<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997
REGISTRATION NO.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
METATOOLS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 7372 95-4102687
(STATE OF INCORPORATION) (PRIMARY STANDARD (I.R.S. EMPLOYER
INDUSTRIAL IDENTIFICATION NUMBER)
CLASSIFICATION CODE
NUMBER)
6303 CARPINTERIA AVENUE
CARPINTERIA, CA 93013
(805) 566-6200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
TERANCE A. KINNINGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
METATOOLS, INC.
6303 CARPINTERIA AVENUE
CARPINTERIA, CA 93103
(805) 566-6200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
JAMES L. BROCK JEFFREY D. SAPER, ESQ.
STEVEN J. TONSFELDT HERBERT P. FOCKLER, ESQ
STEVE J. BOOM KAIVAN M. SHAKIB, ESQ.
VENTURE LAW GROUP, ROMY S. TAUBMAN, ESQ.
A PROFESSIONAL CORPORATION WILSON SONSINI GOODRICH & ROSATI
2800 SAND HILL ROAD PROFESSIONAL CORPORATION
MENLO PARK, CALIFORNIA 94025 650 PAGE MILL ROAD
(415) 854-4488 PALO ALTO, CALIFORNIA 94304
FAX: (415) 854-1121 (415) 493-9300
FAX: (415) 493-6811
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
CALCULATION OF REGISTRATION FEE
<TABLE>
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- --------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT(2) OFFERING PRICE(2) FEE(3)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, Par Value
$0.001 per share....... 10,088,687 shares $5.10 $51,452,304 $15,592
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Represents the number of shares of the Common Stock of the Registrant
which may be issued to former shareholders of Fractal Design Corporation
("Fractal") pursuant to the Merger described herein.
(2) Each share of Common Stock of Fractal will be converted into 0.749 shares
of Common Stock of the Registrant pursuant to the Merger described herein.
Pursuant to Rule 457(f) under the Securities Act of 1933, as amended, the
registration fee has been calculated as of April 21, 1997.
(3) The amount of the registration fee includes $23,951 previously paid
pursuant to Section 14(g) of the Securities Exchange Act, as amended, in
connection with the filing by the Registrant and Fractal of a preliminary
Joint Proxy Statement/Prospectus related to the proposed Merger.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
METATOOLS, INC. AND FRACTAL DESIGN CORPORATION
JOINT PROXY STATEMENT
---------------
METATOOLS, INC. PROSPECTUS
---------------
MetaTools, Inc., a Delaware corporation ("MetaTools"), and Fractal Design
Corporation, a California corporation ("Fractal"), have entered into an
Agreement and Plan of Reorganization, dated as of February 11, 1997 (the
"Reorganization Agreement") among MetaTools, Fractal and Rook Acquisition
Corp., a wholly-owned subsidiary of MetaTools ("Merger Sub"). Pursuant to the
Reorganization Agreement, Merger Sub will merge with and into Fractal, Fractal
will become a wholly-owned subsidiary of MetaTools, the name of MetaTools will
be changed to "MetaCreations Corporation", and each outstanding share of
Common Stock of Fractal, $0.001 par value ("Fractal Common Stock") will be
converted into 0.749 shares of the Common Stock of the Combined Company,
$0.001 par value (the "Exchange Ratio") (collectively, the "Merger"). Each
outstanding option to purchase Fractal Common Stock under Fractal's stock
option plans will be assumed by MetaTools and will become an option or right
to purchase Combined Company Common Stock, with appropriate adjustments to be
made to the number of shares issuable thereunder and the exercise price
thereof, based on the Exchange Ratio. Based on the number of shares of Fractal
Common Stock outstanding as of April 21, 1997, a total of 9,021,080 shares of
Combined Company Common Stock will be issued in connection with the Merger.
MetaTools and Fractal, as the combined company following the Merger, are
referred to herein as the "Combined Company."
Holders of MetaTools Common Stock are not entitled to appraisal rights under
the Delaware General Corporation Law in connection with the Merger. Pursuant
to California law, holders of Fractal Common Stock may be entitled to certain
dissenters' rights in connection with the Merger. The obligations of MetaTools
and Merger Sub to consummate and effect the Merger are subject to holders of
not more than 4.9% of the outstanding shares of Fractal Common Stock having
exercised, or having a continued right to exercise, appraisal, dissenters' or
similar rights under applicable law with respect to their shares by virtue of
the Merger. See "Terms of the Merger--Dissenters' Rights" and Annex E hereto.
On April 21, 1997, the last practicable date before the printing of this
Joint Proxy Statement/Prospectus, the closing price of MetaTools Common Stock
as reported on the Nasdaq National Market ("Nasdaq") was $7.25, and the
closing price of Fractal Common Stock as reported on Nasdaq was $5.00.
This Joint Proxy Statement/Prospectus is being furnished to holders of
Common Stock, $0.001 par value per share, of MetaTools ("MetaTools Common
Stock," and following the Merger, "Combined Company Common Stock"), in
connection with the solicitation of proxies by the MetaTools Board of
Directors for use at the Annual Meeting of MetaTools stockholders (the
"MetaTools Annual Meeting") to be held on May 29, 1997, at Fess Parker's Red
Lion Resort at 633 E. Cabrillo Boulevard, Santa Barbara, commencing at 8:00
a.m., local time, and at any adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Common Stock, $0.001 par value per share, of Fractal ("Fractal Common Stock"),
in connection with the solicitation of proxies by the Fractal Board of
Directors for use at the Special Meeting of Fractal shareholders (the "Fractal
Special Meeting") to be held on May 29, 1997, at 5550 Scotts Valley Drive,
Scotts Valley, California, commencing at 8:00 a.m., local time, and at any
adjournment or postponement thereof.
This Joint Proxy Statement/Prospectus constitutes the prospectus of
MetaTools with respect to up to 10,088,687 shares of Combined Company Common
Stock that may be issued in the Merger in exchange for outstanding shares of
Fractal Common Stock (including shares of Fractal Common Stock that may be
issued upon the exercise of outstanding options to purchase shares of Fractal
Common Stock that have vested or will vest prior to the Merger).
---------------
THE ABOVE MATTERS ARE DISCUSSED IN DETAIL IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. THE
STOCKHOLDERS OF METATOOLS AND SHAREHOLDERS OF FRACTAL ARE URGED TO READ AND
CONSIDER CAREFULLY THIS JOINT PROXY STATEMENT/PROSPECTUS IN ITS ENTIRETY,
INCLUDING THE MATTERS REFERRED TO BEGINNING ON PAGE 21 UNDER "RISK FACTORS."
---------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY
STATEMENT/PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS JOINT
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
---------------
This Joint Proxy Statement/Prospectus and the accompanying proxy cards are
first being mailed to stockholders of MetaTools and shareholders of Fractal on
or about April 29, 1997.
---------------
The date of this Joint Proxy Statement/Prospectus is April 28, 1997.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION..................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE........................... 3
TRADEMARKS................................................................ 4
FORWARD-LOOKING STATEMENTS................................................ 4
SUMMARY................................................................... 5
The Companies........................................................... 5
Annual Meeting of Stockholders of MetaTools............................. 6
Special Meeting of Shareholders of Fractal.............................. 7
Dissenters' Rights...................................................... 8
Risk Factors............................................................ 8
Fairness Opinions....................................................... 8
Reasons for the Merger; Recommendations of Boards of Directors.......... 8
Interests of Certain Persons in the Merger.............................. 10
Income Tax Treatment.................................................... 11
Accounting Treatment.................................................... 11
The Merger.............................................................. 11
Market and Price Data for the MetaTools and Fractal Common Stock........ 15
RECENT DEVELOPMENTS....................................................... 16
Specular Acquisition.................................................... 16
MetaTools Quarterly Results............................................. 16
Preliminary Fractal Quarterly Results................................... 17
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA........ 18
RISK FACTORS.............................................................. 21
COMPARATIVE PER SHARE DATA................................................ 33
COMPARATIVE MARKET PRICE DATA............................................. 34
METATOOLS ANNUAL MEETING.................................................. 35
Date, Time and Place of MetaTools Annual Meeting........................ 35
Purpose................................................................. 35
Record Date and Outstanding Shares...................................... 35
Vote Required........................................................... 35
Proxies................................................................. 36
Solicitation of Proxies; Expenses....................................... 36
FRACTAL SPECIAL MEETING................................................... 37
Date, Time and Place of Fractal Special Meeting......................... 37
Purpose................................................................. 37
Record Date and Outstanding Shares...................................... 37
Vote Required........................................................... 37
Proxies................................................................. 38
Solicitation of Proxies; Expenses....................................... 38
THE MERGER AND RELATED TRANSACTIONS....................................... 39
(Proposal No. 1 for MetaTools Stockholders and the Only Proposal for
Fractal Shareholders)
Joint Reasons For the Merger............................................ 39
MetaTools' Reasons For the Merger....................................... 40
Fractal's Reasons For the Merger........................................ 42
Material Contacts and Board Deliberations............................... 43
Opinion of MetaTools' Financial Advisor................................. 46
Opinion of Fractal's Financial Advisor.................................. 51
Certain Federal Income Tax Considerations............................... 54
Governmental and Regulatory Approvals................................... 55
Accounting Treatment.................................................... 56
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
TERMS OF THE MERGER....................................................... 56
Effective Time.......................................................... 56
Manner and Basis of Converting Shares................................... 56
Stock Ownership Before and After the Merger............................. 57
Conduct Following the Merger............................................ 61
Conduct of MetaTools' and Fractal's Businesses Prior to the Merger...... 61
No Solicitation......................................................... 63
Break Up Fees........................................................... 65
Conditions to the Merger................................................ 66
Termination of the Reorganization Agreement............................. 66
Stock Option Agreements................................................. 67
Affiliate Agreements.................................................... 69
Voting Agreements....................................................... 69
Noncompetition Agreements............................................... 69
Employee Benefits....................................................... 70
Interests of Certain Persons............................................ 70
Dissenters' Rights...................................................... 72
COMPARISON OF CAPITAL STOCK............................................... 75
Description of MetaTools Capital Stock.................................. 75
Description of Fractal Capital Stock.................................... 75
Comparison of Capital Stock............................................. 76
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION.............. 83
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET...................... 84
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS........... 85
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS...... 86
PRINCIPAL METATOOLS SHARE OWNERSHIP....................................... 88
SECURITY OWNERSHIP OF METATOOLS MANAGEMENT................................ 89
COMPENSATION OF METATOOLS EXECUTIVE OFFICERS.............................. 90
REPORT OF THE COMPENSATION COMMITTEE OF THE METATOOLS BOARD............... 93
METATOOLS' STOCK PERFORMANCE GRAPH........................................ 95
ADDITIONAL MATTERS BEING SUBMITTED TO A VOTE OF ONLY METATOOLS
STOCKHOLDERS............................................................. 95
Proposal Two-- Amendment to Restated Certificate of Incorporation--Name
Change................................................................. 95
Proposal Three -- Amendment to Restated Certificate of Incorporation--
Increase to Authorized Common Stock.................................... 96
Proposal Four-- Election of Board of Directors.......................... 96
Proposal Five-- Approval of Amendment to MetaTools 1995 Stock Option
Plan................................................................... 100
Proposal Six-- Ratification of Appointment of Independent Accountants... 103
MetaTools Other Matters................................................. 103
LEGAL MATTERS............................................................. 104
EXPERTS................................................................... 104
STOCKHOLDER PROPOSALS..................................................... 104
ANNEX A-- Agreement and Plan of Reorganization, dated as of February 11,
1997, among MetaTools, Rook Acquisition Corp. and Fractal
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
ANNEX B-1 -- Stock Option Agreement dated as of February 11, 1997, between
MetaTools and Fractal
ANNEX B-2 -- Stock Option Agreement dated as of February 11, 1997, between
Fractal and MetaTools
ANNEX C-1 -- Form of MetaTools Affiliates Agreement, dated as of February
11, 1997
ANNEX C-2 -- Form of Fractal Affiliates Agreement, dated as of February
11, 1997
ANNEX D-1 -- Form of MetaTools Voting Agreement, dated as of February 11,
1997
ANNEX D-2 -- Form of Fractal Voting Agreement, dated as of February 11,
1997
ANNEX E-- Sections 1300-1312 of the California Corporations Code
ANNEX F-- Opinion of Alex. Brown & Sons Incorporated
ANNEX G-- Opinion of Unterberg Harris
</TABLE>
(iii)
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT/
PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF
SECURITIES MADE HEREBY, AND, IF GIVEN, ANY SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY METATOOLS, FRACTAL, OR
ANY OTHER PERSON. THIS JOINT PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF SECURITIES HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF METATOOLS OR
FRACTAL SINCE THE DATE HEREOF, OR THAT INFORMATION HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
MetaTools and Fractal are subject to the information reporting requirements
of the Securities and Exchange Act of 1934 (the "Exchange Act"), and in
accordance therewith, file reports, proxy statements and other information
with the Securities and Exchange Commission (the "SEC"). Such reports, proxy
statements and other information may be inspected and copied at the public
reference facilities maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
located at Seven World Trade Center, Suite 1300, New York, New York 10048 and
at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60601. Copies of such material may be obtained by mail from the Public
Reference Section of the SEC at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The SEC also maintains a web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC at the address
"http://www.sec.gov." MetaTools Common Stock and Fractal Common Stock are
quoted on Nasdaq, and such reports, proxy statements and other information can
also be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
MetaTools has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"). This Joint Proxy Statement/Prospectus does not contain all
of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the SEC. For
further information, reference is hereby made to the Registration Statement.
Copies of the Registration Statement and the exhibits and schedules thereto
may be inspected, without charge, at the offices of the SEC or obtained at
prescribed rates from the Public Reference Section of the SEC at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by MetaTools
(File No. 000-27168) pursuant to the Exchange Act are incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. MetaTools' Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended on April 25, 1997;
2. MetaTools' Current Report on Form 8-K filed January 15, 1997, as
amended on March 11, 1997; and
3. Description of MetaTools Common Stock contained in MetaTools'
Registration Statement on Form 8-A filed on October 25, 1995.
The following documents previously filed with the Commission by Fractal
(File No. 000-26822) pursuant to the Exchange Act are incorporated by
reference in this Joint Proxy Statement/Prospectus:
1. Fractal's Annual Report on Form 10-KSB for the fiscal year ended March
31, 1996;
2. Fractal's Quarterly Reports on Form 10-QSB for the quarters ended June
30, 1996, September 30, 1996 and December 31, 1996;
3. Fractal's Current Report on Form 8-K filed March 18, 1997; and
4. Description of Fractal Common Stock contained in Fractal's
Registration Statement on Form 8-A filed on September 20, 1995.
All documents and reports subsequently filed by MetaTools and by Fractal
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the
date of this Joint Proxy Statement/Prospectus prior to the date of the
MetaTools Annual Meeting and the Fractal Special Meeting shall be deemed to be
incorporated by reference in this Joint Proxy Statement/Prospectus and to be
part hereof from the dates of filing of such documents and reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that is or is deemed to be incorporated by
reference herein) modifies or supersedes such previous statement. Any
statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
All information contained or incorporated by reference on this Joint Proxy
Statement/Prospectus relating to MetaTools has been supplied by MetaTools, and
all such information relating to Fractal has been supplied by Fractal.
THIS JOINT PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
THAT ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (OTHER
THAN EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE HEREIN) ARE AVAILABLE, WITHOUT CHARGE, UPON ORAL OR
WRITTEN REQUEST BY ANY PERSON TO WHOM THIS JOINT PROXY STATEMENT/PROSPECTUS
HAS BEEN DELIVERED, IN THE CASE OF DOCUMENTS RELATING TO METATOOLS, FROM
METATOOLS, 6303 CARPINTERIA AVENUE, CARPINTERIA, CALIFORNIA 93013, ATTENTION:
INVESTOR RELATIONS; TELEPHONE NUMBER: (805) 566-6200, AND IN THE CASE OF
DOCUMENTS RELATING TO FRACTAL, FROM FRACTAL, 5550 SCOTTS VALLEY DRIVE, SCOTTS
VALLEY, CALIFORNIA 95066, ATTENTION: VICE PRESIDENT, FINANCE; TELEPHONE
NUMBER: (408) 430-4000. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS
PRIOR TO THE METATOOLS ANNUAL MEETING OR THE FRACTAL SPECIAL MEETING, ANY SUCH
REQUEST SHOULD BE MADE BY MAY 19, 1997.
3
<PAGE>
TRADEMARKS
This Joint Proxy Statement/Prospectus contains trademarks of MetaTools and
Fractal and may contain trademarks of others.
FORWARD-LOOKING STATEMENTS
This Joint Proxy Statement/Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act. Words such as "anticipates", "expects", "intends", "plans",
"believes", "seeks", "estimates", variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to predict. Therefore,
actual results could differ materially from those projected in the forward-
looking statements as a result of certain factors, including those set forth in
the risk factors set forth in "Risk Factors" below. In connection with forward-
looking statements which appear in these disclosures, shareholders should
carefully review the factors set forth in this Joint Proxy Statement/Prospectus
under "Risk Factors."
4
<PAGE>
SUMMARY
The following contains a summary of certain information contained elsewhere
in this Joint Proxy Statement/Prospectus. This summary does not contain a
complete statement of all material elements of the proposals to be voted on and
is qualified in its entirety by the more detailed information appearing
elsewhere in this Joint Proxy Statement/Prospectus and in the information and
documents annexed hereto.
THE COMPANIES
MetaTools, Inc.
MetaTools is a leading provider of visual computing and graphics software and
technologies for professionals and consumers for Windows, Macintosh and other
digital operating systems. MetaTools designs, develops, publishes, markets and
supports visual computing software tools and technologies for the creation,
editing and manipulation of computer graphic images, digital art and
Internet/online content. These tools enable desktop publishers, production
artists, multimedia developers, creative directors, film and video producers,
web site designers, digital imagers and photographers (collectively, "Creative
Professionals") and consumers to produce and enhance still images, animations,
2D and 3D graphics, digital video and special effects. Uses of the materials
produced include print and broadcast advertising, merchandising materials,
electronic entertainment, business presentations, film and video special
effects, games and Internet/online graphics, such as for web sites. MetaTools
offers two principal product types consisting of (i) stand-alone applications
and (ii) plug-in extensions. MetaTools' plug-in extensions work with and extend
the capabilities of widely available computer graphic imaging and
Internet/online design application platforms, including Adobe Systems, Inc.'s
Photoshop, Illustrator, After Effects and Premiere products; Autodesk, Inc.'s
Animator Studio and 3D Studio products; Corel Corporation's PhotoPaint;
Fractal's Fractal Design Painter ("Painter"); Macromedia, Inc.'s Freehand and
X-Res products; and Micrografx, Inc.'s Picture Publisher.
MetaTools was founded in March 1987 as Harvard Systems Corp., a California
corporation, and changed its name to HSC Software Corp. in August 1993. HSC
Software Corp. changed its name to MetaTools, Inc. in September 1995 and
reincorporated in Delaware in December 1995. MetaTools' executive offices are
located at 6303 Carpinteria Avenue, Carpinteria, California 93013, and its
telephone number is (805) 566-6200.
Fractal Design Corporation
Fractal is a leading provider of software tools for the creation, editing and
manipulation of computer graphics images and digital art. Fractal's principal
product, Painter for Macintosh and Windows, is used primarily by artists,
graphics professionals and animators in a number of industries, including print
and electronic publishing, print and broadcast advertising and entertainment
and content development. Creative Professionals use Painter and other Fractal
products, such as Ray Dream Studio and Expression, to create and modify images
for brochures, books, magazines and print and broadcast advertisements, to
provide on-screen graphics for television broadcasts, to edit digital video
projects and create animation, to develop multimedia content and to author web
pages for the Internet.
Fractal was incorporated in California in April 1991. Fractal's executive
offices are located at 5550 Scotts Valley Drive, Scotts Valley, California
95066, and its telephone number is (408) 430-4000.
Rook Acquisition Corp.
Merger Sub is a corporation recently organized by MetaTools for the purpose
of effecting the Merger. It has no material assets and has not engaged in any
activities except in connection with the Merger. Merger Sub's executive offices
are located at 6303 Carpinteria Avenue, Carpinteria, California 93013, and its
telephone number is (805) 566-6200.
5
<PAGE>
ANNUAL MEETING OF STOCKHOLDERS OF METATOOLS
Time, Date, Place and Purpose
An Annual Meeting of Stockholders of MetaTools will be held at Fess Parker's
Red Lion Resort at 633 E. Cabrillo Boulevard, Santa Barbara, California, on May
29, 1997 at 8:00 a.m., local time (the "MetaTools Annual Meeting"). The purpose
of the MetaTools Annual Meeting is to (i) approve the Merger and the related
issuance of shares of Common Stock of MetaTools, par value $0.001 (prior to the
Merger, "MetaTools Common Stock," and immediately following the Merger,
"Combined Company Common Stock") to the shareholders of Fractal pursuant to the
Reorganization Agreement, (ii) approve an amendment to the Restated Certificate
of Incorporation of MetaTools (the "Certificate") to change the corporate name
of MetaTools to "MetaCreations Corporation" (the "Combined Company"), subject
to and upon consummation of the Merger, (iii) approve an amendment to the
Certificate to increase the number of authorized shares of MetaTools Common
Stock by 45 million shares to 75 million shares, subject to and upon
consummation of the Merger, (iv) elect six (6) directors to serve until their
successors are duly elected, (v) amend the 1995 Stock Option Plan to add an
additional 1,500,000 shares of MetaTools Common Stock thereto, (vi) ratify the
appointment of Coopers & Lybrand L.L.P. as independent accountants for
MetaTools for the 1997 fiscal year, and (vii) transact such other business as
may properly come before the meeting or any postponements or adjournments
thereof. See "MetaTools Annual Meeting--Date, Time and Place of MetaTools
Annual Meeting" and "--Purpose."
Record Date and Vote Required
Only MetaTools stockholders of record at the close of business on April 11,
1997 (the "MetaTools Record Date") are entitled to notice of and to vote at the
MetaTools Annual Meeting. Each stockholder is entitled to one vote for each
share of MetaTools Common Stock on all matters proposed at the MetaTools Annual
Meeting. Stockholders do not have the right to cumulate their votes in the
election of directors.
Pursuant to the Delaware General Corporation Law and the rules of Nasdaq, the
affirmative vote of a majority of the total votes present in person or by proxy
and entitled to vote is required to approve of (i) the issuance of MetaTools
Common Stock pursuant to the Reorganization Agreement, (ii) the amendment of
the 1995 Stock Plan to add an additional 1,500,000 shares of MetaTools Common
Stock, and (iii) the ratification of Coopers & Lybrand L.L.P. as independent
accountants for MetaTools for the 1997 fiscal year. The affirmative vote of a
majority of the shares of MetaTools Common Stock issued and outstanding as of
the MetaTools Record Date is required to approve of (i) the amendment of the
Certificate to change the corporate name of MetaTools to "MetaCreations
Corporation" and (ii) the amendment of the Certificate to increase the number
of authorized shares of MetaTools Common Stock by 45 million shares to 75
million shares, subject to and upon consummation of the Merger. The six
candidates receiving the highest number of "FOR" votes shall be elected to
MetaTools' Board of Directors.
Abstentions and broker non-votes will be included for purposes of determining
whether a quorum of shares is present at the Annual Meeting. In all proposals
requiring a majority of the total present in person or by proxy and entitled to
vote, abstentions will be counted in the tabulation of the voting results and
will be treated as votes against the proposal. Broker non-votes will not be
treated as "entitled to vote" and will have no effect on the voting result. In
all proposals requiring a majority of the shares of MetaTools Common Stock
issued and outstanding as of the MetaTools Record Date, abstentions and broker
non-votes will be treated as votes against the proposals. In the election of
directors, abstentions and broker non-votes will not be counted as votes for or
against any director. A broker non-vote occurs when a nominee holding shares
for a beneficial owner does not vote on a particular proposal because the
nominee does not have discretionary voting power with respect to that item and
has not received instructions from the beneficial owner.
See "MetaTools Annual Meeting--Record Date and Outstanding Shares" and "--
Vote Required."
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As of the MetaTools Record Date, there were approximately 181 stockholders of
record of MetaTools Common Stock and 13,288,770 shares of MetaTools Common
Stock outstanding, each of which shares will be entitled to one vote on each
matter to be acted upon at the MetaTools Annual Meeting. See "MetaTools Annual
Meeting--Vote Required."
Each executive officer and director and certain stockholders of MetaTools
(who own an aggregate of 5,933,701 shares of MetaTools Common Stock and options
exercisable within 60 days of the MetaTools Record Date to purchase 560,231
shares of MetaTools Common Stock, representing approximately 44.7% of the votes
entitled to be cast by holders of MetaTools Common Stock issued and outstanding
as of the MetaTools Record Date and 46.9% of such votes assuming exercise of
all vested options held by all such persons) have entered into Voting
Agreements (the "MetaTools Voting Agreements") with Fractal. Pursuant to the
MetaTools Voting Agreements, the foregoing persons have agreed to vote all
shares of MetaTools Common Stock of which they are the beneficial owners and
all shares of MetaTools Common Stock of which they acquire beneficial ownership
in favor of any matter that could reasonably be expected to facilitate the
Merger. In addition, certain of such persons have granted irrevocable proxies
to Fractal's Board of Directors (the "Fractal Board") to vote such persons'
MetaTools Common Stock in accordance with the MetaTools Voting Agreements.
SPECIAL MEETING OF SHAREHOLDERS OF FRACTAL
Time, Date, Place and Purpose
A Special Meeting of Shareholders of Fractal will be held at 5550 Scotts
Valley Drive, Scotts Valley, California, on May 29, 1997 at 8:00 a.m., local
time (the "Fractal Special Meeting"). The purpose of the Fractal Special
Meeting is to approve and adopt the Reorganization Agreement and to approve the
Merger. See "Fractal Special Meeting--Date, Time and Place of Fractal Special
Meeting" and "--Purpose."
Record Date and Vote Required
Only Fractal shareholders of record at the close of business on April 11,
1997 (the "Fractal Record Date") are entitled to notice of and to vote at the
Fractal Special Meeting. Each shareholder is entitled to one vote for each
share of Fractal Common Stock on all matters proposed at the Fractal Special
Meeting. Pursuant to the California Corporations Code (the "CCC"), approval and
adoption of the Reorganization Agreement requires the affirmative vote of the
holders of a majority of the Fractal Common Stock outstanding as of the Fractal
Record Date.
Votes cast by proxy or in person at the Fractal Special Meeting will be
tabulated to determine whether or not a quorum is present. Abstentions and
broker non-votes will be treated as shares that are present and entitled to
vote for purposes of determining the presence of a quorum, and such abstentions
and broker non-votes will have the effect of a vote against the adoption and
approval of the Reorganization Agreement.
As of the Fractal Record Date, there were approximately 221 shareholders of
record of Fractal Common Stock and 12,034,126 shares of Fractal Common Stock
outstanding, each of which shares will be entitled to one vote on each matter
to be acted upon at the Fractal Special Meeting. See "Fractal Special Meeting--
Vote Required."
Each executive officer and director who owns shares of Fractal Common Stock
and certain shareholders of Fractal (who own an aggregate of 3,451,306 shares
of Fractal Common Stock and options exercisable within 60 days of the Fractal
Record Date to purchase 579,078 shares of Fractal common Stock, representing
approximately 28.7% of the votes entitled to be cast by holders of Fractal
Common Stock issued and outstanding as of the Fractal Record Date and 32.0% of
such votes assuming exercise of all vested options held by all such persons)
have entered into Voting Agreements (the "Fractal Voting Agreements") with
MetaTools. Pursuant to the Fractal Voting Agreements, the foregoing persons
have agreed to vote in favor of any matter that could
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reasonably be expected to facilitate the Merger. In addition, certain of such
persons have granted irrevocable proxies to the MetaTools Board to vote such
persons' Fractal Common Stock in accordance with the Fractal Voting Agreements.
DISSENTERS' RIGHTS
Holders of MetaTools Common Stock are not entitled to appraisal rights under
the Delaware General Corporation Law in connection with the Merger. Pursuant to
California law, and as described in greater detail in the Joint Proxy
Statement/Prospectus, holders of Fractal Common Stock may be entitled to
certain dissenters' rights in connection with the Merger. The obligations of
MetaTools and Merger Sub to consummate and effect the Merger are subject to
holders of not more than 4.9% of the outstanding shares of Fractal Common Stock
having exercised, or having a continued right to exercise, appraisal,
dissenters' or similar rights under applicable law with respect to their shares
by virtue of the Merger. While this condition is waivable, the companies have
no current intention to waive such condition. In order for the Merger to
qualify as a pooling of interests for financial reporting purposes in
accordance with generally accepted accounting principles, at least 90% of the
outstanding shares of common stock of each company shall not have exercised
appraisal, dissenters' or similar rights. See "Terms of the Merger--Dissenters'
Rights" and Annex E hereto.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors pertaining to the
Merger and the combined businesses of MetaTools and Fractal.
FAIRNESS OPINIONS
Alex. Brown & Sons Incorporated ("Alex. Brown") has delivered to the
MetaTools Board of Directors (the "MetaTools Board") its written opinion, dated
February 11, 1997, to the effect that, as of such date, the Exchange Ratio was
fair from a financial point of view to MetaTools and its stockholders. The full
text of the opinion of Alex. Brown, which sets forth assumptions made and
matters considered, is attached hereto as Annex F to this Joint Proxy
Statement/Prospectus, and is incorporated herein by reference. Holders of
MetaTools Common Stock are urged to, and should, read such opinion in its
entirety. See "The Merger and Related Transactions--Opinion of MetaTools'
Financial Advisor" and Annex F attached hereto.
Unterberg Harris has delivered to the Fractal Board of Directors (the
"Fractal Board") its written opinion, dated February 11, 1997, to the effect
that, as of such date, the consideration to be received pursuant to the
Reorganization Agreement was fair from a financial point of view to the holders
of Fractal Common Stock. The full text of the opinion of Unterberg Harris,
which sets forth assumptions made and matters considered is attached hereto as
Annex G to this Joint Proxy Statement/Prospectus and is incorporated herein by
reference. Holders of Fractal Common Stock are urged to, and should, read such
opinion in its entirety. See "The Merger and Related Transactions--Opinion of
Fractal's Financial Advisor" and Annex G attached hereto.
REASONS FOR THE MERGER; RECOMMENDATIONS OF BOARDS OF DIRECTORS
The Boards of MetaTools and Fractal have authorized the execution and
delivery of the Reorganization Agreement with the expectation that, among other
benefits, the proposed Merger, by combining the experience, financial
resources, size and breadth of product offerings of MetaTools and Fractal, will
result in meaningful long-term strategic benefits to the companies and their
stockholders/shareholders.
Recommendations of MetaTools' Board of Directors
The MetaTools Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is
fair and in the best interests of MetaTools and its stockholders. After careful
consideration, the MetaTools Board unanimously recommends a vote in favor of
the issuance of shares of MetaTools Common Stock pursuant to the Reorganization
Agreement.
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Since the announcement of the proposed Merger, the closing price of MetaTools
Common Stock has ranged from a high of $14.63 per share to a low of $6.94 per
share and on April 21, 1997, the latest practicable date before the printing of
this Joint Proxy Statement/Prospectus, the closing price was $7.25 per share.
The closing price of Fractal Common Stock has ranged from a high of $10.38 per
share to a low of $4.88 per share and on April 21, 1997, the closing price was
$5.00 per share. The MetaTools Board has reviewed the decline in the MetaTools
Common Stock and the Fractal Common Stock since the signing of the
Reorganization Agreement, and has also reviewed the recent volatility in the
trading prices of technology companies generally, and noted that a number of
technology companies have experienced declines in their stock prices over the
same period. The MetaTools Board has also reviewed the recent financial
performance of both companies and the potential synergies between them, and
other factors described in more detail in "The Merger and Related
Transactions--Joint Reasons for the Merger" and "--MetaTools' Reasons for the
Merger." The MetaTools Board also reviewed the opinion of Alex. Brown, dated as
of February 11, 1997, as to the fairness from a financial point of view of the
Exchange Ratio to MetaTools and its stockholders, and the potential effect of
the recent declines in the companies' trading prices on the Alex. Brown
analyses, as summarized under "The Merger and Related Transactions--Opinion of
MetaTools' Financial Advisor." The MetaTool Board noted that of these analyses,
the contribution analysis and pro forma combined analysis are not dependent
upon the trading prices of the MetaTools and Fractal Common Stock. The
MetaTools Board also continued to find meaningful certain other analyses that
were based in part on the historical trading prices of the MetaTools and
Fractal shares prior to the announcement of the Merger, insofar as the
historical trading prices prior to the announcement represent the most recent
market valuation of the companies without giving effect to the pending Merger.
The MetaTools Board noted that, since the announcement of the Merger, the
trading prices of each of the company's stock have reflected, among other
things, the Exchange Ratio and the combined valuation of the companies. The
MetaTools Board also noted that the final financial results for MetaTools and
the preliminary financial results for Fractal, each for the quarter ended March
31, 1997, were below expectations of industry analysts, that each of the
companies participates in the graphics software market and that each of the
companies is likely to have been affected by similar factors and business
fundamentals. After careful consideration of all of the foregoing factors,
including the reconsideration of the Alex. Brown opinion, the MetaTools Board
continues to believe that the Merger is in the best interest of its
stockholders and continues to make its recommendations as herein set forth
through the date of this Joint Proxy Statement/Prospectus. See "Recent
Developments," "Risk Factors," "The Merger and Related Transactions--Joint
Reasons For the Merger," "--MetaTools' Reasons For the Merger," and "--Material
Contacts and Board Deliberations."
The MetaTools Board also unanimously recommends a vote in favor of (i) the
amendment of the Certificate to change the corporate name of MetaTools to
"MetaCreations Corporation", subject to and upon consummation of the Merger,
(ii) the amendment of the Certificate to increase the number of authorized
shares of MetaTools Common Stock by 45 million shares to 75 million shares,
subject to and upon consummation of the Merger, (iii) the election of the six
(6) directors put forth by the MetaTools Board to serve until their successors
are duly elected and qualified, (iv) the amendment of the 1995 Stock Option
Plan to add an additional 1,500,000 shares of MetaTools Common Stock thereto
and (v) the ratification of the appointment of Coopers & Lybrand L.L.P. as
independent accountants for the 1997 fiscal year.
Stockholders should read this Joint Proxy Statement/Prospectus (including
information deemed incorporated herein by reference) carefully before voting.
See "The Merger and Related Transactions--Joint Reasons For the Merger," "--
MetaTools' Reasons For the Merger" and "--Material Contacts and Board
Deliberations."
Recommendation of Fractal Board of Directors
The Fractal Board has unanimously approved the Reorganization Agreement and
the transactions contemplated thereby and has determined that the Merger is
fair and in the best interests of Fractal and its shareholders. After careful
consideration, the Fractal Board unanimously recommends a vote in favor of
approval and adoption of the Reorganization Agreement and approval of the
Merger.
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The Fractal Board has reviewed the decline in the MetaTools Common Stock and
the Fractal Common Stock since the signing of the Reorganization Agreement (as
described above), and has also reviewed the recent volatility in the trading
prices of technology companies generally, and noted that a number of technology
companies have experienced declines in their stock prices over the same period.
The Fractal Board has also reviewed the recent financial performance of both
companies and the potential synergies between them, and other factors described
in more detail in "The Merger and Related Transactions--Joint Reasons for the
Merger" and "--Fractal's Reasons for the Merger." The Fractal Board also
reviewed the opinion of Unterberg Harris dated as of February 11, 1997, as to
the consideration to be received pursuant to the Reorganization Agreement being
fair from a financial point of view to the holders of Fractal Common Stock, and
the potential effect of the recent declines in trading prices on the Unterberg
Harris analyses, as summarized under "The Merger and Related Transactions--
Opinion of Fractal's Financial Advisor." The Fractal Board noted that of these
analyses, the pro forma analysis is not dependent upon the trading prices of
the MetaTools and Fractal Common Stock. The Fractal Board also continued to
find meaningful certain other analyses that were based in part on the
historical trading prices of the MetaTools and Fractal shares prior to
announcement of the Merger, insofar as the historical trading prices prior to
the announcement represent the most recent market valuation of the companies
without giving effect to the pending Merger. The Fractal Board noted that,
since the announcement of the Merger, the trading prices of each of the
company's stock have reflected, among other things, the Exchange Ratio and the
combined valuation of the companies. The Fractal Board also noted that the
final financial results for MetaTools and the preliminary financial results for
Fractal, each for the quarter ended March 31, 1997, were below expectations of
industry analysts, that each of the companies participates in the graphics
software market and that each of the companies is likely to have been affected
by similar factors and business fundamentals. After careful consideration of
all of the foregoing factors, including the reconsideration of the Unterberg
Harris opinion, the Fractal Board continues to believe that the Merger is in
the best interest of its shareholders and continues to make its recommendations
as herein set forth through the date of this Joint Proxy Statement/Prospectus.
Shareholders should read this Joint Proxy Statement/Prospectus (including
information deemed incorporated herein by reference) carefully prior to voting.
See "Recent Developments," "Risk Factors," "The Merger and Related
Transactions--Joint Reasons For the Merger," "--Fractal's Reasons For the
Merger" and "--Material Contacts and Board Deliberations."
The Reorganization Agreement does not provide for termination rights in the
event that the market prices of MetaTools Common Stock or Fractal Common Stock
reach any specified low or high prices.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In connection with agreements previously entered into with Fractal, options
held directly or indirectly by various officers and directors of Fractal will
vest in full and become exercisable immediately prior to the consummation of
the Merger. In addition, from and after the Effective Time, MetaTools will
fulfill and honor, and will cause the surviving corporation (the "Surviving
Corporation") to fulfill and honor, the obligations of Fractal pursuant to any
indemnification agreements between Fractal and its officers and directors
existing prior to February 11, 1997. For six years after the Effective Time,
MetaTools will also cause the Surviving Corporation to use its commercially
reasonable efforts to maintain in effect, if available, directors' and
officers' liability insurance covering those persons who are currently covered
by Fractal's directors' and officers' liability insurance policy.
Further, certain officers of Fractal have entered into a letter agreement
with MetaTools addressing their initial terms of employment with the Combined
Company, and MetaTools and Fractal have entered into a Transition Agreement
regarding certain employee transition matters. The fee payable by Fractal to
Unterberg Harris, Fractal's financial advisor, in connection with the Merger,
is contingent upon the closing of the Merger. Thomas Unterberg, a managing
director, is a director of Fractal. Craig Johnson, a director of Fractal, also
is a director of Venture Law Group, a Professional Corporation ("VLG"), legal
counsel to Fractal. VLG will receive customary fees and expenses in connection
with its representation of Fractal in the Merger. See "Terms of the Merger--
Interests of Certain Persons."
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INCOME TAX TREATMENT
The Merger is intended to qualify as a reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"), in which case no
gain or loss generally should be recognized by the holders of shares of Fractal
Common Stock on the exchange of their shares of Fractal Common Stock solely for
shares of Combined Company Common Stock. Each of MetaTools and Fractal has
received an opinion from its respective tax counsel that the Merger will
constitute a "reorganization" under Section 368(a) of the Code. However, all
Fractal shareholders are urged to consult their own tax advisors. See "The
Merger and Related Transactions--Certain Federal Income Tax Considerations."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting principles.
Consummation of the Merger is conditioned upon receipt at the closing of the
Merger by MetaTools and Fractal of letters from Coopers & Lybrand L.L.P.,
MetaTools' independent accountants, and Price Waterhouse LLP, Fractal's
independent accountants, reaffirming each firm's concurrence with MetaTools
management's and Fractal management's conclusions, respectively, as to the
appropriateness of pooling of interests accounting for the Merger, if
consummated in accordance with the Reorganization Agreement, under Accounting
Principles Board Opinion No. 16 and the related interpretation of the American
Institute of Certified Public Accountants and the Financial Accounting Standard
Board and the rules and regulations of the Securities and Exchange Commission.
On February 11, 1997, MetaTools and Fractal received a preliminary letter from
Coopers & Lybrand L.L.P. affirming that firm's concurrence with MetaTools
management's conclusions that as of February 11, 1997 no conditions existed
that would preclude accounting for the Merger as a pooling of interests. On
February 11, 1997, Fractal received a preliminary letter from Price Waterhouse
LLP affirming that firm's concurrence with Fractal management's conclusions
that, with respect to Fractal no conditions existed that would preclude
accounting for the Merger as a pooling of interests. While the condition to
consummation of the Merger that the Merger qualify as a pooling of interests
for financial reporting purposes is waivable, the companies have no current
intention to waive such condition. See "The Merger and Related Transactions--
Accounting Treatment."
THE MERGER
Terms of the Merger; Exchange Ratio
At the Effective Time (as defined below) of the Merger, Merger Sub will merge
with and into Fractal and Fractal will become a wholly-owned subsidiary of the
Combined Company. Once the Merger is consummated, Merger Sub will cease to
exist as a corporation, and all of the business, assets, liabilities and
obligations of Merger Sub will be assumed by Fractal with Fractal remaining as
the Surviving Corporation. As a result of the Merger, each outstanding share of
Fractal Common Stock (other than shares as to which dissenters' rights pursuant
to the CCC have been perfected and shares owned by Merger Sub, MetaTools or any
wholly-owned subsidiary of MetaTools or Fractal) will be converted into the
right to receive 0.749 shares of Combined Company Common Stock, and each
outstanding option to purchase Fractal Common Stock under Fractal's stock
option plans will be assumed by MetaTools and will become an option or right to
purchase Combined Company Common Stock, with appropriate adjustments to be made
to the number of shares issuable thereunder and the exercise price thereof
based on the Exchange Ratio.
On February 11, 1997, the last full trading day prior to the public
announcement of the execution of the Reorganization Agreement, the closing
prices per share of MetaTools Common Stock and Fractal Common Stock on Nasdaq
were $15.00 and $8.125, respectively. On April 21, 1997, the most recent
practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing prices per share of MetaTools Common Stock
and Fractal Common Stock on Nasdaq were $7.25 and $5.00, respectively. See
"Comparative Market Price Data." Because the Exchange Ratio is fixed, changes
in the market price of MetaTools Common Stock prior to
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the consummation of the Merger will affect the value of the Combined Company
Common Stock to be received by shareholders of Fractal in the Merger. MetaTools
stockholders and Fractal shareholders are encouraged to obtain current market
quotations for MetaTools Common Stock and Fractal Common Stock prior to the
MetaTools Annual Meeting and the Fractal Special Meeting.
Effective Time of the Merger
The Merger will become effective upon the filing of an Agreement of Merger
(the "Agreement of Merger") with the Secretary of State of the State of
California and the filing of a Certificate of Merger (the "Certificate of
Merger") with the Secretary of State of the State of Delaware or at such later
time as may be agreed in writing by MetaTools, Fractal and Merger Sub and
specified in the Agreement of Merger. Assuming all conditions to the Merger are
met or waived prior thereto, it is anticipated that the Closing Date of the
Merger (the "Closing Date") and Effective Time will be on or about May 30,
1997. See "Terms of the Merger--Effective Time."
Exchange of Fractal Stock Certificates
Promptly after the Effective Time, MetaTools, acting through Boston EquiServe
as its exchange agent (the "Exchange Agent"), will deliver to each Fractal
shareholder of record a letter of transmittal with instructions to be used by
such shareholder in surrendering certificates which, prior to the Merger,
represented shares of Fractal Common Stock. CERTIFICATES SHOULD NOT BE
SURRENDERED BY THE HOLDERS OF FRACTAL COMMON STOCK UNTIL SUCH HOLDERS RECEIVE
THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. At the Effective Time, each
then outstanding option to purchase Fractal Common Stock, whether vested or
unvested, will be assumed by MetaTools without any action on the part of the
holder thereof, and the number of shares issuable thereunder and the exercise
price thereof will be appropriately adjusted according to the Exchange Ratio.
OPTION AGREEMENTS NEED NOT BE SURRENDERED. See "Terms of the Merger--Manner and
Basis of Converting Shares."
Form S-8 Registration Statement
No later than one (1) business day after the Closing Date, MetaTools will
file a registration statement on Form S-8 under the Securities Act covering the
shares of Combined Company Common Stock issuable upon exercise of options to
purchase Fractal Common Stock to be assumed by MetaTools at the Effective Time.
See "Terms of the Merger--Manner and Basis of Converting Shares."
Stock Ownership Following the Merger
Based upon the number of shares of Fractal Common Stock outstanding and the
number of shares issuable upon exercise of outstanding options to purchase
Fractal Common Stock as of April 21, 1997, and assuming that dissenters' rights
are not perfected, an aggregate of approximately 9,021,080 shares of Combined
Company Common Stock will be issued to Fractal shareholders in the Merger, and
MetaTools will assume options exercisable for up to approximately 1,353,462
additional shares of Combined Company Common Stock. Based upon the number of
shares of MetaTools Common Stock issued and outstanding as of April 21, 1997,
and after giving effect to the issuance of Combined Company Common Stock as
described in the previous sentence, the former holders of Fractal Common Stock
would hold, and have voting power with respect to, approximately 39.5% of the
Combined Company's total issued and outstanding shares as of the Effective
Time, and holders of former Fractal options would hold options to purchase an
additional approximately 5.6% of the Combined Company's total issued and
outstanding shares (assuming the exercise of such options but not others). The
foregoing numbers of shares and percentages are subject to change in the event
that the capitalization of either MetaTools or Fractal changes subsequent to
April 21, 1997 and prior to the Effective Time, and there can be no assurance
as to the actual capitalization of MetaTools or Fractal at the Effective Time
or of the Combined Company at any time following the Effective Time. See "Terms
of the Merger--Stock Ownership Before and After the Merger."
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Board of Directors; Management following the Merger
Pursuant to the Reorganization Agreement, upon consummation of the Merger,
the Board of Directors of the Combined Company will be expanded from six (6) to
nine (9) members. The three (3) additional members will be Mark Zimmer, Thomas
Hedges and Arthur Collmeyer, all current directors of Fractal, and will be
appointed by the Board of Directors of the Combined Company. Subject to the
election of the six (6) MetaTools nominees at the MetaTools Annual Meeting, the
MetaTools Board following the Merger will be composed of five (5) outside
directors and four (4) employee directors. See "Additional Matters Being
Submitted to a Vote of Only MetaTools Stockholders--Proposal Four--Election of
Board of Directors."
Following the Merger, the following directors will serve in the following
management capacities: Howard Morgan, who is currently a director of MetaTools,
will, subject to his reelection, be Chairman of the Board; John J. Wilczak, who
is currently Chairman of the Board, President and Chief Executive Officer of
MetaTools, will be President and Chief Executive Officer; Kai Krause, who is
currently Chief Design Officer of MetaTools, will be Chief Design Officer; Mark
Zimmer, who is currently President and Chief Executive Officer of Fractal, will
be Chief Technical Officer; and Thomas Hedges, who is currently Chairman and
Vice President, Research and Development of Fractal, will be Chief Systems
Architect. See "Terms of the Merger--Conduct Following the Merger."
Conduct of Business Prior to the Merger
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms and the
Effective Time, each of Fractal (and each of its subsidiaries) and MetaTools
(and each of its subsidiaries) has agreed, except (i) as indicated in its
respective disclosure schedules or (ii) to the extent that the other of them
shall otherwise consent in writing, to conduct its business diligently, in
accordance with good commercial practice, in the usual, regular and ordinary
course, in substantially the same manner as previously conducted and in
compliance with all applicable laws and regulations; to pay its debts and taxes
when due, subject to good faith disputes over such debts or taxes; to pay or
perform other material obligations when due; and to use its commercially
reasonable efforts consistent with past practices and policies to preserve
intact its present business organization, to keep available the services of its
present officers and employees and to preserve its relationships with
customers, suppliers, distributors, licensors, licensees, and others with which
it has business dealings. Each of Fractal and MetaTools has agreed to promptly
notify the other of any material event involving its business or operations. In
addition, except as provided in its respective disclosure schedules, each of
Fractal and MetaTools has agreed that it shall not, without the prior written
consent of the other, perform or engage in certain activities in the conduct of
its business and the business of its subsidiaries. See "Terms of the Merger--
Conduct of MetaTools, and Fractal's Business Prior to the Merger."
No Solicitation
Under the terms of the Reorganization Agreement, except under certain limited
circumstances, each of MetaTools and Fractal has agreed that it will not engage
in certain activities relating to, or which could result in, an acquisition
proposal from a third party. See "Terms of the Merger--No Solicitation."
Termination; Fees
The Reorganization Agreement may be terminated under certain circumstances.
Each of MetaTools and Fractal has agreed that if the Merger is not consummated
under certain circumstances, then it will pay to the other party an amount
equal to $4 million, or in certain other circumstances an amount equal to
$750,000. See "Terms of the Merger--Break Up Fees" and "--Termination of the
Reorganization Agreement."
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Conditions to the Merger
Consummation of the Merger is subject to certain conditions, including: (a)
certain approvals by the shareholders of Fractal and the stockholders of
MetaTools in connection with the Merger; (b) declaration by the SEC of the
effectiveness of the Registration Statement; (c) the absence of any law or
order prohibiting consummation of the Merger; (d) receipt by MetaTools and
Fractal of legal opinions that the Merger will constitute a reorganization
within the meaning of Section 368(a) of the Code; (e) receipt by MetaTools and
Fractal of accounting opinions as to the appropriateness of pooling of interest
accounting for the Merger; (f) the accuracy in all material respects of certain
of the representations and warranties given by each party in the Reorganization
Agreement; (g) performance of all covenants required by the Reorganization
Agreement; (h) the shares of MetaTools Common Stock issuable to shareholders of
Fractal pursuant to the Merger and such other shares required to be reserved
for issuance in connection with the Merger shall have been authorized for
listing on Nasdaq upon official notice of issuance, (i) the absence of a
material adverse effect with regard to either MetaTools or Fractal; (j) that
holders of more than 4.9% of outstanding shares of Fractal Common Stock shall
not have exercised, nor shall they have any continued right to exercise,
appraisal, dissenters' or similar rights; and (k) the Noncompetition Agreements
that Mark Zimmer and Thomas Hedges have entered into shall continue to be in
full force and effect. See "Terms of the Merger--Conditions to the Merger."
Stock Option Agreements
As an inducement to the other party to enter into the Reorganization
Agreement, each of MetaTools and Fractal entered into a Stock Option Agreement
with the other, pursuant to which, subject to certain conditions, MetaTools
granted to Fractal (the "Fractal Option") and Fractal granted to MetaTools (the
"MetaTools Option") the right to acquire up to a number of shares of MetaTools
Common Stock or Fractal Common Stock, as the case may be, equal to 19.9% of its
issued and outstanding shares upon the occurrence of certain events. See "Terms
of the Merger--Stock Option Agreements" and Annexes B-1 and B-2 attached
hereto.
Voting Agreements and Proxies
Each executive officer, director and certain stockholders of MetaTools have
entered into Voting Agreements (the "MetaTools Voting Agreements") with
Fractal. Pursuant to the MetaTools Voting Agreements, the foregoing persons
have agreed to vote all shares of MetaTools Common Stock of which they are the
beneficial owners and all shares of MetaTools Common Stock of which they
acquire beneficial ownership in favor of any matter that could reasonably be
expected to facilitate the Merger. In addition, certain of such persons have
granted irrevocable proxies to the Fractal Board to vote such persons'
MetaTools Common Stock in accordance with the MetaTools Voting Agreements. Each
executive officer and director of Fractal who owns shares of Fractal Common
Stock and certain shareholders of Fractal have entered into Voting Agreements
(the "Fractal Voting Agreements" and collectively with the MetaTools Voting
Agreements, the "Voting Agreements") with MetaTools. Pursuant to the Fractal
Voting Agreements, the foregoing persons have agreed to vote in favor of any
matter that could reasonably be expected to facilitate the Merger. In addition,
certain of such persons have granted irrevocable proxies to the MetaTools Board
to vote such persons' Fractal Common Stock in accordance with the Fractal
Voting Agreements. See "Terms of the Merger--Voting Agreements" and Annexes D-1
and D-2 attached hereto.
Affiliate Agreements
Each of the members of the MetaTools Board and certain other affiliates of
MetaTools have entered into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of
MetaTools Common Stock held by them to help ensure that the Merger will be
treated as a pooling of interests for accounting and financial reporting
purposes. Each of the members of the Fractal Board and certain other affiliates
of Fractal have entered into agreements restricting sales, dispositions or
other transactions
14
<PAGE>
reducing their risk of investment in respect of the shares of Fractal Common
Stock held by them prior to the Merger and the shares of Combined Company
Common Stock to be received by them in the Merger so as to comply with the
requirements of applicable federal securities and tax laws and to help ensure
that the Merger will be treated as a pooling of interests for accounting and
financial reporting purposes. See "Terms of the Merger--Conditions to the
Merger" and "--Affiliate Agreements" and Annexes C-1 and C-2 attached hereto.
Noncompetition Agreements
Each of Mark Zimmer and Thomas Hedges, the President and Chief Executive
Officer of Fractal and the Chairman and Vice President, Research and
Development, of Fractal, respectively, has entered into a Noncompetition
Agreement with MetaTools pursuant to which each such person has agreed that,
for a period beginning on February 11, 1997 and ending thirty (30) months after
the Effective Time, he will not participate in certain graphics and design
software businesses in certain geographic areas other than for the benefit of
the Combined Company or its subsidiaries and will not solicit employees of
MetaTools, Fractal or any of their respective subsidiaries. See "Terms of the
Merger--Noncompetition Agreements."
Antitakeover Provisions of Delaware Law and the Combined Company's Charter
Documents
Fractal is a corporation organized under the laws of California. Upon
consummation of the Merger, the shareholders of Fractal will become
stockholders of the Combined Company, a corporation organized under the laws of
Delaware. Certain provisions of Delaware law applicable to the Combined Company
may have the effect of delaying, deterring or preventing changes in control or
management of the Combined Company. The charter documents of the Combined
Company will contain certain additional provisions which may further this
effect. The Combined Company will be subject to the provisions of Section 203
of the Delaware General Corporation Law, which restricts the corporation from
entering into certain "business combinations" with an "interested person" for a
period of three years. An interested person is generally defined to mean a
person or entity that has acquired in excess of 15% of the Combined Company's
voting stock. In addition, the Combined Company's Board of Directors will have
the authority to issue up to 5,000,000 shares of preferred stock and to fix the
rights, preferences, privileges and restrictions, including voting rights, of
such preferred stock without any further vote or action by the stockholders.
The issuance of such preferred stock could have a dilutive effect upon the
stockholders of the Combined Company and could discourage an unsolicited
attempt to take over the Combined Company. The Combined Company's Certificate
of Incorporation will not provide for cumulative voting. See "Comparison of
Capital Stock."
MARKET AND PRICE DATA FOR THE METATOOLS AND FRACTAL COMMON STOCK
MetaTools Common Stock has been traded on Nasdaq under the symbol "MTLS"
since MetaTools' initial public offering on December 12, 1995. On February 11,
1997, the last trading day before the announcement of the execution of the
Reorganization Agreement, the closing price of MetaTools Common Stock as
reported on Nasdaq was $15.00 per share. On April 21, 1997, the closing price
of MetaTools Common Stock as reported on Nasdaq was $7.25. There can be no
assurance as to the actual price of MetaTools Common Stock prior to, at or at
any time following the Effective Time of the Merger, or in the event the Merger
is not consummated.
Fractal Common Stock has been traded on Nasdaq under the symbol "FRAC" since
Fractal's initial public offering on November 9, 1995. On February 11, 1997,
the last day before the announcement of the execution of the Reorganization
Agreement, the closing price of Fractal Common Stock as reported on Nasdaq was
$8.125 per share. Following the Merger, Fractal Common Stock will no longer be
traded on Nasdaq. On April 21, 1997, the closing price of Fractal Common Stock
as reported on Nasdaq was $5.00. There can be no assurance as to the actual
price of Fractal Common Stock prior to or at the Effective Time of the Merger,
or in the event the Merger is not consummated. See "Risk Factors" and
"Comparison of Capital Stock."
Effective upon the closing of the Merger, the Combined Company intends to
change the Nasdaq listing symbol of the Combined Company from "MTLS" to "MCRE".
15
<PAGE>
RECENT DEVELOPMENTS
SPECULAR ACQUISITION
On April 6, 1997, MetaTools entered into an agreement (the "Specular
Acquisition Agreement") to acquire Specular International Ltd. ("Specular"), a
privately held software company based in Amherst, Massachusetts, which develops
and markets 3D animation and graphic design tools for professionals and
prosumers. The acquisition of Specular was consummated on April 15, 1997.
MetaTools believes that the acquisition of Specular will help accelerate the
adoption of MetaTools' Real Time Geometry Corp. ("RTG") technology in the
marketplace. The acquisition is intended to further extend MetaTools'
professional 3D graphic design tools as well as its ability to participate in
the expansion of broad application areas that will utilize 3D graphics
technology. Specular's software technologies are currently available on the
Windows and Macintosh platforms through products such as "Infini-D" and
"LogoMotion."
In order to acquire Specular, MetaTools issued 546,781 shares of MetaTools
Common Stock, plus $1,000,000 in cash, in exchange for all outstanding shares
of Specular capital stock. MetaTools also issued 450,000 non-qualified stock
options to purchase MetaTools Common Stock to Specular employees. The options
issued in this transaction have an exercise price of $7 per share, the fair
market value of the MetaTools Common Stock on April 14, 1997, the trading date
immediately prior to the issuance date, and will vest over three or four years.
The acquisition of Specular will be accounted for by MetaTools by using the
purchase method of accounting. MetaTools expects to incur expenses of
approximately $7 million during its second quarter ended June 30, 1997, related
to the write-off of acquired in-process research and development, the closing
of Specular's Amherst facility and other costs related to the transaction.
MetaTools plans to relocate approximately 17 of Specular's existing engineering
and product management personnel to Princeton, New Jersey for consolidation
with MetaTools' RTG lab and facilities. MetaTools will continue to market
Specular's professional 3D modeling software targeted at video professionals
while expanding distribution of certain Specular consumer products. MetaTools
plans to close Specular's Amherst, Massachusetts headquarters and lay-off and
provide severance to approximately 18 personnel in operations, accounting and
sales positions. Pursuant to the Reorganization Agreement, Fractal has provided
its written consent to the acquisition of Specular.
The acquisition of Specular is subject to certain risks. These risks include
(i) Specular's experience of net losses in each of the 1992, 1993, 1995 and
1996 fiscal years, (ii) the fact that during fiscal 1996 approximately 94% of
Specular's net revenues were from sales of products for use on the Macintosh
platform and (iii) the potential disruptive impact of the relocation of the
Specular personnel from Amherst, Massachusetts to Princeton, New Jersey. See
"Risk Factors--Managements of Potential Growth; Integration of Potential
Acquisitions" and "--Uncertainty as to the Future of the MacIntosh Platform and
Apple Computer."
METATOOLS QUARTERLY RESULTS
On April 17, 1997, MetaTools announced its final earnings for its first
quarter ended March 31, 1997. Net revenues for the first quarter ended March
31, 1997, were $6.2 million, as compared to $5.5 million for the quarter ended
March 31, 1996, and gross profit for the quarter ended March 31, 1997 was $5.4
million, or 87% of net revenues, as compared to $4.4 million, or 80% of net
revenues, for the quarter ended March 31, 1996. Net income for the quarter
ended March 31, 1997, was $81,000, or $0.01 per share, compared with net income
of $724,000 or $0.06 per share, for the quarter ended March 31, 1996.
MetaTools experienced slower revenue growth in the first quarter of 1997
compared with 1996 due to the delay in expected shipment of the OEM version of
MetaTools' new consumer digital photo product, Kai's Photo Soap, to the second
quarter of 1997, combined with the general weakness in the domestic retail
software market for graphics products. Expected increased operating expenses
from the acquisition of RTG in December 1996 also contributed to lower earnings
in the first quarter of 1997 compared to 1996.
16
<PAGE>
PRELIMINARY FRACTAL QUARTERLY RESULTS
Fractal currently estimates that net revenue for its fourth quarter ended
March 31, 1997 will be between $6.7 and $7.2 million compared to $9.3 million
for the quarter ended March 31, 1996. Fractal currently estimates that it will
report a net loss of between $(0.05) and $(0.01) cents per share compared to
earnings of $0.10 per share for the quarter ended March 31, 1996. Fractal
attributes the lower fourth quarter results to lower than anticipated order
volume in the fourth quarter and an unexpected disruption at its manufacturing
and fulfillment provider, which caused up to $2 million in customer orders to
remain unshipped prior to the close of the quarter.
Fractal's sole third-party manufacturing and fulfillment provider ceased
operations unexpectedly near the end of the quarter. Although Fractal was able
to relocate its inventory and resume manufacturing and fulfillment functions
with another manufacturer, it was determined after the end of the quarter that,
due to the high volume of manufacturing and shipments in the final week of the
quarter, orders in the aggregate of approximately $2.0 million were not shipped
prior to the end of the quarter. After completing a physical inventory, the
manufacturer has been instructed to ship the remaining orders as quickly as
possible. See "Risk Factors--Fluctuations in Quarterly Results" and "Dependence
on Distributors and on Other Third Parties."
Fractal's final results for its fourth quarter ended March 31, 1997 are
expected to be announced on or about April 28, 1997.
The above quarterly results of Fractal are preliminary and constitute
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Among the factor which could affect final
operating results are any accounting adjustments required in connection with
Fractal's closing of financial results for its quarter ended March 31, 1997.
See also "Risk Factors."
17
<PAGE>
SELECTED HISTORICAL AND SELECTED PRO FORMA COMBINED FINANCIAL DATA
The following selected consolidated historical financial data of MetaTools
and Fractal should be read in conjunction with the respective audited and
unaudited historical consolidated financial statements and notes thereto
incorporated by reference in this Joint Proxy Statement/Prospectus. The
selected consolidated historical financial data for MetaTools as of December
31, 1996 and for each of the five years in the period then ended have been
derived from MetaTools' audited consolidated financial statements. The selected
consolidated historical financial data for Fractal as of March 31, 1996 and for
each of the five years in the period then ended has been derived from Fractal's
consolidated financial statements. The selected consolidated historical
financial data for Fractal presented as of December 31, 1996 and for the nine
months ended December 31, 1995 and 1996 have been derived from the unaudited
consolidated financial statements of Fractal, which, in the opinion of Fractal
management reflect all adjustments (consisting only of normal, recurring
adjustments) necessary for the fair presentation of Fractal's consolidated
financial condition as of that date and the results of its operations for those
unaudited interim periods. The results of operations for such interim periods
are not necessarily indicative of the results to be expected for the entire
year. The selected unaudited pro forma consolidated financial data are derived
from the unaudited pro forma combined condensed financial statements, which
give effect to the Merger as a pooling of interests and should be read in
conjunction with such unaudited pro forma statements and the notes thereto
included in this Joint Proxy Statement/Prospectus. The unaudited pro forma
combined condensed balance sheet data as of December 31, 1996 give effect to
the Merger as if it had occurred on December 31, 1996, and combines the audited
condensed consolidated balance sheet of MetaTools and the unaudited condensed
consolidated balance sheet of Fractal as of December 31, 1996. The unaudited
pro forma combined condensed statements of operations data for the years ended
December 31, 1994 and 1995 combine the audited historical consolidated
statements of operations of MetaTools for each of the fiscal years in the two
year period ended December 31, 1995 with the audited historical consolidated
statements of operations of Fractal for each of the fiscal years in the two
year period ended March 31, 1996, in each case as if the Merger and Fractal's
merger with Ray Dream, Inc. ("Ray Dream") had occurred at the beginning of the
earliest period presented. The unaudited pro forma combined condensed statement
of operations data for the year ended December 31, 1996 combine the unaudited
pro forma combined condensed statement of operations of MetaTools for the year
ended December 31, 1996 with the unaudited historical consolidated statement of
operations of Fractal for the twelve months ended December 31, 1996, as if the
Merger and Fractal's merger with Ray Dream, had occurred on January 1, 1996 and
MetaTools' acquisition of RTG had occurred on February 1, 1996 (the date of
incorporation of RTG). Consequently, Fractal net revenues of approximately
$9,307,000, gross profit of approximately $7,670,000, operating expenses of
approximately $6,033,000, and net income of approximately $1,345,000 for the
three months ended March 31, 1996 have thus been reflected in the unaudited pro
forma combined condensed statements of operations for both the years ended
December 31, 1995 and 1996. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the Merger had been
consummated at the beginning of the periods indicated, nor is it necessarily
indicative of future operating results or financial position.
METATOOLS SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues...................... $1,259 $4,524 $ 9,832 $16,731 $ 28,035
Gross profit...................... 611 3,625 6,329 11,796 23,475
Write-off of acquired in-process
technology and other acquisition
costs(1) ........................ -- -- -- -- 15,182
Operating expenses................ 1,597 3,503 8,487 12,363 34,013
Income (loss) from operations..... (986) 122 (2,158) (567) (10,538)
Net income (loss)................. (976) 150 (2,212) (500) (9,239)
Net income (loss) applicable to
common stockholders.............. (976) 150 (2,451) (589) (9,239)
Net income (loss) per common
share(1)......................... $(0.20) $ 0.02 $ (0.43) $ (0.11) $ (0.78)
Weighted average number of shares
outstanding(1)................... 4,807 7,055 5,647 5,415 11,791
<CAPTION>
DECEMBER 31,
------------------------------------------
1992 1993 1994 1995 1996
------ ------ ------- ------- --------
<S> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE
SHEET DATA:
Cash, cash equivalents and
restricted cash.................. $ 52 $ 135 $ 3,257 $46,885 $ 18,961
Short-term investments............ -- -- -- -- 20,596
Working capital (deficiency)...... (790) (660) 4,264 48,115 46,431
Total assets...................... 368 1,989 7,709 53,437 57,029
Series B redeemable preferred
stock............................ -- -- 8,359 -- --
Total stockholders' equity
(deficit)........................ $ (671) $ (455) $(3,342) $50,188 $ 50,831
</TABLE>
- -------
(1) During the year ended December 31, 1996, MetaTools issued approximately
1,332,000 shares of MetaTools Common Stock in connection with its
acquisition of Real Time Geometry Corp. This acquisition was accounted for
using the purchase method of accounting; MetaTools expensed approximately
$15,182,000 in 1996 related to certain acquired in-process technology and
related acquisition costs.
18
<PAGE>
FRACTAL SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
-------------- -------------------------
NINE MONTHS NINE MONTHS
YEAR ENDED MARCH 31, ENDED ENDED
---------------------------------------- DECEMBER 31, DECEMBER 31,
1992 1993 1994 1995 1996 1995 1996
------ ------ ------- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA(1):
Net revenues............ $1,591 $5,778 $10,002 $18,476 $29,529 $20,222 $27,897
Gross profit............ 1,164 4,674 7,478 15,352 24,383 16,713 22,610
Merger expenses......... -- -- -- -- -- -- 1,865
Operating expenses...... 1,570 5,106 8,576 13,185 20,197 14,164 19,902
Income (loss) from
operations............. (406) (432) (1,098) 2,167 4,186 2,549 2,708
Net income (loss)....... (395) (389) (1,162) 1,759 2,926 1,581 2,102
Net income (loss) per
common share........... $(0.05) $(0.05) $ (0.14) $ 0.17 $ 0.25 $ 0.14 $ 0.16
Weighted average number
of shares outstanding.. 8,210 8,210 8,240 10,485 11,603 11,107 12,962
PRO FORMA DATA(2):
Loss before income
taxes.................. $ (395) $ (389) $(1,162)
Provision for income
taxes.................. -- (214) (15)
Net loss................ (395) (603) (1,177)
Net loss per common
share.................. $(0.05) $(0.07) $ (0.14)
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
-------------------- ------------
MARCH 31,
------------------------------------ DECEMBER 31,
1992 1993 1994 1995 1996 1996
------ ------ ------ ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED
BALANCE SHEET DATA(1):
Cash and cash
equivalents............ $2,048 $ 832 $2,992 $ 5,562 $ 7,153 $ 3,944
Short-term investments.. -- -- -- 488 23,683 24,318
Working capital......... 1,629 1,177 1,225 4,822 32,020 32,498
Total assets............ 2,984 2,649 5,010 10,779 43,935 45,699
Long-term obligations... -- 200 -- -- 250 --
Total shareholders'
equity................. $1,944 $1,315 $1,613 $ 3,293 $32,728 $34,847
</TABLE>
- --------
(1) In May 1996, Fractal issued 3,165,660 shares of Fractal Common Stock in
exchange for the outstanding common stock of Ray Dream. The Ray Dream
acquisition has been accounted for as a pooling-of-interests, and,
accordingly, Fractal's consolidated financial position and results of
operations have been restated for all periods prior to the Ray Dream
acquisition to include the financial statements of Ray Dream. Fractal
reports its financial results on a March 31 fiscal year-end basis, whereas
Ray Dream reported its financial results on a December 31 calendar year-end
basis. For the purposes of pooling-of-interests accounting, revenues and
net income (loss) of Fractal for the years ended March 31, 1992, 1993,
1994, 1995 and 1996 have been combined with those of Ray Dream for the
years ended December 31, 1991, 1992, 1993, 1994 and 1995. Ray Dream's net
loss of $519,000 for the three months ended March 31, 1996 has been
reflected as an adjustment to retained earnings.
(2) Fractal was exempt from the payment of U.S. federal and certain state
income taxes prior to October 1, 1993 as a result of its shareholders'
electing to be taxed as a Subchapter S Corporation. Effective October 1,
1993, Fractal's shareholders terminated their Subchapter S election.
Accordingly, net loss per share is pro forma for the years ended March 31,
1992, 1993 and 1994 and historical for the years ended March 31, 1995 and
1996 and for the nine months ended December 31, 1995 and 1996. The pro
forma data is based upon historical income before taxes, adjusted to
reflect a provision for income taxes as if Fractal were a C Corporation.
19
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
(UNAUDITED)
------------------------
YEAR ENDED DECEMBER 31,
------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
DATA(2):
Net revenues......................................... $28,308 $46,260 $65,239
Gross profit......................................... 21,681 36,179 53,755
Write-off of acquired in-process technology and other
acquisition costs................................... -- -- 2,598
Operating expenses................................... 21,672 32,560 48,143
Income from operations............................... 9 3,619 5,612
Net income (loss).................................... (453) 2,426 6,597
Net income (loss) applicable to common stockholders.. (692) 2,337 6,597
Net income (loss) per common share................... $ (0.05) $ 0.15 $ 0.28
Weighted average number of shares outstanding(1)..... 13,500 15,268 23,854
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------
DECEMBER 31, 1996
-----------------
<S> <C>
PRO FORMA COMBINED CONDENSED BALANCE SHEET DATA:
Working capital(2)............................................ $74,729
Total assets.................................................. 99,777
Stockholders' equity(2)....................................... 81,478
</TABLE>
- --------
(1) The increase in weighted average shares outstanding from 1994 to 1995 is
primarily attributed to the issuance of shares by both MetaTools and
Fractal in conjunction with their respective initial public offerings in
November and December 1995, respectively. The increase in weighted average
shares outstanding from 1995 to 1996 is primarily attributed to the shares
issued by MetaTools and Fractal in connection with their initial public
offerings in 1995 being outstanding for all of 1996, and shares issued in
connection with MetaTools' acquisition of Real Time Geometry Corp. in
December 1996.
(2) MetaTools and Fractal estimate that they will incur direct transaction
costs of approximately $4.2 million associated with the Merger, consisting
of transaction fees for investment bankers, attorneys, accountants,
financial printing, consultants and other related charges. In addition,
MetaTools anticipates incurring an additional charge upon consummation of
the Merger of approximately $4.8 million to reflect costs and expenses
relating to integrating the two companies. These nonrecurring costs are
reflected in the unaudited pro forma combined condensed balance sheet at
December 31, 1996 as a reduction to stockholders' equity and an increase in
accrued expenses. These nonrecurring costs, which have not been reflected
in the unaudited pro forma combined condensed statements of operations,
will be charged to operations in the fiscal quarter in which the Merger is
consummated or as incurred.
20
<PAGE>
RISK FACTORS
The following factors should be considered carefully by shareholders of
Fractal in evaluating whether to approve and adopt the Reorganization
Agreement, and by stockholders of MetaTools in evaluating whether to approve
the issuance of MetaTools Common Stock pursuant to the Reorganization
Agreement. The risks associated with the Combined Company in the Merger will
be additional risks faced by both the Fractal shareholders and the MetaTools
stockholders following the Merger. The risks described that are currently
specific to Fractal will be additional risks faced by MetaTools stockholders
following the Merger. The risks described that are currently specific to
MetaTools will be additional risks faced by Fractal shareholders following the
Merger. This section contains forward-looking statements that involve risks
and uncertainties. Actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
herein. These factors should be considered in conjunction with the other
information included or incorporated by reference in this Joint Proxy
Statement/Prospectus.
INTEGRATION OF OPERATIONS; ADVERSE EFFECT ON FINANCIAL RESULTS
The realization of the benefits sought from the Merger depends on the
ability of the Combined Company to utilize product development capabilities,
sales and marketing capabilities, administrative organizations and facilities
better than either company could do separately. There can be no assurance that
these benefits will be achieved or that the activities of MetaTools and
Fractal will be integrated in a coordinated, timely and efficient manner. The
combination of the two organizations also will require the dedication of
management resources, which will temporarily detract such persons' attention
from the day-to-day business of the Combined Company. There can be no
assurance that the integration will be completed without disrupting MetaTools'
and Fractal's businesses. The inability of MetaTools and Fractal to better
utilize resources and to achieve integration in a timely and coordinated
fashion could result in a material adverse effect on the Combined Company's
financial condition, operating results and cash flows. Following the Merger,
the Combined Company intends to seek to reduce operating costs over time by
eliminating duplicative operations and facilities that would otherwise have
been required by each of the two companies operating on a stand-alone basis.
There can be no assurance that these steps actually will reduce costs to the
extent, or as quickly, as planned or that these steps will not adversely
affect future revenues and results of operations. These reductions also could
have a material adverse effect on employee morale and on the ability of the
Combined Company to retain key management, engineering and sales and marketing
personnel critical to the Combined Company's future operations. See "Unaudited
Pro Forma Combined Condensed Financial Information."
MetaTools and Fractal estimate that in connection with the Merger they will
incur direct transaction costs that currently are estimated to be
approximately $4.2 million, which primarily represent fees and expenses of
investment bankers, attorneys, accountants, consultants and financial
printers. In addition, MetaTools anticipates incurring an additional charge
upon consummation of the Merger of approximately $4.8 million to reflect costs
and expenses relating to integrating the two companies. All transaction costs
will be charged to the Combined Company's operations upon consummation of the
Merger or as incurred. Should the Merger not be consummated, each company will
charge its operations with its own direct transaction expenses in the period
incurred. These fees (excluding any breakup fees payable) are estimated to be
approximately $1,000,000 and $500,000 for MetaTools and Fractal, respectively.
These estimates are preliminary and therefore subject to change. See "Notes to
Unaudited Pro Forma Combined Condensed Financial Statements." In addition, if
approved by the stockholders of MetaTools, MetaTools will undergo a name
change in connection with the Merger. Such name change may cause confusion in
the marketplace and will result in an increase in near-term costs,
attributable to repackaging and redistributing the products of the Combined
Company and various other costs associated with the name change. Going
forward, if the anticipated savings in operating costs are not achieved, or if
the Merger has other adverse effects that are not currently anticipated, the
Merger could result in a reduction in per share earnings of the Combined
Company as compared to the per share earnings that either or both of the
companies would have achieved if the Merger had not occurred. Furthermore,
even if the effects of the Merger prove to be as anticipated, there can be no
assurance that future earnings will not be adversely affected by any number of
economic, market or other factors that are not related to the Merger.
21
<PAGE>
The Combined Company also expects to incur expenses of approximately $7
million during the quarter ending June 30, 1997, related to the write-off of
acquired in-process research and development, the closing of Specular's
Amherst, Massachusetts facility and other costs related to the transaction.
Separately, given the recent general weakness in the domestic retail software
market for graphics products, MetaTools and Fractal believe that near-term
benefits from the Merger may be more difficult to achieve. See "Recent
Developments-- MetaTools Quarterly Results" and "--Preliminary Fractal
Quarterly Results."
POTENTIAL DILUTIVE EFFECT TO STOCKHOLDERS
Although the companies believe that beneficial synergies will result from
the Merger, there can be no assurance that the combining of the two companies'
businesses, even if achieved in an efficient, effective and timely manner,
will result in combined results of operations and financial condition superior
to what would have been achieved by each company independently, or as to the
period of time required to achieve such result. The issuance of MetaTools
Common Stock in connection with the Merger may have the effect of reducing the
Combined Company's net income per share from levels otherwise expected and
could reduce the market price of the Combined Company Common Stock unless
revenue growth or cost savings and other business synergies sufficient to
offset the effect of such issuance can be achieved.
LOSS OF OPPORTUNITY FOR FRACTAL AS A STAND-ALONE ENTITY
As a consequence of the Merger, Fractal shareholders will lose the chance to
invest in the development and exploitation of Fractal's products on a stand-
alone basis. Additionally, the Combined Company will have different management
than Fractal's current management, and consequently the management of the
Combined Company may make strategic and operational decisions that differ from
those of Fractal's current management. It is possible that Fractal, if it were
to remain independent, could achieve economic performance superior to that of
the Combined Company. Consequently, there can be no assurance that
shareholders of Fractal would not achieve greater returns on investment if
Fractal were to remain an independent company.
CONSTANT EXCHANGE RATIO OF PRICE OF METATOOLS COMMON STOCK
Under the terms of the Reorganization Agreement, each share of Fractal
Common Stock issued and outstanding at the Effective Time will be converted
into the right to receive 0.749 shares of MetaTools Common Stock. The Merger
Agreement does not contain any provisions for adjustment of the Exchange Ratio
based on fluctuations in the price of MetaTools Common Stock prior to the
Effective Time. Accordingly, the value of the consideration to be received by
shareholders of Fractal upon the Merger will depend on the market price of the
MetaTools Common Stock at the Effective Time. On February 11, 1997, the last
trading day prior to the announcement of the execution of the Reorganization
Agreement, the closing prices of the MetaTools Common Stock and the Fractal
Common Stock on the Nasdaq National Market were $15.00 and $8.125,
respectively. On April 21, 1997, the closing prices of the MetaTools Common
Stock and the Fractal Common Stock on Nasdaq were $7.25 and $5.00,
respectively. There can be no assurance that the market price of the MetaTools
Common Stock at and after the Effective Time will not be higher or lower than
such price. Stockholders of MetaTools and shareholders of Fractal should
obtain and consider historical and recent trading prices for the MetaTools
Common Stock in determining whether to vote in favor of the Merger and the
Reorganization Agreement. See "--Volatility of MetaTools and Fractal Stock
Prices."
FLUCTUATIONS IN QUARTERLY RESULTS
MetaTools and Fractal have experienced in the past and expect in the future
to continue to experience significant fluctuations in quarterly operating
results. For example, MetaTools announced net revenues for the quarter ended
March 31, 1997 of $6.2 million compared to $5.5 million for the quarter ended
March 31, 1996, and earnings per share for the quarter ended March 31, 1997 of
$0.01 per share compared to $0.06 for the quarter ended March 31, 1996.
Fractal currently estimates that net revenues for the quarter ended March 31,
1997 will be between $6.7 and $7.2 million compared to $9.3 million for the
quarter ended March 31, 1996 and loss per share for the quarter ended March
31, 1997 is expected to be between $(0.05) and $(0.01) cents
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compared to earnings of $0.10 per share for the quarter ended March 31, 1996.
There can be no assurance that the Combined Company's future revenues,
operating results and cash flows will not also vary substantially. MetaTools
and Fractal generally ship products as orders are received and, therefore,
have little or no backlog. As a result, quarterly revenues, operating results
and cash flows of the Combined Company will generally depend on a number of
factors that are difficult to forecast, including, among others, the volume
and timing of and ability to fulfill orders received within a quarter.
