documentation"),
registrations and applications for any of the foregoing and all other tangible
or intangible proprietary information or materials that are or have been used
(including without limitation in the development of) the Company's business
and/or in any product, technology or process (i) currently being or formerly
manufactured, published or marketed by the Company or (ii) previously or
currently under development for possible future manufacturing, publication,
marketing or other use by the Company are hereinafter referred to as the
"Company Intellectual Property."
(b) Applications and Registrations. The Company Disclosure Schedule
contains a true and complete list of all of the Company's patents, patent
applications, trademarks, trademark applications, trade names, service marks,
service mark applications, Internet domain names, Internet domain name
applications, copyrights and copyright registrations and applications and other
filings and formal actions made or taken pursuant to Federal, state, local and
foreign laws by the Company to protect its interests in the Company Intellectual
Property.
23.
<PAGE>
(c) Rights to Company Intellectual Property. The Company Intellectual
Property consists solely of items and rights which are: (i) owned by the
Company; (ii) in the public domain; or (iii) rightfully used by the Company and
its successors pursuant to a valid license. The Company has all rights in the
Company Intellectual Property necessary to carry out the Company's current
activities (and had all rights necessary to carry out its former activities at
the time such activities were being conducted), including without limitation, to
the extent required to carry out such activities, rights to make, use,
reproduce, modify, adopt, create derivative works based on, translate,
distribute (directly and indirectly), transmit, display and perform publicly,
license, rent, lease, assign and sell the Company Intellectual Property.
(d) Third Party Claims. To the Company's knowledge, reproduction,
manufacturing, distribution, licensing, sublicensing, sale or any other exercise
of rights in any Company licensing, sublicensing, sale or any other exercise of
rights in any Company Intellectual Property, product, work, technology or
process as now used or offered or proposed for use, licensing or sale by the
Company does not infringe on any copyright, trade secret, trademark, service
mark, trade name, trade dress, firm name, Internet domain name, logo, trade
dress, mask work or of any person or the patent of any person. No claims (i)
challenging the validity, effectiveness or ownership by the Company of any of
the Company Intellectual Property, or (ii) to the effect that the use,
distribution, licensing, sublicensing, sale or any other exercise of rights in
any product, work, technology or process as now used or offered or proposed for
use, licensing, sublicensing or sale by the Company infringes or will infringe
on any intellectual property or other proprietary right of any person have been
asserted or, to the knowledge of Company, are threatened by any person, nor are
there, to the Company's knowledge, any valid grounds for any bona fide claim of
any such kind; provided that with respect to the third-party software listed in
Section 4.14 of the Company Disclosure Schedule, the foregoing shall apply only
to the best of the Company's knowledge. All registered, granted or issued
patents, trademarks, Internet domain names and copyrights held by the Company
are enforceable and subsisting. To the best of Company's knowledge, there is no
unauthorized use, infringement or misappropriation of any of the Company
Intellectual Property by any third party, employee or former employee.
(e) Royalties. Except as set forth on the Company Disclosure Schedule,
there are no royalties, fees, honoraria or other payments payable by the Company
to any person or entity by reason of the ownership, development, use, license,
sale or disposition of the Company Intellectual Property, other than salaries
and sales commissions paid to employees and sales agents in the ordinary course
of business.
(f) Personnel. Except as set forth in Section 4.14(f) of the Company
Disclosure Schedule, all personnel, including employees, agents, consultants and
contractors, who have contributed to or participated in the conception and
development of the Company Intellectual Property on behalf of the Company, have
executed nondisclosure agreements in the form set forth on the Company
Disclosure Schedule and either (i) have been a party to a "work-for-hire"
arrangement or agreements with the Company in accordance with applicable
national and state law that has accorded the Company full, effective, exclusive
and original ownership of all tangible and intangible property thereby arising,
or (ii) have executed appropriate instruments of
24.
<PAGE>
assignment in favor or the Company as assignee that have conveyed to the Company
effective and exclusive ownership of all tangible and intangible property
thereby arising.
(g) Third Party Agreements. The Company is not, nor as a result of the
execution or delivery of this Agreement, or performance of the Company's
obligations hereunder, will Company be, in violation of any license, sublicense,
agreement or instrument to which the Company is a party or otherwise bound, nor
will execution or delivery of this Agreement, or performance of Company's
obligations hereunder, cause the diminution, termination or forfeiture of any
Company Intellectual Property except as would not result in a Company Material
Adverse Effect.
(h) Company Software Programs. Section 4.14(h) of the Company
Disclosure Schedule contains a true and complete list of all of Company's
Software Programs (the "Software Programs"). The Company owns full and
unencumbered right and good, valid and marketable title to such Software
Programs free and clear of all mortgages, pledges, liens, security interests,
conditional sales agreements, encumbrances or charges of any kind.
(i) Protection. The source code and system documentation relating to
the Software Programs (i) have at all times been maintained in strict
confidence, (ii) have been disclosed by the Company only to employees who have a
"need to know" the contents thereof in connection with the performance of their
duties to the Company and who have executed the nondisclosure agreements
referred to in Section 4.14, and (iii) have not been disclosed to any third
party.
(j) Third-Party Software. The Company Disclosure Schedule contains a
complete list of (i) material software libraries, compilers and other
third-party software used in the development of the Software Programs and (ii)
material software systems and applications used by the Company in the operation
of its business. The Company Disclosure Schedule lists all license agreements
for the use of all such software and, if any such software is not licensed, the
basis of the use of such software by the Company. All use of each of such
software product by the Company has been in full compliance with the respective
license agreement or other right of use listed on the Company Disclosure
Schedule.
(k) Contract Performance. The Company has observed all material
provisions of, and performed all of their material obligations under, the
License Agreements. The Company has not taken any action that could cause, or
failed to take any action, except that Company has not filed any copyright
registrations or patent applications with respect to the Company Intellectual
Property, the failure of which could cause, (i) any source code, trade secret or
other Company Intellectual Property to be released from an escrow or otherwise
made available to any person or entity other than those person described in
Section 4.14, dedicated to the public or otherwise placed in the public domain
or (ii) any other material adverse affect to the protection of the Software
Programs under trade secret, copyright, patent or other intellectual property
laws.
(l) Year 2000. The Software Programs (i) have been designed to ensure
year 2000 compatibility, which should include, but is not limited to, date data
century recognition, and calculations that accommodate same century and
multi-century formulas and date values; (ii)
25.
<PAGE>
operate and will operate in accordance with their specifications prior to,
during and after the calendar year 2000 AD; and (iii) shall not end abnormally
or provide invalid or incorrect results as a result of date data, specifically
including date data which represents or references different centuries or more
than one century; provided, however, that the Company makes no representations
concerning any website or operating system of a customer using the Software
Program.
Section 4.15 Taxes. The Company on behalf of itself and all of the Company
Subsidiaries hereby represents that, other than as disclosed in Section 4.15(a)
of the Company Disclosure Schedule: (a) the Company and the Company Subsidiaries
have filed all United States Federal income tax and all other material Tax
Returns required to be filed by them, and the Company and the Company
Subsidiaries have paid and discharged all Taxes due in connection with or with
respect to the filing of all Tax Returns and have paid all other Taxes as are
due, except such as are being contested in good faith by appropriate proceedings
(to the extent any such proceedings are required) and with respect to which the
Company is maintaining reserves to the extent currently required in all material
respects adequate for their payment; (b) neither the IRS nor any other taxing
authority or agency is now asserting or, to the best of the Company's knowledge,
threatening to assert against the Company or any of the Company Subsidiaries any
deficiency or claim for additional Taxes other than additional Taxes with
respect to which the Company is maintaining reserves in all material respects
adequate for their payment, and there are no requests for information currently
outstanding that could affect the Taxes of the Company or any Company
Subsidiaries; (c) neither the Company nor any of the Company Subsidiaries is
currently being audited by any taxing authority; (d) there are no tax liens on
any assets of the Company or any Company Subsidiary; (e) neither the Company nor
any of the Company Subsidiaries has granted any waiver of any statute of
limitations with respect to, or any extension of a period for the assessment of,
any Tax; (f) the accruals and reserves for taxes reflected in the unaudited
balance sheet as of January 31, 1998 are in all material respects adequate to
cover all Taxes accruable through the date thereof (including interest and
penalties, if any, thereon and Taxes being contested) in accordance with U.S.
GAAP; (g) neither the Company nor any of the Company Subsidiaries is required to
include in income any amount in respect of any adjustment under Section 481 of
the Code; (h) neither the Company nor any of the Company Subsidiaries is a party
to any agreement, contract or arrangement that may result, separately or in the
aggregate, in the payment of any "excess parachute payment" within the meaning
of Section 280G of the Code, determined without regard to Section 280G(b)(4) of
the Code; (i) neither the Company nor any of the Company Subsidiaries owns any
real property of a character, the transfer of which would give rise to (x) a
revaluation of such property for purposes of any ad valorem or similar tax, or
(y) any documentary, stamp or other transfer tax; and (j) neither the Company
nor any of the Company Subsidiaries has an "excess loss account" for purposes of
the treasury regulations promulgated under Section 1502 of the Code. Within ten
days after the date hereof, the Company and the Company Subsidiaries will make
available to Parent or its legal counsel for inspection copies of all income and
sales and use tax returns for all periods since the date of the Company's and
the Company Subsidiaries' incorporation. The Company has delivered to the Parent
true and complete copies of Federal, state, local and foreign Tax Returns and
the related Form K-1's of the Predecessor Company, and the members thereof for
each of the years ended December 31, 1997, 1996 and 1995 and all revenue agent's
reports and other written assertions
26.
<PAGE>
of deficiencies or other liabilities for Taxes with respect to the Predecessor
Company for past periods for which the applicable statute of limitations has not
expired. None of such Tax Returns is or has been subject to audit. The Company
will provide to the Parent copies of any such reports or written assertions
received after the date hereof within ten days of their first being received by
the Company. The Company has complied with all applicable laws, rules and
regulations relating to the withholding of Taxes and has timely collected or
withheld and paid over (and up to the Effective Time will have timely collected
or withheld and paid over) to the proper Governmental Entities all amounts
required to be so collected or withheld and paid over for all periods up to the
Effective Time under all applicable laws. There are not currently in effect any
waivers or extensions of any applicable statute of limitations for the
assessment or collection of Taxes with respect to any Tax Return that relates to
the Company, and no request for any such waiver or extension is pending. There
are no Tax rulings, requests for rulings or closing agreements relating to the
Company that could affect its liability for Taxes for any period after the
Effective Time. The Company does not have any contractual obligation to
indemnify any other Person with respect to Taxes, or any obligation to make
distributions in respect of Taxes. No claim has ever been made by a taxing
authority in a jurisdiction where the Company does not file Tax Returns that the
Company is or may be subject to taxation by such jurisdiction. No power of
attorney has been granted by the Company with respect to any matter relating to
Taxes, which power of attorney is currently in force. The Company has not filed
a consent under Section 341(f) of the Code or any comparable provision of state
law.
Section 4.16 Properties. Except as set forth in Section 4.16 of the Company
Disclosure Schedule, the Company and the Company Subsidiaries have good and
marketable title, free and clear of all liens, to all their material properties
and assets, whether tangible or intangible, real, personal or mixed, except as
would not result in (i) a Company Material Adverse Effect, and (ii) liens
arising in the ordinary course of business. All buildings, and all fixtures,
equipment and other property and assets that are material to its business on a
consolidated basis, held under leases or sub-leases by the Company or any
Company Subsidiary are held under valid instruments enforceable in accordance
with their respective terms, subject to applicable laws of bankruptcy,
insolvency or similar laws relating to creditors' rights generally and to
general principles of equity (whether applied in a proceeding in law or equity).
Substantially all of the Company's and the Company Subsidiaries' equipment in
regular use has been reasonably maintained and is in serviceable condition,
reasonable wear and tear excepted.
Section 4.17 Affiliates. Section 4.17 of the Company Disclosure Schedule
sets forth the name and address of each person who is, in the Company's
reasonable judgment, an Affiliate of the Company.
Section 4.18 Brokers. No broker, finder or investment banker is entitled to
any brokerage, finder's or other fee or commission in connection with the Merger
based upon arrangements made by or on behalf of the Company.
Section 4.19 Certain Business Practices. None of the Company, any Company
Subsidiary or any directors, officers, agents or employees of the Company or any
Company Subsidiary (in their capacities as such) has (i) used any funds for
unlawful contributions, gifts,
27.