Quarterly revenues, operating results and cash flows also may fluctuate due to
factors such as demand for the Combined Company's products; introduction,
localization or enhancement of products by the Combined Company and its
competitors; customer or distributor order deferrals in anticipation of new
versions of products; market acceptance of new products; reviews in the
industry press concerning the products of the Combined Company or its
competitors; changes or anticipated changes in pricing by the Combined Company
or its competitors; the mix of distribution channels through which products
are sold; the mix of products sold; returns from distributors; and general
economic conditions. Revenues, operating results and cash flows from the
Combined Company's products also may be negatively affected by delays in the
introduction or availability of new hardware and software products from third
parties. Both MetaTools and Fractal experience some effect of seasonality in
their respective businesses, as demand for their respective products tends to
increase during the quarter ending December 31 as a result of timing of year-
end holiday season buying. Quarterly revenues, operating results and cash
flows may also be adversely affected by financial and other difficulties of
the Combined Company's third party manufacturers and fulfillment providers.
For example, Fractal's anticipated loss in the quarter ended March 31, 1997 is
due, in part, to a disruption of its manufacturer and fulfillment provider,
which resulted in up to $2 million in customer orders to remain unshipped at
the end of the quarter ended March 31, 1997.
As is common in the software industry, MetaTools' and Fractal's experience
has been that a disproportionately large percentage of shipments in each
fiscal quarter occurs in the latter half of the third month of that quarter.
Because MetaTools' and Fractal's staffing and other operating expenses are
based in part on anticipated net revenues, a substantial portion of which may
not be realized until shortly before the end of each fiscal quarter, delays in
the receipt or shipment of orders, including delays that may be occasioned by
failures of third party product fulfillment firms to produce and ship
products, can cause significant variations in revenues, operating results and
cash flows from quarter to quarter. The Combined Company may also be unable to
adjust spending in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues from the
Combined Company's products in relation to expectations could have an
immediate adverse impact on business, operating results, financial condition
and cash flows of the Combined Company. In addition, the Combined Company
currently intends to increase its operating expenses to fund greater levels of
research and product development, to increase its sales and marketing
operations and to expand distribution channels. To the extent that such
expenses precede, or are not subsequently followed by, increased revenues, the
business, operating results, financial condition and cash flows of the
Combined Company will be materially and adversely affected.
Due to the foregoing factors, operating results for each of Fractal and
MetaTools have in the past fallen below the expectations of securities
analysts and investors, and it is likely that the operating results of the
Combined Company for some future quarters will again fall below the
expectations of securities analysts and investors. In such event, the trading
price of the Combined Company Common Stock could be materially and adversely
affected.
UNCERTAINTY AS TO THE FUTURE OF THE MACINTOSH PLATFORM AND APPLE COMPUTER
Apple Computer, Inc. ("Apple Computer") has recently experienced significant
financial difficulties and losses in market share and acceptance. On April 16,
1997, Apple Computer announced a substantial loss of approximately $708
million for its second fiscal quarter of 1997 due to the purchase of NeXT
Software Inc. and certain restructuring charges including layoffs. This and
previous announcements, and the overall perception of Apple Computer's
prospects and continuing commercial vitality, has and is likely in the future
to negatively impact MetaTools', Fractal's and the Combined Company's
Macintosh-based business. In particular, both Fractal and
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MetaTools have experienced declining momentum in sales of their Macintosh-
based products compared to sales of their Windows-based products and historic
Macintosh sales. The companies attribute this decline in part to uncertainty
regarding the future of Apple Computer and the Macintosh environment.
Although MetaTools and Fractal offer their principal products on both the
Windows and Macintosh platforms, a significant percentage of the sales of
their products to date have been for the Macintosh platform, which
historically has been a popular platform among art and graphics professionals.
During calendar 1996 approximately 37% of MetaTools' and 63% of Fractal's net
revenues were from the sales of product versions for use exclusively on the
Macintosh platform, respectively. To the extent that other operating systems,
such as Windows 95 and Windows NT, continue to become more prevalent among
Fractal's customers, the Combined Company will be required to modify its
development, personnel recruiting, marketing and distribution efforts to more
effectively address these platforms; however, there can be no assurance that
the Combined Company will be able effectively to do so. In addition, on April
15, 1997 MetaTools acquired Specular. During fiscal 1996, approximately 94% of
Specular's net revenues were from the sales of products for use on the
Macintosh platform. See "Recent Developments."
Fractal and Specular each depend upon Altura Software ("Altura") for
software and technical assistance in the porting of software applications from
the Macintosh to other platforms, including Windows 95 and Windows NT. To the
extent that the decline in the Macintosh platform adversely affects Altura and
its ability to provide these services to Fractal and Specular, the Combined
Company's ability to introduce versions of its products on these platforms on
a timely basis would be substantially impaired. See "--Dependence on
Distributors and on Other Third Parties."
PRODUCT TRANSITIONS AND PRODUCT RETURNS
From time to time, the Combined Company and its competitors may announce new
products, product versions, capabilities or technologies that have the
potential to replace or shorten the life cycles of the Combined Company's
existing products. MetaTools and Fractal have each historically experienced
increased returns of a particular product version following the announcement
of a planned release of a new version of that product. Although the companies
provide allowances for anticipated returns, there can be no assurance that
product returns will not exceed such allowances in the future. Each company
has from time to time offered free upgrades to customers who purchased a
product following announcement of a new release and before shipment of the new
version of that product. Such offers can have a negative effect on revenues,
operating results and cash flows. In addition, the Combined Company may offer
price discounts for new products and product releases in order to facilitate
market acceptance, which also negatively impacts revenue, operating results
and cash flows. Moreover, the announcement of currently planned or other new
products may cause customers to delay their purchasing decisions in
anticipation of such products. For example, in early April 1997 Fractal
announced the scheduled availability of Painter 5.0, its principal product,
beginning in the quarter ending June 30, 1997. Any of the foregoing could have
a material adverse effect on the business, operating results, financial
condition and cash flows of the Combined Company.
PRODUCT CONCENTRATION; LACK OF PRODUCT REVENUE DIVERSIFICATION
A substantial percentage of MetaTools' and Fractal's revenues to date have
been derived from a limited number of products, and such products are expected
to continue to account for a substantial majority of the Combined Company's
revenues in the near term. Fractal currently markets six primary products,
Painter, Ray Dream Studio/Designer, Expression, Detailer, Dabbler and Poser.
Revenues from Painter have been the primary source of Fractal's net revenues
since inception and currently are expected to constitute a substantial portion
of Fractal's net revenues for the foreseeable future. Collective sales of
Kai's Power Goo, Kai's Power Tools and Bryce accounted for a substantial
majority of MetaTools' net revenues in 1996. Continued market acceptance of
MetaTools' and Fractal's primary products are therefore critical to the future
success of the Combined Company. Any decline in demand for or failure to
achieve continued market acceptance of such products or any new version of
these products, if any, as a result of competition, technological change,
failure of the Combined Company to timely release new versions of these
products, or otherwise, could have a material adverse effect on the business,
operating results, financial condition and cash flows of the Combined Company.
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RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON AND NEED FOR NEW PRODUCTS AND
PRODUCT VERSIONS; POTENTIAL DELAYS IN PRODUCT RELEASES
The market for visual computing graphics software products, and the personal
computer industry in general, is characterized by rapidly changing technology,
resulting in short product life cycles and strong pricing pressures. As a
result, the success of the Combined Company depends substantially upon its
ability to continue to enhance its existing products, to develop and introduce
in a timely manner new products incorporating technological advances and to
meet increasing customer expectations. To the extent one or more competitors
introduce products that better address customer needs, the Combined Company's
business could be adversely affected. There can be no assurance that the
Combined Company will be successful in developing and marketing enhancements
to its existing products or new products on a timely basis or that any new or
enhanced products will adequately address the changing needs of the
marketplace. Also, negative reviews of the Combined Company's new products or
product versions in industry publications could have a material adverse effect
on product sales.
The Combined Company intends to continue to significantly increase its
research and development expenditures. For example, the RTG and Specular
acquisitions will result in an increase in research and development costs as
compared to prior periods. To the extent such increases are not accompanied by
increased revenues, the Combined Company's business, operating results,
financial condition and cash flows would be materially adversely affected.
MetaTools and Fractal have supplemented their respective research and
development efforts by exclusively licensing products developed by or co-
developed with third parties. There can be no assurance that the Combined
Company will be able to continue to obtain such outside product development
capabilities on terms favorable to the Combined Company or at all. If the
Combined Company were unable to maintain existing development arrangements or
to attract new product development partners, then the Combined Company would,
at a minimum, have to further increase its research and development
expenditures, which could have a material adverse effect on the Combined
Company's business, operating results, financial condition and cash flows. In
addition, there can be no assurance that such additional research and
development expenditures would result in the production of commercially
acceptable products.
MetaTools and Fractal also depend upon internal efforts for the development
of new products and product enhancements. Each of the companies has in the
past experienced delays in the development of new products and product
versions. There can be no assurance that the Combined Company will not
experience further delays in connection with the current product development
or future development activities. Also, software products as complex as those
offered by MetaTools and Fractal may contain undetected errors when first
introduced or as new versions are released. MetaTools and Fractal have in the
past discovered software errors in certain of their new products and
enhancements after the introduction of these products. There can be no
assurance that errors will not be found in new products or releases after
commencement of commercial shipments, resulting in adverse product reviews and
a loss of or delay in market acceptance, which could have a material adverse
effect upon the Combined Company's business, operating results, financial
condition and cash flows.
MetaTools is expending significant resources to develop the in-process
research and development obtained in the acquisition of RTG. Presently,
MetaTools employs 22 people and leases a 6,000 square foot office in
Princeton, New Jersey, dedicated toward these activities. In addition,
MetaTools anticipates capital expenditures in excess of $1 million during 1997
for computer and office equipment and furniture to support these development
activities. The market for visual computing graphics software products, and
the personal computer industry in general, is characterized by rapidly
changing technology. There can be no assurance that the further development of
the in-process research and development of MetaTools will result in
commercially viable products.
DEPENDENCE UPON THIRD PARTY SOFTWARE DEVELOPERS
MetaTools and Fractal use certain products and technologies of both domestic
and foreign third party software developers, including both complete products
offered as extensions of the companies' product lines and technologies used in
the enhancement of internally developed products. For example, Fractal
licenses its
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Expression and Poser products from third party software developers, and
MetaTools licenses Final Effects, Studio Effects and the MetaPhotos collection
of royalty free photographs from third party software developers. Such
products and technologies are obtained from third party providers under
contractual license agreements, which in some cases are for limited time
periods and may be terminated under certain circumstances. There can be no
assurance that the Combined Company will be able to maintain adequate
relationships with any such third party providers (including, in particular,
those Fractal relationships that will be maintained by the Combined Company
after the Merger), that these third party providers will commit adequate
development resources to maintain these products and technologies, or that any
license agreement for a limited time period will be renewed upon termination.
In such circumstances, the Combined Company's inability to obtain or develop
substitute technology could adversely affect the business, results of
operations, financial condition and cash flows of the Combined Company. Unlike
internally developed products, these license arrangements also may limit the
companies' ability to timely create and release product upgrades and to
effectively control the product development process.
LIMITED OPERATING HISTORY; UNCERTAIN PROFITABILITY; FLUCTUATING RATES OF
GROWTH
MetaTools and Fractal have only limited operating histories on which an
evaluation of their businesses and prospects can be based. MetaTools was
incorporated in March 1987 and did not introduce its first internally
developed product until January 1993. Fractal was incorporated in April 1991
and commenced shipment of its initial product in August 1991. MetaTools
experienced losses in each quarter of 1994 and in the first two quarters of
1995. MetaTools also realized a loss in the fourth quarter of 1996 due to a
one-time write-off of acquired in-process technology and other acquisition
costs charge related to the acquisition of RTG. Fractal had experienced
revenue growth in recent fiscal periods but in April announced preliminary net
revenue estimates for its fourth quarter of fiscal 1997 that are less than net
revenues for the comparable period in fiscal 1996. Fractal experienced a loss
in its first quarter of fiscal 1997 as a result of one-time acquisition
charges in connection with the acquisition of Ray Dream, and announced
preliminary estimates of a loss in the fourth quarter of fiscal 1997. There
can be no assurance that the net revenues of the Combined Company will
continue at their current level or will grow, or that the Combined Company
will be able to achieve sustained profitability on a quarterly or annual
basis. MetaTools' and Fractal's historical net revenue growth rates, both
domestically and internationally, have varied significantly between monthly
and quarterly periods. Therefore, recent net revenue comparisons should not be
taken as indicative of the rate of net revenue growth, if any, that can be
expected in the future. See "Recent Developments" "--MetaTools Quarterly
Results" and "--Preliminary Fractal Quarterly Results."
DEPENDENCE ON KEY PERSONNEL AND DIFFICULTY OF IDENTIFYING AND HIRING CERTAIN
PERSONNEL
The future performance of the Combined Company is substantially dependent on
the performance of its executive officers and key employees. The loss of the
services of any of the executive officers or other key employees of MetaTools
or Fractal for any reason could have a material adverse effect on the
business, operating results, financial condition and cash flows of the
Combined Company after the Merger.
The future success of the Combined Company also depends on its continuing
ability to identify, hire, train and retain other highly qualified technical
and managerial personnel. In that regard, MetaTools and Fractal anticipate
that the increased operations of the Combined Company may require the hiring
and retaining of additional senior management. Competition for such personnel
is intense, and MetaTools and Fractal have experienced difficulty in
identifying and hiring qualified engineering personnel. There can be no
assurance that the Combined Company will be able to attract, assimilate or
retain other highly qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary technical and
managerial personnel could have a material adverse effect upon the Combined
Company's business, operating results, financial condition and cash flows.
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HIGHLY COMPETITIVE MARKETS
The markets for graphics software products such as those offered by
MetaTools and Fractal are intensely competitive, subject to rapid change and
characterized by constant demand for new product features, pressure to
accelerate the release of new products and product enhancements and pressure
to reduce prices. A number of companies currently offer products that compete
directly or indirectly with one or more MetaTools or Fractal products.
Competitors of MetaTools and Fractal include, among others, Adobe Systems
Incorporated ("Adobe"), Corel Corporation ("Corel"), Micrografx Incorporated
("Micrografx"), Macromedia, Inc. ("Macromedia"), Silicon Graphics, Inc.
(through its Alias/Wavefront division), Microsoft Corporation ("Microsoft")
and Broderbund Software, Inc. ("Broderbund"). Many of MetaTools' and Fractal's
competitors or potential competitors have significantly greater financial,
managerial, technical, and marketing resources. A variety of potential actions
by any of these competitors, including a reduction of product prices,
increased promotion, announcement or accelerated introduction of new or
enhanced products or features, acquisitions of software applications or
technologies from third parties, product giveaways or product bundling could
have a material adverse effect on the business, operating results, financial
condition and cash flows of the Combined Company. In the event of price
erosion, the Combined Company may be unable to successfully reposition itself
to accommodate these actions.
In addition, the consummation of the Merger may induce more highly
capitalized competitors of both MetaTools and Fractal to either enter the
markets served by the Combined Company's products or to acquire companies that
compete with either MetaTools or Fractal. Potential participants in such
activity could include, among others, Adobe, Autodesk, Inc., Broderbund,
Corel, Macromedia, Microsoft and Silicon Graphics. Such actions could have a
material adverse effect on the Combined Company's business, operating results,
financial condition and cash flows.
Present or future competitors may be able to develop products comparable or
superior to those offered by the Combined Company or adapt more quickly to new
technologies or evolving customer requirements. In addition, developers of
personal computer operating systems, including Microsoft and Apple Computer,
may incorporate 3D functionality into their operating systems, which may be
superior to or incompatible with the products of the Combined Company, thus
adversely affecting the Combined Company's operating results. In particular,
while MetaTools and Fractal currently are developing additional product
enhancements that they believe address customer requirements, there can be no
assurance that the development or introduction of these additional product
enhancements will be successfully completed on a timely basis or that these
product enhancements will achieve market acceptance. Accordingly, there can be
no assurance that the Combined Company will be able to continue to compete
effectively in its markets, that competition will not intensify or that future
competition will not have a material adverse effect on the business, operating
results, financial condition and cash flows of the Combined Company.
DEPENDENCE ON DISTRIBUTORS AND ON OTHER THIRD PARTIES
While each of MetaTools and Fractal derives some revenues from direct sales,
most of their respective revenues are derived from the sale of products
through third parties. The companies sell their products worldwide through
multiple distribution channels, including traditional software distributors,
hardware and software OEMs, international distributors, educational
distributors, VARs, hardware superstores, retail dealers, and direct
marketers. In addition, the companies' products are manufactured by third
party manufacturing and fulfillment providers. Ingram Micro, Inc. ("Ingram")
and Prisma Distributionsgesellschaft GmbH, MetaTools' principal distributors,
accounted for approximately 26% and 1% of net revenues, respectively, for the
fiscal year ended December 31, 1995, and approximately 18% and 15% of net
revenues, respectively, for the fiscal year ended December 31, 1996. For the
fiscal year ended March 31, 1996 and the nine months ended December 31, 1996,
aggregate sales to Fractal's five principal distributors, including Ingram,
represented approximately 46% and 55%, respectively, of Fractal's net
revenues, and sales to Ingram represented approximately 16% and 23%,
respectively, of Fractal's net revenues.
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The Combined Company will be dependent on the continued viability and
financial stability of these third parties. Any termination or significant
disruption of the Combined Company's relationship with any major distributor
or retailer, or a significant reduction in sales volume attributable to either
company's principal resellers could materially and adversely affect the
business, operating results, financial condition and cash flows of the
Combined Company. The distribution channels through which MetaTools' and
Fractal's software products are sold have been characterized by rapid change,
significant margin pressures, consolidation and financial difficulties,
including certain of the companies' current distributors and retailers. In
addition, new distribution channels may develop and there can be no assurance
that the Combined Company will be able to effectively distribute its products
through such channels. The bankruptcy, deterioration in financial condition or
other business difficulties of a distributor or retailer could render the
Combined Company's accounts receivable from such entity uncollectible, which
could result in a material adverse effect on the Combined Company's business,
operating results, financial condition and cash flows. The bankruptcy,
deterioration in financial condition or other business difficulties of a third
party manufacturer and fulfillment provider could lead to delays in fulfilling
and shipping orders for the Combined Company's products, which could result in
a material adverse effect on the Combined Company's business, operating
results, financial condition and cash flows. For example, Fractal's sole
third-party manufacturing and fulfillment provider ceased operations
unexpectedly near the end of the quarter ended March 31, 1997. See "Recent
Developments--Preliminary Fractal Quarterly Results." Retailers of the
companies' products typically have a limited amount of shelf space and
promotional resources for which there is intense competition, and the
companies depend in part upon promotional efforts of distributors in placing
products with retailers. There can be no assurance that distributors and
retailers will continue to purchase the Combined Company's products or provide
the Combined Company's products with adequate levels of shelf space and
promotional support. Failure of distributors or retailers to do so could have
a material adverse effect on the business, operating results, financial
condition and cash flows of the Combined Company. Moreover, the announcement
of the Merger and related uncertainty with respect to the future channels of
distribution of the Combined Company's products, or any failure of the
Combined Company to manage the integration of MetaTools' and Fractal's current
channels of distribution successfully may have a material adverse effect on
its relationships with distributors and their activities in promoting the
Combined Company's products.
An integral element of MetaTools' strategy is to enhance and diversify its
channels of distribution both domestically and internationally. MetaTools is
currently investing, and the Combined Company plans to continue to invest, a
significant portion of its cash and personnel resources to expand its domestic
and international direct sales and marketing force and develop distribution
relationships with additional third-party distributors and resellers. The
Combined Company's ability to achieve significant revenue growth in the future
will depend in large part on its success in recruiting and training sufficient
sales personnel, distributors and resellers.
Certain of MetaTools' products operate as plug-in extensions and
enhancements for specific print, animation, video and multimedia application
platforms, including Adobe's PhotoShop, Illustrator, After Effects and
Premiere; Autodesk's Animator Studio and 3D Studio; Corel's PhotoPaint;
Macromedia's Freehand; Micrografx's Picture Publisher; and other application
platforms. Market acceptance of MetaTools' plug-in products is dependent upon
market acceptance of these third-party application platforms as well as the
willingness of the manufacturers of such platforms to permit their platforms
to be extended and enhanced by plug-in products such as those of MetaTools. A
decline in demand for any such platforms or exclusionary practices by the
manufacturers of such platforms would have a material adverse effect on the
Combined Company's business, operating results, financial condition and cash
flows.
Fractal typically develops many of its applications on the Macintosh
platform and then ports the applications to the Windows operating environment
using proprietary software developed by Altura, a private company affiliated
with one of Fractal's directors and principal shareholders. Fractal also
relies on Altura for certain technical assistance in the porting process and
relies on Altura to develop software and techniques for porting Fractal's
products to other platforms, such as Windows 95 and Windows NT. If the
agreement with Altura were terminated or if Fractal's relationship with Altura
is impaired for any reason, or if Altura should have financial difficulties or
lose key personnel, the Combined Company's ability to introduce versions of
its products on the
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Windows platform on a timely basis would be substantially impaired. In such
event, there can be no assurance that the Combined Company would be able to
attract and assimilate highly qualified technical personnel to port the
Combined Company's software to the Windows platform or any other platforms on
a timely basis. Fractal also relies from time to time on other third parties
for engineering services. Any interruption in the availability or quality of
these services and software from Altura or any other third party for any
reason could have a material adverse effect on the Combined Company's
business, operating results, financial condition and cash flows.
EVOLVING MARKETS FOR COMPUTER GRAPHIC IMAGING AND INTERNET/ONLINE DESIGN TOOLS
The markets for computer graphic imaging and Internet/online design tools
are still emerging. There can be no assurance that the markets for the
Combined Company's existing products will grow, that digital graphic and
Internet/online content developers will adopt the Combined Company's products,
that sufficient distribution resources will be available to market the
Combined Company's products in a timely manner or that such products will be
successful in achieving market acceptance. The demand for computer graphic
imaging and Internet/online design tools is dependent upon a number of
variables, including the installed base of digital graphic and multimedia
capable personal computers, the widespread availability of digital media and
the number and expertise of skilled content producers. If the markets for such
tools fail to grow or grow more slowly than the Combined Company currently
anticipates, or if the Combined Company's products fail to achieve market
acceptance, the Combined Company's business, operating results, financial
condition and cash flows would be materially adversely affected.
INTERNATIONAL OPERATIONS AND EXPANSION
International sales represented approximately 28% of MetaTools' net revenues
in the fiscal year ended December 31, 1995 and approximately 36% of net
revenues in the fiscal year ended December 31, 1996. International sales
represented approximately 44% of Fractal's net revenues in the fiscal year
ended March 31, 1996, and approximately 41% of net revenues in the nine months
ended December 31, 1996. A key component of the Combined Company's strategy is
continued expansion into international markets, primarily Japan and Western
Europe, and the companies currently anticipate that international sales will
represent an increasing portion of the Combined Company's net revenues. The
Combined Company will need to retain effective distributors and hire, retain
and motivate qualified personnel internationally to expand its international
presence. There can be no assurance that the Combined Company will be able to
successfully market, sell, localize and deliver its products in these
international markets.
In addition to the uncertainty as to the Combined Company's ability to
expand its international presence, there are certain risks inherent in doing
business on an international level, such as unexpected changes in regulatory
requirements, problems and delays in collecting accounts receivable, tariffs
and other trade barriers, difficulties in staffing and managing foreign
operations, longer payment cycles, political instability, fluctuations in
currency exchange rates, seasonal reductions in business activity during
summer months in Europe and certain other parts of the world and potentially
adverse tax consequences, any of which could adversely impact the success of
international operations. Sales of products by MetaTools and Fractal currently
are denominated principally in U.S. dollars. Accordingly, any increase in the
value of the U.S. dollar as compared to currencies in the companies' principal
overseas markets would increase the foreign currency-denominated cost of the
companies' products, which may negatively affect the companies' sales in those
markets. The Japanese yen has decreased in value relative to the U.S. dollar
in recent months. In addition to the potential impact on the pricing of the
Combined Company products, this decline will likely lower the rate of dollar
revenue growth, operating results and cash flow. To date, neither company has
engaged in currency hedging transactions to reduce the effect of currency
exchange rate fluctuations. In addition, effective copyright and trade secret
protection may be limited or unavailable under the laws of certain foreign
jurisdictions. There can be no assurance that one or more of such factors will
not have a material adverse effect on the Combined Company's international
operations and, consequently, on the business, operating results, financial
condition and cash flows of the Combined Company.
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MANAGEMENT OF POTENTIAL GROWTH; INTEGRATION OF POTENTIAL ACQUISITIONS
In recent years, both MetaTools and Fractal have experienced expansion of
their operations that have placed significant demands on their respective
administrative, operational and financial resources, which demands are
expected to intensify as a result of the Merger. Additionally, MetaTools'
acquisition of RTG in December 1996 and Fractal's acquisition of Ray Dream in
May 1996 have placed significant demands on their respective administrative,
operational and financial resources, which demands will affect the Combined
Company. In addition, on April 15, 1997, MetaTools acquired Specular. The
acquisition of Specular is subject to certain risks. These risks include (i)
Specular's experience of net losses in each of the 1992, 1993, 1995 and 1996
fiscal years; (ii) the fact that during fiscal 1996 approximately 94% of
Specular's net revenues were from the sales of products for use on the
Macintosh platform and (iii) the potential disruptive impact of the relocation
of the Specular personnel from Amherst, Massachusetts to Princeton, New
Jersey. See "Recent Developments--Specular Acquisition." To manage future
growth, if any, the Combined Company must improve its financial and management
controls, management processes, business and management information systems
and procedures on a timely basis and expand, train and manage its work force.
There can be no assurance that the Combined Company will be able to perform
such actions successfully. The Combined Company intends to continue to invest
in improving its financial systems and controls in connection with higher
levels of operations. In the future, the Combined Company may make additional
acquisitions of complementary companies, products or technologies. Managing
acquired businesses entails numerous operational and financial risks,
including difficulties in assimilating acquired operations, diversion of
management's attention to other business concerns, amortization of acquired
intangible assets and potential loss of key employees or customers of acquired
operations. The Combined Company's success will depend, to a significant
extent, on the ability of its executive officers and other members of senior
management to respond to these challenges effectively. There can be no
assurance that the Combined Company will be able to effectively achieve and
manage any such growth, or that its management, personnel or systems will be
adequate to support the Combined Company's operations. Any such inabilities or
inadequacies would have a material adverse effect on the Combined Company's
business, operating results, financial condition and cash flows.
PROPRIETARY RIGHTS AND LICENSES
Each of MetaTools and Fractal relies on a combination of copyright,
trademark, patent, trade secret laws, employee and third-party nondisclosure
agreements and exclusive contracts to protect its intellectual and proprietary
rights and products. Each of MetaTools and Fractal distributes its software
under shrinkwrap license agreements but generally does not obtain signed
license agreements from its end users. In keeping with software industry
standards, MetaTools and Fractal do not copy protect their software.
Accordingly, it may be possible for unauthorized third parties to copy or
reverse engineer the Combined Company's products or otherwise obtain and use
information that the Combined Company regards as proprietary. Furthermore,
there can be no assurance that competitors will not independently develop
technologies that are substantially equivalent or superior to the technologies
of the Combined Company. Policing unauthorized use of MetaTools' and Fractal's
products is difficult, and while MetaTools and Fractal are unable to determine
the extent to which software piracy of their products exists, software piracy
can be expected to be a persistent problem. In addition, the laws of certain
countries in which MetaTools' and Fractal's products are or may be distributed
do not protect products and the intellectual rights to the same extent as do
laws in the United States.
As the number of software products in the industry increases and the
functionality of these products further overlaps, both MetaTools and Fractal
believe that software increasingly will become the subject of claims that such
software infringes the rights of others. There can be no assurance that third
parties will not assert infringement claims against the Combined Company in
the future or that any such assertions will not result in costly litigation or
require the Combined Company to obtain a license to intellectual property
rights of third parties. There can be no assurance that such licenses will be
available on reasonable terms or at all. Furthermore, both MetaTools and
Fractal license certain software products from other companies for
distribution or inclusion in their own products. There can be no assurance
that upon the expiration of these licenses, such licenses will be available
again on reasonable terms or at all, or that similar products could be
obtained to substitute for these
30
<PAGE>
products. The inability to license such products could have a material adverse
effect on the Combined Company's business, operating results, financial
condition and cash flows.
VOLATILITY OF METATOOLS AND FRACTAL STOCK PRICES
The prices of MetaTools and Fractal Common Stock have fluctuated
significantly in the past and continue to fluctuate significantly. For
example, on February 11, 1997, the last full trading day prior to the public
announcement of the execution of the Reorganization Agreement, the closing
sale prices on Nasdaq were $15.00 per share of MetaTools Common Stock and
$8.125 per share of Fractal Common Stock. Between February 11, 1997 and April
21, 1997, MetaTools Common Stock has closed as high as $14.63 per share and
has closed as low as $6.94 per share, and was $7.25 per share on April 21,
1997, the most recent practicable date prior to the printing of this Joint
Proxy Statement/Prospectus. Furthermore, between February 11, 1997 and
April 21, 1997 the Fractal Common Stock has closed as high as $10.38 per share
and as low as $4.88 per share. On April 21, 1997, the closing price of Fractal
Common stock was $5.00 per share. The managements of MetaTools and Fractal
each believe that such recent fluctuations may have been caused by a number of
factors, including the volatility in technology markets generally, the general
weakness in the domestic retail software market for graphics products, the
weakness in retail software distribution channels, recent announcements by
each company of preliminary financial results below the expectations of
industry analysts, the uncertainty in the future of the Macintosh platform and
volatility in the stock prices of a number of publicly-traded companies in
industries similar to that of MetaTools and Fractal. The companies anticipate
that prices for their respective common stocks prior to consummation of the
proposed merger, including during the periods between stockholder/shareholder
approvals and consummation of the Merger, and the price for the Combined
Company Common Stock will continue to be volatile due to those factors
discussed above, as well as announcements of new products, quarterly
fluctuations, fluctuations in results of operations, continued volatility in
the stock market and other factors. Although fluctuations in the respective
trading prices of Fractal and MetaTools Common Stock will not affect the
Exchange Ratio, any further decreases prior to the consummation of the Merger
will decrease the value of each MetaTools stockholder's, and Fractal
shareholder's investment in the Combined Company. Stockholders of MetaTools
and shareholders of Fractal are encouraged to obtain current quotations as to
the market prices of MetaTools Common Stock and Fractal Common Stock prior to
voting their proxies. See "--Constant Exchange Ratio of Price of MetaTools
Common Stock," "Recent Developments--MetaTools Quarterly Results" and "--
Preliminary Fractal Quarterly Results." In addition, in the quarter ending
June 30, 1997, MetaTools is expected to ship Kai's Photo Soap and Fractal is
expected to ship Painter 5.0. Should either company not meet these expected
shipment dates, it could have a material adverse effect on the Combined
Company's stock price. See "--Fluctuations in Quarterly Results."
SHARES ELIGIBLE FOR FUTURE SALE
Based upon the number of shares of Fractal Common Stock outstanding and the
number of shares issuable upon exercise of outstanding options to purchase
Fractal Common Stock as of April 21, 1997, and assuming that dissenters'
rights are not perfected, an aggregate of approximately 9,021,080 shares of
Combined Company Common Stock will be issued to Fractal shareholders in the
Merger and MetaTools will assume options exercisable for up to approximately
1,353,462 additional shares of Combined Company Common Stock. In general, the
shares issued in the Merger, other than to Fractal affiliates, will be freely
tradeable following the Merger. The shares issued after the Effective Time
upon the exercise of the assumed Fractal options will be registered pursuant
to a registration statement on Form S-8 to be filed by MetaTools within one
(1) business day following the closing of the Merger. In addition, certain
persons who, following the Merger, will be holders of approximately 8,519,000
shares of Combined Common Stock (on an as-converted basis) have agreed that
they will not transfer, sell, exchange, pledge or otherwise dispose of any
Combined Company Common Stock from 30 days prior to the anticipated Effective
Time until the date the Combined Company publicly releases financial results
for a period that includes at least 30 days of combined operations of
MetaTools and Fractal (the "Affiliates Expiration Date"). Immediately after
the Affiliates Expiration Date, these shares will be eligible for sale in the
public market, subject to compliance with Rules 144 and 145 under the
Securities Act. Substantially
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<PAGE>
all shares of MetaTools Common Stock outstanding prior to the Merger are
freely tradeable in the public market, subject in the case of affiliates to
compliance with the volume restrictions of Rule 144. The sale of any currently
outstanding shares of MetaTools Common Stock and any Combined Company Common
Stock issued in connection with the Merger may cause substantial fluctuations
in the price of the Combined Company Common Stock over short time periods.
CONCENTRATION OF STOCK OWNERSHIP
Upon completion of the Merger, the directors and executive officers of the
Combined Company and their respective affiliates will beneficially own
approximately 37.6% of the outstanding Combined Company Common Stock. As a
result, these stockholders will be able to exercise significant influence over
all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying or preventing
a change in control of the Combined Company.
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<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical per share data of
MetaTools and Fractal and combined per share data on an unaudited pro forma
basis after giving effect to the Merger on a pooling of interests basis of
accounting. The information set forth below should be read in conjunction with
the selected historical financial data, and the unaudited pro forma combined
condensed financial information, included elsewhere in this Joint Proxy
Statement/Prospectus or incorporated herein by reference. The pro forma
combined per share data are not necessarily indicative of the operating
results that would have been achieved had the Merger been consummated as of
the beginning of the periods presented and should not be construed as
representative of future operating results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
HISTORICAL--METATOOLS:
Net loss per common share... $ (0.43) $ (0.11) $ (0.78)
Book value per common
share(1)(at period end).... N/A N/A $ 3.84
<CAPTION>
UNAUDITED
-----------------
YEAR ENDED MARCH 31,
------------------------- NINE MONTHS ENDED
1994 1995 1996 DECEMBER 31, 1996
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
HISTORICAL--FRACTAL:
Net income (loss) per common
share...................... $ (0.14) $ 0.17 $ 0.25 $0.16
Book value per common
share(1)(at period end).... N/A N/A $ 2.80 $2.91
<CAPTION>
UNAUDITED
-------------------------
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
EQUIVALENT PRO FORMA COMBINED:
Equivalent pro forma net
income (loss) per Combined
Company common
share(2)(3)................ $ (0.05) $ 0.15 $ 0.28
Equivalent pro forma
combined book value per
Combined Company common
share (at period
end)(2)(4)................. N/A N/A $ 3.67
</TABLE>
- --------
(1) Historical book value per common share is computed by dividing total
stockholders'/shareholders' equity by the number of common shares
(assuming the conversion of all preferred shares into common shares at
each date and at the respective conversion rates) outstanding at the end
of each period. Pro forma combined book value per common share is computed
by dividing pro forma stockholders' equity by the pro forma number of
shares of common stock outstanding.
(2) The unaudited pro forma combined condensed balance sheet as of December
31, 1996 gives effect to the Merger as if it had occurred on December 31,
1996, and combines the audited condensed consolidated balance sheet of
MetaTools and the unaudited condensed consolidated balance sheet of
Fractal as of December 31, 1996. The unaudited pro forma combined
condensed statements of operations for the years ended December 31, 1994
and 1995 combine the audited historical consolidated statements of
operations of MetaTools for each of the fiscal years in the two year
period ended December 31, 1995 with the audited historical consolidated
statements of operations of Fractal for each of the fiscal years in the
two year period ended March 31, 1996, in each case as if the Merger and
Fractal's merger with Ray Dream had occurred at the beginning of the
earliest period presented. The unaudited pro forma combined condensed
statement of operations for the year ended December 31, 1996 combines the
unaudited pro forma combined condensed statement of operations of
MetaTools for the year ended December 31, 1996 with the unaudited
historical consolidated statement of operations of Fractal for the twelve
months ended December 31, 1996, as if the Merger and Fractal's merger with
Ray Dream had occurred on January 1, 1996 and MetaTools' acquisition of
RTG had occurred on February 1, 1996 (the date of incorporation of RTG).
Consequently, Fractal net revenues of approximately $9,307,000, gross
profit of approximately $7,670,000, operating expenses of approximately
$6,033,000, and net income of approximately $1,345,000 for the three
months ended March 31, 1996 have thus been reflected in the unaudited pro
forma combined condensed statements of operations for both the years ended
December 31, 1995 and 1996. In addition, MetaTools and Fractal estimate
that they will incur direct transaction costs of approximately $3.75
million associated with the Merger, consisting of transaction fees for
investment bankers, attorneys, accountants, financial printing,
consultants and other related charges. These nonrecurring costs are
reflected in the unaudited pro forma combined condensed balance sheet at
December 31, 1996 as a reduction to stockholders' equity and an increase
in accrued expenses. These nonrecurring costs, which have not been
reflected in the unaudited pro forma combined condensed statements of
operations, will be charged to operations in the fiscal quarter in which
the Merger is consummated or as incurred.
(3) Pro forma combined net income (loss) per common share is calculated by
dividing the pro forma net income (loss) for the Combined Company by the
sum of the weighted average number of common and common equivalent shares
of Fractal Common Stock multiplied by the exchange ratio of 0.749 shares
of MetaTools Common Stock for each share of Fractal Common Stock, and the
weighted average number of common and common equivalent shares of
MetaTools Common Stock.
(4) Pro forma combined book value per common share is calculated by dividing
the pro forma book value for the Combined Company by the sum of the number
of common shares (assuming the conversion of all preferred shares into
common shares at each date and at the respective conversion rates) of
Fractal Common Stock outstanding at the end of each period multiplied by
the exchange ratio of 0.749 shares of MetaTools Common Stock for each
share of Fractal Common Stock, and the number of common shares (assuming
the conversion of all preferred shares into common shares at each date and
at the respective conversion rates) of MetaTools Common Stock outstanding
at the end of each period.
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<PAGE>
COMPARATIVE MARKET PRICE DATA
MetaTools Common Stock has been traded on Nasdaq since December 12, 1995 and
Fractal Common Stock has been traded on Nasdaq since November 9, 1995. The
table below sets forth, for the calendar quarters indicated, the reported high
and low sale prices of MetaTools Common Stock and Fractal Common Stock as
reported on Nasdaq.
<TABLE>
<CAPTION>
METATOOLS FRACTAL
COMMON STOCK COMMON STOCK
------------- -------------
HIGH LOW HIGH LOW
------ ------ ------ ------
<S> <C> <C> <C> <C>
1995 CALENDAR YEAR
Fourth Quarter................................ $29.00 $18.00 $18.25 $11.25
1996 CALENDAR YEAR
First Quarter................................. 27.25 16.25 15.50 10.00
Second Quarter................................ 41.00 18.00 18.63 11.50
Third Quarter................................. 24.75 10.75 15.00 9.75
Fourth Quarter................................ 27.25 11.50 14.00 9.75
1997 CALENDAR YEAR
First Quarter................................. 19.00 10.00 11.63 6.75
Second Quarter (through April 21, 1997)....... 10.50 6.63 7.75 4.88
</TABLE>
On February 11, 1997, the last full trading day prior to the public
announcement of the execution of the Reorganization Agreement, the closing
sale prices on Nasdaq were $15.00 per share of MetaTools Common Stock and
$8.125 per share of Fractal Common Stock. On April 21, 1997, the most recent
practicable date prior to the printing of this Joint Proxy
Statement/Prospectus, the closing sale prices on Nasdaq were $7.25 per share
of MetaTools Common Stock and $5.00 per share of Fractal Common Stock.
Because the Exchange Ratio is fixed, changes in the market price of
MetaTools Common Stock prior to consummation of the Merger will affect the
dollar value of the Combined Company Common Stock to be received by
shareholders of Fractal in the Merger. MetaTools stockholders and Fractal
shareholders are urged to obtain current market quotations for MetaTools
Common Stock and Fractal Common Stock prior to the MetaTools Annual Meeting
and Fractal Special Meeting.
MetaTools has never paid cash dividends. Prior to Fractal's termination of
its Subchapter S Corporation status on September 30, 1993, Fractal distributed
tax basis Subchapter S Corporation profits to its shareholders. Fractal has
never paid any other dividends. The Combined Company currently intends to
retain earnings for the development of its business and not to distribute
earnings to stockholders as dividends. The declaration and payment by the
Combined Company of any future dividends and the amount thereof will depend
upon the Combined Company's results of operations, financial condition, cash
requirements, future prospects, limitations imposed by credit agreements or
senior securities and other factors deemed relevant by its Board of Directors.
34
<PAGE>
METATOOLS ANNUAL MEETING
DATE, TIME AND PLACE OF METATOOLS ANNUAL MEETING
The MetaTools Annual Meeting will be held at Fess Parker's Red Lion Resort
at 633 E. Cabrillo Boulevard, Santa Barbara, California on May 29, 1997 at
8:00 a.m. local time.
PURPOSE
The purpose of the MetaTools Annual Meeting is to (i) approve the issuance
of shares of MetaTools Common Stock to the shareholders of Fractal pursuant to
the Reorganization Agreement, (ii) approve an amendment to the Certificate to
change the corporate name of MetaTools to "MetaCreations Corporation" subject
to and upon consummation of the Merger, (iii) approve an amendment to the
Certificate to increase the authorized shares of MetaTools Common Stock by 45
million shares to 75 million shares of Common Stock, subject to and upon
consummation of the Merger, (iv) elect six (6) directors to serve until their
successors are duly elected, (v) amend the 1995 Stock Option Plan to add an
additional 1,500,000 shares of MetaTools Common Stock thereto and (vi) ratify
the appointment of Coopers & Lybrand L.L.P. as independent accountants for the
1997 fiscal year.
RECORD DATE AND OUTSTANDING SHARES
Only MetaTools stockholders of record at the close of business on the
MetaTools Record Date are entitled to notice of and to vote at the MetaTools
Annual Meeting. As of the MetaTools Record Date, there were 181 stockholders
of record of MetaTools Common Stock and approximately 13,288,770 shares of
MetaTools Common Stock outstanding.
On or about April 29, 1997, a notice meeting the requirements of Delaware
law is being mailed to all stockholders of record as of the MetaTools Record
Date.
VOTE REQUIRED
Each stockholder is entitled to one vote for each share of MetaTools Common
Stock on all matters at the MetaTools Annual Meeting. Stockholders do not have
the right to cumulative voting in the election of directors.
Pursuant to the Delaware General Corporation Law and the rules of the Nasdaq
National Stock Market, the affirmative vote of a majority of the total votes
present in person or by proxy and entitled to vote is required to approve of
(i) the issuance of MetaTools Common Stock pursuant to the Reorganization
Agreement, (ii) the amendment of the 1995 Stock Plan to add an additional
1,500,000 shares of MetaTools Common Stock thereto, and (iii) the ratification
of Coopers & Lybrand L.L.P. as independent accountants for MetaTools for the
1997 fiscal year. The affirmative vote of a majority of the shares of
MetaTools Common Stock issued and outstanding as of the MetaTools Record Date
is required to approve of (i) the amendment of the Certificate to change the
corporate name of MetaTools to "MetaCreations Corporation", and (ii) the
amendment of the Certificate to increase the number of authorized shares of
MetaTools Common Stock by 45 million shares to 75 million shares, subject to
and upon consummation of the Merger. The six candidates receiving the highest
number of "FOR" votes shall be elected to MetaTools' Board.
Abstentions and broker non-votes will be included for purposes of
determining whether a quorum of shares is present at the Annual Meeting. In
all proposals requiring a majority of the total present in person or by proxy
and entitled to vote, abstentions will be counted in the tabulation of the
voting results and will be treated as votes against a proposal. Broker non-
votes will not be treated as a "entitled to vote" and will have no effect on
the voting result. In all proposals requiring a majority of the shares of
MetaTools Common Stock issued and outstanding as of the MetaTools Record Date,
abstentions and broker non-votes will be treated as votes against the
proposals. In the election of directors, abstentions and broker non-votes will
not be counted as votes for or against any director. A broker non-vote occurs
when a nominee holding shares for a beneficial owner does not vote on a
particular proposal because the nominee does not have discretionary voting
power with respect to that item and has not received instructions from the
beneficial owner.
35
<PAGE>
Each executive officer and director and certain stockholders of MetaTools
(who own an aggregate of 5,933,701 shares of MetaTools Common Stock and
options exercisable within 60 days of the MetaTools Record Date to purchase
560,231 shares of MetaTools Common Stock, representing approximately 44.7% of
the votes entitled to be cast by holders of MetaTools Common Stock issued and
outstanding as of the MetaTools Record Date, and 46.9% of such votes assuming
exercise of all options held by all such persons) have entered into the
MetaTools Voting Agreements with Fractal. Pursuant to the MetaTools Voting
Agreements, the foregoing persons have agreed to vote all shares of MetaTools
Common Stock of which they are the beneficial owners and all shares of
MetaTools Common Stock of which they acquire beneficial ownership in favor of
any matter that could reasonably be expected to facilitate the Merger. In
addition, certain of such persons have granted irrevocable proxies to the
Fractal Board to vote such persons' MetaTools Common Stock in accordance with
the MetaTools Voting Agreements.
PROXIES
Each of the persons named as proxies in the proxy is an officer of
MetaTools. All shares of MetaTools Common Stock that are entitled to vote and
are represented at the MetaTools Annual Meeting either in person or by
properly executed proxies received prior to or at the MetaTools Annual Meeting
and not duly and timely revoked will be voted at the MetaTools Annual Meeting
in accordance with the instructions indicated on such proxies. If no such
instructions are indicated, such proxies will be voted for (i) the issuance of
shares of MetaTools Common Stock pursuant to the Reorganization Agreement,
(ii) the amendments of the Certificate, (iii) the six (6) nominated directors,
(iv) the amendment of the 1995 Stock Option Plan and (v) the ratification of
the appointment of Coopers & Lybrand L.L.P. as the Company's independent
accountants.
The MetaTools Board knows of no other matter to be presented at the
MetaTools Annual Meeting. If any other matters are properly presented for
consideration at the MetaTools Annual Meeting (or any adjournments or
postponements thereof) including, among other things, consideration of a
motion to adjourn or postpone the MetaTools Annual Meeting to another time
and/or place (including, without limitation, for the purpose of soliciting
additional proxies), the persons named in the enclosed forms of proxy and
voting thereunder will have the discretion to vote on such matters in
accordance with their best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of MetaTools at or before the taking of the vote at the
MetaTools Annual Meeting, a written notice of revocation bearing a later date
than the proxy; (ii) duly executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of MetaTools before the taking of
the vote at the MetaTools Annual Meeting; or (iii) attending the MetaTools
Annual Meeting and voting in person (although attendance at the MetaTools
Annual Meeting will not in and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent so as to
be delivered to MetaTools at 6303 Carpinteria Avenue, Carpinteria, California
93013, Attention: Secretary, or hand-delivered to the Secretary of MetaTools,
in each case at or before the taking of the vote at the MetaTools Annual
Meeting.
A representative of Coopers & Lybrand L.L.P. will be present at the
MetaTools Annual Meeting and will have the opportunity to make a statement, if
such person desires to do so, and to respond to appropriate questions.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of MetaTools stockholders will be borne by
MetaTools. In addition, MetaTools may reimburse brokerage firms and other
persons representing beneficial owners of shares for their expenses in
forwarding solicitation materials to such beneficial owners. Proxies may also
be solicited by certain MetaTools directors, officers and regular employees
personally or by telephone, telegram, letter or facsimile. Such persons will
not receive additional compensation, but may be reimbursed for reasonable out-
of-pocket expenses incurred in connection with such solicitation. In addition,
MetaTools has retained Corporate Investor Communications, Inc. to assist in
the solicitation of proxies from brokers, nominees, institutions and
individuals at an estimated fee of not more than $5,000 plus reimbursement of
reasonable expenses. Arrangements will also be made with custodians, nominees
and fiduciaries for forwarding of proxy solicitation materials to beneficial
owners of shares held of record by such custodians, nominees and fiduciaries,
and MetaTools will reimburse such custodians, nominees and fiduciaries for
reasonable expenses incurred in connection therewith.
36
<PAGE>
FRACTAL SPECIAL MEETING
DATE, TIME AND PLACE OF FRACTAL SPECIAL MEETING
The Fractal Special Meeting will be held at 5550 Scotts Valley Drive, Scotts
Valley, California 95066, on May 29, 1997 at 8:00 a.m. local time.
PURPOSE
The purpose of the Fractal Special Meeting is to consider and vote upon the
approval and adoption of the Reorganization Agreement and such other matters
as may properly be brought before the Fractal Special Meeting or any
postponements or adjournments thereof. Fractal does not intend to bring any
business other than the approval and adoption of the Reorganization Agreement
before the Fractal Special Meeting or any postponements or adjournments
thereof.
RECORD DATE AND OUTSTANDING SHARES
Only shareholders of record of Fractal Common Stock at the close of business
on the Fractal Record Date are entitled to notice of, and to vote at, the
Fractal Special Meeting. As of the Fractal Record Date, there were 221
shareholders of record and approximately 12,034,126 shares of Fractal Common
Stock outstanding.
On or about April 29, 1997, a notice meeting the requirements of California
law is being mailed to all shareholders of record as of the Fractal Record
Date.
VOTE REQUIRED
Pursuant to the CCC and the Fractal Amended and Restated Articles of
Incorporation, the affirmative vote of the holders of a majority of the
Fractal Common Stock outstanding as of the Fractal Record Date is required to
approve and adopt the Reorganization Agreement. Each shareholder of record of
Fractal Common Stock on the Fractal Record Date will be entitled to cast one
vote per share on each matter to be acted upon at the Fractal Special Meeting.
The representation, in person or by proxy, of at least a majority of the
outstanding shares of Fractal Common Stock entitled to vote at the Fractal
Special Meeting is necessary to constitute a quorum for the transaction of
business. The effect of an abstention is the same as that of a vote "against"
the proposal.
Votes cast by proxy or in person at the Fractal Special Meeting will be
tabulated to determine whether or not a quorum is present. Abstentions and
broker non-votes will be treated as shares that are present and entitled to
vote for purposes of determining the presence of a quorum, and such
abstentions and broker non-votes will have the effect of a vote against the
adoption and approval of the Reorganization Agreement.
Each executive officer and director who owns shares of Fractal Common Stock
and certain shareholders of Fractal (who own an aggregate of 3,451,306 shares
of Fractal Common Stock and options exercisable within 60 days of the Fractal
Record Date to purchase 579,078 shares of Fractal Common Stock, representing
approximately 28.7% of the votes entitled to be cast by holders of Fractal
Common Stock issued and outstanding as of the Fractal Record Date, and 32.0%
of such votes assuming exercise of all options held by all such persons) have
entered into the Fractal Voting Agreements with MetaTools. Pursuant to the
Fractal Voting Agreements, the foregoing persons have agreed to vote all
shares of Fractal Common Stock of which they are the beneficial owner and all
shares of Fractal Common Stock of which they acquire beneficial ownership in
favor of any matter that could reasonably be expected to facilitate the
Merger. In addition, certain of such persons have granted irrevocable proxies
to the MetaTools Board to vote such persons' Fractal Common Stock in
accordance with the Fractal Voting Agreements.
37
<PAGE>
PROXIES
Each of the persons named as proxies in the proxy is an officer of Fractal.
All shares of Fractal Common Stock that are entitled to vote and are
represented at the Fractal Special Meeting either in person or by properly
executed proxies received prior to or at the Fractal Special Meeting and not
duly and timely revoked will be voted at the Fractal Special Meeting in
accordance with the instructions indicated on such proxies. If no such
instructions are indicated, such proxies will be voted for the approval of the
Reorganization Agreement.
The Fractal Board knows of no other matter to be presented at the Fractal
Special Meeting. If any other matter upon which a vote may properly be taken
should be presented at the Fractal Special Meeting (or any postponements or
adjournments thereof) including, among other things, consideration of a motion
to adjourn or postpone the Fractal Special Meeting to another time and/or
place (including, without limitation, for the purpose of soliciting additional
proxies), shares represented by all proxies received by the Fractal Board will
be voted with respect thereto in accordance with the judgment of the persons
named as proxies in the proxies.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of Fractal at or before the taking of the vote at the
Fractal Special Meeting, a written notice of revocation bearing a later date
than the proxy; (ii) duly executing a later-dated proxy relating to the same
shares and delivering it to the Secretary of Fractal before the taking of the
vote at the Fractal Special Meeting; or (iii) attending the Fractal Special
Meeting and voting in person (although attendance at the Fractal Special
Meeting will not in and of itself constitute a revocation of a proxy). Any
written notice of revocation or subsequent proxy should be sent so as to be
delivered to Fractal at 5550 Scotts Valley Drive, Scotts Valley, California
95066, Attention: Secretary, or hand-delivered to the Secretary of Fractal, in
each case at or before the taking of the vote at the Fractal Special Meeting.
SOLICITATION OF PROXIES; EXPENSES
The cost of the solicitation of Fractal shareholders will be borne by
Fractal. In addition, Fractal may reimburse brokerage firms and other persons
representing beneficial owners of shares for their expenses in forwarding
solicitation materials to such beneficial owners. Proxies may also be
solicited by certain Fractal directors, officers and regular employees
personally or by telephone, telegram, letter or facsimile. Such persons will
not receive additional compensation, but may be reimbursed for reasonable out-
of-pocket expenses incurred in connection with such solicitation. In addition,
Fractal has retained Skinner & Co., Inc. to assist in the solicitation of
proxies from brokers, nominees, institutions and individuals at an estimated
fee of not more than $5,000 plus reimbursement of reasonable expenses.
Arrangements will also be made with custodians, nominees and fiduciaries for
forwarding of proxy solicitation materials to beneficial owners of shares held
of record by such custodians, nominees and fiduciaries, and Fractal will
reimburse such custodians, nominees and fiduciaries for reasonable expenses
incurred in connection therewith.
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THE MERGER AND RELATED TRANSACTIONS
NOTE: THIS IS PROPOSAL NO. 1 TO BE CONSIDERED AND VOTED ON BY METATOOLS
STOCKHOLDERS AND IS THE ONLY PROPOSAL TO BE CONSIDERED AND VOTED ON BY FRACTAL
SHAREHOLDERS.
THE FOLLOWING DISCUSSION SUMMARIZES THE PROPOSED MERGER AND RELATED
TRANSACTIONS. THE FOLLOWING IS NOT, HOWEVER, A COMPLETE STATEMENT OF ALL
PROVISIONS OF THE REORGANIZATION AGREEMENT AND RELATED AGREEMENTS. DETAILED
TERMS OF AND CONDITIONS TO THE MERGER AND CERTAIN RELATED TRANSACTIONS ARE
CONTAINED IN THE REORGANIZATION AGREEMENT, A CONFORMED COPY OF WHICH IS
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX A. REFERENCE IS
ALSO MADE TO THE METATOOLS OPTION AGREEMENT AND THE FRACTAL OPTION AGREEMENT
ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS ANNEX B-1 AND B-2,
RESPECTIVELY, TO THE FORM OF METATOOLS VOTING AGREEMENT AND THE FORM OF
FRACTAL VOTING AGREEMENT ATTACHED TO THIS JOINT PROXY STATEMENT/PROSPECTUS AS
ANNEX D-1 AND D-2, RESPECTIVELY, AND TO THE OTHER ANNEXES HERETO. STATEMENTS
MADE IN THIS JOINT PROXY STATEMENT/PROSPECTUS WITH RESPECT TO THE TERMS OF THE
MERGER AND SUCH RELATED TRANSACTIONS ARE QUALIFIED IN THEIR RESPECTIVE
ENTIRETIES BY REFERENCE TO THE MORE DETAILED INFORMATION SET FORTH IN THE
REORGANIZATION AGREEMENT AND THE OTHER ANNEXES HERETO. THIS SECTION CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-
LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH
IN RISK FACTORS AND ELSEWHERE HEREIN OR INCORPORATED BY REFERENCE.
JOINT REASONS FOR THE MERGER
The Boards of Directors of MetaTools and Fractal have determined that the
Combined Company would have the potential to realize both improved long-term
operating and financial results and a stronger competitive position. MetaTools
and Fractal believe that by merging, the Combined Company will be able to
offer customers a broader range of software tools for the creation, editing
and manipulation of computer graphic images and digital art. In addition,
increased efficiencies in the operations in the Combined Company may permit
additional investment in research and development that neither company had the
resources to address independently.
Each of the MetaTools Board and the Fractal Board has identified additional
potential mutual benefits of the Merger for the Combined Company. These
potential benefits include principally the following:
. The broadening and integration of the companies' product lines may
enhance the Combined Company's ability to increase market penetration by
allowing the Combined Company to compete more effectively.
. The creation of a larger field sales and service organization, the
expansion of the companies' dedicated sales teams, a higher market
profile and greater financial strength may present greater opportunities
for marketing the products of the Combined Company.
. Combined technological resources may allow the Combined Company to
compete more effectively against competitors by providing the Combined
Company with enhanced ability to develop new products and greater
functionality for existing products.
. The combined experience, financial resources, size and breadth of product
offerings of the Combined Company may allow the Combined Company to
respond more quickly and effectively to technological change, increased
competition and market demands in an industry experiencing rapid
innovation and evolution.
Between the announcement of the proposed Merger on February 11, 1997 and
April 21, 1997, MetaTools Common Stock has closed as high as $14.63 per share
and has closed as low as $6.94 per share, and was $7.25 per share on April 21,
1997, the most recent practicable date prior to the printing of this Joint
Proxy Statement/Prospectus. Furthermore, between February 11, 1997 and April
21, 1997 the Fractal Common Stock has closed as high as $10.38 per share and
as low as $4.88 per share. On April 21, 1997, the closing price of Fractal
Common stock was $5.00 per share. Each of the MetaTools and Fractal Boards
noted that the Merger involves significant potential synergies and strategic
benefits that are long-term in nature and that are not likely to be affected
by short-term fluctuations in the trading prices of the companies' common
stock. Nonetheless, the MetaTools Board met on April 8 and April 18, 1997 and
the Fractal Board met on April 5, 6 and 17, 1997 to
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evaluate the impact, if any, of the recent declines in the prices of MetaTools
and Fractal Common Stock on their respective recommendations of approval of
the proposed Merger. At such meetings, the MetaTools and Fractal Boards each
reviewed the recent financial results of the two companies, the recent trading
prices for the MetaTools Common Stock and the Fractal Common Stock, as well as
the recent volatility of technology companies generally, the potential
synergies between the two companies and the reasons described in the
immediately preceding paragraph. In addition, the MetaTools Board reviewed the
reasons set forth under "MetaTools' Reasons For the Merger" and the Alex.
Brown fairness opinion, dated February 11, 1997, as to the fairness from a
financial point of view of the Exchange Ratio to MetaTools and its
stockholders, and the Fractal Board reviewed the reasons set forth under "--
Fractal's Reasons For the Merger" and the Unterberg Harris fairness opinion.
In addition, the Boards of MetaTools and Fractal each considered the effect
of the recent declines in trading prices on the analyses of its respective
financial advisor as to the fairness from a financial point of view of the
Exchange Ratio. The MetaTools Board noted that the Alex. Brown opinion is
based on a number of analyses, as summarized under "--Opinion of MetaTools'
Financial Advisor," of which the contribution analysis and pro forma combined
analysis are not dependent upon the trading prices of the MetaTools and
Fractal Common Stock. The Fractal Board noted that the Unterberg Harris
opinion is based on a number of analyses, as summarized under "--Opinion of
Fractal's Financial Advisor," of which the pro forma analysis is not dependent
upon the trading prices of the MetaTools and Fractal Common Stock. The Boards
of MetaTools and Fractal also continued to find meaningful certain other
analyses that were based in part on the historical trading prices of the
MetaTools and Fractal Shares prior to the announcement of the Merger, insofar
as the historical trading prices prior to the announcement represent the most
recent market valuation of the companies without giving effect to the pending
Merger. The Boards of MetaTools and Fractal noted that, since the announcement
of the Merger, the trading prices of each of the company's stock have
reflected, among other things, the Exchange Ratio and the combined valuation
of the companies. Each Board also noted that the preliminary financial results
for both companies for the quarter ended March 31, 1997 were below
expectations of industry analysts, that each of the companies participates in
the graphics software market and that each of the companies is likely to have
been affected by similar factors and business fundamentals.
After careful reconsideration of all of the foregoing factors, the MetaTools
Board continues to believe that the Merger is in the best interests of the
MetaTools stockholders and continues to unanimously recommend, as of the date
of this Joint Proxy Statement/Prospectus, that the MetaTools stockholders vote
for each of the proposals to be voted on at the MetaTools Annual Meeting.
After careful reconsideration of all of the foregoing factors, the Fractal
Board continues to believe that the Merger is in the best interests of the
Fractal shareholders and continues to unanimously recommend, as of the date of
this Joint Proxy Statement/Prospectus, that the Fractal Shareholders vote for
the approval and adoption of the Reorganization Agreement.
MetaTools and Fractal each has identified additional reasons for the Merger.
Nevertheless, each Board of Directors has recognized that the potential
benefits of the Merger may not be realized. See "Risk Factors--Integration of
Operations; Adverse Effect on Financial Results."
METATOOLS' REASONS FOR THE MERGER
In addition to the anticipated joint benefits described above, the MetaTools
Board believes that the following are additional reasons the Merger will be
beneficial to MetaTools:
. Given the complementary nature of the product lines of MetaTools and
Fractal, the Merger will enhance the opportunity for the potential
realization of MetaTools' strategic objective of achieving greater scale
and presence in its targeted markets.
. Combining with Fractal would provide an opportunity for expanded
distribution of MetaTools' products to current Fractal customers.
. The MetaTools stockholders would have the opportunity to participate in
the potential for growth of the Combined Company after the Merger.
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The MetaTools Board considered a number of factors relating to the Merger,
including, but not limited to, the following: (1) historical information
concerning MetaTools' and Fractal's respective businesses, prospects,
financial performance and condition, operations, technology, management and
competitive position, including public reports concerning results of
operations during the most recent fiscal year and fiscal quarter for each
company filed with the SEC; (2) the financial condition, results of operations
and businesses of MetaTools and Fractal before and after giving effect to the
Merger; (3) current financial market conditions and historical market prices,
volatility and trading information with respect to the Common Stock of
MetaTools and the Common Stock of Fractal; (4) the relationship of the market
value of the Fractal Common Stock to the MetaTools Common Stock to be received
by the shareholders of Fractal in connection with the Merger and a comparison
of that relationship to those in comparable mergers; (5) the belief that the
terms of the Reorganization Agreement, including the parties' representations,
warranties and covenants, and the conditions to their respective obligations,
are reasonable; (6) the prospects of MetaTools as an independent company; (7)
the potential for other third parties to enter into strategic relationships
with or to acquire MetaTools or Fractal; (8) the results of analyses set forth
under the caption "--Opinion of MetaTools' Financial Advisor" as presented by
Alex. Brown & Sons Incorporated ("Alex. Brown") in Board presentations,
including Alex. Brown's opinion that the Exchange Ratio was fair from a
financial point of view to MetaTools and its stockholders; (9) the impact of
the Merger on MetaTools' customers and employees; and (10) reports from
management, legal and financial advisors as to the results of their due
diligence investigation of Fractal.
The MetaTools Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (1) the risk that the potential benefits sought in the Merger
might not be fully realized if at all; (2) the possibility that the Merger
might not be consummated; (3) the effect of public announcement of the Merger
on (a) MetaTools' sales and operating results, (b) MetaTools' ability to
attract and retain key management, marketing and technical personnel and (c)
progress of certain development projects; (4) the potential dilutive effect of
the issuance of MetaTools Common Stock in the Merger; (5) the substantial
charges to be incurred, primarily in the quarters ending June 30, 1997 and
September 30, 1997, in connection with the Merger, including costs of
integrating the businesses and transaction expenses arising from the Merger;
(6) the risk that despite the efforts of the Combined Company, key technical
and management personnel might not remain employed by the Combined Company;
and (7) the difficulty of managing separate operations at different geographic
locations.
The MetaTools Board believes that (1) given the complementary nature of the
product lines of MetaTools and Fractal, the Merger will enhance the
opportunity for the potential realization of MetaTools' strategic objective of
achieving greater scale and presence in the visual computing software market;
(2) the Merger will provide an opportunity for expanded distribution of
MetaTools' products to current Fractal customers; (3) MetaTools' stockholders
would have the opportunity to participate in the potential for growth of the
Combined Company after the Merger; (4) the combined experience, financial
resources, size and breadth of product offerings of the Combined Company will
allow the Combined Company to respond more quickly and effectively to
technological change, increased competition and market demands in an industry
experiencing rapid innovation and change; (5) the combination of Fractal's
products with MetaTools' products will allow the Combined Company to offer a
more comprehensive and integrated set of software solutions to its customers;
(6) the creation of a larger customer base, a higher market profile and
greater financial strength may present greater opportunities for marketing the
products of the Combined Company; (7) the structure of the Merger can provide
significant advantages in increasing the opportunity for (a) effectively
utilizing the skills and resources of the companies' respective management
teams and (b) matching the respective "corporate cultures" of the two
companies while maintaining some of the most important aspects of each
culture; and (8) combined technological resources may allow the Combined
Company to compete more effectively against larger competitors by providing
the Combined Company with enhanced ability to develop new products and greater
functionality for existing products.
In view of the wide variety of factors considered by the MetaTools Board, it
did not find it practicable to quantify, or otherwise attempt to assign
relative weights to, the specific factors considered in making its
determination. Consequently, the MetaTools Board did not quantify the
assumptions and results of its analysis in making its determination that the
Merger is fair to, and in the best interests of, MetaTools and its
stockholders.
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THE METATOOLS BOARD UNANIMOUSLY RECOMMENDS THAT METATOOLS STOCKHOLDERS VOTE
"FOR" THE ISSUANCE OF METATOOLS COMMON STOCK IN CONNECTION WITH THE MERGER.
FRACTAL'S REASONS FOR THE MERGER
The Fractal Board has determined that the terms of the Reorganization
Agreement and the transactions contemplated thereby are fair to, and in the
best interests of, Fractal and its shareholders. Accordingly, the Fractal
Board has unanimously approved the Reorganization Agreement and unanimously
recommends that the shareholders of Fractal vote FOR approval and adoption of
the Reorganization Agreement. In reaching its determination, the Fractal Board
consulted with Fractal's management, as well as its legal counsel and
financial advisor. In addition to the anticipated joint benefits described
above, the Fractal Board considered the following benefits:
. The Combined Company will be better positioned than Fractal alone to
adapt to, and benefit from, rapidly changing technologies and to develop
products based on such technologies.
. The Merger affords Fractal shareholders the opportunity to reduce their
exposure to the difficulties in competing against larger companies with
more diversified product lines and greater financial resources than
Fractal.
. The Exchange Ratio represents a significant premium over the trading
prices of Fractal Common Stock in the period prior to the announcement of
the Merger.
. Combining with MetaTools would provide an opportunity for Fractal's
products to reach a broader market by leveraging MetaTools' existing
customer base and distribution channels.
. The management team of the Combined Company will have greater experience
and depth than that of Fractal alone.
The Fractal Board considered a number of factors relating to the Merger,
including, but not limited to, the following: (1) historical information
concerning MetaTools' and Fractal's respective businesses, prospects,
financial performance and condition, operations, technology, management and
competitive position, including public reports concerning results of
operations during the most recent fiscal year and fiscal quarter for each
company filed with the SEC; (2) the financial condition, results of operations
and businesses of MetaTools and Fractal before and after giving effect to the
Merger; (3) current financial market conditions and historical market prices,
volatility and trading information with respect to the MetaTools Common Stock
and Fractal Common Stock; (4) the relationship of the market value of the
Fractal Common Stock to the MetaTools Common Stock to be received by the
shareholders of Fractal in connection with the Merger and a comparison of that
relationship to those in comparable mergers; (5) the belief that the terms of
the Reorganization Agreement, including the parties' representations,
warranties and covenants, and the conditions to their respective obligations,
are reasonable; (6) the prospects of Fractal as an independent company; (7)
the potential for other third parties to enter into strategic relationships
with or to acquire MetaTools or Fractal; (8) detailed financial analysis and
pro forma and other information with respect to MetaTools and Fractal
presented by Unterberg Harris in Board presentations, including Unterberg
Harris' opinion that the consideration to be paid pursuant to the
Reorganization Agreement was fair from a financial point of view to
shareholders of Fractal; (9) the impact of the Merger on Fractal's customers
and employees; and (10) reports from management, legal and financial advisors
as to the results of their due diligence investigation of MetaTools.
The Fractal Board also identified and considered a variety of potentially
negative factors in its deliberations concerning the Merger, including, but
not limited to: (1) the risk that the potential benefits sought in the Merger
might not be fully realized, if at all; (2) the possibility that the Merger
might not be consummated; (3) the risk that despite the efforts of the
Combined Company, key technical and management personnel might not remain
employed by the Combined Company; (4) the effect of public announcement of the
Merger on (a) Fractal's sales and operating results, (b) Fractal's
relationships with third parties, including developers and distributors and
(c) Fractal's ability to attract and retain key management, marketing and
technical personnel; and (5) the potential dilutive effect of the Merger on
Fractal shareholders.
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In view of the wide variety of factors considered by the Fractal Board, it
did not find it practicable to quantify, or otherwise attempt to assign
relative weights to, the specific factors considered in making its
determination. Consequently, the Fractal Board did not quantify the
assumptions and results of its analysis in making its determination that the
Merger is fair to, and in the best interests of, Fractal and its shareholders.
MATERIAL CONTACTS AND BOARD DELIBERATIONS
On October 3, 1996, John J. Wilczak, Chairman of the Board, and President
and Chief Executive Officer of MetaTools, and Mark Zimmer, then Chairman of
the Board and Chief Executive Officer of Fractal, had a telephone conversation
in which Mr. Wilczak inquired as to whether Fractal would be interested in
discussing whether a merger of MetaTools and Fractal would be to the
companies' mutual benefit.
On October 4, 1996, Messrs. Wilczak and Zimmer and other representatives of
MetaTools and Fractal met in San Jose, California to discuss potential product
and market benefits of a combination of the two companies.
On October 23, 1996, at a MetaTools Board meeting, Mr. Wilczak updated the
Board on preliminary discussions with Fractal.
On October 28, 1996, at its regularly scheduled board meeting, the Fractal
Board received a report from Fractal management on the preliminary discussions
with MetaTools. Also on October 28, 1996, representatives of MetaTools and
Fractal, and their respective investment bankers, met in Santa Cruz,
California to continue to discuss potential product and market benefits of a
combination of the two companies.
On November 6, 1996, representatives of MetaTools and Fractal, and their
respective investment bankers, met in Santa Cruz, California to continue to
discuss potential product and market benefits of a combination of the two
companies, as well as the benefits of combining the companies' respective
creative development teams.
On November 10, 1996, Mr. Wilczak and Eric Hautemont, then President of
Fractal, met in New York to review the status of discussions between the
parties and agreed that such discussions should continue.
On November 15, 1996, a group of representatives of MetaTools and Fractal
met in Montecito, California to discuss further the potential combination of
the two companies, including organizational issues.
On November 18, 1996, the Fractal Board convened to receive a report on
discussions with MetaTools.
On November 22, 1996, the Fractal Board convened to discuss a number of
business issues, including the status of discussions with MetaTools.
On November 26, 1996, representatives of MetaTools and Fractal, and their
respective investment bankers, met at Venture Law Group, legal counsel to
Fractal. At this meeting, MetaTools and Fractal signed a nondisclosure
agreement, reviewed historical financial information for each company and
discussed the outlook for each company's December 31, 1996 quarter.
On December 3, 1996, representatives of MetaTools and Fractal met at the
home of Kai Krause, Chief Design Officer of MetaTools, in Santa Barbara,
California to discuss product development process synergies and market
opportunities for the combined companies.
On December 4, 1996, the Fractal Board convened to receive a report on
discussions with MetaTools, including a report on the meeting on December 3,
1996.
On December 16, 1996, representatives of MetaTools and Fractal again met in
Santa Barbara, California to discuss synergies and market opportunities.
On December 17, 1996, the Fractal Board met to receive an update on the
status of discussions with MetaTools.
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On December 20, 1996, representatives of MetaTools, Fractal and Unterberg,
investment banker to Fractal, met to discuss the status of MetaTools'
acquisition of RTG.
On December 23, 1996, MetaTools entered into an agreement with the
stockholders of RTG whereby MetaTools would acquire all outstanding shares of
RTG. On December 31, 1996, the acquisition of such shares was completed, and
RTG became a wholly-owned subsidiary of MetaTools. Also on December 23, 1996,
the Fractal Board met to discuss the status of discussions with MetaTools.
On January 8, 1997, representatives of MetaTools and Fractal met to discuss
a demonstration of the technology acquired by MetaTools in the recently
completed acquisition of RTG.
On January 9, 1997, representatives of MetaTools and Fractal, and their
respective investment bankers, met at the offices of Alex. Brown, investment
banker to MetaTools, in San Francisco, California. At this meeting, the
parties discussed their respective results for the quarter ended December 31,
1996 and the acquisition of RTG. The parties also confirmed their desire to
continue discussions of a potential combination of the two companies.
On January 15, 1997, the MetaTools Board met by telephone to discuss the
potential benefits of a combination of MetaTools and Fractal.
On January 21, 1997, the Fractal Board met by telephone to discuss the
status of discussion with MetaTools.
On January 27, 1997, the MetaTools Board met by telephone to discuss the
potential benefits of a combination of MetaTools and Fractal. Also on January,
27, 1997, representatives of MetaTools and Fractal, and their respective
investment bankers, met at the offices of Alex. Brown in San Francisco,
California. At this meeting, the parties further discussed their respective
results for the quarter ended December 31, 1996.
On January 30, 1996, at its regularly scheduled board meeting, the Fractal
Board received a report on developments in the discussions with MetaTools and
the results of the recent meetings between the companies' officers.
On February 5, 1997, at its regularly scheduled board meeting, the MetaTools
Board discussed the potential benefits of a combination of MetaTools and
Fractal. Representatives of Alex. Brown and legal counsel to MetaTools made
presentations to the MetaTools Board regarding the proposed business
combination. The MetaTools Board then directed MetaTools' management to
continue negotiation of a definitive agreement and plan of reorganization for
the transaction.
On February 5, 1997, the Fractal Board met by telephone to discuss the
potential combination with MetaTools.
On February 7, 1997, representatives of MetaTools and Fractal, and their
respective legal counsels, met at Alex. Brown in San Francisco. At this
meeting, the price range for the potential merger of MetaTools and Fractal was
discussed. An exchange ratio of 0.749 shares of MetaTools Common Stock for
each share of Fractal Common Stock was agreed upon and a post-merger ownership
of the Combined Company whereby current holders of MetaTools Common Stock
would own approximately 60.5% of the Combined Company and current holders of
Fractal Common Stock would own approximately 39.5% of the Combined Company, in
each case, subject to approval by the MetaTools Board and the Fractal Board
and the negotiation of a definitive agreement and plan of reorganization. Such
Exchange Ratio and the respective percentage ownership of the Combined Company
were agreed upon after arms-length negotiations between representatives of the
two companies and were based upon a variety of factors, including both
historical and estimated, future financial performance of the two companies,
the relative strength of each company's balance sheet, a comparison of the two
companies' businesses, technology, research and development, products,
management and prospects, especially in the long- term, potential for future
growth, traditional financial contribution analyses, and other relevant
analyses.
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On February 8, 1997, the Fractal Board met by telephone to discuss the
results of the February 7, 1997 meeting and discuss the proposed exchange
ratio, as well as other terms and conditions relating to the potential
combination.
On February 9, 1997, a special meeting of the MetaTools Board was held to
review the status of the merger negotiations. Open negotiating points were
summarized and included, (i) various terms of the Reorganization Agreement,
including the termination events, breakup fees and closing conditions, (ii)
the structure of the proposed merger and (iii) a management retention plan.
MetaTools' management reported on the results of its due diligence
investigation and responded to questions regarding various aspects of the
Merger and impact on MetaTools. Representatives of Alex. Brown discussed
certain financial aspects of the Merger. In addition, there was a discussion
regarding the potential market reaction to the proposed combination. At that
time, the MetaTools Board unanimously agreed that management should continue
to proceed with negotiation and investigation of the proposed combination.
On February 9 and 10, 1997, MetaTools and Fractal, together with their
respective legal advisors continued to negotiate the terms of definitive
agreements relating to the transaction, including the terms of the proposed
stock option agreements, the proposed voting agreements, the proposed
noncompetition agreements, the provisions relating to the termination of the
Reorganization Agreement, the conditions upon which any breakup fees would be
payable and the amount of such fees, and the representations, warranties and
covenants to be made. Final due diligence by MetaTools of Fractal, and by
Fractal of MetaTools, also took place. MetaTools and Fractal also signed an
additional nondisclosure agreement.
On February 11, 1997, at a specially scheduled meeting of the MetaTools
Board, (i) the management of MetaTools made further presentations to the
MetaTools Board regarding the risks and benefits of the Merger, (ii)
MetaTools' legal advisors reviewed proposed definitive terms of the
Reorganization Agreement and related documents, including the Stock Option
Agreements, the Affiliates Agreements, the Voting Agreements and the
Noncompetition Agreements, (iii) Alex. Brown made a presentation to the
MetaTools Board regarding the fairness of the Exchange Ratio, from a financial
point of view to MetaTools and its stockholders, and delivered its written
opinion to such effect (a copy of this opinion is attached hereto as Annex F)
and (iv) the MetaTools Board approved the Reorganization Agreement and related
agreements. See "--Opinion of MetaTools' Financial Advisor" and Annex F
attached hereto.
On February 11, 1997, the Fractal Board convened to consider and vote upon
the proposed merger and related transactions. At this specially scheduled
meeting, (i) management of Fractal reported that agreement had been reached
with respect to the Exchange Ratio, (ii) management responded to questions
regarding various aspects of the proposed merger, (iii) Fractal's legal
advisors lead further discussions regarding the Fractal Board's fiduciary
duties in considering a strategic business combination and reviewed proposed
definitive terms of the Reorganization Agreement and related documents,
including the Stock Option Agreements, (iv) Unterberg Harris made a
presentation to the Fractal Board regarding the Exchange Ratio, reviewed its
detailed financial analysis and pro forma and other information with respect
to the companies and delivered its written opinion to the effect that, as of
such date, the consideration to be paid pursuant to the Reorganization
Agreement was fair from a financial point of view to Fractal shareholders (a
copy of this opinion is attached hereto as Annex G, and shareholders are urged
to carefully review the opinion) and (v) the Fractal Board approved the
Reorganization Agreement and related agreements. See "--Opinion of Fractal's
Financial Advisor" and Annex G attached hereto.
On February 11, 1997, following the respective meeting of the MetaTools
Board and the Fractal Board, the Reorganization Agreement, the Stock Option
Agreements, the Voting Agreements, the Affiliates Agreements and the
Noncompetition Agreements and certain other documents were executed by both
companies, and MetaTools and Fractal issued a joint press release announcing
the Merger.
On April 5, 6 and 17, 1997, the Fractal Board held special meetings at which
it reviewed the proposed Merger, the recent financial results for the two
companies, the recent trading prices for the MetaTools Common
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Stock and the Fractal Common Stock as well as for technology companies
generally, and the factors discussed under "--Reasons for the Merger" and
unanimously determined that, based on this review, the Merger continues to be
in the best interests of Fractal and its shareholders.
On April 8 and April 17, 1997, the MetaTools Board held special meetings at
which it reviewed the proposed Merger, the recent financial results for the
two companies, the recent trading prices for the MetaTools Common Stock and
the Fractal Common Stock as well as for technology companies generally, and
the factors discussed under "--Joint Reasons for the Merger" and unanimously
determined that, based on this review, the Merger continues to be in the best
interests of MetaTools and its stockholders.