<PAGE>
entertainment or other unlawful expenses relating to political activity, (ii)
made any unlawful payment to foreign or domestic government officials or
employees or to foreign or domestic political parties or campaigns or violated
any provision of the Foreign Corrupt Practices Act of 1977, as amended, (iii)
consummated any transaction, made any payment, entered into any agreement or
arrangement or taken any other action in violation of Section 1128B(b) of the
Social Security Act, as amended, or (iv) made any other unlawful payment.
Section 4.20 Transaction Expenses. Section 4.20 of the Company Disclosure
Schedule sets forth the Company's current, good faith, itemized estimate of the
fees and expenses the Company will incur in connection with consummating the
Merger and the other transactions contemplated hereby.
Section 4.21 Interested Party Transactions. Except as set forth in Section
4.21 of the Company Disclosure Schedule, since January 31, 1998 no executive
officer, director or stockholder of the Company or any of the Company
Subsidiaries has engaged in any business dealings with the Company or any of the
Company Subsidiaries (other than any such business dealings that would not
required to be disclosed in a proxy statement satisfying the requirements of
Regulation 14A promulgated under the Exchange Act filed on the date hereof).
Except for normal compensation received as employees or directors, no officer,
director or stockholder of the Company, and no entity known by the Company to be
controlled by any officer, director or stockholder of the Company:
(a) is directly or indirectly engaged in business as a competitor,
lessor, lessee, customer or supplier of the Company; owns directly or indirectly
any interest (excepting no more than five percent stockholdings for investment
purposes in securities of publicly held companies) in any Person that is
directly or indirectly engaged in business as a competitor, lessor, lessee,
franchisee, customer or supplier of the Company; or is an officer, director,
employee or consultant of any such person;
(b) owns directly or indirectly, in whole or in part, any material
tangible or intangible property that the Company uses;
(c) has any cause of action or other claim whatsoever against, or owes
any amount to, the Company, except for claims in the ordinary course of
business, such as for accrued vacation pay, and similar matters in agreements
existing on the date hereof; or
(d) has made any payment or commitment to pay any commission, fee or
other amount to, or purchase or obtain or otherwise contract to purchase or
obtain any goods or services from, any Person of which any officer or director
of the Company is a partner or stockholder (excepting no more than five percent
stockholdings for investment purposes in securities of publicly held companies).
Section 4.22 Business Activity Restrictions. There is no agreement
(noncompetition or otherwise), commitment, judgment, injunction, order or decree
to which the Company or any officer, employee or consultant of the Company is a
party or that otherwise is binding upon the Company or such officer, employee or
consultant that has or reasonably could be expected to
28.
<PAGE>
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. The Company has not entered into any
agreement under which the Company is restricted from selling, licensing or
otherwise distributing any of its technology or products to, or 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 or
line of business.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
Parent and Merger Sub hereby jointly and severally represent and warrant to
the Company that:
Section 5.01 Organization And Qualification; Subsidiaries. (a) Parent,
Merger Sub and each other subsidiary of Parent (the "Parent Subsidiaries") has
been duly organized and is validly existing and in good standing (to the extent
applicable) under the laws of the jurisdiction of its incorporation or
organization, as the case may be, and has the requisite corporate power and
authority and all necessary governmental approvals to own, lease and operate its
properties and to carry on its business as it is now being conducted, except
where the failure to be so organized, existing or in good standing or to have
such power, authority and governmental approvals are not reasonably expected to
have, individually or in the aggregate, a Parent Material Adverse Effect.
Parent, Merger Sub and each other Parent Subsidiary is duly qualified or
licensed to do business, and is in good standing (to the extent applicable), in
each jurisdiction where the character of the properties owned, leased or
operated by it or the nature of its business makes such qualification or
licensing necessary, except for such failures to be so qualified or licensed and
in good standing that is not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.
Section 5.02 Certificate Of Incorporation And Bylaws. The copies of
Parent's articles of incorporation and bylaws that are incorporated by reference
as exhibits to Parent's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997 (the "Parent 1997 10-K") are true, complete and correct copies
thereof. Parent has heretofore furnished the Company with true, complete and
correct copies of the certificate of incorporation and bylaws of Merger Sub.
Such certificate or articles of incorporation, as the case may be, and bylaws
are in full force and effect. Neither Parent nor Merger Sub is in violation of
any of the provisions of its certificate or articles of incorporation, as the
case may be, or bylaws.
Section 5.03 Capitalization. The authorized capital stock of Parent
consists of 100,000,000 shares of Parent Common Stock and 25,000,000 shares of
preferred stock. As of May 12, 1998 (i) 36,925,046 shares of Parent Common Stock
are issued and outstanding, all of which are validly issued, fully paid and
nonassessable, (ii) no shares of Parent Common Stock are held by the Parent
Subsidiaries and (iii) no shares of Parent Preferred Stock are issued and
outstanding. Except for the shares of Parent Common Stock issuable pursuant to
the Parent Stock Plans, pursuant to the Parent Rights or pursuant to agreements
or arrangements described in Section 5.03 of the Parent Disclosure Schedule,
there are no options, warrants or other rights,
29.
<PAGE>
agreements, arrangements or commitments of any character to which Parent is a
party or by which Parent is bound relating to the issued or unissued capital
stock of Parent, Merger Sub or any other Parent Subsidiary or obligating Parent,
Merger Sub or any other Parent Subsidiary to issue or sell any shares of capital
stock of, or other equity interests in, Parent, Merger Sub or any other Parent
Subsidiary. All shares of Parent Common Stock subject to issuance as aforesaid,
upon issuance prior to the Effective Time on the terms and conditions specified
in the instruments pursuant to which they are issuable, will be duly authorized,
validly issued, fully paid and nonassessable. The shares of Parent Common Stock
and Redeemable Preferred when issued and delivered in accordance with this
Agreement will be duly authorized, validly issued, fully paid and nonassessable.
Each outstanding share of capital stock of each Parent Subsidiary is duly
authorized, validly issued, fully paid and nonassessable and each such share
owned by Parent or another Parent Subsidiary is free and clear of all security
interests, liens, claims, pledges, options, rights of first refusal, agreements,
limitations on Parent's or such other Parent Subsidiary's voting rights, charges
and other encumbrances of any nature whatsoever, except where the failure to own
such shares free and clear could not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. Except as
set forth in Section 5.03 of the Parent Disclosure Schedule, there are no
material outstanding contractual obligations of Parent, Merger Sub or any other
Parent Subsidiary to provide funds to, or make any material investment (in the
form of a loan, capital contribution or otherwise) in, any Parent Subsidiary or
any other Person.
Section 5.04 Authority Relative To This Agreement. Parent and Merger Sub
have all necessary corporate power and authority to execute and deliver this
Agreement, to perform their respective obligations hereunder and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by Parent and Merger Sub and the consummation by Parent and Merger Sub
of the transactions contemplated hereby have been duly and validly authorized by
all necessary corporate action, and no other corporate proceedings on the part
of Parent or Merger Sub are necessary to authorize this Agreement or to
consummate such transactions (other than the approval of this Agreement and the
Merger by the holders of a majority of the outstanding shares of Parent Common
Stock entitled to vote with respect thereto at the Parent Stockholders' Meeting,
if required, and the filing and recordation of the Certificate of Merger as
required by the Business Corporation Act). This Agreement has been duly executed
and delivered by Parent and Merger Sub and, assuming the due authorization,
execution and delivery by the Company, constitutes the legal, valid and binding
obligation of Parent and Merger Sub, enforceable against Parent and Merger Sub
in accordance with its terms.
Section 5.05 No Conflict; Required Filings And Consents.
(a) The execution and delivery of this Agreement by Parent and Merger
Sub do not, and the performance by Parent and Merger Sub of their obligations
hereunder and the consummation of the Merger will not, (i) conflict with or
violate any provision of the certificate or articles of incorporation, as the
case may be, or bylaws of Parent or Merger Sub or any equivalent organizational
documents of any other Parent Subsidiary, (ii) assuming that all consents,
approvals, authorizations and permits described in Section 5.05(b) have been
obtained and all filings and notifications described in Section 5.05(b) have
been made, conflict with or
30.
<PAGE>
violate any Law applicable to Parent or any other Parent Subsidiary or by which
any property or asset of Parent, Merger Sub or any other Parent Subsidiary is
bound or affected or (iii) except as set forth in Section 5.05(a) of the Parent
Disclosure Schedule, result in any breach of or constitute a default (or an
event which with the giving of notice or lapse of time or both could reasonably
be expected to become a default) under, or give to others any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or other encumbrance on any property or asset of Parent,
Merger Sub or any other Parent Subsidiary pursuant to, any note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation, except, with respect to clauses (ii) and (iii), for
any such conflicts, violations, breaches, defaults or other occurrences which
are not reasonably expected, individually or in the aggregate, (A) to have a
Parent Material Adverse Effect or (B) to prevent or materially delay the
performance by Parent or Merger Sub of its obligations pursuant to this
Agreement or the consummation of the Merger.
(b) The execution and delivery of this Agreement by Parent and Merger
Sub do not, and the performance by Parent and Merger Sub of their respective
obligations hereunder and the consummation of the Merger will not, require any
consent, approval, authorization or permit of, or filing by Parent or Merger Sub
with or notification by Parent or Merger Sub to, any Governmental Entity, except
(i) pursuant to applicable requirements of the Exchange Act, the Securities Act,
Blue Sky Laws, the rules and regulations of the NASD, state takeover laws, the
premerger notification requirements of the HSR Act, if any, and the filing and
recordation of the Certificate of Merger as required by the Business Corporation
Act and (ii) where failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications, could not reasonably be
expected, individually or in the aggregate, (A) to have a Parent Material
Adverse Effect or (B) to prevent or materially delay the performance by Parent
or Merger Sub of its obligations pursuant to this Agreement or the consummation
of the Merger.
Section 5.06 Permits; Compliance With Laws. Parent, Merger Sub and each
other Parent Subsidiary is in possession of (i) all franchises, grants,
authorizations, licenses, establishment registrations, product listings,
permits, easements, variances, exceptions, consents, certificates,
identification and registration numbers, approvals and orders of any
Governmental Entity necessary for Parent, Merger Sub or any other Parent
Subsidiary to own, lease and operate its properties or to store, distribute and
market its products or otherwise to carry on its business as it is now being
conducted and (ii) agreements from all Federal, state, foreign and local
governmental agencies and accrediting and certifying organizations having
jurisdiction over such facility or facilities that are required to operate the
facility or facilities in the manner in which it or they are currently operated
(collectively, the "Parent Permits"), except where the failure to have, or the
suspension or cancellation of, any of the Parent Permits is not reasonably
expected to have, individually or in the aggregate, a Parent Material Adverse
Effect, and, as of the date of this Agreement, no suspension or cancellation of
any of the Parent Permits is pending or, to the knowledge of Parent, threatened,
except where the failure to have, or the suspension or cancellation of, any of
the Parent Permits is not reasonably expected to have, individually or in the
aggregate, a Parent Material Adverse Effect.
31.
<PAGE>
Section 5.07 SEC Filings; Financial Statements.
(a) Parent has timely filed all forms, reports, statements and
documents required to be filed by it with the SEC and the NASD since December
31, 1996, through the date of this Agreement (collectively and as amended, the
"Parent Reports"). Except as is provided in the Parent Reports or as disclosed
in Section 5.07(a) of the Parent Disclosure Schedule, each Parent Report (i) was
prepared in accordance with the requirements of the Securities Act, the Exchange
Act or the NASD, as the case may be, and (ii) did not at the time it was filed
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary in order to make the statements made
therein, in the light of the circumstances under which they were made, not
misleading.
(b) Except as is provided in the Parent Reports or in Section 5.07(b)
of the Parent Disclosure Schedule, each of the consolidated financial statements
(including, in each case, any notes thereto) contained in the Parent Reports was
prepared in accordance with U.S. GAAP applied on a consistent basis throughout
the periods indicated (except as may be indicated in the notes thereto) and each
presented fairly, in all material respects, the consolidated financial position
of Parent and the consolidated Parent Subsidiaries as at the respective dates
thereof and for the respective periods indicated therein, except as otherwise
noted therein (subject, in the case of unaudited statements, to normal and
recurring year-end adjustments which were not and are not expected, individually
or in the aggregate, to have a Parent Material Adverse Effect).
(c) Except as and to the extent set forth or reserved against on the
consolidated balance sheet of Parent and its Subsidiaries as reported in the
Parent Reports, including the notes thereto, or as disclosed in Section 5.07(c)
of the Parent Disclosure Schedule, none of Parent or any Parent Subsidiary has
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on a balance
sheet or in notes thereto prepared in accordance with U.S. GAAP, except for
liabilities or obligations incurred in the ordinary course of business
consistent with past practice since December 31, 1995 that have not had and
could not reasonably be expected to have, individually or in the aggregate, a
Parent Material Adverse Effect.