OPINION OF METATOOLS' FINANCIAL ADVISOR
On February 3, 1997 MetaTools and Alex. Brown executed an engagement letter
(the "Engagement Letter") pursuant to which Alex. Brown was engaged to act as
MetaTools' exclusive financial advisor in connection with the Merger. Pursuant
to the Engagement Letter, MetaTools retained Alex. Brown to furnish financial
advisory and investment banking services with respect to a possible merger of
MetaTools and Fractal and to render an opinion as to the fairness to MetaTools
and its stockholders, from a financial point of view, of the Exchange Ratio.
See "--Material Contacts and Board Deliberations."
At the February 11, 1997 meeting of the MetaTools Board, representatives of
Alex. Brown made a presentation with respect to the Merger and rendered to the
MetaTools Board its oral opinion, subsequently confirmed in writing, that, as
of such date, and subject to the assumptions made, matters considered and
limitations set forth in such opinion and summarized below, the Exchange Ratio
was fair, from a financial point of view, to MetaTools and its stockholders.
No limitations were imposed by the MetaTools Board upon Alex. Brown with
respect to the investigations made or procedures followed by it in rendering
its opinion. The Exchange Ratio was determined through negotiations between
MetaTools management and Fractal management. Although Alex. Brown did assist
the management of MetaTools in those negotiations, it did not recommend to
MetaTools that any specific exchange ratio constituted the appropriate
exchange ratio for the Merger. Alex. Brown also assisted management in the
negotiations leading to an agreement on principal structural terms.
THE FULL TEXT OF ALEX. BROWN'S WRITTEN OPINION DATED FEBRUARY 11, 1997 (THE
"ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, ASSUMPTIONS
MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED
HERETO AS ANNEX F AND IS INCORPORATED HEREIN BY REFERENCE. METATOOLS
STOCKHOLDERS ARE URGED TO READ THE ALEX. BROWN OPINION IN ITS ENTIRETY. THE
ALEX. BROWN OPINION WAS PREPARED FOR THE BENEFIT AND USE OF THE METATOOLS
BOARD IN ITS CONSIDERATION OF THE MERGER AND DOES NOT CONSTITUTE A
RECOMMENDATION TO METATOOLS' STOCKHOLDERS AS TO HOW THEY SHOULD VOTE AT THE
METATOOLS ANNUAL MEETING IN CONNECTION WITH THE MERGER. THE ALEX. BROWN
OPINION DOES NOT ADDRESS THE RELATIVE MERITS OF THE MERGER AND ANY OTHER
TRANSACTIONS OR BUSINESS STRATEGIES DISCUSSED BY THE METATOOLS BOARD AS
ALTERNATIVES TO THE REORGANIZATION AGREEMENT OR THE UNDERLYING BUSINESS
DECISION OF THE METATOOLS BOARD TO PROCEED WITH OR EFFECT THE MERGER. THE
DISCUSSION OF THE ALEX. BROWN OPINION IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE ALEX. BROWN
OPINION.
In connection with the Alex. Brown Opinion, Alex. Brown reviewed certain
publicly available financial information and other information concerning
MetaTools and Fractal and certain internal analyses and other information
furnished to it by MetaTools and Fractal. Alex. Brown also held discussions
with the members of the senior managements of MetaTools and Fractal regarding
the businesses and prospects of their respective companies and the joint
prospects of the Combined Company. In addition, Alex. Brown (i) reviewed the
reported prices and trading activity for the common stock of both MetaTools
and Fractal, (ii) reviewed financial information with respect to the business,
operations and prospects of Fractal and MetaTools furnished to Alex. Brown by
Fractal and MetaTools, (iii) compared certain financial and stock market
information for MetaTools and Fractal with similar information for certain
other companies whose securities are publicly traded, (iv) reviewed the
financial terms of certain recent business combinations, (v) reviewed the
terms of the Reorganization Agreement, (vi) reviewed the potential pro forma
financial effects of the Merger on MetaTools
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and compared the relative financial contribution of MetaTools and Fractal to
the Combined Company following consummation of the Merger and (vii) performed
such other studies and analyses and considered such other factors as it deemed
appropriate.
In conducting its review and arriving at its opinion, Alex. Brown assumed
and relied upon, without independent verification, the accuracy, completeness
and fairness of the information furnished to or otherwise reviewed by or
discussed with it for purposes of rendering its opinion. Alex. Brown received
estimates of Fractal's projected financial performance that were prepared by
the management of MetaTools based in part upon discussions with the management
of Fractal and Alex. Brown also relied upon projected financial performance of
MetaTools made by investment community research analysts projections that
MetaTools' management confirmed were generally consistent with such
management's expectations (such estimates being the "Fractal Estimates" and
"MetaTools Estimates," respectively). With the consent of the MetaTools Board,
the MetaTools Estimates and Fractal Estimates were utilized and relied upon by
Alex. Brown in the Analysis of Certain Other Publicly Traded Companies,
Contribution Analysis, Discounted Cash Flow Analysis and the Pro Forma
Earnings Analysis summarized below. With respect to the other information
relating to the prospects of MetaTools and Fractal provided to Alex. Brown by
each company, Alex. Brown assumed that such other information was reasonably
prepared on bases reflecting the best currently available estimates and good
faith judgments of the respective managements of MetaTools and Fractal. In
performing its analysis, Alex. Brown made adjustments to certain historical
periods for non-recurring items, including expenses related to the acquisition
of RTG. Alex. Brown assumed, with the consent of MetaTools, that the Merger
would qualify as a tax-free transaction for federal income tax purposes and
for pooling of interests accounting treatment. Alex. Brown did not make any
independent evaluation or appraisal of the assets of MetaTools and Fractal,
nor has Alex. Brown been furnished with any such evaluations or appraisals.
The Alex. Brown Opinion is based on market, economic and other conditions as
they existed or were disclosed to Alex. Brown and could be evaluated as of the
date of the Alex. Brown Opinion. Although developments following the date of
the Alex. Brown Opinion may affect the opinion, Alex. Brown assumed no
obligation to update, revise or reaffirm its opinion. See "Summary--Reasons
for the Merger; Recommendations of Boards of Directors" and "The Merger and
Related Transactions--Joint Reasons for the Merger."
The following is a summary of the analyses performed and factors considered
by Alex. Brown in connection with rendering the Alex. Brown Opinion:
Historical Financial Position. In rendering its opinion, Alex. Brown
reviewed and analyzed historical and current financial condition of MetaTools
and Fractal which included (i) an assessment of each of MetaTools' and
Fractal's recent financial statements; (ii) an analysis of each of MetaTools'
and Fractal's revenue, growth and operating performance trends; and (iii) an
assessment of each of MetaTools' and Fractal's margin changes and leverage.
Historical Stock Price Performance. Alex. Brown reviewed and analyzed the
daily closing per share market prices and trading volume, for each of
MetaTools Common Stock and Fractal Common Stock, from February 8, 1996 to
February 10, 1997. Alex. Brown also reviewed the daily closing per share
market prices of the MetaTools Common Stock and Fractal Common Stock and
compared the movement of such daily closing prices with the movement of the
Nasdaq composite average over the period from February 8, 1996 through
February 10, 1997. Alex. Brown noted that, on a relative basis, each of
MetaTools and Fractal underperformed the Nasdaq composite average from
February 8, 1996 through February 10, 1997. Alex. Brown also reviewed the
daily closing per share market prices of MetaTools Common Stock and Fractal
Common Stock and compared the movement of such closing prices with the
movement of a composite average (consisting of Adobe, Avid Technology,
Discreet Logic, Macromedia and Visio Corporation (collectively, the "Selected
Companies")) over the period from February 8, 1996 to February 10, 1997. On a
relative basis the Fractal Common Stock price periodically both underperformed
and outperformed the composite average, from February 8, 1996 to February 10,
1997, and the MetaTools Common Stock price periodically both underperformed
and outperformed the composite average for such period.
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Analysis of Certain Other Publicly Traded Companies. This analysis examines
a company's valuation in the public market as compared to the valuation in the
public market of other selected publicly traded companies. Alex. Brown
compared certain financial information (based on the valuation measurements
described below) relating to MetaTools and Fractal to certain corresponding
information from the Selected Companies. Such financial information included,
among other things, (i) equity market value ("Equity Value"); (ii)
capitalization ratios; (iii) operating performance; (iv) ratios of Equity
Value as adjusted for debt and cash ("Adjusted Value") to revenues for
calendar years 1996 and 1997; (v) and ratios of Adjusted Value to earnings
before interest and income taxes ("EBIT") and earnings before interest, income
taxes, depreciation and amortization ("EBITDA"), for calendar year 1996 and
(vi) ratios of stock price to earnings per share ("EPS") for calendar years
1996 and 1997. The financial information used in connection with the multiples
provided below with respect to MetaTools and Fractal was based on the latest
reported 12-month period as derived from publicly available information, the
MetaTools Estimates and the Fractal Estimates. In the case of the Selected
Companies, the financial information used in connection with the multiples
provided below was based on (i) estimates of EPS obtained from reports
published by the First Call Corporation and (ii) estimates for other operating
measures obtained from selected Wall Street research. Alex. Brown noted that
(i) the multiple of Adjusted Value to calendar year 1996 revenues for the
Selected Companies applied to calendar year 1996 revenues of Fractal implied a
per share range of values for Fractal from $3.41 to $32.97 with a mean of
$14.19 and a median of $10.03 and that for calendar year 1997 revenues this
analysis implied a per share range of $3.48 to $26.89 with a mean of $12.44
and a median of $10.02; (ii) the multiple of Adjusted Value to calendar year
1996 EBITDA for the Selected Companies applied to the calendar year 1996
EBITDA of Fractal implied a per share range of $6.95 to $18.73 with a mean of
$12.58 and a median of $12.33; (iii) the multiple of Adjusted Value to
calendar year 1996 EBIT for the Selected Companies applied to the calendar
year 1996 EBIT of Fractal implied a per share range of $7.87 to $19.00 with a
mean of $13.16 and a median of $12.89; and (iv) the multiple of stock price to
calendar year 1996 EPS of the Selected Companies applied to the calendar year
1996 net income of Fractal implied a per share range of $7.33 to $18.46 with a
mean of $11.24 and a median of $9.59 and that for calendar year 1997 net
income this analysis implied a per share range of $9.79 to $21.90 with a mean
of $16.42 and a median of $16.68. In each case, Alex. Brown compared the
implied share prices against the implied offer price in the Merger of $11.24
(based on an Exchange Ratio of 0.749 and MetaTools Common Stock February 10,
1997 closing price of $15.00).
Analysis of Selected Mergers and Acquisitions. Alex. Brown reviewed the
financial terms, to the extent publicly available, of 12 completed mergers and
acquisitions since February 1994 in the software industry (the "Selected
Transactions"), which included both cash and stock-for-stock transactions.
Alex. Brown calculated various financial multiples based on certain publicly
available information for each of the Selected Transactions and compared them
to corresponding financial multiples for the Merger, based on an Exchange
Ratio of 0.749 and MetaTools Common Stock February 10, 1997 closing price of
$15.00. The 12 software industry transactions reviewed, in reverse
chronological order of public announcement, were: Continuum Co., Inc./Computer
Sciences Corp. (April 28, 1996), Ray Dream, Inc./Fractal Design Corp.
(February 17, 1996), Delrina Corporation/Symantec Corporation (July 5, 1995),
Frame Technology Corporation/Adobe Systems Inc. (June 22, 1995), Rasna
Corporation/Parametric Technology (May 30, 1995), Alias Research/Silicon
Graphics (February 6, 1995), The Software Toolworks, Inc./Pearson Inc. (March
31, 1994), Chronologic Simulation/Viewlogic Systems (March 30, 1994),
WordPerfect Corp./Novell Inc. (March 21, 1994), Uniface Holdings,
B.V./CompuWare Corp. (March 16, 1994), Aldus Corp./Adobe Systems Inc. (March
15, 1994) and Softimage, Inc./Microsoft (February 14, 1994). Alex. Brown noted
that (i) the multiple of the equity purchase price, as adjusted for debt and
cash (the "Adjusted Purchase Price"), to trailing 12-month revenues for the
Selected Transactions applied to the calendar year 1996 revenues of Fractal
implied a per share range of values of approximately $7.10 to $24.40 with a
mean of $15.40 and a median of $17.10, (ii) the multiple of the Adjusted
Purchase Price to trailing 12-month EBIT for the Selected Transactions applied
to the calendar year 1996 EBIT of Fractal implied a per share range of values
of approximately $10.60 to $29.10 with a mean of $19.70 and a median of $20.20
and (iii) the multiple of the equity purchase price to trailing 12-month net
income for the Selected Transactions applied to the calendar year 1996 net
income of Fractal implied a per share range of values of approximately $6.80
to $28.50 with a mean of $19.90 and a median of $20.50. For each financial
multiple, Alex. Brown compared the implied share prices against the implied
offer price in the Merger of $11.24 (based on an Exchange
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Ratio of 0.749 and MetaTools Common Stock February 10, 1997 closing price of
$15.00). All multiples for the Selected Transactions were based on public
information available at the time of announcement of such transaction, without
taking into account differing market and other conditions during the period
which the Selected Transactions occurred.
Historical Exchange Ratio and Premium Analysis. Alex. Brown reviewed and
analyzed the historical ratio of the daily per share market closing prices of
MetaTools Common Stock and Fractal Common Stock over several time periods.
Alex. Brown noted that the Exchange Ratio of 0.749 represents a premium of
14.6% to the average price ratio for the two companies for the 90 trading day
period before the announcement of the transaction, a premium of 7.4% to the
average price ratio for the two companies for the 60 trading day period before
the announcement, a premium of 14.7% to the average price ratio for the two
companies for the 30 trading day period before the announcement, a premium of
33.8% to the average price ratio for the two companies for the 15 trading day
period before the announcement, and a premium of 45.0% to the price ratio for
the two companies as of February 10, 1997 (the last day of trading prior to
announcement). Alex. Brown also noted that the premium to be received by
shareholders in the proposed Merger over the per share average market closing
prices of Fractal over such time periods was 2.9%, 4.0%, 14.5%, 26.4% and
45.0%, respectively.
Alex. Brown presented information on the premiums received by shareholders
in the following selected software mergers (the "Selected Mergers"): Continuum
Co., Inc./Computer Sciences Corp. (April 28, 1996), Delrina
Corporation/Symantec Corporation (July 5, 1995), Frame Technology
Corporation/Adobe Systems, Inc. (June 22, 1995), Alias Research/Silicon
Graphics (February 6, 1995), The Software Toolworks, Inc./Pearson Inc. (March
31, 1994), Aldus Corp./Adobe Systems Inc. (March 15, 1994) and Softimage,
Inc./Microsoft (February 14, 1994). Alex. Brown determined that the average
premium over the price ratios between the respective targets and acquirors for
the 30 trading days prior to, 15 trading days prior to and the last trading
day prior to the announcement of each of the Selected Mergers was 36.9%, 34.8%
and 34.8%, respectively, and that the average premium over the target's per
share average market closing prices over such time periods was 43.8%, 38.2%
and 36.6%, respectively.
Alex. Brown also reviewed the premiums received by target shareholders in
friendly cash transactions, friendly stock-for-stock transactions and
technology stock-for-stock transactions from 1990 through 1996 as compared to
the market closing price 4 weeks prior to, 1 week prior to, and 1 day prior to
the announcement of such transactions where the consideration exceeded $50
million. Alex. Brown noted that the premiums over the per share average market
closing prices at such points in time (i) for friendly cash transactions were
48.3%, 43.7% and 35.7%, respectively; (ii) for friendly stock-for-stock
transactions were 41.6%, 34.4% and 29.9%, respectively; and (iii) for
technology stock-for-stock transactions were 51.2%, 41.5% and 35.9%,
respectively. Finally, Alex. Brown noted that the premium to be received by
shareholders in the proposed Merger over the per share average market closing
prices of Fractal over such time periods was 1.0%, 40.4% and 45.0%,
respectively.
Contribution Analysis. Alex. Brown analyzed the relative contributions of
MetaTools and Fractal, as compared to Fractal shareholders' relative ownership
of approximately 40.0% of the outstanding equity capital of the Combined
Company to the pro forma income statement of the Combined Company, based on
the MetaTools Estimates and Fractal Estimates. This analysis showed that on a
pro forma combined basis (excluding the effect of any non-recurring expenses
relating to the Merger) MetaTools and Fractal would account for approximately
57.7% and 42.3%, respectively, of the Combined Company's pro forma 1996 net
income, and (ii) approximately 54.8% and 45.2% respectively, of the Combined
Company's pro forma 1997 net income. Alex. Brown also analyzed the relative
contributions of MetaTools and Fractal, as compared to Fractal shareholders'
relative ownership of approximately 39.6% of the outstanding equity value, as
adjusted for debt and cash ("Adjusted Market Value") of the Combined Company.
This analysis showed that on a pro forma combined basis (excluding the effect
of any non-recurring expenses relating to the Merger) MetaTools and Fractal
would account for (i) approximately 42.8% and 57.2%, respectively, of the
Combined Company's pro forma 1996 revenues, approximately 43.7% and 56.3%
respectively, of the Combined Company's 1996 pro forma gross profit, and
approximately 46.3% and 53.7% respectively, of the Combined Company's pro
forma
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1996 EBIT, and (ii) approximately 49.1% and 50.9% respectively, of the
Combined Company's pro forma 1997 revenues, approximately 49.5% and 50.5%
respectively, of the Combined Company's pro forma 1997 gross profit,
approximately 52.1% and 47.9% respectively, of the Combined Company's pro
forma 1997 EBIT.
Pro Forma Combined Earnings Analysis. Alex. Brown analyzed certain pro forma
effects of the Merger. Based on such analysis, Alex. Brown computed the
resulting dilution/accretion to the Combined Company's EPS for the 1997
calendar year. Alex. Brown noted that before taking into account any non-
recurring costs relating to the Merger, the Merger would be approximately
10.6% accretive to the Combined Company's estimated EPS for the 1997 calendar
year.
Discounted Cash Flow Analysis. Alex. Brown performed a discounted cash flow
analysis for Fractal. The discounted cash flow approach values a business
based on the current value of the future cash flow that the business may
generate. To establish a current value under this approach, future cash flow
must be estimated and an appropriate discount rate determined. Alex. Brown
used the Fractal Estimates for 1997 and estimates of projected financial
performance based on Alex. Brown's discussions with the managements of Fractal
and MetaTools and Wall Street research estimates of Fractal's long-term
earnings prospects for the years 1998 through 2001. Alex. Brown aggregated the
present value of the cash flows through 2001 with the present value of a range
of terminal values. Alex. Brown discounted these cash flows at discount rates
ranging from 19.0% to 25.0%. The terminal value was computed based on
projected revenues in calendar year 2001 and a range of terminal revenue
multiples of 1.5 times to 3.0 times. Alex. Brown arrived at such discount
rates based on an analysis of the weighted average cost of capital of the
Selected Companies and arrived at such terminal values based on its review of
the trading characteristics of the common stock of the Selected Companies and
the multiples paid for acquired companies included in the Selected
Transactions. This analysis indicated a per share range of values of $9.21 to
$18.34 per share, versus the implied offer price of $11.24 (based on an
Exchange Ratio of 0.749 and MetaTools Common Stock February 10, 1997 closing
price of $15.00).
Relevant Market and Economic Factors. In rendering its opinion, Alex. Brown
considered, among other factors, the conditions of the U.S. stock markets,
particularly in the software sector, and the current level of economic
activity.
While the foregoing summary describes certain analyses and factors that
Alex. Brown deemed material in its presentation to the MetaTools Board, it is
not a comprehensive description of all analyses and factors considered by
Alex. Brown. The preparation of a fairness opinion is a complex process that
involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Alex. Brown believes that its analyses
must be considered as a whole and that selecting portions of its analyses and
of the factors considered by it, without considering all analyses and factors,
would create an incomplete view of the evaluation process underlying the Alex.
Brown Opinion. In performing its analyses, Alex. Brown considered general
economic, market and financial conditions and other matters, many of which are
beyond the control of MetaTools and Fractal. No company used in the analysis
of other publicly traded companies summarized above is identical to MetaTools
or Fractal. No transaction used in the analysis of selected mergers and
acquisitions summarized above is identical to the Merger. Accordingly,
preparation of the Alex. Brown Opinion took into account differences in the
financial and operating characteristics of the Selected Companies and the
companies in the Selected Transactions and the Selected Mergers and other
factors that would affect the public trading value and acquisition value of
the Selected Companies, and the Selected Transactions and the Selected
Mergers, respectively. The analyses performed by Alex. Brown are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than those suggested by such analyses.
Accordingly, analyses relating to the value of a business do not purport to be
appraisals or to reflect the prices at which the business actually may be
purchased. Furthermore, no opinion is being expressed as to the prices at
which shares of MetaTools Common Stock may trade at any future time.
Pursuant to the Engagement Letter, (i) at the signing of the Engagement
Letter, Alex. Brown was paid a non-contingent fee of $50,000.00; (ii) upon
delivery of the Alex. Brown Opinion, a fee of $200,000.00 was payable to Alex.
Brown; and (iii) upon the consummation of the Merger, Alex. Brown will be paid
a success fee
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of $850,000.00. In addition, MetaTools has agreed to reimburse Alex. Brown for
its reasonable out-of-pocket expenses incurred in connection with rendering
financial advisory services. MetaTools has also agreed to indemnify Alex.
Brown and its directors, officers, agents, employees and controlling persons,
for certain costs, expenses, losses, claims, damages and liabilities,
including certain liabilities under federal securities laws, related to or
arising out of its rendering of services under its engagement as financial
advisor. The terms of the fee arrangement with Alex. Brown, which MetaTools
and Alex. Brown believe are customary in transactions of this nature, were
negotiated at arm's length between MetaTools and Alex. Brown, and the
MetaTools Board was aware of such fee arrangements.
The MetaTools Board retained Alex. Brown to act as its advisor based upon
Alex. Brown having served as the lead managing underwriter in MetaTools' 1995
initial public offering of Common Stock and based upon Alex. Brown's
qualifications, reputation, experience and expertise. Alex. Brown may provide
additional investment banking services to MetaTools in the future. Alex. Brown
is an internationally recognized investment banking firm and, as a customary
part of its investment banking business, is engaged in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, private placements and valuations for corporate and
other purposes. Alex. Brown may actively trade the equity securities of
MetaTools and Fractal for its own account and for the account of its customers
and accordingly may at any time hold a long or short position in such
securities. Alex. Brown maintains a market in the MetaTools Common Stock and
regularly publishes research reports regarding the software industry and the
businesses and securities of MetaTools and other publicly traded companies in
the software industry.
OPINION OF FRACTAL'S FINANCIAL ADVISOR
Unterberg Harris has delivered a written opinion to the Fractal Board dated
February 11, 1997 to the effect that the consideration to be received by
holders of shares of Fractal Common Stock pursuant to the Reorganization
Agreement is fair, from a financial point of view, to such holders. Such
opinion confirmed the oral opinion given by Unterberg Harris to the Fractal
Board on February 11, 1997. No limitations were imposed by the Fractal Board
upon Unterberg Harris with respect to the investigations made or the
procedures followed by it in rendering its opinion. In addition to furnishing
a fairness opinion, Unterberg Harris was involved in the structuring and
negotiating of the Merger. The Exchange Ratio was determined through
negotiations between MetaTools management and Fractal management. Although
Unterberg Harris did assist in those negotiations, it did not recommend to
Fractal that any specific exchange ratio constituted the appropriate exchange
ratio for the Merger. See "--Material Contacts and Board Deliberations."
THE FULL TEXT OF THE FEBRUARY 11, 1997 OPINION OF UNTERBERG HARRIS IS
ATTACHED HERETO AS ANNEX G. FRACTAL SHAREHOLDERS ARE URGED TO READ THE OPINION
IN ITS ENTIRETY FOR THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND LIMITS OF THE REVIEW BY UNTERBERG HARRIS. THE SUMMARY OF THE
OPINION OF UNTERBERG HARRIS SET FORTH IN THIS JOINT PROXY STATEMENT/PROSPECTUS
IS QUALIFIED IN ITS ENTIRETY BY REFERENCES TO THE FULL TEXT OF SUCH OPINION.
UNTERBERG HARRIS' OPINION WAS PREPARED FOR THE FRACTAL BOARD AND IS DIRECTED
ONLY TO THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, OF THE CONSIDERATION TO
BE RECEIVED BY HOLDERS OF SHARES OF FRACTAL COMMON STOCK PURSUANT TO THE
REORGANIZATION AGREEMENT AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY
FRACTAL SHAREHOLDER AS TO HOW TO VOTE AT THE FRACTAL SPECIAL MEETING.
In arriving at its opinion, Unterberg Harris reviewed the Reorganization
Agreement and financial and other information that was publicly available or
furnished to Unterberg Harris by Fractal, including financial forecasts and
other information provided during discussions with the management of Fractal.
In addition, Unterberg Harris compared certain financial and securities data
of Fractal and MetaTools with various other publicly traded companies in the
software industry, reviewed the historical stock prices and trading volumes of
Fractal Common Stock and MetaTools Common Stock, reviewed prices and premiums,
if any, paid in other business combinations and conducted such other financial
studies, analyses and investigations as Unterberg Harris deemed appropriate
for purposes of rendering its opinion.
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In rendering its opinion, Unterberg Harris assumed, without independent
verification, the accuracy, completeness and fairness of all the financial and
other information that was available to it from public sources and that was
provided to it by Fractal. With respect to the financial projections supplied
to it by Fractal, Unterberg Harris assumed that such projections were
reasonably prepared and that they reflected the most accurate currently
available estimates and judgments of the management of Fractal as to the
future operating and financial performance of Fractal. With respect to the
industry analyst projections used by Unterberg Harris for MetaTools, Unterberg
Harris assumed that such projections were reasonably prepared and that they
reflected the most accurate currently available estimates and judgments of the
industry analysts as to the future operating and financial performance of
MetaTools. Unterberg Harris did not make any independent evaluation or
appraisal of the assets, liabilities, patents or intellectual property of
Fractal or MetaTools, nor was any such appraisal or evaluation provided to
Unterberg Harris. Unterberg Harris assumed that the Merger would be accounted
for as a pooling of interests in rendering its opinion. In performing its
analysis, Unterberg Harris made adjustments to certain historical periods for
non-recurring items, including expenses related to acquisitions.
Unterberg Harris' opinion is necessarily based on economic, market,
financial and other conditions as they existed on, and on the information made
available to it as of, the date of its opinion. Unterberg Harris does not have
any obligation to confirm or update its opinion. See "Summary--Reasons for the
Merger; Recommendations of Boards of Directors" and "The Merger and Related
Transactions--Joint Reasons for the Merger."
The following summarizes certain financial analyses performed by Unterberg
Harris in arriving at its opinion dated February 11, 1997, which analyses
Unterberg Harris discussed with the Fractal Board.
Comparable Companies Analyses. Unterberg Harris compared selected historical
and projected operating information, stock market data and financial ratios
for Fractal (based on the financial terms of the Merger) and MetaTools and to
selected historical and projected operating information, stock market data and
financial ratios of selected financial ratios of certain publicly traded
software companies. These companies were Adobe, Autodesk, Corel, Macromedia,
MetaTools and Visio Corporation. Such data and ratios include multiples of net
market value (defined as market value of equity adjusted by adding long-term
debt and subtracting cash and short-term investments) to historical revenue,
market value to historical and projected net income and earnings per share and
market value to book value. For the purpose of these comparisons, market value
of equity for Fractal was based upon the market value of equity to be received
by Fractal shareholders in the Merger (based upon the closing price for
MetaTools Common Stock on February 7, 1997 and the Exchange Ratio) and the
market value of equity for MetaTools was based upon the closing price for
MetaTools Common Stock on February 7, 1997. An analysis of net market value to
the latest twelve month revenues yielded a range of 1.5 times to 10.7 times
revenues with a median of 2.5 times revenues, compared to 3.3 times revenue
for Fractal and compared to 6.1 times revenue for MetaTools. An analysis of
current stock price to the latest twelve month earnings per share yielded a
range of 17.0 times to 56.7 times earnings with a median of 27.1 times
earnings, compared to 30.7 times earnings for Fractal and compared to 38.1
times earnings for MetaTools. An analysis of current stock price to projected
calendar 1997 earning per share yielded a range of 17.1 times to 35.4 times
earnings with a median of 27.2 times earnings, compared to 21.4 times earnings
for Fractal and compared to 29.1 times earnings for MetaTools. An analysis of
market value to book value yielded a ratio of 1.6 times to 12.5 times book
value with a median of 4.2 times book value, compared to 4.3 times book value
for Fractal and compared to 4.1 times book value for MetaTools.
Comparable Transaction Analysis. Unterberg Harris reviewed certain mergers
and acquisitions involving software companies. In examining these
transactions, Unterberg Harris analyzed certain income statement and balance
sheet parameters of the acquired companies relative to the consideration paid.
Multiples analyzed included net transaction value (defined as transaction
value adjusted by adding long-term debt and subtracting cash and short-term
investments) to the latest twelve month revenue and transaction value to the
latest twelve months net income and book value. This analysis included 69
comparable software company transactions that occurred from February 23, 1993
to January 16, 1997, or were pending during such period. In certain cases,
complete financial data was not publicly available for these transactions and
only partial information was used in
52
<PAGE>
such instances. The transaction value price for Fractal was based on the
Exchange Ratio and closing price of MetaTools Common Stock as of February 7,
1997. An analysis of net transaction value to the latest twelve month revenues
yielded a range of 0.3 times to 22.9 times revenue with a median of 3.1 times
revenue, compared to 3.3 times revenue for Fractal and 6.1 times revenue for
MetaTools in this transaction. An analysis of transaction value to the latest
twelve month net income yielded a range of 8.0 times net income to multiples
considered not meaningful by Unterberg Harris, with a median of 41.9 times net
income (excluding multiples considered not meaningful by Unterberg Harris),
compared to 30.7 times net income for Fractal and 38.1 times net income for
MetaTools. An analysis of market value to book value yielded a range of 0.8
times to 38.0 times book value with a median of 6.5 times book value, compared
to 4.3 times book value for Fractal and 4.1 times book value for MetaTools.
Acquisition Premium Analysis. Unterberg Harris also reviewed the premiums
paid for certain merger and acquisition transactions involving 33 selected
software companies. Unterberg Harris' analysis indicated that the percentage
premium of offer prices to trading prices on the date prior to the
announcement date ranged from a discount of 3.3% to a premium of 96.9%, with a
median of a premium of 25.5%. The percentage premium of offer prices to
trading prices 30 days prior to the announcement date ranged from 9.3% to
150.0%, with a median of 45.2%. The offer price for Fractal based on the
Exchange Ratio and closing price of MetaTools Common Stock as of February 7,
1997 represented a 54.6% premium to Fractal's closing stock price on the day
prior to the date of announcement, a higher premium than the median premium of
the selected comparable transactions. In addition, Unterberg Harris indicated
that the offer price for the Fractal Common Stock represented a 10.1% premium
over the closing stock price of Fractal Common Stock 30 days prior to the date
of announcement, a 20.8% premium over the 30 day average of Fractal Common
Stock prior to the date of announcement and a 1.3% premium over the 180 day
average of Fractal Common Stock prior to the date of announcement.
Pro Forma Analysis. Unterberg Harris analyzed certain pro forma effects
(excluding transaction costs) resulting from the Merger. For purposes of
comparison, Fractal's operating results for the fiscal year ending March 31,
1998 were calendarized to a December 31, 1997 year using Fractal management
estimates. The analysis indicated, absent potential synergies, approximately
14.5% accretion to the stand-alone earnings per share of MetaTools Common
Stock (excluding non-operating charges to income) for the calendar year ending
December 31, 1997. The results of such pro forma combination analysis are not
necessarily indicative of future operating results or financial condition for
the Combined Company. Unterberg Harris also analyzed the contribution of
Fractal and MetaTools to the pro forma Combined Company in light of the
Fractal shareholders' ownership of the Combined Company being approximately
39.1%. This analysis showed Fractal projected to contribute 52.9% of combined
net revenue for the year ending December 31, 1997 and that Fractal would have
an accretive effect on earnings due to Fractal earnings projected for the
period.
This summary does not purport to be a complete description of the analyses
performed by Unterberg Harris in connection with its fairness opinion. The
preparation of a fairness opinion involves various subjective business
determinations as to the most appropriate and relevant methods of financial
analysis and the application of those methods to the particular circumstances,
and therefore such an opinion is not readily susceptible to partial analysis
or summary description. Accordingly, notwithstanding the separate factors
summarized above, Unterberg Harris believes that its analyses must be
considered as a whole and that selecting portions of its analyses and
considering individual factors without considering all analyses and factors
could create an incomplete and misleading view of the evaluation process
underlying its opinion. With respect to comparable companies analyses and
comparable transaction analyses, a particular analysis performed by Unterberg
Harris is not necessarily indicative of actual values, which may be
significantly higher or lower than suggested by such analyses. The analyses
are not appraisals and do not necessarily reflect the prices for which
businesses actually could be sold or actual values or future results that
might be achieved. Unterberg Harris' analyses were prepared solely as part of
Unterberg Harris' review of the fairness of the consideration to be received
by Fractal shareholders in connection with the Merger from a financial point
of view and were provided to the Fractal Board in connection with the delivery
of Unterberg Harris' opinion. In addition, Unterberg Harris' opinion and
presentation to the Fractal Board was only one of many factors taken into
consideration by the Fractal Board in making its determination to approve the
Merger.
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<PAGE>
Pursuant to the terms of the engagement by Fractal of Unterberg Harris as
its financial advisor in connection with the Merger, upon consummation of the
Merger, Unterberg Harris will receive a fee equal to $1.1 million. In
addition, Unterberg Harris will be reimbursed for out-of-pocket expenses in
connection with the engagement. The terms of the fee arrangement were
negotiated at arm's length between Fractal and Unterberg Harris and approved
by the Fractal Board. The Fractal Board, in making its recommendation with
respect to the Merger and the Reorganization Agreement, was aware of the
foregoing fee arrangement.
Unterberg Harris has provided various financial advisory and investment
banking services to Fractal since 1994. During 1994, parties affiliated with
Unterberg Harris purchased 695,000 shares of Fractal Common Stock. Unterberg
Harris acted as lead managing underwriter for the initial public offering of
Fractal Common Stock, completed in November 1995, and as financial advisor for
Fractal in the acquisition of Ray Dream Inc. in May 1996. Unterberg Harris is,
and since Fractal's initial public offering has been, a market maker for
Fractal Common Stock. Thomas Unterberg, a Managing Director of Unterberg
Harris, currently serves on the Fractal Board. Unterberg Harris, as part of
its investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, private
offerings of securities and valuations for corporate reorganizations and other
purposes. Unterberg Harris was selected by Fractal to act as its financial
advisor based on Unterberg Harris' experience as a financial advisor in
mergers and acquisitions as well as Unterberg Harris' familiarity with
Fractal.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations of the Merger that are generally applicable to holders of
Fractal Common Stock. This summary is based upon opinions of counsel (the "Tax
Opinions") delivered by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, and Venture Law Group, A Professional Corporation (collectively
"Counsel"), that the Merger will constitute a "reorganization" within the
meaning of Section 368 of the Code (a "Reorganization").
This discussion does not deal with all income tax considerations that may be
relevant to particular Fractal shareholders in light of their particular
circumstances, such as shareholders who are dealers in securities, foreign
persons, shareholders who acquired their shares in connection with previous
mergers involving Fractal or an affiliate, or shareholders who acquired their
shares in connection with stock option or stock purchase plans or in other
compensatory transactions. In addition, the following discussion does not
address the tax consequences of transactions effectuated prior to or after the
Merger (whether or not such transactions are in connection with the Merger),
including without limitation transactions in which shares of Fractal Common
Stock were or are acquired or shares of MetaTools Common Stock were or are
disposed of. Furthermore, no foreign, state or local tax considerations are
addressed herein. The discussion is based on federal income tax law in effect
as of the date of this Joint Proxy Statement/Prospectus, which could change at
any time (possibly with retroactive effective). ACCORDINGLY, FRACTAL
SHAREHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC
TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL
AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER.
Subject to the limitations and qualifications referred to herein, Counsel is
of the opinion that qualification of the Merger as a Reorganization will
result in the following federal income tax consequences.
(a) No gain or loss will be recognized by holders of Common Stock of
Fractal solely upon their receipt of Combined Company Common Stock in the
Merger in exchange therefor;
(b) The aggregate tax basis of the Combined Company Common Stock received
in the Merger by a Fractal shareholder will be the same as the aggregate
tax basis of Fractal Common Stock surrendered in exchange therefor;
(c) The holding period of the Combined Company Common Stock received in
the Merger by a Fractal shareholder will include the period during which
the shareholder held the Fractal Common Stock surrendered in exchange
therefor, provided that the Fractal Common Stock is held as a capital asset
at the time of the Merger;
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<PAGE>
(d) Cash payments received by holders of Fractal Common Stock in lieu of
a fractional share will be treated as if a fractional share of Combined
Company Common Stock had been issued in the Merger and then redeemed by the
Combined Company. A shareholder of Fractal receiving such cash will
generally recognize gain or loss upon such payment, equal to the difference
(if any) between such shareholder's basis in the fractional share and the
amount of cash received;
(e) A Fractal shareholder who exercises dissenters' rights with respect
to all of such holder's shares of Common Stock of Fractal will generally
recognize gain or loss for federal income tax purposes, measured by the
difference between the holder's basis in such shares and the amount of cash
received, provided that the payment is neither essentially equivalent to a
dividend within the meaning of Section 302 of the Code nor has the effect
of a distribution of a dividend within the meaning of Section 356(a)(2) of
the Code (collectively, a "Dividend Equivalent Transaction"). Such gain or
loss will be capital gain or loss, provided that the Fractal Common Stock
is held as a capital asset at the time of the Merger. A sale of Common
Stock of Fractal pursuant to an exercise of appraisal rights will generally
not be a Dividend Equivalent Transaction if, as a result of such exercise,
the shareholder exercising appraisal rights owns no shares of Combined
Company Common Stock or Fractal Common Stock (either actually or
constructively within the meaning of Section 318 of the Code). If, however,
a shareholder's sale for cash of Fractal Common Stock pursuant to an
exercise of appraisal rights is a Dividend Equivalent Transaction, then
such shareholder will generally recognize income for federal income tax
purposes in an amount up to the entire amount of cash so received; and
(f) None of MetaTools, Merger Sub or Fractal will recognize gain or loss
solely as a result of the Merger.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. Each of MetaTools and Fractal has
received a Tax Opinion from their respective Counsel to the effect that, for
federal income tax purposes, the Merger will constitute a Reorganization. The
Tax Opinions neither bind the IRS nor preclude the IRS from adopting a
contrary position. In addition, the Tax Opinions are subject to certain
assumptions and qualifications and are based on the truth and accuracy of
certain representations and covenants made by MetaTools, Merger Sub and
Fractal, including representations and covenants in certificates delivered to
counsel by the respective managements of MetaTools, Merger Sub and Fractal.
Of particular importance is the assumption that the "continuity of interest"
requirement for treatment of the Merger as a Reorganization is satisfied. To
satisfy the continuity of interest requirement, Fractal shareholders must not,
pursuant to a plan or intent existing at or prior to the Merger, sell or
otherwise dispose of so much of either (i) their Fractal Common Stock in
anticipation of the Merger or (ii) the Combined Company Common Stock to be
received in the Merger such that the Fractal shareholders, as a group, would
no longer have a significant equity interest in the Fractal business being
conducted after the Merger. No assurance can be made that the "continuity of
interest" requirement will be satisfied. If such requirement is not satisfied,
the Merger would not be treated as a Reorganization.
A successful IRS challenge to the "reorganization" status of the Merger
would result in a Fractal shareholder recognizing gain or loss with respect to
each share of Fractal Common Stock surrendered equal to the difference between
the shareholder's basis in such share and the fair market value, as of the
Effective Time of the Merger, of the Combined Company Common Stock received in
exchange therefor. In such event, a shareholder's aggregate basis in the
Combined Company Common Stock so received would equal its fair market value
and his holding period for such stock would begin the day after the Merger.
GOVERNMENTAL AND REGULATORY APPROVALS
MetaTools and Fractal are aware of no governmental or regulatory approvals
required for consummation of the Merger, other than compliance with the
federal securities laws and applicable securities and "blue sky" laws of
various states.
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<PAGE>
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for financial
reporting purposes in accordance with generally accepted accounting
principles. Consummation of the Merger is conditioned upon receipt by
MetaTools and Fractal of letters from their respective independent
accountants, Coopers & Lybrand L.L.P. and Price Waterhouse LLP, regarding
those firms' concurrence with MetaTools management's and Fractal management's
conclusions, respectively, as to the appropriateness of pooling of interests
accounting for the Merger under APB No. 16, and the related interpretations of
the American Institute of Certified Public Accountants, the Financial
Accounting Standards Board and the rules and regulations of the Securities and
Exchange Commission, if closed and consummated in accordance with the
Reorganization Agreement. On February 11, 1997, MetaTools and Fractal received
a preliminary letter from Coopers & Lybrand L.L.P. affirming that firm's
concurrence with MetaTools management's conclusions that as of February 11,
1997 no conditions existed that would preclude accounting for the Merger as a
pooling of interests. On February 11, 1997, Fractal received a preliminary
letter from Price Waterhouse LLP affirming that firm's concurrence with
Fractal management's conclusions that, with respect to Fractal, no conditions
existed that would preclude accounting for the Merger as a pooling of
interests.
TERMS OF THE MERGER
The following is a brief summary of the material provisions of the
Reorganization Agreement, a copy of which is attached as Annex A to this Joint
Proxy Statement/Prospectus and is incorporated herein by reference. This
summary is qualified in its entirety by reference to the full and complete
text of the Reorganization Agreement.
EFFECTIVE TIME
Subject to the provisions of the Reorganization Agreement, the parties
thereto shall cause the Merger to be consummated by filing an Agreement of
Merger with the Secretary of State of the State of California in accordance
with the relevant provisions of California Law and a Certificate of Merger
with the Secretary of State of the State of Delaware in accordance with the
relevant provisions of Delaware Law (the time of such filings (or such later
time as may be agreed in writing by the parties and specified in the Agreement
of Merger and Certificate of Merger) being the "Effective Time") as soon as
practicable on or after the Closing Date (as herein defined). The closing of
the Merger (the "Closing") shall take place at the offices of Wilson Sonsini
Goodrich & Rosati, Professional Corporation, at a time and date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in the
Reorganization Agreement, or at such other time, date and location as the
parties thereto agree in writing (the "Closing Date").
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, by virtue of the Merger and without any action on the
part of Merger Sub, Fractal or the holders of any of the following securities:
Each share of Fractal Common Stock issued and outstanding immediately prior
to the Effective Time, (other than any shares of Fractal Common Stock to be
canceled and any Dissenting Shares (as defined below)) will be canceled and
extinguished and automatically converted into the right to receive 0.749
shares of MetaTools Common Stock upon surrender of the certificate
representing such share of Fractal Common Stock in the manner provided below
(or in the case of a lost, stolen or destroyed certificate, upon delivery of
an affidavit (and bond, if required)), including, with respect to each whole
share of MetaTools Common Stock to be received.
Each share of Fractal Common Stock held in the treasury of Fractal or owned
by Merger Sub, MetaTools or any direct or indirect wholly-owned subsidiary of
Fractal or of MetaTools immediately prior to the Effective Time shall be
canceled and extinguished without any conversion thereof.
At the Effective Time, all options to purchase Fractal Common Stock then
outstanding under Fractal's 1993 Stock Option Plan, 1995 Stock Option Plan,
1995 Directors' Stock Option Plan and 1992 Assumed Ray Dream,
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<PAGE>
Inc. Stock Option Plan (collectively, the "Fractal Stock Option Plans") shall
be assumed by MetaTools. Each option under the Fractal Stock Option Plans
shall become an option or right to purchase Combined Company Common Stock,
with appropriate adjustments to be made to the number of shares issuable
thereunder and the exercise price thereof, based on the Exchange Ratio. In
connection with agreements previously entered into with Fractal, options to
purchase 702,072 shares of Fractal Common Stock held by certain officers and
directors of Fractal will vest in full and become exercisable immediately
prior to the consummation of the Merger, although a significant number of such
options had exercise prices less than the value of the Fractal Common Stock
implied by the Exchange Ratio and the market price of the MetaTools Common
Stock as of February 11, 1997. Also, options to purchase 60,000 shares of
Fractal Common Stock granted under the 1995 Directors' Stock Option Plan will
vest in full and become exercisable immediately prior to the consummation of
the Merger. See "--Interests of Certain Persons."
At the Effective Time and subject to and upon the terms and conditions of
the Reorganization Agreement and the applicable provisions of California Law
and Delaware Law, Merger Sub shall be merged with and into Fractal and the
separate corporate existence of Merger Sub shall cease and Fractal shall
continue as the Surviving Corporation. Each share of Common Stock, $0.001 par
value, of Merger Sub issued and outstanding immediately prior to the Effective
Time shall be converted into and exchanged for one validly issued, fully paid
and nonassessable share of Common Stock, $0.001 par value, of the Surviving
Corporation. Each stock certificate of Merger Sub evidencing ownership of any
such shares shall continue to evidence ownership of such shares of capital
stock of the Surviving Corporation.
The Exchange Ratio shall be adjusted to reflect appropriately the effect of
any stock split, reverse stock split, stock dividend (including any dividend
or distribution of securities convertible into MetaTools Common Stock or
Fractal Common Stock), reorganization, recapitalization or other like change
with respect to MetaTools Common Stock or Fractal Common Stock occurring on or
after the date hereof and prior to the Effective Time.
At or promptly after the Effective Time, MetaTools, acting through the
Exchange Agent, will deliver to each Fractal shareholder of record a letter of
transmittal with instructions to be used by such shareholder in surrendering
certificates which, prior to the Merger, represented shares of Fractal Common
Stock. CERTIFICATES SHOULD NOT BE SURRENDERED BY THE HOLDERS OF FRACTAL COMMON
STOCK UNTIL SUCH HOLDERS RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE
AGENT.
STOCK OWNERSHIP BEFORE AND AFTER THE MERGER
Based upon the capitalization of Fractal as of the close of business on
April 21, 1997 (including the number of shares of Fractal Common Stock
outstanding and the number of shares issuable upon exercise of outstanding
options to purchase Fractal Common Stock), and assuming that no holder of
Fractal Common Stock exercises dissenters' rights, an aggregate of
approximately 9,021,080 shares of Combined Company Common Stock will be issued
to Fractal shareholders in the Merger and MetaTools will assume options for up
to approximately 1,353,462 additional shares of Combined Company Common Stock.
Based upon the number of shares of MetaTools Common Stock issued and
outstanding as of April 21, 1997, and after giving effect to the issuance of
Combined Company Common Stock as described in the previous sentence, the
former holders of Fractal Common Stock would hold, and have voting power with
respect to, approximately 39.5% of the Combined Company's total issued and
outstanding shares, and holders of former Fractal options would hold options
exercisable for approximately 5.6% of the Combined Company's total issued and
outstanding shares (assuming the exercise of only such options). The foregoing
numbers of shares and percentages are subject to change in the event that the
capitalization of either MetaTools or Fractal changes subsequent to April 21,
1997 and prior to the Effective Time, and there can be no assurance as to the
actual capitalization of MetaTools or Fractal at the Effective Time or of the
Combined Company at any time following the Effective Time.
Of the 1,807,026 shares of Fractal Common Stock subject to outstanding
options under the Fractal Stock Option Plans as of April 21, 1997, 672,188
shares were exercisable.
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<PAGE>
STOCK OWNERSHIP BEFORE AND AFTER THE MERGER
The following table sets forth the beneficial ownership of MetaTools Common
Stock and Fractal Common Stock by each director, executive officer and each 5%
stockholder/shareholder for each company as of February 28, 1997, as well as
the beneficial ownership of such persons in the Combined Company after giving
effect to the Merger.
<TABLE>
<CAPTION>
METATOOLS COMBINED COMPANY
---------------------- --------------------------
NUMBER PERCENT NUMBER PERCENT
METATOOLS OF SHARES OF TOTAL(32) OF SHARES(34) OF TOTAL(35)
- --------- --------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Bert Kolde (1).............. 2,014,375 15.1% 2,014,375 8.5%
Vulcan Ventures, Inc. ...... 2,000,000 15.1% 2,000,000 8.5%
John J. Wilczak (2)......... 1,239,104 9.3% 1,239,104 5.2%
Samuel H. Jones, Jr. (3).... 1,131,055 8.5% 1,131,055 4.8%
Alexander Migdal............ 815,469 6.1% 815,469 3.4%
Kai Krause (4).............. 769,423 5.7% 769,423 3.3%
Howard L. Morgan (5)........ 267,500 2.0% 267,500 1.1%
Bob Rice (6)................ 90,165 * 90,165 *
Fred Brown (7).............. 32,143 * 32,143 *
Terance A. Kinninger (8).... 26,775 * 26,775 *
James Mervis (9)............ 14,333 * 14,333 *
William J. Schroeder (10)... 8,333 * 8,333 *
William H. Lane III (11).... 7,917 * 7,917 *
Sallie Olmsted.............. -- * -- *
All MetaTools directors,
executive officers and 5%
stockholders as a group
(13 persons) (12).......... 6,416,592 46.6% 6,416,592 27.1%
<CAPTION>
FRACTAL
----------------------
NUMBER PERCENT
FRACTAL OF SHARES OF TOTAL(33)
- ------- --------- ------------
<S> <C> <C> <C> <C>
Lee Lorenzen (13)........... 1,038,618 8.6% 795,246 3.4%
Thomas Hedges (14).......... 773,908 6.4% 610,671 2.6%
Thomas Unterberg and
entities affiliated with
Unterberg Harris (15)...... 718,125 6.0% 559,878 2.4%
Mark Zimmer (16)............ 572,500 4.8% 465,434 2.0%
Stephen Manousos (17)....... 368,885 3.1% 286,618 1.2%
Leslie Wright (18).......... 118,577 1.0% 170,970 *
Anthony Sun (19)............ 95,691 * 86,653 *
Steven Guttman (20)......... 91,562 * 118,436 *
Pierre Berkaloff (21)....... 80,385 * 105,042 *
Arthur Collmeyer (22)....... 51,875 * 56,175 *
Joseph Consul (23).......... 42,358 * 67,640 *
Craig Johnson (24).......... 30,500 * 40,165 *
Michael Popolo (25)......... 28,405 * 46,064 *
Karen Bria (26)............. 25,870 * 44,165 *
John Derry (27)............. 20,781 * 38,527 *
Braden Rippetoe (28)........ 18,312 * 35,203 *
Alain Rossmann (29)......... -- * 14,980 *
All Fractal directors,
executive officers and 5%
shareholders as a group (17
persons) (30).............. 4,076,352 32.5% 3,541,867 15.0%
<CAPTION>
COMBINED COMPANY
- ----------------
<S> <C> <C> <C> <C>
All Combined Company
directors, executive
officers and 5%
stockholders as a group (50
persons)(31)............... N/A N/A 9,958,459 42.1%
</TABLE>
- --------
* Less than 1%.
58
<PAGE>
(1) Includes 2,000,000 shares held by Vulcan Ventures, Inc. Mr. Kolde, a
director of MetaTools, is a director of Vulcan Ventures, Inc. Mr. Kolde
disclaims beneficial ownership of all shares held by such entity, except
to the extent of his pecuniary interests therein. Also includes 9,375
shares issuable to Mr. Kolde upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of
February 28, 1997.
(2) Includes 41,771 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(3) Includes 5,000 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(4) Includes 254,479 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(5) Includes 5,000 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(6) Includes 90,165 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(7) Includes 32,143 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(8) Includes 14,375 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(9) Includes 14,333 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(10) Includes 8,333 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(11) Includes 7,917 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(12) Includes 482,891 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997 and 2,000,000 shares held by Vulcan Ventures, Inc.
(13) Includes 41,875 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 23,125 shares of Fractal Common Stock as a result
of the Merger.
(14) Includes 46,093 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 41,407 shares of Fractal Common Stock as a result
of the Merger.
(15) Includes 209,501 shares held by Unterberg Harris Private Equity Partners,
L.P., 262,500 shares held by Unterberg Harris Interactive Media, L.P.,
105,000 shares held by Unterberg Harris, L.L.C. and 52,999 shares held by
Unterberg Harris Private Equity Partners, C.V. Mr. Unterberg, a director
of Fractal, is a principal of Unterberg Harris Private Equity Partners,
L.P., Unterberg Harris Interactive Media, L.P., Unterberg Harris, L.L.C.
and Unterberg Harris Private Equity Partners, C.V. Mr. Unterberg
disclaims beneficial ownership of all shares held by such entities,
except to the extent of his pecuniary interests therein. Also includes
35,625 shares issuable to Mr. Unterberg upon exercise of options to
purchase Fractal Common Stock that are exercisable within 60 days of
February 28, 1997. The Combined Company reflects the acceleration of
options to purchase an additional 29,375 shares of Fractal Common Stock
exercisable by Mr. Unterberg as a result of the Merger.
(16) Includes 48,593 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 48,907 shares of Fractal Common Stock as a result
of the Merger.
(17) Includes 38,718 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 13,782 shares of Fractal Common Stock as a result
of the Merger.
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<PAGE>
(18) Includes 105,312 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 109,688 shares of Fractal Common Stock as a result
of the Merger.
(19) Includes 51,641 shares held by Venrock Associates and 23,152 shares held
by Venrock Associates II, L.P. Mr. Sun, a director of Fractal, is a
general partner of Venrock Associates and Venrock Associates II, L.P. Mr.
Sun disclaims beneficial ownership of all shares held by such entities,
except to the extent of his pecuniary interests therein. The Combined
Company reflects the acceleration of options to purchase 20,000 shares of
Fractal Common Stock exercisable by Mr. Sun as a result of the Merger.
(20) Includes 77,087 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 66,563 shares of Fractal Common Stock as a result
of the Merger.
(21) Includes 5,739 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 59,858 shares of Fractal Common Stock as a result
of the Merger.
(22) Includes 41,875 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 23,125 shares of Fractal Common Stock as a result
of the Merger.
(23) Includes 6,183 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 47,949 shares of Fractal Common Stock as a result
of the Merger.
(24) Includes 11,250 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997, of which 9,000 shares are held by investment partnerships
affiliated with VLG. Mr. Johnson, a director of Fractal, is a general
partner of such partnerships. Mr. Johnson disclaims beneficial ownership
in each partnership, except to the extent of his pecuniary interests
therein. The Combined Company reflects the acceleration of options to
purchase an additional 23,125 shares of Fractal Common Stock exercisable
by Mr. Johnson and such partnerships as a result of the Merger.
(25) Includes 28,405 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 33,095 shares of Fractal Common Stock as a result
of the Merger.
(26) Includes 24,405 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 33,095 shares of Fractal Common Stock as a result
of the Merger.
(27) Includes 20,781 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 30,657 shares of Fractal Common Stock as a result
of the Merger.
(28) Includes 18,312 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997. The Combined Company reflects the acceleration of options to
purchase an additional 28,688 shares of Fractal Common Stock as a result
of the Merger.
(29) The Combined Company reflects the acceleration of options to purchase an
additional 20,000 shares of Fractal Common Stock as a result of the
Merger.
(30) Includes 550,253 shares issuable upon exercise of options to purchase
Fractal Common Stock that are exercisable within 60 days of February 28,
1997, of which 9,000 shares are held by investment partnerships
affiliated with VLG. Also includes 209,501 shares of Fractal Common Stock
held by Unterberg Harris Private Equity Partners, L.P., 262,500 shares
are held by Unterberg Harris Interactive Media, L.P., 105,000 shares held
by Unterberg Harris, L.L.C., 52,999 shares held by Unterberg Harris
Private Equity Partners, C.V., 51,641 shares held by Venrock Associates
and 23,152 shares held by Venrock Associates II, L.P. The Combined
Company reflects the acceleration of options to purchase an additional
652,439 shares of Fractal Common Stock as a result of the Merger.
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(31) Includes 482,891 shares issuable upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997 and 2,000,000 shares of MetaTools Common Stock held by Vulcan
Ventures, Inc. Also includes 550,253 shares issuable upon exercise of
options to purchase Fractal Common Stock that are exercisable within 60
days of February 28, 1997, of which 9,000 shares are held by investment
partnerships affiliated with VLG. Also includes 209,501 shares of Fractal
Common Stock held by Unterberg Harris Private Equity Partners, L.P.,
262,500 shares held by Unterberg Harris Interactive Media, L.P., 105,000
shares held by Unterberg Harris, L.L.C., 52,999 shares are held by
Unterberg Harris Private Equity Partners, C.V., 51,641 shares held by
Venrock Associates and 23,152 shares held by Venrock Associates II, L.P.
Also reflects the acceleration of options to purchase an additional
652,439 shares of Fractal Common Stock as a result of the Merger.
(32) Represents the number of shares held by each director, executive officer,
and 5% stockholder as a percentage of the sum of the total number of
shares of MetaTools Common Stock outstanding at February 28, 1997
(13,286,970) and the total number of shares issuable to all directors,
executive officers, and 5% stockholders upon exercise of options to
purchase MetaTools Common Stock that are exercisable within 60 days of
February 28, 1997 (482,891).
(33) Represents the number of shares held by each director, executive officer,
and 5% shareholder as a percentage of the sum of the total number of
shares of Fractal Common Stock outstanding at February 28, 1997
(11,979,647) and the total number of shares issuable to all directors,
executive officers, and 5% shareholders upon exercise of options to
purchase Fractal Common Stock that are exercisable within 60 days of
February 28, 1997 (550,253).
(34) Reflects the acceleration of certain options to purchase Fractal Common
Stock as a result of the Merger (as reflected in the footnotes for the
above-listed beneficial owners of Fractal Common Stock) and the
conversion of shares of Fractal Common Stock and options to purchase
Fractal Common Stock into Combined Company Common Stock and options to
purchase Combined Company Common Stock at an exchange ratio of 0.749
shares of Combined Company Common Stock and options to purchase
0.749 shares of Combined Company Common Stock for each share of Fractal
Common Stock and options to purchase Fractal Common Stock, respectively.
(35) Represents the number of shares held by each director, executive officer,
and 5% stockholder/shareholder as a percentage of the sum of the total
number of shares of Combined Company Common Stock outstanding at February
28, 1997 (22,259,726) and the total number of shares issuable to all
directors, executive officers, and 5% stockholders upon exercise of
options to purchase Combined Company Common Stock that are exercisable
within 60 days of February 28, 1997 (1,383,707), giving effect to the
acceleration of certain options to purchase Fractal Common Stock as a
result of the Merger (as reflected in the footnotes for the above-listed
beneficial owners of Fractal Common Stock) and the conversion of Fractal
Common Stock and options to purchase Fractal Common Stock into Combined
Company Common Stock at an exchange ratio of 0.749 shares of Combined
Company Common Stock and options to purchase 0.749 shares of Combined
Company Common Stock for each share of Fractal Common Stock and options
to purchase Fractal Common Stock, respectively.
CONDUCT FOLLOWING THE MERGER
Following the Merger, the headquarters of the Combined Company will be in
Carpinteria, California.
Pursuant to the Reorganization Agreement, the Certificate of Incorporation
of Merger Sub in effect immediately prior to the Effective Time will become
the Articles of Incorporation of the Surviving Corporation and the Bylaws of
Merger Sub will become the Bylaws of the Surviving Corporation. The Board of
Directors of the Surviving Corporation will consist of the directors who are
serving as directors of Merger Sub immediately prior to the Effective Time.
The officers of Merger Sub immediately prior to the Effective Time will remain
as officers of the Surviving Corporation, until their successors are duly
elected or appointed or qualified.
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Concurrent with the Effective Time, the MetaTools Board will take action to
cause the Board of Directors of the Combined Company (the "Combined Company
Board"), immediately after the Effective Time, to consist of nine (9) persons,
six (6) of whom have served on the MetaTools Board immediately prior to the
Effective Time and three (3) of whom will have served on the Fractal Board
immediately prior to the Effective Time (Mark Zimmer, Thomas Hedges and Arthur
Collmeyer). In addition, the MetaTools Board will take action to cause its
Audit Committee and Compensation Committee each to consist only of independent
directors. In addition, the MetaTools Board will take action to cause its
Nominating Committee to consist of two independent directors and the Chief
Executive Officer of MetaTools.
Following the Merger, the following directors will serve in the following
management capacities: Howard Morgan, who is currently a director of
MetaTools, will, subject to his reelection, be Chairman of the Board; John J.
Wilczak, who is currently Chairman of the Board, President and Chief Executive
Officer of MetaTools, will be President and Chief Executive Officer. Kai
Krause, who is currently Chief Design Officer of MetaTools, will be Chief
Design Officer; Mark Zimmer, who is currently President and Chief Executive
Officer of Fractal, will be Chief Technical Officer; and Thomas Hedges, who is
currently Chairman and Chief Systems Architect of Fractal, will be Chief
Systems Architect.
CONDUCT OF METATOOLS' AND FRACTAL'S BUSINESSES PRIOR TO THE MERGER
Pursuant to the Reorganization Agreement, until the earlier of the
termination of the Reorganization Agreement pursuant to its terms or the
Effective Time, Fractal (and each of its subsidiaries) and MetaTools (and each
of its subsidiaries) agree, except (i) as indicated in the respective
disclosure schedules or (ii) to the extent that the other of them shall
otherwise consent in writing, to carry on its business diligently and in
accordance with good commercial practice and to carry on its business in the
usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and
regulations, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other material
obligations when due, and to use its commercially reasonable efforts
consistent with past practices and policies to preserve intact its present
business organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, each of Fractal and MetaTools will promptly notify the
other of any material event involving its business or operations. In addition,
except as provided in the respective disclosure schedules, without the prior
written consent of the other, neither Fractal nor MetaTools shall do any of
the following, and neither Fractal nor MetaTools shall permit its subsidiaries
to do any of the following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing as of the
date of the Reorganization Agreement and as previously disclosed in writing
to the other, or adopt any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Fractal
intellectual property rights as indicated in the Reorganization Agreement
or the MetaTools intellectual property rights as indicated in the
Reorganization Agreement, as the case may be, or enter into grants to
future patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock;
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of capital stock except pursuant to rights of repurchase of any such shares
under any employee, consultant or director stock plan existing on the date
of the Reorganization Agreement;
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(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
acquire any shares of capital stock or any securities convertible into
shares of capital stock, or enter into other agreements or commitments of
any character obligating it to issue any such shares or convertible
securities, other than (i) the issuance of shares of Fractal Common Stock
or MetaTools Common Stock, as the case may be, pursuant to the exercise of
stock options therefor outstanding as of the date of the Reorganization
Agreement, (ii) options to purchase shares of Fractal Common Stock or
MetaTools Common Stock, as the case may be, to be granted at fair market
value in the ordinary course of business, consistent with past practice and
in accordance with stock option plans existing as of the date of the
Reorganization Agreement, (iii) shares of Fractal Common Stock or MetaTools
Common Stock, as the case may be, issuable upon the exercise of the options
referred to in clause (ii), (iv) shares of MetaTools Common Stock issuable
to participants in the MetaTools Employee Stock Purchase Plan consistent
with past practice and the terms thereof and (v) shares of Fractal Common
Stock or MetaTools Common Stock, as the case may be, issuable pursuant to
the Stock Option Agreements;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Fractal or MetaTools,
as the case may be, or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Fractal or MetaTools, as the case may be, except in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of Fractal
or MetaTools, as the case may be, or guarantee any debt securities of
others;
(k) Adopt or amend any employee benefit or stock purchase or option plan,
or enter into any employment contract, pay any special bonus or special
remuneration to any director or employee, or increase the salaries or wage
rates of its officers or employees other than in the ordinary course of
business, consistent with past practice, or change in any material respect
any management policies or procedures;
(l) Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business;
(m) Make any grant of exclusive rights to any third party, other than in
the ordinary course of business;
(n) Take any action that would be reasonably likely to interfere with
MetaTools' ability to account for the Merger as a pooling of interests; or
(o) Agree in writing or otherwise to take any of the actions described in
(a) through (n) above.
NO SOLICITATION
Under the terms of the Reorganization Agreement, until the earlier of the
Effective Time or termination of the Reorganization Agreement pursuant to its
terms, each of MetaTools and Fractal has agreed that it will not, its
subsidiaries will not, and it will instruct its respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (i) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group (other
than Fractal or MetaTools, as the case may be, and its affiliates, agents and
representatives) or (ii) participate in any discussions or negotiations with,
or disclose any non-public information concerning itself or any of its
subsidiaries to, or afford any access
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to the properties, books or records of itself or any of its subsidiaries to,
or otherwise assist or facilitate, or enter into any agreement or
understanding with, any person, entity or group (other than Fractal or
MetaTools, as the case may be, and its affiliates, agents and
representatives), in connection with any "Acquisition Proposal" with respect
to itself. For the purposes of the Reorganization Agreement, an "Acquisition
Proposal" with respect to an entity means any proposal or offer relating to
(i) any merger, consolidation, sale of substantial assets or similar
transactions involving the entity or any subsidiaries of the entity (other
than sales of assets or inventory in the ordinary course of business or as
permitted under the terms of the Reorganization Agreement), (ii) sale of 15%
or more of the outstanding shares of capital stock of the entity (including
without limitation by way of a tender offer or an exchange offer), (iii) the
acquisition by any person of beneficial ownership or a right to acquire
beneficial ownership of, or the formation of any "group" (as defined under
Section 13(d) of the Exchange Act and the rules and regulations thereunder)
which beneficially owns, or has the right to acquire beneficial ownership of,
15% or more of the then outstanding shares of capital stock of the entity
(except for acquisitions for passive investment purposes only in circumstances
where the person or group qualifies for and files a Schedule 13G with respect
thereto); or (iv) any public announcement of a proposal, plan or intention to
do any of the foregoing or any agreement to engage in any of the foregoing.
Under the terms of the Reorganization Agreement, each of MetaTools and Fractal
has agreed to immediately cease any and all existing activities, discussions
or negotiations with any parties with respect to any of the foregoing. In
addition, each of MetaTools and Fractal has agreed to (i) notify the other as
promptly as practicable if any inquiry or proposal is made or any information
or access is requested in writing in connection with an Acquisition Proposal
or potential Acquisition Proposal and (ii) as promptly as practicable notify
the other of the significant terms and conditions of any such Acquisition
Proposal. In addition, subject to the other provisions set forth in the
section of the Reorganization Agreement summarized here, each of MetaTools and
Fractal has agreed, until the earlier of the Effective Time and termination of
the Reorganization Agreement pursuant to its terms, that it and its
subsidiaries will not, and it and its subsidiaries will instruct their
respective directors, officers, employees, representatives, investment
bankers, agents and affiliates not to, directly or indirectly, make or
authorize any public statement, recommendation or solicitation in support of
any Acquisition Proposal made by any person, entity or group (other than
Fractal or MetaTools, as the case may be); provided, that MetaTools and
Fractal have agreed that the MetaTools Board and Fractal Board may take and
disclose to the stockholders of MetaTools or shareholders of Fractal,
respectively, a position with respect to a tender offer pursuant to Rules 14d-
9 and 14e-2 promulgated under the Exchange Act.
Notwithstanding the foregoing, MetaTools and Fractal have agreed that, prior
to the Effective Time, each of MetaTools and Fractal may, to the extent its
Board of Directors determines, in good faith, after consultation with outside
legal counsel, that the Board of Directors' fiduciary duties under applicable
law require it to do so, participate in discussions or negotiations with, and,
subject to the requirements of the following paragraph, furnish information to
any person, entity or group after such person, entity or group has delivered
to MetaTools or Fractal, as the case may be, in writing, an unsolicited bona
fide Acquisition Proposal which the MetaTools Board or Fractal Board,
respectively, in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of MetaTools or
the shareholders of Fractal, respectively (a "Superior Proposal"). In
addition, notwithstanding the provisions of the preceding paragraph, in
connection with a possible Acquisition Proposal, each of MetaTools and Fractal
may refer any third party to the section of the Reorganization Agreement
summarized here or make a copy of such section available to a third party. In
the event either MetaTools or Fractal receives a Superior Proposal, nothing
contained in the Reorganization Agreement (but subject to the terms of the
Reorganization Agreement) will prevent the MetaTools Board or Fractal Board,
as the case may be, from recommending such Superior Proposal to the
stockholders or shareholders (as applicable) of such company, if such Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of such company may withdraw, modify or refrain
from making its recommendations concerning the Merger, and, to the extent the
Board of Directors of such company so changes its recommendations, such
company may refrain from soliciting proxies and taking such other action
necessary to secure the vote of its shareholders as may be required by the
Reorganization Agreement; provided, however, that each of MetaTools and
Fractal has agreed that it will not
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recommend a Superior Proposal to its stockholders or shareholders (as
applicable) for a period of not less than 48 hours after the other's receipt
of a copy of such Superior Proposal (or a description of the significant terms
and conditions thereof, if not in writing); and provided further, that nothing
contained in the section of the Reorganization Agreement summarized here
limits the obligations of MetaTools and Fractal to hold and convene the
MetaTools Annual Meeting or the Fractal Special Meeting, as the case may be
(regardless of whether the recommendations of the MetaTools Board or Fractal
Board have been withdrawn, modified or not yet made).
Notwithstanding the foregoing, each of MetaTools and Fractal has agreed that
it will not provide any non-public information to a third party unless: (a) it
provides such non-public information pursuant to a nondisclosure agreement
with terms regarding the protection of confidential information at least as
restrictive as the terms in a certain confidentiality agreement between
MetaTools and Fractal and (b) such non-public information is the same
information previously delivered to the other.
BREAK UP FEES
Except as set forth below, MetaTools and Fractal have agreed that all fees
and expenses incurred in connection with the Reorganization Agreement and the
transactions contemplated thereby will be paid by the party incurring such
expenses whether or not the Merger is consummated, except that MetaTools and
Fractal will share equally all fees and expenses, other than attorneys' and
accountants fees and expenses, incurred in connection with the printing and
filing of this Joint Proxy Statement/Prospectus.
In addition, each of MetaTools and Fractal has agreed that if (a) its Board
withholds, withdraws or modifies, in a manner adverse to the other, certain of
its recommendations concerning the Merger, and at that time (i) there has not
occurred a material adverse effect on the other party and (ii) the provision
by each company's attorneys of an opinion that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code shall not be
incapable of being satisfied, or if (b) its Board recommends a Superior
Proposal to its stockholders or shareholders (as applicable), then it will pay
to the other party an amount equal to $4 million within one business day
following the earlier to occur of (A) termination of the Reorganization
Agreement by the other party in connection with such action or (B) a Negative
Vote (as defined below) with regard to MetaTools or Fractal, respectively. A
"Negative Vote" with regard to MetaTools means that the vote of the
stockholders of MetaTools in favor of (a) an increase in the authorized number
of shares of MetaTools Common Stock so as to permit the issuance of shares of
MetaTools Common Stock by virtue of the Merger, or (b) the issuance of
MetaTools Common Stock by virtue of the Merger is not obtained by reason of
the failure to obtain the required vote upon a vote taken at a meeting of
stockholders duly convened therefor or at any adjournment thereof; and a
"Negative Vote" with regard to Fractal means that the vote of the shareholders
of Fractal in favor of approving and adopting the Reorganization Agreement and
approving the Merger is not obtained by reason of the failure to obtain the
required vote upon a vote taken at a meeting of shareholders duly convened
therefor or at any adjournment thereof.
MetaTools and Fractal have also agreed that if no payment is required
pursuant to the foregoing paragraph, and if (a) a Negative Vote with regard to
it occurs and (b) prior to such Negative Vote there shall have occurred an
Acquisition Proposal with respect to it which has been publicly disclosed and
not withdrawn (a "Competing Proposal") and (c) (i) within 12 months following
such Negative Vote, it enters into a definitive agreement with respect to an
Acquisition Proposal with the party (or any affiliate of the party) that made
the Competing Proposal or an Acquisition Proposal with such party (or any such
affiliate) is consummated or (ii) within six months following such Negative
Vote, it enters into a definitive agreement with respect to an Acquisition
Proposal with any other party or an Acquisition Proposal with respect to any
other party shall have been consummated, then, provided that no material
adverse effect on the other prior had occurred prior to the Negative Vote, it
will pay to the other party, within one business day following demand for such
payment, an amount equal to $4 million.
If no payment is required pursuant to the provisions of either of the
preceding two paragraphs and if there is a Negative Vote with regard to either
MetaTools or Fractal then such company has agreed to pay to the other party an
amount equal to $750,000 within one business day following demand for such
payment.
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MetaTools and Fractal have agreed that payment of the fees described in this
section will not be in lieu of damages incurred in the event of breach of the
Reorganization Agreement.
CONDITIONS TO THE MERGER
The respective obligations of each party to the Reorganization Agreement to
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of the following conditions: (a) certain approvals by the stockholders of
MetaTools and the shareholders of Fractal shall have been obtained, (b) the
SEC shall have declared the Registration Statement effective and no stop order
suspending the effectiveness of the Registration Statement or any part thereof
shall have been issued and no proceeding for that purpose, and no similar
proceeding in respect of the Joint Proxy Statement shall have been initiated
or threatened in writing by the SEC, (c) no Governmental Entity shall have
enacted, issued, promulgated, enforced or entered any statute, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is in effect and which has the
effect of making the Merger illegal or otherwise prohibiting consummation of
the Merger and all waiting periods, if any, under the Hart Scott Rodino Act
relating to the transactions contemplated by the Reorganization Agreement will
have expired or terminated early, (d) MetaTools and Fractal each shall have
received written opinions from legal counsel to the effect that the Merger
will constitute a reorganization within the meaning of Section 368(a) of the
Code, (e) the shares of Combined Company Common Stock issuable to shareholders
of Fractal pursuant to the Reorganization Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall have
been authorized for listing on Nasdaq and (f) each of MetaTools and Fractal
shall have received a letter from its outside auditor regarding the
appropriateness of pooling of interest accounting for the Merger.
In addition, the obligation of Fractal to consummate and effect the Merger
is subject to the satisfaction at or prior to the Effective Time of each of
the following conditions, any of which may be waived, in writing, exclusively
by Fractal: (a) the representations and warranties of MetaTools and Merger Sub
contained in the Reorganization Agreement shall be true and correct, (b)
MetaTools and Merger Sub shall have performed or complied in all material
respects with all agreements and covenants required by the Reorganization
Agreement to be performed or complied with by them on or prior to the
Effective Time and (c) no material adverse effect with respect to MetaTools
shall have occurred since the date of the Reorganization Agreement.
Further, the obligations of MetaTools and Merger Sub to consummate and
effect the Merger are subject to the satisfaction at or prior to the Effective
Time of each of the following conditions, any of which may be waived, in
writing, exclusively by MetaTools: (a) the representations and warranties of
Fractal contained in the Reorganization Agreement shall be true and correct,
(b) Fractal shall have performed or complied in all material respects with all
agreements and covenants required by the Reorganization Agreement to be
performed or complied with by it on or prior to the Effective Time, (c) no
material adverse effect with respect to Fractal shall have occurred since the
date of the Reorganization Agreement, (d) holders of more than 4.9% of the
outstanding shares of Fractal Common Stock shall not have exercised, nor shall
they have a continued right to exercise, appraisal, dissenters' or similar
rights under applicable law with respect to their shares by virtue of the
Merger and (e) Mark Zimmer and Thomas Hedges shall have entered into
noncompetition agreements and such agreements shall be in full force and
effect.
TERMINATION OF THE REORGANIZATION AGREEMENT
The Reorganization Agreement provides that it may be terminated at any time
prior to the Effective Time (a) by mutual written consent duly authorized by
the MetaTools and Fractal Boards, (b) by either Fractal or MetaTools if the
Merger has not been consummated by August 31, 1997 for any reason; provided,
that the right to terminate the Reorganization Agreement under this provision
is not available to any party whose action or failure to act has been a
principal cause of or resulted in the failure of the Merger to occur on or
before such date and such action or failure to act constitutes a breach of the
Reorganization Agreement, (c) by either Fractal or MetaTools if a Governmental
Entity issues an order, decree or ruling or takes any other action, in any
case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Merger, which order, decree
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or ruling is final and nonappealable, (d) by either Fractal or MetaTools if
the required approvals of the shareholders of Fractal or the stockholders of
MetaTools contemplated by the Reorganization Agreement have not been obtained
by reason of the failure to obtain the required vote upon a vote taken at a
meeting of shareholders or stockholders (as applicable) duly convened therefor
or at any adjournment thereof (provided that the right to terminate the
Reorganization Agreement under this provision is not available to any party
where the failure to obtain shareholder or stockholder approval (as
applicable) of such party was caused by the action or failure to act of such
party in breach of the Reorganization Agreement), (e) by MetaTools, if the
Fractal Board recommends a Superior Proposal with regard to Fractal to the
shareholders of Fractal, or if the Fractal Board withholds, withdraws or
modifies in a manner adverse to MetaTools its recommendations concerning the
Merger, (f) by Fractal, if the MetaTools Board recommends a Superior Proposal
with regard to MetaTools to the stockholders of MetaTools, or if the MetaTools
Board withholds, withdraws or modifies in a manner adverse to Fractal its
recommendations concerning the Merger, (g) by Fractal, upon certain breaches
of any representation, warranty, covenant or agreement on the part of
MetaTools set forth in the Reorganization Agreement or (h) by MetaTools, upon
certain breaches of any representation, warranty, covenant or agreement on the
part of Fractal set forth in the Reorganization Agreement.
STOCK OPTION AGREEMENTS
As an inducement to the other party, each of MetaTools and Fractal entered
into a Stock Option Agreement with the other dated as of February 11, 1997,
pursuant to which, subject to certain conditions, MetaTools granted to Fractal
(the "Fractal Option") and Fractal granted to MetaTools (the "MetaTools
Option") rights to acquire up to a number of shares of MetaTools Common Stock
or Fractal Common Stock, as the case may be, equal to 19.9% of the issued and
outstanding such shares as of the first date, if any, upon which an Exercise
Event (as defined below) with regard to such Stock Option Agreement occurs.
The exercise price for the Fractal Option or the MetaTools Option is, at the
option of the exercising party, either (a) cash at a price of $15 per share in
the case of the Fractal Option and $11.235 per share in the case of the
MetaTools Option (the "Exercise Price") or (ii) exchange of shares of Fractal
Common Stock or MetaTools Common Stock, as the case may be, at a rate, for
each share of MetaTools Common Stock or Fractal Common Stock purchased, of a
number of shares of Fractal Common Stock or MetaTools Common Stock,
respectively, equal to the applicable Exercise Price divided by the closing
sale price of Fractal Common Stock or MetaTools Common Stock, respectively, on
Nasdaq for the trading day immediately preceding the date of the closing of
the particular option exercise.
The Fractal Option and the MetaTools Option, as the case may be, may be
exercised in whole or in part, (i) if the stockholders of MetaTools or the
shareholders of Fractal, respectively, fail to give certain approvals in
connection with the Merger at a time when a Competing Proposal is in effect
and such company enters into a definitive agreement to consummate a Competing
Proposal or a Competing Proposal with respect to such company is completed
within certain times, (ii) immediately prior to the consummation of a tender
or exchange offer for 25% or more of any class of MetaTools' capital stock or
Fractal's capital stock, respectively or (iii) immediately prior to the
consummation of, or the record date, if any, with regard to a meeting of
MetaTools stockholders or Fractal shareholders, with regard to an Acquisition
proposal with respect to MetaTools or Fractal, respectively, if the MetaTools
or Fractal Board, respectively, withholds or withdraws or modifies in a manner
adverse to the other party certain of its recommendations concerning the
Merger after receipt of and in connection with an Acquisition Proposal with
respect to it (any of the events specified in clauses (i), (ii) or (iii) of
this sentence being referred to as an "Exercise Event"). If Fractal or
MetaTools, respectively, receives in the aggregate pursuant to certain
provisions of the Reorganization Agreement with regard to fees and expenses,
together with proceeds in connection with any sales or other dispositions of
shares of stock received upon exercise of the Fractal Option or the MetaTools
Option, as the case may be, (and any dividends received by it on such shares)
more than the sum of (a) $4 million plus (b) the applicable Exercise Price
multiplied by the number of shares of MetaTools Common Stock or Fractal Common
Stock, as the case may be, purchased pursuant to such option, then all
proceeds to such party in excess of such sum shall be remitted to the other
party.