Section 5.08 Absence Of Certain Changes Or Events. Since December 31, 1997,
except as contemplated by or as disclosed in this Agreement, as set forth in
Section 5.08 of the Parent Disclosure Schedule or as disclosed in any Parent
Report filed since December 31, 1997, Parent and the Parent Subsidiaries have
conducted their businesses only in the ordinary course consistent with past
practice and, since such date, there has not been (i) any Parent Material
Adverse Effect, excluding any changes and effects resulting from changes in
economic, regulatory or political conditions or changes in conditions generally
applicable to the industries in which Parent and the Parent Subsidiaries are
involved, (ii) any event that could reasonably be expected to prevent or
materially delay the performance of its obligations pursuant to this Agreement
and the consummation of the Merger by Merger Sub, (iii) any material change by
Parent in its accounting methods, principles or practices or (iv) any
declaration, setting aside or payment of any dividend or distribution in respect
of the shares of Parent Common Stock or any redemption, purchase or other
acquisition of any of Parent's securities.
32.
<PAGE>
Section 5.09 Employee Benefit Plans; Labor Matters.
(a) With respect to each employee benefit plan, program, arrangement
and contract (including, without limitation, any "employee benefit plan", as
defined in Section 3(3) of ERISA) maintained or contributed to by Parent or any
Parent Subsidiary, or with respect to which Parent or any Parent Subsidiary
could incur liability under Section 4069, 4212(c) or 4204 of ERISA (the "Parent
Benefit Plans"), Parent has delivered or made available to the Company a true,
complete and correct copy of (i) such Parent Benefit Plan and the most recent
summary plan description related to such Parent Benefit Plan, if a summary plan
description is required therefor, (ii) each trust agreement or other funding
arrangement relating to such Parent Benefit Plan, (iii) the most recent annual
report (Form 5500) filed with the IRS with respect to such Parent Benefit Plan,
(iv) the most recent actuarial report or financial statement relating to such
Parent Benefit Plan and (v) the most recent determination letter issued by the
IRS with respect to such Parent Benefit Plan, if it is qualified under Section
401(a) of the Code.
(b) Each Parent Benefit Plan has been administered in all material
respects in accordance with its terms and all contributions required to be made
under the terms of any of the Parent Benefit Plans as of the date of this
Agreement have been timely made or have been reflected on the most recent
consolidated balance sheet filed or incorporated by reference in the Parent
Reports prior to the date of this Agreement. With respect to the Parent Benefit
Plans, no event has occurred and, to the knowledge of Parent, there exists no
condition or set of circumstances in connection with which Parent or any Parent
Subsidiary that could be subject to any liability under the terms of such Parent
Benefit Plans, ERISA, the Code or any other applicable Law which could
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
Section 5.10 Litigation. Except as disclosed in the Parent Reports or in
Section 5.10 of the Parent Disclosure Schedule, there is no suit, claim, action,
proceeding or investigation pending or, to the knowledge of Parent, threatened
against Parent or any Parent Subsidiary before any Governmental Entity that
could reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect, and, except as disclosed to the Company, to the
knowledge of Parent, there are no existing facts or circumstances that could
reasonably be expected to result in such a suit, claim, action, proceeding or
investigation. Except as disclosed to the Company, Parent is not aware of any
facts or circumstances which could reasonably be expected to result in the
denial of insurance coverage under policies issued to Parent and the Parent
Subsidiaries in respect of such suits, claims, actions, proceedings and
investigations, except in any case as could not reasonably be expected to have,
individually or in the aggregate, a Parent Material Adverse Effect. Except as
disclosed in the Parent Reports, neither Parent nor any Parent Subsidiary is
subject to any outstanding order, writ, injunction or decree which could
reasonably be expected to have, individually or in the aggregate, a Parent
Material Adverse Effect.
Section 5.11 Brokers. No broker, finder or investment banker (other than
NationsBanc Montgomery Securities) is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger based upon arrangements
made by or on behalf of Parent.
33.
<PAGE>
ARTICLE VI
COVENANTS
Section 6.01 Conduct Of Business By The Company Pending The Closing. The
Company agrees that, between the date of this Agreement and the Effective Time,
except as set forth in Section 6.01 of the Company Disclosure Schedule or as
expressly contemplated by any other provision of this Agreement, unless Parent
shall otherwise agree in writing, (x) the respective businesses of the Company
and the Company Subsidiaries shall be conducted only in, and the Company and the
Company Subsidiaries shall not take any action except in, the ordinary course of
business consistent with past practice and (y) the Company shall use all
reasonable efforts to keep available the services of such of the current
officers, significant employees and consultants of the Company and the Company
Subsidiaries and to preserve the current relationships of the Company and the
Company Subsidiaries with such of the corporate partners, customers, suppliers
and other persons with which the Company or any Company Subsidiary has
significant business relations in order to preserve substantially intact its
business organization. By way of amplification and not limitation, except as set
forth in Section 6.01 of the Company Disclosure Schedule or as expressly
contemplated by any other provision of this Agreement, neither the Company nor
any Company Subsidiary shall, between the date of this Agreement and the
Effective Time, directly or indirectly, do, or agree to do, any of the following
without the prior written consent of Parent, which consent shall not be
unreasonably withheld or delayed:
(a) amend or otherwise change its certificate of incorporation or
bylaws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, transfer, lease, license,
guarantee or encumber, or authorize the issuance, sale, pledge, disposition,
grant, transfer, lease, license or encumbrance of, (i) any shares of capital
stock of the Company or any Company Subsidiary of any class, or securities
convertible into or exchangeable or exercisable for any shares of such capital
stock, or any options, warrants or other rights of any kind to acquire any
shares of such capital stock, or any other ownership interest (including,
without limitation, any phantom interest), of the Company or any Company
Subsidiary except for (A) issuances of Company Common Stock pursuant to options,
warrants and convertible Company Capital Stock outstanding on the date hereof
and disclosed as such pursuant to Section 4.03 and (B) employee stock option
grants to non-officers and directors of the Company; provided, however, that (x)
such grants are at fair market value and at a level consistent with past
practice, (y) Parent has received notice of the Company's intention to grant
such options and has consented thereto in writing (which consent shall not be
unreasonably withheld) and (z) the aggregate amount of such granted options does
not exceed 25,000 shares of Company Common Stock, or (ii) any material property
or assets of the Company or any Company Subsidiary;
(c) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any interest in any
corporation, partnership, other business organization or person or any division
thereof; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any person for borrowed money or make
any loans or
34.
<PAGE>
advances; (iii) terminate, cancel or request any material change in, or agree to
any material change in, any Company Material Contract or enter into any contract
or agreement material to the business, results of operations or financial
condition of the Company and the Company Subsidiaries taken as a whole; (iv)
enter into any contract or agreement that is not cancelable without penalty upon
not more than 60 days' notice; (v) make or authorize any capital expenditure,
other than capital expenditures in the ordinary course of business consistent
with past practice that have been budgeted for calendar year 1998 and disclosed
to Parent prior to the date hereof; or (vi) enter into or amend any contract,
agreement, commitment or arrangement that, if fully performed, would not be
permitted under this Section 6.01(c);
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock, except that any Company Subsidiary may pay dividends or
make other distributions to the Company or any other Company Subsidiary;
(e) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(f) amend or change the period (or permit any acceleration, amendment
or change) of exercisability of options granted under the Company Stock Plans or
authorize cash payments in exchange for any Company Stock Options granted under
any of such plans;
(g) amend the terms of, repurchase, redeem or otherwise acquire, or
permit any Company Subsidiary to repurchase, redeem or otherwise acquire, any of
its securities or any securities of any Company Subsidiary, or propose to do any
of the foregoing;
(h) increase the compensation payable or to become payable to, or pay
or enter into any agreement or understanding to pay any bonus to, its directors,
officers, consultants or employees (other than increases in compensation for
non-officer employees that are in the ordinary course of business consistent
with past practice and the payment of bonuses to non- officer employees that are
in the ordinary course of business consistent with past practice and pursuant to
objective written criteria established by the board of directors of the Company
provided that Parent has received notice of the Company's intention to implement
such increase and has consented thereto in writing (which consent shall not be
unreasonably withheld)), or grant any rights to severance or termination pay to,
or enter into any employment or severance agreement which provides benefits upon
a change in control of the Company that would be triggered by the Merger with,
any director, officer, consultant or other employee of the Company or any
Company Subsidiary who is not currently entitled to such benefits from the
Merger, establish, adopt, enter into or amend any collective bargaining, bonus,
profit sharing, thrift, compensation, stock option, restricted stock, pension,
retirement, deferred compensation, employment, termination, severance or other
plan, agreement, trust, fund, policy or arrangement for the benefit of any
director, officer, consultant or employee of the Company or any Company
Subsidiary, except to the extent required by applicable Law or the terms of a
collective bargaining agreement, or enter into or amend any contract, agreement,
commitment or
35.
<PAGE>
arrangement between the Company or any Company Subsidiary and any of the
Company's directors, officers, consultants or employees;
(i) pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction in the ordinary
course of business and consistent with past practice of liabilities reflected or
reserved against on the consolidated balance sheet of the Company and the
Company Subsidiaries dated as of June 30, 1998 and only to the extent of such
reserves;
(j) take any action with respect to accounting policies or procedures,
other than actions in the ordinary course of business consistent with past
practice or as required by U.S. GAAP;
(k) make any tax election or settle or compromise any material
Federal, state or local United States income tax liability, or any income tax
liability of any other jurisdiction, other than those made in the ordinary
course of business consistent with past practice and those for which specific
reserves have been recorded on the consolidated balance sheet of the Company and
the Company Subsidiaries dated as of June 30, 1998 and only to the extent of
such reserves;
(l) enter into or amend any contract, agreement, commitment or
arrangement with, or enter into any transaction with, or make any payment to or
on account or behalf of, other than any such transactions or payments pursuant
to the agreements set forth on Section 6.01(l) of the Company Disclosure
Schedule, any Affiliate of the Company or of any principal stockholder of the
Company; or
(m) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any action
which would make any of the representations or warranties of the Company
contained in this Agreement untrue or incorrect or prevent the Company from
performing or cause the Company not to perform its covenants hereunder or result
in any of the conditions to the Merger set forth herein not being satisfied.
Section 6.02 Conduct Of Business By Parent Pending The Closing. Parent
agrees that, between the date of this Agreement and the Effective Time, except
(i) as set forth in Section 6.02 of the Parent Disclosure Schedule, (ii) for any
actions taken by Parent relating to any other acquisitions or business
combinations or (iii) as expressly contemplated by any other provision of this
Agreement, unless the Company shall otherwise agree in writing, (x) the
respective businesses of Parent and the Parent Subsidiaries shall be conducted
only in, and Parent and the Parent Subsidiaries shall not take any action except
in the ordinary course of business consistent with past practice and (y) Parent
shall use all reasonable efforts to keep available the services of such of the
current officers, significant employees and consultants of Parent and the Parent
Subsidiaries and to preserve the current relationships of Parent and the Parent
Subsidiaries with such of the corporate partners, customers, suppliers and other
persons with which Parent or any Parent Subsidiary has significant business
relations in order to preserve substantially intact its business organization.
By way of amplification and not limitation, except (i) as set forth in Section
6.02 of the Parent Disclosure Schedule, (ii) for any actions taken by Parent
relating to any other acquisitions or business combinations or (iii) as
expressly contemplated by any other
36.
<PAGE>
provision of this Agreement, neither Parent nor any Parent Subsidiary shall,
between the date of this Agreement and the Effective Time, directly or
indirectly, do, or agree to do, any of the following without the prior written
consent of the Company, which consent shall not be unreasonably withheld or
delayed:
(a) amend or otherwise change its articles of incorporation or bylaws
or equivalent organizational documents;
(b) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock, except that any Parent Subsidiary may pay dividends or
make other distributions to Parent or any other Parent Subsidiary;
(c) reclassify, combine, split, subdivide or redeem, purchase or
otherwise acquire, directly or indirectly, any of its capital stock;
(d) sell, transfer, license, sublicense or otherwise dispose of any
material assets; or
(e) authorize or enter into any formal or informal agreement or
otherwise make any commitment to do any of the foregoing or to take any action
which would make any of the representations or warranties of Parent contained in
this Agreement untrue or incorrect or prevent Parent from performing or cause
Parent not to perform its covenants hereunder or result in any of the conditions
to the Merger set forth herein not being satisfied.