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The Fractal Option or the MetaTools Option, as the case may be, will
terminate upon the earliest of (i) the Effective Time, (ii) 12 months
following the termination of the Reorganization Agreement if an Exercise Event
has occurred on or prior to the date of such termination and (iii) the date on
which the Merger Agreement is terminated if no Exercise Event shall have
occurred on or prior to such termination; provided, however, that if the
Fractal Option or the MetaTools Option, as the case may be, is exercisable but
cannot be exercised by reason of any applicable government order, or the need
for certain government approvals then such option shall not terminate until
the tenth business day after such impediment to exercise shall have been
removed or shall have become final and not subject to appeal. Notwithstanding
the foregoing, the Fractal Option or the MetaTools Option, as the case may be,
may not be exercised if (i) Fractal or MetaTools, respectively, has breached
in any material respect any of its covenants or agreements contained in the
Reorganization Agreement or (ii) the representations and warranties of Fractal
or MetaTools, respectively, contained in the Reorganization Agreement were not
true in all material respects on and as of the date when made.
At the request of and upon notice by Fractal or MetaTools, as the case may
be (the "Put Notice"), at any time during the period during which the Fractal
Option or the MetaTools Option, respectively, is exercisable, each of
MetaTools or Fractal, respectively, has agreed to purchase (a) the Fractal
Option or the MetaTools Option, respectively, to the extent not previously
exercised, at a price equal to the number of shares issuable upon exercise of
such option multiplied by the difference between (i) the greater of the
highest price per share offered as of such date pursuant to any public and
not-withdrawn Acquisition Proposal with respect to MetaTools or Fractal,
respectively, or the highest closing sale price of MetaTools Common Stock or
Fractal Common Stock, respectively, on Nasdaq during the twenty (20) trading
days ending on the trading day immediately preceding such date (the
"Market/Tender Offer Price") and (ii) the Exercise Price, and (b) the shares
issued upon exercise of the Fractal Option or the MetaTools Option,
respectively, if any, at a price per share equal to the applicable Exercise
Price plus the difference between the applicable Market/Tender Offer Price and
such Exercise Price. Notwithstanding the foregoing, MetaTools or Fractal,
respectively, will not be required to pay the other party in connection with
the events set forth in this paragraph in excess of an aggregate of (a) $4
million plus (b) any Exercise Price paid minus (c) any amounts paid to Fractal
or MetaTools, respectively, pursuant to certain provisions of the
Reorganization Agreement involving fees and expenses.
MetaTools and Fractal have further agreed that, if the other party has
acquired shares pursuant to exercise of the Fractal Option or the MetaTools
Option, as the case may be, (the date of any Closing relating to any such
exercise referred to as an "Exercise Date") and no Acquisition Proposal with
respect to MetaTools or Fractal, as the case may be, has been consummated at
any time after the date of the Fractal Stock Option Agreement or the MetaTools
Stock Option Agreement, respectively, and prior to the date one year following
such Exercise Date (nor has MetaTools or Fractal, respectively, entered into a
definitive agreement or letter of intent with respect to such an Acquisition
Proposal which agreement or letter of intent remains in effect at the end of
such year), then, at any time after the date one year following such Exercise
Date and prior to the date eighteen months following such Exercise Date,
MetaTools or Fractal, as the case may be, may require the other party to sell
to it any shares of MetaTools Common Stock or Fractal Common Stock,
respectively, held by Fractal or MetaTools, respectively, as of the day that
is ten business days after the date of such notice, up to a number of shares
equal to the number of such shares acquired by Fractal or MetaTools,
respectively, pursuant to exercise of the Fractal Option or the MetaTools
Option, as the case may be. The per share purchase price for such sale will be
equal to the appropriate Exercise Price plus an amount equal to six percent
(6.0%) of the Exercise Price per annum, compounded annually, since the
applicable Exercise Date, less any dividends paid on the shares to be
purchased (the "Call Price"), payable in cash or by the return of a number of
shares of Fractal Common Stock or MetaTools Common Stock, as the case may be,
equal to the Call Price divided by the closing sale price of a share of
Fractal Common Stock or MetaTools Common Stock, respectively, on Nasdaq for
the trading day immediately preceding the date of the Exercise Date on which
the shares to be purchased were originally issued. See Annexes B-1 and B-2
attached hereto.
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AFFILIATE AGREEMENTS
Each of the members of the MetaTools Board, certain officers of MetaTools
and certain other affiliates of MetaTools have entered into agreements
restricting sales, dispositions or other transactions reducing their risk of
investment in respect of the shares of MetaTools Common Stock held by them to
help ensure that the Merger will be treated as a pooling of interests for
accounting and financial reporting purposes. Each of the members of the
Fractal Board, certain officers of Fractal and certain other affiliates of
Fractal have entered into agreements restricting sales, dispositions or other
transactions reducing their risk of investment in respect of the shares of
Fractal Common Stock held by them prior to the Merger and the shares of
MetaTools Common Stock received by them in the Merger so as to comply with the
requirements of applicable federal securities and tax laws and to help ensure
that the Merger will be treated as a pooling of interests for accounting and
financial reporting purposes. See Annexes C-1 and C-2 attached hereto.
VOTING AGREEMENTS
Each executive officer and director and certain stockholders of MetaTools
(who own an aggregate of 5,933,701 shares of MetaTools Common Stock and
options exercisable within 60 days of the MetaTools Record Date to purchase
560,231 shares of MetaTools Common Stock, representing approximately 44.7% of
the votes entitled to be cast by holders of shares of MetaTools Common Stock
issued and outstanding as of the MetaTools Record Date, and 46.9% of such
votes assuming exercise of all vested options held by all such persons) have
entered into the MetaTools Voting Agreements with Fractal. Pursuant to the
MetaTools Voting Agreements, which are irrevocable, the foregoing persons have
agreed to vote all shares of MetaTools Common Stock they have beneficial
ownership of and any MetaTools Common Stock they acquire beneficial ownership
of prior to the termination of the MetaTools Voting Agreements in favor of
approval of (i) amendment of MetaTools' Certificate to increase its authorized
share capital to allow for the issuance of shares of MetaTools Common Stock by
virtue of the Merger, (ii) the issuance of shares of MetaTools Common Stock by
virtue of the Merger and (iii) any matter that could reasonably be expected to
facilitate the Merger (collectively, the "MetaTools Voting Agreement Events").
In addition, certain of such persons have granted irrevocable proxies to the
Fractal Board to vote such persons' MetaTools Common Stock in favor of the
MetaTools Voting Agreement Events. See Annex D-1 attached hereto.
Each executive officer and director who owns shares of Fractal Common Stock
and certain shareholders of Fractal (who own an aggregate of 3,451,306 shares
of Fractal Common Stock and options exercisable within 60 days of the Fractal
Record Date to purchase 579,078 shares of Fractal Common Stock, representing
approximately 28.7% of the votes entitled to be cast by holders of Fractal
Common Stock issued and outstanding as of the Fractal Record Date, and 32.0%
of such votes assuming exercise of all vested options held by all such
persons) have entered into the Fractal Voting Agreements with MetaTools.
Pursuant to the Fractal Voting Agreements, which are irrevocable, the
foregoing persons have agreed to vote all shares of Fractal Common Stock they
have beneficial ownership of and any Fractal Common Stock they acquire
beneficial ownership of prior to the termination of the Fractal Voting
Agreements in favor of approval of (i) the Merger Agreement and the Merger and
(ii) any matter that could reasonably be expected to facilitate the Merger
(collectively, "Fractal Voting Agreement Events"). In addition, certain of
such persons have granted irrevocable proxies to the MetaTools Board to vote
such persons' Fractal Common Stock in favor of the Fractal Voting Agreement
Events. See Annex D-2 attached hereto.
NONCOMPETITION AGREEMENTS
Each of Mark Zimmer and Thomas Hedges has entered into a Noncompetition
Agreement with MetaTools pursuant to which each such person agrees that for a
period beginning on February 11, 1997 and ending thirty (30) months from the
Effective Time, he will not individually or as an employee, consultant,
advisor, independent contractor, partner, officer, director, stockholder or
investor or in any other capacity whatsoever of or for any person, firm,
partnership, company or corporation other than MetaTools or its subsidiaries:
own, manage, operate, sell, control or participate in the ownership,
management, operation, sales or control of or permit his
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name to be used in connection with any business engaged in the design,
development, manufacturing, licensing, sale, marketing or distribution of any
computer software products for certain graphics and design software markets in
certain geographical areas.
EMPLOYEE BENEFITS
Employment Letter Agreement
MetaTools and Mark Zimmer and Thomas Hedges entered into a letter agreement,
dated February 11, 1997 (the "Employment Letter Agreement"). Pursuant to the
Employment Letter Agreement, Mr. Zimmer's title will be Chief Technical
Officer of the Combined Company and Mr. Hedges' title will be Chief Systems
Architect of the Combined Company. For calendar 1997, Mr. Zimmer's and Mr.
Hedges' salaries will be $240,000 and $190,000, respectively. In addition,
Messrs. Zimmer and Hedges will be eligible for certain bonuses if certain
earnings estimates for the Combined Company are met in calendar 1997.
Employee Transition Plan
MetaTools and Fractal have entered into an agreement regarding certain
employee transition matters (the "Transition Agreement"). Pursuant to the
Transition Agreement, those Fractal employees who are terminated without cause
within ninety (90) days of the closing of the Merger will be entitled to
receive severance benefits which are no less favorable than, and are
consistent with, the past severance practices of Fractal. In addition, the
Transition Agreement states that it is anticipated that all Fractal employees
who are not offered permanent positions with the Combined Company will be
offered certain retention bonuses in connection with their employment with the
Combined Company for periods following the closing of the Merger. The terms of
such retention bonus plan have not been finalized. The Transition Agreement
states that it is the intention that the Fractal employees employed by the
Combined Company will be compensated at levels no less favorable than such
employees' compensation levels at the time of the closing of the Merger. The
Transition Agreement states that although Fractal grants additional options to
purchase Fractal Common Stock to its employees in the ordinary course of
business on April 1 of each year, Fractal agrees that it will not make a grant
at any time prior to April 1, 1997 if MetaTools commits to a mutually
acceptable program to grant employees continuing with the Combined Company
options to purchase additional shares of MetaTools Common Stock at the closing
of the Merger. If no such commitment is agreed upon, Fractal may make
additional grants of options to purchase Fractal Common Stock.
INTERESTS OF CERTAIN PERSONS
Fractal Options
In connection with agreements previously entered into with Fractal, options
held directly or beneficially by the following persons for the following
numbers of shares of Fractal Common Stock will vest in full and become
exercisable immediately prior to the consummation of the Merger: (i) Mark
Zimmer, President and Chief Executive Officer: 57,657 shares; (ii) Thomas
Hedges, Vice President, Research and Development: 47,657 shares; (iii) Leslie
Wright, Chief Financial Officer and Chief Operating Officer: 119,688 shares;
(iv) Joseph Consul, Vice President, Operations: 47,949 shares; (v) Braden
Rippetoe, Vice President, Finance: 31,688 shares; (vi) Karen Bria, Vice
President, International Sales and Marketing: 41,845 shares; (vii) Michael
Popolo, Vice President, North American Sales: 41,845 shares; (viii) Pierre
Berkaloff, Vice President, Engineering: 59,858 shares; (ix) Steven Guttman,
Vice President, Marketing: 71,563 shares; (x) John Derry, Vice President,
Creative Design: 34,532 shares; (xi) Arthur Collmeyer, Director: 18,125
shares; (xii) Craig Johnson, Director: 3,625 shares; (xiii) Lee Jay Lorenzen,
Director: 18,125 shares; (xiv) Stephen Manousos, Director: 13,782 shares;
(xvii) Thomas Unterberg, Director: 24,375 shares and (xiv) certain investment
partnerships affiliated with VLG: 14,500 shares. Such options represent an
aggregate 646,814 shares of Fractal Common Stock. Also, options to purchase an
aggregate 60,000 shares of Fractal Common Stock granted to Arthur Collmeyer,
Craig Johnson, Lee Jay Lorenzen, Alain Rossmann, Anthony Sun,
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Thomas Unterberg and an investment partnership affiliated with VLG under the
1995 Directors' Stock Option Plan will, in accordance with the terms of such
plan, vest in full and become exercisable immediately prior to the
consummation of the Merger. The foregoing share numbers are as of April 1,
1997; certain of the shares will vest prior to consummation of the Merger in
accordance with the terms of the respective option agreements to which they
are subject.
Indemnity and Insurance
From and after the Effective Time, MetaTools will fulfill and honor and will
cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Fractal pursuant to any indemnification agreements between
Fractal and its directors and officers existing prior to February 11, 1997.
From and after the Effective Time, such obligations shall be the joint and
several obligations of MetaTools and the Surviving Corporation and MetaTools
will assume such obligations. The Articles of Incorporation and Bylaws of the
Surviving Corporation will contain the provisions with respect to
indemnification set forth in the Amended and Restated Articles of
Incorporation and Bylaws of Fractal, which provisions will not be amended,
repealed or otherwise modified for a period of six years from the Effective
Time in any manner that would adversely affect the rights thereunder of
individuals who, immediately prior to the Effective Time, were directors,
officers, employees or agents of Fractal, unless such modification is required
by law.
For a period of six years after the Effective Time, MetaTools will cause the
Surviving Corporation to use its commercially reasonable efforts to maintain
in effect, if available, directors' and officers' liability insurance covering
those persons who are currently covered by Fractal's directors' and officers'
liability insurance policy on terms comparable to those applicable to the then
current directors and officers of MetaTools; provided, however, that in no
event will MetaTools or the Surviving Corporation be required to expend in
excess of 175% of the annual premium currently paid by Fractal for such
coverage (or such coverage as is available for such 175% of the annual
premium).
The indemnification and insurance obligations of the Reorganization
Agreement will survive any termination of the Reorganization Agreement and the
consummation of the Merger at the Effective Time, is intended to benefit
Fractal, the Surviving Corporation and the indemnified parties, and will be
binding on all successors and assigns of the Surviving Corporation.
Unterberg Harris Fee
The $1.1 million fee payable by Fractal to Unterberg Harris, Fractal's
financial advisor, in connection with the Merger, is contingent upon the
closing of the Merger. Thomas Unterberg, a managing director of Unterberg
Harris, is a director of Fractal. See "The Merger and Related Transactions--
Opinion of Fractal's Financial Advisor."
Employment Letter Agreements
Messrs. Zimmer and Hedges, the President and Chief Executive Officer and
Vice President, Research and Development, respectively, of Fractal have
entered into a letter agreement with MetaTools addressing their employment
with the Combined Company. See "--Employee Benefits--Employment Letter
Agreement."
Employee Transition Plan
MetaTools and Fractal have entered into a Transition Agreement regarding
certain employee transition matters. See "--Employee Benefits--Employee
Transition Plan."
Legal Fees
Craig Johnson, a director of Fractal, also is a director of VLG, legal
counsel to Fractal. VLG will receive customary fees and expenses in connection
with its representation of Fractal in the Merger.
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DISSENTERS' RIGHTS
General
The shares of any holder of Fractal Common Stock who has demanded and
perfected dissenters' rights for such shares in accordance with the CCC and
who, as of the Effective Time, has not effectively withdrawn or lost such
dissenters' rights ("Dissenting Shares"), shall not be converted into or
represent a right to receive Combined Company Common Stock, but the holder
thereof shall only be entitled to such rights as are granted by California
Law.
Notwithstanding the foregoing, if any holder of shares of Fractal Common
Stock who demands appraisal of such shares has exercised dissenters' rights
under California Law shall effectively withdraw or lose (through failure to
perfect or otherwise) such right, then, as of the later of the Effective Time
or the occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive Combined Company Common
Stock and cash in lieu of fractional shares of Combined Company Common Stock,
without interest thereon, upon surrender of the certificate representing such
shares of Fractal Common Stock in the manner provided in the Reorganization
Agreement (or in the case of a lost, stolen or destroyed certificate, upon
delivery of an affidavit (and bond, if required)).
Fractal shall give MetaTools (i) prompt notice of any written demands for
appraisal of any shares of Fractal Common Stock, withdrawals of such demands,
and any other instruments served pursuant to California Law and received by
Fractal which relate to any such demand for appraisal and (ii) the opportunity
to participate in all negotiations and proceedings which take place prior to
the Effective Time with respect to demands for appraisal under California Law.
Fractal shall not, except with the prior written consent of MetaTools or as
may be required by applicable law, voluntarily make any payment with respect
to any demands for appraisal of Fractal Common Stock or offer to settle or
settle any such demands. Any payments made in respect of Dissenting Shares
shall be made by Fractal or the Surviving Corporation as the case may be.
Shareholders of Fractal
"Fractal Dissenting Shares," means shares of Fractal Common Stock with
respect to which the holder thereof has perfected such holder's demand that
Fractal purchase the holder's shares in accordance with Chapter 13 ("Chapter
13") of the CCC and with respect to which the holder thereof has not
effectively withdrawn or lost such rights. "Fractal Dissenting Shareholder,"
as that term is used in this Joint Proxy Statement/Prospectus, means a Fractal
shareholder of record as of April 11, 1997, who wishes to exercise dissenters'
rights, or such holder's duly appointed representative, or a transferee of
record of a holder of Fractal Dissenting share. If a Fractal Dissenting
Shareholder exercises dissenters' rights under Chapter 13 in connection with
the Merger, such holder's Fractal Dissenting Shares will not be converted into
the right to receive shares of Combined Company Common Stock, but rather will
be converted into the right to receive such consideration as may be determined
to be due with respect to such Fractal Dissenting Shares pursuant to the CCC.
A shareholder who wishes to exercise dissenters' rights must not vote in
favor of the Reorganization Agreement and the Merger at the Fractal Special
Meeting. However, failure to vote in favor of the Merger will not, in and of
itself, be sufficient notice of such shareholder's intention to dissent.
Rather, any shareholder wishing to exercise dissenters' rights must comply
with the procedures set forth in Chapter 13.
Required Procedures Under Chapter 13
A summary of the material provisions of Chapter 13 is provided below.
Reference is made to the full text of Chapter 13, a copy of which is attached
to this Joint Proxy Statement/Prospectus as Appendix E and is incorporated
herein by reference. Shareholders of Fractal are urged to read carefully the
full text of Chapter 13 contained in Appendix E.
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If the Merger is approved by the required vote of Fractal's shareholders and
is not abandoned or terminated, each holder of shares of Fractal Common Stock
who does not vote in favor of the Merger and who follows the procedures set
forth in Chapter 13 will be entitled to have such holder's shares of Fractal
Common Stock purchased by Fractal for cash at their fair market value. The
fair market value of shares of Fractal Common Stock will be determined as of
the day before the first announcement of the terms of the Merger, excluding
any appreciation or depreciation in consequence of the Merger, but adjusted
for any stock split, reverse stock split, or share dividend that becomes
effective thereafter. The determination of fair market value will be made by
agreement between Fractal and any dissenting shareholder, or in the event
agreement cannot be reached, by the Superior Court of Santa Cruz County (the
"Court"). If the Court is to determine the fair market value, the court may do
so itself or may appoint one or more appraisers. If the Court appoints
appraisers, each appraiser will submit a report to the Court, which the Court
will consider, but is not bound to accept in making a final determination of
the fair market value. The CCC does not specify the criteria and other
considerations that the Court may employ in determining fair market value, and
California courts generally have interpreted such term to mean the price at
which a willing and fully informed buyer and seller would trade the stock
under existing conditions. The Court may employ certain methods of valuation,
such as liquidation value or asset value, to the extent that they provide
evidence as to fair market value, although they are not substitutes for fair
market value.
Within ten (10) days after approval of the merger by Fractal's shareholders,
Fractal must mail a notice of such approval (the "Approval Notice") to all
Fractal shareholders who did not vote in favor of the Merger, together with a
statement of the price determined by Fractal to represent the fair market
value of a Fractal Dissenting Share, a brief description of the procedures to
be followed in order to pursue dissenters' rights, and a copy of Sections 1300
through 1304 of the CCC. The statement of price made in the approval Notice
will constitute an offer by Fractal to purchase all Fractal Dissenting Shares
at the stated amount, unless such shares lose their status as Fractal
Dissenting Shares as described below.
A Fractal Dissenting Shareholder must make a written demand upon Fractal for
the purchase of such holder's Fractal Dissenting Shares and for payment to the
Fractal Dissenting Shareholder in cash of the fair market value of such
shares. The written demand must state the number and class of the shares of
Fractal Common Stock held of record by the Fractal Dissenting Shareholder that
the Fractal dissenting shareholder demands that Fractal purchase and must
contain a statement of what such Fractal dissenting shareholder claims to be
the fair market value of those shares as of the day before the announcement of
the Merger. The statement of fair market value will constitute an offer by the
Fractal Dissenting Shareholder to sell the shares to Fractal at such price.
The written demand should also specify the Fractal Dissenting Shareholder's
name and mailing address. In order for such demand to be effective, it must be
received by Fractal no later than the day of the approval of the Merger by the
Fractal shareholders. Within thirty (30) days after the date of which the
Approval Notice is mailed to the Fractal Dissenting Shareholder, the Fractal
Dissenting Shareholder must also submit to Fractal the certificate(s)
representing such holder's Fractal Dissenting Share for endorsement as Fractal
Dissenting Share. The written demand and certificate(s) representing the
Fractal Dissenting Shares should be delivered to Fractal, 5550 Scotts Valley
Drive, Scotts Valley, California, 95066, Attention: Secretary.
If Fractal and a Fractal Dissenting Shareholder agree that the Fractal
Dissenting Shareholder's shares are Fractal Dissenting Shares and agree upon
the price of such shares, the Fractal Dissenting Shareholder will be entitled
to the agreed price with interest thereon at the legal rate on judgments from
the date of such agreement. Payment for such Fractal Dissenting Shares must be
made within thirty (30) days after the later of the date of such agreement or
the date on which all statutory and contractual conditions to the Merger are
satisfied, and is subject to the surrender by the Fractal Dissenting
Shareholder of the certificate(s) representing the Fractal Dissenting Shares.
If Fractal denies that a Fractal Dissenting Shareholder's shares qualify as
Fractal Dissenting Shares, or if Fractal and a Fractal Dissenting Shareholder
fail to agree upon the fair market value of the Fractal Dissenting Shares,
then the Fractal Dissenting Shareholder may file a complaint in the Court
requesting a determination as to whether the shares are Fractal Dissenting
Shares or as to the fair market value of the Fractal Dissenting Shareholder's
shares, or both. Such complaint must be filed within six (6) months after the
date on which the
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Approval Notice is mailed to the Fractal Dissenting Shareholder. A Fractal
Dissenting Shareholder may also intervene in any action pending on such a
complaint. Two or more Fractal Dissenting Shareholders may join as plaintiffs
or be joined as defendants in any such action and two or more such actions may
be consolidated. The costs of the action, including reasonable compensation to
appraisers that may be appointed by the Court, will be assessed or apportioned
as the Court considers equitable, and, except in the situation where the
appraised value exceeds the price offered by Fractal and Chapter 13 would
require that Fractal pay such expenses, may be apportioned to the Fractal
Dissenting Shareholders.
If any Fractal Dissenting Shareholder who demands the purchase of such
holder's shares of Fractal Common Stock fails to perfect, or effectively
withdraws or loses the right to such purchase, the shares of Fractal Common
Stock of such holder will be converted into the right to receive that number
of shares of Combined Company Common Stock equal to the Exchange Ratio in
accordance with the Reorganization Agreement. Fractal Dissenting Shares lose
their status as Fractal Dissenting Shares if (i) the Merger is abandoned; (ii)
the shares are transferred prior to their submission for the required
endorsement; (iii) the Fractal Dissenting Shareholder and Fractal do not agree
upon the status of the Fractal Dissenting Shareholder's shares as Fractal
Dissenting Shares or do not agree on the purchase price, but neither the
Fractal Dissenting Shareholder nor Fractal files a complaint of intervenes in
a pending motion within six (6) months after the Approval Notice is mailed to
the Fractal Dissenting Shareholder; or (iv) the Fractal Dissenting
Shareholder, with Fractal's consent withdraws the demand that Fractal purchase
such holder's Fractal Dissenting Shares.
Notwithstanding the foregoing, no shares of Fractal Common Stock shall
entitle their holder to dissenters' rights unless demands for payment as
referred to above are made with respect to at least 5% of the outstanding
shares of Fractal Common Stock.
Stockholders of MetaTools
Stockholders of MetaTools are not entitled to appraisal rights under the
Delaware General Corporation Law in connection with the Merger.
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COMPARISON OF CAPITAL STOCK
DESCRIPTION OF METATOOLS CAPITAL STOCK
The authorized capital stock of MetaTools consists of 30,000,000 shares of
Common Stock, $0.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share. At the MetaTools Annual Meeting,
stockholders will be asked to approve an amendment to the MetaTools
Certificate to increase the authorized capital stock of MetaTools by 45
million shares to 75 million shares. See "--Proposal 3--Amendment to Restated
Certificate of Incorporation--Increase Number of Authorized Shares."
MetaTools Common Stock
As of the MetaTools Record Date, there were 13,288,770 shares of MetaTools
Common Stock. MetaTools Common Stock is listed on Nasdaq under the symbol
"MTLS." Effective upon the closing of the Merger, the Combined Company intends
to change the Nasdaq symbol of the Combined Company to "MCRE." The outstanding
MetaTools Common Stock is held of record by approximately 181 stockholders. In
addition, stock options to purchase an aggregate of 3,245,971 shares of
MetaTools Common Stock were outstanding as of the MetaTools Record Date.
Stockholders of MetaTools Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. The stockholders may not
cumulate votes in connection with the election of directors. Subject to the
preferences that may be applicable to outstanding Preferred Stock, if any, the
holders of MetaTools Common Stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the Board of
Directors out of funds legally available therefor. In the event of a
liquidation, dissolution or winding up of MetaTools, the holders of MetaTools
Common Stock are entitled to share ratably in all assets remaining after
payment of liabilities, subject to the preferences that may be applicable to
outstanding Preferred Stock, if any. The MetaTools Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the MetaTools Common
Stock. All outstanding shares of MetaTools Common Stock are fully paid and
non-assessable, and the shares of MetaTools Common Stock to be outstanding
upon completion of the Merger will be fully paid and non-assessable.
Preferred Stock
MetaTools has 5,000,000 shares of Preferred Stock authorized, of which, as
of April 11, 1997, no shares are outstanding. The MetaTools Board has the
authority to issue these shares of Preferred Stock in one or more series and
to fix the rights, preferences, privileges and restrictions granted to or
imposed upon any unissued and undesignated shares of Preferred Stock and to
fix the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Although it
presently has no intention to do so, the MetaTools Board, without stockholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power or other rights of the holders of
MetaTools Common Stock. The issuance of Preferred Stock may also have the
effect of delaying, deferring or preventing a change in control of MetaTools
and negating MetaTools' ability to apply the pooling of interest method of
accounting to the Merger.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the MetaTools Common Stock is Boston
EquiServe. Its telephone number is (617) 575-2908.
DESCRIPTION OF FRACTAL CAPITAL STOCK
The authorized capital stock of Fractal consists of 50,000,000 shares of
Common Stock, $.001 par value per share, and 5,000,000 shares of Preferred
Stock, $0.001 par value per share.
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Fractal Common Stock
As of the Fractal Record Date, there were 12,034,126 shares of Fractal
Common Stock outstanding held of record by approximately 221 shareholders. In
addition, stock options to purchase an aggregate of 1,807,026 shares of
Fractal Common Stock were also outstanding as of the Fractal Record Date.
Fractal Common Stock is listed on Nasdaq under the symbol "FRAC." Holders of
Fractal Common Stock are entitled to one vote per share on all matters to be
voted upon by the shareholders. Pursuant to the Fractal Amended and Restated
Articles of Incorporation, as amended (the "Fractal Articles"), the
shareholders may cumulate votes in connection with the election of Directors,
until such time as Fractal becomes a "listed corporation" within the meaning
of Section 301.5 of the CCC. Subject to the preferences that may be applicable
to outstanding Preferred Stock, if any, the holders of Fractal Common Stock
are entitled to receive ratably such dividends, if any, as may be declared
form time to time by the Fractal Board out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of Fractal,
the holders of Fractal Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to the preferences that
may be applicable to outstanding Preferred Stock, if any. The Fractal Common
Stock has no preemptive or conversion rights or other subscription rights.
There are no redemption or sinking fund provisions applicable to the Fractal
Common Stock. All outstanding shares of Fractal Common Stock are fully paid
and non-assessable, and the shares of Combined Company Common Stock which are
received in exchange for the Fractal Common Stock to be outstanding upon
completion of the Merger will be fully paid and non-assessable.
Preferred Stock
Fractal has 5,000,000 shares of Preferred Stock authorized, of which, as of
April 11, 1997, no shares are outstanding. The Fractal Board has the authority
to issue these shares of Preferred Stock in one or more series and to fix the
rights, preferences, privileges and restrictions granted to or imposed upon
any unissued and undesignated shares of Preferred Stock and to fix the number
of shares constituting any series and the designations of such series, without
any further vote or action by the shareholders. Although it presently has no
intention to do so, the Fractal Board, without shareholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power or other rights of the holders of Fractal Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of Fractal.
Transfer Agent and Registrar
The Transfer Agent and Registrar of the Fractal Common Stock is Chase Mellon
Shareholder Services, L.L.C. Its telephone number is (415) 954-9512.
COMPARISON OF CAPITAL STOCK
After consummation of the Merger, the holders of Fractal Common Stock who
receive Combined Company Common Stock under the terms of the Reorganization
Agreement will become stockholders of MetaTools. As shareholders of Fractal,
their rights are presently governed by California law and by the Fractal
Articles and the Fractal Bylaws, as amended (the "Fractal Bylaws"). As
stockholders of MetaTools, their rights will be governed by Delaware law, the
MetaTools Certificate, and the MetaTools Bylaws (the "MetaTools Bylaws"). The
following discussion summarizes the material differences between the rights of
holders of Fractal Common Stock and holders of MetaTools Common Stock and
differences between the charters and Bylaws of Fractal and MetaTools. This
summary does not purport to be complete and is qualified in its entirety by
reference to the Fractal Articles and Fractal Bylaws, the MetaTools
Certificate and MetaTools Bylaws and the relevant provisions of California and
Delaware law.
Size of the Board of Directors. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the board of directors may fix the exact number of
directors within a stated range set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. The
Fractal Bylaws provide the Fractal Board the authority to set the exact number
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of directors within the range of six (6) to eleven (11). Delaware law permits
the board of directors alone to change the authorized number, or the range, of
directors by amendment to the bylaws, unless the directors are not authorized
to amend the bylaws or the number of directors is fixed in the certificate of
incorporation (in which case a change in the number of directors may be made
only by amendment to the certificate of incorporation following approval of
such change by the shareholders). The MetaTools Bylaws states that the number
of directors will initially be seven, but authorizes the MetaTools Board to
change the number by resolution. Contemporaneously with the mailing of this
Joint Proxy Statement/Prospectus, William J. Schroeder will resign from the
MetaTools Board and the MetaTools Board shall be reduced to six members. Upon
consummation of the Merger, the Board of Directors of the Combined Company
will be increased to nine members. The MetaTools Bylaws provide, consistent
with Delaware law, that the size of the Board of Directors may be changed
either by the approval of the MetaTools Board acting alone or by MetaTools'
stockholders.
Loans to Officers and Employees. Under California law, any loan or guaranty
to or for the benefit of a director or officer of the corporation or its
parent requires approval of the shareholders unless such loan or guaranty is
provided under a plan approved by shareholders owning a majority of the
outstanding shares of the corporation. In addition, under California law,
shareholders of any corporation with 100 or more shareholders of record may
approve a bylaw authorizing the board of directors alone to approve loans or
guaranties to or on behalf of officers (whether or not such officers are
directors) if the board determines that any such loan or guaranty may
reasonably be expected to benefit the corporation. Under Delaware law, a
corporation may make loans to, guarantee the obligations of or otherwise
assist its officers or other employees and those of its subsidiaries
(including directors who are also officers or employees) when such action, in
the judgment of the directors, may reasonably be expected to benefit the
corporation. The MetaTools Bylaws provide that MetaTools may make loans to,
guarantee the obligations of or otherwise assist its officers or other
employees and those of its subsidiaries (including directors who are also
officers or employees) when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation.
Voting by Ballot. California law provides that the election of directors may
proceed in the manner described in a corporation's bylaws. The Fractal Bylaws
provide that the election of directors at a shareholders' meeting may be by
voice vote or ballot, unless prior to such vote a shareholder demands vote by
ballot, in which case such vote must be by ballot. Under Delaware law, the
right to vote by written ballot may be restricted if so provided in the
certificate of incorporation. The MetaTools Certificate provides that the
election of directors at a stockholders' meeting may be by voice vote or
ballot, unless prior to such vote a shareholder demands vote by ballot, in
which case such vote must be by ballot.
Cumulative Voting. Generally, under California law, if any shareholder has
given notice of his intention to cumulate votes for the election of directors,
he and any other shareholder of the corporation is also entitled to cumulate
his or her votes at such election, unless the corporation's articles of
incorporation abolish the right to cumulative voting. Under Delaware law,
cumulative voting in the election of directors is not mandatory. Pursuant to
the Fractal Articles, the shareholders may cumulate votes in connection with
the election of directors, until such time as Fractal becomes a "listed
corporation" within the meaning of Section 301.5 of the CCC. The MetaTools
Certificate abolishes cumulative voting.
Classified Board of Directors. A classified board is one to which a certain
number, but not all, of the directors are elected on a rotating basis each
year. Under California law, California corporations meeting certain
qualifications may amend their articles of incorporation to provide for a
classified board, but for corporations not so qualified directors must be
elected annually and a classified board is not permitted. Delaware law
permits, but does not require, a classified board of directors, with staggered
terms under which one-half or one-third of the directors are elected for terms
of two or three years, respectively. This method of electing directors makes
changes in the composition of the board of directors, and thus a potential
change in control of a corporation, a lengthier and more difficult process.
Neither of the companies currently has a staggered board and the Combined
Company will not have a staggered board.
Power to Call Special Shareholders/Stockholders Meetings; Advance Notice of
Shareholder/Stockholder Business and Nominees. Under California law, a special
meeting of shareholders may be called by the board of directors, the chairman
of the board, the president, the holders of shares entitled to cast not less
than ten (10%) percent of the votes at such meeting and such additional
persons as are authorized by the articles of incorporation
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or the bylaws. Under Delaware law, a special meeting of stockholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the bylaws. Pursuant to the Fractal
Bylaws, special meetings may be called by stockholders holding 10% of the
voting stock, the Board of Directors, Chairman, President, Vice-President or
by the Chief Financial Officer. Pursuant to the MetaTools Bylaws, special
meetings may be called by the Board of Directors, the Chairman, the President
or by one or more stockholders holding shares in the aggregate entitled to
cast not less than ten percent (10%) of the votes of all shares of stock owned
by stockholders entitled to vote at that meeting. In addition, the MetaTools
Bylaws requires timely advance notice in proper written form of stockholder
nominees for election as director or stockholder business to be brought before
a meeting, and requires that the chairman of the meeting refuse to acknowledge
the nomination of any person or the proposal of any business not made in
compliance with the procedures set forth in the Bylaws. The ability of the
MetaTools Board under Delaware law to limit or eliminate the right of
stockholders to initiate action at shareholder meetings may make it more
difficult to change the existing MetaTools Board and management.
Shareholder Approval of Certain Business Combinations. In the last several
years, a number of states (but not California) have adopted special laws
designed to make certain kinds of "unfriendly" corporate takeovers, or other
transactions involving a corporation and one or more of its significant
stockholders, more difficult. Under Section 203 of the Delaware General
Corporation Law ("Section 203"), certain "business combinations" by Delaware
corporations with "interested stockholders" are subject to a three-year
moratorium unless specified conditions are met. Under Section 1203 of the CCC,
certain business combinations with a majority shareholder are subject to
specified conditions, but there is no equivalent provision to Section 203,
which addresses business combinations with a significant but not majority
shareholder.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
date that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliate or associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the interested stockholder (except for transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or receipt by the interested stockholder (except
proportionately as a shareholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the date on which such stockholder becomes an
interested stockholder, the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested shareholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the date such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66 2/3%) of the voting stock not
owned by the interested stockholder.
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Section 203 only applies to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, is quoted on an
interdealer quotation system such as Nasdaq (as is the MetaTools Common Stock)
or is held of record by more than 2,000 stockholders. However, a Delaware
corporation may elect not to be governed by Section 203 by a provision in its
original certificate of incorporation or an amendment thereto or to the
bylaws, which amendment must be approved by majority stockholder vote and may
not be further amended by the board of directors. MetaTools is governed by
Section 203.
Removal of Directors. Under California law, any director or the entire board
of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director
under cumulative voting (without regard to whether shares may otherwise be
voted cumulatively). Under Delaware law, a director of a corporation such as
MetaTools that does not have a classified board of directors or cumulative
voting may be removed with or without cause with the approval of a majority of
the outstanding shares entitled to vote.
Filling Vacancies on the Board of Directors. Under California law, any
vacancy on the board of directors other than one created by removal of a
director may be filled by the board. If the number of directors is less than a
quorum, a vacancy may be filled by the unanimous written consent of the
directors then in office, by the affirmative vote of a majority of the
directors at a meeting held pursuant to notice or waivers of notice or by a
sole remaining director. The Fractal Bylaws provide that except vacancies
created by removal if the Board of Directors declares vacant the office of a
Director who has been convicted of a felony or declared of unsound mind by an
Order of Court, which the Fractal Board may fill, all vacancies created by
removal must be filled by the shareholders. The Fractal Bylaws permit the
Fractal Board and/or shareholders to fill any other vacancies on the Fractal
Board. Under Delaware law, vacancies and newly created directorships may be
filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or
bylaws (and unless the certificate of incorporation directs that a particular
class is to elect such director, in which case any other directors elected by
such class, or a sole remaining director, shall fill such vacancy). The
MetaTools Bylaws allow any vacancy on the Board of Directors to be filled by a
majority of the directors then in office.
Indemnification and Limitation of Liability. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit
corporations to adopt a provision in their charters eliminating the liability
of a director to the corporation or its shareholders for monetary damages for
breach of the director's fiduciary duty of care. Nonetheless there are certain
differences between the laws of the two states with respect to indemnification
and limitation of liability.
The Fractal Articles eliminate the liability of directors to the fullest
extent permissible under California law. California law does not permit the
elimination of monetary liability where such liability is based on: (a)
intentional misconduct or knowing and culpable violation of law; (b) acts or
omissions that a director believes to be contrary to the best interests of the
corporation or its shareholders, or that involve the absence of good faith on
the part of the director; (c) receipt of an improper personal benefit; (d)
acts or omissions that show reckless disregard for the director's duty to the
corporation or its shareholders, where the director in the ordinary course of
performing a director's duties should be aware of a risk of serious injury to
the corporation or its shareholders; (e) acts or omissions that constitute an
unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders; (f) interested
transactions between the corporation and a director in which a director has a
material financial interest; and (g) liability for improper distributions,
loans or guarantees.
The MetaTools Certificate also eliminates the liability of directors to the
fullest extent permissible under Delaware law, as such law exists currently or
as it may be amended in the future. Under Delaware law, such provision may not
eliminate or limit director monetary liability for: (a) breaches of the
director's duty of loyalty to the corporation or its stockholders; (b) acts or
omissions not in good faith or involving intentional misconduct
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or knowing violations of law; (c) the payment of unlawful dividends or
unlawful stock repurchases or redemptions; or (d) transactions in which the
director received an improper personal benefit. Such limitation of liability
provisions also may not limit a director's liability for violation of, or
otherwise relieve MetaTools or its directors from the necessity of complying
with, federal or state securities laws, or affect the availability of non-
monetary remedies such as injunctive relief or rescission.
California corporations may include in their charter a provision which
extends the scope of indemnification through agreements, bylaws or other
corporate action beyond that specifically authorized by statute. The Fractal
Articles include a provision authorizing Fractal to indemnify the directors
and officers of Fractal to the fullest extent permissible under California
law.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. The
MetaTools Certificate includes a provision providing that MetaTools shall
indemnify the directors of MetaTools to the fullest extent permissible under
Delaware law.
Inspection of Shareholders/Stockholders List. Both California and Delaware
law allow any shareholder/stockholder to inspect and copy the
shareholders/stockholders list for a purpose reasonably related to such
person's interest as a shareholder/stockholder. California law provides, in
addition, for an absolute right to inspect and copy the corporation's
shareholders list by persons holding an aggregate of 5% or more of a
corporation's voting shares, or, under certain other circumstances,
shareholders holding an aggregate of 1% or more of such shares. Delaware law
does not provide for any such absolute right of inspection, and no such right
is granted under the MetaTools Certificate or MetaTools Bylaws. Restricted
access to stockholder records, even though unrelated to the stockholder's
interests as a stockholder, could result in impairment of the stockholder's
ability to coordinate opposition to management proposals, including proposals
with respect to a change in control of the Combined Company.
Dividends and Repurchases of Shares.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses
and deferred charges) would be at least equal to 1 1/4 times its liabilities
(not including deferred taxes, deferred income and other deferred credits),
and the corporation's current assets would be at least equal to its current
liabilities (or 1 1/4 times its current liabilities if the average pre-tax and
pre-interest expense earnings for the preceding two fiscal years were less
than the average interest expense for such years). Such tests are applied to
California corporations on a consolidated basis.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
Shareholder/Stockholder Voting. Both California and Delaware law generally
require that the holders of a majority of the outstanding voting shares of the
acquiring and target corporations approve statutory mergers. Delaware law does
not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its certificate of
incorporation) if (a) the merger agreement does not amend the existing
certificate of incorporation, (b) each share of the surviving corporation
outstanding before the merger is equal to an identical outstanding or treasury
share after the merger, and (c) the number of shares to be issued by the
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surviving corporation in the merger does not exceed 20% of the shares
outstanding immediately prior to the merger. California law contains a similar
exception to its voting requirements for reorganizations where shareholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity. The MetaTools Certificate does require any special vote
of the stockholders to approve the Merger.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. By contrast, Delaware
law generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class of shares.
California law also requires that holders of nonredeemable Common Stock
receive nonredeemable Common Stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such Common Stock or its
affiliate unless all of the holders of such Common Stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Although Delaware law does not parallel California law in this respect, under
some circumstances Section 203 of the Delaware General Corporation Law does
provide similar protection against coercive two-tiered bids for a corporation
in which the stockholders are not treated equally.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable because of such interest
provided that certain conditions, such as obtaining the required approval and
fulfilling the requirements of good faith and full disclosure, are met. With
certain exceptions, the conditions are similar under California and Delaware
law. Under California and Delaware law, either (a) the
shareholders/stockholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and in
the case of board approval the contract or transaction must also be "just and
reasonable" (in California) to the corporation or (b) the contract or
transaction must have been just and reasonable (in California) or fair (in
Delaware) as to the corporation at the time it was approved. In the latter
case, California law explicitly places the burden of proof on the interested
director. Under California law, if shareholder approval is sought, the
interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction. If
board approval is sought, the contract or transaction must be approved by a
majority vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum).
Under Delaware law, if board approval is sought, the contract or transaction
must be approved by a majority of the disinterested directors (even though
less than a majority of a quorum). Therefore, certain transactions that the
Fractal Board would lack the authority to approve because of the number of
interested directors, could be approved by a majority of the disinterested
directors of MetaTools representing less than a majority of a quorum. Neither
MetaTools nor Fractal is aware of any plans to propose any transaction
involving interested directors of Fractal or MetaTools which the Fractal Board
would lack the authority to approve under California law but could approve
under Delaware law.
Dissenters' Rights. Under both California and Delaware law, a
shareholder/stockholder of a corporation participating in certain major
corporate transactions may, under varying circumstances, be entitled to
appraisal rights pursuant to which such shareholder/stockholder may receive
cash in the amount of the fair market value of his or her shares in lieu of
the consideration he or she would otherwise receive in the transaction. Under
Delaware law, such dissenters' rights are not available (a) with respect to
the sale, lease or exchange of all or substantially all of the assets of a
corporation, (b) with respect to a merger or consolidation by a corporation
the shares of which are either listed on a national securities exchange or are
held of record by more than 2,000
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holders if such stockholders receive only shares of the surviving corporation
or shares of any other corporation which are either listed on a national
securities exchange or held of record by more than 2,000 holders, plus cash in
lieu of fractional shares or (c) to stockholders of a corporation surviving a
merger if no vote of the stockholders of the surviving corporation is required
to approve the merger because the merger agreement does not amend the existing
certificate of incorporation, each share of the surviving corporation
outstanding prior to the merger is an identical outstanding or treasury share
after the merger, and the number of shares to be issued in the merger does not
exceed 20% of the shares of the surviving corporation outstanding immediately
prior to the merger and if certain other conditions are met.
In contrast, shareholders of a California corporation whose shares are
listed on a national securities exchange or on a list of over-the-counter
margin stocks issued by the Board of Governors of the Federal Reserve System
generally do not have appraisal rights unless the holders of at least 5% of
the class of outstanding shares claim the right or unless the corporation or
any law restricts the transfer of such shares. Dissenters' rights are
unavailable, however, if the shareholders of a corporation or the corporation
itself, or both, immediately prior to the reorganization will own immediately
after the reorganization equity securities constituting more than five-sixths
of the voting power of the surviving or acquiring corporation or its parent
entity, and if the shares of the surviving corporation have the same rights,
preferences, privileges and restrictions as the shares of the disappearing
corporation that are surrendered in exchange.
Dissolution. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors, and this right may not
be modified by the articles of incorporation. Under Delaware law, unless the
board of directors approves the proposal to dissolve, the dissolution must be
approved by stockholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initially approved by the board of
directors may it be approved by a simple majority of the corporation's
stockholders. In the event of such a board-initiated dissolution, Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions. The
MetaTools Certificate contains no such supermajority voting requirement,
however, and a majority of shares voting at a meeting at which a quorum is
present would be sufficient to approve a dissolution of MetaTools which had
previously been approved by its Board of Directors.
Tender Offer Statute. Delaware provides MetaTools and its stockholders the
benefit and protection of the Delaware tender offer statute. This statute,
which applies to tender offers to more than thirty (30) stockholders,
requires, among other things, that twenty (20) days advance notice of the
basic terms of a proposed tender offer be given to the corporation which is to
be the target of such an offer and requires that such offer, once made, remain
open for a minimum of twenty (20) days. California has no similar legislation
to regulate tender offers.
Shareholder Derivative Suits. California law provides that a shareholder
bringing a derivative action on behalf of a corporation need not have been a
shareholder at the time of the transaction in question, provided that certain
tests are met. Under Delaware law, a stockholder may only bring a derivative
action on behalf of the corporation if the stockholder was a stockholder of
the corporation at the time of the transaction in question or his or her stock
thereafter devolved upon him or her by operation of law. California law also
provides that the corporation or the defendant in a derivative suit may make a
motion to the court for an order requiring the plaintiff shareholder to
furnish a security bond. Delaware does not have a similar bonding requirement.
82
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger using the pooling of interests
method of accounting. The unaudited pro forma combined condensed financial
statements reflect certain assumptions deemed probable by management regarding
the Merger (e.g., that share information used in the unaudited pro forma
information approximates actual share information at the effective date).
The unaudited pro forma combined condensed balance sheet as of December 31,
1996 gives effect to the Merger as if it had occurred on December 31, 1996,
and combines the audited condensed consolidated balance sheet of MetaTools and
the unaudited condensed consolidated balance sheet of Fractal as of December
31, 1996.
The unaudited pro forma combined condensed statements of operations for the
years ended December 31, 1994 and 1995 combine the audited historical
consolidated statements of operations of MetaTools for each of the years in
the two year period ended December 31, 1995 with the audited historical
consolidated statements of operations of Fractal for each of the fiscal years
in the two year period ended March 31, 1996, in each case as if the Merger and
Fractal's merger with Ray Dream had occurred at the beginning of the earliest
period presented. The unaudited pro forma combined condensed statement of
operations for the year ended December 31, 1996 combines the unaudited pro
forma combined condensed statement of operations of MetaTools for the year
ended December 31, 1996 with the unaudited historical consolidated statement
of operations of Fractal for the twelve months ended December 31, 1996, as if
the Merger and Fractal's merger with Ray Dream, had occurred on January 1,
1996 and MetaTools acquisition of RTG occurred on February 1, 1996 (the date
of incorporation of RTG). Consequently, Fractal net revenues of approximately
$9,307,000, gross profit of approximately $7,670,000, operating expenses of
approximately $6,033,000 and net income of approximately $1,345,000 for the
three months ended March 31, 1996 have thus been reflected in the unaudited
pro forma combined condensed statements of operations for both the years ended
December 31, 1995 and 1996.
MetaTools and Fractal estimate that they will incur direct transaction costs
of approximately $4.2 million associated with the Merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing, consultants, and other related charges. These nonrecurring costs are
reflected in the unaudited pro forma combined condensed balance sheet as of
December 31, 1996 as a reduction to stockholders' equity and an increase in
accrued expenses. These nonrecurring costs, which have not been reflected in
the unaudited pro forma combined condensed statements of operations, will be
charged to operations in the fiscal quarter in which the Merger is consummated
or as incurred. In addition, it is expected that following the Merger, the
Combined Company will incur an additional charge to operations, of
approximately $4.8 million to reflect costs associated with integrating the
two companies. There can be no assurance that the Combined Company will not
incur additional costs associated with the Merger or that management will be
successful in its efforts to integrate the operations of the two companies.
Such unaudited pro forma combined condensed financial information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations that would have actually been
reported had the Merger, MetaTools' acquisition of RTG or Fractal's merger
with Ray Dream, occurred at the beginning of the periods presented, nor it is
necessarily indicative of future financial position or results of operations.
These unaudited pro forma combined condensed financial statements are based
upon the respective historical consolidated financial statements of MetaTools
and Fractal and should be read in conjunction with the respective historical
consolidated financial statements and notes thereto of MetaTools and Fractal
incorporated by reference into this Joint Proxy Statement/Prospectus, and do
not incorporate, nor do they assume, any benefits from costs savings or
synergies of operations of the Combined Company.
83
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
PRO FORMA PRO FORMA
METATOOLS FRACTAL ADJUSTMENTS COMBINED
--------- ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........ $18,961 $ 3,944 $ -- $22,905
Short-term investments........... 20,596 24,318 -- 44,914
Accounts receivable, net......... 9,994 10,092 (2,951)(5) 17,135
Inventories...................... 252 1,533 -- 1,785
Deferred income taxes............ 746 1,446 -- 2,192
Prepaid expenses................. 2,080 2,017 -- 4,097
------- ------- ------- -------
Total current assets........... 52,629 43,350 (2,951) 93,028
Property and equipment, net........ 3,123 2,349 -- 5,472
Other assets....................... 1,277 -- -- 1,277
------- ------- ------- -------
Total assets................... $57,029 $45,699 $(2,951) $99,777
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable................. $ 2,269 $ 2,553 $ -- $ 4,822
Accrued expenses................. 3,527 7,069 752 (4,5) 11,348
Income taxes payable............. -- 1,230 -- 1,230
Royalties payable................ 402 -- 497 (5) 899
------- ------- ------- -------
Total current liabilities...... 6,198 10,852 1,249 18,299
Stockholders' equity............... 50,831 34,847 (4,200)(4) 81,478
------- ------- ------- -------
Total liabilities and
stockholders' equity.......... $57,029 $45,699 $(2,951) $99,777
======= ======= ======= =======
</TABLE>
See accompanying notes.
84
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1995 1996(1)
------- ------- -------
<S> <C> <C> <C>
Net revenues......................................... $28,308 $46,260 $65,239
Cost of revenues..................................... 6,627 10,081 11,484
------- ------- -------
Gross profit......................................... 21,681 36,179 53,755
Operating expenses:
Sales and marketing................................ 14,378 22,331 28,757
General and administrative......................... 3,735 4,590 6,572
Research and development........................... 3,559 5,639 10,216
Write-off of acquired in-process technology and
other acquisition costs........................... -- -- 2,598
------- ------- -------
Total operating expenses......................... 21,672 32,560 48,143
------- ------- -------
Income from operations............................... 9 3,619 5,612
Interest income, net................................. 11 634 3,403
------- ------- -------
Income before provision for income taxes............. 20 4,253 9,015
Provision for income taxes........................... 473 1,827 2,418
------- ------- -------
Net income (loss).................................... $ (453) $ 2,426 $ 6,597
======= ======= =======
Net income (loss).................................... $ (453) $ 2,426 $ 6,597
Amortization of costs related to the issuance of
mandatory redeemable Series B convertible preferred
stock............................................... (99) (89) --
Preferred stock dividend requirement................. (140) -- --
------- ------- -------
Net income (loss) applicable to common stockholders.. $ (692) $ 2,337 $ 6,597
======= ======= =======
Net income (loss) per common share................... $ (.05) $ .15 $ .28
======= ======= =======
Weighted average number of shares outstanding........ 13,500 15,268 23,854
======= ======= =======
</TABLE>
- --------
(1) See note 6 on page 87.
See accompanying notes.
85
<PAGE>
NOTES TO UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL STATEMENTS
1. PERIODS PRESENTED
MetaTools' fiscal year ends on December 31 and Fractal's fiscal year ends on
March 31. The unaudited pro forma combined condensed balance sheet combines
MetaTools' December 31, 1996 audited consolidated condensed balance sheet with
Fractal's December 31, 1996 unaudited consolidated condensed balance sheet.
The unaudited pro forma combined condensed statements of operations for the
years ended December 31, 1994 and 1995 combine the audited historical
consolidated statements of operations of MetaTools for each of the fiscal
years in the two year period ended December 31, 1995 with the audited
historical consolidated statements of operations of Fractal for each of the
fiscal years in the two year period ended March 31, 1996, in each case as if
the Merger and Fractal's merger with Ray Dream had occurred at the beginning
of the earliest period presented. The unaudited pro forma combined condensed
statement of operations for the year ended December 31, 1996 combines the
unaudited pro forma combined condensed statement of operations of MetaTools
for the year ended December 31, 1996 with the unaudited historical
consolidated statement of operations of Fractal for the twelve months ended
December 31, 1996, as if the Merger and Fractal's merger with Ray Dream, had
occurred on January 1, 1996 and MetaTools acquisition of RTG had occurred on
February 1, 1996 (the date of incorporation, as of RTG). Consequently, net
income of Fractal for the three months ended March 31, 1996, of approximately
$1,345,000 has thus been reflected in the unaudited pro forma combined
condensed statements of operations for both the years ended December 31, 1995
and 1996.
2. BASIS OF COMBINATION
The unaudited pro forma combined condensed balance sheet reflects the
issuance of 8,962,067 shares of MetaTools Common Stock in exchange for an
aggregate of 11,965,376 shares of Fractal Common Stock in connection with the
Merger based on an exchange ratio of 0.749 shares of MetaTools Common Stock
for each share of Fractal Common Stock.
3. PRO FORMA EARNINGS PER SHARE
The unaudited pro forma combined condensed statements of operations for
MetaTools and Fractal have been prepared as if the Merger was completed at the
beginning of the periods presented. The unaudited pro forma combined net
income (loss) per share is based on the combined weighted average number of
common and common equivalent shares of MetaTools Common Stock and Fractal
Common Stock for each period, based on the exchange ratio of 0.749 shares of
MetaTools Common Stock for each share of Fractal Common Stock.
4. MERGER TRANSACTION COSTS
MetaTools and Fractal estimate that they will incur direct transaction costs
of approximately $4.2 million associated with the Merger, consisting of
transaction fees for investment bankers, attorneys, accountants, financial
printing, consultants and other related charges. These nonrecurring costs are
reflected in the unaudited pro forma combined condensed balance sheet as of
December 31, 1996 as a reduction to stockholders' equity and an increase in
accrued expenses. These nonrecurring costs, which have not been reflected in
the unaudited pro forma combined condensed statements of operations, will be
charged to operations in the fiscal quarter in which the Merger is consummated
or as incurred. In addition, it is expected that following the Merger, the
Combined Company will incur an additional charge to operations of
approximately $4.8 million to reflect costs associated with integrating the
two companies. There can be no assurance that the Combined Company will not
incur additional costs associated with the Merger or that management will be
successful in its efforts to integrate the operations of the two companies.
5. CONFORMING ADJUSTMENTS
There have been no adjustments required to conform the accounting policies
of the Combined Company. The following pro forma adjustments were made to
conform the Fractal financial statement presentation to the MetaTools
financial statement presentation as of December 31, 1996:
-- Reclassification of Fractal's sales return reserve totaling
approximately $2,951,000 from accrued expenses to accounts receivable.
-- Reclassification of Fractal's royalties payable totaling approximately
$497,000 from accrued expenses to royalties payable.
There have been no significant intercompany transactions.
86
<PAGE>
6. ACQUISITION OF RTG
The pro forma combined condensed statement of operations for the year ended
December 31, 1996, which gives effect to MetaTools' acquisition of RTG as if
it had occurred on February 1, 1996 (the date of incorporation of RTG) and the
Merger as if it had occurred on January 1, 1996, is as follows:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
METATOOLS RTG ADJUSTMENTS METATOOLS FRACTAL ADJUSTMENTS COMBINED
--------- ------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 28,035 $ -- $ -- $28,035 $37,204 $ -- $65,239
Cost of revenues........ 4,560 -- -- 4,560 6,924 -- 11,484
-------- ------- -------- ------- ------- ------ -------
Gross profit........... 23,475 -- -- 23,475 30,280 -- 53,755
Operating expenses:
Sales and marketing.... 12,392 -- -- 12,392 16,365 -- 28,757
General and
administrative......... 3,002 679 -- 3,681 2,891 -- 6,572
Research and
development........... 3,437 1,965 -- 5,402 4,814 -- 10,216
Write-off of acquired
in-process technology
and other acquisition
costs................. 15,182 -- (14,449)(1) 733 1,865 -- 2,598
-------- ------- -------- ------- ------- ------ -------
Total operating
expenses............ 34,013 2,644 (14,449) 22,208 25,935 -- 48,143
-------- ------- -------- ------- ------- ------ -------
Income (loss) from
operations............. (10,538) (2,644) 14,449 1,267 4,345 -- 5,612
Interest income
(expense), net......... 2,348 (17) -- 2,331 1,072 -- 3,403
-------- ------- -------- ------- ------- ------ -------
Income (loss) before
provision (benefit) for
income taxes........... (8,190) (2,661) 14,449 3,598 5,417 -- 9,015
Provision (benefit) for
income taxes........... 1,049 -- (601)(2) 448 1,970 -- 2,418
-------- ------- -------- ------- ------- ------ -------
Net income (loss)....... $ (9,239) $(2,661) $ 15,050 $ 3,150 $ 3,447 $ -- $ 6,597
======== ======= ======== ======= ======= ====== =======
Net income (loss)....... $ (9,239) $(2,661) $ 15,050 $ 3,150 $ 3,447 $ -- $ 6,597
Preferred stock dividend
requirement............ -- (146) 146 (3) -- -- -- --
-------- ------- -------- ------- ------- ------ -------
Net income (loss)
applicable to common
stockholders........... $ (9,239) $(2,807) $ 15,196 $ 3,150 $ 3,447 $ -- $ 6,597
======== ======= ======== ======= ======= ====== =======
Net income (loss) per
common share........... $ (0.78) $(2,807) $ N/A $ 0.22 $ 0.27 $ N/A $ 0.28
======== ======= ======== ======= ======= ====== =======
Weighted average number
of shares outstanding.. 11,791 1 N/A 14,319 12,730 N/A 23,854
======== ======= ======== ======= ======= ====== =======
</TABLE>
- -------
(1) Reflects the write-off of acquired in-process technology and other costs
related to the acquisition of RTG, which would not have been incurred had
the acquisition occurred on February 1, 1996 (the date of incorporation of
RTG).
(2) Reflects the net tax benefit which would have been realized by MetaTools
due to utilization of the RTG net operating losses for Federal income tax
purposes.
(3) Reflects the preferred stock dividend which would not have been required
had the acquisition occurred on February 1, 1996 (the date of
incorporation of RTG).
87
<PAGE>
PRINCIPAL METATOOLS SHARE OWNERSHIP
Stockholders of record at the close of business on April 11, 1997 are
entitled to notice of the meeting and to vote at the meeting. At the Record
Date, 13,288,770 shares of MetaTools Common Stock were issued and outstanding.
As of February 28, 1997, the following entities were known by MetaTools to be
the beneficial owners of more than 5% of MetaTools Common Stock:
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME SHARES TOTAL(5)
---- --------- ----------
<S> <C> <C>
Vulcan Ventures, Inc. (1)............................... 2,014,375 15.1%
110 110th Avenue N.E., Suite 550
Bellevue, WA 98004
John J. Wilczak (2)..................................... 1,239,104 9.3%
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, CA 93013
Samuel H. Jones, Jr. (3)................................ 1,131,055 8.5%
U.S. Route 40
P.O. Box 169
Woodstown, NJ 08098
Alexander Migdal........................................ 815,469 6.1%
51 J.F. Kennedy Parkway
Suite 303
Short Hills, NJ 07078
Kai Krause (4).......................................... 769,423 5.7%
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, CA 93013
</TABLE>
- --------
(1) Includes 5,000 shares held by Bert Kolde and 9,375 shares issuable to Mr.
Kolde upon the exercise of options to purchase MetaTools Common Stock that
are exercisable within 60 days of February 28, 1997. Mr. Kolde, a director
of MetaTools, is also a director of Vulcan Ventures, Inc.
(2) Includes 41,771 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February 28,
1997.
(3) Includes 5,000 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February 28,
1997.
(4) Includes 254,479 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February 28,
1997.
(5) Represents the number of shares held by each director, executive officer,
and 5% stockholder as a percentage of the sum of the total number of
shares of MetaTools Common Stock outstanding at February 28, 1997
(13,286,970) and the total number of shares issuable to all directors,
executive officers, and 5% stockholders upon exercise of options to
purchase MetaTools Common Stock that are exercisable within 60 days of
February 28, 1997 (482,891).
88
<PAGE>
SECURITY OWNERSHIP OF METATOOLS MANAGEMENT
The following table sets forth the beneficial ownership of MetaTools Common
Stock as of February 28, 1997 by each director (including MetaTools' Chief
Executive Officer), by the four other most highly compensated executive
officers of MetaTools whose compensation exceeded $100,000 for fiscal 1996
(such officers, together with the Chief Executive Officer, are collectively
referred to as the "Named Executive Officers"), and by all current directors
and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF PERCENT
NAME SHARES OF TOTAL(12)
---- --------- ------------
<S> <C> <C>
Bert Kolde(1)........................................ 2,014,375 15.1%
John J. Wilczak(2)................................... 1,239,104 9.3%
Samuel H. Jones, Jr(3)............................... 1,131,055 8.5%
Kai Krause(4)........................................ 769,423 5.7%
Howard L. Morgan(5).................................. 267,500 2.0%
Fred Brown(6)........................................ 32,143 *
Terance A. Kinninger(7).............................. 26,775 *
James Mervis(8)...................................... 14,333 *
William J. Schroeder(9).............................. 8,333 *
William H. Lane III(10).............................. 7,917 *
All directors and executive officers as a group (13
persons)(11)........................................ 6,416,592 46.6%
</TABLE>
- --------
* Less than 1%
(1) Includes 2,000,000 shares held by Vulcan Ventures, Inc. Mr. Kolde, a
director of MetaTools, is a director of Vulcan Ventures, Inc. Includes
9,375 shares issuable to Mr. Kolde upon exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(2) Includes 41,771 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(3) Includes 5,000 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(4) Includes 254,479 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(5) Includes 5,000 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(6) Includes 32,143 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(7) Includes 14,375 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(8) Includes 14,333 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(9) Includes 8,333 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(10) Includes 7,917 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997.
(11) Includes 482,891 shares issuable upon the exercise of options to purchase
MetaTools Common Stock that are exercisable within 60 days of February
28, 1997 and 2,000,000 shares held by Vulcan Ventures, Inc.
(12) Represents the number of shares held by each director, executive officer,
and 5% stockholder as a percentage of the sum of the total number of
shares of MetaTools Common Stock outstanding at February 28, 1997
(13,286,970) and the total number of shares issuable to all directors,
executive officers, and 5% stockholders upon exercise of options to
purchase MetaTools Common Stock that are exercisable within 60 days of
February 28, 1997 (482,891).
89
<PAGE>
COMPENSATION OF METATOOLS EXECUTIVE OFFICERS
The following table sets forth the compensation paid to the Named Executive
Officers for MetaTools' last three fiscal years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------------------------- ------------
SECURITIES
FISCAL OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) COMPENSATION($) OPTIONS(#) COMPENSATION($)
--------------------------- ------ ---------- --------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
John J. Wilczak ........... 1996 215,680 120,000(1) 34,968(4) 85,000 --
Chairman of the Board,
President and Chief 1995 194,720 -- 21,775(4) 35,000 --
Executive Officer 1994 184,341 50,000(3) -- -- 105,003(6)
Kai Krause................. 1996 215,680 120,000(1) 15,366(4) 485,000 --
Chief Design Officer 1995 195,070 -- 8,232(4) 410,000 --
and Director 1994 184,996 50,000(3) -- 410,000 --
Fred Brown(7).............. 1996 225,000 50,000(1) 11,674(4) 105,000 --
Senior Vice President, 1995 4,327 -- -- 110,000 --
Sales and Marketing
Terance A. Kinninger(7).... 1996 136,667 60,000(1) 4,198(4) 79,750 --
Vice President and 1995 55,000 25,000(2) -- 65,000 44,020(5)
Chief Financial Officer
James Mervis(7)(8)......... 1996 142,500 -- 4,953(4) 44,500 --
Vice President, 1995 90,000 30,000 -- 55,000 --
Strategic Development
and Business Affairs
</TABLE>
- -------
(1) Represents amount paid in 1997 for services in 1996.
(2) Represents amount paid in 1996 for services in 1995.
(3) Represents amount paid in 1995 for services in 1994.
(4) Represents auto allowance and the cost of providing health, life and
disability insurance.
(5) Represents an allowance for relocation expenses, of which $19,589 was paid
in 1996.
(6) Represents an allowance for relocation expenses, of which $50,000 was paid
in 1995.
(7) The individual became an executive officer of MetaTools in 1995.
(8) Subsequent to December 31, 1996, Mr. Mervis announced his resignation as
Vice President, Strategic Development and Business Affairs, effective as
of May 31, 1997. Mr. Mervis will continue to be an employee of MetaTools
until March 3, 1998.
90
<PAGE>
OPTIONS GRANTED AND OPTIONS EXERCISED IN THE LAST FISCAL YEAR
The following tables set forth information regarding stock options granted
to and exercised by the Named Executive Officers during the last fiscal year,
as well as options held by such officers as of December 31, 1996, the last day
of MetaTools' 1996 fiscal year.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
NUMBER OF VALUES AT ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK PRICE
UNDERLYING OPTIONS APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION --------------------------
NAME (#) FISCAL YEAR ($ SHARE) DATE 5% ($)(1) 10% ($)(1)
---- ---------- ------------ --------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Wilczak(2)...... 25,000 1.5 16.38 3/25/06 257,985 651,105
25,000 1.5 18.00 10/29/06 283,500 715,500
Kai Krause(3)........... 25,000 1.5 16.38 3/25/06 257,985 651,105
50,000 2.9 18.00 10/29/06 567,000 1,431,000
Fred Brown.............. 10,000 0.6 11.75 12/31/06 74,025 186,825
Terance A.
Kinninger(4)........... 10,000 0.6 13.75 6/25/06 86,625 218,625
25,000 1.5 11.75 12/31/06 185,063 467,063
James Mervis............ 10,000 0.6 13.75 7/16/06 86,625 218,625
</TABLE>
- --------
(1) The dollar amounts in these columns are the result of calculations at the
five percent and ten percent appreciation rates from fair market value on
the date of grant. Such rates are specified by the SEC and are not
intended to forecast actual future appreciation of MetaTools Common Stock.
(2) In the aggregate, Mr. Wilczak received options to purchase 50,000 shares,
which represented 3% of the total options granted to employees in the last
fiscal year.
(3) In the aggregate, Mr. Krause received options to purchase 75,000 shares,
which represented 4.4% of the total options granted to employees in the
last fiscal year.
(4) In the aggregate, Mr. Kinninger received options to purchase 35,000
shares, which represented 2.1% of the total options granted to employees
in the last fiscal year.
OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT OPTIONS AT
ACQUIRED ON VALUE FISCAL YEAR END (#) FISCAL YEAR END ($) (1)
EXERCISE REALIZED ------------------------- -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John J. Wilczak......... -- -- 35,000 50,000 372,750 --
Kai Krause.............. -- -- 213,542 271,458 2,295,577 2,111,924
Fred Brown.............. 15,000 140,625 24,286 80,714 91,073 265,178
Terance A. Kinninger.... 20,250 166,065 16,764 62,986 125,730 209,895
James Mervis............ 20,500 235,188 10,972 33,528 90,519 194,106
</TABLE>
- --------
(1) The value of unexercised, in-the-money options is the difference between
the exercise price of the options and the fair market value of MetaTools
Common Stock at December 31, 1996, based upon the last reported sale price
on December 31, 1996 on Nasdaq ($11.75).
SECTION 16(a) REPORTING DELINQUENCIES
Based solely on its review of copies of filings under Section 16(a) of the
Exchange Act ("Section 16"), received by MetaTools, or written representations
from certain reporting persons, MetaTools believes that during fiscal 1995 all
Section 16 filing requirements were met.
91
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors of MetaTools consists
of Messrs. Morgan, Schroeder and Wilczak. Mr. Wilczak is an officer of
MetaTools. No interlocking relationship exists between any member of
MetaTools' Compensation Committee and any member of any other company's board
of directors or compensation committee.
EMPLOYMENT ARRANGEMENTS
MetaTools has entered into employment agreements with Messrs. Wilczak,
Krause, Kinninger, Mervis and Brown. Mr. Wilczak's employment agreement, dated
as of April 15, 1992 and amended as of February 8, 1994, provides for a base
annual salary $160,000, with the opportunity to participate in any incentive
or bonus plans adopted in the discretion of the MetaTools Board. The agreement
provides for an employment term through December 31, 1998. Pursuant to the
agreement, MetaTools pays premiums on a term life insurance policy on Mr.
Wilczak in the amount of $3,000,000, the beneficiaries of which may be
designated by Mr. Wilczak. Under the agreement, MetaTools may terminate Mr.
Wilczak for cause, as defined in the agreement, or upon Mr. Wilczak's
inability to perform under the agreement due to illness or incapacity for a
continuous period of 120 days or for 180 days in any one-year period. In May
1995, Mr. Wilczak's annual base salary was increased to $185,000 by the
MetaTools Board. In January 1996, Mr. Wilczak's annual base salary was
increased to $215,000 by the MetaTools Board. In January 1997, Mr. Wilczak's
annual base salary was increased to $240,000 by the MetaTools Board.
MetaTools' employment agreement with Mr. Krause, dated as of January 26,
1994, provides for an annual base salary of $160,000, with the opportunity to
participate in any incentive or bonus plans adopted in the discretion of the
MetaTools Board. The agreement provides for an employment term through
December 31, 1998. Pursuant to the agreement, MetaTools pays premiums on a
term life insurance policy on Mr. Krause in the amount of $3,000,000, the
beneficiaries of which may be designated by Mr. Krause. The employment
agreement may be terminated by MetaTools at any time upon a material breach of
Mr. Krause's obligations to perform under the agreement, including failure to
perform by reason of illness, incapacity or otherwise. In May 1995, Mr.
Krause's annual base salary was increased to $195,000 by the MetaTools Board.
In January 1996, Mr. Krause's annual base salary was increased to $215,000 by
the MetaTools Board. In January 1997, Mr. Krause's annual base salary was
increased to $240,000 by the MetaTools Board.
Pursuant to the terms of an employment offer letter dated June 27, 1995 from
MetaTools to Mr. Kinninger, MetaTools pays Mr. Kinninger an annual base salary
of $120,000. Pursuant to the offer, MetaTools granted Mr. Kinninger options to
purchase 65,000 shares of MetaTools Common Stock at an exercise price of $4.25
per share. Such options vest over a period of four years, but become fully
vested upon a change in control of MetaTools. In accordance with the offer
letter, 16,250 shares of such options became fully vested upon the closing of
MetaTools' initial public offering. In addition, if Mr. Kinninger is
terminated following a change in control of MetaTools, he is entitled to
receive severance pay equal to six months of his base salary. In January 1996,
Mr. Kinninger received a bonus of $25,000 in connection with his performance
and the completion of MetaTools' initial public offering. In March 1996, Mr.
Kinninger's annual base salary was increased to $140,000 by the MetaTools
Board. In January 1997, Mr. Kinninger's annual base salary was increased to
$160,000 by the MetaTools Board.
Pursuant to the terms of the employment offer letter dated April 3, 1995
from MetaTools to Mr. Mervis, MetaTools pays Mr. Mervis an annual base salary
of $120,000. Pursuant to the offer letter, MetaTools granted Mr. Mervis
options to purchase 55,000 shares of MetaTools Common Stock at an exercise
price of $3.50 per share. Such options vest over a period of four years, but
become fully vested upon a change in control of MetaTools. In accordance with
the offer letter, 11,000 shares of such options became fully vested upon the
closing of MetaTools' initial public offering. In addition, if Mr. Mervis is
terminated following a change in control of MetaTools, he is entitled to
receive severance pay equal to six months of his base salary. In January 1996,
Mr. Mervis received a bonus of $30,000 in connection with his performance and
the completion of
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MetaTools' initial public offering. In April 1996, Mr. Mervis's annual base
salary was increased to $150,000 by the MetaTools Board.
Pursuant to the terms of an employment offer letter dated November 12, 1995
from MetaTools to Mr. Brown, MetaTools paid Mr. Brown a signing bonus equal to
$25,000, monthly consulting fees of $11,250 from November 13, 1995 to January
14, 1996 and an annual base salary of $225,000 thereafter. Pursuant to the
offer letter, Mr. Brown has received options to purchase 110,000 shares of
MetaTools Common Stock at an exercise price of $8.00 per share, with such
options vesting over a 45-month period beginning July 15, 1996, but 50% of the
unvested portion of such options become fully vested upon a change in control
of MetaTools, and the balance of such unvested options become fully vested if
Mr. Brown's employment is terminated within one year after a change in control
of MetaTools.
REPORT OF THE COMPENSATION COMMITTEE OF THE METATOOLS BOARD
The Compensation Committee of the MetaTools Board (the "Committee") during
fiscal 1996 consisted of Messrs. Morgan, Schroeder and Wilczak. The Committee
recommends, subject to the MetaTools Board's approval, compensation for
executive officers and evaluates performance of management.
COMPENSATION PHILOSOPHY
MetaTools operates in the competitive and rapidly changing environment of
high technology businesses. The Committee seeks to establish compensation
policies that allow MetaTools flexibility to respond to changes in its
business environment. MetaTools' compensation philosophy is based on the
belief that achievement in this environment is enhanced by the coordinated
efforts of all individuals working toward common objectives. The goals of
MetaTools' compensation program are to align compensation with MetaTools'
business objectives and performance, to foster teamwork and to enable
MetaTools to attract, retain and reward employees who contribute to MetaTools'
long-term success.
COMPENSATION COMPONENTS
MetaTools' executive officers are compensated with a salary, and are
eligible for bonus and stock option awards. The Committee assesses the past
performance and anticipated future contribution, and considers the total
compensation (earned or potentially available) of each executive officer in
establishing each element of compensation.
Salary. The salaries of the executive officers, including the Chief
Executive Officer, are determined annually by the Committee with reference to
several surveys of salaries paid to executive with similar responsibilities at
comparable companies, generally in the high technology industry. The peer
group for each executive officer is composed of executives whose
responsibilities are similar in scope and content. MetaTools seeks to set
executive compensation levels that are competitive with the average levels of
peer group compensation.
Bonus. MetaTools has a discretionary key employee incentive pool pursuant to
which executive officers and a limited number of key employees may receive
annual cash bonuses. Targets for sales growth and operating income influence
the amount of the pool. Individual payments are made based on MetaTools'
achievement of these targets and upon the individual's personal and
departmental performance.
Stock options. Stock options awards are designed to align the interests of
executives with the long-term interests of the stockholders. The Committee
approves option grants subject to vesting periods (usually 48 months) to
retain executives and encourage sustained contributions. The exercise price of
options are not less than the market price on the date of grant. These options
will acquire value only to the extent that the price of MetaTools Common Stock
increases relative to the market price at the date of grant.
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CHIEF EXECUTIVE OFFICER'S COMPENSATION
Mr. Wilczak's salary and stock option grant for fiscal 1996 reflect the
Committee's evaluation of his overall leadership of MetaTools. The Committee
considered, among other factors, the continued strong year-to-year growth of
revenue and profitability, the release of new products and versions of
existing products, the expansion of sales through domestic distribution
channels, and the increase in international sales.
On February 3, 1997, the Committee reviewed Mr. Wilczak's salary,
considering MetaTools' interim financial results as compared to industry
averages, Mr. Wilczak's individual performance and his salary level relative
to those for comparable positions, primarily in the high technology industry.
Based on this review, the Committee increased Mr. Wilczak's annual salary to
$240,000, effective January 1, 1997.
On March 27, 1996 and October 29, 1996, Mr. Wilczak was granted options to
purchase 25,000 shares each of MetaTools Common Stock at $16.375 and $18.000
per share, respectively, which options vest over four years. In keeping with
MetaTools' overall philosophy regarding the grant of stock options as a long-
term incentive, the Committee based its grant on an evaluation of Mr.
Wilczak's overall leadership of MetaTools and the fact that Mr. Wilczak had
not been previously granted any option under MetaTools' stock plans.
The Committee has considered the potential impact of Section 162(m) of the
Code, and proposed regulations thereunder (the "Section"). The Section
disallows a tax deduction for any publicly-held corporation for individual
compensation exceeding $1 million in any taxable year for any of the Named
Executive Officers, unless such compensation is performance-based. MetaTools'
policy is to qualify, to the extent reasonable, its executive officers'
compensation for deductibility under applicable tax laws. However, the
Committee believes that its primary responsibility is to provide a
compensation program that will attract, retain and reward the executive talent
necessary to MetaTools' success. Consequently, the Committee recognizes that
the loss of a tax deduction could be necessary in some circumstances.
COMPENSATION COMMITTEE
Howard L. Morgan
William J. Schroeder
John J. Wilczak
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METATOOLS' STOCK PERFORMANCE GRAPH
STOCKHOLDER RETURN COMPARISON
The graph below compares the cumulative total return on MetaTools Common
Stock for the year ended December 31, 1996 compared to the CRSP Total Return
Index for the Nasdaq Stock Market (U.S. companies) and the CRSP Total Return
Index for the Nasdaq Computer and Data Processing Services Stocks (SIC 737).
The stock price performance shown on the graph below is not necessarily
indicative of future price performance.
[PERFORMANCE GRAPH APPEARS HERE]
COMPARISON OF 1 YEAR CUMULATIVE TOTAL RETURN*
AMONG METATOOLS, INC., THE NASDAQ STOCK MARKET-US INDEX,
AND THE NASDAQ COMPUTER AND DATA PROCESSING INDEX
<TABLE>
<CAPTION>
12-12-95 12-31-95 12-31-96
-------- -------- --------
<S> <C> <C> <C>
META 100 96 44
NASDAQ MARKET 100 100 123
NASDAQ COM. 100 98 122
</TABLE>
*$100 INVESTED ON 12/12/95 IN STOCK OR INDEX-
BASED ON OPENING PRICE OF $27.00 ON 12/12/95
INCLUDING REINVESTMENT OF DIVIDENDS.