Section 6.03 Notices Of Certain Events. Each of Parent and the Company
shall give prompt notice to the other of (i) any notice or other communication
from any person alleging that the consent of such person is or may be required
in connection with the Merger; (ii) any notice or other communication from any
Governmental Entity in connection with the Merger; (iii) any actions, suits,
claims, investigations or proceedings commenced or, to its knowledge, threatened
against, relating to or involving or otherwise affecting Parent, the Company,
Parent Subsidiaries or the Company Subsidiaries that relate to the consummation
of the Merger; (iv) the occurrence of a default or event that, with the giving
of notice or lapse of time or both, will become a default under any Company
Material Contract; and (v) any change that could reasonably be expected to have
a Company Material Adverse Effect or a Parent Material Adverse Effect or to
delay or impede the ability of either the Company or Parent to perform its
obligations pursuant to this Agreement and to effect the consummation of the
Merger.
Section 6.04 Access To Information; Confidentiality.
(a) Except as required pursuant to any confidentiality agreement or
similar agreement or arrangement to which Parent or the Company or any of Parent
Subsidiaries or Company Subsidiaries is a party or pursuant to applicable Law or
the regulations or requirements of any stock exchange or other regulatory
organization with whose rules a party hereto is required to comply, from the
date of this Agreement to the Effective Time, Parent and the Company shall (and
shall cause the Parent Subsidiaries and the Company Subsidiaries,
37.
<PAGE>
respectively, to) (i) provide to the other (and its officers, directors,
employees, accountants, consultants, legal counsel, agents and other
representatives (collectively, "Representatives")) access at reasonable times
upon prior notice to its and its subsidiaries' officers, employees, agents,
properties, offices and other facilities and to the books and records thereof,
and (ii) furnish promptly such information concerning its and its subsidiaries'
business, properties, contracts, assets, liabilities and personnel as the other
party or its Representatives may reasonably request. No investigation conducted
pursuant to this Section 6.04 shall affect or be deemed to modify any
representation or warranty made in this Agreement.
(b) The parties hereto shall comply with, and shall cause their
respective Representatives to comply with, all of their respective obligations
under the Confidentiality Agreements with respect to the information disclosed
pursuant to this Section 6.04.
Section 6.05 No Solicitation Of Transactions. The Company shall not,
directly or indirectly, and shall instruct its officers, directors, employees,
subsidiaries, agents or advisors or other representatives (including, without
limitation, any investment banker, attorney or accountant retained by it), not
to, directly or indirectly, solicit, initiate or knowingly encourage (including
by way of furnishing nonpublic information), or take any other action knowingly
to facilitate, any inquiries or the making of any proposal or offer (including,
without limitation, any proposal or offer to its stockholders) that constitutes,
or may reasonably be expected to lead to, a transaction involving a change of
control of the Company, the sale of all or substantially all of the Company's
assets, a merger consolidation or reorganization of or with the Company or any
other party, the sale of 25% or more of the Company's stock or other similar
transaction (collectively, "Other Transaction"), or enter into or maintain or
continue discussions or negotiate with any person in furtherance of such
inquiries or to obtain an Other Transaction, or agree to or endorse any Other
Transaction, or authorize or permit any of the officers, directors or employees
of the Company or any Company Subsidiary, or any investment banker, financial
advisor, attorney, accountant or other representative retained by the Company or
any Company Subsidiary, to take any such action. The Company shall notify Parent
promptly, and in no event later than one day after receipt, if any proposal or
offer, or any inquiry or contact with any person with respect thereto, regarding
an Other Transaction is made. The Company immediately shall cease and cause to
be terminated all existing discussions or negotiations with any parties
conducted heretofore with respect to an Other Transaction. The Company shall not
release any third party from, or waive any provision of, any confidentiality or
standstill agreement to which it is a party. The Company shall use its best
efforts to ensure that its officers, directors, employees, subsidiaries, agents
and advisors or other representatives (including, without limitation, any
investment banker, attorney or accountant retained by it) are aware of the
restrictions described in this Section 6.05.
Section 6.06 Further Action; Consents; Filings.
(a) Upon the terms and subject to the conditions hereof, each of the
parties hereto shall use all reasonable efforts to (i) take, or cause to be
taken, all appropriate action, and do, or cause to be done, all things
necessary, proper or advisable under applicable Law or otherwise to consummate
and make effective the Merger, (ii) obtain from Governmental Entities any
38.
<PAGE>
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by Parent, Merger Sub, the Company or the
Surviving Corporation or any of their respective subsidiaries in connection with
the authorization, execution and delivery of this Agreement and the consummation
of the Merger and (iii) make all necessary filings, and thereafter make any
other required or appropriate submissions, with respect to this Agreement and
the Merger required under (A) the rules and regulations of the NASD, (B) the
Securities Act, the Exchange Act and any other applicable Federal or state
securities Laws, (C) the HSR Act, if any, and (D) any other applicable Law. The
parties hereto shall cooperate and consult with each other in connection with
the making of all such filings, including by providing copies of all such
documents to the nonfiling parties and their advisors prior to filing, and none
of the parties shall file any such document if any of the other parties shall
have reasonably objected to the filing of such document. No party shall consent
to any voluntary extension of any statutory deadline or waiting period or to any
voluntary delay of the consummation of the Merger at the behest of any
Governmental Entity without the consent and agreement of the other parties
hereto, which consent shall not be unreasonably withheld or delayed.
(b) Each of the parties hereto shall promptly give (or cause their
respective subsidiaries to give) any notices regarding the Merger, this
Agreement or the transactions contemplated hereby or thereby to third parties
required under applicable Law or by any contract, license, lease or other
agreement to which it or any of its subsidiaries is bound, and use, and cause
its subsidiaries to use, all reasonable efforts to obtain any third party
consents required under any such contract, license, lease or other agreement in
connection with the consummation of the Merger or the other transactions
contemplated by this Agreement.
Section 6.07 Option Cash-Out. Immediately prior to the Effective Time, the
Company shall (or shall have) accelerated vesting of not more than 25% of
outstanding Company Stock Options and irrevocably undertaken to cash-out such
options for an aggregate cash payment with respect to all such Company Stock
Options of an amount not in excess of $7,000,000. One-half of such amount shall
be paid out immediately after the Effective Time. The remainder of Cash-Out
amount shall be paid out on the 120th day following the Effective Time and, at
the Effective Time, deposited into an escrow account with an escrow agent to be
identified by the Company. The terms of release of such amount from escrow shall
be as specified by the Company and in accordance with the Company Stock Option
Plans.
Section 6.08 Interim Financing. Between the date hereof and the Effective
Time, Parent agrees to make funds available to the Company through a loan to be
evidenced by a promissory note (the "Note") by the Company in favor of Parent.
Promptly after the date hereof, the Company and Parent will negotiate, execute
and deliver the Note which shall provide, among other customary provisions, for:
(i) a maximum principal amount of $10,000,000;
(ii) interest at a rate equal to the higher of (A) 10% and (B) 1%
above the rate charged to Parent under its Credit Agreement;
(iii) delivery of weekly cash flow statements;
39.
<PAGE>
(iv) Parent's obligation to advance funds being subject to its
reasonable approval of a cash budget;
(v) advanced funds being utilized only for the working capital needs
of the Company; and
(vi) repayment (a) within two business days of the closing of an
initial public offering of the Company's Common Stock, (b) within two business
days of the closing of a private placement of equity or debt securities of the
Company generating net proceeds of $15,000,000 or more, (c) immediately upon the
announcement by the Company of, or consummation of, an Other Transaction, (d)
six months after termination by the Parent of this Agreement pursuant to
Sections 9.01(d) or 9.01(e) and (e) twelve months after termination of this
Agreement for any other reason.
Section 6.09 Employee Matters. (a) To the extent permitted under the terms
of the applicable Parent benefit plans, all Company employees shall be eligible
to participate in the various benefit plans and programs maintained for Parent
employees or in substantially similar programs. Company employees shall be given
credit, for purposes of any service requirements for participation, for their
period of service with Company prior to the Effective Time, and the Company
employees shall also, with respect to any Parent plans or programs which have
co-payment, deductible or other co-insurance features, receive credit for any
amounts such employees have paid to date in the plan year of the Merger in
co-payments, deductibles or co-insurance under comparable programs maintained by
the Company prior to the Effective Time.
(b) At the Effective Time, Parent shall enter into a severance
agreement in substantially the form of Exhibit E-1 with Julie Wainwright, Chris
Deyo, Peter Rosberg and Minda Sandler and a severance agreement in substantially
the form of Exhibit E-2 with Dave Rochlin, Harry Bernstein, Dianne Hourany and
Rosie Ruley Atkins.
Section 6.10 Tax Treatment. The parties hereto acknowledge and agree to use
their best efforts to amend (or cause to be amended), prior to the Effective
Time, this Agreement and the Stock Purchase Agreement to exchange the right to
receive 1,300,000 shares (or such different number of shares as the parties
shall determine is necessary or desirable) of the Redeemable Preferred issued
pursuant to this Agreement for the right to receive 1,300,000 shares (or such
difference number of shares as the parties shall determine is necessary or
desirable) of the Parent Common Stock to be issued and sold pursuant to the
Stock Purchase Agreement.
Section 6.11 Listing of Additional Shares. Upon the Effective Time the
Company shall have filed with the Nasdaq National Market a Notification Form for
Listing of Additional Shares with respect to the Parent Common Stock issued or
issuable in connection with the Merger.
41.
<PAGE>
ARTICLE VII
ADDITIONAL AGREEMENTS
Section 7.01 Proxy Statement.
(a) Within 270 days after the Effective Time, Parent shall, if
Redeemable Preferred is issued pursuant to Section 3.01, file with the SEC a
proxy statement relating to a meeting of stockholders of Parent regarding the
conversion of such Redeemable Preferred into Parent Common Stock (the "Parent
Stockholders' Meeting"), such Parent Stockholders' Meeting to be held to
consider the approval of the conversion of the Redeemable Preferred into Parent
Common Stock as provided in the terms and provisions governing the Redeemable
Preferred (the "Proposal") (together with any amendments thereto, the "Proxy
Statement").
(b) The Proxy Statement shall include the recommendation of the board
of directors of Parent to Parent's stockholders that they vote in favor of
approval the Proposal.
(c) None of the information supplied by the Company for inclusion or
incorporation by reference in the Proxy Statement shall, at the respective times
filed with the SEC or other regulatory agency and at the date it or any
amendments or supplements thereto are mailed to stockholders of Parent in
connection with the Parent Stockholders' Meeting, if any, and at the time of the
Parent Stockholders' Meeting, if any, and at the Effective Time, 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. If at any
time prior to the Effective Time any event or circumstance relating to Company
or any Company Subsidiary, or their respective officers or directors, should be
discovered by the Company that should be set forth in an amendment or a
supplement to the Proxy Statement, the Company shall promptly inform Parent.
Section 7.02 Company Stockholders' Meeting. The Company shall call and hold
the Company stockholders' meeting (or action by written consent) no later than
August 20, 1998. The Company shall use all reasonable efforts to solicit from
its stockholders proxies in favor of this Agreement and the Merger and shall
take all other action necessary or advisable to secure the vote or consent of
stockholders required by the Business Corporation Act to obtain such approval.
Section 7.03 Directors' And Officers' Indemnification
(a) The certificate of incorporation and bylaws of the Surviving
Corporation shall contain the provisions with respect to indemnification that
are set forth, as of the date of this Agreement, in the certificate of
incorporation and bylaws of the Company, which provisions shall not be amended,
repealed or otherwise modified for a period of six years from the Effective Time
in any manner that would affect adversely the rights thereunder of individuals
who at or at any time prior to the Effective Time were directors, officers,
employees, fiduciaries or agents of the Company.
41.
<PAGE>
(b) From and after the Effective Time, Parent and the Surviving
Corporation shall indemnify and hold harmless each present and former director
and officer of the Company (the "Surviving Indemnified Parties"), against any
costs or expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages or liabilities (collectively, "Costs") incurred in
connection with any claim, action, suit, proceeding or investigation, whether
civil, criminal, administrative or investigative, arising out of or pertaining
to matters existing or occurring at or prior to the Effective Time, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent that the Company would have been permitted under Delaware law and its
charter documents (each as in effect on the date hereof) to indemnify such
Surviving Indemnified Parties.
Section 7.04 Public Announcements. Parent and the Company shall consult
with each other before issuing any press release or otherwise making any public
statements with respect to this Agreement or the Merger and shall not issue any
such press release or make any such public statement without the prior written
approval of the other, except to the extent required by applicable Law or the
requirements of the rules and regulations of the NASD, in which case the issuing
party shall use all reasonable efforts to consult with the other party before
issuing any such release or making any such public statement.
Section 7.05 Blue Sky. Each of the parties hereto shall use all reasonable
efforts to obtain prior to the Effective Time all necessary blue sky permits and
approvals required under Blue Sky Laws to permit the distribution of the shares
of Parent Common Stock and of Redeemable Preferred to be issued in accordance
with the provisions of this Agreement.