FISCAL YEAR ENDING DECEMBER 31.
ADDITIONAL MATTERS BEING SUBMITTED TO A
VOTE OF ONLY METATOOLS STOCKHOLDERS
PROPOSAL TWO--AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION--NAME CHANGE
MetaTools' Certificate provides that the name of MetaTools is "MetaTools."
Pursuant to the Reorganization Agreement, MetaTools has agreed to propose and
recommend that the Certificate be amended at the Effective Time to change
MetaTools' name to "MetaCreations Corporation." The MetaTools Board has
authorized such amendment of the Certificate at the Effective Time, subject to
stockholder approval. Under the proposed amendment, subject to and upon
consummation of the Merger, Article One of the Certificate would be amended and
restated to read as follows:
"The name of the corporation is MetaCreations Corporation."
The MetaTools stockholders are being asked to approve such amendment. The
affirmative vote of the holders of a majority of the shares of MetaTools Common
Stock issued and outstanding on the MetaTools Record Date will be required to
approve the amendment of the Certificate. The effect of an abstention is the
same as that of a vote against the proposal.
THIS PROPOSAL WILL NOT BE IMPLEMENTED IF THE ISSUANCE OF METATOOLS COMMON
STOCK TO SHAREHOLDERS OF FRACTAL IS NOT APPROVED.
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THE METATOOLS BOARD UNANIMOUSLY RECOMMENDS THAT METATOOLS STOCKHOLDERS VOTE
"FOR" THE AMENDMENT OF THE METATOOLS CERTIFICATE TO CHANGE THE CORPORATE NAME
OF METATOOLS TO "METACREATIONS CORPORATION", SUBJECT TO AND UPON CONSUMMATION
OF THE MERGER.
PROPOSAL THREE--AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION--INCREASE
TO AUTHORIZED COMMON STOCK
MetaTools' Certificate authorizes 30 million shares of MetaTools Common
Stock. Pursuant to the Reorganization Agreement, MetaTools has agreed to
propose and recommend that the Certificate be amended at the Effective Time to
increase the number of authorized shares of MetaTools Common Stock by 45
million to 75 million. The MetaTools Board has authorized such amendment to
the Certificate at the Effective Time, subject to stockholder approval. Under
the proposed amendment, subject to and upon consummation of the Merger,
Article Four of the Certificate would be amended and restated to read as
follows:
"This Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation shall have authority to issue is
75,000,000 shares, and shall have a par value of $0.001 per share, and the
total number of shares of Preferred Stock this Corporation shall have
authority to issue is 5,000,000 shares, and shall have a par value of $0.001
per share."
The MetaTools stockholders are being asked to approve such amendment. The
affirmative vote of the holders of a majority of the shares of MetaTools
Common Stock issued and outstanding on the MetaTools Record Date will be
required to approve the amendment of the Certificate. The effect of an
abstention is the same as that of a vote against the proposal.
Each additional share of Common Stock authorized by the proposed amendment
will have the same rights and privileges as each share of Common Stock
currently authorized. Stockholders, as such, will have no statutory preemptive
rights to receive or purchase any of the Common Stock authorized by this
proposed Amendment.
The increase in authorized Common Stock will not have any immediate effect
on the rights of existing stockholders. To the extent that the additional
authorized shares are issued in the future, they will decrease the existing
stockholders' percentage equity ownership and, depending on the price at which
they are issued, could be dilutive to the existing stockholders.
The increase in the authorized number of shares of Common Stock could have
an anti-takeover effect. Shares of authorized and unissued Common Stock could
(within the limits imposed by applicable law) be issued in one or more
transactions that would make a takeover of MetaTools more difficult, and
therefore less likely. Any such issuance of additional stock could have the
effect of diluting the earnings per share and book value per share of
outstanding shares of MetaTools Common Stock, and such additional shares could
be used to dilute the stock ownership or voting rights of persons seeking to
obtain control of MetaTools.
THIS PROPOSAL WILL NOT BE IMPLEMENTED IF THE ISSUANCE OF METATOOLS COMMON
STOCK TO SHAREHOLDERS OF FRACTAL IS NOT APPROVED.
THE METATOOLS BOARD UNANIMOUSLY RECOMMENDS THAT METATOOLS STOCKHOLDERS VOTE
"FOR" THE AMENDMENT OF THE METATOOLS CERTIFICATE TO INCREASE THE AUTHORIZED
COMMON STOCK TO 75,000,000 SHARES, SUBJECT TO AND UPON CONSUMMATION OF THE
MERGER.
PROPOSAL FOUR--ELECTION OF BOARD OF DIRECTORS
ELECTION OF METATOOLS DIRECTORS AT METATOOLS ANNUAL MEETING
A board of six directors is to be elected at the MetaTools Annual Meeting.
Unless otherwise instructed, the proxy holders will vote the proxies received
by them for MetaTools' six (6) nominees named below, all of whom
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are currently directors of MetaTools. If any nominee of MetaTools is unable or
declines to serve as a director at the time of MetaTools Annual Meeting, the
proxies will be voted for the nominee designated by the present MetaTools
Board to fill the vacancy. It is not expected that any nominee will be unable
or will decline to serve as a director. The term of office of each person
elected as a director will continue until the next MetaTools Annual Meeting or
until a successor has been elected and qualified.
VOTE REQUIRED; RECOMMENDATION OF THE METATOOLS BOARD
The six (6) candidates receiving the highest number of "FOR" votes shall be
elected to the MetaTools Board. An abstention will have the same effect as a
vote withheld for the election of directors, and, pursuant to Delaware law, a
broker non-vote will not be treated as voting in person or by proxy on the
proposal.
THE METATOOLS BOARD RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" THE NOMINEES
LISTED BELOW:
<TABLE>
<CAPTION>
NAME AGE PRINCIPAL OCCUPATION
---- --- --------------------
<S> <C> <C>
John J. Wilczak.............. 45 Chairman of the Board, President and Chief
Executive Officer of MetaTools
Kai Krause................... 41 Chief Design Officer of MetaTools
Samuel H. Jones, Jr.......... 63 President of S-J Venture Capital Company
and President of S-J Transportation Company
Bert Kolde................... 42 Vice Chairman of Trail Blazers Inc. and
Oregon Arena Corp. and Advisor at Paul
Allen Group
William H. Lane III.......... 58 President of Canyon Vista, Inc.
Howard L. Morgan............. 51 President of The Arca Group, Inc. and
General Partner of Renaissance Partners
</TABLE>
Except as set forth below, each nominee has been engaged in his principal
occupation described above during the past five years. There is no family
relationship among any directors or executive officers of MetaTools.
Mr. Wilczak has been Chairman of the MetaTools Board and Chief Executive
Officer since he co-founded MetaTools in March 1987. Prior to founding
MetaTools, Mr. Wilczak was a business strategy and marketing consultant from
1984 to 1987. From February 1982 to December 1983, Mr. Wilczak served as a
Senior Consultant with Touche Ross & Company, and from December 1979 to
January 1982 he served as an internal Senior Consultant performing marketing
and business strategy development services at General Electric Co. Mr. Wilczak
holds a B.A. from Brown University and an M.B.A. from Columbia University.
Mr. Krause co-founded MetaTools and has been a director since 1992. For more
than eleven years prior to joining MetaTools on a full-time basis in 1993, Mr.
Krause designed and developed graphics, audio and systems software as an
independent consultant. Mr. Krause attended college in Essen, Germany where he
majored in foreign languages, math and philosophy. He also attended the Music
Conservatory where he studied classical piano. During 1992, MetaTools was Mr.
Krause's primary client.
Mr. Kolde has been a director of MetaTools since January 1995. Mr. Kolde is
currently the Vice Chairman of Trail Blazers Inc. and of the Oregon Arena
Corporation, an arena operations firm, positions he has held since May 1988
and January 1991, respectively. From 1985 to 1994, Mr. Kolde served as
President of the Asymterix Corporation, a software development company. Mr.
Kolde is also a director of Precision Systems, Inc.
Mr. Jones has been a director of MetaTools since April 1992. He has been
President of S-J Venture Capital Company since 1991 and President of S-J
Transportation Company, an industrial waste transportation company, since
1971. Mr. Jones is a director of Fulton Financial Corp.
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Mr. Lane has been a director of MetaTools since September 1995. Mr. Lane is
currently the President of Canyon Vista, Inc. a management consulting company.
Mr. Lane retired from Intuit Inc. effective July 31, 1996, having served as
its Vice President, Chief Financial Officer, Secretary and Treasurer from
January 1994 to April 30, 1996. From July 1991 to January 1994 Mr. Lane served
in a similar capacity at ChipSoft, Inc., a tax preparation software company.
Mr. Lane is also a director of Expert Software, Inc. and Quarterdeck
Corporation.
Dr. Morgan has been a director of MetaTools since April 1992. Dr. Morgan is
President of The Arca Group, Inc., a consulting and investment management
firm. Dr. Morgan is also a director of Cylink Corporation, Franklin Electronic
Publishers Corp., Infonautics Corporation, HDS Network Systems, Corp.,
Quarterdeck Corporation, Segue Software Corporation, Kentek Information
Systems, and Unitronix Corp.
BOARD MEETINGS AND COMMITTEES
The MetaTools Board held eight (8) meetings during fiscal 1996.
The Audit Committee consisted of Messrs. Lane, Kolde and Morgan during
fiscal 1996 and held one (1) meeting during fiscal 1996. The Audit Committee
reviews the financial statements and the internal financial reporting system
and controls of MetaTools with MetaTools' management and independent auditors,
recommends resolutions for any disputes between MetaTools' management and its
auditors, and reviews other matters relating to the relationship of MetaTools
with the auditors, including their engagement and discharge. For fiscal 1997,
the Audit Committee consists of Messrs. Lane and Morgan.
The Compensation Committee consisted of Messrs. Morgan, Schroeder and
Wilczak during fiscal 1996 and held one meeting. The Compensation Committee
develops and monitors compensation arrangements for the officers and directors
of MetaTools, including preparation of proper reports or other disclosure
required by the Compensation Committee in accordance with applicable proxy or
other rules of the Securities and Exchange Commission. For fiscal 1997, the
Compensation Committee consists of Messrs. Morgan, Lane and Wilczak.
The Option Committee, consisting of Messrs. Morgan and Schroeder, held one
(1) meeting and acted by unanimous written consent on four (4) occasions
during fiscal 1996. The Option Committee administers the stock option and
purchase plans of MetaTools in accordance with the terms of such plans and the
grants and issuance of awards thereunder, including stock options, stock
units, restricted stock and stock appreciation rights. The Option Committee
also reviews and makes recommendations to the MetaTools Board for changes in
MetaTools' compensation and benefit plans and practices, which recommendations
are then submitted to the MetaTools Board.
Each director attended at least 75% of the aggregate of the total number of
meetings of the MetaTools Board held during such director's term of office
during fiscal 1996.
After completion of the Merger, the Combined Company intends to reconsider
the compositions of its Audit, Compensation and Option Committees.
COMPENSATION OF DIRECTORS
Through December 31, 1996, directors received no compensation for serving on
the MetaTools Board, except for options granted under MetaTools' stock option
plans. Beginning in fiscal 1997, MetaTools has agreed to reimburse each of its
non-employee directors as follows: each non-employee director shall be paid
(i) $2,500 at the end of each fiscal quarter in which he or she is a director,
(ii) $1,000 for each regular MetaTools Board meeting he or she attends and
(iii) $500 for each MetaTools Board committee meeting he or she attends,
provided however that if more than one committee meeting is held on the same
day or a MetaTools Board meeting and one or more committee meetings are held
on the same day, no more than the initial $500 or $1,000, as the case may be,
shall be paid to any director for all such meetings attended by such director
on such date. In 1996,
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Howard L. Morgan was paid $44,000 for consulting services rendered to
MetaTools. Effective March 1, 1997 Mr. Morgan will receive a monthly
consulting fee of $4,500 for services to be rendered to MetaTools. In
addition, effective February 1, 1997, William H. Lane III will receive a
monthly consulting fee of $4,000 for services to be rendered to MetaTools.
Non-employee directors participate in MetaTools' 1995 Director Option Plan
(the "Director Plan"). Under the Director Plan, each non-employee director who
joins the MetaTools Board in the future will automatically be granted a
nonstatutory option to purchase 20,000 shares of MetaTools Common Stock on the
date upon which such person first becomes a director. In addition, each non-
employee director, including current non-employee directors, automatically
receives a nonstatutory option to purchase 5,000 shares of MetaTools Common
Stock on January 1 of each year, provided the director has been a member of
the MetaTools Board for at least six months. The exercise price of each option
granted under the Director Plan is equal to the fair market value of the
MetaTools Common Stock on the date of grant. The 20,000 share grant vests at a
rate of one-eighth of the option shares upon the end of the first six-month
period after the date of grant and one forty-eighth of the option shares per
month thereafter, provided the optionee remains a director of MetaTools. The
5,000 share grant vests at the rate of one-half of the option shares upon the
end of the first six-month period after the date of grant and one-twelfth of
the option shares per month thereafter, provided the optionee remains a
director of MetaTools. Options granted under the Director Plan have a term of
ten (10) years unless terminated sooner, whether upon termination of the
optionee's status as a director or otherwise pursuant to the Director Plan.
APPOINTMENT OF ADDITIONAL DIRECTORS AFTER THE MERGER
As described above under "Terms of Merger--Conduct Following the Merger" if
the Merger closes, Mark Zimmer, the President and Chief Executive Officer of
Fractal, Thomas Hedges, Chairman of the Board and Vice President, Research and
Development and Arthur Collmeyer, a director of Fractal, will be appointed to
the Board of Directors of the Combined Company following the Effective Time.
For your information, certain information with respect to Messrs. Zimmer,
Hedges and Collmeyer, including the ages of such individuals is included
below:
<TABLE>
<CAPTION>
NAME OF APPOINTEE AGE POSITION WITH FRACTAL
----------------- --- ---------------------
<S> <C> <C>
Mark Zimmer.................... 40 President, Chief Executive Officer and
Director
Thomas Hedges.................. 46 Chairman of the Board and Vice President,
Research and Development
Arthur Collmeyer............... 55 Director
</TABLE>
Mr. Zimmer, a founder of Fractal, has been President, Chief Executive
Officer and a director of Fractal since its inception. Mr. Zimmer also served
Fractal as President from its inception until May 1996 and resumed such office
in February 1997. Mr. Zimmer founded Fractal Software, a predecessor of
Fractal, with Mr. Hedges in 1985 and was a partner in Fractal Software from
1985 to 1990. He also developed the initial versions of Painter that became
the initial product of Fractal. From 1981 to 1985, Mr. Zimmer co-founded
TRICAD, a software firm specializing in computer-aided design. Prior to that
time, Mr. Zimmer worked at Calma Corporation, a computer-aided design company
where he designed several versions of CAD software.
Mr. Hedges, a founder of Fractal, has served as Vice President, Research and
Development and a director of Fractal since its inception. Mr. Hedges served
Fractal as Chairman of the Board from March 1993 until May 1996 and resumed
the Chairmanship in February 1997. From 1985 to 1990, Mr. Hedges was a partner
in Fractal Software with Mr. Zimmer where he co-developed ImageStudio,
ColorStudio, and the initial versions of Painter. From 1975 to 1985, Mr.
Hedges was a lead scientist and software engineer at Calma Corporation.
Mr. Collmeyer has been a director of Fractal since January 1994. He is
currently the President of Hi/fn, a subsidiary of Stac, Inc. From July 1994
until January 1995, Mr. Collmeyer served as President and Chief Executive
Officer of Dyna Logic Corporation, a development stage company specializing in
field programmable gate arrays. Prior to that time, Mr. Collmeyer was employed
by Weitek Corporation ("Weitek"), Calma, Xerox Corporation and Motorola, Inc.
in various management and engineering roles. Mr. Collmeyer is also a director
of Weitek.
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PROPOSAL FIVE--APPROVAL OF AMENDMENT TO METATOOLS 1995 STOCK PLAN
The MetaTools Board and stockholders have previously adopted and approved
the 1995 Stock Plan (the "1995 Plan"). A total of 500,000 shares of MetaTools
Common Stock are presently reserved for issuance under the 1995 Plan, and only
16,500 shares were available for future grant as of the Record Date. On
February 11, 1997, the MetaTools Board authorized an amendment to the 1995
Plan, subject to stockholder approval, to increase the shares reserved for
issuance thereunder by 1,500,000, bringing the total number of shares issuable
under the 1995 Plan to 2,000,000.
At the MetaTools Annual Meeting, the stockholders are being requested to
consider and approve the proposed amendment of the 1995 Plan to increase the
number of shares of MetaTools Common Stock reserved for issuance thereunder.
The MetaTools Board believes that the amendment is necessary to enable
MetaTools to continue its policy of employee stock ownership as a means to
motivate high levels of performance and to recognize key employee
accomplishments. A summary of the 1995 Plan is set forth below.
SUMMARY OF THE 1995 STOCK PLAN
General. The 1995 Plan was originally adopted by the MetaTools Board in
October 1995 and approved by the stockholders in November 1995. The 1995 Plan
authorizes the MetaTools Board or one or more committees which the MetaTools
Board may appoint from among its members (a "Committee"), to grant options and
rights to purchase MetaTools Common Stock. Options granted under the 1995 Plan
may be either "incentive stock options" as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or nonstatutory stock
options, as determined by the Board of Directors or the Committee.
Purpose. The general purpose of the 1995 Plan is to attract and retain the
best available personnel for positions of substantial responsibility, to
provide additional incentive to employees, consultants and outside directors
and to promote the success of MetaTools' business.
Administration. The 1995 Plan may be administered by the MetaTools Board or
a Committee (either one, the "Administrator"). Subject to the other provisions
of the 1995 Plan, the Administrator has the authority to: (i) interpret the
plan and apply its provisions; (ii) prescribe, amend or rescind rules and
regulations relating to the plan; (iii) select the eligible persons to whom
options and rights are to be granted; (iv) determine the number of shares to
be made subject to each option and right; (v) determine whether and to what
extent options and rights are to be granted; (vi) prescribe the terms and
conditions of each option and right (including, but not limited to, the
exercise price, vesting schedule, classification as an incentive stock option
or a nonstatutory option and any restriction or limitation regarding any
option or right); (vii) amend any outstanding option or right subject to
applicable legal restrictions; (viii) authorize any person to execute, on
behalf of MetaTools, any instrument required to effect the grant of an option
or right; (ix) determine the fair market value of the Common Stock in
accordance with the plan; (x) reduce the exercise price of any option or right
to current fair market value if the fair market value covered by such option
or right shall have declined since the date of grant; (xi) institute an option
exchange program; and (xii) take any other actions deemed necessary or
advisable for the administration of the 1995 Plan. All decisions,
interpretations and other actions of the Administrator shall be final and
binding on all holders of options or rights and on all persons deriving their
rights therefrom.
Eligibility. The 1995 Plan provides that options and rights may be granted
to MetaTools' employees, directors (including directors who are not employees)
and independent contractors. Incentive stock options may be granted only to
employees. Any optionee who owns more than 10% of the combined voting power of
all classes of outstanding stock of MetaTools (a "10% Stockholder") is not
eligible for the grant of an incentive stock option unless the exercise price
of the option is at least 110% of the fair market value of the Common Stock on
the date of grant.
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Terms and Conditions of Options. Each option granted under the 1995 Plan is
evidenced by a written stock option agreement between the optionee and
MetaTools and is subject to the following terms and conditions:
Exercise Price. The Administrator determines the exercise price of
options to purchase shares of Common Stock at the time the options are
granted. However, excluding options issued to 10% Stockholders, the
exercise price under an incentive stock option must not be less than 100%
of the fair market value of the Common Stock on the date the option is
granted. If the Common Stock is listed on any established stock exchange or
a national market system, the fair market value shall be the closing sale
price for such stock (or the closing bid if no sales were reported) on the
date the option is granted. If the Common Stock is traded on the over-the-
counter market, the fair market value shall be the mean of the high bid and
high ask prices on the date the option is granted. The exercise price per
share of a nonstatutory option shall be determined by the Administrator.
Form of Consideration. The means of payment for shares issued upon
exercise of an option is specified in each option agreement and generally
may consist of cash, check, a full-recourse promissory note, other shares
of MetaTools Common Stock owned by the optionee, delivery of an exercise
notice together with irrevocable instructions to a broker to deliver the
exercise price to MetaTools from sale or loan proceeds, or by a combination
thereof.
Exercise of the Option. Each stock option agreement will specify the term
of the option and the date when the option is to become exercisable.
However, in no event shall an option granted under the 1995 Plan be
exercised more than 10 years after the date of grant. Moreover, in the case
of an incentive stock option granted to a 10% Stockholder, the term of the
option shall be for no more than five years from the date of grant. To
date, all options granted under the 1995 Plan vest according to the
following schedule: 25 percent of the shares subject to the option vest on
the day which is one year from the date of grant and 1/48th of the total
shares subject to the option vest each month thereafter.
Termination of Employment. If an optionee's employment terminates for any
reason (other than death or permanent disability), then all options held by
such optionee under the 1995 Plan expire upon the earlier of (i) such
period of time as is set forth in his or her option agreement (but not to
exceed ninety days after the termination of his or her employment in the
event of an incentive stock option) or (ii) the expiration date of the
option. The optionee may exercise all or part of his or her option at any
time before such expiration to the extent that such option was exercisable
at the time of termination of employment. Any unexercised or unvested
options revert to the 1995 Plan.
Permanent Disability. If an employee is unable to continue employment
with MetaTools as a result of permanent and total disability (as defined in
the Code), then all options held by such optionee under the 1995 Plan shall
expire upon the earlier of (i) 12 months after the date of termination of
the optionee's employment or (ii) the expiration date of the option. The
optionee may exercise all or part of his or her option at any time before
such expiration to the extent that such option was exercisable at the time
of termination of employment. Any unexercised or unvested options revert to
the 1995 Plan.
Death. If an optionee dies while employed by MetaTools, his or her option
shall expire upon the earlier of (i) 12 months after the optionee's death
or (ii) the expiration date of the option. The executors or other legal
representative of the optionee may exercise all or part of the optionee's
option at any time before such expiration to the extent that such option
was exercisable at the time of death. Any unexercised or unvested options
revert to the 1995 Plan.
Termination of Options. Each stock option agreement will specify the term
of the option and the date when all or any installment of the option is to
become exercisable. Notwithstanding the foregoing, however, the term of any
incentive stock option shall not exceed 10 years from the date of grant. No
options may be exercised by any person after the expiration of its term.
Nontransferability of Options. During an optionee's lifetime, his or her
option(s) shall be exercisable only by the optionee and shall not be
transferable other than by will or by the laws of descent or distribution.
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Value Limitation. If the aggregate fair market value of all shares of
MetaTools Common Stock subject to an optionee's incentive stock option
which are exercisable for the first time during any calendar year exceeds
$100,000, the excess options shall be treated as nonstatutory options.
Other Provisions. The stock option agreement may contain such terms,
provisions and conditions not inconsistent with the 1995 Plan as may be
determined by the Administrator.
Stock Purchase Rights. The 1995 Plan permits MetaTools to grant rights to
purchase Common Stock either alone or in tandem with other awards granted
under the 1995 Plan and/or cash awards made outside of the 1995 Plan. The
offer of a right must be accepted within six months of its grant by the
execution of a restricted stock purchase agreement between MetaTools and the
offeree and the payment of the purchase price of the shares. Unless the
Administrator determines otherwise, the restricted stock purchase agreement
shall grant MetaTools a repurchase option exercisable upon termination of the
purchaser's employment or consulting relationship with MetaTools. The purchase
price for any shares repurchased by MetaTools shall be the original price paid
by the purchaser. The repurchase option shall lapse at such rate as the
Administrator may determine.
Adjustment Upon Changes in Capitalization, Corporate Transactions. In the
event that the stock of MetaTools is changed by reason of any stock split,
reverse stock split, stock dividend, recapitalization or other change in the
capital structure of MetaTools, appropriate proportional adjustments shall be
made in the number and class of shares of stock subject to the 1995 Plan, the
number and class of shares of stock subject to any option or right outstanding
under the 1995 Plan and the exercise price of any such outstanding option or
right. Any such adjustment shall be made upon approval of the MetaTools Board
and, if required, the stockholders of MetaTools, whose determination shall be
conclusive. Notwithstanding the above, in connection with any merger of
MetaTools with or into another corporation, or the sale of substantially all
of the assets of MetaTools, each outstanding option and right shall be assumed
or an equivalent option or right substituted by the successor corporation (or
a parent or subsidiary thereof). If the successor corporation does not assume
the options or substitute substantially equivalent options, then the
exercisability of all outstanding options and rights shall be automatically
accelerated in which case the Administrator shall notify each optionee that
the option or right must be exercised within 15 days, after which time the
option or right will terminate. In the event of a proposed dissolution or
liquidation of MetaTools, all options will terminate immediately prior to such
event.
Amendment, Suspensions and Termination of the 1995 Plan. The MetaTools Board
may amend, suspend or terminate the 1995 Plan at any time; provided, however,
that stockholder approval is required for any amendment to the extent
necessary to comply with Rule 16b-3 promulgated under the Exchange Act or
Section 422 of the Code, or any similar rule or statute. No amendment or
termination of the 1995 Plan may impair the rights of any optionee unless
agreed to in writing by the optionee and MetaTools. The 1995 Plan will
terminate automatically in 2003.
Federal Tax Information. Options granted under the 1995 Plan may be either
incentive stock options, as defined in Section 422 of the Code, or
nonstatutory options.
An optionee who is granted an incentive stock option will not recognize
taxable income either at the time the option is granted or upon its exercise,
although the exercise may subject the optionee to the alternative minimum tax.
Upon the sale or exchange of the shares more than two years after grant of the
option and one year after exercising the option, any gain or loss will be
treated as long-term capital gain or loss. If these holding periods are not
satisfied, the optionee will recognize ordinary income at the time of sale or
exchange equal to the difference between the exercise price and the lower of
(i) the fair market value of the shares at the date of the option exercise or
(ii) the sale price of the shares. A different rule for measuring ordinary
income upon such a premature disposition may apply if the optionee is also an
officer, director or 10% stockholder of MetaTools. MetaTools will be entitled
to a deduction in the same amount as the ordinary income recognized by the
optionee. Any gain or loss recognized on such a premature disposition of the
shares in excess of the amount treated as ordinary income will be
characterized as long-term or short-term capital gain or loss, depending on
the holding period.
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All other options which do not qualify as incentive stock options are
referred to as nonstatutory options. An optionee will not recognize any
taxable income at the time he is granted a nonstatutory option. However, upon
its exercise, the optionee will recognize taxable income generally measured as
the excess of the then fair market value of the shares purchased over the
purchase price. Any taxable income recognized in connection with an option
exercise by an optionee who is also an employee of MetaTools will be subject
to tax withholding by MetaTools. Upon resale of such shares by the optionee,
any difference between the sales price and the optionee's purchase price, to
the extent not previously recognized as taxable income as described above,
will be treated as long-term or short-term capital gain or loss, depending on
the holding period.
Subject to Section 162(m) of the Code, MetaTools will be entitled to a tax
deduction in the same amount as the ordinary income recognized by the optionee
with respect to shares acquired upon exercise of a nonstatutory option.
Stock purchase rights are taxed in substantially the same manner as
nonstatutory options.
The foregoing is only a summary of the effect of federal income taxation
upon the optionee and MetaTools with respect to the grant and exercise of
options under the 1995 Plan, does not purport to be complete, and does not
discuss the tax consequences of the optionee's death or the income tax laws of
any municipality, state or foreign country in which an optionee may reside.
VOTE REQUIRED
The approval of the amendment of the 1995 Plan requires the affirmative vote
of a majority of the shares of MetaTools Common Stock present in person or by
proxy and entitled to vote at the Annual Meeting. An abstention is not an
affirmative vote and, therefore, will have the same effect as a vote against
the proposal.
THE METATOOLS BOARD UNANIMOUSLY RECOMMENDS THAT METATOOLS STOCKHOLDERS VOTE
"FOR" THE AMENDMENT OF THE METATOOLS 1995 STOCK PLAN TO INCREASE THE SHARES
RESERVED FOR ISSUANCE THEREUNDER BY 1,500,000 SHARES.
PROPOSAL SIX--RATIFICATION OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The MetaTools Board has selected Coopers & Lybrand L.L.P., independent
accountants, to audit the financial statements of MetaTools for the 1997
fiscal year. This appointment is being presented to the stockholders for
ratification at the meeting. If the stockholders of MetaTools reject the
appointment, the MetaTools Board will reconsider its selection. Coopers &
Lybrand L.L.P. has audited MetaTools' financial statements since MetaTools'
inception. A representative of Coopers & Lybrand L.L.P. is expected to be
present at the meeting, will have the opportunity to make a statement, and is
expected to be available to respond to appropriate questions.
VOTE REQUIRED; RECOMMENDATION OF THE METATOOLS BOARD
The affirmative vote of a majority of the shares of MetaTools Common Stock
present in person or by proxy and entitled to vote on the proposal at the
Annual Meeting is required to ratify the MetaTools Board's appointment. An
abstention will have the same effect as a vote against the appointment of the
independent accountants, and, pursuant to Delaware law, a broker non-vote will
not be treated as voting in person or by proxy on the proposal.
THE METATOOLS BOARD HAS UNANIMOUSLY APPROVED THE APPOINTMENT OF COOPERS &
LYBRAND L.L.P. AS METATOOLS' ACCOUNTANTS FOR FISCAL 1997 AND RECOMMENDS THAT
THE STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
METATOOLS OTHER MATTERS
MetaTools knows of no other matters to be submitted at the meeting. If any
other matters properly come before the meeting, it is the intention of the
persons named in the enclosed proxy card to vote the shares they represent as
the MetaTools Board may recommend.
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LEGAL MATTERS
The validity of the shares of MetaTools Common Stock to be issued in
connection with the Merger and the federal income tax consequences of the
Merger will be passed upon for MetaTools by Wilson Sonsini Goodrich & Rosati
P.C., Palo Alto, California. As of the date of this Joint Proxy
Statement/Prospectus, Jeffrey D. Saper, a member of Wilson Sonsini Goodrich &
Rosati P.C., Palo Alto, California, beneficially owned 16,000 shares of
MetaTools Common Stock, and certain affiliated investment partnerships of
Wilson Sonsini Goodrich & Rosati owned 9,000 shares of MetaTools Common Stock.
The federal income tax consequences of the Merger will be passed upon for
Fractal by Venture Law Group, A Professional Corporation, Menlo Park,
California. As of the date of this Joint Proxy Statement/Prospectus, attorneys
of Venture Law Group and certain affiliated investment partnerships, owned
23,783 shares of Fractal Common Stock and options to purchase an aggregate of
34,375 shares of Fractal Common Stock.
EXPERTS
The consolidated financial statements of MetaTools as of December 31, 1995
and 1996, and for each of the three years in the period ended December 31,
1996, incorporated in this Joint Proxy Statement/Prospectus by reference to
its Annual Report on Form 10-K for the year ended December 31, 1996, have been
so incorporated in reliance on the report of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The consolidated financial statements of Fractal as of March 31, 1996 and
1995 and for each of the three years in the three year period ended March 31,
1996 incorporated in this Joint Proxy Statement/Prospectus, by reference to
Fractal's Form 8-K dated March 18, 1997 have been so incorporated in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
It is expected that representatives of Coopers & Lybrand L.L.P., MetaTools'
independent accountants, will be present at the MetaTools Annual Meeting and
that representatives of Price Waterhouse LLP, Fractal's independent
accountants, will be present at the Fractal Special Meeting where they will
have an opportunity to respond to appropriate questions of
stockholders/shareholders and to make a statement if they so desire.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, MetaTools stockholders may
present proper proposals for inclusion in MetaTools' proxy statement and for
consideration at the next annual meeting of its stockholders by submitting
such proposals to MetaTools in a timely manner. As noted in MetaTools' proxy
statement relating to its 1996 Annual Meeting of Stockholders, in order to be
so included for the 1997 annual meeting, stockholder proposals must be
received by MetaTools no later than December 16, 1996 and must otherwise
comply with the requirements of Rule 14a-8.
Proposals by stockholders of MetaTools which such stockholders intend to
present at MetaTools' 1998 Annual Meeting of Stockholders must be received by
the Company no later than December 30, 1997 so that they may be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
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INDEX OF ANNEXES
ANNEX A -- Agreement and Plan of Reorganization, dated as of February 11,
1997, among MetaTools, Rook Acquisition Corp. and Fractal
ANNEX B-1 -- Stock Option Agreement dated as of February 11, 1997, between
MetaTools and Fractal
ANNEX B-2 -- Stock Option Agreement dated as of February 11, 1997, between
Fractal and MetaTools
ANNEX C-1 -- Form of MetaTools Affiliates Agreement, dated as of February 11,
1997
ANNEX C-2 -- Form of Fractal Affiliates Agreement, dated as of February 11, 1997
ANNEX D-1 -- Form of MetaTools Voting Agreement, dated as of February 11, 1997
ANNEX D-2 -- Form of Fractal Voting Agreement, dated as of February 11, 1997
ANNEX E -- Sections 1300-1312 of the California Corporations Code
ANNEX F -- Opinion of Alex. Brown & Sons Incorporated
ANNEX G -- Opinion of Unterberg Harris
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
FRACTAL DESIGN CORPORATION
ROOK ACQUISITION CORP.
AND
METATOOLS, INC.
DATED AS OF FEBRUARY 11, 1997
<PAGE>
TABLE OF CONTENTS
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ARTICLE I THE MERGER................................................. 2
1.1 The Merger................................................. 2
1.2 Effective Time; Closing.................................... 2
1.3 Effect of the Merger....................................... 2
1.4 Articles of Incorporation; Bylaws.......................... 2
1.5 Directors and Officers..................................... 2
1.6 Effect on Capital Stock.................................... 2
1.7 Dissenting Shares.......................................... 3
1.8 Surrender of Certificates.................................. 4
1.9 No Further Ownership Rights in Fractal Common Stock........ 5
1.10 Lost, Stolen or Destroyed Certificates..................... 5
1.11 Tax and Accounting Consequences............................ 5
1.12 Taking of Necessary Action; Further Action................. 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF FRACTAL.................. 6
2.1 Organization of Fractal.................................... 6
2.2 Fractal Capital Structure.................................. 6
2.3 Obligations With Respect to Capital Stock.................. 6
2.4 Authority.................................................. 7
2.5 SEC Filings; Fractal Financial Statements.................. 8
2.6 Absence of Certain Changes or Events....................... 8
2.7 Tax........................................................ 9
2.8 Title to Properties; Absence of Liens and Encumbrances..... 9
2.9 Intellectual Property...................................... 10
2.10 Compliance; Permits; Restrictions.......................... 10
2.11 Litigation................................................. 11
2.12 Brokers' and Finders' Fees................................. 11
2.13 Employee Benefit Plans..................................... 11
2.14 Employees; Labor Matters................................... 11
2.15 Environmental Matters...................................... 11
2.16 Agreements, Contracts and Commitments...................... 12
2.17 Pooling of Interests....................................... 13
2.18 Change of Control Payments................................. 13
2.19 Statements; Proxy Statement/Prospectus..................... 13
2.20 Board Approval............................................. 13
2.21 Fairness Opinion........................................... 13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF METATOOLS AND MERGER
SUB........................................................ 14
3.1 Organization of MetaTools ................................. 14
3.2 MetaTools and Merger Sub Capital Structure................. 14
3.3 Obligations With Respect to Capital Stock.................. 15
3.4 Authority.................................................. 15
Section 203 of the Delaware General Corporation Law Not
3.5 Applicable................................................. 16
3.6 SEC Filings; MetaTools Financial Statements................ 16
3.7 Absence of Certain Changes or Events....................... 17
3.8 Tax Returns and Audits..................................... 17
3.9 Title to Properties; Absence of Liens and Encumbrances..... 18
3.10 Intellectual Property...................................... 18
3.11 Compliance; Permits; Restrictions.......................... 19
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3.12 Litigation................................................ 19
3.13 Brokers' and Finders' Fees................................ 19
3.14 Employee Benefit Plans.................................... 19
3.15 Employees; Labor Matters ................................. 19
3.16 Environmental Matters..................................... 20
3.17 Agreements, Contracts and Commitments..................... 20
3.18 Pooling of Interests...................................... 21
3.19 Change of Control Payments................................ 21
3.20 Statements; Proxy Statement/Prospectus.................... 21
3.21 Board Approval............................................ 21
3.22 Fairness Opinion.......................................... 22
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME....................... 22
4.1 Conduct of Business....................................... 22
ARTICLE V ADDITIONAL AGREEMENTS..................................... 23
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations............................ 23
5.2 Meetings of Shareholders and Stockholders................. 24
5.3 Confidentiality; Access to Information.................... 25
5.4 No Solicitation........................................... 25
5.5 Public Disclosure......................................... 27
5.6 Legal Requirements........................................ 27
5.7 Third Party Consents...................................... 27
5.8 Notification of Certain Matters........................... 28
5.9 Best Efforts and Further Assurances....................... 28
5.10 Stock Options and Employee Benefits....................... 28
5.11 Form S-8.................................................. 29
5.12 Indemnification and Insurance............................. 29
5.13 NMS Listing............................................... 30
5.14 MetaTools Affiliate Agreement............................. 30
5.15 Fractal Affiliate Agreement............................... 30
5.16 Regulatory Filings; Reasonable Efforts.................... 30
5.17 Board of Directors of the Combined Company................ 30
5.18 Committees of Board of Directors of MetaTools ............ 30
5.19 Increase in Authorized Shares............................. 30
5.20 MetaTools Name Change .................................... 31
5.21 Tax-Free Reorganization .................................. 31
ARTICLE VI CONDITIONS TO THE MERGER.................................. 31
Conditions to Obligations of Each Party to Effect the
6.1 Merger.................................................... 31
6.2 Additional Conditions to Obligations of Fractal........... 32
Additional Conditions to the Obligations of MetaTools and
6.3 Merger Sub................................................ 32
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER......................... 33
7.1 Termination............................................... 33
7.2 Notice of Termination; Effect of Termination.............. 33
7.3 Fees and Expenses......................................... 34
7.4 Amendment................................................. 35
7.5 Extension; Waiver......................................... 35
ARTICLE VIII GENERAL PROVISIONS........................................ 35
8.1 Non-Survival of Representations and Warranties............ 35
8.2 Notices................................................... 36
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8.3 Interpretation; Knowledge....................................... 36
8.4 Counterparts.................................................... 37
8.5 Entire Agreement; Third Party Beneficiaries..................... 37
8.6 Severability.................................................... 37
8.7 Other Remedies; Specific Performance............................ 37
8.8 Governing Law................................................... 37
8.9 Rules of Construction........................................... 37
8.10 Assignment...................................................... 37
8.11 WAIVER OF JURY TRIAL ........................................... 38
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of February 11, 1997, among MetaTools, Inc., a Delaware
corporation ("METATOOLS"), Rook Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of MetaTools ("MERGER SUB"), and Fractal Design
Corporation, a California corporation ("FRACTAL").
Recitals
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the California General
Corporation Law ("CALIFORNIA LAW"), MetaTools and Fractal intend to enter into
a business combination transaction to pursue their long-term business
strategies.
B. Immediately upon the effectiveness of the Merger (as defined in Section
1.1), the Board of Directors of the combined company would consist of nine (9)
members, with designees of Fractal to hold three (3) of such seats. It is also
contemplated that the senior management of the combined company would consist
of senior management from both Fractal and MetaTools.
C. The Board of Directors of Fractal (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
Fractal and fair to, and in the best interests of, Fractal and its
shareholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement and (iii) has determined to
recommend that the shareholders of Fractal adopt and approve this Agreement
and approve the Merger.
D. The Board of Directors of MetaTools (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
MetaTools and fair to, and in the best interests of, MetaTools and its
stockholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement and (iii) has determined to
recommend that the stockholders of MetaTools vote to approve the issuance of
shares of MetaTools Common Stock (as defined below) to the shareholders of
Fractal pursuant to the terms of the Merger.
E. Concurrently with the execution of this Agreement, and as a condition and
inducement to MetaTools's willingness to enter into this Agreement, the Chief
Executive Officer of Fractal and certain other affiliates of Fractal shall
enter into Voting Agreements in substantially the form attached hereto as
Exhibit A-1 (the "FRACTAL VOTING AGREEMENTS"). Concurrently with the execution
of this Agreement, and as a condition and inducement to Fractal's willingness
to enter into this Agreement, the Chief Executive Officer of MetaTools and
certain other affiliates of MetaTools shall enter into Voting Agreements in
substantially the form attached hereto as Exhibit A-2 (the "METATOOLS VOTING
AGREEMENTS").
F. Concurrently with the execution of this Agreement, and as a condition and
inducement to Fractal's and MetaTools' willingness to enter into this
Agreement, MetaTools shall execute and deliver a Stock Option Agreement in
favor of Fractal in substantially the form attached hereto as Exhibit B-1 (the
"METATOOLS STOCK OPTION AGREEMENT") and Fractal shall execute and deliver a
Stock Option Agreement in favor of MetaTools in substantially the form
attached hereto as Exhibit B-2 (the "FRACTAL STOCK OPTION AGREEMENT" and,
together with the MetaTools Stock Option Agreement, the "STOCK OPTION
AGREEMENTS"). The Board of Directors of MetaTools and Fractal have each
approved the Stock Option Agreements.
G. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "CODE").
H. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
The Merger
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of California Law, Merger Sub shall be merged with and
into Fractal (the "MERGER"), the separate corporate existence of Merger Sub
shall cease and Fractal shall continue as the surviving corporation. Fractal
as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing an
Agreement of Merger with the Secretary of State of the State of California in
accordance with the relevant provisions of California Law and by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware General Corporation Law
(collectively, the "AGREEMENT OF MERGER") (the time of such filing (or such
later time as may be agreed in writing by the parties and specified in the
Agreement of Merger) being the "EFFECTIVE TIME") as soon as practicable on or
after the Closing Date (as herein defined). Unless the context otherwise
requires, the term "AGREEMENT" as used herein refers collectively to this
Agreement and Plan of Reorganization and the Agreement of Merger. The closing
of the Merger (the "CLOSING") shall take place at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, at a time and date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in Article VI, or
at such other time, date and location as the parties hereto agree in writing
(the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
California Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of Fractal and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Fractal and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Articles of Incorporation of the Surviving
Corporation; provided, however, that at the Effective Time the Articles of
Incorporation of the Surviving Corporation shall be amended so that the name
of the Surviving Corporation shall be Fractal Corporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Merger Sub immediately prior to the Effective Time,
until their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Fractal or the holders of
any of the following securities:
(a) Conversion of Fractal Common Stock. Each share of Common Stock, $.001
par value, of Fractal (the "FRACTAL COMMON STOCK") issued and outstanding
immediately prior to the Effective Time,
2
<PAGE>
(other than any shares of Fractal Common Stock to be canceled pursuant to
Section 1.6(b) and any Dissenting Shares (as defined in and to the extent
provided in Section 1.7(a)) will be canceled and extinguished and
automatically converted (subject to Sections 1.6(e) and (f)) into the right
to receive 0.749 (the "EXCHANGE RATIO") share of Common Stock, par value
$.001 per share, of MetaTools (the "METATOOLS COMMON STOCK") upon surrender
of the certificate representing such share of Fractal Common Stock in the
manner provided in Section 1.8 (or in the case of a lost, stolen or
destroyed certificate, upon delivery of an affidavit (and bond, if
required) in the manner provided in Section 1.10).
(b) Cancellation of MetaTools-Owned Stock. Each share of Fractal Common
Stock held by Fractal or owned by Merger Sub, MetaTools or any direct or
indirect wholly owned subsidiary of Fractal or of MetaTools immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective Time,
all options to purchase Fractal Common Stock then outstanding under
Fractal's 1993 Stock Option Plan, 1995 Stock Option Plan, 1995 Directors'
Stock Option Plan and 1992 Assumed Ray Dream, Inc. Stock Option Plan
(collectively, the "FRACTAL STOCK OPTION PLANS") shall be assumed by
MetaTools in accordance with Section 5.10 hereof.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $.001, of
Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of Common Stock, $.001, of the
Surviving Corporation. Each certificate evidencing ownership of shares of
Merger Sub Common Stock shall continue to evidence ownership of such shares
of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into MetaTools Common Stock or Fractal Common Stock),
reorganization, recapitalization or other like change with respect to
MetaTools Common Stock or Fractal Common Stock occurring on or after the
date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of MetaTools Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Fractal Common Stock who would otherwise be entitled to a
fraction of a share of MetaTools Common Stock (after aggregating all
fractional shares of MetaTools Common Stock to be received by such holder)
shall receive from MetaTools an amount of cash (rounded to the nearest
whole cent) equal to the product of (i) such fraction, multiplied by (ii)
the average closing price of one share of MetaTools Common Stock for the
ten most recent days that MetaTools Common Stock has traded ending on the
trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Fractal Common Stock who has demanded and perfected
appraisal rights for such shares in accordance with California Law and who, as
of the Effective Time, has not effectively withdrawn or lost such appraisal
rights ("DISSENTING SHARES"), shall not be converted into or represent a right
to receive MetaTools Common Stock pursuant to Section 1.6, but the holder
thereof shall only be entitled to such rights as are granted by California
Law.
(b) Notwithstanding the foregoing, if any holder of shares of Fractal Common
Stock who demands appraisal of such shares under California Law shall
effectively withdraw or lose (through failure to perfect or otherwise) the
right to appraisal, then, as of the later of the Effective Time or the
occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive MetaTools Common Stock
and cash in lieu of fractional shares of MetaTools Common Stock in accordance
with Section 1.6 hereof, without interest thereon, upon surrender of the
certificate representing such shares of Fractal Common Stock in
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the manner provided in Section 1.8 (or in the case of a lost, stolen or
destroyed certificate, upon delivery of an affidavit (and bond, if required)
in the manner provided in Section 1.10).
(c) Fractal shall give MetaTools (i) prompt notice of any written demands
for appraisal of any shares of Fractal Common Stock, withdrawals of such
demands, and any other instruments served pursuant to California Law and
received by Fractal which relate to any such demand for appraisal and (ii) the
opportunity to participate in all negotiations and proceedings which take
place prior to the Effective Time with respect to demands for appraisal under
California Law. Fractal shall not, except with the prior written consent of
MetaTools or as may be required by applicable law, voluntarily make any
payment with respect to any demands for appraisal of Fractal Common Stock or
offer to settle or settle any such demands. Any payments made in respect of
Dissenting Shares shall be made by Fractal or the Surviving Corporation as the
case may be.
1.8 Surrender of Certificates.
(a) Exchange Agent. MetaTools shall select a bank or trust company with
assets of not less than $500 million to act as the exchange agent (the
"EXCHANGE AGENT") in the Merger.
(b) MetaTools to Provide Common Stock. Promptly after the Effective Time,
MetaTools shall make available to the Exchange Agent for exchange in
accordance with this Article I, the shares of MetaTools Common Stock issuable
pursuant to Section 1.6 in exchange for outstanding shares of Fractal Common
Stock, and cash in an amount sufficient for payment in lieu of fractional
shares pursuant to Section 1.6(f) and any dividends or distributions which
holders of shares of Fractal Common Stock may be entitled pursuant to Section
1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, MetaTools shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Fractal Common
Stock whose shares were converted into the right to receive shares of
MetaTools Common Stock pursuant to Section 1.6, cash in lieu of any fractional
shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.8(d), (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
MetaTools may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
shares of MetaTools Common Stock, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant
to Section 1.8(d). Upon surrender of Certificates for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
MetaTools, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holders of
such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of MetaTools Common
Stock, payment in lieu of fractional shares which such holders have the right
to receive pursuant to Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.8(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will be
deemed from and after the Effective Time, for all corporate purposes, subject
to Section 1.8(d) as to the payment of dividends, to evidence the ownership of
the number of full shares of MetaTools Common Stock into which such shares of
Fractal Common Stock shall have been so converted and the right to receive an
amount in cash in lieu of the issuance of any fractional shares in accordance
with Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect
to MetaTools Common Stock with a record date after the Effective Time will be
paid to the holders of any unsurrendered Certificates with respect to the
shares of MetaTools Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange
Agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of MetaTools
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Common Stock issued in exchange therefor along with payment in lieu of
fractional shares pursuant to Section 1.6(f) hereof and the amount of any such
dividends or other distributions with a record date after the Effective Time
payable with respect to such whole shares of MetaTools Common Stock.
(e) Transfers of Ownership. If certificates for shares of MetaTools Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to MetaTools or any agent designated
by it any transfer or other taxes required by reason of the issuance of
certificates for shares of MetaTools Common Stock in any name other than that
of the registered holder of the Certificates surrendered, or established to
the satisfaction of MetaTools or any agent designated by it that such tax has
been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.8, neither the Exchange Agent, MetaTools, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of MetaTools Common Stock
or Fractal Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Fractal Common Stock. All shares of
MetaTools Common Stock issued upon the surrender for exchange of shares of
Fractal Common Stock in accordance with the terms hereof (including any cash
paid in respect thereof pursuant to Section 1.6(f) and 1.8(d)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Fractal Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Fractal
Common Stock which were outstanding immediately prior to the Effective Time.
If after the Effective Time Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided
in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of MetaTools
Common Stock, cash for fractional shares, if any, as may be required pursuant
to Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d); provided, however, that MetaTools may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
MetaTools, Fractal or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning
of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify for
accounting treatment as a pooling of interests.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of Fractal and Merger Sub, the officers and directors of
Fractal and Merger Sub will take all such lawful and necessary action, so long
as such action is consistent with this Agreement.
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ARTICLE II
Representations and Warranties of Fractal
Fractal represents and warrants to MetaTools and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Fractal to MetaTools dated as of the date hereof and certified by a duly
authorized officer of Fractal (the "FRACTAL SCHEDULES"), as follows:
2.1 Organization of Fractal.
(a) Fractal and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on Fractal.
(b) Fractal has delivered to MetaTools a true and complete list of all of
Fractal's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Fractal's equity interest therein.
(c) Fractal has delivered or made available to MetaTools a true and correct
copy of the Articles of Incorporation and Bylaws of Fractal and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Fractal nor any
of its subsidiaries is in violation of any of the provisions of its Articles
of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Fractal, the term "MATERIAL ADVERSE EFFECT"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of Fractal and its subsidiaries
taken as a whole.
2.2 Fractal Capital Structure. The authorized capital stock of Fractal
consists of 50,000,000 shares of Common Stock, $.001 par value, of which there
were 11,979,647 shares issued and outstanding as of February 7, 1997 and
5,000,000 shares of Preferred Stock, $.001, of which no shares are issued or
outstanding. All outstanding shares of Fractal Common Stock are duly
authorized, validly issued, fully paid and nonassessable and are not subject
to preemptive rights created by statute, the Articles of Incorporation or
Bylaws of Fractal or any agreement or document to which Fractal is a party or
by which it is bound. As of February 7, 1997, Fractal had reserved an
aggregate of 2,516,336 shares of Fractal Common Stock, net of exercises, for
issuance to employees, consultants and non-employee directors pursuant to the
Fractal Stock Option Plans. As of February 7, 1997, there were options
outstanding to purchase an aggregate of 2,017,666 shares of Common Stock,
issued to employees, consultants and non-employee directors pursuant to the
Fractal Stock Option Plans. All shares of Fractal Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. The Fractal Schedules list for
each person who held in the aggregate options to acquire 10,000 or more shares
of Fractal Common Stock at on or about February 7, 1997, the name of the
holder of such option, the exercise price of such option, the number of shares
as to which such option will have vested at such date, the vesting schedule
for such option and whether the exercisability of such option will be
accelerated in any way by the transactions contemplated by this Agreement, and
indicate the extent of acceleration, if any. Fractal has reserved 100,000
shares of Common Stock for issuance pursuant to Fractal's 401(k) Profit
Sharing Plan and Trust.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Fractal, or any securities
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exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except for securities Fractal owns, directly or
indirectly through one or more subsidiaries, there are no equity securities,
partnership interests or similar ownership interests of any class of any
subsidiary of Fractal, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Section 2.2, there are no options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which
Fractal or any of its subsidiaries is a party or by which it is bound
obligating Fractal or any of its subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition, of any shares of
capital stock, partnership interests or similar ownership interests of Fractal
or any of its subsidiaries or obligating Fractal or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement. There are no
registration rights and, to the knowledge of Fractal, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of Fractal or
with respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries.
2.4 Authority.
(a) Fractal has all requisite corporate power and authority to enter into
this Agreement and the Fractal Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
and the execution and delivery of the Fractal Stock Option Agreement and the
consummation of the transactions contemplated thereby, have been duly
authorized by all necessary corporate action on the part of Fractal, subject
only to the approval and adoption of this Agreement and the approval of the
Merger by Fractal's shareholders and the filing and recordation of the
Agreement of Merger pursuant to California Law. A vote of the holders of at
least a majority of the outstanding shares of the Fractal Common Stock is
required for Fractal's shareholders to approve and adopt this Agreement and
approve the Merger. This Agreement and the Fractal Stock Option Agreement have
been duly executed and delivered by Fractal and, assuming the due
authorization, execution and delivery by MetaTools and, if applicable, Merger
Sub, constitute valid and binding obligations of Fractal, enforceable in
accordance with their respective terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of equity.
The execution and delivery of this Agreement and the Fractal Stock Option
Agreement by Fractal do not, and the performance of this Agreement and the
Fractal Stock Option Agreement by Fractal will not, (i) conflict with or
violate the Articles of Incorporation or Bylaws of Fractal or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
Fractal's shareholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 2.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to Fractal or any
of its subsidiaries or by which its or any of their respective properties is
bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair Fractal's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Fractal or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Fractal or any of its subsidiaries is a party or by which
Fractal or any of its subsidiaries or its or any of their respective
properties are bound or affected. The Fractal Schedules list all material
consents, waivers and approvals under any of Fractal's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
(b) 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, foreign or domestic
("GOVERNMENTAL ENTITY"), is required by or with respect to Fractal in
connection with the execution and delivery of this Agreement and the Fractal
Stock Option Agreement or the consummation of the Merger,
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except for (i) the filing of the Agreement of Merger with the Secretary of
State of the State of California, (ii) the filing of the Proxy Statement (as
defined in Section 2.19) with the Securities and Exchange Commission ("SEC")
in accordance with the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"), and the securities or
antitrust laws of any foreign country, and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not be material to Fractal or MetaTools or have a material adverse
effect on the ability of the parties to consummate the Merger.
2.5 SEC Filings; Fractal Financial Statements.
(a) Fractal has filed all forms, reports and documents required to be filed
with the SEC since November 9, 1995 and has made available to MetaTools such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Fractal may file subsequent
to the date hereof) are referred to herein as the "FRACTAL SEC REPORTS." As of
their respective dates, the Fractal SEC Reports (i) were prepared in
accordance with the requirements of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Fractal SEC Reports,
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. None of Fractal's subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Fractal SEC Reports (the "FRACTAL
FINANCIALS"), including any Fractal SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may
be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (z) fairly presented the consolidated financial position of
Fractal and its subsidiaries as at the respective dates thereof and the
consolidated results of Fractal's 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. The balance sheet of
Fractal contained in Fractal SEC Reports as of September 30, 1996 is
hereinafter referred to as the "FRACTAL BALANCE SHEET." Except as disclosed in
the Fractal Financials, since the date of the Fractal Balance Sheet neither
Fractal nor any of its subsidiaries has any liabilities (absolute, accrued,
contingent or otherwise) of a nature required to be disclosed on a balance
sheet or in the related notes to the consolidated financial statements
prepared in accordance with GAAP which are, individually or in the aggregate,
material to the business, results of operations or financial condition of
Fractal and its subsidiaries taken as a whole, except liabilities (i) provided
for in the Fractal Balance Sheet, or (ii) incurred since the date of the
Fractal Balance Sheet in the ordinary course of business consistent with past
practices and immaterial in the aggregate.
(c) Fractal has heretofore furnished to MetaTools a complete and correct
copy of any amendments or modifications, which have not yet been filed with
the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Fractal with the SEC pursuant
to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Fractal
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Fractal, (ii) any material change by Fractal in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by Fractal of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the
ordinary course of business.
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2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements
or arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) Fractal and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("RETURNS") relating to Taxes required to be filed by Fractal and each
of its subsidiaries, except such Returns which are not material to Fractal,
and have paid all Taxes shown to be due on such Returns.
(ii) Except as is not material to Fractal, Fractal and each of its
subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, the Federal Insurance
Contribution Act ("FICA"), the Federal Unemployment Tax Act ("FUTA") and other
Taxes required to be withheld.
(iii) Except as is not material to Fractal, neither Fractal nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there any
Tax deficiency outstanding, proposed or assessed against Fractal or any of its
subsidiaries, nor has Fractal or any of its subsidiaries executed any waiver
of any statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) Except as is not material to Fractal, no audit or other examination of
any Return of Fractal or any of its subsidiaries is presently in progress, nor
has Fractal or any of its subsidiaries been notified of any request for such
an audit or other examination.
(v) Except as is not material to Fractal, no adjustment relating to any
Returns filed by Fractal or any of its subsidiaries has been proposed formally
or informally by any Tax authority to Fractal or any of its subsidiaries or
any representative thereof.
(vi) Except as is not material to Fractal, neither Fractal nor any of its
subsidiaries has any liability for unpaid Taxes which has not been accrued for
or reserved on the Fractal Balance Sheet, whether asserted or unasserted,
contingent or otherwise, which is material to Fractal.
(vii) There is no contract, agreement, plan or arrangement, including but
not limited to the provisions of this Agreement, covering any employee or
former employee of Fractal or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Fractal nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Fractal.
(ix) Neither Fractal nor any of its subsidiaries is party to or has any
obligation under any tax-sharing or allocation agreement or arrangement.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) The Fractal Schedules list the real property owned by Fractal. The
Fractal Schedules list all real property leases to which Fractal is a party
and each amendment thereto. All such current leases are in full force and
effect, are valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any
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existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default) that would give rise to a claim in
an amount greater than $100,000.
(b) Fractal has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
Fractal Financials or in the Fractal Schedules and except for liens for taxes
not yet due and payable and such imperfections of title and encumbrances, if
any, which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
2.9 Intellectual Property.
(a) Fractal and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by, or necessary to, the operation or conduct
of their respective businesses as presently conducted (such intellectual
property and the rights thereto are collectively referred to herein as the
"FRACTAL IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
copyright, trademark, trade secret or other intellectual property rights
licensed by, or to, Fractal, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Fractal IP Rights or
materially impair the right of Fractal, the Surviving Corporation or MetaTools
in or to use, sell, enforce license or otherwise exploit any Fractal IP Rights
or portion thereof.
(c) Neither the operation of Fractal's nor any of its subsidiaries'
respective businesses nor the manufacture, marketing, license, sale or
intended use of any product, service or technology currently licensed,
manufactured, created, distributed, authored, used, sold or under development
by Fractal or any of its subsidiaries (i) violates in any material respect any
license or agreement between Fractal or any of its subsidiaries and any third
party or (ii) infringes any patents, copyright, trademark, trade secret or
other intellectual property right of any other party; and there is no pending
or, to the knowledge of Fractal, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
Fractal IP Rights, nor has Fractal received any written notice asserting that
any Fractal IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party.
(d) Fractal has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Fractal IP Rights.
2.10 Compliance; Permits; Restrictions.
(a) Neither Fractal nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to Fractal or any of its subsidiaries or
by which Fractal or any of its subsidiaries or any of their respective
properties is bound or affected, or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Fractal or any of its subsidiaries is a
party or by which Fractal or any of its subsidiaries or its or any of their
respective properties is bound or affected. To the knowledge of Fractal, no
investigation or review by any Governmental Entity is pending or threatened
against Fractal or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Fractal or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Fractal or any of
its subsidiaries, any acquisition of material property by Fractal or any of
its subsidiaries or the conduct of business by Fractal as currently conducted.
(b) Fractal and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities that are
material to the operation of the business of Fractal (collectively, the
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"FRACTAL PERMITS"). Fractal and its subsidiaries are in compliance in all
material respects with the terms of the Fractal Permits.
2.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Fractal or any of its subsidiaries has
received any notice of assertion nor, to Fractal's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against Fractal or any of its subsidiaries which reasonably would be likely to
be material to Fractal. To the knowledge of Fractal, no Governmental Entity
has at any time challenged or questioned in writing the legal right of Fractal
to manufacture, offer or sell any of its products in the present manner or
style thereof.
2.12 Brokers' and Finders' Fees. Except for fees payable to Unterberg Harris
pursuant to an engagement letter dated February 11, 1997, a copy of which has
been provided to MetaTools, Fractal has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.13 Employee Benefit Plans.
(a) With respect to each material 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
Fractal or any trade or business which is under common control with Fractal
within the meaning of Section 414 of the Code (the "FRACTAL EMPLOYEE PLANS"),
Fractal has made available to MetaTools a true and complete copy of, to the
extent applicable, (i) such Fractal Employee Plan, (ii) the most recent annual
report (Form 5500), (iii) each trust agreement related to such Fractal
Employee Plan, (iv) the most recent summary plan description for each Fractal
Employee Plan for which such a description is required, (v) the most recent
actuarial report relating to any Fractal Employee Plan subject to Title IV of
ERISA and (vi) the most recent IRS determination letter issued with respect to
any Fractal Employee Plan.
(b) Each Fractal Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such
Fractal Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified
status of such plan. Each Fractal Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither Fractal nor any ERISA Affiliate of Fractal has
incurred or is reasonably expected to incur any material liability under Title
IV of ERISA in connection with any Fractal Employee Plan.
2.14 Employees; Labor Matters. To Fractal's knowledge after reasonable
inquiry, no employee of Fractal (i) is in violation of any term of any
employment contract, patent disclosure agreement, non-competition agreement,
or any restrictive covenant to a former employer relating to the right of any
such employee to be employed by Fractal because of the nature of the business
conducted or presently proposed to be conducted by Fractal or to the use of
trade secrets or proprietary information of others and (ii) has given notice
to Fractal, nor is Fractal otherwise aware, that any employee intends to
terminate his or her employment with Fractal except for terminations of a
nature and number that are consistent with Fractal's prior experience. To
Fractal's knowledge, there are no activities or proceedings of any labor union
to organize any employees of Fractal or any of its subsidiaries and there are
no strikes, or material slowdowns, work stoppages or lockouts, or threats
thereof by or with respect to any employees of Fractal or any of its
subsidiaries. Fractal and its subsidiaries are and have been in compliance in
all material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
2.15 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to Fractal, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise
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a danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste
pursuant to the United States Resource Conservation and Recovery Act of 1976,
as amended, and the regulations promulgated pursuant to said laws, (a
"HAZARDOUS MATERIAL"), but excluding office and janitorial supplies, are
present, as a result of the actions of Fractal or any of its subsidiaries or
any affiliate of Fractal, or, to Fractal's knowledge, as a result of any
actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water
thereof, that Fractal or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be likely
to result in a material liability to Fractal, neither Fractal nor any of its
subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has Fractal
or any of its subsidiaries disposed of, transported, sold, used, released,
exposed its employees or others to or manufactured any product containing a
Hazardous Material (collectively "HAZARDOUS MATERIALS ACTIVITIES") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Fractal and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "FRACTAL
ENVIRONMENTAL PERMITS") necessary for the conduct of Fractal's and its
subsidiaries' Hazardous Material Activities and other businesses of Fractal
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
Fractal's knowledge, threatened concerning any Fractal Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of Fractal or any of
its subsidiaries. Fractal is not aware of any fact or circumstance which could
involve Fractal or any of its subsidiaries in any material environmental
litigation or impose upon Fractal any material environmental liability.
2.16 Agreements, Contracts and Commitments. Except as set forth in the
Fractal Schedules, neither Fractal nor any of its subsidiaries is a party to
or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of Fractal's Board of
Directors, other than those that are terminable by Fractal or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit Fractal's or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Fractal or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Fractal or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
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Neither Fractal nor any of its subsidiaries, nor to Fractal's knowledge any
other party to a Fractal Contract (as defined below), has breached, violated
or defaulted under, or received notice that it has breached violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which Fractal or any of its
subsidiaries is a party or by which it is bound of the type described in
clauses (a) through (l) above (any such agreement, contract or commitment, a
"FRACTAL CONTRACT") in such a manner as would permit any other party to cancel
or terminate any such Fractal Contract, or would permit any other party to
seek damages, which would be reasonably likely to be material to Fractal.
2.17 Pooling of Interests. To the knowledge of Fractal, based on
consultation with its independent accountants, neither Fractal nor any of its
directors, officers, affiliates or shareholders has taken any action which
would preclude MetaTools' ability to account for the Merger as a pooling of
interests.
2.18 Change of Control Payments. The Fractal Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and
directors of Fractal as a result of or in connection with the Merger.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
Fractal for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, 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 not misleading. The information supplied by Fractal for inclusion in
the proxy statement/prospectus to be sent to the shareholders of Fractal and
stockholders of MetaTools in connection with the meeting of Fractal's
shareholders to consider the approval and adoption of this Agreement and the
approval of the Merger (the "FRACTAL SHAREHOLDERS' MEETING") and in connection
with the meeting of MetaTools' stockholders to consider the approval of (i)
the amendment of MetaTools' Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (ii) the issuance of shares of
MetaTools Common Stock by virtue of the Merger, (the "METATOOLS STOCKHOLDERS'
MEETING") (such proxy statement/prospectus as amended or supplemented is
referred to herein as the "PROXY STATEMENT") shall not, on the date the Proxy
Statement is first mailed to Fractal's shareholders and MetaTools'
stockholders, at the time of the Fractal Shareholders' Meeting or the
MetaTools Stockholders' Meeting 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 false or misleading; or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Fractal Shareholders' Meeting or the MetaTools Stockholders' Meeting which has
become false or misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time, any event
relating to Fractal or any of its affiliates, officers or directors should be
discovered by Fractal which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Fractal shall
promptly inform MetaTools. Notwithstanding the foregoing, Fractal makes no
representation or warranty with respect to any information supplied by
MetaTools or Merger Sub which is contained in any of the foregoing documents.
2.20 Board Approval. The Board of Directors of Fractal has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of Fractal and its shareholders, and (ii) to recommend that the
shareholders of Fractal approve and adopt this Agreement and approve the
Merger.
2.21 Fairness Opinion. Fractal's Board of Directors has received a written
opinion from Unterberg Harris dated as of the date hereof, to the effect that
as of the date hereof, the Exchange Ratio is fair to Fractal's shareholders
from a financial point of view and has delivered to MetaTools a copy of such
opinion.
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ARTICLE III
Representations and Warranties of MetaTools and Merger Sub
MetaTools and Merger Sub represent and warrant to Fractal, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by MetaTools to Fractal dated as of the date hereof and certified by a duly
authorized officer of MetaTools (the "METATOOLS SCHEDULES"), as follows:
3.1 Organization of MetaTools.
(a) MetaTools and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on MetaTools.
(b) MetaTools has delivered to Fractal a true and complete list of all of
MetaTools' subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and MetaTools' equity interest therein.
(c) MetaTools has delivered or made available to Fractal a true and correct
copy of the Certificate of Incorporation and Bylaws of MetaTools and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither MetaTools nor
any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with MetaTools, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of MetaTools and its
subsidiaries taken as a whole.
3.2 MetaTools and Merger Sub Capital Structure. The authorized capital stock
of MetaTools consists of 30,000,000 shares of Common Stock, par value $0.001
per share, of which there were 13,233,949 shares issued and outstanding as of
February 6, 1997, and 5,000,000 shares of Preferred Stock, par value $0.001
per share, of which no shares are issued or outstanding. The authorized
capital stock of Merger Sub consists of 100 shares of Common Stock, $.001 par
value, all of which, as of the date hereof, are issued and outstanding and are
held by MetaTools. Merger Sub was formed on December 12, 1996, for the purpose
of consummating a merger and has no material assets or liabilities except as
necessary for such purpose. All outstanding shares of MetaTools Common Stock
are duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of MetaTools or any agreement or document to which
MetaTools is a party or by which it is bound. As of February 6, 1997,
MetaTools had reserved an aggregate of 4,296,230, net of exercise, for
issuance to employees, consultants and non-employee directors pursuant to the
MetaTools Stock Option Plans. As of February 7, 1997, there were options
outstanding to purchase an aggregate of 901,084 shares of Common Stock, issued
to employees, consultants and non-employee directors pursuant to the MetaTools
Stock Option Plans. All shares of MetaTools Common Stock subject to issuance
as aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. The MetaTools Schedules list for
each person who held in the aggregate options to acquire 10,000 or more shares
of MetaTools Common Stock at February 6, 1997, the name of the holder of such
option, the number of shares subject to such option, the exercise price of
such option, the number of shares as to which such option will have vested at
such date, the vesting schedule for such option and whether the exercisability
of such option will be accelerated in any way by the transactions contemplated
by this Agreement, and indicate the extent of acceleration, if any. As of
February 6, 1997, an aggregate of 141,763 shares of MetaTools Common Stock
have
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been reserved for issuance pursuant to MetaTools' Employee Stock Purchase Plan
(the "METATOOLS EMPLOYEE STOCK PURCHASE PLAN").
3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2, there are no equity securities, partnership interests or similar
ownership interests of any class of MetaTools, or any securities exchangeable
or convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities MetaTools owns, directly or indirectly
through one or more subsidiaries, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
MetaTools, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
3.2, there are no options, warrants, equity securities, partnership interests
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which MetaTools or any of its
subsidiaries is a party or by which it is bound obligating MetaTools or any of
its subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition, of any shares of capital stock, partnership
interests or similar ownership interests of MetaTools or any of its
subsidiaries or obligating MetaTools or any of its subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. There are no
registration rights and, to the knowledge of MetaTools, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of MetaTools
or with respect to any equity security, partnership interest or similar
ownership interest of any class of any of its subsidiaries.
3.4 Authority.
(a) Each of MetaTools and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and MetaTools has all requisite corporate power and
authority to enter into the MetaTools Stock Option Agreement and to consummate
the transactions contemplated thereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, and
the execution and delivery of the MetaTools Stock Option Agreement and the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of MetaTools and, in the case of this Agreement,
Merger Sub, subject only to the filing and recordation of the Agreement of
Merger pursuant to California Law and the approval by MetaTools' stockholders
of (i) the amendment of MetaTools' Certificate of Incorporation to increase
its authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (ii) the issuance of shares of
MetaTools Common Stock by virtue of the Merger. A vote of the holders of at
least a majority of the outstanding shares of the MetaTools Common Stock is
required for MetaTools' stockholders to approve each of (i) the amendment of
MetaTools' Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of MetaTools Common Stock by
virtue of the Merger and (ii) the issuance of shares of MetaTools Common Stock
by virtue of the Merger. This Agreement has been duly executed and delivered
by each of MetaTools and Merger Sub and, assuming the due authorization,
execution and delivery by Fractal, constitutes the valid and binding
obligation of MetaTools, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The MetaTools Stock Option Agreement has been duly
executed and delivered by MetaTools and, assuming due authorization, execution
and delivery of the MetaTools Stock Option Agreement by Fractal, the MetaTools
Stock Option Agreement constitutes the valid and binding obligation of
MetaTools, enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement by each of MetaTools and
Merger Sub and the execution and delivery of the MetaTools Stock Option
Agreement by MetaTools do not, and the performance of this Agreement by each
of MetaTools and Merger Sub will not and the performance of the MetaTools
Stock Option Agreement by MetaTools will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of MetaTools or the Articles of
Incorporation or Bylaws of Merger Sub or the equivalent organizational
documents of any of MetaTools' other subsidiaries, (ii) subject to obtaining
the approval of MetaTools' stockholders of (y) the amendment of MetaTools'
Certificate of Incorporation to increase its authorized share capital to allow
for
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the issuance of shares of MetaTools Common Stock by virtue of the Merger and
(z) the issuance of shares of MetaTools Common Stock by virtue of the Merger
as contemplated in Section 5.2 and compliance with the requirements set forth
in Section 3.4(b) below, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to MetaTools or any of its subsidiaries
(including Merger Sub) or by which its or any of their respective properties
is bound or affected or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair MetaTools' rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of MetaTools or any of its
subsidiaries (including Merger Sub) pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which MetaTools or any of its subsidiaries
(including Merger Sub) is a party or by which MetaTools or any of its
subsidiaries or its or any of their respective properties are bound or
affected. The MetaTools Schedules list all material consents, waivers and
approvals under any of MetaTools' or any of its subsidiaries' agreements,
contracts, licenses or leases required to be obtained in connection with the
consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to MetaTools or Merger Sub in connection with the execution and
delivery of this Agreement and the MetaTools Stock Option Agreement or the
consummation of the Merger, except for (i) the filing of a Form S-4
Registration Statement (the "REGISTRATION STATEMENT") with the SEC in
accordance with the Securities Act, (ii) the filing of the Agreement of Merger
with the Secretary of State of the State of California and the Secretary of
State of the State of Delaware, (iii) the filing of the Proxy Statement with
the SEC in accordance with the Exchange Act, (iv) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws and the HSR Act
and the securities or antitrust laws of any foreign country, and (v) such
other consents, authorizations, filings, approvals and registrations which if
not obtained or made would not be material to MetaTools or Fractal or have a
material adverse effect on the ability of the parties to consummate the
Merger.
3.5 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of MetaTools has taken all actions so that the restrictions
contained in Section 203 of the Delaware General Corporation Law applicable to
a "business combination" (as defined in such Section 203) will not apply to
the execution, delivery or performance of this Agreement or the Stock Option
Agreements or to the consummation of the Merger or the other transactions
contemplated by this Agreement or the Stock Option Agreements.
3.6 SEC Filings; MetaTools Financial Statements.
(a) MetaTools has filed all forms, reports and documents required to be
filed with the SEC since December 12, 1995, and has made available to Fractal
such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that MetaTools may file
subsequent to the date hereof) are referred to herein as the "METATOOLS SEC
REPORTS." As of their respective dates, the MetaTools SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such MetaTools SEC Reports, 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. None of
MetaTools' subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in MetaTools SEC Reports (the "METATOOLS
FINANCIALS"), including any MetaTools SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or,
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in the case of unaudited interim financial statements, as may be permitted by
the SEC on Form 10-Q under the Exchange Act) and (z) fairly presented the
consolidated financial position of MetaTools and its subsidiaries as at the
respective dates thereof and the consolidated results of MetaTools' 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. The balance sheet of MetaTools contained in MetaTools SEC Reports
as of September 30, 1996 is hereinafter referred to as the "METATOOLS BALANCE
SHEET." Except as disclosed in the MetaTools Financials, since the date of the
MetaTools Balance Sheet neither MetaTools nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required
to be disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of MetaTools and its subsidiaries taken as a whole, except
liabilities (i) provided for in the MetaTools Balance Sheet, or (ii) incurred
since the date of the MetaTools Balance Sheet in the ordinary course of
business consistent with past practices and immaterial in the aggregate.
(c) MetaTools has heretofore furnished to Fractal a complete and correct
copy of any amendments or modifications, which have not yet been filed with
the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by MetaTools with the SEC pursuant
to the Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the MetaTools
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on MetaTools, (ii) any material change by MetaTools in
its accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (iii) any material revaluation by MetaTools of
any of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.8 Tax Returns and Audits.
(a) MetaTools and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by MetaTools and each of its
subsidiaries, except such Returns which are not material to MetaTools, and
have paid all Taxes shown to be due on such Returns.
(b) Except as is not material to MetaTools, MetaTools and each of its
subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld.
(c) Except as is not material to MetaTools, neither MetaTools nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there any
Tax deficiency outstanding, proposed or assessed against MetaTools or any of
its subsidiaries, nor has MetaTools or any of its subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(d) Except as is not material to MetaTools, no audit or other examination of
any Return of MetaTools or any of its subsidiaries is presently in progress,
nor has MetaTools or any of its subsidiaries been notified of any request for
such an audit or other examination.
(e) Except as is not material to MetaTools, no adjustment relating to any
Returns filed by MetaTools or any of its subsidiaries has been proposed
formally or informally by any Tax authority to MetaTools or any of its
subsidiaries or any representative thereof.
(f) Except as is not material to MetaTools, neither MetaTools nor any of its
subsidiaries has any liability for unpaid Taxes which has not been accrued for
or reserved on the MetaTools Balance Sheet, whether asserted or unasserted,
contingent or otherwise, which is material to MetaTools.
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(g) There is no contract, agreement, plan or arrangement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of MetaTools or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(h) Neither MetaTools nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by MetaTools.
(i) Neither MetaTools nor any of its subsidiaries is party to or has
obligations under any tax-sharing or allocation agreement or arrangement.
3.9 Title to Properties; Absence of Liens and Encumbrances.
(a) The MetaTools Schedules list the real property owned by MetaTools. The
MetaTools Schedules list all real property leases to which MetaTools is a
party and each amendment thereto. All such current leases are in full force
and effect, are valid and effective in accordance with their respective terms,
and there is not, under any of such leases, any existing default or event of
default (or event which with notice or lapse of time, or both, would
constitute a default) that would give rise to a claim in an amount greater
than $100,000.
(b) MetaTools has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in MetaTools
Financials or in the MetaTools Schedules and except for liens for taxes not
yet due and payable and such imperfections of title and encumbrances, if any,
which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
3.10 Intellectual Property.
(a) MetaTools and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by or necessary to the operation or conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "METATOOLS
IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
copyright, trademark, trade secret or other intellectual property rights
licensed by or to, MetaTools, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any MetaTools IP Rights
or materially impair the right of MetaTools, the Surviving Corporation or
Fractal in or to use, sell, enforce, license or otherwise exploit any
MetaTools IP Rights or portion thereof.
(c) Neither the operation of MetaTools' nor any of its subsidiaries'
respective business nor the manufacture, marketing, license, sale or intended
use of any product, service or technology currently licensed, manufactured,
created, distributed, authored, used, sold or under development by MetaTools
or any of its subsidiaries (i) violates in any material respect any license or
agreement between MetaTools or any of its subsidiaries and any third party or
(ii) infringes any patent, copyright, trademark, trade secret or other
intellectual property right of any other party; and there is no pending or, to
the knowledge of MetaTools, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
MetaTools IP Rights, nor has MetaTools received any written notice asserting
that any MetaTools IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party.
(d) MetaTools has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all MetaTools IP Rights.
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3.11 Compliance; Permits; Restrictions.
(a) Neither MetaTools nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to MetaTools or any of its
subsidiaries or by which MetaTools or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which MetaTools or any of its subsidiaries
is a party or by which MetaTools or any of its subsidiaries or its or any of
their respective properties is bound or affected. To the knowledge of
MetaTools, no investigation or review by any Governmental Entity is pending or
threatened against MetaTools or any of its subsidiaries, nor has any
Governmental Entity indicated an intention to conduct the same. There is no
material agreement, judgment, injunction, order or decree binding upon
MetaTools or any of its subsidiaries which has or could reasonably be expected
to have the effect of prohibiting or materially impairing any business
practice of MetaTools or any of its subsidiaries, any acquisition of material
property by MetaTools or any of its subsidiaries or the conduct of business by
MetaTools as currently conducted.
(b) MetaTools and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of MetaTools (collectively, the
"METATOOLS PERMITS"). MetaTools and its subsidiaries are in compliance in all
material respects with the terms of the MetaTools Permits.
3.12 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which MetaTools or any of its subsidiaries has
received any notice of assertion nor, to MetaTools' knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against MetaTools or any of its subsidiaries which reasonably would be likely
to be material to MetaTools. To the knowledge of MetaTools, no Governmental
Entity has at any time challenged or questioned in writing the legal right of
MetaTools to manufacture, offer or sell any of its products in the present
manner or style thereof.
3.13 Brokers' and Finders' Fees. Except for fees payable to Alex. Brown &
Sons pursuant to an engagement letter dated February 3, 1997, a copy of which
has been provided to Fractal, MetaTools has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
3.14 Employee Benefit Plans.
(a) With respect to each material 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
MetaTools or any trade or business which is under common control with
MetaTools within the meaning of Section 414 of the Code (the "METATOOLS
EMPLOYEE PLANS"), MetaTools has made available to Fractal a true and complete
copy of, to the extent applicable, (i) such MetaTools Employee Plan, (ii) the
most recent annual report (Form 5500), (iii) each trust agreement related to
such MetaTools Employee Plan, (iv) the most recent summary plan description
for each MetaTools Employee Plan for which such a description is required, (v)
the most recent actuarial report relating to any MetaTools Employee Plan
subject to Title IV of ERISA and (vi) the most recent IRS determination letter
issued with respect to any MetaTools Employee Plan.
(b) Each MetaTools Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such
MetaTools Employee Plan is so qualified and nothing has occurred since the
date of such letter that could reasonably be expected to affect the qualified
status of such plan. Each MetaTools Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither MetaTools nor any ERISA Affiliate of MetaTools has
incurred or is reasonably expected to incur any material liability under Title
IV of ERISA in connection with any MetaTools Employee Plan.
3.15 Employees; Labor Matters. To MetaTools' knowledge after reasonable
inquiry, no employee of MetaTools (i) is in violation of any term of any
employment contract, patent disclosure agreement, non-
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competition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by MetaTools because
of the nature of the business conducted or presently proposed to be conducted
by MetaTools or to the use of trade secrets or proprietary information of
others and (ii) has given notice to MetaTools, nor is MetaTools otherwise
aware, that any employee intends to terminate his or her employment with
MetaTools except for terminations of a nature and number that are consistent
with MetaTools' prior experience. To MetaTools' knowledge, there are no
activities or proceedings of any labor union to organize any employees of
MetaTools or any of its subsidiaries and there are no strikes, or material
slowdowns, work stoppages or lockouts, or threats thereof by or with respect
to any employees of MetaTools or any of its subsidiaries. MetaTools and its
subsidiaries are and have been in compliance in all material respects with all
applicable laws regarding employment practices, terms and conditions of
employment, and wages and hours (including, without limitation, ERISA, WARN or
any similar state or local law).
3.16 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to MetaTools, no underground storage tanks and no
amount of any Hazardous Material, but excluding office and janitorial
supplies, are present, as a result of the actions of MetaTools or any of its
subsidiaries or any affiliate of MetaTools, or, to MetaTools' knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that MetaTools or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be likely
to result in a material liability to MetaTools, neither MetaTools nor any of
its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has
MetaTools or any of its subsidiaries engaged in any Hazardous Materials
Activities in violation of any rule, regulation, treaty or statute promulgated
by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. MetaTools and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "METATOOLS
ENVIRONMENTAL PERMITS") necessary for the conduct of MetaTools' and its
subsidiaries' Hazardous Material Activities and other businesses of MetaTools
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
MetaTools' knowledge, threatened concerning any MetaTools Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of MetaTools or
any of its subsidiaries. MetaTools is not aware of any fact or circumstance
which could involve MetaTools or any of its subsidiaries in any material
environmental litigation or impose upon MetaTools any material environmental
liability.
3.17 Agreements, Contracts and Commitments. Except as set forth in the
MetaTools Schedules, neither MetaTools nor any of its subsidiaries is a party
to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of MetaTools' Board of
Directors, other than those that are terminable by MetaTools or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit MetaTools' or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
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(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
MetaTools or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of MetaTools or any of its subsidiaries to engage in
any line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
Neither MetaTools nor any of its subsidiaries, nor to MetaTools' knowledge
any other party to a MetaTools Contract (as defined below), has breached,
violated or defaulted under, or received notice that it has breached violated
or defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which MetaTools or any of its
subsidiaries is a party or by which it is bound of the type described in
clauses (a) through (l) above (any such agreement, contract or commitment, a
"METATOOLS CONTRACT") in such a manner as would permit any other party to
cancel or terminate any such MetaTools Contract, or would permit any other
party to seek damages, which would be reasonably likely to be material to
MetaTools.
3.18 Pooling of Interests. To the knowledge of MetaTools, based on
consultation with its independent accountants, neither MetaTools nor any of
its directors, officers, affiliates or stockholders has taken any action which
would preclude MetaTools' ability to account for the Merger as a pooling of
interests.
3.19 Change of Control Payments. The MetaTools Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and
directors of MetaTools as a result of or in connection with the Merger.
3.20 Statements; Proxy Statement/Prospectus. The information supplied by
MetaTools for inclusion in the Registration Statement shall not at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, 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 not misleading. The
information supplied by MetaTools for inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to MetaTools'
stockholders and Fractal's shareholders, at the time of the MetaTools
Stockholders' Meeting or the Fractal Shareholders' Meeting 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 false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the MetaTools Stockholders' Meeting or the
Fractal Shareholders' Meeting which has become false or misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Time, any event relating to MetaTools or any of its
affiliates, officers or directors should be discovered by MetaTools which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, MetaTools shall promptly inform Fractal.
Notwithstanding the foregoing, MetaTools makes no representation or warranty
with respect to any information supplied by Fractal which is contained in any
of the foregoing documents.
3.21 Board Approval. The Board of Directors of MetaTools has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of MetaTools and its stockholders, and (ii) to recommend that the
stockholders of MetaTools approve (y) the amendment of MetaTools' Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of MetaTools Common
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Stock by virtue of the Merger and (z) the issuance of shares of MetaTools
Common Stock by virtue of the Merger.
3.22 Fairness Opinion. MetaTools' Board of Directors has received written
opinions from Alex. Brown & Sons Incorporated, dated as of the date hereof, to
the effect is Board of Directors that as of the date hereof, the Exchange
Ratio is fair to MetaTools from a financial point of view and has delivered to
Fractal a copy of such opinions.
ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Fractal (which for the purposes of this
Article 4 shall include Fractal and each of its subsidiaries) and MetaTools
(which for the purposes of this Article 4 shall include MetaTools and each of
its subsidiaries) agree, except (i) in the case of Fractal as provided in
Article 4 of the Fractal Schedules and in the case of MetaTools as provided in
Article 4 of the MetaTools Schedules, or (ii) to the extent that the other of
them shall otherwise consent in writing, to carry on its business diligently
and in accordance with good commercial practice and to carry on its business
in the usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and
regulations, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other material
obligations when due, and use its commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, each of Fractal and MetaTools will promptly notify the
other of any material event involving its business or operations.
In addition, except as permitted by the terms of this Agreement or the Stock
Option Agreements, and except in the case of Fractal as provided in Article 4
of the Fractal Schedules, and except in the case of MetaTools as provided in
Article 4 of the MetaTools Schedules, without the prior written consent of the
other, neither Fractal nor MetaTools shall do any of the following, and
neither Fractal nor MetaTools shall permit its subsidiaries to do any of the
following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing to the other, or adopt
any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Fractal IP Rights
or the MetaTools IP Rights, as the case may be, or enter into grants to
future patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock.
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of capital stock except pursuant to rights of repurchase of any such shares
under any employee, consultant or director stock plan existing on the date
hereof.
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
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acquire any shares of capital stock or any securities convertible into
shares of capital stock, or enter into other agreements or commitments of
any character obligating it to issue any such shares or convertible
securities, other than (i) the issuance of shares of Fractal Common Stock
or MetaTools Common Stock, as the case may be, pursuant to the exercise of
stock options therefor outstanding as of the date of this Agreement, (ii)
options to purchase shares of Fractal Common Stock or MetaTools Common
Stock, as the case may be, to be granted at fair market value in the
ordinary course of business, consistent with past practice and in
accordance with stock option plans existing on the date hereof, (iii)
shares of Fractal Common Stock or MetaTools Common Stock, as the case may
be, issuable upon the exercise of the options referred to in clause (ii),
(iv) shares of Fractal Common Stock or MetaTools Common Stock, as the case
may be, issuable to participants in the MetaTools Employee Stock Purchase
Plan consistent with past practice and the terms thereof and (v) shares of
the Fractal Common Stock or MetaTools Common Stock, as the case may be,
issuable pursuant to the Option Agreements;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Fractal or MetaTools,
as the case may be, or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Fractal or MetaTools, as the case may be, except in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of Fractal
or MetaTools, as the case may be, or guarantee any debt securities of
others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its officers or employees other than
in the ordinary course of business, consistent with past practice, or
change in any material respect any management policies or procedures;
provided, however that this Section 4.1(k) will not prohibit MetaTools from
amending its 401(k) plan to include contributions from MetaTools;
(l) Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business;
(m) Make any grant of exclusive rights to any third party, other than in
the ordinary course of business;
(n) Take any action that would be reasonably likely to interfere with
MetaTools' ability to account for the Merger as a pooling of interests; or
(o) Agree in writing or otherwise to take any of the actions described in
Article 4 (a) through (n) above.
ARTICLE V
Additional Agreements
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Fractal and MetaTools will prepare, and file with the SEC, the Proxy Statement
and MetaTools will prepare and file with the SEC the Registration Statement in
which the Proxy Statement will be included as a prospectus. Each of Fractal
and MetaTools will
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respond to any comments of the SEC, will use its respective reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause the
Proxy Statement to be mailed to its respective stockholders or shareholders,
as the case may be, at the earliest practicable time. As promptly as
practicable after the date of this Agreement, Fractal and MetaTools will
prepare and file any other filings required under the Exchange Act, the
Securities Act or any other Federal, foreign or Blue Sky laws relating to the
Merger and the transactions contemplated by this Agreement (the "OTHER
FILINGS"). Each of Fractal and MetaTools will notify the other promptly upon
the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff or any other government officials for amendments or
supplements to the Registration Statement, the Proxy Statement or any Other
Filing or for additional information and will supply the other with copies of
all correspondence between such party or any of its representatives, on the
one hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement,
the Merger or any Other Filing. The Proxy Statement, the Registration
Statement and the Other Filings will comply in all material respects with all
applicable requirements of law and the rules and regulations promulgated
thereunder. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Proxy Statement, the Registration Statement or
any Other Filing, Fractal or MetaTools, as the case may be, will promptly
inform the other of such occurrence and cooperate in filing with the SEC or
its staff or any other government officials, and/or mailing to shareholders of
Fractal or stockholders of MetaTools, such amendment or supplement.
(b) The Proxy Statement will include the recommendation of the Board of
Directors of Fractal in favor of adoption and approval of this Agreement and
approval of the Merger (except that the Board of Directors of Fractal may
withdraw, modify or refrain from making such recommendation to the extent that
the Board determines, in good faith, after consultation with outside legal
counsel, that compliance with the Board's fiduciary duties under applicable
law would require it to do so). In addition, the Proxy Statement will include
the recommendations of the Board of Directors of MetaTools in favor of (x) the
amendment of MetaTools' Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (y) the issuance of shares of
MetaTools Common Stock by virtue of the Merger.
5.2 Meetings of Shareholders and Stockholders. Promptly after the date
hereof, Fractal will take all action necessary in accordance with California
Law and its Articles of Incorporation and Bylaws to convene the Fractal
Shareholders' Meeting to be held as promptly as practicable, and in any event
(to the extent permissible under applicable law) within 45 days after the
declaration of effectiveness of the Registration Statement, for the purpose of
voting upon this Agreement. Fractal will consult with MetaTools and use its
reasonable best efforts to hold the Fractal Shareholders' Meeting on the same
day as the MetaTools Stockholders' Meeting. Promptly after the date hereof,
MetaTools will take all action necessary in accordance with the Delaware
General Corporation Law and its Certificate of Incorporation and Bylaws to
convene the MetaTools Stockholders' Meeting to be held as promptly as
practicable, and in any event (to the extent permissible under applicable law)
within 45 days after the declaration of effectiveness of the Registration
Statement, for the purpose of (i) amending its Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
MetaTools Common Stock by virtue of the Merger and (ii) voting upon the
issuance of shares of MetaTools Common Stock by virtue of the Merger.
MetaTools will consult with Fractal and will use its reasonable best efforts
to hold the MetaTools Stockholders' Meeting on the same day as the Fractal
Shareholders' Meeting. For so long as the Board of Directors of Fractal
continues to make the recommendation set forth in Section 5.1, Fractal will
use its reasonable best efforts to solicit from its shareholders proxies in
favor of the adoption and approval of this Agreement and the approval of the
Merger and will take all other action necessary or advisable to secure the
vote or consent of its shareholders required by the rules of the National
Association of Securities Dealers, Inc. or California Law to obtain such
approvals. For so long as the Board of Directors of MetaTools continues to
make the recommendations set forth in Section 5.1, MetaTools will use its best
efforts to solicit from its stockholders proxies in favor of (i) the amendment
of MetaTools' Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of MetaTools Common Stock by
virtue of the Merger and (ii) the issuance of shares of MetaTools Common Stock
by virtue of the Merger.
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5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Fractal and MetaTools have previously
executed a Mutual Nondisclosure Agreement, dated November 26, 1996, and a
Confidentiality Agreement, dated February 9, 1997 (collectively the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. Each party will afford the other party and its
accountants, counsel, and other representatives access during normal business
hours to the properties, books, records and personnel of the other party
during the period prior to the Effective Time to obtain all information
concerning the business, including the status of product development efforts,
properties, results of operations and personnel of such party, as the other
party may reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 5.3 will affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Restrictions on MetaTools.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
MetaTools and its subsidiaries shall not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, (i) solicit or knowingly
encourage submission of, any proposals or offers by any person, entity or
group (other than Fractal and its affiliates, agents and representatives), or
(ii) participate in any discussions or negotiations with, or disclose any non-
public information concerning MetaTools or any of its subsidiaries to, or
afford any access to the properties, books or records of MetaTools or any of
its subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
Fractal and its affiliates, agents and representatives), in connection with
any Acquisition Proposal with respect to MetaTools. For the purposes of this
Agreement, an "ACQUISITION PROPOSAL" with respect to an entity means any
proposal or offer relating to (i) any merger, consolidation, sale of
substantial assets or similar transactions involving the entity or any
subsidiaries of the entity (other than sales of assets or inventory in the
ordinary course of business or as permitted under the terms of this
Agreement), (ii) sale of 15% or more of the outstanding shares of capital
stock of the entity (including without limitation by way of a tender offer or
an exchange offer), (iii) the acquisition by any person of beneficial
ownership or a right to acquire beneficial ownership of, or the formation of
any "group" (as defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) which beneficially owns, or has the right to
acquire beneficial ownership of, 15% or more of the then outstanding shares of
capital stock of the entity (except for acquisitions for passive investment
purposes only in circumstances where the person or group qualifies for and
files a Schedule 13G with respect thereto); or (iv) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing. MetaTools will immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. MetaTools will (i) notify
Fractal as promptly as practicable if any inquiry or proposal is made or any
information or access is requested in writing in connection with an
Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly as
practicable notify Fractal of the significant terms and conditions of any such
Acquisition Proposal. In addition, subject to the other provisions of this
Section 5.4(a), from and after the date of this Agreement until the earlier of
the Effective Time and termination of this Agreement pursuant to its terms,
MetaTools and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than Fractal); provided,
however, that nothing herein shall prohibit MetaTools' Board of Directors from
taking and disclosing to MetaTools' stockholders a position with respect to a
tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act.
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(ii) Notwithstanding the provisions of paragraph (a)(i) above, prior to the
Effective Time, MetaTools may, to the extent the Board of Directors of
MetaTools determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to
do so, participate in discussions or negotiations with, and, subject to the
requirements of paragraph (a)(iii), below, furnish information to any person,
entity or group after such person, entity or group has delivered to MetaTools
in writing, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of MetaTools in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of MetaTools (a
"METATOOLS SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (a)(i) above, in connection with a possible Acquisition Proposal,
MetaTools may refer any third party to this Section 5.4(a) or make a copy of
this Section 5.4(a) available to a third party. In the event MetaTools
receives a MetaTools Superior Proposal, nothing contained in this Agreement
(but subject to the terms hereof) will prevent the Board of Directors of
MetaTools from recommending such MetaTools Superior Proposal to MetaTools'
stockholders, if the Board determines, in good faith, after consultation with
outside legal counsel, that such action is required by its fiduciary duties
under applicable law; in such case, the Board of Directors of MetaTools may
withdraw, modify or refrain from making its recommendations set forth in
Section 5.1(b), and, to the extent it does so, MetaTools may refrain from
soliciting proxies and taking such other action necessary to secure the vote
of its stockholders as may be required by Section 5.2; provided, however, that
MetaTools shall not recommend to its stockholders a MetaTools Superior
Proposal for a period of not less than 48 hours after Fractal's receipt of a
copy of such MetaTools Superior Proposal (or a description of the significant
terms and conditions thereof, if not in writing); and provided further, that
nothing contained in this Section shall limit MetaTools' obligation to hold
and convene the MetaTools Stockholders Meeting (regardless of whether the
recommendations of the Board of Directors of MetaTools shall have been
withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary herein, MetaTools will not
provide any non-public information to a third party unless: (x) MetaTools
provides such non-public information pursuant to a nondisclosure agreement
with terms regarding the protection of confidential information at least as
restrictive as such terms in the Confidentiality Agreement; and (y) such non-
public information has been previously delivered to Fractal.
(b) Restrictions on Fractal.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, Fractal
and its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (i) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group (other
than MetaTools and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-
public information concerning Fractal or any of its subsidiaries to, or afford
any access to the properties, books or records of Fractal or any of its
subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
MetaTools and its affiliates, agents and representatives), in connection with
any Acquisition Proposal with respect to Fractal. Fractal will immediately
cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. Fractal
will (i) notify MetaTools as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in writing in
connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify MetaTools of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the other
provisions of this Section 5.4(b), from and after the date of this Agreement
until the earlier of the Effective Time and termination of this Agreement
pursuant to its terms, Fractal and its subsidiaries will not, and will
instruct their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly, make
or authorize any public statement, recommendation or solicitation in support
of any Acquisition Proposal made by any person, entity or group (other than
MetaTools); provided, however, that nothing herein shall prohibit Fractal's
Board of Directors from taking and disclosing to Fractal's shareholders a
position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act.
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(ii) Notwithstanding the provisions of paragraph (b)(i) above, prior to the
Effective Time, Fractal may, to the extent the Board of Directors of Fractal
determines, in good faith, after consultation with outside legal counsel, that
the Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (b)(iii), below, furnish information to any person,
entity or group after such person, entity or group has delivered to Fractal in
writing, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of Fractal in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the shareholders of Fractal (a
"FRACTAL SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (b)(i) above, in connection with a possible Acquisition Proposal,
Fractal may refer any third party to this Section 5.4(b) or make a copy of
this Section 5.4(b) available to a third party. In the event Fractal receives
a Fractal Superior Proposal, nothing contained in this Agreement (but subject
to the terms hereof) will prevent the Board of Directors of Fractal from
recommending such Fractal Superior Proposal to its stockholders, if the Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of Fractal may withdraw, modify or refrain from
making its recommendation set forth in Section 5.1(b), and, to the extent it
does so, Fractal may refrain from soliciting proxies and taking such other
action necessary to secure the vote of its shareholders as may be required by
Section 5.2; provided, however, that Fractal shall not recommend to its
shareholders a Fractal Superior Proposal for a period of not less than 48
hours after MetaTools' receipt of a copy of such Fractal Superior Proposal (or
a description of the significant terms and conditions thereof, if not in
writing); and provided further, that nothing contained in this Section shall
limit Fractal's obligation to hold and convene the Fractal Shareholders
Meeting (regardless of whether the recommendation of the Board of Directors of
Fractal shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in paragraph (b), Fractal
will not provide any non-public information to a third party unless: (x)
Fractal provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously delivered to MetaTools.
5.5 Public Disclosure. MetaTools and Fractal will consult with each other,
and to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to the Merger, this
Agreement or an Acquisition Proposal and will not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law or any listing agreement with a national securities exchange
or the Nasdaq Stock Market. The parties have agreed to the text of the joint
press release announcing the signing of this Agreement.
5.6 Legal Requirements. Each of MetaTools, Merger Sub and Fractal will take
all reasonable actions necessary or desirable to comply promptly with all
legal requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement (including
furnishing all information required in connection with approvals by or filings
with any Governmental Entity, and prompt resolution of any litigation prompted
hereby) and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such filings with or investigations by
any Governmental Entity, and any other such requirements imposed upon any of
them or their respective subsidiaries in connection with the consummation of
the transactions contemplated by this Agreement. MetaTools will use its
commercially reasonable efforts to take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of MetaTools Common Stock pursuant hereto. Fractal
will use its commercially reasonable efforts to assist MetaTools as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of MetaTools Common Stock
pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
MetaTools and Fractal will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of
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its or its subsidiaries' agreements, contracts, licenses or leases required to
be obtained in connection with the consummation of the transactions
contemplated hereby.
5.8 Notification of Certain Matters. MetaTools and Merger Sub will give
prompt notice to Fractal, and Fractal will give prompt notice to MetaTools, of
the occurrence, or failure to occur, of any event, which occurrence or failure
to occur would be reasonably likely to cause (a) any representation or
warranty contained in this Agreement and made by it to be untrue or inaccurate
in any material respect at any time from the date of this Agreement to the
Effective Time such that the conditions set forth in Section 6.2(a) or 6.3(a),
as the case may be, would not be satisfied as a result thereof or (b) any
material failure of MetaTools and Merger Sub or Fractal, as the case may be,
or of any officer, director, employee or agent thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement. Notwithstanding the above, the delivery of any
notice pursuant to this section will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
5.9 Best Efforts and Further Assurances. Subject to the respective rights
and obligations of MetaTools and Fractal under this Agreement, each of the
parties to this Agreement will use its reasonable best efforts to effectuate
the Merger and the other transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to closing under this Agreement; provided
that neither MetaTools nor Fractal nor any subsidiary or affiliate thereof
will be required to agree to any divestiture by itself or any of its
affiliates of shares of capital stock or of any business, assets or property,
or the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock. Subject to the foregoing, each party hereto, at the
reasonable request of another party hereto, will execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
5.10 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares of
Fractal Common Stock (each a "FRACTAL STOCK OPTION") under the Fractal Stock
Option Plans, whether or not exercisable, will be assumed by MetaTools. Each
Fractal Stock Option so assumed by MetaTools under this Agreement will
continue to have, and be subject to, the same terms and conditions set forth
in the applicable Fractal Stock Option Plan immediately prior to the Effective
Time (including, without limitation, any repurchase rights), except that (i)
each Fractal Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of MetaTools Common
Stock equal to the product of the number of shares of Fractal Common Stock
that were issuable upon exercise of such Fractal Stock Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down to
the nearest whole number of shares of MetaTools Common Stock, and (ii) the per
share exercise price for the shares of MetaTools Common Stock issuable upon
exercise of such assumed Fractal Stock Option will be equal to the quotient
determined by dividing the exercise price per share of Fractal Common Stock at
which such Fractal Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, MetaTools will issue to each holder of an
outstanding Fractal Stock Option a notice describing the foregoing assumption
of such Fractal Stock Option by MetaTools.
(b) It is intended that Fractal Stock Options assumed by MetaTools shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Fractal Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.10 shall be applied consistent with such intent.
(c) MetaTools will reserve sufficient shares of MetaTools Common Stock for
issuance under Section 5.10(a) and under Section 1.6(c) hereof.
(d) Employees and Employee Benefits; Location of Facilities.
(i) Employees and Employee Benefits. From and after the Effective Time,
MetaTools shall grant all employees of Fractal and any subsidiaries of Fractal
credit for all service (to the same extent as service with
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MetaTools or any subsidiary of MetaTools is taken into account with respect to
similarly situated employees of MetaTools and the subsidiaries of MetaTools)
with Fractal and any subsidiary of Fractal and their respective predecessors
prior to the Effective Time for all purposes as if such service with Fractal
or any subsidiary of Fractal was service with MetaTools or any subsidiary of
MetaTools (provided, however, that no such past service credit shall be
granted to the extent it would result in duplicative accrual of benefits for
the same period of service), and, with respect to any medical or dental
benefit plan, MetaTools shall waive any pre-existing condition exclusions and
actively-at-work requirements (provided, however, that no such waiver shall
apply to a pre- existing condition of any employee of Fractal or any
subsidiary of Fractal who was, as of the Effective Time, excluded from
participation in a plan by virtue of such pre-existing condition) and provide
that any covered expenses incurred on or before the Effective Time by an
employee or an employee's covered dependent shall be taken into account for
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions after the Effective Time to the same extent as such expenses
are taken into account for the benefit of similarly situate employees of
MetaTools and subsidiaries of MetaTools. MetaTools shall provide or shall
cause Fractal and each subsidiary of Fractal to provide benefits to any
employee of Fractal and each subsidiary of Fractal which are not less
favorable in the aggregate than the benefits provided to similarly situated
employees of MetaTools and subsidiaries of MetaTools.
(ii) Location of Facilities. It is the current intention of the parties that
following the Closing, operations of Fractal and MetaTools shall remain in
substantially the same geographic locations as such operations are located
prior to the Closing.
(iii) Fractal 401(k). The parties will agree as to the treatment of the
Fractal 401(k) as a result of the Merger. It is understood that any treatment
of the Fractal 401(k) Plan will not preclude MetaTools' ability to account for
the Merger as a pooling of interests and will not treat any participant in the
Fractal 401(k) in a manner disproportionate to similarly situated employees of
MetaTools.
5.11 Form S-8. MetaTools agrees to file a registration statement on Form S-8
for the shares of MetaTools Common Stock issuable with respect to assumed
Fractal Stock Options no later than the next business day after the Closing
Date.
5.12 Indemnification and Insurance.
(a) From and after the Effective Time, MetaTools will fulfill and honor and
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Fractal pursuant to any indemnification agreements between
Fractal and its directors and officers existing prior to the date hereof. From
and after the Effective Time, such obligations shall be the joint and several
obligations of MetaTools and the Surviving Corporation and, by executing this
Agreement, MetaTools hereby assumes such obligations. The Articles of
Incorporation and By-laws of the Surviving Corporation will contain the
provisions with respect to indemnification set forth in the Articles of
Incorporation and Bylaws of Fractal, which provisions will not be amended,
repealed or otherwise modified from the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who, immediately
prior to the Effective Time, were directors, officers, employees or agents of
Fractal, unless such modification is required by law.
(b) For a period of six years after the Effective Time, MetaTools will cause
the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by Fractal's directors' and
officers' liability insurance policy on terms comparable to those applicable
to the then current directors and officers of MetaTools; provided, however,
that in no event will MetaTools or the Surviving Corporation be required to
expend in excess of 175% of the annual premium currently paid by Fractal for
such coverage (or such coverage as is available for such 175% of the annual
premium).
(c) This Section 5.13 will survive any termination of this Agreement and the
consummation of the Merger at the Effective Time, is intended to benefit
Fractal, the Surviving Corporation and the Indemnified Parties, and will be
binding on all successors and assigns of the Surviving Corporation.
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5.13 NMS Listing. MetaTools agrees to authorize for listing on the Nasdaq
National Market the shares of MetaTools Common Stock issuable, and those
required to be reserved for issuance, in connection with the Merger, upon
official notice of issuance.
5.14 MetaTools Affiliate Agreement. Set forth on the MetaTools Schedules is
a list of those persons who may be deemed to be, in MetaTools' reasonable
judgment, affiliates of MetaTools within the meaning of Rule 145 promulgated
under the Securities Act (each a "METATOOLS AFFILIATE"). MetaTools will
provide Fractal with such information and documents as Fractal reasonably
requests for purposes of reviewing such list. MetaTools will use its
reasonable best efforts to deliver or cause to be delivered to Fractal, as
promptly as practicable on or following the date hereof, from each MetaTools
Affiliate an executed affiliate agreement in substantially the form attached
hereto as Exhibit C-1, each of which will be in full force and effect as of
the Effective Time.
5.15 Fractal Affiliate Agreement. Set forth on the Fractal Schedules is a
list of those persons who may be deemed to be, in Fractal's reasonable
judgment, affiliates of Fractal within the meaning of Rule 145 promulgated
under the Securities Act (each a "FRACTAL AFFILIATE"). Fractal will provide
MetaTools with such information and documents as MetaTools reasonably requests
for purposes of reviewing such list. Fractal will use its reasonable best
efforts to deliver or cause to be delivered to MetaTools, as promptly as
practicable on or following the date hereof, from each Fractal Affiliate an
executed affiliate agreement in substantially the form attached hereto as
Exhibit C-2 (the "FRACTAL AFFILIATE AGREEMENT"), each of which will be in full
force and effect as of the Effective Time. MetaTools will be entitled to place
appropriate legends on the certificates evidencing any MetaTools Common Stock
to be received by a Fractal Affiliate pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the MetaTools Common Stock, consistent with the terms of the Fractal Affiliate
Agreement.
5.16 Regulatory Filings; Reasonable Efforts. If required under applicable
law, as soon as may be reasonably practicable, Fractal and MetaTools each
shall file with the United States Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated herein
as required by the HSR Act, as well as comparable pre-merger notification
forms required by the merger notification or control laws and regulations of
any applicable jurisdiction, as agreed to by the parties. Fractal and
MetaTools each shall promptly (a) supply the other with any information which
may be required in order to effectuate such filings and (b) supply any
additional information which reasonably may be required by the FTC, the DOJ or
the competition or merger control authorities of any other jurisdiction and
which the parties may reasonably deem appropriate.
5.17 Board of Directors of the Combined Company. The Board of Directors of
MetaTools will take all actions necessary to cause the Board of Directors of
MetaTools, immediately after the Effective Time, to consist of nine (9)
persons, three (3) of whom shall be Thomas Hedges, Mark Zimmer and one (1)
additional person to be named by Fractal who shall be reasonably acceptable to
MetaTools. If, prior to the Effective Time, Mr. Hedges or Mr. Zimmer shall
decline or be unable to serve as a Fractal director, Fractal shall designate
another person to serve in such person's stead, which person shall be
reasonably acceptable to MetaTools.
5.18 Committees of Board of Directors of MetaTools. The Board of Directors
of MetaTools will take all actions necessary to cause the Audit Committee and
the Compensation Committee of the Board of Directors of MetaTools to each
consist only of independent directors. In addition, the Board of Directors of
MetaTools will take all actions necessary to cause the Nominating Committee of
the Board of Directors of MetaTools to consist of two (2) independent
directors and the Chief Executive Officer of MetaTools.
5.19 Increase in Authorized Shares. Subject to the terms hereof, at the
MetaTools Stockholders' Meeting MetaTools shall propose and recommend that its
Certificate of Incorporation be amended to increase the authorized number of
shares of Common Stock thereunder to 75,000,000 shares, provided that
MetaTools may propose and recommend an increase of such lesser number as in
good faith it determines (provided that, subject
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to the terms hereof, such lesser number is not less than the number required
to issue shares by virtue of the Merger and the other transactions
contemplated hereby).
5.20 MetaTools Name Change. The Proxy Statement shall include a proposal to
change the name of MetaTools (upon, and subject to consummation of, the
Merger) to a name that is mutually agreeable to the parties hereto.
5.21 Tax-Free Reorganization. No party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code.
ARTICLE VI
Conditions to the Merger
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder and Shareholder Approval. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the shareholders of Fractal; and an
increase in the authorized number of shares of MetaTools Common Stock so as
to permit the issuance of shares of MetaTools Common Stock by virtue of the
Merger, as well as such issuance, shall have been duly approved by the
requisite vote under applicable law and the rules of the National
Association of Securities Dealers, Inc. by the stockholders of MetaTools.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(d) Tax Opinions. MetaTools and Fractal shall each have received written
opinions from their respective counsel, Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and Venture Law Group, Professional Corporation,
in form and substance reasonably satisfactory to them, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and such opinions shall not have been withdrawn;
provided, however, that if the counsel to either MetaTools or Fractal does
not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of MetaTools Common Stock issuable to
shareholders of Fractal pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(f) Opinion of Accountants. Each of MetaTools and Fractal shall have
received a letter from Coopers & Lybrand L.L.P. and Price Waterhouse LLP,
respectively, dated within two (2) business days prior to the Effective
Time, regarding that firm's concurrence with MetaTools' managements' and
Fractal's managements' conclusions as to the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board
Opinion No. 16, if the Merger is consummated in accordance with this
Agreement.
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6.2 Additional Conditions to Obligations of Fractal. The obligation of
Fractal to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by Fractal:
(a) Representations and Warranties. The representations and warranties of
MetaTools and Merger Sub contained in this Agreement shall have been true
and correct in all material respects as of the date of this Agreement. In
addition, the representations and warranties of MetaTools and Merger Sub
contained in this Agreement shall be true and correct in all material
respects on and as of the Effective Time except for changes contemplated by
this Agreement and except for those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such particular date), with the same force and effect as if
made on and as of the Effective Time, except in such cases (other than the
representations in Sections 3.2, 3.3 and 3.22) where the failure to be so
true and correct would not have a Material Adverse Effect on MetaTools.
Fractal shall have received a certificate with respect to the foregoing
signed on behalf of MetaTools by the Chief Executive Officer and the Chief
Financial Officer of MetaTools;
(b) Agreements and Covenants. MetaTools and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and Fractal shall have received a
certificate to such effect signed on behalf of MetaTools by the Chief
Executive Officer and the Chief Financial Officer of MetaTools; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
MetaTools shall have occurred since the date of this Agreement.
6.3 Additional Conditions to the Obligations of MetaTools and Merger
Sub. The obligations of MetaTools and Merger Sub to consummate and effect the
Merger shall be subject to the satisfaction at or prior to the Effective Time
of each of the following conditions, any of which may be waived, in writing,
exclusively by MetaTools:
(a) Representations and Warranties. The representations and warranties of
Fractal contained in this Agreement shall have been true and correct in all
material respects as of the date of this Agreement. In addition, the
representations and warranties of Fractal contained in this Agreement shall
be true and correct in all material respects on and as of the Effective
Time except for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Effective
Time, except in such cases (other than the representations in Sections 2.2,
2.3 and 2.21) where the failure to be so true and correct would not have a
Material Adverse Effect on Fractal. MetaTools shall have received a
certificate with respect to the foregoing signed on behalf of Fractal by
the Chief Executive Officer and the Chief Financial Officer of Fractal;
(b) Agreements and Covenants. Fractal shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time, and the MetaTools shall have received a certificate to such
effect signed on behalf of Fractal by the President and the Chief Financial
Officer of Fractal; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Fractal shall have occurred since the date of this Agreement.
(d) No Dissenters. Holders of more than 4.9% of the outstanding shares of
Fractal Common Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(e) Noncompetition Agreements. Thomas Hedges and Mark Zimmer shall have
entered into Noncompetition Agreements substantially in the form attached
hereto as Exhibit D and such agreements shall be in full force and effect.
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ARTICLE VII
Termination, Amendment and Waiver
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the shareholders of Fractal or the approval of the issuance of MetaTools
Common Stock in connection with the Merger by the stockholders of MetaTools:
(a) by mutual written consent duly authorized by the Boards of Directors
of MetaTools and Fractal;
(b) by either Fractal or MetaTools if the Merger shall not have been
consummated by August 31, 1997 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement;
(c) by either Fractal or MetaTools if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action (an "ORDER"),
in any case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, which order, decree or ruling is final
and nonappealable;
(d) by either Fractal or MetaTools if the required approvals of the
shareholders of Fractal or the stockholders of MetaTools contemplated by
this Agreement shall not have been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of shareholders or
stockholders, as the case may be, duly convened therefor or at any
adjournment thereof (provided that the right to terminate this Agreement
under this Section 7.1(d) shall not be available to any party where the
failure to obtain shareholder or stockholder approval of such party shall
have been caused by the action or failure to act of such party in breach of
this Agreement);
(e) by MetaTools, if the Board of Directors of Fractal recommends a
Fractal Superior Proposal to the shareholders of Fractal, or if the Board
of Directors of Fractal shall have withheld, withdrawn or modified in a
manner adverse to MetaTools its recommendation in favor of adoption and
approval of this Agreement and approval of the Merger;
(f) by Fractal, if the Board of Directors of MetaTools recommends a
MetaTools Superior Proposal to the stockholders of MetaTools, or if the
Board of Directors of MetaTools shall have withheld, withdrawn or modified
in a manner adverse to Fractal its recommendation in favor of approving the
issuance of the shares of MetaTools Common Stock by virtue of the Merger;
(g) by Fractal, upon a breach of any representation, warranty, covenant
or agreement on the part of MetaTools set forth in this Agreement, or if
any representation or warranty of MetaTools shall have become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided
that if such inaccuracy in MetaTools' representations and warranties or
breach by MetaTools is curable by MetaTools through the exercise of its
commercially reasonable efforts, then Fractal may not terminate this
Agreement under this Section 7.1(i) provided MetaTools continues to
exercise such commercially reasonable efforts to cure such breach; or
(h) by MetaTools, upon a breach of any representation, warranty, covenant
or agreement on the part of Fractal set forth in this Agreement, or if any
representation or warranty of Fractal shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Fractal's representations and warranties or breach by Fractal
is curable by Fractal through the exercise of its commercially reasonable
efforts, then MetaTools may not terminate this Agreement under this Section
7.1(j) provided Fractal continues to exercise such commercially reasonable
efforts to cure such breach.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other
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parties hereto. In the event of the termination of this Agreement as provided
in Section 7.1, this Agreement shall be of no further force or effect, except
(i) as set forth in this Section 7.2, Section 7.3 and Article 8
(miscellaneous), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any breach of this Agreement. No termination of this Agreement shall affect
the obligations of the parties contained in the Confidentiality Agreement or
the Stock Option Agreements, all of which obligations shall survive
termination of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that MetaTools and Fractal shall
share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in relation to the printing and filing of the
Proxy Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
(b) Fractal Payments.
(i) If (x) the Board of Directors of Fractal shall have withheld, withdrawn
or modified in a manner adverse to MetaTools its recommendation in favor of
adoption and approval of this Agreement and approval of the Merger and at that
time (A) there shall not have occurred a Material Adverse Effect on MetaTools
and (B) the condition set forth in Section 6.1(d) hereof shall not be
incapable of being satisfied (other than incapability as a result of a failure
of the parties hereto and their respective affiliates to make reasonable
representations for the purposes of the opinions described in Section 6.1(d)
hereof), or (y) the Board of Directors of Fractal recommends a Fractal
Superior Proposal to the shareholders of Fractal, Fractal shall pay to
MetaTools an amount equal to $4,000,000 within one business day following the
earlier to occur of (A) termination of this Agreement pursuant to Section
7.1(e) hereof and (B) a Fractal Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i) above, and
if (x) the vote of the shareholders of Fractal approving and adopting this
Agreement and approving the Merger shall not have been obtained by reason of
the failure to obtain the required vote upon a vote taken at a meeting of
shareholders duly convened therefor or at any adjournment thereof (a "FRACTAL
NEGATIVE VOTE") and (y) prior to such Fractal Negative Vote there shall have
occurred an Acquisition Proposal with respect to Fractal which shall have been
publicly disclosed and not withdrawn (a "FRACTAL COMPETING PROPOSAL") and (z)
(i) within 12 months following such Fractal Negative Vote, Fractal shall enter
into a definitive agreement with respect to an Acquisition Proposal with the
party (or any affiliate of the party) that made the Fractal Competing Proposal
or an Acquisition Proposal with such party (or any such affiliate) with
respect to Fractal shall have been consummated or (ii) within 6 months
following such Fractal Negative Vote, Fractal shall enter into a definitive
agreement with respect to an Acquisition Proposal with any other party or an
Acquisition Proposal with any other party with respect to Fractal shall have
been consummated, then, provided that there shall have not occurred a Material
Adverse Effect on MetaTools prior to the Fractal Negative Vote, Fractal shall
pay to MetaTools an amount equal to $4,000,000 within one business day
following demand therefor after the occurrence of the events set forth in (x)
and (y) and either (z)(i) or (z)(ii) above; and
(iii) If no payment shall be required pursuant to clauses 7.3(b)(i) or (ii)
above and if there shall be a Fractal Negative Vote then Fractal shall pay to
MetaTools an amount equal to $750,000 within one business day following demand
therefor; provided there shall not have occurred a Material Adverse Effect on
MetaTools prior to the Fractal Negative Vote.
(c) MetaTools Payments.
(i) If (x) the Board of Directors of MetaTools shall have withheld,
withdrawn or modified in a manner adverse to Fractal its recommendation in
favor of approving the issuance of the shares of MetaTools Common Stock by
virtue of the Merger and at that time (A) there shall not have occurred a
Material Adverse Effect on
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Fractal and (B) the condition set forth in Section 6.1(d) hereof shall not be
incapable of being satisfied (other than incapability as a result of a failure
of the parties hereto and their respective affiliates to make reasonable
representations for the purposes of the opinions described in Section 6.1(d)
hereof), or (y) the Board of Directors of MetaTools recommends a MetaTools
Superior Proposal to the stockholders of MetaTools, MetaTools shall pay to
Fractal an amount equal to $4,000,000 million within one business day
following the earlier to occur of (A) termination of this Agreement pursuant
to Section 7.1(f) hereof and (B) a MetaTools Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(c)(i) above, and
if (x) the vote of the stockholders of MetaTools in favor of an increase in
the authorized number of shares of MetaTools Common Stock so as to permit the
issuance of shares of MetaTools Common Stock by virtue of the Merger, as well
as such issuance, shall not have been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of stockholders duly
convened therefor or at any adjournment thereof (a "METATOOLS NEGATIVE VOTE")
and (y) prior to such MetaTools Negative Vote there shall have occurred an
Acquisition Proposal with respect to MetaTools which shall have been publicly
disclosed and not withdrawn (a "METATOOLS COMPETING PROPOSAL") and (z) (i)
within 12 months following such MetaTools Negative Vote MetaTools shall enter
into a definitive agreement with respect to an Acquisition Proposal with the
party (or any affiliate of the party) that made the MetaTools Competing
Proposal or an Acquisition Proposal with such party (or any such affiliate)
with respect to MetaTools shall have been consummated or (ii) within 6 months
following such MetaTools Negative Vote, MetaTools shall enter into a
definitive agreement with respect to an Acquisition Proposal with any other
party or an Acquisition Proposal with any other party with respect to
MetaTools shall have been consummated, then, provided that there shall not
have occurred a Material Adverse Effect on Fractal prior to the MetaTools
Negative Vote, MetaTools shall pay to Fractal an amount equal to $4,000,000
within one business day following demand therefor after the occurrence of the
events set forth in (x) and (y) and either z(i) or (z)(ii) above; and
(iii) If no payment shall be required pursuant to clauses 7.3(c)(i) or (ii)
above and if there shall be a MetaTools Negative Vote then MetaTools shall pay
to Fractal an amount equal to $750,000 within one business day following
demand therefor; provided there shall not have occurred a Material Adverse
Effect on Fractal prior to the MetaTools Negative Vote.
(d) Payment of the fees described in Section 7.3(b) and (c) above shall not
be in lieu of damages incurred in the event of breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
General Provisions
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Fractal, MetaTools and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
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8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a) if to MetaTools or Merger Sub, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attention: Chief Executive Officer
Telephone No.: (805) 566-6700
Telecopy No.: (805) 566-6384
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
(b) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attention: President
Telephone No.: (408) 688-5300
Telecopy No.: (408) 430-0305
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attention: James Brock, Esq.
Telephone No.: (415) 854-4488
Telecopy No.: (415) 233-8386
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each
case to be followed by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
When reference is made herein to "THE BUSINESS OF" an entity, such reference
shall be deemed to include the business of all direct and indirect
subsidiaries of such entity. Reference to the subsidiaries of an entity shall
be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with respect
to any matter in question, that any of the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or Controller of Fractal or
MetaTools, as the case may be, have actual knowledge of such matter.
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8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Fractal Schedules and the
MetaTools Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive
any termination of this Agreement; and (b) are not intended to confer upon any
other person any rights or remedies hereunder, except with respect to the
matters set forth in Section 5.12.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof; provided that issues involving the corporate governance of any of the
parties hereto shall be governed by their respective jurisdictions of
incorporation. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of any state or federal court within the Northern
District of California, in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, other than issues
involving the corporate governance of any of the parties hereto, agrees that
process may be served upon them in any manner authorized by the laws of the
State of California for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. 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.
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8.11 WAIVER OF JURY TRIAL. EACH OF METATOOLS, FRACTAL AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF METATOOLS, FRACTAL OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
Metatools, Inc.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
Rook Acquisition Corp.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President and Chairman of
the Board of Directors
Fractal Design Corporation
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
* * * * REORGANIZATION AGREEMENT * * * *
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ANNEX B-1
[OPTION FROM METATOOLS TO FRACTAL]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of February 11, 1997 (the "AGREEMENT")
is entered into by and between MetaTools, Inc., a Delaware corporation
("METATOOLS"), and Fractal Design Corporation, a California corporation
("FRACTAL").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
MetaTools, Fractal and Rook Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of MetaTools ("SUB"), are entering into an Agreement
and Plan of Reorganization (the "MERGER AGREEMENT"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
MetaTools and Fractal will enter into a business combination transaction to
pursue their long-term business strategies (the "MERGER"); and
WHEREAS, as a condition to Fractal's willingness to enter into the Merger
Agreement, Fractal has requested that MetaTools agree, and MetaTools has so
agreed, to grant to Fractal an option to acquire shares of MetaTools' Common
Stock, $0.001 par value, upon the terms and subject to the conditions set
forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
MetaTools hereby grants to Fractal an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.001 par value, of
MetaTools ("METATOOLS SHARES") equal to 19.9% of the issued and outstanding
shares as of the first date, if any, upon which an Exercise Event (as defined
in Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set
forth below (i) by paying cash at a price of $15.00 per share (the "EXERCISE
PRICE") and/or, at Fractal's election, (ii) by exchanging therefor shares of
the Common Stock, par value $0.001 per share, of Fractal ("FRACTAL SHARES") at
a rate (the "EXERCISE RATIO"), for each Option Share, of a number of Fractal
Shares equal to the Exercise Price divided by the closing sale price of
Fractal Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Closing (as defined below) of the particular Option
exercise. Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of MetaTools' stockholders with
regard to, an Acquisition Proposal with respect to MetaTools with any party
other than Fractal (or an affiliate of Fractal) if the Board of Directors of
MetaTools shall have withheld, withdrawn or modified in a manner adverse to
Fractal its recommendation in favor of approving the issuance of the MetaTools
Shares by virtue of the Merger (and at that time there shall not have occurred
a Material Adverse Effect on Fractal) after receipt of and in connection with
an Acquisition Proposal with respect to MetaTools, (ii) immediately prior to
the consummation of a tender or exchange offer for 25% or more of any class of
MetaTools' capital stock, or (iii) immediately prior to the time at which all
of the events specified in clauses (x), (y) and either (z)(i) or (z)(ii) of
Section 7.3(c)(ii) of the Merger Agreement shall have occurred.
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(b) Fractal may deliver to MetaTools a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of MetaTools
shall have withheld, withdrawn or modified in a manner adverse to Fractal its
recommendation in favor of approving the issuance of the MetaTools Shares by
virtue of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Fractal) after receipt of and in connection with an
Acquisition Proposal with respect to MetaTools, (ii) upon the commencement of
a tender or exchange offer for 25% or more of any class of MetaTools' capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(c)(ii)(x) and 7.3(c)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by Fractal, the closing of a purchase of Option Shares (a "CLOSING")
specified in such Exercise Notice shall take place at the principal offices of
MetaTools upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Fractal in writing.
In the event that no Exercise Event shall occur prior to termination of the
Option, such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) Fractal shall have breached in any material respect any of its covenants
or agreements contained in the Merger Agreement or (ii) the representations
and warranties of Fractal contained in the Merger Agreement shall not have
been true and correct in all material respects on and as of the date when
made.
(d) If Fractal receives in the aggregate pursuant to Section 7.3(c) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by Fractal declared
on Option Shares, more than the sum of (x) $4,000,000 plus (y) the Exercise
Price multiplied by the number of MetaTools Shares purchased by Fractal
pursuant to the Option, then all proceeds to Fractal in excess of such sum
shall be remitted by Fractal to MetaTools.
3. CONDITIONS TO CLOSING
The obligation of MetaTools to issue Option Shares to Fractal hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which Fractal shall be entitled to deliver
to MetaTools an Exercise Notice, the parties will use their respective best
efforts to satisfy all conditions to Closing, so that a Closing may take place
as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event; provided that neither MetaTools nor Fractal nor any subsidiary
or affiliate thereof will be required to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
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4. CLOSING
At any Closing, (a) MetaTools shall deliver to Fractal a single certificate
in definitive form representing the number of MetaTools Shares designated by
Fractal in its Exercise Notice, such certificate to be registered in the name
of Fractal and to bear the legend set forth in Section 10 hereof, against
delivery of (b) payment by Fractal to MetaTools of the aggregate purchase
price for the MetaTools Shares so designated and being purchased by delivery
of (i) a certified check or bank check and/or, at Fractal's election, (ii) a
single certificate in definitive form representing the number of Fractal
Shares being issued by Fractal in consideration therefor (based on the
Exercise Ratio), such certificate to be registered in the name of MetaTools
and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF METATOOLS
MetaTools represents and warrants to Fractal that (a) MetaTools is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by MetaTools and consummation by
MetaTools of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of MetaTools and no other corporate
proceedings on the part of MetaTools are necessary to authorize this Agreement
or any of the transactions contemplated hereby; (c) this Agreement has been
duly executed and delivered by MetaTools and constitutes a legal, valid and
binding obligation of MetaTools and, assuming this Agreement constitutes a
legal, valid and binding obligation of Fractal, is enforceable against
MetaTools in accordance with its terms, except as enforceability may be
limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any
filings required under the HSR Act, MetaTools has taken all necessary
corporate and other action to authorize and reserve for issuance and to permit
it to issue upon exercise of the Option, and at all times from the date hereof
until the termination of the Option will have reserved for issuance, a
sufficient number of unissued MetaTools Shares for Fractal to exercise the
Option in full and will take all necessary corporate or other action to
authorize and reserve for issuance all additional MetaTools Shares or other
securities which may be issuable pursuant to Section 9(a) upon exercise of the
Option, all of which, upon their issuance and delivery in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable;
(e) upon delivery of the MetaTools Shares and any other securities to Fractal
upon exercise of the Option, Fractal will acquire such MetaTools Shares or
other securities free and clear of all material claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Fractal; (f) the execution and delivery of this
Agreement by MetaTools do not, and the performance of this Agreement by
MetaTools will not, (i) violate the Articles of Incorporation or By-Laws of
MetaTools, (ii) conflict with or violate any order applicable to MetaTools or
any of its subsidiaries or by which they or any of their property is bound or
affected or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the property
or assets of MetaTools or any of its subsidiaries pursuant to, any contract or
agreement to which MetaTools or any of its subsidiaries is a party or by which
MetaTools or any of its subsidiaries or any of their property is bound or
affected, except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on MetaTools; (g) the execution and
delivery of this Agreement by MetaTools does not, and the performance of this
Agreement by MetaTools will not, require any consent, approval, authorization
or permit of, or filing with, or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Fractal Shares acquired pursuant
to this Agreement will not be acquired by MetaTools with a view to the public
distribution thereof and MetaTools will not sell or otherwise dispose of such
shares in violation of applicable law or this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF FRACTAL
Fractal represents and warrants to MetaTools that (a) Fractal is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California and has the corporate power and authority
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to enter into this Agreement and to carry out its obligations hereunder; (b)
the execution and delivery of this Agreement by Fractal and the consummation
by Fractal of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Fractal and no other
corporate proceedings on the part of Fractal are necessary to authorize this
Agreement or any of the transactions contemplated hereby; (c) this Agreement
has been duly executed and delivered by Fractal and constitutes a legal, valid
and binding obligation of Fractal and, assuming this Agreement constitutes a
legal, valid and binding obligation of MetaTools, is enforceable against
Fractal in accordance with its terms, except as enforceability may be limited
by bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings
required under the HSR Act, Fractal has taken (or will in a timely manner
take) all necessary corporate and other action to authorize and reserve for
issuance and to permit it to issue upon exercise of the Option and will take
all necessary corporate or other action to authorize and reserve for issuance
all additional Fractal Shares or other securities which may be issuable
pursuant to Section 9(b) upon exercise of the Option, all of which, upon their
issuance and delivery in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable; (e) upon delivery of Fractal
Shares to MetaTools in consideration of any acquisition of MetaTools Shares
pursuant hereto, MetaTools will acquire such Fractal Shares free and clear of
all material claims, liens, charges, encumbrances and security interests of
any kind or nature whatsoever, excluding those imposed by MetaTools; (f) the
execution and delivery of this Agreement by Fractal do not, and the
performance of this Agreement by Fractal will not, (i) violate the Certificate
of Incorporation or By-Laws of Fractal, (ii) conflict with or violate any
order applicable to Fractal or any of its subsidiaries or by which they or any
of their property is bound or affected or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give rise to any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the property or assets of Fractal or any of its
subsidiaries pursuant to, any contract or agreement to which Fractal or any of
its subsidiaries is a party or by which Fractal or any of its subsidiaries or
any of their property is bound or affected, except, in the case of clauses
(ii) and (iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on Fractal; (g) the execution and delivery of this Agreement by Fractal
does not, and the performance of this Agreement by Fractal will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity except pursuant to the HSR Act; and
(h) any MetaTools Shares acquired upon exercise of the Option will not be
acquired by Fractal with a view to the public distribution thereof and Fractal
will not sell or otherwise dispose of such shares in violation of applicable
law or this Agreement.
7. CERTAIN RIGHTS
(a) FRACTAL PUT. Fractal may deliver to MetaTools a written notice (a "PUT
NOTICE") at any time during which Fractal may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Fractal
pursuant thereto, at the price set forth in subparagraph (ii) below (as
limited by subparagraph (iii) below) (the "PUT"). At any time after delivery
of a Put Notice, unless such Put Notice is withdrawn by Fractal, the closing
of the Put (the "PUT CLOSING") shall take place at the principal offices of
MetaTools upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Fractal in writing.
In the event that no Exercise Event shall occur prior to termination of the
Option, such Put Notice shall be void and of no further force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for MetaTools
Shares as of the date Fractal gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and not terminated or withdrawn
as of such date and (B) the highest closing sale price of MetaTools Shares
on the Nasdaq National Market during the twenty (20) trading days ending on
the trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of MetaTools Shares purchasable pursuant to the
Option, but only if the Market/Tender Offer Price is greater than the
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Exercise Price. For purposes of determining the highest price offered
pursuant to any Acquisition Proposal which involves consideration other
than cash, the value of such consideration shall be equal to the higher of
(x) if securities of the same class of the proponent as such consideration
are traded on any national securities exchange or by any registered
securities association, a value based on the closing sale price or asked
price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Acquisition Proposal, or if no such value is ascribed, a value determined
in good faith by the Board of Directors of MetaTools.
(ii) The Exercise Price paid by Fractal for MetaTools Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of MetaTools
Shares so purchased. If Fractal issued Fractal Shares in connection with
any exercise of the Option, the Exercise Price in connection with such
exercise shall be calculated as set forth in the last sentence of Section 4
as if Fractal had exercised its right to pay cash instead of issuing
Fractal Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 MetaTools shall not be required to pay Fractal in excess of an
aggregate of (x) $4,000,000 plus (y) the Exercise Price paid by Fractal for
MetaTools Shares acquired pursuant to the Option minus (z) any amounts paid
to Fractal by MetaTools pursuant to Section 7.3(c) of the Merger Agreement.
(b) REDELIVERY OF FRACTAL SHARES. If Fractal has acquired MetaTools Shares
pursuant to exercise of the Option by the issuance and delivery of Fractal
Shares, then MetaTools shall, if so requested by Fractal, in fulfillment of
its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of Fractal Shares only, redeliver the
certificate(s) for such Fractal Shares to Fractal, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by Fractal.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing,
MetaTools shall pay the required amount to Fractal in immediately available
funds (and Fractal Shares, if applicable) and Fractal shall surrender to
MetaTools the Option and the certificates evidencing the MetaTools Shares
purchased by Fractal pursuant thereto, and Fractal shall represent and warrant
that such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other
than those imposed by MetaTools.
(d) METATOOLS CALL. If Fractal has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to MetaTools has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
MetaTools entered into a definitive agreement or letter of intent with respect
to such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, MetaTools may require Fractal, upon delivery to Fractal of
written notice, to sell to MetaTools any MetaTools Shares held by Fractal as
of the day that is ten business days after the date of such notice, up to a
number of shares equal to the number of Option Shares acquired by Fractal
pursuant to exercise of the Option in connection with such Exercise Date. The
per share purchase price for such sale (the "METATOOLS CALL PRICE") shall be
equal to the Exercise Price, plus an amount equal to six percent (6.0%) of the
Exercise Price per annum, compounded annually, since the applicable Exercise
Date, less any dividends paid on the MetaTools Shares to be purchased by
MetaTools pursuant to this Section 7(d). The closing of any sale of MetaTools
Shares pursuant to this Section 7(d) shall take place at the principal offices
of MetaTools at a time and on a date designated by MetaTools in the
aforementioned notice to Fractal, which date shall be no more than 20 and no
less than 12 business days from the date of such notice. The MetaTools Call
Price shall be paid in immediately available funds, provided that, in the
event Fractal has acquired Option Shares pursuant to exercise of the Option by
issuance and delivery of
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Fractal Shares, at the option of MetaTools, the MetaTools Call Price for part
or all of any purchase of MetaTools Shares pursuant to this Section 7(d), up
to a number of such shares equal to the number of Option Shares acquired by
Fractal by issuance and delivery of Fractal Shares, shall be paid by delivery
of a number of Fractal Shares equal to the MetaTools Call Price divided by the
closing sale price of Fractal Shares on the Nasdaq National Market for the
trading day immediately preceding the date of the Exercise Date on which the
Option Shares to be purchased by MetaTools pursuant to this Section 7(d) were
originally issued to Fractal.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, MetaTools
shall not sell, transfer or otherwise dispose of any Fractal Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principle executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such
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financial statements are not yet available for inclusion in such registration
statement; or (C) such Registrant determines, in its reasonable judgment, that
such registration would interfere with any financing, acquisition or other
material transaction involving the Registrant. If consummation of the sale of
any Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Holder may reasonably request and shall continue such registration or
qualification in effect in such jurisdictions; provided, however, that the
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or
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threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such
directors, officers or control persons or underwriters for any legal or any
other expenses reasonably incurred in connection with investigating, preparing
or defending any such claim, loss, damage, liability or action, in each case
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Registrant by the Holder for use therein, provided that in no event shall any
indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the MetaTools Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that Fractal shall receive, upon exercise of the Option, the number and class
of shares or other securities or property that Fractal would have received in
respect of the MetaTools Shares if the Option had been exercised immediately
prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither
MetaTools nor Fractal shall adopt a stockholders rights plan (a so-called
"poison pill") that contains provisions for the distribution of rights
thereunder as a result of the other party being the beneficial owner of shares
of the first party by virtue of the Option being exercisable or having been
exercised (or as a result of such other party beneficially owning shares
issuable in respect of any Option Shares). It is understood, however, that
following termination (if any) of the Merger Agreement, a party may adopt a
stockholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned
by virtue of the Option being exercisable or having been exercised (or as a
result of such other party beneficially owning shares issuable in respect of
any Option Shares).
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10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to Fractal hereunder, and
each certificate representing Fractal Shares delivered to MetaTools at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET
FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY 11, 1997, A COPY OF
WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
MetaTools, upon the request of Fractal, shall promptly file an application
to list the MetaTools Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. Fractal, upon the
request of MetaTools, shall promptly file an application to list the Fractal
Shares issued and delivered to MetaTools pursuant to Section 4 for quotation
on the Nasdaq National Market and shall use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto shall promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the MetaTools Shares subject to the Option at the earliest
possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
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16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to MetaTools, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
(b) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
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20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
MetaTools, Inc..
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
FRACTAL DESIGN CORPORATION
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
***STOCK OPTION AGREEMENT***
(MetaTools option to Fractal)
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ANNEX B-2
[OPTION FROM FRACTAL TO METATOOLS]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of February 11, 1997 (the "AGREEMENT")
is entered into by and between Fractal Design Corporation, a California
corporation ("FRACTAL"), and MetaTools, Inc., a Delaware corporation
("METATOOLS").
Recitals
WHEREAS, concurrently with the execution and delivery of this Agreement,
Fractal, MetaTools and Rook Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of MetaTools ("SUB"), are entering into an Agreement
and Plan of Reorganization (the "MERGER AGREEMENT"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
Fractal and MetaTools will enter into a business combination transaction to
pursue their long-term business strategies (the "MERGER"); and
WHEREAS, as a condition to MetaTools' willingness to enter into the Merger
Agreement, MetaTools has requested that Fractal agree, and Fractal has so
agreed, to grant to MetaTools an option to acquire shares of Fractal's Common
Stock, $0.001 par value, upon the terms and subject to the conditions set
forth herein;
Agreement
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
Fractal hereby grants to MetaTools an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.001 par value, of
Fractal ("FRACTAL SHARES") equal to 19.9% of the issued and outstanding shares
as of the first date, if any, upon which an Exercise Event (as defined in
Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set forth
below (i) by paying cash at a price of $11.235 per share (the "EXERCISE
PRICE") and/or, at MetaTools' election, (ii) by exchanging therefor shares of
the Common Stock, par value $0.001 per share, of MetaTools ("METATOOLS
SHARES") at a rate (the "EXERCISE RATIO"), for each Option Share, of a number
of MetaTools Shares equal to the Exercise Price divided by the closing sale
price of MetaTools Shares on the Nasdaq National Market for the trading day
immediately preceding the date of the Closing (as defined below) of the
particular Option exercise. Capitalized terms used in this Agreement but not
defined herein shall have the meanings ascribed thereto in the Merger
Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of Fractal's shareholders with
regard to, an Acquisition Proposal with respect to Fractal with any party
other than MetaTools (or an affiliate of MetaTools) if the Board of Directors
of Fractal shall have withheld, withdrawn or modified in a manner adverse to
MetaTools its recommendation in favor of adoption and approval of the Merger
Agreement and approval of the Merger (and at that time there shall not have
occurred a Material Adverse Effect on MetaTools) after receipt of and in
connection with an Acquisition Proposal with respect to Fractal,
(ii) immediately prior to the consummation of a tender or exchange offer for
25% or more of any class of Fractal's capital stock, or (iii) immediately
prior to the time at which all of the events specified in clauses (x), (y) and
either (z)(i) or (z)(ii) of Section 7.3(b)(ii) of the Merger Agreement shall
have occurred.
<PAGE>
(b) MetaTools may deliver to Fractal a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Fractal shall
have withheld, withdrawn or modified in a manner adverse to MetaTools its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on MetaTools) after receipt of and in connection with
an Acquisition Proposal with respect to Fractal, (ii) upon the commencement of
a tender or exchange offer for 25% or more of any class of Fractal's capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(b)(ii)(x) and 7.3(b)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by MetaTools, the closing of a purchase of Option Shares (a
"CLOSING") specified in such Exercise Notice shall take place at the principal
offices of Fractal upon the occurrence of an Exercise Event or at such later
date prior to the termination of the Option as may be designated by MetaTools
in writing. In the event that no Exercise Event shall occur prior to
termination of the Option, such Exercise Notice shall be void and of no
further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) MetaTools shall have breached in any material respect any of its covenants
or agreements contained in the Merger Agreement or (ii) the representations
and warranties of MetaTools contained in the Merger Agreement shall not have
been true and correct in all material respects on and as of the date when
made.
(d) If MetaTools receives in the aggregate pursuant to Section 7.3(b) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by MetaTools declared
on Option Shares, more than the sum of (x) $4,000,000 plus (y) the Exercise
Price multiplied by the number of Fractal Shares purchased by MetaTools
pursuant to the Option, then all proceeds to MetaTools in excess of such sum
shall be remitted by MetaTools to Fractal.
3. CONDITIONS TO CLOSING
The obligation of Fractal to issue Option Shares to MetaTools hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which MetaTools shall be entitled to
deliver to Fractal an Exercise Notice, the parties will use their respective
best efforts to satisfy all conditions to Closing, so that a Closing may take
place as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event; provided that neither Fractal nor MetaTools nor any subsidiary
or affiliate thereof will be required to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
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4. CLOSING
At any Closing, (a) Fractal shall deliver to MetaTools a single certificate
in definitive form representing the number of Fractal Shares designated by
MetaTools in its Exercise Notice, such certificate to be registered in the
name of MetaTools and to bear the legend set forth in Section 10 hereof,
against delivery of (b) payment by MetaTools to Fractal of the aggregate
purchase price for the Fractal Shares so designated and being purchased by
delivery of (i) a certified check or bank check and/or, at MetaTools'
election, (ii) a single certificate in definitive form representing the number
of MetaTools Shares being issued by MetaTools in consideration therefor (based
on the Exercise Ratio), such certificate to be registered in the name of
Fractal and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF FRACTAL
Fractal represents and warrants to MetaTools that (a) Fractal is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by Fractal and consummation by
Fractal of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Fractal and no other corporate
proceedings on the part of Fractal are necessary to authorize this Agreement
or any of the transactions contemplated hereby; (c) this Agreement has been
duly executed and delivered by Fractal and constitutes a legal, valid and
binding obligation of Fractal and, assuming this Agreement constitutes a
legal, valid and binding obligation of MetaTools, is enforceable against
Fractal in accordance with its terms, except as enforceability may be limited
by bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings
required under the HSR Act, Fractal has taken all necessary corporate and
other action to authorize and reserve for issuance and to permit it to issue
upon exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued Fractal Shares for MetaTools to exercise the Option in full and
will take all necessary corporate or other action to authorize and reserve for
issuance all additional Fractal Shares or other securities which may be
issuable pursuant to Section 9(a) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of the Fractal Shares and any other securities to MetaTools upon
exercise of the Option, MetaTools will acquire such Fractal Shares or other
securities free and clear of all material claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever, excluding those
imposed by MetaTools; (f) the execution and delivery of this Agreement by
Fractal do not, and the performance of this Agreement by Fractal will not, (i)
violate the Articles of Incorporation or By-Laws of Fractal, (ii) conflict
with or violate any order applicable to Fractal or any of its subsidiaries or
by which they or any of their property is bound or affected or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Fractal
or any of its subsidiaries pursuant to, any contract or agreement to which
Fractal or any of its subsidiaries is a party or by which Fractal or any of
its subsidiaries or any of their property is bound or affected, except, in the
case of clauses (ii) and (iii) above, for violations, conflicts, breaches,
defaults, rights of termination, amendment, acceleration or cancellation,
liens or encumbrances which would not, individually or in the aggregate, have
a Material Adverse Effect on Fractal; (g) the execution and delivery of this
Agreement by Fractal does not, and the performance of this Agreement by
Fractal will not, require any consent, approval, authorization or permit of,
or filing with, or notification to, any Governmental Entity except pursuant to
the HSR Act; and (h) any MetaTools Shares acquired pursuant to this Agreement
will not be acquired by Fractal with a view to the public distribution thereof
and Fractal will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF METATOOLS
MetaTools represents and warrants to Fractal that (a) MetaTools is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority
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to enter into this Agreement and to carry out its obligations hereunder; (b)
the execution and delivery of this Agreement by MetaTools and the consummation
by MetaTools of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of MetaTools and no other
corporate proceedings on the part of MetaTools are necessary to authorize this
Agreement or any of the transactions contemplated hereby; (c) this Agreement
has been duly executed and delivered by MetaTools and constitutes a legal,
valid and binding obligation of MetaTools and, assuming this Agreement
constitutes a legal, valid and binding obligation of Fractal, is enforceable
against MetaTools in accordance with its terms, except as enforceability may
be limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any
filings required under the HSR Act, MetaTools has taken (or will in a timely
manner take) all necessary corporate and other action to authorize and reserve
for issuance and to permit it to issue upon exercise of the Option and will
take all necessary corporate or other action to authorize and reserve for
issuance all additional MetaTools Shares or other securities which may be
issuable pursuant to Section 9(b) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of MetaTools Shares to Fractal in consideration of any acquisition of
Fractal Shares pursuant hereto, Fractal will acquire such MetaTools Shares
free and clear of all material claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, excluding those imposed
by Fractal; (f) the execution and delivery of this Agreement by MetaTools do
not, and the performance of this Agreement by MetaTools will not, (i) violate
the Certificate of Incorporation or By-Laws of MetaTools, (ii) conflict with
or violate any order applicable to MetaTools or any of its subsidiaries or by
which they or any of their property is bound or affected or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of
MetaTools or any of its subsidiaries pursuant to, any contract or agreement to
which MetaTools or any of its subsidiaries is a party or by which MetaTools or
any of its subsidiaries or any of their property is bound or affected, except,
in the case of clauses (ii) and (iii) above, for violations, conflicts,
breaches, defaults, rights of termination, amendment, acceleration or
cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on MetaTools; (g) the execution and
delivery of this Agreement by MetaTools does not, and the performance of this
Agreement by MetaTools will not, require any consent, approval, authorization
or permit of, or filing with or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Fractal Shares acquired upon
exercise of the Option will not be acquired by MetaTools with a view to the
public distribution thereof and MetaTools will not sell or otherwise dispose
of such shares in violation of applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) METATOOLS PUT. MetaTools may deliver to Fractal a written notice (a "PUT
NOTICE") at any time during which MetaTools may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by
MetaTools pursuant thereto, at the price set forth in subparagraph (ii) below
(as limited by subparagraph (iii) below) (the "PUT"). At any time after
delivery of a Put Notice, unless such Put Notice is withdrawn by MetaTools,
the closing of the Put (the "PUT CLOSING") shall take place at the principal
offices of Fractal upon the occurrence of an Exercise Event or at such later
date prior to the termination of the Option as may be designated by MetaTools
in writing. In the event that no Exercise Event shall occur prior to
termination of the Option, such Put Notice shall be void and of no further
force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for Fractal
Shares as of the date MetaTools gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and not terminated or withdrawn
as of such date and (B) the highest closing sale price of Fractal Shares on
the Nasdaq National Market during the twenty (20) trading days ending on
the trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of Fractal
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Shares purchasable pursuant to the Option, but only if the Market/Tender
Offer Price is greater than the Exercise Price. For purposes of determining
the highest price offered pursuant to any Acquisition Proposal which
involves consideration other than cash, the value of such consideration
shall be equal to the higher of (x) if securities of the same class of the
proponent as such consideration are traded on any national securities
exchange or by any registered securities association, a value based on the
closing sale price or asked price for such securities on their principal
trading market on such date and (y) the value ascribed to such
consideration by the proponent of such Acquisition Proposal, or if no such
value is ascribed, a value determined in good faith by the Board of
Directors of Fractal.
(ii) The Exercise Price paid by MetaTools for Fractal Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Fractal Shares
so purchased. If MetaTools issued MetaTools Shares in connection with any
exercise of the Option, the Exercise Price in connection with such exercise
shall be calculated as set forth in the last sentence of Section 4 as if
MetaTools had exercised its right to pay cash instead of issuing MetaTools
Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 Fractal shall not be required to pay MetaTools in excess of an
aggregate of (x) $4,000,000 plus (y) the Exercise Price paid by MetaTools
for Fractal Shares acquired pursuant to the Option minus (z) any amounts
paid to MetaTools by Fractal pursuant to Section 7.3(b) of the Merger
Agreement.
(b) REDELIVERY OF METATOOLS SHARES. If MetaTools has acquired Fractal Shares
pursuant to exercise of the Option by the issuance and delivery of MetaTools
Shares, then Fractal shall, if so requested by MetaTools, in fulfillment of
its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of MetaTools Shares only, redeliver the
certificate(s) for such MetaTools Shares to MetaTools, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by MetaTools.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing, Fractal
shall pay the required amount to MetaTools in immediately available funds (and
MetaTools Shares, if applicable) and MetaTools shall surrender to Fractal the
Option and the certificates evidencing the Fractal Shares purchased by
MetaTools pursuant thereto, and MetaTools shall represent and warrant that
such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other
than those imposed by Fractal.
(d) FRACTAL CALL. If MetaTools has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to Fractal has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Fractal entered into a definitive agreement or letter of intent with respect
to such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Fractal may require MetaTools, upon delivery to MetaTools
of written notice, to sell to Fractal any Fractal Shares held by MetaTools as
of the day that is ten business days after the date of such notice, up to a
number of shares equal to the number of Option Shares acquired by MetaTools
pursuant to exercise of the Option in connection with such Exercise Date. The
per share purchase price for such sale (the "FRACTAL CALL PRICE") shall be
equal to the Exercise Price, plus an amount equal to six percent (6.0%) of the
Exercise Price per annum, compounded annually, since the applicable Exercise
Date, less any dividends paid on the Fractal Shares to be purchased by Fractal
pursuant to this Section 7(d). The closing of any sale of Fractal Shares
pursuant to this Section 7(d) shall take place at the principal offices of
Fractal at a time and on a date designated by Fractal in the aforementioned
notice to MetaTools, which date shall be no more than 20 and no less than 12
business days from the date of such notice. The Fractal Call Price shall be
paid in immediately available funds, provided that, in the event MetaTools has
acquired Option Shares pursuant to exercise of the Option by issuance and
delivery of MetaTools Shares, at the option of Fractal,
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the Fractal Call Price for part or all of any purchase of Fractal Shares
pursuant to this Section 7(d), up to a number of such shares equal to the
number of Option Shares acquired by MetaTools by issuance and delivery of
MetaTools Shares, shall be paid by delivery of a number of MetaTools Shares
equal to the Fractal Call Price divided by the closing sale price of MetaTools
Shares on the Nasdaq National Market for the trading day immediately preceding
the date of the Exercise Date on which the Option Shares to be purchased by
Fractal pursuant to this Section 7(d) were originally issued to MetaTools.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, Fractal
shall not sell, transfer or otherwise dispose of any MetaTools Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principle executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such
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<PAGE>
financial statements are not yet available for inclusion in such registration
statement; or (C) such Registrant determines, in its reasonable judgment, that
such registration would interfere with any financing, acquisition or other
material transaction involving the Registrant. If consummation of the sale of
any Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Holder may reasonably request and shall continue such registration or
qualification in effect in such jurisdictions; provided, however, that the
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or
7
<PAGE>
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such
directors, officers or control persons or underwriters for any legal or any
other expenses reasonably incurred in connection with investigating, preparing
or defending any such claim, loss, damage, liability or action, in each case
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Registrant by the Holder for use therein, provided that in no event shall any
indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the Fractal Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that MetaTools shall receive, upon exercise of the Option, the number and
class of shares or other securities or property that MetaTools would have
received in respect of the Fractal Shares if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither
Fractal nor MetaTools shall adopt a shareholders rights plan (a so-called
"poison pill") that contains provisions for the distribution of rights
thereunder as a result of the other party being the beneficial owner of shares
of the first party by virtue of the Option being exercisable or having been
exercised (or as a result of such other party beneficially owning shares
issuable in respect of any Option Shares). It is understood, however, that
following termination (if any) of the Merger Agreement, a party may adopt a
shareholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned
by virtue of the Option being exercisable or having been exercised (or as a
result of such other party beneficially owning shares issuable in respect of
any Option Shares).
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10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to MetaTools hereunder,
and each certificate representing MetaTools Shares delivered to Fractal at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY
11, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
Fractal, upon the request of MetaTools, shall promptly file an application
to list the Fractal Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. MetaTools, upon the
request of Fractal, shall promptly file an application to list the MetaTools
Shares issued and delivered to Fractal pursuant to Section 4 for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each
of the parties hereto shall promptly file with the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice all
required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of
the Fractal Shares subject to the Option at the earliest possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
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16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
(b) if to MetaTools, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
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20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
Fractal Design Corporation
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
MetaTools, Inc.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
***STOCK OPTION AGREEMENT***
(Fractal option to MetaTools)
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<PAGE>
ANNEX C-1
[FORM OF AGREEMENT]
METATOOLS, INC.
AFFILIATE AGREEMENT
This METATOOLS, INC. AFFILIATE AGREEMENT ("AGREEMENT") is dated as of
February 11, 1997, between MetaTools, Inc., a Delaware corporation
("METATOOLS"), Fractal Design Corporation, a California corporation
("FRACTAL"), and the undersigned affiliate ("AFFILIATE") of MetaTools.
WHEREAS, MetaTools and Fractal have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Fractal and MetaTools
intend to enter into a business combination transaction to pursue their long
term business strategies (the "MERGER") (capitalized terms used and not
otherwise defined herein shall have the respective meanings ascribed to them
in the Merger Agreement);
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of MetaTools, as the term "affiliate" is used in Accounting Series
Releases 130 and 135, as amended, although nothing contained herein shall be
construed as an admission by Affiliate that Affiliate is in fact an affiliate
of MetaTools;
WHEREAS, it will be a condition to effectiveness of the Merger pursuant to
the Merger Agreement that the independent accounting firms that audit the
annual financial statements of Fractal and MetaTools will have delivered their
written concurrences with the conclusions of management of Fractal and
MetaTools to the effect that the Merger will be accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to MetaTools to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that
the representations, warranties and covenants by Affiliate set forth herein
will be relied upon by MetaTools, Fractal, and their respective affiliates,
counsel and accounting firms, and that substantial losses and damages may be
incurred by these persons if Affiliate's representations, warranties or
covenants are breached. Affiliate has carefully read this Agreement and the
Merger Agreement and has discussed the requirements of this Agreement with
Affiliate's professional advisors, who are qualified to advise him with regard
to such matters.
2. Covenants Related to Pooling of Interests. In accordance with SAB 65,
until the second day after the day that MetaTools publicly announces financial
results covering at least 30 days of combined operations of MetaTools and
Fractal, Affiliate will not sell, exchange, transfer, pledge, distribute, make
any gift or otherwise dispose of or grant any option, establish any "short" or
put-equivalent position with respect to or enter into any similar transaction
(through derivatives or otherwise) intended or having the effect, directly or
indirectly, to reduce Affiliate's risk relative to any shares of MetaTools
Common Stock. MetaTools may, at its discretion, place a stock transfer notice
consistent with the foregoing with its transfer agent with respect to
Affiliate's shares. Notwithstanding the foregoing, Affiliate will not be
prohibited by the foregoing from selling or disposing of shares so long as
such sale or disposition is in accordance with the "de minimis" test set forth
in SEC Staff Accounting Bulletin No. 76.
3. Beneficial Ownership of Stock. Except for the MetaTools Common Stock and
options to purchase MetaTools Common Stock set forth on the last page of this
Agreement, Affiliate does not beneficially own any shares of MetaTools Common
Stock or any other equity securities of MetaTools or any options, warrants or
other rights to acquire any equity securities of MetaTools.
<PAGE>
4. Miscellaneous.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where
the context so permits, heirs, executors, administrators, trustees and
successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall be
entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
Executed as of the date shown on the first page of this Agreement.
METATOOLS, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
FRACTAL DESIGN CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
AFFILIATE
By:__________________________________
Name of Affiliate:___________________
Name of Signatory (if different from
name of Affiliate):_________________
Title of Signatory
(if applicable):_____________________
Number of shares of MetaTools Common Stock beneficially owned by Affiliate:
__________________________________________
Number of shares MetaTools Common Stock subject to options beneficially owned
by Affiliate:
__________________________________________
***METATOOLS, INC. AFFILIATE AGREEMENT***
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<PAGE>
ANNEX C-2
[FORM OF AGREEMENT]
FRACTAL DESIGN CORPORATION
AFFILIATE AGREEMENT
This FRACTAL DESIGN CORPORATION AFFILIATE AGREEMENT ("AGREEMENT") is dated
as of February 11, 1997, between MetaTools, Inc., a Delaware corporation
("METATOOLS"), Fractal Design Corporation, a California corporation
("FRACTAL") and the undersigned affiliate ("AFFILIATE") of Fractal.