Section 7.06 Company Stock Options.
(a) At the Effective Time, Parent shall assume, by virtue of this
Agreement and without any further action on the part of the Company, all of the
Company's obligations with respect to each outstanding unvested Company Stock
Option. Unless otherwise elected by Parent prior to the Effective Time, Parent
shall make such assumption in such manner that Parent (i) is a corporation
"assuming a stock option in a transaction to which Section 424(a) applies"
within the meaning of Section 424 of the Code or (ii) to the extent that Section
424 of the Code does not apply to such Company Stock Option, would be such a
corporation were Section 424 of the Code applicable to such Company Stock
Option; and, if not so otherwise elected, after the Effective Time, all
references to the Company in the Company Stock Plans and the applicable Company
Stock Option agreements shall be deemed to refer to Parent, which shall have
assumed the Company Stock Plans as of the Effective Time by virtue of this
Agreement and without any further action on the part of the Company or Parent.
Each Company Stock Option so assumed by Parent under this Agreement shall
continue to have, and be subject to, the same terms and conditions set forth in
the applicable Company Stock Plan and the applicable Company Stock Option as in
effect immediately prior to the Effective Time, except as otherwise provided in
Section 3.06. Parent shall use all reasonable efforts to ensure that Company
Stock Options intended to qualify as incentive stock options under Section 422
of the Code prior to the Effective Time continue to so qualify after the
Effective Time.
42.
<PAGE>
(b) With respect to the Company Stock Plans, Parent shall take all
corporate action necessary or appropriate to, as soon as practicable after the
Effective Time, but in no event later than 30 days after the Effective Time,
file a registration statement on Form S-8 (or any successor or other appropriate
form) with respect to the shares of Parent Common Stock subject to such plan to
the extent such registration statement is required under applicable law in order
for such shares of Parent Common Stock to be sold without restriction, and
Parent shall use its best efforts to maintain the effectiveness of such
registration statements (and maintain the current status of the prospectuses
contained therein) for so long as such benefits and grants remain payable and
such options under such plans remain outstanding.
Section 7.07 Directors. Immediately after the Effective Time, Parent shall
appoint Scott Beck and David S. Wetherell to its board of directors, which,
taking into account such appointments shall consist of 5 members.
ARTICLE VIII
CONDITIONS TO THE MERGER
Section 8.01 Conditions To The Obligations Of Each Party To Consummate The
Merger. The obligations of the parties hereto to consummate the Merger, or to
permit the consummation of the Merger, are subject to the satisfaction or, if
permitted by applicable Law, waiver of the following conditions:
(a) this Agreement and the Merger shall have been duly approved by the
requisite vote of stockholders of the Company, in accordance with the Business
Corporation Act;
(b) no court of competent jurisdiction shall have issued or entered
any order, writ, injunction or decree, and no other Governmental Entity shall
have issued any order, which is then in effect and has the effect of making the
Merger illegal or otherwise prohibiting its consummation;
(c) any waiting period (and any extension thereof) applicable to the
consummation of the Merger under the HSR Act or any other applicable
competition, merger control or similar Law shall have expired or been
terminated;
(d) all consents, approvals and authorizations legally required to be
obtained to consummate the Merger shall have been obtained from all Governmental
Entities, except where the failure to obtain any such consent, approval or
authorization could not reasonably be expected to result in a change in or have
an effect on the business of the Company or Parent that is materially adverse to
the business, assets (including intangible assets), liabilities (contingent or
otherwise), condition (financial or otherwise) or results of operations of
Parent and its subsidiaries, taken as a whole; and
(e) the Registration Rights and Disposition Restriction Agreement and
Stock Purchase Agreement shall have been executed and delivered by Parent and
the other parties thereto; and
43.
<PAGE>
(f) each Affiliate of the Company shall have entered into an
Affiliate's Agreement, dated as of the Closing, with Parent.
Section 8.02 Conditions To The Obligations Of The Company. The obligations
of the Company to consummate the Merger, or to permit the consummation of the
Merger, are subject to the satisfaction or, if permitted by applicable Law,
waiver of the following further conditions:
(a) each of the representations and warranties of Parent contained in
this Agreement that is qualified by materiality shall be true, complete and
correct on and as of the Effective Time as if made at and as of the Effective
Time (other than representations and warranties which address matters only as of
a certain date which shall be true, complete and correct as of such certain
date) and each of the representations and warranties that is not so qualified
shall be true, complete and correct in all material respects on and as of the
Effective Time as if made at and as of the Effective Time (other than
representations and warranties which address matters only as of a certain date
which shall be true, complete and correct in all material respects as of such
certain date), in each case except as contemplated or permitted by this
Agreement, and the Company shall have received a certificate of the Chairman or
President and Chief Financial Officer of Parent to such effect; and
(b) Parent shall have performed or complied in all material respects
with all material agreements and covenants required by this Agreement to be
performed or complied with by it on or prior to the Effective Time and the
Company shall have received a certificate of the Chairman or President and Chief
Financial Officer of Parent to that effect.
Section 8.03 Conditions To The Obligations Of Parent. The obligations of
Parent to consummate the Merger, or to permit the consummation of the Merger,
are subject to the satisfaction or, if permitted by applicable Law, waiver of
the following further conditions:
(a) each of the representations and warranties of the Company
contained in this Agreement that is qualified by materiality shall be true,
complete and correct on and as of the Effective Time as if made at and as of the
Effective Time (other than representations and warranties which address matters
only as of a certain date which shall be true, complete and correct as of such
certain date) and each of the representations and warranties that is not so
qualified shall be true, complete and correct in all material respects on and as
of the Effective Time as if made on and as of such date (other than
representations and warranties which address matters only as of a certain date
which shall be true, complete and correct in all material respects as of such
certain date), in each case except as contemplated or permitted by this
Agreement, and Parent shall have received a certificate of the Chairman or
President and Chief Financial Officer of the Company to such effect;
(b) the Company shall have performed or complied in all material
respects with all material agreements and covenants required by this Agreement
to be performed or complied with by it on or prior to the Effective Time and
Parent shall have received a certificate of the Chairman or President and Chief
Financial Officer of the Company to that effect;
44.
<PAGE>
(c) there shall not be pending any action, proceeding, claim or
counterclaim which seeks to or would, or any order, decree or injunction
(whether preliminary, final or appealable) which would, require Parent to hold
separate or dispose of any of the stock or assets of the Company or the Company
Subsidiaries or impose material limitations on the ability of Parent to control
in any material respect the business, assets or operations of either Parent or
the Company; and
(d) Parent shall have provided any necessary notice to its existing
bank syndicate regarding the consummation of the Merger and shall have complied
with any necessary waiting periods relating thereto.
ARTICLE IX
TERMINATION, AMENDMENT AND WAIVER
Section 9.01 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite adoption and approval of this Agreement, as follows:
(a) by mutual written consent duly authorized by the boards of
directors of each of Parent and the Company;
(b) by either Parent or the Company, if the Effective Time shall not
have occurred on or before September 30, 1998; provided, however, that the right
to terminate this Agreement under this Section 9.01(b) shall not be available to
any party whose failure to fulfill an obligation under this Agreement has been
the cause of the failure of the Merger to occur on or before such date;
(c) by either Parent or the Company, if any Governmental Order, writ,
injunction or decree preventing the consummation of the Merger shall have been
entered by any court of competent jurisdiction and shall have become final and
nonappealable;
(d) by Parent, if the board of directors of the Company withdraws,
modifies or changes its recommendation of this Agreement or the Merger in a
manner adverse to Parent or its stockholders or shall have resolved to do so
(which shall also constitute a material breach hereof);
(e) by Parent, upon a breach of any representation, warranty, covenant
or agreement on the part of the Company set forth in this Agreement, or if any
representation or warranty of the Company shall have become untrue, incomplete
or incorrect, in either case such that the conditions set forth in Section 8.03
would not be satisfied (a "Terminating Company Breach"); provided, however, that
if such Terminating Company Breach is curable by the Company through the
exercise of its reasonable efforts within 10 days and for so long as the Company
continues to exercise such reasonable efforts, Parent may not terminate this
Agreement under this Section 9.01(e); and provided further that the preceding
proviso shall not in any event be deemed to extend any date set forth in
paragraph (b) of this Section 9.01; and
45.
<PAGE>
(f) by the Company, upon breach of any representation, warranty,
covenant or agreement on the part of Parent set forth in this Agreement, or if
any representation or warranty of Parent shall have become untrue, incomplete or
incorrect, in either case such that the conditions set forth in Section 8.02
would not be satisfied (a "Terminating Parent Breach"); provided, however, that
if such Terminating Parent Breach is curable by Parent through the exercise of
its reasonable efforts within 10 days and for so long as Parent continues to
exercise such reasonable efforts, the Company may not terminate this Agreement
under this Section 9.01(e); and provided further that the preceding proviso
shall not in any event be deemed to extend any date set forth in paragraph (b)
of this Section 9.01.
Section 9.02 Effect Of Termination. Except as provided in Section 9.05, in
the event of termination of this Agreement pursuant to Section 9.01, this
Agreement shall forthwith become void, there shall be no liability under this
Agreement on the part of any party hereto or any of its affiliates or any of its
or their officers or directors, and all rights and obligations of each party
hereto shall cease, subject to each party's ability to pursue remedies for
breach and reimbursement of Expenses and enforcement Expenses in the case of
breach; provided, however, that nothing herein shall relieve any party hereto
from liability for the willful or intentional breach of any of its
representations and warranties or the willful or intentional breach of any of
its covenants or agreements set forth in this Agreement.
Section 9.03 Amendment. This Agreement may be amended by the parties hereto
by action taken by or on behalf of their respective boards of directors at any
time prior to the Effective Time; provided, however, that, after the approval of
this Agreement by the stockholders of the Company, no amendment may be made,
except such amendments that have received the requisite stockholder approval and
such amendments as are permitted to be made without stockholder approval under
the Business Corporation Act. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
Section 9.04 Waiver. At any time prior to the Effective Time, any party
hereto may (a) extend the time for or waive compliance with the performance of
any obligation or other act of any other party hereto or (b) waive any
inaccuracy in the representations and warranties contained herein or in any
document delivered pursuant hereto. Any such extension or waiver shall be valid
if set forth in an instrument in writing signed by the party or parties to be
bound thereby.
Section 9.05 Expenses. All Expenses incurred in connection with this
Agreement and the Merger shall be paid by the party incurring such Expenses,
whether or not the Merger is consummated.
ARTICLE X
GENERAL PROVISIONS
Section 10.01 Survival of Representations And Warranties. The
representations and warranties of the Company contained in this Agreement, and
all statements contained in this Agreement, the Exhibits to this Agreement, the
Disclosure Schedule and any certificate, financial
46.
<PAGE>
statement, interim financial statement or report or other document delivered
pursuant to this Agreement or in connection with the transactions contemplated
by this Agreement (collectively, the "Acquisition Documents"), shall survive the
Closing until May 1, 1999; provided, however, that the representations and
warranties dealing with Taxes shall survive until thirty calendar days after the
expiration of the applicable statute of limitations governing such claims. If
written notice of a claim has been given prior to the expiration of the
applicable representations and warranties, then the relevant representations and
warranties shall survive as to such claim, until such claim has been finally
resolved.
Section 10.02 Indemnification by the Holders.
(a) Parent and its Affiliates, offices, directors, employees, agents,
successors and assigns (each an "Indemnified Party") shall be indemnified and
held harmless, jointly and severally, by each holder (a "Holder") of Company
Capital Stock receiving Consideration for any and all Liabilities, losses,
damages, claims, costs (including business interruption costs) and expenses,
interest, awards, judgments and penalties (including, without limitation,
attorneys' and consultants' fees and expenses) actually suffered or incurred by
them (including, without limitation, any Action brought or otherwise initiated
by any of them) (hereinafter a "Loss"), arising out of or resulting from (i) the
breach of any representation or warranty made by the Company contained in the
Acquisition Document and (ii) any breach of any representation or warranty by
the Company regarding Taxes and any Taxes owed by the Company, any Predecessor
Company or equity holder therein related to periods or acts prior to the
Effective Time.
(b) An Indemnified Party shall give the Holder's Representative notice
of any matter which an Indemnified Party has determined has given or could give
rise to a right of indemnification under this Agreement, within 60 days of such
determination, stating the amount of the Loss, if known, and method of
computation thereof, and containing a reference to the provisions of this
Agreement in respect of which such right of indemnification is claimed or
arises. The obligations and Liabilities of the Holders under this Article X with
respect to Losses arising from claims of any third party which are subject to
the indemnification provided for in this Article X ("Third Party Claims") shall
be governed by and contingent upon the following additional terms and
conditions: if an Indemnified Party shall receive notice of any Third Party
Claim, the Indemnified Party shall give the Holders' Representative notice of
such Third Party Claim within 30 days of the receipt by the Indemnified Party of
such notice; provided, however, that the failure to provide such notice shall
not release the Holders from any of its obligations under this Article X except
to the extent the Holders are materially prejudiced by such failure and shall
not relieve the Holders from any other obligation or Liability that it may have
to any Indemnified Party otherwise than under this Article X. If the Holders'
Representative acknowledges in writing the Holders' obligation to indemnify the
Indemnified Party hereunder against any Losses that may result from such Third
Party Claim, then the Holders' Representative shall be entitled to assume and
control the defense of such Third Party Claim on behalf of the Holders at its
expense and through counsel of its choice if it gives notice of its intention to
do so to the Indemnified Party within ten days of the receipt of such notice
from the Indemnified Party; provided, however, that if there exists or is
reasonably likely to exist a
47.
<PAGE>
conflict of interest that would make it in appropriate in the judgment of the
Indemnified Party, in its sole and absolute discretion, for the same counsel to
represent both the Indemnified Party and the Holders, then the Indemnified Party
shall be entitled to retain its own counsel, in each jurisdiction for which the
Indemnified Party determines counsel is required, at the expense of the Holders.
In any event the Holders' Representative exercises the right to undertake any
such defense against any such Third Party Claim on behalf of the Holders as
provided above, the Indemnified Party shall cooperate with the Holders'
Representative in such defense and make available to the Holders'
Representative, at the Holders' expense, all witnesses, pertinent records,
materials and information in the Indemnified Party's possession or under the
Indemnified Party's control relating thereto as is reasonably required by the
Holders' Representative. Similarly, in the event the Indemnified Party is,
directly or indirectly, conducting the defense against any such Third Party
Claim, the Holders shall cooperate with the Indemnified Party in such defense
and make available to the Indemnified Party, at the Holders' expense, all such
witnesses, records, materials and information in the Holders' possession or
under the Holders' control relating thereto as is reasonably required by the
Indemnified Party. No such Third Party Claim may be settled by the Holders
without the prior written consent of the Indemnified Party; provided, however,
that if the Indemnified Party does not consent to a settlement that is otherwise
acceptable to the Holders, in no event shall the Holders be required to
indemnify the Indemnified Party for any judgment amount in excess of the
proposed settlement amount. In no event shall Holders be liable for a Loss
arising out of any matter with respect to which Holders' Representative did not
receive notice hereunder on or before May 1, 1999.
Section 10.03 Limits on Indemnification. Notwithstanding anything to the
contrary contained in this Agreement, the maximum amount of indemnifiable Losses
which may be recovered from the Holders arising out of or resulting from the
causes enumerated in Section 10.2(a) (i) shall be an amount equal to
$10,000,000. No claim may be made by the Parent with respect to indemnifiable
Losses under Section 10.2(a) (i) and (ii) until the aggregate of all
indemnifiable Losses exceeds $250,000, and the Holders shall not be obligated
with respect to indemnified Losses below such threshold.
Section 10.04 Accredited Investors. If, prior to the Closing, Parent is not
reasonably satisfied that a holder of non-Electing Shares (including Deemed
Stock Electing Share) is an "accredited investor" as defined in SEC Rule 501(a),
Parent and Merger Sub reserve the right to cause the Company Capital Stock held
by such Person to convert into cash.
Section 10.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be given (and shall be
deemed to have been duly given upon receipt) by delivery in person, by telecopy
or facsimile, by registered or certified mail (postage prepaid, return receipt
requested) or by a nationally recognized courier service to the respective
parties at their addresses set forth on the signature pages to this Agreement
(or at such other address for a party as shall be specified in a notice given in
accordance with this Section 10.04).
Section 10.06 Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of Law
or public policy, all other conditions
48.
<PAGE>
and provisions of this Agreement shall nevertheless remain in full force and
effect so long as the economic or legal substance of the Merger is not affected
in any manner materially adverse to any party. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in a mutually
acceptable manner to the fullest extent permitted by applicable Law in order
that the Merger may be consummated as originally contemplated to the fullest
extent possible.
Section 10.07 Assignment; Binding Effect; Benefit. Neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto (whether by operation of Law or otherwise) without the
prior written consent of the other parties hereto; provided, however, that
Parent may assign its rights, interests and obligations hereunder to any
successor or parent entity of Parent whose shares are registered under Section
12 of the Exchange Act (or will be so registered at the Effective Time). Subject
to the preceding sentence, this Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
permitted assigns. Notwithstanding anything contained in this Agreement to the
contrary, other than Section 7.03, nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the parties hereto or
their respective successors and permitted assigns any rights or remedies under
or by reason of this Agreement.
Section 10.08 Incorporation Of Exhibits. The Parent Disclosure Schedule,
the Company Disclosure Schedule and all Exhibits attached hereto and referred to
herein are hereby incorporated herein and made a part of this Agreement for all
purposes as if fully set forth herein.
Section 10.09 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF DELAWARE
(WITHOUT REFERENCE TO CONTRACT OF LAW PRINCIPLES OTHER THAN THOSE DIRECTING
DELAWARE LAW.
Section 10.10 Waiver Of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY PROCEEDING (WHETHER BASED ON CONTRACT,
TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY
TRANSACTION OR AGREEMENT CONTEMPLATED HEREBY OR THE ACTIONS OF ANY PARTY HERETO
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE OR ENFORCEMENT HEREOF.
Section 10.11 Headings. The descriptive headings contained in this
Agreement are included for convenience of reference only and shall not affect in
any way the meaning or interpretation of this Agreement.
Section 10.12 Counterparts. This Agreement may be executed and delivered
(including by facsimile transmission) in one or more counterparts, and by the
different parties hereto in separate counterparts, each of which when executed
and delivered shall be deemed to be an original but all of which taken together
shall constitute one and the same agreement.
49.
<PAGE>
Section 10.13 Entire Agreement. This Agreement (including the Exhibits, the
Parent Disclosure Schedule and the Company Disclosure Schedule) constitute the
entire agreement among the parties with respect to the subject matter hereof and
supersede all prior agreements and understandings among the parties with respect
thereto. No addition to or modification of any provision of this Agreement shall
be binding upon any party hereto unless made in writing and signed by all
parties hereto.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
50.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first written above by their respective officers
thereunto duly authorized.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
51.
<PAGE>
HOLLYWOOD ENTERTAINMENT CORPORATION
By: DONALD J. EKMAN
----------------------------------
Name: Donald J. Ekman
Title: Senior Vice President and
General Counsel
9275 SW Peyton Lane
Wilsonville, Oregon 97070
Telephone: (503) 570-1600
Telecopy: (503) 570-1701
Attention: Donald J. Ekman
with a copy to:
Brobeck, Phleger & Harrison
One Market, Spear Street Tower
San Francisco, California 94105
Telephone: (415) 442-0900
Telecopy: (415) 442-1010
Attention: Michael J. Kennedy
R ACQUISITION CORPORATION
By: DONALD J. EKMAN
----------------------------------
Name: Donald J. Ekman
Title: Secretary
9275 SW Peyton Lane
Wilsonville, Oregon 97070
Telephone: (503) 570-1600
Telecopy: (503) 570-1701
Attention: Donald J. Ekman
REEL.COM, INC.
By:--------------------------------------
Name:------------------------------------
Title:-----------------------------------
Address:---------------------------------
Telephone:-------------------------------
Telecopy:--------------------------------
Attention:-------------------------------
52.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I DEFINITIONS........................................................1
Section 1.01 Certain Defined Terms..................................1
ARTICLE II THE MERGER........................................................7
Section 2.01 The Merger.............................................7
Section 2.02 Closing................................................7
Section 2.03 Effective Time.........................................7
Section 2.04 Effect of The Merger...................................8
Section 2.05 Certificate of Incorporation; Bylaws; Directors and
Officers of Surviving Corporation.................8
ARTICLE III CONVERSION OF SECURITIES; EXCHANGE OF CERTIFICATES...............8
Section 3.01 Conversion of Securities...............................8
Section 3.02 Cash Elections........................................10
Section 3.03 Exchange Of Shares Other Than Treasury Shares
And Dissenting Shares............................11
Section 3.04 Stock Transfer Books..................................12
Section 3.05 No Fractional Share Certificates......................12
Section 3.06 Options And Warrants To Purchase Company Common Stock.13
Section 3.07 Certain Adjustments...................................13
Section 3.08 Undistributed Amounts.................................14
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................14
Section 4.01 Organization and Qualification; Subsidiaries..........14
Section 4.02 Certificate of Incorporation and Bylaws...............15
Section 4.03 Capitalization........................................15
Section 4.04 Authority Relative to This Agreement..................15
Section 4.05 No Conflict; Required Filings and Consents............16
Section 4.06 Permits; Compliance With Laws.........................16
Section 4.07 Financial Statements..................................17
Section 4.08 Absence of Certain Changes or Events..................18
Section 4.09 Employee Benefit Plans; Labor Matters.................18
Section 4.10 Certain Tax Matters...................................21
Section 4.11 Contracts; Debt Instruments...........................22
Section 4.12 Litigation............................................22
Section 4.13 Environmental Matters.................................22
Section 4.14 Intellectual Property.................................22
Section 4.15 Taxes.................................................25
Section 4.16 Properties............................................26
i.
<PAGE>
TABLE OF CONTENTS
(continued) Page
----
Section 4.17 Affiliates............................................26
Section 4.18 Brokers...............................................26
Section 4.19 Certain Business Practices............................27
Section 4.20 Transaction Expenses..................................27
Section 4.21 Interested Party Transactions.........................27
Section 4.22 Business Activity Restrictions........................27
ARTICLE V REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB...........28
Section 5.01 Organization And Qualification; Subsidiaries..........28
Section 5.02 Certificate Of Incorporation And Bylaws...............28
Section 5.03 Capitalization........................................28
Section 5.04 Authority Relative To This Agreement..................29
Section 5.05 No Conflict; Required Filings And Consents............29
Section 5.06 Permits; Compliance With Laws.........................30
Section 5.07 SEC Filings; Financial Statements.....................30
Section 5.08 Absence Of Certain Changes Or Events..................31
Section 5.09 Employee Benefit Plans; Labor Matters.................31
Section 5.10 Litigation............................................32
Section 5.11 Brokers...............................................32
ARTICLE VI COVENANTS........................................................32
Section 6.01 Conduct Of Business By The Company Pending
The Closing......................................32
Section 6.02 Conduct Of Business By Parent Pending The Closing.....35
Section 6.03 Notices Of Certain Events.............................36
Section 6.04 Access To Information; Confidentiality................36
Section 6.05 No Solicitation Of Transactions.......................37
Section 6.06 Further Action; Consents; Filings.....................37
Section 6.07 Option Cash-Out.......................................38
Section 6.08 Interim Financing.....................................38
Section 6.09 Employee Matters......................................39
Section 6.10 Tax Treatment.........................................39
Section 6.11 Listing of Additional Shares..........................39
ARTICLE VII ADDITIONAL AGREEMENTS...........................................39
Section 7.01 Proxy Statement.......................................39
Section 7.02 Company Stockholders' Meeting.........................40
Section 7.03 Directors' And Officers' Indemnification..............40
Section 7.04 Public Announcements..................................40
Section 7.05 Blue Sky..............................................41
ii
<PAGE>
TABLE OF CONTENTS
(continued) Page
----
Section 7.06 Company Stock Options.................................41
Section 7.07 Directors.............................................41
ARTICLE VIII CONDITIONS TO THE MERGER.......................................41
Section 8.01 Conditions To The Obligations Of Each Party To
Consummate The Merger............................41
Section 8.02 Conditions To The Obligations Of The Company..........42
Section 8.03 Conditions To The Obligations Of Parent...............43
ARTICLE IX TERMINATION, AMENDMENT AND WAIVER................................43
Section 9.01 Termination...........................................43
Section 9.02 Effect Of Termination.................................44
Section 9.03 Amendment.............................................44
Section 9.04 Waiver................................................45
Section 9.05 Expenses..............................................45
ARTICLE X GENERAL PROVISIONS................................................45
Section 10.01 Survival of Representations And Warranties............45
Section 10.02 Indemnification by the Holders........................45
Section 10.03 Limits on Indemnification.............................46
Section 10.04 Accredited Investors..................................47
Section 10.05 Notices...............................................47
Section 10.06 Severability..........................................47
Section 10.07 Assignment; Binding Effect; Benefit...................47
Section 10.08 Incorporation Of Exhibits.............................47
Section 10.09 Governing Law.........................................47
Section 10.10 Waiver Of Jury Trial..................................48
Section 10.11 Headings..............................................48
Section 10.12 Counterparts..........................................48
Section 10.13 Entire Agreement......................................48
SCHEDULES
Company Disclosure Schedule
Parent Disclosure Schedule
EXHIBITS
Exhibit A Terms of Series A Redeemable Preferred Stock of Parent
Exhibit B Registration Rights and Disposition Restriction Agreement
iii
<PAGE>
TABLE OF CONTENTS
(continued) Page
----
Exhibit C Stock Purchase Agreement
Exhibit D Form of Election
Exhibit E-1 Form of Severance Agreement
Exhibit E-2 Form of Severance Agreement
iv
HOLLYWOOD ENTERTAINMENT CORPORATION
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of July 30, 1998, by and among Hollywood Entertainment Corporation, an Oregon
corporation (the "Company"), and certain stockholders of Reel.com, Inc., a
Delaware corporation ("Reel"), listed on Exhibit A (the "Purchasers").