WHEREAS, Fractal and MetaTools have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Fractal and MetaTools
intend to enter into a business combination transaction to pursue their long
term business strategies (the "MERGER") (capitalized terms used and not
otherwise defined herein shall have the respective meanings ascribed to them
in the Merger Agreement);
WHEREAS, pursuant to the Merger, at the Effective Time outstanding shares of
Fractal Capital Stock, including any shares owned by Affiliate, will be
converted into the right to receive shares of MetaTools Common Stock as set
forth in the Merger Agreement;
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of Fractal, as the term "affiliate" is used (i) for purposes of
paragraphs (c) and (d) of Rule 145 of the Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and (ii) in the SEC's
Accounting Series Releases 130 and 135, as amended, although nothing contained
herein shall be construed as an admission by Affiliate that Affiliate is in
fact an affiliate of Fractal;
WHEREAS, it will be a condition to consummation of the Merger pursuant to
the Merger Agreement that (i) the attorneys for each of MetaTools and Fractal
will have delivered written opinions that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "CODE"), and (ii) the independent accounting
firms that audit the annual financial statements of Fractal and MetaTools will
have delivered their written concurrences with the conclusions of management
of Fractal and MetaTools to the effect that the Merger will be accounted for
as a pooling of interests under Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to MetaTools to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that
the representations, warranties and covenants by Affiliate set forth herein
will be relied upon by MetaTools, Fractal, and their respective affiliates,
counsel and accounting firms, and that substantial losses and damages may be
incurred by these persons if Affiliate's representations, warranties or
covenants are breached. Affiliate has carefully read this Agreement and the
Merger Agreement and has discussed the requirements of this Agreement with
Affiliate's professional advisors, who are qualified to advise Affiliate with
regard to such matters.
2. Compliance with Rule 145 and the Act.
(a) Affiliate has been advised that (i) the issuance of shares of MetaTools
Common Stock in connection with the Merger is expected to be effected pursuant
to a Registration Statement on Form S-4 under the Securities Act of 1933, as
amended (the "ACT"), and as such will not be deemed "restricted securities"
within the meaning of Rule 144 promulgated thereunder and resale of such
shares will not be subject to any restrictions other than as set forth in Rule
145 of the Act unless otherwise transferred pursuant to an effective
registration statement under the Act or an appropriate exemption from
registration, (ii) Affiliate may be deemed to be an
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affiliate of Fractal, and (iii) no sale, transfer or other disposition by
Affiliate of any MetaTools Common Stock received by Affiliate will be
registered under the Act. Affiliate accordingly agrees not to sell, transfer
or otherwise dispose of any MetaTools Common Stock issued to Affiliate in the
Merger unless (x) such sale, transfer or other disposition is made in
conformity with the requirements of Rule 145(d) promulgated under the Act, or
(y) Affiliate delivers to MetaTools a written opinion of counsel, reasonably
acceptable to MetaTools in form and substance, that such sale, transfer or
other disposition is otherwise exempt from registration under the Act.
(b) MetaTools will give stop transfer instructions to its transfer agent
with respect to any MetaTools Common Stock received by Affiliate pursuant to
the Merger and there will be placed on the certificates representing such
MetaTools Common Stock, or any substitutions therefor, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY WITH RULE 145(d) UNDER
SUCH ACT OR IN ACCORDANCE WITH A WRITTEN OPINION OF COUNSEL, REASONABLY
ACCEPTABLE TO THE ISSUER IN THE FORM AND SUBSTANCE THAT SUCH TRANSFER IS
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED."
The legend set forth above shall be removed (by delivery of a substitute
certificate without such legend) and MetaTools shall so instruct its transfer
agent, if Affiliate delivers to MetaTools (i) satisfactory written evidence
that the shares have been sold in compliance with Rule 145 (in which case, the
substitute certificate will be issued in the name of the transferee), or (ii)
an opinion of counsel, in form and substance reasonably satisfactory to the
effect that public sale of the shares by the holder thereof is no longer
subject to Rule 145.
(c) To the extent required by applicable securities laws, MetaTools agrees,
for a period of two years from the date of this Agreement, to file with the
SEC in a timely manner all reports and other documents required of MetaTools
under the Act and the Securities Exchange Act of 1934, as amended.
3. Covenants Related to Pooling of Interests. In accordance with SAB 65,
until the second day after the day that MetaTools publicly announces financial
results covering at least 30 days of combined operations of MetaTools and
Fractal, Affiliate will not sell, exchange, transfer, pledge, distribute, or
otherwise dispose of or grant any option, establish any "short" or put-
equivalent position with respect to or enter into any similar transaction
(through derivatives or otherwise) intended or having the effect, directly or
indirectly, to reduce its risk relative to any securities, or shares of
MetaTools Common Stock received by Affiliate in connection with the Merger.
MetaTools may, at its discretion, cause a restrictive legend to the foregoing
effect to be placed on MetaTools Common Stock certificates issued to Affiliate
in the Merger and place a stock transfer notice consistent with the foregoing
with its transfer agent with respect to the certificates, provided that such
restrictive legend shall be removed and/or such notice shall be countermanded
promptly upon expiration of the necessity therefor at the request of
Affiliate. Notwithstanding the foregoing, Affiliate will not be prohibited by
the foregoing from selling or disposing of shares, so long as such sale or
disposition is in accordance with the "de minimis" test set forth in SEC Staff
Accounting Bulletin No. 76 and so long as Affiliate has obtained MetaTools's
prior written approval of such sale or disposition.
4. Representations, Warranties and Covenants Related to Tax Effects of the
Merger.
(a) Affiliate is the beneficial owner of the number of shares of Fractal
Common Stock (including shares issuable upon exercise of stock options) set
forth on the last page of this Agreement and did not acquire any of the
Fractal Common Stock in contemplation of the Merger;
(b) Affiliate has not engaged in a Sale (as defined below) of any shares of
Fractal Common Stock in contemplation of the Merger;
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<PAGE>
(c) Affiliate has no plan or intention (a "PLAN") to engage in a sale,
exchange, transfer, redemption or reduction in any way of Affiliate's risk of
ownership by short sale or otherwise, or other disposition, directly or
indirectly (such actions being collectively referred to herein as a "SALE") of
more than 50% of the shares of MetaTools Common Stock to be received by
Affiliate in the Merger;
(d) If Affiliate is a partnership, then the term "sale" as used in paragraph
(c) above shall be deemed to include any distribution to the partners of the
undersigned unless no recipient of any such distribution will receive shares
of Fractal Common Stock representing 1% or more of the shares of Fractal
Common Stock presently outstanding;
(e) Affiliate is not aware of, or participating in, any Plan on the part of
the Affiliates of Fractal to engage in a Sale or Sales of the MetaTools Common
Stock to be received in the Merger such that the aggregate fair market value,
as of the Effective Date of the Merger, of the shares subject to such Sales
would exceed 50% of the aggregate fair market value of all shares of
outstanding Fractal Common Stock immediately prior to the Merger; and
(f) Affiliate understands that Fractal, MetaTools and their respective
affiliates, as well as legal counsel to Fractal and MetaTools (in connection
with rendering their opinions that the Merger will be a "reorganization"
within the meaning of Section 368(a) of the Code) will be relying on (a) the
truth and accuracy of the representations contained herein and (b) Affiliate's
performance of the obligations set forth herein.
5. Miscellaneous.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where
the context so permits, heirs, executors, administrators, trustees and
successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of California
(without regard to the principles of conflict of laws thereof.
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall be
entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
3
<PAGE>
Executed as of the date shown on the first page of this Agreement.
Metatools, Inc.
By:___________________________________________
Name: ________________________________________
Title: _______________________________________
Fractal Design Corporation
By:___________________________________________
Name: ________________________________________
Title: _______________________________________
Affiliate
By:___________________________________________
Name of Affiliate: ___________________________
Name of Signatory (if different from
name of Affiliate): __________________________
Title of Signatory (if applicable): __________
Number of shares of Fractal Common Stock beneficially owned by Affiliate:
_______________________________________________________________
Number of shares of Fractal Common Stock subject to options beneficially owned
by Affiliate:
_______________________________________________________________
***FRACTAL DESIGN CORPORATION AFFILIATE AGREEMENT***
4
<PAGE>
ANNEX D-1
[FORM OF AGREEMENT]
METATOOLS, INC.
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of February
11, 1997, between Fractal Design Corporation, a California corporation (the
"COMPANY"), and the undersigned stockholder ("STOCKHOLDER") of MetaTools,
Inc., a Delaware corporation ("PARENT").
Recitals
A. Concurrently with the execution of this Agreement, the Company, Parent
and Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan
of Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
Parent as is indicated on the final page of this Agreement (the "SHARES").
C. As a material inducement to enter into the Merger Agreement, the Company
desires the Stockholder to agree, and the Stockholder is willing to agree to
vote the Shares and any other such shares of capital stock of Parent so as to
facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Agreement to Vote Shares: Additional Purchases.
1.1 Agreement to Vote Shares. At every meeting of the stockholders of
Parent called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of
the stockholders of Parent with respect to any of the following Stockholder
shall vote the Shares and any New Shares in favor of approval of (x) the
amendment of Parent's Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of its Common
Stock by virtue of the Merger, (y) the issuance of shares of such Common
Stock by virtue of the Merger and (z) any matter that could reasonably be
expected to facilitate the Merger.
1.2 Additional Purchases. Stockholder agrees that any shares of capital
stock of Parent that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership after the execution of
this Agreement and prior to the Expiration Date ("NEW SHARES") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "PROXY"), which shall be irrevocable, with the total number of
shares of capital stock of Parent beneficially owned (as such term is defined
in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
3. Representations and Warranties of the Stockholder. Stockholder (i) is the
beneficial owner of the Shares, which at the date hereof are free and clear of
any liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of Parent other than the Shares
(excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law); and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement.
<PAGE>
4. Additional Documents. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of the Company or Stockholder, as the case may be, to carry out the
intent of this Agreement.
5. Consent and Waiver. Stockholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Merger under the terms of
any agreements to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. Termination. This Agreement shall terminate and shall have no further
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of
the Merger Agreement or (ii) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof.
7. Miscellaneous.
7.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
7.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that the Company will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to the Company upon
any such violation, the Company shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by
any other means available to the Company at law or in equity.
7.5 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight
courier (prepaid) to the respective parties as follows:
If to the Company: Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
With a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
If to the Stockholder: To the address for notice set forth on the last
page hereof.
With a copy to:Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq. Marty Korman, Esq.
2
<PAGE>
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
7.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
7.9 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly
executed on the date and year first above written.
Fractal Design Corporation
By: _________________________________________
Title: _______________________________________
Stockholder:
By: __________________________________________
Stockholder's Address for Notice:
______________________________________________
______________________________________________
______________________________________________
__ Shares of Common Stock Beneficially Owned:
***METATOOLS VOTING AGREEMENT***
3
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of MetaTools, Inc., a Delaware corporation
("PARENT"), hereby irrevocably appoints the directors on the Board of
Directors of Fractal Design Corporation, a California corporation (the
"COMPANY"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to the
full extent of the undersigned's rights with respect to the shares of capital
stock of Parent beneficially owned by the undersigned, which shares are listed
on the final page of this Proxy (the "SHARES"), and any and all other shares
or securities issued or issuable in respect thereof on or after the date
hereof, until such time as that certain Agreement of Merger and Plan of
Reorganization dated as of February 11, 1997 (the "MERGER AGREEMENT"), among
Parent, Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company, shall be terminated in
accordance with its terms or the Merger (as defined in the Merger Agreement)
is effective. Upon the execution hereof, all prior proxies given by the
undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement dated
as of February 11, 1997 between the Company and the undersigned stockholder
(the "VOTING AGREEMENT"), and is granted in consideration of the Company
entering into the Merger Agreement. The attorneys and proxies named above will
be empowered at any time prior to termination of the Merger Agreement to
exercise all voting and other rights (including, without limitation, the power
to execute and deliver written consents with respect to the Shares) of the
undersigned at every annual, special or adjourned meeting of Parent
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, in favor of approval of (x) the amendment of Parent's Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of its Common Stock by virtue of the Merger, (y) the
issuance of shares of such Common Stock by virtue of the Merger and (z) any
matter that could reasonably be expected to facilitate the Merger.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the stockholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of (x) the amendment of Parent's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
its Common Stock by virtue of the Merger, (y) the issuance of shares of such
Common Stock by virtue of the Merger and (z) any matter that could reasonably
be expected to facilitate the Merger. The undersigned stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: February 11, 1997
Signature of Stockholder: ___________________________________
Print Name of Stockholder: ____________________________________
_____________Shares of Common Stock Beneficially Owned
***METATOOLS PROXY***
1
<PAGE>
ANNEX D-2
[FORM OF AGREEMENT]
FRACTAL DESIGN CORPORATION
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of February
11, 1997, between MetaTools, Inc., a Delaware corporation ("PARENT"), and the
undersigned shareholder ("SHAREHOLDER") of Fractal Design Corporation, a
California corporation (the "COMPANY").
Recitals
A. Concurrently with the execution of this Agreement, Parent, the Company
and Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan
of Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Shareholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
the Company as is indicated on the final page of this Agreement (the
"SHARES").
C. As a material inducement to enter into the Merger Agreement, Parent
desires the Shareholder to agree, and the Shareholder is willing to agree to
vote the Shares and any other such shares of capital stock of the Company so
as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Agreement to Vote Shares; Additional Purchases.
1.1 Agreement to Vote Shares. At every meeting of the shareholders of the
Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of
the shareholders of the Company with respect to any of the following,
Shareholder shall vote the Shares and any New Shares in favor of (x)
approval of the Merger Agreement and the Merger and (y) any matter that
could reasonably be expected to facilitate the Merger.
1.2 Additional Purchases. Shareholder agrees that any shares of capital
stock of the Company that Shareholder purchases or with respect to which
Shareholder otherwise acquires beneficial ownership after the execution of
this Agreement and prior to the Expiration Date ("NEW SHARES") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto
as Exhibit A (the "PROXY"), which shall be irrevocable, with the total
number of shares of capital stock of the Company beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by Shareholder
set forth therein.
3. Representations and Warranties of the Shareholder. Shareholder (i) is
the beneficial owner of the Shares, which at the date hereof are free and
clear of any liens, claims, options, charges or other encumbrances; (ii)
does not beneficially own any shares of capital stock of the Company other
than the Shares (excluding shares s to which Shareholder currently
disclaims beneficial ownership in accordance with applicable law); and
(iii) has full power and authority to make, enter into and carry out the
terms of this Agreement.
<PAGE>
4. Additional Documents. Shareholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent or Shareholder, as the case may be, to carry out the intent
of this Agreement.
5. Consent and Waiver. Shareholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Merger under the terms of
any agreements to which Shareholder is a party or pursuant to any rights
Shareholder may have.
6. Termination. This Agreement shall terminate and shall have no further
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of
the Merger Agreement or (ii) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof.
7. Miscellaneous.
7.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by
either of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at
law or in equity.
7.5 Notices. All notices, requests, claims, demands and other communications
hereunder shall be in writing and sufficient if delivered in person, by cable,
telegram or telex, or sent by mail (registered or certified mail, postage
prepaid, return receipt requested) or overnight courier (prepaid) to the
respective parties as follows:
If to Parent: MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
If to the Shareholder: To the address for notice set forth on the
last page hereof.
With a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
2
<PAGE>
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
7.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
7.9 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly
executed on the date and year first above written.
PARENT
By:__________________________________
Title: President and Chief Executive
Officer
------------------------------
SHAREHOLDER:
By:__________________________________
Shareholder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
__Shares of Common Stock Beneficially
Owned:
***FRACTAL VOTING AGREEMENT***
3
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned shareholder of Fractal Design Corporation, a California
corporation (the "COMPANY"), hereby irrevocably appoints the directors on the
Board of Directors of MetaTools, Inc., a Delaware corporation ("PARENT"), and
each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of the Company beneficially owned by the undersigned, which shares are listed
on the final page of this Proxy (the "SHARES"), and any and all other shares
or securities issued or issuable in respect thereof on or after the date
hereof, until such time as that certain Agreement of Merger and Plan of
Reorganization dated as of February 11, 1997 (the "MERGER AGREEMENT"), among
Parent, Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company, shall be terminated in
accordance with its terms or the Merger (as defined in the Merger Agreement)
is effective. Upon the execution hereof, all prior proxies given by the
undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement dated
as of February 11, 1997 between Parent and the undersigned shareholder (the
"VOTING AGREEMENT"), and is granted in consideration of Parent entering into
the Merger Agreement. The attorneys and proxies named above will be empowered
at any time prior to termination of the Merger Agreement to exercise all
voting and other rights (including, without limitation, the power to execute
and deliver written consents with respect to the Shares) of the undersigned at
every annual, special or adjourned meeting of the Company shareholders, and in
every written consent in lieu of such a meeting, or otherwise, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the shareholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger. The undersigned shareholder
may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: February 11, 1997
Signature of Shareholder: ________________________________
Print Name of Shareholder: _______________________________
______ Shares of Common Stock Beneficially Owned
***FRACTAL PROXY***
1
<PAGE>
ANNEX E
CALIFORNIA GENERAL CORPORATION LAW
CHAPTER 13
DISSENTERS' RIGHTS
SEC. 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE
PURCHASE AT FAIR MARKET VALUE; DEFINITIONS
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
SEC. 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND
FOR PURCHASE; TIME; CONTENTS
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1309.
E-1
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
SEC. 1302. SUBMISSION OF SHARE CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED
SECURITIES
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
SEC. 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET
VALUE; FILING; TIME OF PAYMENT
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
SEC. 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR
MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF
ISSUES; APPOINTMENT OF APPRAISERS
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
E-2
<PAGE>
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
SEC. 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT;
JUDGMENT; PAYMENT; APPEAL; COSTS
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
SEC. 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
SEC. 1307. DIVIDENDS ON DISSENTING SHARES
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
SEC. 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF
DEMAND FOR PAYMENT
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
SEC. 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
E-3
<PAGE>
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
SEC. 1310. SUSPENSION OF RIGHT TO COMPENSATION OR VALUATION PROCEEDINGS;
LITIGATION OF SHAREHOLDERS' APPROVAL
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
SEC. 1311. EXEMPT SHARES
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
SEC. 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND
MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
E-4
<PAGE>
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
E-5
<PAGE>
ANNEX F
February 11, 1997
Board of Directors
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, CA 93013
Dear Sirs:
Fractal Design Corporation ("Fractal" or the "Company"), MetaTools, Inc.
("MetaTools") and Rook Acquisition Corp., a Delaware corporation and a wholly-
owned subsidiary of MetaTools (the "Merger Sub"), propose to enter into an
Agreement and Plan of Reorganization together with the exhibits thereto (the
"Agreement"). Subject to the terms and conditions of the Agreement, Merger Sub
will be merged with and into Fractal (the "Merger"), and each share of Fractal
common stock issued and outstanding immediately prior to the effective time of
the Merger will be converted into 0.749 shares (the "Exchange Ratio") of
common stock of MetaTools. We have assumed, with your consent, that the Merger
will qualify as a tax-free transaction for federal income tax purposes and for
pooling-of-interests accounting treatment. You have requested our opinion as
to whether or not the Exchange Ratio is fair, from a financial point of view,
to MetaTools and its stockholders.
Alex. Brown & Sons Incorporated ("Alex. Brown"), as a customary part of its
investment banking business, is engaged in the valuation of businesses and
their securities in connection with mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors
of MetaTools in connection with the transaction described above and will
receive a fee for our services and upon delivery of this opinion, a
significant portion of our fee is contingent upon the consummation of the
Merger. We also served as the lead-managing underwriter in MetaTools's 1995
initial public offering. Alex. Brown maintains a market in the common stock of
MetaTools and regularly publishes research reports regarding the software
industry and the businesses and securities of MetaTools and other publicly
owned companies in the software industry. In the ordinary course of business,
Alex. Brown may actively trade the securities of both MetaTools and Fractal
for our own account and the account of our customers and, accordingly, may at
any time hold a long or short position in securities of MetaTools and Fractal.
In connection with this opinion, we have reviewed certain publicly available
financial information and other information concerning MetaTools and Fractal
and certain internal analyses and other information furnished to us by
MetaTools and Fractal. We have also held discussions with the members of the
senior management of MetaTools and Fractal regarding the businesses and
prospects of their respective companies and the joint prospects of a combined
company. In addition, we have (i) reviewed the reported prices and trading
activity for the common stock of both MetaTools and Fractal, (ii) reviewed
financial information with respect to the business, operations and prospects
of the Company and MetaTools furnished to us by the Company and MetaTools,
(iii) compared certain financial and stock market information for MetaTools
and Fractal with similar information for certain other companies whose
securities are publicly traded, (iv) reviewed the financial terms of certain
recent business combinations, (v) reviewed the terms of the Agreement, (vi)
reviewed the potential pro forma financial effects of the Merger on MetaTools
and compared the relative financial contributions of MetaTools and the Company
to the combined company following consummation of the Merger, and (vii)
performed such other studies and analyses and considered such other factors as
we deemed appropriate.
We have not independently verified the information described above and for
purposes of this opinion have assumed and relied upon the accuracy,
completeness and fairness thereof including information furnished to us orally
or otherwise discussed with us by management of MetaTools and Fractal. With
respect to the information relating to the prospects of MetaTools and Fractal,
we have assumed that such information was reasonably
1
<PAGE>
prepared on bases reflecting the best currently available estimates and good
faith judgments of the managements of MetaTools and Fractal. In addition, we
have not assumed any responsibility for any independent evaluation or
appraisal of the assets of MetaTools and Fractal, nor have we been furnished
with any such evaluations or appraisals. Our opinion is based on market,
economic and other conditions as they exist or as disclosed to us as of the
date of such disclosure and can be evaluated as of the date of this letter. It
should be understood that, although subsequent developments may affect this
opinion we assume no obligation to update, revise or reaffirm this opinion.
Our opinion expressed herein was prepared for the benefit and use of the
Board of Directors of MetaTools in its consideration of the Merger and does
not constitute a recommendation to MetaTools's stockholders as to how they
should vote at the stockholder's meeting in connection with the Merger. This
opinion does not address the relative merits of the Merger and any other
transactions or business strategies discussed by the Board of Directors of
MetaTools as alternatives to the Agreement or the underlying business decision
of the Board of Directors of MetaTools to proceed with or effect the Merger.
Based upon and subject to the foregoing review and assumptions, it is our
opinion that, as of the date of this letter, the Exchange Ratio is fair, from
a financial point of view, to MetaTools and its stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
/s/ Alex. Brown & Sons Incorporated
___________________________________
2
<PAGE>
ANNEX G
February 11, 1997
Board of Directors
Fractal Design Corporation
335 Spreckels Drive
Aptos, CA 95003
Dear Sirs:
We understand that Fractal Design Corporation ("Fractal Design" or the
"Company"), and MetaTools Inc. ("MetaTools") have entered into an Agreement
and Plan of Reorganization, dated as of February 11, 1997 (the "Agreement")
pursuant to which Fractal Design will become a wholly owned subsidiary of
MetaTools (the "Merger"). In connection with the Merger, MetaTools will issue
0.7490 shares of its Common Stock for each share of Fractal Design's Common
Stock (the "Merger Consideration").
You have requested our opinion with respect to the fairness of the Merger
Consideration, from a financial point of view, to the shareholders of Fractal
Design.
In connection with our review, we have, among other things:
(i) reviewed the Agreement and Plan of Reorganization;
(ii) reviewed publicly available financial information with respect to
the business operations of the Company including, but not limited to,
audited financial statements for the fiscal years ended March 31, 1994,
1995 and 1996 and the unaudited financial statements for the quarterly
periods ended June 30, 1996, September 30, 1996 and December 31, 1996;
(iii) reviewed publicly available financial information with respect to
the business operations of MetaTools including, but not limited to, audited
financial statements for the fiscal years ended December 31, 1994, 1995,
and 1996;
(iv) reviewed certain internal financial and operating information
relating to Fractal Design (including financial projections) prepared by
the management of Fractal Design;
(v) reviewed certain current financial and operating information relating
to MetaTools (including financial projections) prepared by independent
financial research analysts;
(vi) held discussions with certain members of both Fractal Design and
MetaTools senior management concerning their past and current operations,
financial condition and business prospects and the potential financial
effect of the Merger of Fractal Design and MetaTools if the Merger were
consummated;
(vii) reviewed a comparison of operating results and other financial
information of Fractal Design and MetaTools with other companies which we
deemed appropriate;
(viii) reviewed the historical market prices and reported trading
activity of Fractal Design and MetaTools shares;
(ix) compared the financial terms of the Merger and the premium paid over
the Company's current, historical and average stock price with the
financial terms and premiums paid of certain other merger, acquisition and
business combination transactions which we deemed appropriate; and
(x) considered such other information, financial studies and analyses as
we deemed relevant and performed such analyses, studies and investigations
as we deemed necessary.
We have assumed and relied upon, without independent verification, the
accuracy and completeness of the information reviewed by us. With respect to
any financial projections, we assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
the respective
1
<PAGE>
future financial performances of Fractal Design and MetaTools and the future
financial performance of the combined company. We have also assumed that the
Merger will be accounted for as a pooling-of-interests.
We have not conducted a physical inspection of the properties or facilities
of Fractal Design or MetaTools or made any independent valuation or appraisal
of the assets, liabilities, patents or intellectual property of Fractal Design
and MetaTools, nor have we been furnished with any such valuations or
appraisals. Our opinion is necessarily based upon economic, market and other
conditions as in effect on, and the information made available to us, as of
the date of this letter.
We understand that in considering the Merger, the Board of Directors of the
Company has considered a wide range of financial and non-financial factors,
many of which are beyond the scope of this letter. This letter is not intended
to substitute for the Board's exercise of its own business judgment in
reviewing the Merger. Our opinion expressed herein was prepared for the
benefit and use of the Board of Directors of Fractal in its consideration of
the Merger and does not constitute a recommendation to Fractal's shareholders
as to how they should vote at the shareholder's meeting in connection with the
Merger.
It should be understood that, although subsequent developments may affect
this opinion, Unterberg Harris does not have any obligation to update, revise
or reaffirm this opinion. We are expressing no opinion herein as to the prices
at which the shares of the Company or MetaTools will actually trade at any
time.
Based upon and subject to the foregoing considerations, it is our opinion as
financial advisors that, as of the date hereof, the Merger Consideration is
fair from a financial point of view to the shareholders of Fractal Design.
Very truly yours,
/s/ Unterberg Harris
UNTERBERG HARRIS
2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. Article
12 of the Registrant's Certificate and Article VII of the Registrant's Bylaws
provide for indemnification of its directors, officers, employees and other
agents to the maximum extent permitted by the Delaware Law. In addition, the
Registrant has entered into Indemnification Agreements with its officers and
directors.
The Reorganization Agreement provides that commencing with the effectiveness
of the Merger, the Registrant will indemnify the current officers and
directors of Fractal for any action or inaction by such person prior to the
Merger.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of February 11,
1997, among MetaTools, Inc., Rook Acquisition Corp. and Fractal
Design Corporation ("Reorganization Agreement")
2.2 Stock Option Agreement, dated as of February 11, 1997, between
MetaTools, Inc. and Fractal Design Corporation
2.3 Stock Option Agreement, dated as of February 11, 1997, between
MetaTools, Inc. and Fractal Design Corporation
2.4 Form of Affiliate Agreement, dated as of February 11, 1997 for
MetaTools, Inc.
2.5 Form of Affiliate Agreement, dated as of February 11, 1997 for
Fractal Design Corporation
2.6 Form of Voting Agreement, dated February 11, 1997, between
Stockholder of MetaTools, Inc. and Fractal Design Corporation.
2.7 Form of Voting Agreement, dated February 11, 1997, between
Shareholder of Fractal Design Corporation and MetaTools, Inc.
2.8 Form of Noncompetition Agreement, dated February 11, 1997, between
each of Thomas Hedges and Mark Zimmer and MetaTools, Inc.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's
Amendment No. 1 to Registration Statement on Form SB-2, as filed
with the Securities and Exchange Commission on November 14, 1995)
3.2 Bylaws of the Registrant (incorporated by reference to the
Registrant's Amendment No. 1 to Registration Statement on Form SB-
2, as filed with the Securities and Exchange Commission on
November 14, 1995)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati P.C. as to the
legality of the securities being registered
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
8.1 Opinion of Wilson Sonsini Goodrich & Rosati P.C. supporting the
tax matters and consequences to shareholders described in the
Joint Proxy Statement/Prospectus forming part of this registration
statement
8.2 Opinion of Venture Law Group, A Professional Corporation,
supporting the tax matters and consequences to shareholders
described in the Joint Proxy Statement/Prospectus forming part of
this registration statement
23.1 Consent of Wilson Sonsini Goodrich & Rosati P.C. (Included in
opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of Venture Law Group, A Professional Corporation (Included
in opinion filed as Exhibit 8.2)
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Price Waterhouse LLP
23.5 Consent of Mark Zimmer
23.6 Consent of Thomas Hedges
23.7 Consent of Arthur Collmeyer
23.8 Consent of Alex. Brown & Sons Incorporated
23.9 Consent of Unterberg Harris
24.1 Power of Attorney (See Page II-4)
99.1 Registrant's Stockholder Letter, dated April 28, 1997
99.2 Registrant's Notice of Annual Meeting of Stockholders, dated April
28, 1997
99.3 Form of Registrant's Proxy for Annual Meeting of Stockholders to
be held May 29, 1997
99.4 Fractal Design Corporation's Shareholder Letter, dated April 28,
1997
99.5 Fractal Design Corporation's Notice of Special Meeting of
Shareholders, dated April 28, 1997
99.6 Form of Fractal Design Corporation's Proxy for Special Meeting of
Shareholders to be held May 29, 1997
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
MetaTools
Report of Independent Auditors (see page S-1)
Schedule II Valuation and Qualifying Accounts (see page S-2)
Fractal
Report of Independent Auditors (see page S-3)
Schedule II Valuation and Qualifying Accounts (see page S-4)
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the
financial statements, management's discussion and analysis or notes thereto.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
II-2
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement.
(2) That, for purposes of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the undersigned Registrant undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form.
(d) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the Registration Statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(e) Insofar as the indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through
the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 23 DAY OF APRIL
1997.
MetaTools, Inc.
/s/ John J. Wilczak
By: _________________________________
JOHN J. WILCZAK
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John J. Wilczak and Terance A.
Kinninger, and each of them, jointly and severally, as his attorneys-in-fact,
each with full power of substitution for him in any and all capacities, to
sign any and all amendments to this Registration Statement, and to file the
same, with exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission, hereby ratifying and confirming all
that each said attorneys-in-fact or his substitute or substitutes, may do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ John J. Wilczak Chairman, President April 23, 1997
- ------------------------------------- and Chief Executive
(JOHN J. WILCZAK) Officer (Principal
Executive Officer)
/s/ Terance A. Kinninger Vice President April 23, 1997
- ------------------------------------- and Chief Financial
(TERANCE A. KINNINGER) Officer (Principal
Financial and
Accounting Officer)
/s/ Kai Krause Director and Chief April 23, 1997
- ------------------------------------- Design Officer
(KAI KRAUSE)
/s/ Samuel H. Jones, Jr. Director April 23, 1997
- -------------------------------------
(SAMUEL H. JONES, JR.)
II-4
<PAGE>
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ Bert Kolde Director April 23, 1997
- -------------------------------------
(BERT KOLDE)
/s/ William H. Lane III Director April 23, 1997
- -------------------------------------
(WILLIAM H. LANE III)
/s/ Howard L. Morgan Director April 23, 1997
- -------------------------------------
(HOWARD L. MORGAN)
/s/ William J. Schroeder Director April 23, 1997
- -------------------------------------
(WILLIAM J. SCHROEDER)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization, dated as of February 11,
1997, among MetaTools, Inc., Rook Acquisition Corp. and Fractal
Design Corporation ("Reorganization Agreement")
2.2 Stock Option Agreement, dated as of February 11, 1997, between
MetaTools, Inc. and Fractal Design Corporation
2.3 Stock Option Agreement, dated as of February 11, 1997, between
MetaTools, Inc. and Fractal Design Corporation
2.4 Form of Affiliate Agreement, dated as of February 11, 1997 for
MetaTools, Inc.
2.5 Form of Affiliate Agreement, dated as of February 11, 1997 for
Fractal Design Corporation
2.6 Form of Voting Agreement, dated February 11, 1997, between
Stockholder of MetaTools, Inc. and Fractal Design Corporation.
2.7 Form of Voting Agreement, dated February 11, 1997, between
Shareholder of Fractal Design Corporation and MetaTools, Inc.
2.8 Form of Noncompetition Agreement, dated February 11, 1997, between
each of Thomas Hedges and Mark Zimmer and MetaTools, Inc.
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to the Registrant's
Amendment No. 1 to Registration Statement on Form SB-2, as filed
with the Securities and Exchange Commission on November 14, 1995)
3.2 Bylaws of the Registrant (incorporated by reference to the
Registrant's Amendment No. 1 to Registration Statement on Form SB-
2, as filed with the Securities and Exchange Commission on
November 14, 1995)
5.1 Opinion of Wilson Sonsini Goodrich & Rosati P.C. as to the
legality of the securities being registered
8.1 Opinion of Wilson Sonsini Goodrich & Rosati P.C. supporting the
tax matters and consequences to shareholders described in the
Joint Proxy Statement/Prospectus forming part of this registration
statement
8.2 Opinion of Venture Law Group, A Professional Corporation,
supporting the tax matters and consequences to shareholders
described in the Joint Proxy Statement/Prospectus forming part of
this registration statement
23.1 Consent of Wilson Sonsini Goodrich & Rosati P.C. (Included in
opinions filed as Exhibits 5.1 and 8.1)
23.2 Consent of Venture Law Group, A Professional Corporation (Included
in opinion filed as Exhibit 8.2)
23.3 Consent of Coopers & Lybrand L.L.P.
23.4 Consent of Price Waterhouse LLP
23.5 Consent of Mark Zimmer
23.6 Consent of Thomas Hedges
23.7 Consent of Arthur Collmeyer
23.8 Consent of Alex. Brown & Sons Incorporated
23.9 Consent of Unterberg Harris
24.1 Power of Attorney (See Page II-4)
99.1 Registrant's Stockholder Letter, dated April 28, 1997
99.2 Registrant's Notice of Annual Meeting of Stockholders, dated April
28, 1997
99.3 Form of Registrant's Proxy for Annual Meeting of Stockholders to
be held May 29, 1997
99.4 Fractal Design Corporation's Shareholder Letter, dated April 28,
1997
99.5 Fractal Design Corporation's Notice of Special Meeting of
Shareholders, dated April 28, 1997
99.6 Form of Fractal Design Corporation's Proxy for Special Meeting of
Shareholders to be held May 29, 1997
</TABLE>
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EXHIBIT 2.1
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
FRACTAL DESIGN CORPORATION
ROOK ACQUISITION CORP.
AND
METATOOLS, INC.
DATED AS OF FEBRUARY 11, 1997
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TABLE OF CONTENTS
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ARTICLE I THE MERGER................................................. 2
1.1 The Merger................................................. 2
1.2 Effective Time; Closing.................................... 2
1.3 Effect of the Merger....................................... 2
1.4 Articles of Incorporation; Bylaws.......................... 2
1.5 Directors and Officers..................................... 2
1.6 Effect on Capital Stock.................................... 2
1.7 Dissenting Shares.......................................... 3
1.8 Surrender of Certificates.................................. 4
1.9 No Further Ownership Rights in Fractal Common Stock........ 5
1.10 Lost, Stolen or Destroyed Certificates..................... 5
1.11 Tax and Accounting Consequences............................ 5
1.12 Taking of Necessary Action; Further Action................. 5
ARTICLE II REPRESENTATIONS AND WARRANTIES OF FRACTAL.................. 6
2.1 Organization of Fractal.................................... 6
2.2 Fractal Capital Structure.................................. 6
2.3 Obligations With Respect to Capital Stock.................. 6
2.4 Authority.................................................. 7
2.5 SEC Filings; Fractal Financial Statements.................. 8
2.6 Absence of Certain Changes or Events....................... 8
2.7 Tax........................................................ 9
2.8 Title to Properties; Absence of Liens and Encumbrances..... 9
2.9 Intellectual Property...................................... 10
2.10 Compliance; Permits; Restrictions.......................... 10
2.11 Litigation................................................. 11
2.12 Brokers' and Finders' Fees................................. 11
2.13 Employee Benefit Plans..................................... 11
2.14 Employees; Labor Matters................................... 11
2.15 Environmental Matters...................................... 11
2.16 Agreements, Contracts and Commitments...................... 12
2.17 Pooling of Interests....................................... 13
2.18 Change of Control Payments................................. 13
2.19 Statements; Proxy Statement/Prospectus..................... 13
2.20 Board Approval............................................. 13
2.21 Fairness Opinion........................................... 13
ARTICLE III REPRESENTATIONS AND WARRANTIES OF METATOOLS AND MERGER
SUB........................................................ 14
3.1 Organization of MetaTools ................................. 14
3.2 MetaTools and Merger Sub Capital Structure................. 14
3.3 Obligations With Respect to Capital Stock.................. 15
3.4 Authority.................................................. 15
Section 203 of the Delaware General Corporation Law Not
3.5 Applicable................................................. 16
3.6 SEC Filings; MetaTools Financial Statements................ 16
3.7 Absence of Certain Changes or Events....................... 17
3.8 Tax Returns and Audits..................................... 17
3.9 Title to Properties; Absence of Liens and Encumbrances..... 18
3.10 Intellectual Property...................................... 18
3.11 Compliance; Permits; Restrictions.......................... 19
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3.12 Litigation................................................ 19
3.13 Brokers' and Finders' Fees................................ 19
3.14 Employee Benefit Plans.................................... 19
3.15 Employees; Labor Matters ................................. 19
3.16 Environmental Matters..................................... 20
3.17 Agreements, Contracts and Commitments..................... 20
3.18 Pooling of Interests...................................... 21
3.19 Change of Control Payments................................ 21
3.20 Statements; Proxy Statement/Prospectus.................... 21
3.21 Board Approval............................................ 21
3.22 Fairness Opinion.......................................... 22
ARTICLE IV CONDUCT PRIOR TO THE EFFECTIVE TIME....................... 22
4.1 Conduct of Business....................................... 22
ARTICLE V ADDITIONAL AGREEMENTS..................................... 23
5.1 Proxy Statement/Prospectus; Registration Statement; Other
Filings; Board Recommendations............................ 23
5.2 Meetings of Shareholders and Stockholders................. 24
5.3 Confidentiality; Access to Information.................... 25
5.4 No Solicitation........................................... 25
5.5 Public Disclosure......................................... 27
5.6 Legal Requirements........................................ 27
5.7 Third Party Consents...................................... 27
5.8 Notification of Certain Matters........................... 28
5.9 Best Efforts and Further Assurances....................... 28
5.10 Stock Options and Employee Benefits....................... 28
5.11 Form S-8.................................................. 29
5.12 Indemnification and Insurance............................. 29
5.13 NMS Listing............................................... 30
5.14 MetaTools Affiliate Agreement............................. 30
5.15 Fractal Affiliate Agreement............................... 30
5.16 Regulatory Filings; Reasonable Efforts.................... 30
5.17 Board of Directors of the Combined Company................ 30
5.18 Committees of Board of Directors of MetaTools ............ 30
5.19 Increase in Authorized Shares............................. 30
5.20 MetaTools Name Change .................................... 31
5.21 Tax-Free Reorganization .................................. 31
ARTICLE VI CONDITIONS TO THE MERGER.................................. 31
Conditions to Obligations of Each Party to Effect the
6.1 Merger.................................................... 31
6.2 Additional Conditions to Obligations of Fractal........... 32
Additional Conditions to the Obligations of MetaTools and
6.3 Merger Sub................................................ 32
ARTICLE VII TERMINATION, AMENDMENT AND WAIVER......................... 33
7.1 Termination............................................... 33
7.2 Notice of Termination; Effect of Termination.............. 33
7.3 Fees and Expenses......................................... 34
7.4 Amendment................................................. 35
7.5 Extension; Waiver......................................... 35
ARTICLE VIII GENERAL PROVISIONS........................................ 35
8.1 Non-Survival of Representations and Warranties............ 35
8.2 Notices................................................... 36
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8.3 Interpretation; Knowledge....................................... 36
8.4 Counterparts.................................................... 37
8.5 Entire Agreement; Third Party Beneficiaries..................... 37
8.6 Severability.................................................... 37
8.7 Other Remedies; Specific Performance............................ 37
8.8 Governing Law................................................... 37
8.9 Rules of Construction........................................... 37
8.10 Assignment...................................................... 37
8.11 WAIVER OF JURY TRIAL ........................................... 38
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<PAGE>
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (the "AGREEMENT") is made and
entered into as of February 11, 1997, among MetaTools, Inc., a Delaware
corporation ("METATOOLS"), Rook Acquisition Corp., a Delaware corporation and
a wholly-owned subsidiary of MetaTools ("MERGER SUB"), and Fractal Design
Corporation, a California corporation ("FRACTAL").
Recitals
A. Upon the terms and subject to the conditions of this Agreement (as
defined in Section 1.2 below) and in accordance with the California General
Corporation Law ("CALIFORNIA LAW"), MetaTools and Fractal intend to enter into
a business combination transaction to pursue their long-term business
strategies.
B. Immediately upon the effectiveness of the Merger (as defined in Section
1.1), the Board of Directors of the combined company would consist of nine (9)
members, with designees of Fractal to hold three (3) of such seats. It is also
contemplated that the senior management of the combined company would consist
of senior management from both Fractal and MetaTools.
C. The Board of Directors of Fractal (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
Fractal and fair to, and in the best interests of, Fractal and its
shareholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement and (iii) has determined to
recommend that the shareholders of Fractal adopt and approve this Agreement
and approve the Merger.
D. The Board of Directors of MetaTools (i) has determined that the Merger is
consistent with and in furtherance of the long-term business strategy of
MetaTools and fair to, and in the best interests of, MetaTools and its
stockholders, (ii) has approved this Agreement, the Merger and the other
transactions contemplated by this Agreement and (iii) has determined to
recommend that the stockholders of MetaTools vote to approve the issuance of
shares of MetaTools Common Stock (as defined below) to the shareholders of
Fractal pursuant to the terms of the Merger.
E. Concurrently with the execution of this Agreement, and as a condition and
inducement to MetaTools's willingness to enter into this Agreement, the Chief
Executive Officer of Fractal and certain other affiliates of Fractal shall
enter into Voting Agreements in substantially the form attached hereto as
Exhibit A-1 (the "FRACTAL VOTING AGREEMENTS"). Concurrently with the execution
of this Agreement, and as a condition and inducement to Fractal's willingness
to enter into this Agreement, the Chief Executive Officer of MetaTools and
certain other affiliates of MetaTools shall enter into Voting Agreements in
substantially the form attached hereto as Exhibit A-2 (the "METATOOLS VOTING
AGREEMENTS").
F. Concurrently with the execution of this Agreement, and as a condition and
inducement to Fractal's and MetaTools' willingness to enter into this
Agreement, MetaTools shall execute and deliver a Stock Option Agreement in
favor of Fractal in substantially the form attached hereto as Exhibit B-1 (the
"METATOOLS STOCK OPTION AGREEMENT") and Fractal shall execute and deliver a
Stock Option Agreement in favor of MetaTools in substantially the form
attached hereto as Exhibit B-2 (the "FRACTAL STOCK OPTION AGREEMENT" and,
together with the MetaTools Stock Option Agreement, the "STOCK OPTION
AGREEMENTS"). The Board of Directors of MetaTools and Fractal have each
approved the Stock Option Agreements.
G. The parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Internal Revenue Code
of 1986, as amended (the "CODE").
H. It is also intended by the parties hereto that the Merger shall qualify
for accounting treatment as a pooling of interests.
<PAGE>
NOW, THEREFORE, in consideration of the covenants, promises and
representations set forth herein, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the parties agree as follows:
ARTICLE I
The Merger
1.1 The Merger. At the Effective Time (as defined in Section 1.2) and
subject to and upon the terms and conditions of this Agreement and the
applicable provisions of California Law, Merger Sub shall be merged with and
into Fractal (the "MERGER"), the separate corporate existence of Merger Sub
shall cease and Fractal shall continue as the surviving corporation. Fractal
as the surviving corporation after the Merger is hereinafter sometimes
referred to as the "SURVIVING CORPORATION."
1.2 Effective Time; Closing. Subject to the provisions of this Agreement,
the parties hereto shall cause the Merger to be consummated by filing an
Agreement of Merger with the Secretary of State of the State of California in
accordance with the relevant provisions of California Law and by filing a
Certificate of Merger with the Secretary of State of the State of Delaware in
accordance with the relevant provisions of Delaware General Corporation Law
(collectively, the "AGREEMENT OF MERGER") (the time of such filing (or such
later time as may be agreed in writing by the parties and specified in the
Agreement of Merger) being the "EFFECTIVE TIME") as soon as practicable on or
after the Closing Date (as herein defined). Unless the context otherwise
requires, the term "AGREEMENT" as used herein refers collectively to this
Agreement and Plan of Reorganization and the Agreement of Merger. The closing
of the Merger (the "CLOSING") shall take place at the offices of Wilson
Sonsini Goodrich & Rosati, Professional Corporation, at a time and date to be
specified by the parties, which shall be no later than the second business day
after the satisfaction or waiver of the conditions set forth in Article VI, or
at such other time, date and location as the parties hereto agree in writing
(the "CLOSING DATE").
1.3 Effect of the Merger. At the Effective Time, the effect of the Merger
shall be as provided in this Agreement and the applicable provisions of
California Law. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all the property, rights, privileges, powers
and franchises of Fractal and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of Fractal and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
1.4 Articles of Incorporation; Bylaws.
(a) At the Effective Time, the Articles of Incorporation of Merger Sub, as
in effect immediately prior to the Effective Time, shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Articles of Incorporation of the Surviving
Corporation; provided, however, that at the Effective Time the Articles of
Incorporation of the Surviving Corporation shall be amended so that the name
of the Surviving Corporation shall be Fractal Corporation.
(b) The Bylaws of Merger Sub, as in effect immediately prior to the
Effective Time, shall be, at the Effective Time, the Bylaws of the Surviving
Corporation until thereafter amended.
1.5 Directors and Officers. The initial directors of the Surviving
Corporation shall be the directors of Merger Sub immediately prior to the
Effective Time, until their respective successors are duly elected or
appointed and qualified. The initial officers of the Surviving Corporation
shall be the officers of Merger Sub immediately prior to the Effective Time,
until their respective successors are duly appointed.
1.6 Effect on Capital Stock. At the Effective Time, by virtue of the Merger
and without any action on the part of Merger Sub, Fractal or the holders of
any of the following securities:
(a) Conversion of Fractal Common Stock. Each share of Common Stock, $.001
par value, of Fractal (the "FRACTAL COMMON STOCK") issued and outstanding
immediately prior to the Effective Time,
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(other than any shares of Fractal Common Stock to be canceled pursuant to
Section 1.6(b) and any Dissenting Shares (as defined in and to the extent
provided in Section 1.7(a)) will be canceled and extinguished and
automatically converted (subject to Sections 1.6(e) and (f)) into the right
to receive 0.749 (the "EXCHANGE RATIO") share of Common Stock, par value
$.001 per share, of MetaTools (the "METATOOLS COMMON STOCK") upon surrender
of the certificate representing such share of Fractal Common Stock in the
manner provided in Section 1.8 (or in the case of a lost, stolen or
destroyed certificate, upon delivery of an affidavit (and bond, if
required) in the manner provided in Section 1.10).
(b) Cancellation of MetaTools-Owned Stock. Each share of Fractal Common
Stock held by Fractal or owned by Merger Sub, MetaTools or any direct or
indirect wholly owned subsidiary of Fractal or of MetaTools immediately
prior to the Effective Time shall be canceled and extinguished without any
conversion thereof.
(c) Stock Options; Employee Stock Purchase Plans. At the Effective Time,
all options to purchase Fractal Common Stock then outstanding under
Fractal's 1993 Stock Option Plan, 1995 Stock Option Plan, 1995 Directors'
Stock Option Plan and 1992 Assumed Ray Dream, Inc. Stock Option Plan
(collectively, the "FRACTAL STOCK OPTION PLANS") shall be assumed by
MetaTools in accordance with Section 5.10 hereof.
(d) Capital Stock of Merger Sub. Each share of Common Stock, $.001, of
Merger Sub (the "MERGER SUB COMMON STOCK") issued and outstanding
immediately prior to the Effective Time shall be converted into one validly
issued, fully paid and nonassessable share of Common Stock, $.001, of the
Surviving Corporation. Each certificate evidencing ownership of shares of
Merger Sub Common Stock shall continue to evidence ownership of such shares
of capital stock of the Surviving Corporation.
(e) Adjustments to Exchange Ratio. The Exchange Ratio shall be adjusted
to reflect appropriately the effect of any stock split, reverse stock
split, stock dividend (including any dividend or distribution of securities
convertible into MetaTools Common Stock or Fractal Common Stock),
reorganization, recapitalization or other like change with respect to
MetaTools Common Stock or Fractal Common Stock occurring on or after the
date hereof and prior to the Effective Time.
(f) Fractional Shares. No fraction of a share of MetaTools Common Stock
will be issued by virtue of the Merger, but in lieu thereof each holder of
shares of Fractal Common Stock who would otherwise be entitled to a
fraction of a share of MetaTools Common Stock (after aggregating all
fractional shares of MetaTools Common Stock to be received by such holder)
shall receive from MetaTools an amount of cash (rounded to the nearest
whole cent) equal to the product of (i) such fraction, multiplied by (ii)
the average closing price of one share of MetaTools Common Stock for the
ten most recent days that MetaTools Common Stock has traded ending on the
trading day immediately prior to the Effective Time, as reported on the
Nasdaq National Market.
1.7 Dissenting Shares.
(a) Notwithstanding any provision of this Agreement to the contrary, the
shares of any holder of Fractal Common Stock who has demanded and perfected
appraisal rights for such shares in accordance with California Law and who, as
of the Effective Time, has not effectively withdrawn or lost such appraisal
rights ("DISSENTING SHARES"), shall not be converted into or represent a right
to receive MetaTools Common Stock pursuant to Section 1.6, but the holder
thereof shall only be entitled to such rights as are granted by California
Law.
(b) Notwithstanding the foregoing, if any holder of shares of Fractal Common
Stock who demands appraisal of such shares under California Law shall
effectively withdraw or lose (through failure to perfect or otherwise) the
right to appraisal, then, as of the later of the Effective Time or the
occurrence of such event, such holder's shares shall automatically be
converted into and represent only the right to receive MetaTools Common Stock
and cash in lieu of fractional shares of MetaTools Common Stock in accordance
with Section 1.6 hereof, without interest thereon, upon surrender of the
certificate representing such shares of Fractal Common Stock in
3
<PAGE>
the manner provided in Section 1.8 (or in the case of a lost, stolen or
destroyed certificate, upon delivery of an affidavit (and bond, if required)
in the manner provided in Section 1.10).
(c) Fractal shall give MetaTools (i) prompt notice of any written demands
for appraisal of any shares of Fractal Common Stock, withdrawals of such
demands, and any other instruments served pursuant to California Law and
received by Fractal which relate to any such demand for appraisal and (ii) the
opportunity to participate in all negotiations and proceedings which take
place prior to the Effective Time with respect to demands for appraisal under
California Law. Fractal shall not, except with the prior written consent of
MetaTools or as may be required by applicable law, voluntarily make any
payment with respect to any demands for appraisal of Fractal Common Stock or
offer to settle or settle any such demands. Any payments made in respect of
Dissenting Shares shall be made by Fractal or the Surviving Corporation as the
case may be.
1.8 Surrender of Certificates.
(a) Exchange Agent. MetaTools shall select a bank or trust company with
assets of not less than $500 million to act as the exchange agent (the
"EXCHANGE AGENT") in the Merger.
(b) MetaTools to Provide Common Stock. Promptly after the Effective Time,
MetaTools shall make available to the Exchange Agent for exchange in
accordance with this Article I, the shares of MetaTools Common Stock issuable
pursuant to Section 1.6 in exchange for outstanding shares of Fractal Common
Stock, and cash in an amount sufficient for payment in lieu of fractional
shares pursuant to Section 1.6(f) and any dividends or distributions which
holders of shares of Fractal Common Stock may be entitled pursuant to Section
1.8(d).
(c) Exchange Procedures. Promptly after the Effective Time, MetaTools shall
cause the Exchange Agent to mail to each holder of record (as of the Effective
Time) of a certificate or certificates (the "CERTIFICATES"), which immediately
prior to the Effective Time represented outstanding shares of Fractal Common
Stock whose shares were converted into the right to receive shares of
MetaTools Common Stock pursuant to Section 1.6, cash in lieu of any fractional
shares pursuant to Section 1.6(f) and any dividends or other distributions
pursuant to Section 1.8(d), (i) a letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon delivery of the Certificates to the
Exchange Agent and shall be in such form and have such other provisions as
MetaTools may reasonably specify) and (ii) instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing
shares of MetaTools Common Stock, cash in lieu of any fractional shares
pursuant to Section 1.6(f) and any dividends or other distributions pursuant
to Section 1.8(d). Upon surrender of Certificates for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by
MetaTools, together with such letter of transmittal, duly completed and
validly executed in accordance with the instructions thereto, the holders of
such Certificates shall be entitled to receive in exchange therefor
certificates representing the number of whole shares of MetaTools Common
Stock, payment in lieu of fractional shares which such holders have the right
to receive pursuant to Section 1.6(f) and any dividends or distributions
payable pursuant to Section 1.8(d), and the Certificates so surrendered shall
forthwith be canceled. Until so surrendered, outstanding Certificates will be
deemed from and after the Effective Time, for all corporate purposes, subject
to Section 1.8(d) as to the payment of dividends, to evidence the ownership of
the number of full shares of MetaTools Common Stock into which such shares of
Fractal Common Stock shall have been so converted and the right to receive an
amount in cash in lieu of the issuance of any fractional shares in accordance
with Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d).
(d) Distributions With Respect to Unexchanged Shares. No dividends or other
distributions declared or made after the date of this Agreement with respect
to MetaTools Common Stock with a record date after the Effective Time will be
paid to the holders of any unsurrendered Certificates with respect to the
shares of MetaTools Common Stock represented thereby until the holders of
record of such Certificates shall surrender such Certificates. Subject to
applicable law, following surrender of any such Certificates, the Exchange
Agent shall deliver to the record holders thereof, without interest,
certificates representing whole shares of MetaTools
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<PAGE>
Common Stock issued in exchange therefor along with payment in lieu of
fractional shares pursuant to Section 1.6(f) hereof and the amount of any such
dividends or other distributions with a record date after the Effective Time
payable with respect to such whole shares of MetaTools Common Stock.
(e) Transfers of Ownership. If certificates for shares of MetaTools Common
Stock are to be issued in a name other than that in which the Certificates
surrendered in exchange therefor are registered, it will be a condition of the
issuance thereof that the Certificates so surrendered will be properly
endorsed and otherwise in proper form for transfer and that the persons
requesting such exchange will have paid to MetaTools or any agent designated
by it any transfer or other taxes required by reason of the issuance of
certificates for shares of MetaTools Common Stock in any name other than that
of the registered holder of the Certificates surrendered, or established to
the satisfaction of MetaTools or any agent designated by it that such tax has
been paid or is not payable.
(f) No Liability. Notwithstanding anything to the contrary in this Section
1.8, neither the Exchange Agent, MetaTools, the Surviving Corporation nor any
party hereto shall be liable to a holder of shares of MetaTools Common Stock
or Fractal Common Stock for any amount properly paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
1.9 No Further Ownership Rights in Fractal Common Stock. All shares of
MetaTools Common Stock issued upon the surrender for exchange of shares of
Fractal Common Stock in accordance with the terms hereof (including any cash
paid in respect thereof pursuant to Section 1.6(f) and 1.8(d)) shall be deemed
to have been issued in full satisfaction of all rights pertaining to such
shares of Fractal Common Stock, and there shall be no further registration of
transfers on the records of the Surviving Corporation of shares of Fractal
Common Stock which were outstanding immediately prior to the Effective Time.
If after the Effective Time Certificates are presented to the Surviving
Corporation for any reason, they shall be canceled and exchanged as provided
in this Article I.
1.10 Lost, Stolen or Destroyed Certificates. In the event any Certificates
shall have been lost, stolen or destroyed, the Exchange Agent shall issue in
exchange for such lost, stolen or destroyed Certificates, upon the making of
an affidavit of that fact by the holder thereof, such shares of MetaTools
Common Stock, cash for fractional shares, if any, as may be required pursuant
to Section 1.6(f) and any dividends or distributions payable pursuant to
Section 1.8(d); provided, however, that MetaTools may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed Certificates to deliver a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
MetaTools, Fractal or the Exchange Agent with respect to the Certificates
alleged to have been lost, stolen or destroyed.
1.11 Tax and Accounting Consequences.
(a) It is intended by the parties hereto that the Merger shall constitute a
reorganization within the meaning of Section 368 of the Code. The parties
hereto adopt this Agreement as a "plan of reorganization" within the meaning
of Sections 1.368-2(g) and 1.368-3(a) of the United States Income Tax
Regulations.
(b) It is intended by the parties hereto that the Merger shall qualify for
accounting treatment as a pooling of interests.
1.12 Taking of Necessary Action; Further Action. If, at any time after the
Effective Time, any further action is necessary or desirable to carry out the
purposes of this Agreement and to vest the Surviving Corporation with full
right, title and possession to all assets, property, rights, privileges,
powers and franchises of Fractal and Merger Sub, the officers and directors of
Fractal and Merger Sub will take all such lawful and necessary action, so long
as such action is consistent with this Agreement.
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ARTICLE II
Representations and Warranties of Fractal
Fractal represents and warrants to MetaTools and Merger Sub, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by Fractal to MetaTools dated as of the date hereof and certified by a duly
authorized officer of Fractal (the "FRACTAL SCHEDULES"), as follows:
2.1 Organization of Fractal.
(a) Fractal and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on Fractal.
(b) Fractal has delivered to MetaTools a true and complete list of all of
Fractal's subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and Fractal's equity interest therein.
(c) Fractal has delivered or made available to MetaTools a true and correct
copy of the Articles of Incorporation and Bylaws of Fractal and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither Fractal nor any
of its subsidiaries is in violation of any of the provisions of its Articles
of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with Fractal, the term "MATERIAL ADVERSE EFFECT"
means, for purposes of this Agreement, any change, event or effect that is
materially adverse to the business, assets (including intangible assets),
financial condition or results of operations of Fractal and its subsidiaries
taken as a whole.
2.2 Fractal Capital Structure. The authorized capital stock of Fractal
consists of 50,000,000 shares of Common Stock, $.001 par value, of which there
were 11,979,647 shares issued and outstanding as of February 7, 1997 and
5,000,000 shares of Preferred Stock, $.001, of which no shares are issued or
outstanding. All outstanding shares of Fractal Common Stock are duly
authorized, validly issued, fully paid and nonassessable and are not subject
to preemptive rights created by statute, the Articles of Incorporation or
Bylaws of Fractal or any agreement or document to which Fractal is a party or
by which it is bound. As of February 7, 1997, Fractal had reserved an
aggregate of 2,516,336 shares of Fractal Common Stock, net of exercises, for
issuance to employees, consultants and non-employee directors pursuant to the
Fractal Stock Option Plans. As of February 7, 1997, there were options
outstanding to purchase an aggregate of 2,017,666 shares of Common Stock,
issued to employees, consultants and non-employee directors pursuant to the
Fractal Stock Option Plans. All shares of Fractal Common Stock subject to
issuance as aforesaid, upon issuance on the terms and conditions specified in
the instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. The Fractal Schedules list for
each person who held in the aggregate options to acquire 10,000 or more shares
of Fractal Common Stock at on or about February 7, 1997, the name of the
holder of such option, the exercise price of such option, the number of shares
as to which such option will have vested at such date, the vesting schedule
for such option and whether the exercisability of such option will be
accelerated in any way by the transactions contemplated by this Agreement, and
indicate the extent of acceleration, if any. Fractal has reserved 100,000
shares of Common Stock for issuance pursuant to Fractal's 401(k) Profit
Sharing Plan and Trust.
2.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 2.2, there are no equity securities, partnership interests or similar
ownership interests of any class of Fractal, or any securities
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exchangeable or convertible into or exercisable for such equity securities,
partnership interests or similar ownership interests, issued, reserved for
issuance or outstanding. Except for securities Fractal owns, directly or
indirectly through one or more subsidiaries, there are no equity securities,
partnership interests or similar ownership interests of any class of any
subsidiary of Fractal, or any security exchangeable or convertible into or
exercisable for such equity securities, partnership interests or similar
ownership interests, issued, reserved for issuance or outstanding. Except as
set forth in Section 2.2, there are no options, warrants, equity securities,
partnership interests or similar ownership interests, calls, rights (including
preemptive rights), commitments or agreements of any character to which
Fractal or any of its subsidiaries is a party or by which it is bound
obligating Fractal or any of its subsidiaries to issue, deliver or sell, or
cause to be issued, delivered or sold, or repurchase, redeem or otherwise
acquire, or cause the repurchase, redemption or acquisition, of any shares of
capital stock, partnership interests or similar ownership interests of Fractal
or any of its subsidiaries or obligating Fractal or any of its subsidiaries to
grant, extend, accelerate the vesting of or enter into any such option,
warrant, equity security, call, right, commitment or agreement. There are no
registration rights and, to the knowledge of Fractal, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of Fractal or
with respect to any equity security, partnership interest or similar ownership
interest of any class of any of its subsidiaries.
2.4 Authority.
(a) Fractal has all requisite corporate power and authority to enter into
this Agreement and the Fractal Stock Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby,
and the execution and delivery of the Fractal Stock Option Agreement and the
consummation of the transactions contemplated thereby, have been duly
authorized by all necessary corporate action on the part of Fractal, subject
only to the approval and adoption of this Agreement and the approval of the
Merger by Fractal's shareholders and the filing and recordation of the
Agreement of Merger pursuant to California Law. A vote of the holders of at
least a majority of the outstanding shares of the Fractal Common Stock is
required for Fractal's shareholders to approve and adopt this Agreement and
approve the Merger. This Agreement and the Fractal Stock Option Agreement have
been duly executed and delivered by Fractal and, assuming the due
authorization, execution and delivery by MetaTools and, if applicable, Merger
Sub, constitute valid and binding obligations of Fractal, enforceable in
accordance with their respective terms, except as enforceability may be
limited by bankruptcy and other similar laws and general principles of equity.
The execution and delivery of this Agreement and the Fractal Stock Option
Agreement by Fractal do not, and the performance of this Agreement and the
Fractal Stock Option Agreement by Fractal will not, (i) conflict with or
violate the Articles of Incorporation or Bylaws of Fractal or the equivalent
organizational documents of any of its subsidiaries, (ii) subject to obtaining
the approval and adoption of this Agreement and the approval of the Merger by
Fractal's shareholders as contemplated in Section 5.2 and compliance with the
requirements set forth in Section 2.4(b) below, conflict with or violate any
law, rule, regulation, order, judgment or decree applicable to Fractal or any
of its subsidiaries or by which its or any of their respective properties is
bound or affected, or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair Fractal's rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of Fractal or any of its
subsidiaries pursuant to, any material note, bond, mortgage, indenture,
contract, agreement, lease, license, permit, franchise or other instrument or
obligation to which Fractal or any of its subsidiaries is a party or by which
Fractal or any of its subsidiaries or its or any of their respective
properties are bound or affected. The Fractal Schedules list all material
consents, waivers and approvals under any of Fractal's or any of its
subsidiaries' agreements, contracts, licenses or leases required to be
obtained in connection with the consummation of the transactions contemplated
hereby.
(b) 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, foreign or domestic
("GOVERNMENTAL ENTITY"), is required by or with respect to Fractal in
connection with the execution and delivery of this Agreement and the Fractal
Stock Option Agreement or the consummation of the Merger,
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except for (i) the filing of the Agreement of Merger with the Secretary of
State of the State of California, (ii) the filing of the Proxy Statement (as
defined in Section 2.19) with the Securities and Exchange Commission ("SEC")
in accordance with the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT"), (iii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
federal and state securities laws and the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR ACT"), and the securities or
antitrust laws of any foreign country, and (iv) such other consents,
authorizations, filings, approvals and registrations which if not obtained or
made would not be material to Fractal or MetaTools or have a material adverse
effect on the ability of the parties to consummate the Merger.
2.5 SEC Filings; Fractal Financial Statements.
(a) Fractal has filed all forms, reports and documents required to be filed
with the SEC since November 9, 1995 and has made available to MetaTools such
forms, reports and documents in the form filed with the SEC. All such required
forms, reports and documents (including those that Fractal may file subsequent
to the date hereof) are referred to herein as the "FRACTAL SEC REPORTS." As of
their respective dates, the Fractal SEC Reports (i) were prepared in
accordance with the requirements of the Securities Act of 1933, as amended
(the "SECURITIES ACT"), or the Exchange Act, as the case may be, and the rules
and regulations of the SEC thereunder applicable to such Fractal SEC Reports,
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. None of Fractal's subsidiaries is required to file any
forms, reports or other documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in Fractal SEC Reports (the "FRACTAL
FINANCIALS"), including any Fractal SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with generally accepted accounting principles ("GAAP")
applied on a consistent basis throughout the periods involved (except as may
be indicated in the notes thereto or, in the case of unaudited interim
financial statements, as may be permitted by the SEC on Form 10-Q under the
Exchange Act) and (z) fairly presented the consolidated financial position of
Fractal and its subsidiaries as at the respective dates thereof and the
consolidated results of Fractal's 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. The balance sheet of
Fractal contained in Fractal SEC Reports as of September 30, 1996 is
hereinafter referred to as the "FRACTAL BALANCE SHEET." Except as disclosed in
the Fractal Financials, since the date of the Fractal Balance Sheet neither
Fractal nor any of its subsidiaries has any liabilities (absolute, accrued,
contingent or otherwise) of a nature required to be disclosed on a balance
sheet or in the related notes to the consolidated financial statements
prepared in accordance with GAAP which are, individually or in the aggregate,
material to the business, results of operations or financial condition of
Fractal and its subsidiaries taken as a whole, except liabilities (i) provided
for in the Fractal Balance Sheet, or (ii) incurred since the date of the
Fractal Balance Sheet in the ordinary course of business consistent with past
practices and immaterial in the aggregate.
(c) Fractal has heretofore furnished to MetaTools a complete and correct
copy of any amendments or modifications, which have not yet been filed with
the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by Fractal with the SEC pursuant
to the Securities Act or the Exchange Act.
2.6 Absence of Certain Changes or Events. Since the date of the Fractal
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on Fractal, (ii) any material change by Fractal in its
accounting methods, principles or practices, except as required by concurrent
changes in GAAP, or (iii) any material revaluation by Fractal of any of its
assets, including, without limitation, writing down the value of capitalized
inventory or writing off notes or accounts receivable other than in the
ordinary course of business.
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2.7 Taxes.
(a) Definition of Taxes. For the purposes of this Agreement, "TAX" or
"TAXES" refers to any and all federal, state, local and foreign taxes,
assessments and other governmental charges, duties, impositions and
liabilities relating to taxes, including taxes based upon or measured by gross
receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, franchise, withholding, payroll, recapture, employment,
excise and property taxes, together with all interest, penalties and additions
imposed with respect to such amounts and any obligations under any agreements
or arrangements with any other person with respect to such amounts and
including any liability for taxes of a predecessor entity.
(b) Tax Returns and Audits.
(i) Fractal and each of its subsidiaries have timely filed all federal,
state, local and foreign returns, estimates, information statements and
reports ("RETURNS") relating to Taxes required to be filed by Fractal and each
of its subsidiaries, except such Returns which are not material to Fractal,
and have paid all Taxes shown to be due on such Returns.
(ii) Except as is not material to Fractal, Fractal and each of its
subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, the Federal Insurance
Contribution Act ("FICA"), the Federal Unemployment Tax Act ("FUTA") and other
Taxes required to be withheld.
(iii) Except as is not material to Fractal, neither Fractal nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there any
Tax deficiency outstanding, proposed or assessed against Fractal or any of its
subsidiaries, nor has Fractal or any of its subsidiaries executed any waiver
of any statute of limitations on or extending the period for the assessment or
collection of any Tax.
(iv) Except as is not material to Fractal, no audit or other examination of
any Return of Fractal or any of its subsidiaries is presently in progress, nor
has Fractal or any of its subsidiaries been notified of any request for such
an audit or other examination.
(v) Except as is not material to Fractal, no adjustment relating to any
Returns filed by Fractal or any of its subsidiaries has been proposed formally
or informally by any Tax authority to Fractal or any of its subsidiaries or
any representative thereof.
(vi) Except as is not material to Fractal, neither Fractal nor any of its
subsidiaries has any liability for unpaid Taxes which has not been accrued for
or reserved on the Fractal Balance Sheet, whether asserted or unasserted,
contingent or otherwise, which is material to Fractal.
(vii) There is no contract, agreement, plan or arrangement, including but
not limited to the provisions of this Agreement, covering any employee or
former employee of Fractal or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(viii) Neither Fractal nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by Fractal.
(ix) Neither Fractal nor any of its subsidiaries is party to or has any
obligation under any tax-sharing or allocation agreement or arrangement.
2.8 Title to Properties; Absence of Liens and Encumbrances.
(a) The Fractal Schedules list the real property owned by Fractal. The
Fractal Schedules list all real property leases to which Fractal is a party
and each amendment thereto. All such current leases are in full force and
effect, are valid and effective in accordance with their respective terms, and
there is not, under any of such leases, any
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existing default or event of default (or event which with notice or lapse of
time, or both, would constitute a default) that would give rise to a claim in
an amount greater than $100,000.
(b) Fractal has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any liens, pledges, charges, claims, security
interests or other encumbrances of any sort ("LIENS"), except as reflected in
Fractal Financials or in the Fractal Schedules and except for liens for taxes
not yet due and payable and such imperfections of title and encumbrances, if
any, which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
2.9 Intellectual Property.
(a) Fractal and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by, or necessary to, the operation or conduct
of their respective businesses as presently conducted (such intellectual
property and the rights thereto are collectively referred to herein as the
"FRACTAL IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
copyright, trademark, trade secret or other intellectual property rights
licensed by, or to, Fractal, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any Fractal IP Rights or
materially impair the right of Fractal, the Surviving Corporation or MetaTools
in or to use, sell, enforce license or otherwise exploit any Fractal IP Rights
or portion thereof.
(c) Neither the operation of Fractal's nor any of its subsidiaries'
respective businesses nor the manufacture, marketing, license, sale or
intended use of any product, service or technology currently licensed,
manufactured, created, distributed, authored, used, sold or under development
by Fractal or any of its subsidiaries (i) violates in any material respect any
license or agreement between Fractal or any of its subsidiaries and any third
party or (ii) infringes any patents, copyright, trademark, trade secret or
other intellectual property right of any other party; and there is no pending
or, to the knowledge of Fractal, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
Fractal IP Rights, nor has Fractal received any written notice asserting that
any Fractal IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party.
(d) Fractal has taken reasonable and practicable steps designed to safeguard
and maintain the secrecy and confidentiality of, and its proprietary rights
in, all Fractal IP Rights.
2.10 Compliance; Permits; Restrictions.
(a) Neither Fractal nor any of its subsidiaries is, in any material respect,
in conflict with, or in default or violation of (i) any law, rule, regulation,
order, judgment or decree applicable to Fractal or any of its subsidiaries or
by which Fractal or any of its subsidiaries or any of their respective
properties is bound or affected, or (ii) any material note, bond, mortgage,
indenture, contract, agreement, lease, license, permit, franchise or other
instrument or obligation to which Fractal or any of its subsidiaries is a
party or by which Fractal or any of its subsidiaries or its or any of their
respective properties is bound or affected. To the knowledge of Fractal, no
investigation or review by any Governmental Entity is pending or threatened
against Fractal or any of its subsidiaries, nor has any Governmental Entity
indicated an intention to conduct the same. There is no material agreement,
judgment, injunction, order or decree binding upon Fractal or any of its
subsidiaries which has or could reasonably be expected to have the effect of
prohibiting or materially impairing any business practice of Fractal or any of
its subsidiaries, any acquisition of material property by Fractal or any of
its subsidiaries or the conduct of business by Fractal as currently conducted.
(b) Fractal and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities that are
material to the operation of the business of Fractal (collectively, the
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"FRACTAL PERMITS"). Fractal and its subsidiaries are in compliance in all
material respects with the terms of the Fractal Permits.
2.11 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which Fractal or any of its subsidiaries has
received any notice of assertion nor, to Fractal's knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against Fractal or any of its subsidiaries which reasonably would be likely to
be material to Fractal. To the knowledge of Fractal, no Governmental Entity
has at any time challenged or questioned in writing the legal right of Fractal
to manufacture, offer or sell any of its products in the present manner or
style thereof.
2.12 Brokers' and Finders' Fees. Except for fees payable to Unterberg Harris
pursuant to an engagement letter dated February 11, 1997, a copy of which has
been provided to MetaTools, Fractal has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
2.13 Employee Benefit Plans.
(a) With respect to each material 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
Fractal or any trade or business which is under common control with Fractal
within the meaning of Section 414 of the Code (the "FRACTAL EMPLOYEE PLANS"),
Fractal has made available to MetaTools a true and complete copy of, to the
extent applicable, (i) such Fractal Employee Plan, (ii) the most recent annual
report (Form 5500), (iii) each trust agreement related to such Fractal
Employee Plan, (iv) the most recent summary plan description for each Fractal
Employee Plan for which such a description is required, (v) the most recent
actuarial report relating to any Fractal Employee Plan subject to Title IV of
ERISA and (vi) the most recent IRS determination letter issued with respect to
any Fractal Employee Plan.
(b) Each Fractal Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such
Fractal Employee Plan is so qualified and nothing has occurred since the date
of such letter that could reasonably be expected to affect the qualified
status of such plan. Each Fractal Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither Fractal nor any ERISA Affiliate of Fractal has
incurred or is reasonably expected to incur any material liability under Title
IV of ERISA in connection with any Fractal Employee Plan.
2.14 Employees; Labor Matters. To Fractal's knowledge after reasonable
inquiry, no employee of Fractal (i) is in violation of any term of any
employment contract, patent disclosure agreement, non-competition agreement,
or any restrictive covenant to a former employer relating to the right of any
such employee to be employed by Fractal because of the nature of the business
conducted or presently proposed to be conducted by Fractal or to the use of
trade secrets or proprietary information of others and (ii) has given notice
to Fractal, nor is Fractal otherwise aware, that any employee intends to
terminate his or her employment with Fractal except for terminations of a
nature and number that are consistent with Fractal's prior experience. To
Fractal's knowledge, there are no activities or proceedings of any labor union
to organize any employees of Fractal or any of its subsidiaries and there are
no strikes, or material slowdowns, work stoppages or lockouts, or threats
thereof by or with respect to any employees of Fractal or any of its
subsidiaries. Fractal and its subsidiaries are and have been in compliance in
all material respects with all applicable laws regarding employment practices,
terms and conditions of employment, and wages and hours (including, without
limitation, ERISA, WARN or any similar state or local law).
2.15 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to Fractal, no underground storage tanks and no amount
of any substance that has been designated by any Governmental Entity or by
applicable federal, state or local law to be radioactive, toxic, hazardous or
otherwise
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a danger to health or the environment, including, without limitation, PCBs,
asbestos, petroleum, urea-formaldehyde and all substances listed as hazardous
substances pursuant to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980, as amended, or defined as a hazardous waste
pursuant to the United States Resource Conservation and Recovery Act of 1976,
as amended, and the regulations promulgated pursuant to said laws, (a
"HAZARDOUS MATERIAL"), but excluding office and janitorial supplies, are
present, as a result of the actions of Fractal or any of its subsidiaries or
any affiliate of Fractal, or, to Fractal's knowledge, as a result of any
actions of any third party or otherwise, in, on or under any property,
including the land and the improvements, ground water and surface water
thereof, that Fractal or any of its subsidiaries has at any time owned,
operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be likely
to result in a material liability to Fractal, neither Fractal nor any of its
subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has Fractal
or any of its subsidiaries disposed of, transported, sold, used, released,
exposed its employees or others to or manufactured any product containing a
Hazardous Material (collectively "HAZARDOUS MATERIALS ACTIVITIES") in
violation of any rule, regulation, treaty or statute promulgated by any
Governmental Entity in effect prior to or as of the date hereof to prohibit,
regulate or control Hazardous Materials or any Hazardous Material Activity.
(c) Permits. Fractal and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "FRACTAL
ENVIRONMENTAL PERMITS") necessary for the conduct of Fractal's and its
subsidiaries' Hazardous Material Activities and other businesses of Fractal
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
Fractal's knowledge, threatened concerning any Fractal Environmental Permit,
Hazardous Material or any Hazardous Materials Activity of Fractal or any of
its subsidiaries. Fractal is not aware of any fact or circumstance which could
involve Fractal or any of its subsidiaries in any material environmental
litigation or impose upon Fractal any material environmental liability.
2.16 Agreements, Contracts and Commitments. Except as set forth in the
Fractal Schedules, neither Fractal nor any of its subsidiaries is a party to
or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of Fractal's Board of
Directors, other than those that are terminable by Fractal or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit Fractal's or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
Fractal or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of Fractal or any of its subsidiaries to engage in any
line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
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Neither Fractal nor any of its subsidiaries, nor to Fractal's knowledge any
other party to a Fractal Contract (as defined below), has breached, violated
or defaulted under, or received notice that it has breached violated or
defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which Fractal or any of its
subsidiaries is a party or by which it is bound of the type described in
clauses (a) through (l) above (any such agreement, contract or commitment, a
"FRACTAL CONTRACT") in such a manner as would permit any other party to cancel
or terminate any such Fractal Contract, or would permit any other party to
seek damages, which would be reasonably likely to be material to Fractal.
2.17 Pooling of Interests. To the knowledge of Fractal, based on
consultation with its independent accountants, neither Fractal nor any of its
directors, officers, affiliates or shareholders has taken any action which
would preclude MetaTools' ability to account for the Merger as a pooling of
interests.
2.18 Change of Control Payments. The Fractal Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and
directors of Fractal as a result of or in connection with the Merger.
2.19 Statements; Proxy Statement/Prospectus. The information supplied by
Fractal for inclusion in the Registration Statement (as defined in Section
3.4(b)) shall not at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, 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 not misleading. The information supplied by Fractal for inclusion in
the proxy statement/prospectus to be sent to the shareholders of Fractal and
stockholders of MetaTools in connection with the meeting of Fractal's
shareholders to consider the approval and adoption of this Agreement and the
approval of the Merger (the "FRACTAL SHAREHOLDERS' MEETING") and in connection
with the meeting of MetaTools' stockholders to consider the approval of (i)
the amendment of MetaTools' Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (ii) the issuance of shares of
MetaTools Common Stock by virtue of the Merger, (the "METATOOLS STOCKHOLDERS'
MEETING") (such proxy statement/prospectus as amended or supplemented is
referred to herein as the "PROXY STATEMENT") shall not, on the date the Proxy
Statement is first mailed to Fractal's shareholders and MetaTools'
stockholders, at the time of the Fractal Shareholders' Meeting or the
MetaTools Stockholders' Meeting 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 false or misleading; or
omit to state any material fact necessary to correct any statement in any
earlier communication with respect to the solicitation of proxies for the
Fractal Shareholders' Meeting or the MetaTools Stockholders' Meeting which has
become false or misleading. The Proxy Statement will comply as to form in all
material respects with the provisions of the Exchange Act and the rules and
regulations thereunder. If at any time prior to the Effective Time, any event
relating to Fractal or any of its affiliates, officers or directors should be
discovered by Fractal which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement, Fractal shall
promptly inform MetaTools. Notwithstanding the foregoing, Fractal makes no
representation or warranty with respect to any information supplied by
MetaTools or Merger Sub which is contained in any of the foregoing documents.
2.20 Board Approval. The Board of Directors of Fractal has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of Fractal and its shareholders, and (ii) to recommend that the
shareholders of Fractal approve and adopt this Agreement and approve the
Merger.