ARTICLE I
AUTHORIZATION AND SALE OF STOCK
Section 1.1 Sale of the Stock. Subject to the terms and conditions hereof,
at the Closing (as defined below), the Company will issue and sell to each
Purchaser, and each Purchaser will purchase, in the respective amounts set forth
on Exhibit A, an aggregate of 5,000,000 shares of Common Stock from the Company
(the "Stock"), at a purchase price per share of $13.50 this Agreement for an
aggregate purchase price of $67,500,000.00.
ARTICLE II
CLOSING DATE; DELIVERY
Section 2.1 Closing Date. Subject to the satisfaction of the terms and
conditions hereof, the consummation of the purchase and sale of the Stock
hereunder (the "Closing") shall be held at the offices of Brobeck, Phleger &
Harrison LLP at 10:00 a.m., on August 31, 1998 or at such other time and place
as the Company and each Purchaser mutually agree upon in writing (the "Closing
Date").
Section 2.2 Delivery. At the Closing, the Company shall deliver to each
Purchaser a certificate representing the Stock being purchased thereby against
payment of the purchase price therefor by check or by wire transfer to the
Company's bank account.
Section 2.3 Consummation of Closing. All acts, deliveries and confirmations
comprising the Closing regardless of chronological sequence shall be deemed to
occur contemporaneously and simultaneously upon the occurrence of the last act,
delivery or confirmation of the Closing and none of such acts, deliveries or
confirmations shall be effective unless and until the last of same shall have
occurred.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to each Purchaser, at and as of
the date of this Agreement and at and as of the Closing Date, as follows:
Section 3.1 Organization The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Oregon and
has all requisite
<PAGE>
corporate power to own, lease and operate its property and to carry on its
business as now being conducted and is duly qualified or licensed to do business
and is in good standing in each jurisdiction in which the failure to be so
qualified or licensed would have a material adverse effect on the business,
assets (including intangible assets), liabilities, condition (financial or
otherwise), prospects, property or results of operations (a "Material Adverse
Effect") of the Company.
Section 3.2 Valid Issuance of Common Stock; Compliance with Securities
Laws. The Stock, when issued and paid for in accordance with this Agreement will
be duly authorized, validly issued, fully paid, and non-assessable and issued in
compliance with all applicable federal or state securities laws.
Section 3.3 Authority; No Conflict; Required Filings and Consents.
(a) The Company has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated by
this Agreement. The execution and delivery of this Agreement and the
consummation of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of the Company. This
Agreement has been duly executed and delivered by the Company, and constitutes a
valid and binding obligation of the Company, enforceable in accordance with its
terms, except to the extent that enforceability may be limited by applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights generally and by general principles of equity.
(b) The execution and delivery by the Company of this Agreement does
not, and consummation of the transactions contemplated by this Agreement will
not, (i) conflict with, or result in any violation or breach of any provision of
the Articles of Incorporation or Bylaws of the Company, (ii) result in any
violation or breach of, or constitute (with or without notice or lapse of time,
or both) a default (or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of any material benefit) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, lease,
contract or other agreement, instrument or obligation to which the Company is a
party or by which any of its properties or assets may be bound, or (iii)
conflict or violate any permit, concession, franchise, license, judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company or
any of its properties or assets, except in the case of (ii) and (iii) for any
such conflicts, violations, defaults, terminations, cancellations or
accelerations which would not have a Material Adverse Effect on the Company and
its subsidiaries, taken as a whole.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to the Company in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (i) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the laws of any foreign country, and (iii)
such other consents, authorizations,
-2-
<PAGE>
filings, approvals and registrations, including, without limitation, any filings
and compliance with any notice period required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), which, if not
obtained or made, could prohibit the matters covered by this Agreement or could
be expected to have a Material Adverse Effect on the Company and its
subsidiaries, taken as a whole.
Section 3.4 Commission Filings; Financial Statements.
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") and made available to each Purchaser or its representatives
all forms, reports and documents required to be filed by the Company with the
Commission since December 31, 1996 (collectively, the "Company Commission
Reports"). The Company Commission Reports (i) at the time filed, complied in all
material respects with the applicable 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 the case may be, and (ii) did not at
the time they were filed (or if amended or superseded by a filing prior to the
date of this Agreement, then on the date of such filing) contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(b) Each of the financial statements (including, in each case, any
related notes) contained in the Company Commission Reports, including any such
Report filed after the date of this Agreement until the Closing, complied as to
form in all material respects with the applicable published rules and
regulations of the Commission with respect thereto, was prepared in accordance
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, as permitted by
Form 10-Q of the Commission) and fairly presented the consolidated financial
position of the Company and its subsidiaries as at the respective dates and the
consolidated results of its operations and cash flows for the periods indicated,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount.
Section 3.5 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
federal, state or local statute, law or regulation with respect to the conduct
of its business, or the ownership or operation of its business, including but
not limited to statutes, laws or regulations relating to the protection of the
environment or concerning the handling, storage, disposal or discharge of toxic
materials (collectively, "Environmental Laws"), except for failures to comply or
violations which would not have a Material Adverse Effect on the Company and its
subsidiaries, taken as a whole.
Section 3.6 Stockholders Consent. No consent or approval of the
stockholders of the Company is required or necessary for the Company to enter
into this Agreement or to consummate the transactions contemplated hereby and
thereby.
-3-
<PAGE>
Section 3.7 Litigation. Except as otherwise disclosed in the Company
Commission Reports, and the Company Disclosure Schedule attached as Exhibit C
hereto, (i) there is no private or governmental action, suit, proceeding, claim,
arbitration or investigation pending before any agency, court or tribunal,
foreign or domestic, or, to the knowledge of the Company or any of its
subsidiaries, threatened against the Company or any of its properties or any of
its officers or directors (in their capacities as such), which, if determined
adversely to the Company, would have a Material Adverse Effect on the Company
and its subsidiaries, taken as a whole, and (ii) there is no judgment, decree or
order against the Company, or, to the knowledge of the Company, after reasonable
investigation, any of its respective directors or officers (in their capacities
as such) relating to the business of the Company, the presence of which would
have Material Adverse Effect with respect the Company and its subsidiaries,
taken as a whole.
Section 3.8 Intellectual Property. Except as disclosed in the Company
Commission Reports, the Company owns or possesses, or reasonably believes that
it can acquire on commercially reasonable terms, adequate licenses or other
rights to use all patents, trademarks, service marks, trade names, copyrights,
technology, software, know-how and trade secrets necessary to conduct the
business now conducted by the Company, and the Company has not received any
notice of infringement of or conflict with (and knows of no such infringement of
or conflict with) asserted rights of others with respect to any patents,
trademarks, service marks, trade names, copyrights, technology, know-how or
trade secrets that would result in a Material Adverse Effect; and, to the
Company's knowledge, the discoveries, inventions, products, services or
processes used in the Company's business do not, infringe or conflict with any
right or patent of any third party, or any discovery, invention, product or
process which is the subject of a patent application filed by any third party,
which infringement or conflict would result in a Material Adverse Effect.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser hereby represents and warrants to the Company, at and as of
the date of this Agreement and at and as of the Closing, as follows:
Section 4.1 Authority. Each Purchaser has now, and will have at the Closing
Date, all requisite legal and corporate power to enter into this Agreement, to
purchase the Stock hereunder, and to perform its obligations under the terms of
this Agreement.
Section 4.2 Authorization. All corporate action on the part of each
Purchaser necessary for the purchase of the Stock and the performance of each
Purchaser's obligations hereunder has been taken or will be taken prior to the
Closing Date. This Agreement, when executed and delivered by the Purchasers,
will constitute a valid and legally binding obligation of each Purchaser,
enforceable in accordance with its terms, except as enforcement may be limited
by applicable bankruptcy laws or other similar laws affecting creditors' rights
generally, and except insofar as the availability of equitable remedies may be
limited.
-4-
<PAGE>
Section 4.3 Purchase Entirely for Own Account. This Agreement is made with
each Purchaser in reliance upon each Purchaser's representation to the Company,
which by each Purchaser's execution of this Agreement, each Purchaser hereby
confirms, that the Stock to be acquired by each Purchaser will be acquired for
investment for each Purchaser's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that each
Purchaser has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, each Purchaser
further represents that each Purchaser does not presently have any contract,
undertaking, agreement or arrangement with any person to sell, transfer or grant
participation to such person or to any third person, with respect to any of the
Stock. Each Purchaser has not been formed for the specific purpose of acquiring
the Stock.
Section 4.4 Investment Experience. Purchaser is an "accredited investor" as
defined in Rule 501(a) under the Securities Act. Purchaser is aware of the
Company's business affairs and financial condition and has had access to and has
acquired sufficient information about the Company to reach an informed and
knowledgeable decision to acquire the Stock. Purchaser has such business and
financial experience as is required to give it the capacity to protect its own
interests in connection with the purchase of the Stock. Purchaser is not a
"broker" or a "dealer" as defined in the Exchange Act
Section 4.5 Restricted Securities. Each Purchaser understands that the
Stock is characterized as "restricted securities" under applicable U.S. federal
and state securities laws inasmuch as it is being acquired from the Company in a
transaction not involving a public offering and that, pursuant to these laws and
applicable regulations, each Purchaser must hold the Stock indefinitely unless
it is registered with the Commission and qualified by state authorities, or an
exemption from such registration and qualification requirements is available.
Each Purchaser further acknowledges that if an exemption from registration or
qualification is available, it may be conditioned on various requirements
including, but not limited to, the time and manner of sale, the holding period
for the Stock, and other requirements relating to the Company which are outside
of each Purchaser's control, and which the Company is under no obligation and
may not be able to satisfy. In this connection, Purchaser represents that it is
familiar with SEC Rule 144, as presently in effect, and understands the resale
limitations imposed thereby and by the Securities Act. Each purchaser further
acknowledges that the Stock is subject to a Registration Rights and Disposition
Restriction Agreement of even date herewith.
Section 4.6 Legends. Each Purchaser understands that the Stock, and any
securities issued in respect thereof or exchange therefor, may bear one or all
of the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM
-5-
<PAGE>
REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED
UNDER THE SECURITIES ACT OF 1933."
(b) Any legend required pursuant to the terms of the Registration
Rights and Disposition Restriction Agreement of even date herewith between the
Company, the Purchasers and certain Company stockholders.
(c) Any legend required by the Blue Sky laws of any state to the
extent such laws are applicable to the shares represented by the certificate so
legended.
ARTICLE V
CONDITIONS TO CLOSING
Section 5.1 Conditions to each Purchasers' Obligations. The obligation of
each Purchaser to purchase the Stock at the Closing is subject to the
fulfillment on or prior to the Closing Date of the following conditions:
(a) Representations and Warranties Correct; Performance of
Obligations. The representations and warranties made by the Company in Article
III hereof shall be true and correct when made, and shall be true and correct on
the Closing Date with the same force and effect as if they had been made on and
as of such date, subject to changes contemplated by this Agreement; and the
Company shall have performed all obligations and conditions herein required to
be performed or observed by it on or prior to the Closing Date.
(b) Compliance Certificate. The President of the Company shall deliver
to each Purchaser at the Closing a certificate certifying that the conditions
specified in Section 5.1(a) have been fulfilled and stating that there shall
have been no material adverse change in the business, operations, properties,
assets or financial condition of the Company since the date of this Agreement.
(c) Opinion of Company's Counsel. Each Purchaser shall have received
from Brobeck, Phleger and Harrison, L.P., counsel to the Company, an opinion
addressed to each Purchaser, dated the Closing Date, substantially in the form
of Exhibit B attached hereto.
(d) Qualifications. The offer and sale of the Stock to the Purchasers
pursuant to this Agreement shall be exempt from registration or qualification
under federal and state securities laws. All other authorizations, approvals or
permits of any other governmental authority that are required in connection with
the lawful issuance and sale of the Stock shall have been duly obtained and
shall be effective on and as of the Closing Date.
(e) Registration Rights. The Company and the Purchasers shall enter
into a Registration Rights and Disposition Restriction Agreement of even date
herewith (the "Rights Agreement"), which shall include the Stock as Registrable
Securities (as defined therein).
(f) Minimum Closing. The Purchasers shall have purchased a minimum of
5,000,000 shares of Stock at the Closing.
-6-
<PAGE>
(g) Listing of Additional Shares. Upon the Closing the Company shall
have filed with the Nasdaq National Market a Notification Form for Listing of
Additional Shares with respect to the Stock.
(h) HSR Act. The Parties shall have obtained any necessary HSR Act
clearance.
(i) Closing of Merger. The Parties shall have closed the Merger which
is contemplated in the Agreement and Plan of Merger dated as of July 30, 1998
between the Company and Reel.
Section 5.2 Conditions to Obligations of the Company. The Company's
obligation to issue and sell the Stock at the Closing is subject to the
fulfillment on or prior to the Closing Date of each of the following conditions:
(a) Representations and Warranties Correct; Performance of
Obligations. The representations and warranties of the Purchasers in Article IV
hereof shall be true and correct when made, and shall be true and correct on the
Closing Date with the same force and effect as if they had been made on and as
of such date; and the Purchasers shall have performed all obligations and
conditions herein required to be performed by it on or prior to the Closing
Date.
(b) Qualifications. The offer and sale of the Stock to each Purchaser
pursuant to this Agreement shall be exempt from registration or qualification
under federal and state securities laws. All other authorizations, approvals or
permits of any other governmental authority that are required in connection with
the lawful issuance and sale of the Stock shall have been duly obtained and
shall be effective on and as of the Closing Date.
(c) Minimum Closing. The Purchasers shall have purchased a minimum of
5,000,000 shares of Stock at the Closing.
(d) Registration Rights. The Company and the Purchasers shall enter
into the Rights Agreement, which shall include the Stock as Registrable
Securities (as defined therein).
(e) HSR Act. The Parties shall have obtained any necessary HSR Act
clearance.
ARTICLE VI
MISCELLANEOUS
Section 6.1 Governing Law. This Agreement shall be governed in all respects
by the laws of the State of California.
Section 6.2 Survival. The representations, warranties, covenants and
agreements made herein shall survive the closing of the transactions
contemplated hereby.
-7-
<PAGE>
Section 6.3 Successors and Assigns. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
Section 6.4 Entire Agreement; Amendment. This Agreement and the other
documents delivered pursuant hereto constitute the full and entire understanding
and agreement among the parties with regard to the subjects hereof and thereof.
Any term of this Agreement may be amended and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and each Purchaser.
Section 6.5 Notices and Other Communications. Every notice or other
communication required or contemplated by this Agreement by either party shall
be delivered either by (i) personal delivery, (ii) postage prepaid return
receipt requested registered or certified mail or the equivalent of registered
or certified mail under the laws of the country where mailed, (iii) nationally
recognized overnight courier, such as Federal Express or UPS, or (iv) facsimile
with a confirmation copy sent simultaneously by postage prepaid, return receipt
requested, registered or certified mail, in each case addressed to the Company
or each Purchaser as the case may be at the following address:
To the Company: Hollywood Entertainment Corporation
25600 S.W. Parkway Center Dr.
Wilsonville, OR 97070
Attn: General Counsel
Facsimile: (503) 570-1701
With a copy at the same address to the attention of the General Counsel and
Secretary.
To each Purchaser at its respective address listed on Exhibit A.
With a copy to: Venture Law Group
A Professional Corporation
2775 Sand Hill Road
Menlo Park, California 94025
Attn.: Joshua L. Green
Facsimile: (415) 233-8386
or at such other address as the intended recipient previously shall have
designated by written notice to the other party (with copies to counsel as may
be indicated on the signature page). Notice by registered or certified mail
shall be effective on the date it is officially recorded as delivered to the
intended recipient by return receipt or equivalent, and in the absence of such
record of delivery, the effective date shall be presumed to have been the fifth
(5th) business day
-8-
<PAGE>
after it was deposited in the mail. All notices delivered in person or sent by
courier shall be deemed to have been delivered to and received by the addressee
and shall be effective on the date of personal delivery; notices delivered by
facsimile with simultaneous confirmation copy by registered or certified mail
shall be deemed delivered to and received by the addressee and effective on the
date sent. Notice not given in writing shall be effective only if acknowledged
in writing by a duly authorized representative of the party to whom it was
given.
Section 6.6 Delays or Omissions. No delay or omission to exercise any
right, power or remedy accruing to any holder of any Stock, upon any breach or
default of the Company under this Agreement, shall impair any such right, power
or remedy of such holder nor shall it be construed to be a waiver of any such
breach or default, or an acquiescence therein, or of or in any similar breach or
default thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any kind or
character on the part of any holder of any breach or default under this
Agreement, or any waiver on the part of any holder of any provisions or
conditions of this Agreement, must be in writing and shall be effective only to
the extent specifically set forth in such writing. All remedies either under
this Agreement, or by law or otherwise afforded to any holder, shall be
cumulative and not alternative.
Section 6.7 Separability of Agreements; Severability of this Agreement. In
case any provision of this Agreement shall be invalid, illegal or unenforceable,
the validity, legality and enforceability of the remaining provisions shall not
in any way be affected or impaired thereby.
Section 6.8 Finder's Fees.
(a) The Company (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold each Purchaser
harmless of and from any liability for commission or compensation in the nature
of a finder's fee to any broker or other person or firm (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company, or any of its employees or representatives, is responsible.
(b) Each Purchaser (i) represents and warrants that it has retained no
finder or broker in connection with the transactions contemplated by this
Agreement and (ii) hereby agrees to indemnify and to hold the Company harmless
of and from any liability for any commission or compensation in the nature of a
finder's fee to any broker or other person or firm (and the costs and expenses
of defending against such liability or asserted liability) for which each
Purchaser, or any of its employees or representatives, is responsible.
Section 6.9 California Corporate Securities Law. THE SALE OF THE SECURITIES
WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, AND THE ISSUANCE OF
SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION
THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES
IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100, 25102, OR 25105 OF THE
CALIFORNIA
-9-
<PAGE>
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
Section 6.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument. Execution and delivery of this Agreement by
exchange of facsimile copies bearing the facsimile signature of a party hereto
shall constitute a valid and binding execution and delivery of this Agreement by
such party. Such facsimile copies shall constitute enforceable original
documents.
Section 6.11 Expenses. At the Closing, the Company and the Purchasers shall
each pay their own expenses, including attorney's fees, in connection with the
matters described herein.
Section 6.12 Attorneys' Fees. If any action or proceeding shall be
commenced to enforce this Agreement or any right arising in connection with this
Agreement, the prevailing party in such action or proceeding shall be entitled
to recover from the other party, the reasonable attorneys' fees, costs and
expenses incurred by such prevailing party in connection with such action or
proceeding or negotiation to avoid such action or proceeding.
Section 6.13 Protection of Confidential Information. Confidential or
proprietary information disclosed by any party under this Agreement, as well as
the terms of this Agreement, the Merger Agreement and the terms of the
investment by the Purchasers' and Intel Corporation (the "Intel") in the Company
(subject to Section 6.14 below), shall be considered confidential information
(the "Confidential Information") and shall not be disclosed by any party hereto
to any third party. The Company shall immediately notify the other parties of
any information that comes to its attention which might indicate that there has
been a loss of confidentiality with respect to the Confidential Information. In
the event that any party is requested or becomes legally compelled (by statute
or regulation or by oral questions, interrogatories, request for information or
documents, subpoena, criminal or civil investigative demand or similar process,
including without limitation, in connection with any public or private offering
of the Company's capital stock) to disclose any of the Confidential Information,
such party (the "Disclosing Party") shall provide the other party (the
"Non-Disclosing Parties") with prompt written notice of that fact so that the
Non-Disclosing Parties may seek (with the cooperation and reasonable efforts or
the Disclosing Party) a protective order, confidential treatment or other
appropriate remedy. In such event, the Disclosing Party shall furnish only that
portion of the Confidential Information which is legally required and shall
exercise reasonable efforts to obtain reliable assurance that the confidential
treatment will be accorded the Confidential Information to the extent reasonably
requested by the Non-Disclosing Parties. The provisions of this Section 6.13
shall be in addition to, and not in substitution for, the provisions of any
separate nondisclosure agreement executed by the parties hereto with respect to
the transaction contemplated hereby.
Section 6.14 Disclosure of Terms: Press Release. The Company shall not
issue any press release or make any other announcement to the general public or
in any professional or trade publication regarding this Agreement or the Merger
Agreement, or any of the terms hereof or
-10-
<PAGE>
thereof without the prior written consent of Intel, which consent may be
withheld at the sole discretion of Intel. Notwithstanding the foregoing, Intel
may disclose its investment in the Company and the terms thereof to third
parties or to the public at its discretion, and the Company shall have the right
to disclose to third parties any such information disclosed by Intel in a press
release or other public announcement. If the Company or Intel determines that
any disclosure not otherwise authorized by this Agreement is required by law or
regulation, then the provisions of Section 6.13 regarding disclosure of
Confidential Information by a Disclosing Party shall govern.
-11-
<PAGE>
The parties have executed this Stock Purchase Agreement as of the date
first written above.
HOLLYWOOD ENTERTAINMENT CORPORATION
By:--------------------------------------
Name:------------------------------------
Title:-----------------------------------
PURCHASER
By:--------------------------------------
Name:------------------------------------
Title:-----------------------------------
-12-
<PAGE>
EXHIBIT A
SCHEDULE OF PURCHASERS
<TABLE>
<CAPTION>
No. of Shares of
Name and Address Common Stock Price Per Aggregate Purchase
of Purchaser to be Purchased Share Price
<S> <C> <C> <C>
Scott Beck 31,794 $13.50 $ 429,219.00
835 11th Street
Boulder, CO 80302
Bowana Foundation 262,534 13.50 3,544,209.00
Attn: Scott Beck
835 11th Street
Boulder, CO 80302
Pearl Street Trust 984,100 13.50 13,285,350.00
Attn: Scott Beck
835 11th Street
Boulder, CO 80302
CMG@Ventures II, LLC 2,909,918 13.50 39,283,893.00
Attn: Peter Mills
3000 Alpine Road
Menlo Park, CA 94028
Intel Corporation 262,535 13.50 3,544,222.50
Attn: Terri Remillard
2625 Walsh Avenue, Building 4
Santa Clara, CA 95052
Vulcan Ventures Incorporated 525,069 13.50 7,088,431.50
Attn: Eric Robison
110 - 110th Avenue NE, Suite 500
Bellevue, WA 98004
Toby Coppel 1,850 13.50 24,975.00
Allen & Company Incorporated
711 Fifth Avenue
New York, NY 10022
John H. Josephson 7,400 13.50 99,900.00
Allen & Company Incorporated
711 Fifth Avenue
New York, NY 10022
Eran Ashany 7,400 13.50 99,900.00
Allen & Company Incorporated
711 Fifth Avenue
New York, NY 10022
Nancy Peretsman 7,400 13.50 99,900.00
Allen & Company Incorporated
711 Fifth Avenue
New York, NY 10022
TOTALS 5,000,000 $67,500,000.00
</TABLE>
<PAGE>
EXHIBIT B
LEGAL OPINION OF COMPANY COUNSEL
<PAGE>
EXHIBIT C
COMPANY DISCLOSURE SCHEDULE
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,968
<SECURITIES> 0
<RECEIVABLES> 41,861
<ALLOWANCES> 0
<INVENTORY> 58,965
<CURRENT-ASSETS> 113,197
<PP&E> 724,756
<DEPRECIATION> 180,848
<TOTAL-ASSETS> 769,748
<CURRENT-LIABILITIES> 134,802
<BONDS> 200,000
0
0
<COMMON> 249,140
<OTHER-SE> 55,346
<TOTAL-LIABILITY-AND-EQUITY> 769,748
<SALES> 336,682
<TOTAL-REVENUES> 336,682
<CGS> 34,675
<TOTAL-COSTS> 34,675
<OTHER-EXPENSES> 265,538
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,175
<INCOME-PRETAX> 22,382
<INCOME-TAX> 9,065
<INCOME-CONTINUING> 13,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,317
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