2.21 Fairness Opinion. Fractal's Board of Directors has received a written
opinion from Unterberg Harris dated as of the date hereof, to the effect that
as of the date hereof, the Exchange Ratio is fair to Fractal's shareholders
from a financial point of view and has delivered to MetaTools a copy of such
opinion.
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ARTICLE III
Representations and Warranties of MetaTools and Merger Sub
MetaTools and Merger Sub represent and warrant to Fractal, subject to the
exceptions specifically disclosed in writing in the disclosure letter supplied
by MetaTools to Fractal dated as of the date hereof and certified by a duly
authorized officer of MetaTools (the "METATOOLS SCHEDULES"), as follows:
3.1 Organization of MetaTools.
(a) MetaTools and each of its subsidiaries is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of
its incorporation; has the corporate power and authority to own, lease and
operate its assets and property and to carry on its business as now being
conducted and as proposed to be conducted; and is duly qualified or licensed
to do business and is in good standing in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of
its activities makes such qualification or licensing necessary, except where
the failure to be so qualified would not have a Material Adverse Effect (as
defined below) on MetaTools.
(b) MetaTools has delivered to Fractal a true and complete list of all of
MetaTools' subsidiaries, indicating the jurisdiction of incorporation of each
subsidiary and MetaTools' equity interest therein.
(c) MetaTools has delivered or made available to Fractal a true and correct
copy of the Certificate of Incorporation and Bylaws of MetaTools and similar
governing instruments of each of its subsidiaries, each as amended to date,
and each such instrument is in full force and effect. Neither MetaTools nor
any of its subsidiaries is in violation of any of the provisions of its
Certificate of Incorporation or Bylaws or equivalent governing instruments.
(d) When used in connection with MetaTools, the term "MATERIAL ADVERSE
EFFECT" means, for purposes of this Agreement, any change, event or effect
that is materially adverse to the business, assets (including intangible
assets), financial condition or results of operations of MetaTools and its
subsidiaries taken as a whole.
3.2 MetaTools and Merger Sub Capital Structure. The authorized capital stock
of MetaTools consists of 30,000,000 shares of Common Stock, par value $0.001
per share, of which there were 13,233,949 shares issued and outstanding as of
February 6, 1997, and 5,000,000 shares of Preferred Stock, par value $0.001
per share, of which no shares are issued or outstanding. The authorized
capital stock of Merger Sub consists of 100 shares of Common Stock, $.001 par
value, all of which, as of the date hereof, are issued and outstanding and are
held by MetaTools. Merger Sub was formed on December 12, 1996, for the purpose
of consummating a merger and has no material assets or liabilities except as
necessary for such purpose. All outstanding shares of MetaTools Common Stock
are duly authorized, validly issued, fully paid and nonassessable and are not
subject to preemptive rights created by statute, the Certificate of
Incorporation or Bylaws of MetaTools or any agreement or document to which
MetaTools is a party or by which it is bound. As of February 6, 1997,
MetaTools had reserved an aggregate of 4,296,230, net of exercise, for
issuance to employees, consultants and non-employee directors pursuant to the
MetaTools Stock Option Plans. As of February 7, 1997, there were options
outstanding to purchase an aggregate of 901,084 shares of Common Stock, issued
to employees, consultants and non-employee directors pursuant to the MetaTools
Stock Option Plans. All shares of MetaTools Common Stock subject to issuance
as aforesaid, upon issuance on the terms and conditions specified in the
instruments pursuant to which they are issuable, would be duly authorized,
validly issued, fully paid and nonassessable. The MetaTools Schedules list for
each person who held in the aggregate options to acquire 10,000 or more shares
of MetaTools Common Stock at February 6, 1997, the name of the holder of such
option, the number of shares subject to such option, the exercise price of
such option, the number of shares as to which such option will have vested at
such date, the vesting schedule for such option and whether the exercisability
of such option will be accelerated in any way by the transactions contemplated
by this Agreement, and indicate the extent of acceleration, if any. As of
February 6, 1997, an aggregate of 141,763 shares of MetaTools Common Stock
have
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been reserved for issuance pursuant to MetaTools' Employee Stock Purchase Plan
(the "METATOOLS EMPLOYEE STOCK PURCHASE PLAN").
3.3 Obligations With Respect to Capital Stock. Except as set forth in
Section 3.2, there are no equity securities, partnership interests or similar
ownership interests of any class of MetaTools, or any securities exchangeable
or convertible into or exercisable for such equity securities, partnership
interests or similar ownership interests, issued, reserved for issuance or
outstanding. Except for securities MetaTools owns, directly or indirectly
through one or more subsidiaries, there are no equity securities, partnership
interests or similar ownership interests of any class of any subsidiary of
MetaTools, or any security exchangeable or convertible into or exercisable for
such equity securities, partnership interests or similar ownership interests,
issued, reserved for issuance or outstanding. Except as set forth in Section
3.2, there are no options, warrants, equity securities, partnership interests
or similar ownership interests, calls, rights (including preemptive rights),
commitments or agreements of any character to which MetaTools or any of its
subsidiaries is a party or by which it is bound obligating MetaTools or any of
its subsidiaries to issue, deliver or sell, or cause to be issued, delivered
or sold, or repurchase, redeem or otherwise acquire, or cause the repurchase,
redemption or acquisition, of any shares of capital stock, partnership
interests or similar ownership interests of MetaTools or any of its
subsidiaries or obligating MetaTools or any of its subsidiaries to grant,
extend, accelerate the vesting of or enter into any such option, warrant,
equity security, call, right, commitment or agreement. There are no
registration rights and, to the knowledge of MetaTools, as of the date of this
Agreement, there are no voting trusts, proxies or other agreements or
understandings with respect to any equity security of any class of MetaTools
or with respect to any equity security, partnership interest or similar
ownership interest of any class of any of its subsidiaries.
3.4 Authority.
(a) Each of MetaTools and Merger Sub has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby and MetaTools has all requisite corporate power and
authority to enter into the MetaTools Stock Option Agreement and to consummate
the transactions contemplated thereby. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby, and
the execution and delivery of the MetaTools Stock Option Agreement and the
transactions contemplated thereby have been duly authorized by all necessary
corporate action on the part of MetaTools and, in the case of this Agreement,
Merger Sub, subject only to the filing and recordation of the Agreement of
Merger pursuant to California Law and the approval by MetaTools' stockholders
of (i) the amendment of MetaTools' Certificate of Incorporation to increase
its authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (ii) the issuance of shares of
MetaTools Common Stock by virtue of the Merger. A vote of the holders of at
least a majority of the outstanding shares of the MetaTools Common Stock is
required for MetaTools' stockholders to approve each of (i) the amendment of
MetaTools' Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of MetaTools Common Stock by
virtue of the Merger and (ii) the issuance of shares of MetaTools Common Stock
by virtue of the Merger. This Agreement has been duly executed and delivered
by each of MetaTools and Merger Sub and, assuming the due authorization,
execution and delivery by Fractal, constitutes the valid and binding
obligation of MetaTools, enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy and other similar laws and general
principles of equity. The MetaTools Stock Option Agreement has been duly
executed and delivered by MetaTools and, assuming due authorization, execution
and delivery of the MetaTools Stock Option Agreement by Fractal, the MetaTools
Stock Option Agreement constitutes the valid and binding obligation of
MetaTools, enforceable in accordance with its terms, except as enforceability
may be limited by bankruptcy and other similar laws and general principles of
equity. The execution and delivery of this Agreement by each of MetaTools and
Merger Sub and the execution and delivery of the MetaTools Stock Option
Agreement by MetaTools do not, and the performance of this Agreement by each
of MetaTools and Merger Sub will not and the performance of the MetaTools
Stock Option Agreement by MetaTools will not, (i) conflict with or violate the
Certificate of Incorporation or Bylaws of MetaTools or the Articles of
Incorporation or Bylaws of Merger Sub or the equivalent organizational
documents of any of MetaTools' other subsidiaries, (ii) subject to obtaining
the approval of MetaTools' stockholders of (y) the amendment of MetaTools'
Certificate of Incorporation to increase its authorized share capital to allow
for
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the issuance of shares of MetaTools Common Stock by virtue of the Merger and
(z) the issuance of shares of MetaTools Common Stock by virtue of the Merger
as contemplated in Section 5.2 and compliance with the requirements set forth
in Section 3.4(b) below, conflict with or violate any law, rule, regulation,
order, judgment or decree applicable to MetaTools or any of its subsidiaries
(including Merger Sub) or by which its or any of their respective properties
is bound or affected or (iii) result in any breach of or constitute a default
(or an event that with notice or lapse of time or both would become a default)
under, or impair MetaTools' rights or alter the rights or obligations of any
third party under, or give to others any rights of termination, amendment,
acceleration or cancellation of, or result in the creation of a lien or
encumbrance on any of the properties or assets of MetaTools or any of its
subsidiaries (including Merger Sub) pursuant to, any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which MetaTools or any of its subsidiaries
(including Merger Sub) is a party or by which MetaTools or any of its
subsidiaries or its or any of their respective properties are bound or
affected. The MetaTools Schedules list all material consents, waivers and
approvals under any of MetaTools' or any of its subsidiaries' agreements,
contracts, licenses or leases required to be obtained in connection with the
consummation of the transactions contemplated hereby.
(b) No consent, approval, order or authorization of, or registration,
declaration or filing with any Governmental Entity is required by or with
respect to MetaTools or Merger Sub in connection with the execution and
delivery of this Agreement and the MetaTools Stock Option Agreement or the
consummation of the Merger, except for (i) the filing of a Form S-4
Registration Statement (the "REGISTRATION STATEMENT") with the SEC in
accordance with the Securities Act, (ii) the filing of the Agreement of Merger
with the Secretary of State of the State of California and the Secretary of
State of the State of Delaware, (iii) the filing of the Proxy Statement with
the SEC in accordance with the Exchange Act, (iv) such consents, approvals,
orders, authorizations, registrations, declarations and filings as may be
required under applicable federal and state securities laws and the HSR Act
and the securities or antitrust laws of any foreign country, and (v) such
other consents, authorizations, filings, approvals and registrations which if
not obtained or made would not be material to MetaTools or Fractal or have a
material adverse effect on the ability of the parties to consummate the
Merger.
3.5 Section 203 of the Delaware General Corporation Law Not Applicable. The
Board of Directors of MetaTools has taken all actions so that the restrictions
contained in Section 203 of the Delaware General Corporation Law applicable to
a "business combination" (as defined in such Section 203) will not apply to
the execution, delivery or performance of this Agreement or the Stock Option
Agreements or to the consummation of the Merger or the other transactions
contemplated by this Agreement or the Stock Option Agreements.
3.6 SEC Filings; MetaTools Financial Statements.
(a) MetaTools has filed all forms, reports and documents required to be
filed with the SEC since December 12, 1995, and has made available to Fractal
such forms, reports and documents in the form filed with the SEC. All such
required forms, reports and documents (including those that MetaTools may file
subsequent to the date hereof) are referred to herein as the "METATOOLS SEC
REPORTS." As of their respective dates, the MetaTools SEC Reports (i) were
prepared in accordance with the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations of the SEC
thereunder applicable to such MetaTools SEC Reports, 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. None of
MetaTools' subsidiaries is required to file any forms, reports or other
documents with the SEC.
(b) Each of the consolidated financial statements (including, in each case,
any related notes thereto) contained in MetaTools SEC Reports (the "METATOOLS
FINANCIALS"), including any MetaTools SEC Reports filed after the date hereof
until the Closing, (x) complied as to form in all material respects with the
published rules and regulations of the SEC with respect thereto, (y) was
prepared in accordance with GAAP applied on a consistent basis throughout the
periods involved (except as may be indicated in the notes thereto or,
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in the case of unaudited interim financial statements, as may be permitted by
the SEC on Form 10-Q under the Exchange Act) and (z) fairly presented the
consolidated financial position of MetaTools and its subsidiaries as at the
respective dates thereof and the consolidated results of MetaTools' 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. The balance sheet of MetaTools contained in MetaTools SEC Reports
as of September 30, 1996 is hereinafter referred to as the "METATOOLS BALANCE
SHEET." Except as disclosed in the MetaTools Financials, since the date of the
MetaTools Balance Sheet neither MetaTools nor any of its subsidiaries has any
liabilities (absolute, accrued, contingent or otherwise) of a nature required
to be disclosed on a balance sheet or in the related notes to the consolidated
financial statements prepared in accordance with GAAP which are, individually
or in the aggregate, material to the business, results of operations or
financial condition of MetaTools and its subsidiaries taken as a whole, except
liabilities (i) provided for in the MetaTools Balance Sheet, or (ii) incurred
since the date of the MetaTools Balance Sheet in the ordinary course of
business consistent with past practices and immaterial in the aggregate.
(c) MetaTools has heretofore furnished to Fractal a complete and correct
copy of any amendments or modifications, which have not yet been filed with
the SEC but which are required to be filed, to agreements, documents or other
instruments which previously had been filed by MetaTools with the SEC pursuant
to the Securities Act or the Exchange Act.
3.7 Absence of Certain Changes or Events. Since the date of the MetaTools
Balance Sheet through the date of this Agreement, there has not been: (i) any
Material Adverse Effect on MetaTools, (ii) any material change by MetaTools in
its accounting methods, principles or practices, except as required by
concurrent changes in GAAP, or (iii) any material revaluation by MetaTools of
any of its assets, including, without limitation, writing down the value of
capitalized inventory or writing off notes or accounts receivable other than
in the ordinary course of business.
3.8 Tax Returns and Audits.
(a) MetaTools and each of its subsidiaries have timely filed all Returns
relating to Taxes required to be filed by MetaTools and each of its
subsidiaries, except such Returns which are not material to MetaTools, and
have paid all Taxes shown to be due on such Returns.
(b) Except as is not material to MetaTools, MetaTools and each of its
subsidiaries as of the Effective Time will have withheld with respect to its
employees all federal and state income taxes, FICA, FUTA and other Taxes
required to be withheld.
(c) Except as is not material to MetaTools, neither MetaTools nor any of its
subsidiaries has been delinquent in the payment of any Tax nor is there any
Tax deficiency outstanding, proposed or assessed against MetaTools or any of
its subsidiaries, nor has MetaTools or any of its subsidiaries executed any
waiver of any statute of limitations on or extending the period for the
assessment or collection of any Tax.
(d) Except as is not material to MetaTools, no audit or other examination of
any Return of MetaTools or any of its subsidiaries is presently in progress,
nor has MetaTools or any of its subsidiaries been notified of any request for
such an audit or other examination.
(e) Except as is not material to MetaTools, no adjustment relating to any
Returns filed by MetaTools or any of its subsidiaries has been proposed
formally or informally by any Tax authority to MetaTools or any of its
subsidiaries or any representative thereof.
(f) Except as is not material to MetaTools, neither MetaTools nor any of its
subsidiaries has any liability for unpaid Taxes which has not been accrued for
or reserved on the MetaTools Balance Sheet, whether asserted or unasserted,
contingent or otherwise, which is material to MetaTools.
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(g) There is no contract, agreement, plan or arrangement, including but not
limited to the provisions of this Agreement, covering any employee or former
employee of MetaTools or any of its subsidiaries that, individually or
collectively, could give rise to the payment of any amount that would not be
deductible pursuant to Sections 280G, 404 or 162(m) of the Code.
(h) Neither MetaTools nor any of its subsidiaries has filed any consent
agreement under Section 341(f) of the Code or agreed to have Section 341(f)(2)
of the Code apply to any disposition of a subsection (f) asset (as defined in
Section 341(f)(4) of the Code) owned by MetaTools.
(i) Neither MetaTools nor any of its subsidiaries is party to or has
obligations under any tax-sharing or allocation agreement or arrangement.
3.9 Title to Properties; Absence of Liens and Encumbrances.
(a) The MetaTools Schedules list the real property owned by MetaTools. The
MetaTools Schedules list all real property leases to which MetaTools is a
party and each amendment thereto. All such current leases are in full force
and effect, are valid and effective in accordance with their respective terms,
and there is not, under any of such leases, any existing default or event of
default (or event which with notice or lapse of time, or both, would
constitute a default) that would give rise to a claim in an amount greater
than $100,000.
(b) MetaTools has good and valid title to, or, in the case of leased
properties and assets, valid leasehold interests in, all of its tangible
properties and assets, real, personal and mixed, used or held for use in its
business, free and clear of any Liens, except as reflected in MetaTools
Financials or in the MetaTools Schedules and except for liens for taxes not
yet due and payable and such imperfections of title and encumbrances, if any,
which are not material in character, amount or extent, and which do not
materially detract from the value, or materially interfere with the present
use, of the property subject thereto or affected thereby.
3.10 Intellectual Property.
(a) MetaTools and its subsidiaries either own, or have a valid license with
respect to, all patents, copyrights, trademarks, trade secrets and other
intellectual property used in, by or necessary to the operation or conduct of
their respective businesses as presently conducted (such intellectual property
and the rights thereto are collectively referred to herein as the "METATOOLS
IP RIGHTS").
(b) The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not constitute a
material breach of any instrument or agreement governing any patent,
copyright, trademark, trade secret or other intellectual property rights
licensed by or to, MetaTools, will not cause the forfeiture or termination or
give rise to a right of forfeiture or termination of any MetaTools IP Rights
or materially impair the right of MetaTools, the Surviving Corporation or
Fractal in or to use, sell, enforce, license or otherwise exploit any
MetaTools IP Rights or portion thereof.
(c) Neither the operation of MetaTools' nor any of its subsidiaries'
respective business nor the manufacture, marketing, license, sale or intended
use of any product, service or technology currently licensed, manufactured,
created, distributed, authored, used, sold or under development by MetaTools
or any of its subsidiaries (i) violates in any material respect any license or
agreement between MetaTools or any of its subsidiaries and any third party or
(ii) infringes any patent, copyright, trademark, trade secret or other
intellectual property right of any other party; and there is no pending or, to
the knowledge of MetaTools, threatened claim or litigation contesting the
validity, ownership or right to use, sell, enforce, license or dispose of any
MetaTools IP Rights, nor has MetaTools received any written notice asserting
that any MetaTools IP Rights or the proposed use, sale, license or disposition
thereof conflicts or will conflict with the rights of any other party.
(d) MetaTools has taken reasonable and practicable steps designed to
safeguard and maintain the secrecy and confidentiality of, and its proprietary
rights in, all MetaTools IP Rights.
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3.11 Compliance; Permits; Restrictions.
(a) Neither MetaTools nor any of its subsidiaries is, in any material
respect, in conflict with, or in default or violation of (i) any law, rule,
regulation, order, judgment or decree applicable to MetaTools or any of its
subsidiaries or by which MetaTools or any of its subsidiaries or any of their
respective properties is bound or affected, or (ii) any material note, bond,
mortgage, indenture, contract, agreement, lease, license, permit, franchise or
other instrument or obligation to which MetaTools or any of its subsidiaries
is a party or by which MetaTools or any of its subsidiaries or its or any of
their respective properties is bound or affected. To the knowledge of
MetaTools, no investigation or review by any Governmental Entity is pending or
threatened against MetaTools or any of its subsidiaries, nor has any
Governmental Entity indicated an intention to conduct the same. There is no
material agreement, judgment, injunction, order or decree binding upon
MetaTools or any of its subsidiaries which has or could reasonably be expected
to have the effect of prohibiting or materially impairing any business
practice of MetaTools or any of its subsidiaries, any acquisition of material
property by MetaTools or any of its subsidiaries or the conduct of business by
MetaTools as currently conducted.
(b) MetaTools and its subsidiaries hold all permits, licenses, variances,
exemptions, orders and approvals from governmental authorities which are
material to the operation of the business of MetaTools (collectively, the
"METATOOLS PERMITS"). MetaTools and its subsidiaries are in compliance in all
material respects with the terms of the MetaTools Permits.
3.12 Litigation. There is no action, suit, proceeding, claim, arbitration or
investigation pending, or as to which MetaTools or any of its subsidiaries has
received any notice of assertion nor, to MetaTools' knowledge, is there a
threatened action, suit, proceeding, claim, arbitration or investigation
against MetaTools or any of its subsidiaries which reasonably would be likely
to be material to MetaTools. To the knowledge of MetaTools, no Governmental
Entity has at any time challenged or questioned in writing the legal right of
MetaTools to manufacture, offer or sell any of its products in the present
manner or style thereof.
3.13 Brokers' and Finders' Fees. Except for fees payable to Alex. Brown &
Sons pursuant to an engagement letter dated February 3, 1997, a copy of which
has been provided to Fractal, MetaTools has not incurred, nor will it incur,
directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with this Agreement
or any transaction contemplated hereby.
3.14 Employee Benefit Plans.
(a) With respect to each material 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
MetaTools or any trade or business which is under common control with
MetaTools within the meaning of Section 414 of the Code (the "METATOOLS
EMPLOYEE PLANS"), MetaTools has made available to Fractal a true and complete
copy of, to the extent applicable, (i) such MetaTools Employee Plan, (ii) the
most recent annual report (Form 5500), (iii) each trust agreement related to
such MetaTools Employee Plan, (iv) the most recent summary plan description
for each MetaTools Employee Plan for which such a description is required, (v)
the most recent actuarial report relating to any MetaTools Employee Plan
subject to Title IV of ERISA and (vi) the most recent IRS determination letter
issued with respect to any MetaTools Employee Plan.
(b) Each MetaTools Employee Plan which is intended to be qualified under
Section 401(a) of the Code has received a favorable determination from the IRS
covering the provisions of the Tax Reform Act of 1986 stating that such
MetaTools Employee Plan is so qualified and nothing has occurred since the
date of such letter that could reasonably be expected to affect the qualified
status of such plan. Each MetaTools Employee Plan has been operated in all
material respects in accordance with its terms and the requirements of
applicable law. Neither MetaTools nor any ERISA Affiliate of MetaTools has
incurred or is reasonably expected to incur any material liability under Title
IV of ERISA in connection with any MetaTools Employee Plan.
3.15 Employees; Labor Matters. To MetaTools' knowledge after reasonable
inquiry, no employee of MetaTools (i) is in violation of any term of any
employment contract, patent disclosure agreement, non-
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competition agreement, or any restrictive covenant to a former employer
relating to the right of any such employee to be employed by MetaTools because
of the nature of the business conducted or presently proposed to be conducted
by MetaTools or to the use of trade secrets or proprietary information of
others and (ii) has given notice to MetaTools, nor is MetaTools otherwise
aware, that any employee intends to terminate his or her employment with
MetaTools except for terminations of a nature and number that are consistent
with MetaTools' prior experience. To MetaTools' knowledge, there are no
activities or proceedings of any labor union to organize any employees of
MetaTools or any of its subsidiaries and there are no strikes, or material
slowdowns, work stoppages or lockouts, or threats thereof by or with respect
to any employees of MetaTools or any of its subsidiaries. MetaTools and its
subsidiaries are and have been in compliance in all material respects with all
applicable laws regarding employment practices, terms and conditions of
employment, and wages and hours (including, without limitation, ERISA, WARN or
any similar state or local law).
3.16 Environmental Matters.
(a) Hazardous Material. Except as reasonably would not be likely to result
in a material liability to MetaTools, no underground storage tanks and no
amount of any Hazardous Material, but excluding office and janitorial
supplies, are present, as a result of the actions of MetaTools or any of its
subsidiaries or any affiliate of MetaTools, or, to MetaTools' knowledge, as a
result of any actions of any third party or otherwise, in, on or under any
property, including the land and the improvements, ground water and surface
water thereof, that MetaTools or any of its subsidiaries has at any time
owned, operated, occupied or leased.
(b) Hazardous Materials Activities. Except as reasonably would not be likely
to result in a material liability to MetaTools, neither MetaTools nor any of
its subsidiaries has transported, stored, used, manufactured, disposed of,
released or exposed its employees or others to Hazardous Materials in
violation of any law in effect on or before the Closing Date, nor has
MetaTools or any of its subsidiaries engaged in any Hazardous Materials
Activities in violation of any rule, regulation, treaty or statute promulgated
by any Governmental Entity in effect prior to or as of the date hereof to
prohibit, regulate or control Hazardous Materials or any Hazardous Material
Activity.
(c) Permits. MetaTools and its subsidiaries currently hold all environmental
approvals, permits, licenses, clearances and consents (the "METATOOLS
ENVIRONMENTAL PERMITS") necessary for the conduct of MetaTools' and its
subsidiaries' Hazardous Material Activities and other businesses of MetaTools
and its subsidiaries as such activities and businesses are currently being
conducted.
(d) Environmental Liabilities. No material action, proceeding, revocation
proceeding, amendment procedure, writ, injunction or claim is pending, or to
MetaTools' knowledge, threatened concerning any MetaTools Environmental
Permit, Hazardous Material or any Hazardous Materials Activity of MetaTools or
any of its subsidiaries. MetaTools is not aware of any fact or circumstance
which could involve MetaTools or any of its subsidiaries in any material
environmental litigation or impose upon MetaTools any material environmental
liability.
3.17 Agreements, Contracts and Commitments. Except as set forth in the
MetaTools Schedules, neither MetaTools nor any of its subsidiaries is a party
to or is bound by:
(a) any employment or consulting agreement, contract or commitment with
any officer or director level employee or member of MetaTools' Board of
Directors, other than those that are terminable by MetaTools or any of its
subsidiaries on no more than thirty days notice without liability or
financial obligation, except to the extent general principles of wrongful
termination law may limit MetaTools' or any of its subsidiaries' ability to
terminate employees at will;
(b) any agreement or plan, including, without limitation, any stock
option plan, stock appreciation right plan or stock purchase plan, any of
the benefits of which will be increased, or the vesting of benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which
will be calculated on the basis of any of the transactions contemplated by
this Agreement;
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(c) any agreement of indemnification or guaranty not entered into in the
ordinary course of business other than indemnification agreements between
MetaTools or any of its subsidiaries and any of its officers or directors;
(d) any agreement, contract or commitment containing any covenant
limiting the freedom of MetaTools or any of its subsidiaries to engage in
any line of business or compete with any person or granting any exclusive
distribution rights;
(e) any agreement, contract or commitment currently in force relating to
the disposition or acquisition of assets not in the ordinary course of
business or any ownership interest in any corporation, partnership, joint
venture or other business enterprise; or
(f) any material joint marketing or development agreement.
Neither MetaTools nor any of its subsidiaries, nor to MetaTools' knowledge
any other party to a MetaTools Contract (as defined below), has breached,
violated or defaulted under, or received notice that it has breached violated
or defaulted under, any of the material terms or conditions of any of the
agreements, contracts or commitments to which MetaTools or any of its
subsidiaries is a party or by which it is bound of the type described in
clauses (a) through (l) above (any such agreement, contract or commitment, a
"METATOOLS CONTRACT") in such a manner as would permit any other party to
cancel or terminate any such MetaTools Contract, or would permit any other
party to seek damages, which would be reasonably likely to be material to
MetaTools.
3.18 Pooling of Interests. To the knowledge of MetaTools, based on
consultation with its independent accountants, neither MetaTools nor any of
its directors, officers, affiliates or stockholders has taken any action which
would preclude MetaTools' ability to account for the Merger as a pooling of
interests.
3.19 Change of Control Payments. The MetaTools Schedules set forth each plan
or agreement pursuant to which any material amounts may become payable
(whether currently or in the future) to current or former officers and
directors of MetaTools as a result of or in connection with the Merger.
3.20 Statements; Proxy Statement/Prospectus. The information supplied by
MetaTools for inclusion in the Registration Statement shall not at the time
the Registration Statement is filed with the SEC and at the time it becomes
effective under the Securities Act, 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 not misleading. The
information supplied by MetaTools for inclusion in the Proxy Statement shall
not, on the date the Proxy Statement is first mailed to MetaTools'
stockholders and Fractal's shareholders, at the time of the MetaTools
Stockholders' Meeting or the Fractal Shareholders' Meeting 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 false or misleading; or omit to state any material fact
necessary to correct any statement in any earlier communication with respect
to the solicitation of proxies for the MetaTools Stockholders' Meeting or the
Fractal Shareholders' Meeting which has become false or misleading. The Proxy
Statement will comply as to form in all material respects with the provisions
of the Exchange Act and the rules and regulations thereunder. If at any time
prior to the Effective Time, any event relating to MetaTools or any of its
affiliates, officers or directors should be discovered by MetaTools which
should be set forth in an amendment to the Registration Statement or a
supplement to the Proxy Statement, MetaTools shall promptly inform Fractal.
Notwithstanding the foregoing, MetaTools makes no representation or warranty
with respect to any information supplied by Fractal which is contained in any
of the foregoing documents.
3.21 Board Approval. The Board of Directors of MetaTools has, as of the date
of this Agreement, determined (i) that the Merger is fair to, and in the best
interests of MetaTools and its stockholders, and (ii) to recommend that the
stockholders of MetaTools approve (y) the amendment of MetaTools' Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of MetaTools Common
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Stock by virtue of the Merger and (z) the issuance of shares of MetaTools
Common Stock by virtue of the Merger.
3.22 Fairness Opinion. MetaTools' Board of Directors has received written
opinions from Alex. Brown & Sons Incorporated, dated as of the date hereof, to
the effect is Board of Directors that as of the date hereof, the Exchange
Ratio is fair to MetaTools from a financial point of view and has delivered to
Fractal a copy of such opinions.
ARTICLE IV
Conduct Prior to the Effective Time
4.1 Conduct of Business. During the period from the date of this Agreement
and continuing until the earlier of the termination of this Agreement pursuant
to its terms or the Effective Time, Fractal (which for the purposes of this
Article 4 shall include Fractal and each of its subsidiaries) and MetaTools
(which for the purposes of this Article 4 shall include MetaTools and each of
its subsidiaries) agree, except (i) in the case of Fractal as provided in
Article 4 of the Fractal Schedules and in the case of MetaTools as provided in
Article 4 of the MetaTools Schedules, or (ii) to the extent that the other of
them shall otherwise consent in writing, to carry on its business diligently
and in accordance with good commercial practice and to carry on its business
in the usual, regular and ordinary course, in substantially the same manner as
heretofore conducted and in compliance with all applicable laws and
regulations, to pay its debts and taxes when due subject to good faith
disputes over such debts or taxes, to pay or perform other material
obligations when due, and use its commercially reasonable efforts consistent
with past practices and policies to preserve intact its present business
organization, keep available the services of its present officers and
employees and preserve its relationships with customers, suppliers,
distributors, licensors, licensees, and others with which it has business
dealings. In addition, each of Fractal and MetaTools will promptly notify the
other of any material event involving its business or operations.
In addition, except as permitted by the terms of this Agreement or the Stock
Option Agreements, and except in the case of Fractal as provided in Article 4
of the Fractal Schedules, and except in the case of MetaTools as provided in
Article 4 of the MetaTools Schedules, without the prior written consent of the
other, neither Fractal nor MetaTools shall do any of the following, and
neither Fractal nor MetaTools shall permit its subsidiaries to do any of the
following:
(a) Waive any stock repurchase rights, accelerate, amend or change the
period of exercisability of options or restricted stock, or reprice options
granted under any employee, consultant or director stock plans or authorize
cash payments in exchange for any options granted under any of such plans;
(b) Grant any severance or termination pay to any officer or employee
except payments in amounts consistent with policies and past practices or
pursuant to written agreements outstanding, or policies existing, on the
date hereof and as previously disclosed in writing to the other, or adopt
any new severance plan;
(c) Transfer or license to any person or entity or otherwise extend,
amend or modify in any material respect any rights to the Fractal IP Rights
or the MetaTools IP Rights, as the case may be, or enter into grants to
future patent rights, other than in the ordinary course of business;
(d) Declare or pay any dividends on or make any other distributions
(whether in cash, stock or property) in respect of any capital stock or
split, combine or reclassify any capital stock or issue or authorize the
issuance of any other securities in respect of, in lieu of or in
substitution for any capital stock.
(e) Repurchase or otherwise acquire, directly or indirectly, any shares
of capital stock except pursuant to rights of repurchase of any such shares
under any employee, consultant or director stock plan existing on the date
hereof.
(f) Issue, deliver, sell, authorize or propose the issuance, delivery or
sale of, any shares of capital stock or any securities convertible into
shares of capital stock, or subscriptions, rights, warrants or options to
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acquire any shares of capital stock or any securities convertible into
shares of capital stock, or enter into other agreements or commitments of
any character obligating it to issue any such shares or convertible
securities, other than (i) the issuance of shares of Fractal Common Stock
or MetaTools Common Stock, as the case may be, pursuant to the exercise of
stock options therefor outstanding as of the date of this Agreement, (ii)
options to purchase shares of Fractal Common Stock or MetaTools Common
Stock, as the case may be, to be granted at fair market value in the
ordinary course of business, consistent with past practice and in
accordance with stock option plans existing on the date hereof, (iii)
shares of Fractal Common Stock or MetaTools Common Stock, as the case may
be, issuable upon the exercise of the options referred to in clause (ii),
(iv) shares of Fractal Common Stock or MetaTools Common Stock, as the case
may be, issuable to participants in the MetaTools Employee Stock Purchase
Plan consistent with past practice and the terms thereof and (v) shares of
the Fractal Common Stock or MetaTools Common Stock, as the case may be,
issuable pursuant to the Option Agreements;
(g) Cause, permit or propose any amendments to any charter document or
Bylaw (or similar governing instruments of any subsidiaries);
(h) Acquire or agree to acquire by merging or consolidating with, or by
purchasing any equity interest in or a material portion of the assets of,
or by any other manner, any business or any corporation, partnership
interest, association or other business organization or division thereof,
or otherwise acquire or agree to acquire any assets which are material,
individually or in the aggregate, to the business of Fractal or MetaTools,
as the case may be, or enter into any material joint ventures, strategic
partnerships or alliances;
(i) Sell, lease, license, encumber or otherwise dispose of any properties
or assets which are material, individually or in the aggregate, to the
business of Fractal or MetaTools, as the case may be, except in the
ordinary course of business consistent with past practice;
(j) Incur any indebtedness for borrowed money (other than ordinary course
trade payables or pursuant to existing credit facilities in the ordinary
course of business) or guarantee any such indebtedness or issue or sell any
debt securities or warrants or rights to acquire debt securities of Fractal
or MetaTools, as the case may be, or guarantee any debt securities of
others;
(k) Adopt or amend any employee benefit or employee stock purchase or
employee option plan, or enter into any employment contract, pay any
special bonus or special remuneration to any director or employee, or
increase the salaries or wage rates of its officers or employees other than
in the ordinary course of business, consistent with past practice, or
change in any material respect any management policies or procedures;
provided, however that this Section 4.1(k) will not prohibit MetaTools from
amending its 401(k) plan to include contributions from MetaTools;
(l) Pay, discharge or satisfy any claim, liability or obligation
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business;
(m) Make any grant of exclusive rights to any third party, other than in
the ordinary course of business;
(n) Take any action that would be reasonably likely to interfere with
MetaTools' ability to account for the Merger as a pooling of interests; or
(o) Agree in writing or otherwise to take any of the actions described in
Article 4 (a) through (n) above.
ARTICLE V
Additional Agreements
5.1 Proxy Statement/Prospectus; Registration Statement; Other Filings; Board
Recommendations.
(a) As promptly as practicable after the execution of this Agreement,
Fractal and MetaTools will prepare, and file with the SEC, the Proxy Statement
and MetaTools will prepare and file with the SEC the Registration Statement in
which the Proxy Statement will be included as a prospectus. Each of Fractal
and MetaTools will
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respond to any comments of the SEC, will use its respective reasonable best
efforts to have the Registration Statement declared effective under the
Securities Act as promptly as practicable after such filing and will cause the
Proxy Statement to be mailed to its respective stockholders or shareholders,
as the case may be, at the earliest practicable time. As promptly as
practicable after the date of this Agreement, Fractal and MetaTools will
prepare and file any other filings required under the Exchange Act, the
Securities Act or any other Federal, foreign or Blue Sky laws relating to the
Merger and the transactions contemplated by this Agreement (the "OTHER
FILINGS"). Each of Fractal and MetaTools will notify the other promptly upon
the receipt of any comments from the SEC or its staff and of any request by
the SEC or its staff or any other government officials for amendments or
supplements to the Registration Statement, the Proxy Statement or any Other
Filing or for additional information and will supply the other with copies of
all correspondence between such party or any of its representatives, on the
one hand, and the SEC, or its staff or any other government officials, on the
other hand, with respect to the Registration Statement, the Proxy Statement,
the Merger or any Other Filing. The Proxy Statement, the Registration
Statement and the Other Filings will comply in all material respects with all
applicable requirements of law and the rules and regulations promulgated
thereunder. Whenever any event occurs which is required to be set forth in an
amendment or supplement to the Proxy Statement, the Registration Statement or
any Other Filing, Fractal or MetaTools, as the case may be, will promptly
inform the other of such occurrence and cooperate in filing with the SEC or
its staff or any other government officials, and/or mailing to shareholders of
Fractal or stockholders of MetaTools, such amendment or supplement.
(b) The Proxy Statement will include the recommendation of the Board of
Directors of Fractal in favor of adoption and approval of this Agreement and
approval of the Merger (except that the Board of Directors of Fractal may
withdraw, modify or refrain from making such recommendation to the extent that
the Board determines, in good faith, after consultation with outside legal
counsel, that compliance with the Board's fiduciary duties under applicable
law would require it to do so). In addition, the Proxy Statement will include
the recommendations of the Board of Directors of MetaTools in favor of (x) the
amendment of MetaTools' Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of MetaTools
Common Stock by virtue of the Merger and (y) the issuance of shares of
MetaTools Common Stock by virtue of the Merger.
5.2 Meetings of Shareholders and Stockholders. Promptly after the date
hereof, Fractal will take all action necessary in accordance with California
Law and its Articles of Incorporation and Bylaws to convene the Fractal
Shareholders' Meeting to be held as promptly as practicable, and in any event
(to the extent permissible under applicable law) within 45 days after the
declaration of effectiveness of the Registration Statement, for the purpose of
voting upon this Agreement. Fractal will consult with MetaTools and use its
reasonable best efforts to hold the Fractal Shareholders' Meeting on the same
day as the MetaTools Stockholders' Meeting. Promptly after the date hereof,
MetaTools will take all action necessary in accordance with the Delaware
General Corporation Law and its Certificate of Incorporation and Bylaws to
convene the MetaTools Stockholders' Meeting to be held as promptly as
practicable, and in any event (to the extent permissible under applicable law)
within 45 days after the declaration of effectiveness of the Registration
Statement, for the purpose of (i) amending its Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
MetaTools Common Stock by virtue of the Merger and (ii) voting upon the
issuance of shares of MetaTools Common Stock by virtue of the Merger.
MetaTools will consult with Fractal and will use its reasonable best efforts
to hold the MetaTools Stockholders' Meeting on the same day as the Fractal
Shareholders' Meeting. For so long as the Board of Directors of Fractal
continues to make the recommendation set forth in Section 5.1, Fractal will
use its reasonable best efforts to solicit from its shareholders proxies in
favor of the adoption and approval of this Agreement and the approval of the
Merger and will take all other action necessary or advisable to secure the
vote or consent of its shareholders required by the rules of the National
Association of Securities Dealers, Inc. or California Law to obtain such
approvals. For so long as the Board of Directors of MetaTools continues to
make the recommendations set forth in Section 5.1, MetaTools will use its best
efforts to solicit from its stockholders proxies in favor of (i) the amendment
of MetaTools' Certificate of Incorporation to increase its authorized share
capital to allow for the issuance of shares of MetaTools Common Stock by
virtue of the Merger and (ii) the issuance of shares of MetaTools Common Stock
by virtue of the Merger.
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5.3 Confidentiality; Access to Information.
(a) The parties acknowledge that Fractal and MetaTools have previously
executed a Mutual Nondisclosure Agreement, dated November 26, 1996, and a
Confidentiality Agreement, dated February 9, 1997 (collectively the
"CONFIDENTIALITY AGREEMENT"), which Confidentiality Agreement will continue in
full force and effect in accordance with its terms.
(b) Access to Information. Each party will afford the other party and its
accountants, counsel, and other representatives access during normal business
hours to the properties, books, records and personnel of the other party
during the period prior to the Effective Time to obtain all information
concerning the business, including the status of product development efforts,
properties, results of operations and personnel of such party, as the other
party may reasonably request. No information or knowledge obtained in any
investigation pursuant to this Section 5.3 will affect or be deemed to modify
any representation or warranty contained herein or the conditions to the
obligations of the parties to consummate the Merger.
5.4 No Solicitation.
(a) Restrictions on MetaTools.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms,
MetaTools and its subsidiaries shall not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, (i) solicit or knowingly
encourage submission of, any proposals or offers by any person, entity or
group (other than Fractal and its affiliates, agents and representatives), or
(ii) participate in any discussions or negotiations with, or disclose any non-
public information concerning MetaTools or any of its subsidiaries to, or
afford any access to the properties, books or records of MetaTools or any of
its subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
Fractal and its affiliates, agents and representatives), in connection with
any Acquisition Proposal with respect to MetaTools. For the purposes of this
Agreement, an "ACQUISITION PROPOSAL" with respect to an entity means any
proposal or offer relating to (i) any merger, consolidation, sale of
substantial assets or similar transactions involving the entity or any
subsidiaries of the entity (other than sales of assets or inventory in the
ordinary course of business or as permitted under the terms of this
Agreement), (ii) sale of 15% or more of the outstanding shares of capital
stock of the entity (including without limitation by way of a tender offer or
an exchange offer), (iii) the acquisition by any person of beneficial
ownership or a right to acquire beneficial ownership of, or the formation of
any "group" (as defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) which beneficially owns, or has the right to
acquire beneficial ownership of, 15% or more of the then outstanding shares of
capital stock of the entity (except for acquisitions for passive investment
purposes only in circumstances where the person or group qualifies for and
files a Schedule 13G with respect thereto); or (iv) any public announcement of
a proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing. MetaTools will immediately cease any and all
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any of the foregoing. MetaTools will (i) notify
Fractal as promptly as practicable if any inquiry or proposal is made or any
information or access is requested in writing in connection with an
Acquisition Proposal or potential Acquisition Proposal and (ii) as promptly as
practicable notify Fractal of the significant terms and conditions of any such
Acquisition Proposal. In addition, subject to the other provisions of this
Section 5.4(a), from and after the date of this Agreement until the earlier of
the Effective Time and termination of this Agreement pursuant to its terms,
MetaTools and its subsidiaries will not, and will instruct their respective
directors, officers, employees, representatives, investment bankers, agents
and affiliates not to, directly or indirectly, make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal made by any person, entity or group (other than Fractal); provided,
however, that nothing herein shall prohibit MetaTools' Board of Directors from
taking and disclosing to MetaTools' stockholders a position with respect to a
tender offer pursuant to Rules 14d-9 and 14e-2 promulgated under the Exchange
Act.
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(ii) Notwithstanding the provisions of paragraph (a)(i) above, prior to the
Effective Time, MetaTools may, to the extent the Board of Directors of
MetaTools determines, in good faith, after consultation with outside legal
counsel, that the Board's fiduciary duties under applicable law require it to
do so, participate in discussions or negotiations with, and, subject to the
requirements of paragraph (a)(iii), below, furnish information to any person,
entity or group after such person, entity or group has delivered to MetaTools
in writing, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of MetaTools in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the stockholders of MetaTools (a
"METATOOLS SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (a)(i) above, in connection with a possible Acquisition Proposal,
MetaTools may refer any third party to this Section 5.4(a) or make a copy of
this Section 5.4(a) available to a third party. In the event MetaTools
receives a MetaTools Superior Proposal, nothing contained in this Agreement
(but subject to the terms hereof) will prevent the Board of Directors of
MetaTools from recommending such MetaTools Superior Proposal to MetaTools'
stockholders, if the Board determines, in good faith, after consultation with
outside legal counsel, that such action is required by its fiduciary duties
under applicable law; in such case, the Board of Directors of MetaTools may
withdraw, modify or refrain from making its recommendations set forth in
Section 5.1(b), and, to the extent it does so, MetaTools may refrain from
soliciting proxies and taking such other action necessary to secure the vote
of its stockholders as may be required by Section 5.2; provided, however, that
MetaTools shall not recommend to its stockholders a MetaTools Superior
Proposal for a period of not less than 48 hours after Fractal's receipt of a
copy of such MetaTools Superior Proposal (or a description of the significant
terms and conditions thereof, if not in writing); and provided further, that
nothing contained in this Section shall limit MetaTools' obligation to hold
and convene the MetaTools Stockholders Meeting (regardless of whether the
recommendations of the Board of Directors of MetaTools shall have been
withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary herein, MetaTools will not
provide any non-public information to a third party unless: (x) MetaTools
provides such non-public information pursuant to a nondisclosure agreement
with terms regarding the protection of confidential information at least as
restrictive as such terms in the Confidentiality Agreement; and (y) such non-
public information has been previously delivered to Fractal.
(b) Restrictions on Fractal.
(i) From and after the date of this Agreement until the earlier of the
Effective Time or termination of this Agreement pursuant to its terms, Fractal
and its subsidiaries will not, and will instruct their respective directors,
officers, employees, representatives, investment bankers, agents and
affiliates not to, directly or indirectly, (i) solicit or knowingly encourage
submission of, any proposals or offers by any person, entity or group (other
than MetaTools and its affiliates, agents and representatives), or (ii)
participate in any discussions or negotiations with, or disclose any non-
public information concerning Fractal or any of its subsidiaries to, or afford
any access to the properties, books or records of Fractal or any of its
subsidiaries to, or otherwise assist or facilitate, or enter into any
agreement or understanding with, any person, entity or group (other than
MetaTools and its affiliates, agents and representatives), in connection with
any Acquisition Proposal with respect to Fractal. Fractal will immediately
cease any and all existing activities, discussions or negotiations with any
parties conducted heretofore with respect to any of the foregoing. Fractal
will (i) notify MetaTools as promptly as practicable if any inquiry or
proposal is made or any information or access is requested in writing in
connection with an Acquisition Proposal or potential Acquisition Proposal and
(ii) as promptly as practicable notify MetaTools of the significant terms and
conditions of any such Acquisition Proposal. In addition, subject to the other
provisions of this Section 5.4(b), from and after the date of this Agreement
until the earlier of the Effective Time and termination of this Agreement
pursuant to its terms, Fractal and its subsidiaries will not, and will
instruct their respective directors, officers, employees, representatives,
investment bankers, agents and affiliates not to, directly or indirectly, make
or authorize any public statement, recommendation or solicitation in support
of any Acquisition Proposal made by any person, entity or group (other than
MetaTools); provided, however, that nothing herein shall prohibit Fractal's
Board of Directors from taking and disclosing to Fractal's shareholders a
position with respect to a tender offer pursuant to Rules 14d-9 and 14e-2
promulgated under the Exchange Act.
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(ii) Notwithstanding the provisions of paragraph (b)(i) above, prior to the
Effective Time, Fractal may, to the extent the Board of Directors of Fractal
determines, in good faith, after consultation with outside legal counsel, that
the Board's fiduciary duties under applicable law require it to do so,
participate in discussions or negotiations with, and, subject to the
requirements of paragraph (b)(iii), below, furnish information to any person,
entity or group after such person, entity or group has delivered to Fractal in
writing, an unsolicited bona fide Acquisition Proposal which the Board of
Directors of Fractal in its good faith reasonable judgment determines, after
consultation with its independent financial advisors, would result in a
transaction more favorable than the Merger to the shareholders of Fractal (a
"FRACTAL SUPERIOR PROPOSAL"). In addition, notwithstanding the provisions of
paragraph (b)(i) above, in connection with a possible Acquisition Proposal,
Fractal may refer any third party to this Section 5.4(b) or make a copy of
this Section 5.4(b) available to a third party. In the event Fractal receives
a Fractal Superior Proposal, nothing contained in this Agreement (but subject
to the terms hereof) will prevent the Board of Directors of Fractal from
recommending such Fractal Superior Proposal to its stockholders, if the Board
determines, in good faith, after consultation with outside legal counsel, that
such action is required by its fiduciary duties under applicable law; in such
case, the Board of Directors of Fractal may withdraw, modify or refrain from
making its recommendation set forth in Section 5.1(b), and, to the extent it
does so, Fractal may refrain from soliciting proxies and taking such other
action necessary to secure the vote of its shareholders as may be required by
Section 5.2; provided, however, that Fractal shall not recommend to its
shareholders a Fractal Superior Proposal for a period of not less than 48
hours after MetaTools' receipt of a copy of such Fractal Superior Proposal (or
a description of the significant terms and conditions thereof, if not in
writing); and provided further, that nothing contained in this Section shall
limit Fractal's obligation to hold and convene the Fractal Shareholders
Meeting (regardless of whether the recommendation of the Board of Directors of
Fractal shall have been withdrawn, modified or not yet made).
(iii) Notwithstanding anything to the contrary in paragraph (b), Fractal
will not provide any non-public information to a third party unless: (x)
Fractal provides such non-public information pursuant to a nondisclosure
agreement with terms regarding the protection of confidential information at
least as restrictive as such terms in the Confidentiality Agreement; and (y)
such non-public information has been previously delivered to MetaTools.
5.5 Public Disclosure. MetaTools and Fractal will consult with each other,
and to the extent practicable, agree, before issuing any press release or
otherwise making any public statement with respect to the Merger, this
Agreement or an Acquisition Proposal and will not issue any such press release
or make any such public statement prior to such consultation, except as may be
required by law or any listing agreement with a national securities exchange
or the Nasdaq Stock Market. The parties have agreed to the text of the joint
press release announcing the signing of this Agreement.
5.6 Legal Requirements. Each of MetaTools, Merger Sub and Fractal will take
all reasonable actions necessary or desirable to comply promptly with all
legal requirements which may be imposed on them with respect to the
consummation of the transactions contemplated by this Agreement (including
furnishing all information required in connection with approvals by or filings
with any Governmental Entity, and prompt resolution of any litigation prompted
hereby) and will promptly cooperate with and furnish information to any party
hereto necessary in connection with any such filings with or investigations by
any Governmental Entity, and any other such requirements imposed upon any of
them or their respective subsidiaries in connection with the consummation of
the transactions contemplated by this Agreement. MetaTools will use its
commercially reasonable efforts to take such steps as may be necessary to
comply with the securities and blue sky laws of all jurisdictions which are
applicable to the issuance of MetaTools Common Stock pursuant hereto. Fractal
will use its commercially reasonable efforts to assist MetaTools as may be
necessary to comply with the securities and blue sky laws of all jurisdictions
which are applicable in connection with the issuance of MetaTools Common Stock
pursuant hereto.
5.7 Third Party Consents. As soon as practicable following the date hereof,
MetaTools and Fractal will each use its commercially reasonable efforts to
obtain all material consents, waivers and approvals under any of
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its or its subsidiaries' agreements, contracts, licenses or leases required to
be obtained in connection with the consummation of the transactions
contemplated hereby.
5.8 Notification of Certain Matters. MetaTools and Merger Sub will give
prompt notice to Fractal, and Fractal will give prompt notice to MetaTools, of
the occurrence, or failure to occur, of any event, which occurrence or failure
to occur would be reasonably likely to cause (a) any representation or
warranty contained in this Agreement and made by it to be untrue or inaccurate
in any material respect at any time from the date of this Agreement to the
Effective Time such that the conditions set forth in Section 6.2(a) or 6.3(a),
as the case may be, would not be satisfied as a result thereof or (b) any
material failure of MetaTools and Merger Sub or Fractal, as the case may be,
or of any officer, director, employee or agent thereof, to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it under this Agreement. Notwithstanding the above, the delivery of any
notice pursuant to this section will not limit or otherwise affect the
remedies available hereunder to the party receiving such notice.
5.9 Best Efforts and Further Assurances. Subject to the respective rights
and obligations of MetaTools and Fractal under this Agreement, each of the
parties to this Agreement will use its reasonable best efforts to effectuate
the Merger and the other transactions contemplated hereby and to fulfill and
cause to be fulfilled the conditions to closing under this Agreement; provided
that neither MetaTools nor Fractal nor any subsidiary or affiliate thereof
will be required to agree to any divestiture by itself or any of its
affiliates of shares of capital stock or of any business, assets or property,
or the imposition of any material limitation on the ability of any of them to
conduct their businesses or to own or exercise control of such assets,
properties and stock. Subject to the foregoing, each party hereto, at the
reasonable request of another party hereto, will execute and deliver such
other instruments and do and perform such other acts and things as may be
necessary or desirable for effecting completely the consummation of the
transactions contemplated hereby.
5.10 Stock Options and Employee Benefits.
(a) At the Effective Time, each outstanding option to purchase shares of
Fractal Common Stock (each a "FRACTAL STOCK OPTION") under the Fractal Stock
Option Plans, whether or not exercisable, will be assumed by MetaTools. Each
Fractal Stock Option so assumed by MetaTools under this Agreement will
continue to have, and be subject to, the same terms and conditions set forth
in the applicable Fractal Stock Option Plan immediately prior to the Effective
Time (including, without limitation, any repurchase rights), except that (i)
each Fractal Stock Option will be exercisable (or will become exercisable in
accordance with its terms) for that number of whole shares of MetaTools Common
Stock equal to the product of the number of shares of Fractal Common Stock
that were issuable upon exercise of such Fractal Stock Option immediately
prior to the Effective Time multiplied by the Exchange Ratio, rounded down to
the nearest whole number of shares of MetaTools Common Stock, and (ii) the per
share exercise price for the shares of MetaTools Common Stock issuable upon
exercise of such assumed Fractal Stock Option will be equal to the quotient
determined by dividing the exercise price per share of Fractal Common Stock at
which such Fractal Stock Option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole cent.
After the Effective Time, MetaTools will issue to each holder of an
outstanding Fractal Stock Option a notice describing the foregoing assumption
of such Fractal Stock Option by MetaTools.
(b) It is intended that Fractal Stock Options assumed by MetaTools shall
qualify following the Effective Time as incentive stock options as defined in
Section 422 of the Code to the extent Fractal Stock Options qualified as
incentive stock options immediately prior to the Effective Time and the
provisions of this Section 5.10 shall be applied consistent with such intent.
(c) MetaTools will reserve sufficient shares of MetaTools Common Stock for
issuance under Section 5.10(a) and under Section 1.6(c) hereof.
(d) Employees and Employee Benefits; Location of Facilities.
(i) Employees and Employee Benefits. From and after the Effective Time,
MetaTools shall grant all employees of Fractal and any subsidiaries of Fractal
credit for all service (to the same extent as service with
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MetaTools or any subsidiary of MetaTools is taken into account with respect to
similarly situated employees of MetaTools and the subsidiaries of MetaTools)
with Fractal and any subsidiary of Fractal and their respective predecessors
prior to the Effective Time for all purposes as if such service with Fractal
or any subsidiary of Fractal was service with MetaTools or any subsidiary of
MetaTools (provided, however, that no such past service credit shall be
granted to the extent it would result in duplicative accrual of benefits for
the same period of service), and, with respect to any medical or dental
benefit plan, MetaTools shall waive any pre-existing condition exclusions and
actively-at-work requirements (provided, however, that no such waiver shall
apply to a pre- existing condition of any employee of Fractal or any
subsidiary of Fractal who was, as of the Effective Time, excluded from
participation in a plan by virtue of such pre-existing condition) and provide
that any covered expenses incurred on or before the Effective Time by an
employee or an employee's covered dependent shall be taken into account for
purposes of satisfying applicable deductible, coinsurance and maximum out-of-
pocket provisions after the Effective Time to the same extent as such expenses
are taken into account for the benefit of similarly situate employees of
MetaTools and subsidiaries of MetaTools. MetaTools shall provide or shall
cause Fractal and each subsidiary of Fractal to provide benefits to any
employee of Fractal and each subsidiary of Fractal which are not less
favorable in the aggregate than the benefits provided to similarly situated
employees of MetaTools and subsidiaries of MetaTools.
(ii) Location of Facilities. It is the current intention of the parties that
following the Closing, operations of Fractal and MetaTools shall remain in
substantially the same geographic locations as such operations are located
prior to the Closing.
(iii) Fractal 401(k). The parties will agree as to the treatment of the
Fractal 401(k) as a result of the Merger. It is understood that any treatment
of the Fractal 401(k) Plan will not preclude MetaTools' ability to account for
the Merger as a pooling of interests and will not treat any participant in the
Fractal 401(k) in a manner disproportionate to similarly situated employees of
MetaTools.
5.11 Form S-8. MetaTools agrees to file a registration statement on Form S-8
for the shares of MetaTools Common Stock issuable with respect to assumed
Fractal Stock Options no later than the next business day after the Closing
Date.
5.12 Indemnification and Insurance.
(a) From and after the Effective Time, MetaTools will fulfill and honor and
will cause the Surviving Corporation to fulfill and honor in all respects the
obligations of Fractal pursuant to any indemnification agreements between
Fractal and its directors and officers existing prior to the date hereof. From
and after the Effective Time, such obligations shall be the joint and several
obligations of MetaTools and the Surviving Corporation and, by executing this
Agreement, MetaTools hereby assumes such obligations. The Articles of
Incorporation and By-laws of the Surviving Corporation will contain the
provisions with respect to indemnification set forth in the Articles of
Incorporation and Bylaws of Fractal, which provisions will not be amended,
repealed or otherwise modified from the Effective Time in any manner that
would adversely affect the rights thereunder of individuals who, immediately
prior to the Effective Time, were directors, officers, employees or agents of
Fractal, unless such modification is required by law.
(b) For a period of six years after the Effective Time, MetaTools will cause
the Surviving Corporation to use its commercially reasonable efforts to
maintain in effect, if available, directors' and officers' liability insurance
covering those persons who are currently covered by Fractal's directors' and
officers' liability insurance policy on terms comparable to those applicable
to the then current directors and officers of MetaTools; provided, however,
that in no event will MetaTools or the Surviving Corporation be required to
expend in excess of 175% of the annual premium currently paid by Fractal for
such coverage (or such coverage as is available for such 175% of the annual
premium).
(c) This Section 5.13 will survive any termination of this Agreement and the
consummation of the Merger at the Effective Time, is intended to benefit
Fractal, the Surviving Corporation and the Indemnified Parties, and will be
binding on all successors and assigns of the Surviving Corporation.
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5.13 NMS Listing. MetaTools agrees to authorize for listing on the Nasdaq
National Market the shares of MetaTools Common Stock issuable, and those
required to be reserved for issuance, in connection with the Merger, upon
official notice of issuance.
5.14 MetaTools Affiliate Agreement. Set forth on the MetaTools Schedules is
a list of those persons who may be deemed to be, in MetaTools' reasonable
judgment, affiliates of MetaTools within the meaning of Rule 145 promulgated
under the Securities Act (each a "METATOOLS AFFILIATE"). MetaTools will
provide Fractal with such information and documents as Fractal reasonably
requests for purposes of reviewing such list. MetaTools will use its
reasonable best efforts to deliver or cause to be delivered to Fractal, as
promptly as practicable on or following the date hereof, from each MetaTools
Affiliate an executed affiliate agreement in substantially the form attached
hereto as Exhibit C-1, each of which will be in full force and effect as of
the Effective Time.
5.15 Fractal Affiliate Agreement. Set forth on the Fractal Schedules is a
list of those persons who may be deemed to be, in Fractal's reasonable
judgment, affiliates of Fractal within the meaning of Rule 145 promulgated
under the Securities Act (each a "FRACTAL AFFILIATE"). Fractal will provide
MetaTools with such information and documents as MetaTools reasonably requests
for purposes of reviewing such list. Fractal will use its reasonable best
efforts to deliver or cause to be delivered to MetaTools, as promptly as
practicable on or following the date hereof, from each Fractal Affiliate an
executed affiliate agreement in substantially the form attached hereto as
Exhibit C-2 (the "FRACTAL AFFILIATE AGREEMENT"), each of which will be in full
force and effect as of the Effective Time. MetaTools will be entitled to place
appropriate legends on the certificates evidencing any MetaTools Common Stock
to be received by a Fractal Affiliate pursuant to the terms of this Agreement,
and to issue appropriate stop transfer instructions to the transfer agent for
the MetaTools Common Stock, consistent with the terms of the Fractal Affiliate
Agreement.
5.16 Regulatory Filings; Reasonable Efforts. If required under applicable
law, as soon as may be reasonably practicable, Fractal and MetaTools each
shall file with the United States Federal Trade Commission (the "FTC") and the
Antitrust Division of the United States Department of Justice ("DOJ")
Notification and Report Forms relating to the transactions contemplated herein
as required by the HSR Act, as well as comparable pre-merger notification
forms required by the merger notification or control laws and regulations of
any applicable jurisdiction, as agreed to by the parties. Fractal and
MetaTools each shall promptly (a) supply the other with any information which
may be required in order to effectuate such filings and (b) supply any
additional information which reasonably may be required by the FTC, the DOJ or
the competition or merger control authorities of any other jurisdiction and
which the parties may reasonably deem appropriate.
5.17 Board of Directors of the Combined Company. The Board of Directors of
MetaTools will take all actions necessary to cause the Board of Directors of
MetaTools, immediately after the Effective Time, to consist of nine (9)
persons, three (3) of whom shall be Thomas Hedges, Mark Zimmer and one (1)
additional person to be named by Fractal who shall be reasonably acceptable to
MetaTools. If, prior to the Effective Time, Mr. Hedges or Mr. Zimmer shall
decline or be unable to serve as a Fractal director, Fractal shall designate
another person to serve in such person's stead, which person shall be
reasonably acceptable to MetaTools.
5.18 Committees of Board of Directors of MetaTools. The Board of Directors
of MetaTools will take all actions necessary to cause the Audit Committee and
the Compensation Committee of the Board of Directors of MetaTools to each
consist only of independent directors. In addition, the Board of Directors of
MetaTools will take all actions necessary to cause the Nominating Committee of
the Board of Directors of MetaTools to consist of two (2) independent
directors and the Chief Executive Officer of MetaTools.
5.19 Increase in Authorized Shares. Subject to the terms hereof, at the
MetaTools Stockholders' Meeting MetaTools shall propose and recommend that its
Certificate of Incorporation be amended to increase the authorized number of
shares of Common Stock thereunder to 75,000,000 shares, provided that
MetaTools may propose and recommend an increase of such lesser number as in
good faith it determines (provided that, subject
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to the terms hereof, such lesser number is not less than the number required
to issue shares by virtue of the Merger and the other transactions
contemplated hereby).
5.20 MetaTools Name Change. The Proxy Statement shall include a proposal to
change the name of MetaTools (upon, and subject to consummation of, the
Merger) to a name that is mutually agreeable to the parties hereto.
5.21 Tax-Free Reorganization. No party shall take any action either prior to
or after the Effective Time that could reasonably be expected to cause the
merger to fail to qualify as a "reorganization" under Section 368(a) of the
Code.
ARTICLE VI
Conditions to the Merger
6.1 Conditions to Obligations of Each Party to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction at or prior to the Effective Time of the
following conditions:
(a) Stockholder and Shareholder Approval. This Agreement shall have been
approved and adopted, and the Merger shall have been duly approved, by the
requisite vote under applicable law, by the shareholders of Fractal; and an
increase in the authorized number of shares of MetaTools Common Stock so as
to permit the issuance of shares of MetaTools Common Stock by virtue of the
Merger, as well as such issuance, shall have been duly approved by the
requisite vote under applicable law and the rules of the National
Association of Securities Dealers, Inc. by the stockholders of MetaTools.
(b) Registration Statement Effective; Proxy Statement. The SEC shall have
declared the Registration Statement effective. No stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose, and no similar proceeding
in respect of the Proxy Statement, shall have been initiated or threatened
in writing by the SEC.
(c) No Order; HSR Act. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any statute, rule, regulation, executive
order, decree, injunction or other order (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger. All waiting
periods, if any, under the HSR Act relating to the transactions
contemplated hereby will have expired or terminated early.
(d) Tax Opinions. MetaTools and Fractal shall each have received written
opinions from their respective counsel, Wilson Sonsini Goodrich & Rosati,
Professional Corporation, and Venture Law Group, Professional Corporation,
in form and substance reasonably satisfactory to them, to the effect that
the Merger will constitute a reorganization within the meaning of Section
368(a) of the Code and such opinions shall not have been withdrawn;
provided, however, that if the counsel to either MetaTools or Fractal does
not render such opinion, this condition shall nonetheless be deemed to be
satisfied with respect to such party if counsel to the other party renders
such opinion to such party. The parties to this Agreement agree to make
reasonable representations as requested by such counsel for the purpose of
rendering such opinions.
(e) Nasdaq Listing. The shares of MetaTools Common Stock issuable to
shareholders of Fractal pursuant to this Agreement and such other shares
required to be reserved for issuance in connection with the Merger shall
have been authorized for listing on the Nasdaq National Market upon
official notice of issuance.
(f) Opinion of Accountants. Each of MetaTools and Fractal shall have
received a letter from Coopers & Lybrand L.L.P. and Price Waterhouse LLP,
respectively, dated within two (2) business days prior to the Effective
Time, regarding that firm's concurrence with MetaTools' managements' and
Fractal's managements' conclusions as to the appropriateness of pooling of
interest accounting for the Merger under Accounting Principles Board
Opinion No. 16, if the Merger is consummated in accordance with this
Agreement.
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6.2 Additional Conditions to Obligations of Fractal. The obligation of
Fractal to consummate and effect the Merger shall be subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any of which may be waived, in writing, exclusively by Fractal:
(a) Representations and Warranties. The representations and warranties of
MetaTools and Merger Sub contained in this Agreement shall have been true
and correct in all material respects as of the date of this Agreement. In
addition, the representations and warranties of MetaTools and Merger Sub
contained in this Agreement shall be true and correct in all material
respects on and as of the Effective Time except for changes contemplated by
this Agreement and except for those representations and warranties which
address matters only as of a particular date (which shall remain true and
correct as of such particular date), with the same force and effect as if
made on and as of the Effective Time, except in such cases (other than the
representations in Sections 3.2, 3.3 and 3.22) where the failure to be so
true and correct would not have a Material Adverse Effect on MetaTools.
Fractal shall have received a certificate with respect to the foregoing
signed on behalf of MetaTools by the Chief Executive Officer and the Chief
Financial Officer of MetaTools;
(b) Agreements and Covenants. MetaTools and Merger Sub shall have
performed or complied in all material respects with all agreements and
covenants required by this Agreement to be performed or complied with by
them on or prior to the Effective Time, and Fractal shall have received a
certificate to such effect signed on behalf of MetaTools by the Chief
Executive Officer and the Chief Financial Officer of MetaTools; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
MetaTools shall have occurred since the date of this Agreement.
6.3 Additional Conditions to the Obligations of MetaTools and Merger
Sub. The obligations of MetaTools and Merger Sub to consummate and effect the
Merger shall be subject to the satisfaction at or prior to the Effective Time
of each of the following conditions, any of which may be waived, in writing,
exclusively by MetaTools:
(a) Representations and Warranties. The representations and warranties of
Fractal contained in this Agreement shall have been true and correct in all
material respects as of the date of this Agreement. In addition, the
representations and warranties of Fractal contained in this Agreement shall
be true and correct in all material respects on and as of the Effective
Time except for changes contemplated by this Agreement and except for those
representations and warranties which address matters only as of a
particular date (which shall remain true and correct as of such particular
date), with the same force and effect as if made on and as of the Effective
Time, except in such cases (other than the representations in Sections 2.2,
2.3 and 2.21) where the failure to be so true and correct would not have a
Material Adverse Effect on Fractal. MetaTools shall have received a
certificate with respect to the foregoing signed on behalf of Fractal by
the Chief Executive Officer and the Chief Financial Officer of Fractal;
(b) Agreements and Covenants. Fractal shall have performed or complied in
all material respects with all agreements and covenants required by this
Agreement to be performed or complied with by it on or prior to the
Effective Time, and the MetaTools shall have received a certificate to such
effect signed on behalf of Fractal by the President and the Chief Financial
Officer of Fractal; and
(c) Material Adverse Effect. No Material Adverse Effect with respect to
Fractal shall have occurred since the date of this Agreement.
(d) No Dissenters. Holders of more than 4.9% of the outstanding shares of
Fractal Common Stock shall not have exercised, nor shall they have any
continued right to exercise, appraisal, dissenters' or similar rights under
applicable law with respect to their shares by virtue of the Merger.
(e) Noncompetition Agreements. Thomas Hedges and Mark Zimmer shall have
entered into Noncompetition Agreements substantially in the form attached
hereto as Exhibit D and such agreements shall be in full force and effect.
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ARTICLE VII
Termination, Amendment and Waiver
7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time of the Merger, whether before or after approval of the Merger
by the shareholders of Fractal or the approval of the issuance of MetaTools
Common Stock in connection with the Merger by the stockholders of MetaTools:
(a) by mutual written consent duly authorized by the Boards of Directors
of MetaTools and Fractal;
(b) by either Fractal or MetaTools if the Merger shall not have been
consummated by August 31, 1997 for any reason; provided, however, that the
right to terminate this Agreement under this Section 7.1(b) shall not be
available to any party whose action or failure to act has been a principal
cause of or resulted in the failure of the Merger to occur on or before
such date and such action or failure to act constitutes a breach of this
Agreement;
(c) by either Fractal or MetaTools if a Governmental Entity shall have
issued an order, decree or ruling or taken any other action (an "ORDER"),
in any case having the effect of permanently restraining, enjoining or
otherwise prohibiting the Merger, which order, decree or ruling is final
and nonappealable;
(d) by either Fractal or MetaTools if the required approvals of the
shareholders of Fractal or the stockholders of MetaTools contemplated by
this Agreement shall not have been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of shareholders or
stockholders, as the case may be, duly convened therefor or at any
adjournment thereof (provided that the right to terminate this Agreement
under this Section 7.1(d) shall not be available to any party where the
failure to obtain shareholder or stockholder approval of such party shall
have been caused by the action or failure to act of such party in breach of
this Agreement);
(e) by MetaTools, if the Board of Directors of Fractal recommends a
Fractal Superior Proposal to the shareholders of Fractal, or if the Board
of Directors of Fractal shall have withheld, withdrawn or modified in a
manner adverse to MetaTools its recommendation in favor of adoption and
approval of this Agreement and approval of the Merger;
(f) by Fractal, if the Board of Directors of MetaTools recommends a
MetaTools Superior Proposal to the stockholders of MetaTools, or if the
Board of Directors of MetaTools shall have withheld, withdrawn or modified
in a manner adverse to Fractal its recommendation in favor of approving the
issuance of the shares of MetaTools Common Stock by virtue of the Merger;
(g) by Fractal, upon a breach of any representation, warranty, covenant
or agreement on the part of MetaTools set forth in this Agreement, or if
any representation or warranty of MetaTools shall have become untrue, in
either case such that the conditions set forth in Section 6.2(a) or Section
6.2(b) would not be satisfied as of the time of such breach or as of the
time such representation or warranty shall have become untrue, provided
that if such inaccuracy in MetaTools' representations and warranties or
breach by MetaTools is curable by MetaTools through the exercise of its
commercially reasonable efforts, then Fractal may not terminate this
Agreement under this Section 7.1(i) provided MetaTools continues to
exercise such commercially reasonable efforts to cure such breach; or
(h) by MetaTools, upon a breach of any representation, warranty, covenant
or agreement on the part of Fractal set forth in this Agreement, or if any
representation or warranty of Fractal shall have become untrue, in either
case such that the conditions set forth in Section 6.3(a) or Section 6.3(b)
would not be satisfied as of the time of such breach or as of the time such
representation or warranty shall have become untrue, provided, that if such
inaccuracy in Fractal's representations and warranties or breach by Fractal
is curable by Fractal through the exercise of its commercially reasonable
efforts, then MetaTools may not terminate this Agreement under this Section
7.1(j) provided Fractal continues to exercise such commercially reasonable
efforts to cure such breach.
7.2 Notice of Termination; Effect of Termination. Any termination of this
Agreement under Section 7.1 above will be effective immediately upon the
delivery of written notice of the terminating party to the other
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parties hereto. In the event of the termination of this Agreement as provided
in Section 7.1, this Agreement shall be of no further force or effect, except
(i) as set forth in this Section 7.2, Section 7.3 and Article 8
(miscellaneous), each of which shall survive the termination of this
Agreement, and (ii) nothing herein shall relieve any party from liability for
any breach of this Agreement. No termination of this Agreement shall affect
the obligations of the parties contained in the Confidentiality Agreement or
the Stock Option Agreements, all of which obligations shall survive
termination of this Agreement in accordance with their terms.
7.3 Fees and Expenses.
(a) General. Except as set forth in this Section 7.3, all fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid by the party incurring such expenses whether or not the
Merger is consummated; provided, however, that MetaTools and Fractal shall
share equally all fees and expenses, other than attorneys' and accountants
fees and expenses, incurred in relation to the printing and filing of the
Proxy Statement (including any preliminary materials related thereto) and the
Registration Statement (including financial statements and exhibits) and any
amendments or supplements thereto.
(b) Fractal Payments.
(i) If (x) the Board of Directors of Fractal shall have withheld, withdrawn
or modified in a manner adverse to MetaTools its recommendation in favor of
adoption and approval of this Agreement and approval of the Merger and at that
time (A) there shall not have occurred a Material Adverse Effect on MetaTools
and (B) the condition set forth in Section 6.1(d) hereof shall not be
incapable of being satisfied (other than incapability as a result of a failure
of the parties hereto and their respective affiliates to make reasonable
representations for the purposes of the opinions described in Section 6.1(d)
hereof), or (y) the Board of Directors of Fractal recommends a Fractal
Superior Proposal to the shareholders of Fractal, Fractal shall pay to
MetaTools an amount equal to $4,000,000 within one business day following the
earlier to occur of (A) termination of this Agreement pursuant to Section
7.1(e) hereof and (B) a Fractal Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(b)(i) above, and
if (x) the vote of the shareholders of Fractal approving and adopting this
Agreement and approving the Merger shall not have been obtained by reason of
the failure to obtain the required vote upon a vote taken at a meeting of
shareholders duly convened therefor or at any adjournment thereof (a "FRACTAL
NEGATIVE VOTE") and (y) prior to such Fractal Negative Vote there shall have
occurred an Acquisition Proposal with respect to Fractal which shall have been
publicly disclosed and not withdrawn (a "FRACTAL COMPETING PROPOSAL") and (z)
(i) within 12 months following such Fractal Negative Vote, Fractal shall enter
into a definitive agreement with respect to an Acquisition Proposal with the
party (or any affiliate of the party) that made the Fractal Competing Proposal
or an Acquisition Proposal with such party (or any such affiliate) with
respect to Fractal shall have been consummated or (ii) within 6 months
following such Fractal Negative Vote, Fractal shall enter into a definitive
agreement with respect to an Acquisition Proposal with any other party or an
Acquisition Proposal with any other party with respect to Fractal shall have
been consummated, then, provided that there shall have not occurred a Material
Adverse Effect on MetaTools prior to the Fractal Negative Vote, Fractal shall
pay to MetaTools an amount equal to $4,000,000 within one business day
following demand therefor after the occurrence of the events set forth in (x)
and (y) and either (z)(i) or (z)(ii) above; and
(iii) If no payment shall be required pursuant to clauses 7.3(b)(i) or (ii)
above and if there shall be a Fractal Negative Vote then Fractal shall pay to
MetaTools an amount equal to $750,000 within one business day following demand
therefor; provided there shall not have occurred a Material Adverse Effect on
MetaTools prior to the Fractal Negative Vote.
(c) MetaTools Payments.
(i) If (x) the Board of Directors of MetaTools shall have withheld,
withdrawn or modified in a manner adverse to Fractal its recommendation in
favor of approving the issuance of the shares of MetaTools Common Stock by
virtue of the Merger and at that time (A) there shall not have occurred a
Material Adverse Effect on
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Fractal and (B) the condition set forth in Section 6.1(d) hereof shall not be
incapable of being satisfied (other than incapability as a result of a failure
of the parties hereto and their respective affiliates to make reasonable
representations for the purposes of the opinions described in Section 6.1(d)
hereof), or (y) the Board of Directors of MetaTools recommends a MetaTools
Superior Proposal to the stockholders of MetaTools, MetaTools shall pay to
Fractal an amount equal to $4,000,000 million within one business day
following the earlier to occur of (A) termination of this Agreement pursuant
to Section 7.1(f) hereof and (B) a MetaTools Negative Vote (as defined below);
(ii) If no payment shall be required pursuant to clause 7.3(c)(i) above, and
if (x) the vote of the stockholders of MetaTools in favor of an increase in
the authorized number of shares of MetaTools Common Stock so as to permit the
issuance of shares of MetaTools Common Stock by virtue of the Merger, as well
as such issuance, shall not have been obtained by reason of the failure to
obtain the required vote upon a vote taken at a meeting of stockholders duly
convened therefor or at any adjournment thereof (a "METATOOLS NEGATIVE VOTE")
and (y) prior to such MetaTools Negative Vote there shall have occurred an
Acquisition Proposal with respect to MetaTools which shall have been publicly
disclosed and not withdrawn (a "METATOOLS COMPETING PROPOSAL") and (z) (i)
within 12 months following such MetaTools Negative Vote MetaTools shall enter
into a definitive agreement with respect to an Acquisition Proposal with the
party (or any affiliate of the party) that made the MetaTools Competing
Proposal or an Acquisition Proposal with such party (or any such affiliate)
with respect to MetaTools shall have been consummated or (ii) within 6 months
following such MetaTools Negative Vote, MetaTools shall enter into a
definitive agreement with respect to an Acquisition Proposal with any other
party or an Acquisition Proposal with any other party with respect to
MetaTools shall have been consummated, then, provided that there shall not
have occurred a Material Adverse Effect on Fractal prior to the MetaTools
Negative Vote, MetaTools shall pay to Fractal an amount equal to $4,000,000
within one business day following demand therefor after the occurrence of the
events set forth in (x) and (y) and either z(i) or (z)(ii) above; and
(iii) If no payment shall be required pursuant to clauses 7.3(c)(i) or (ii)
above and if there shall be a MetaTools Negative Vote then MetaTools shall pay
to Fractal an amount equal to $750,000 within one business day following
demand therefor; provided there shall not have occurred a Material Adverse
Effect on Fractal prior to the MetaTools Negative Vote.
(d) Payment of the fees described in Section 7.3(b) and (c) above shall not
be in lieu of damages incurred in the event of breach of this Agreement.
7.4 Amendment. Subject to applicable law, this Agreement may be amended by
the parties hereto at any time by execution of an instrument in writing signed
on behalf of each of the parties hereto.
7.5 Extension; Waiver. At any time prior to the Effective Time any party
hereto may, to the extent legally allowed, (i) extend the time for the
performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties made
to such party contained herein or in any document delivered pursuant hereto
and (iii) waive compliance with any of the agreements or conditions for the
benefit of such party contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party. Delay in exercising any
right under this Agreement shall not constitute a waiver of such right.
ARTICLE VIII
General Provisions
8.1 Non-Survival of Representations and Warranties. The representations and
warranties of Fractal, MetaTools and Merger Sub contained in this Agreement
shall terminate at the Effective Time, and only the covenants that by their
terms survive the Effective Time shall survive the Effective Time.
35
<PAGE>
8.2 Notices. All notices and other communications hereunder shall be in
writing and shall be deemed given if delivered personally or by commercial
delivery service, or sent via telecopy (receipt confirmed) to the parties at
the following addresses or telecopy numbers (or at such other address or
telecopy numbers for a party as shall be specified by like notice):
(a)if to MetaTools or Merger Sub, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attention: Chief Executive Officer
Telephone No.: (805) 566-6700
Telecopy No.: (805) 566-6384
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attention: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
Telephone No.: (415) 493-9300
Telecopy No.: (415) 493-6811
(b) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attention: President
Telephone No.: (408) 688-5300
Telecopy No.: (408) 430-0305
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attention: James Brock, Esq.
Telephone No.: (415) 854-4488
Telecopy No.: (415) 233-8386
8.3 Interpretation; Knowledge.
(a) When a reference is made in this Agreement to Exhibits, such reference
shall be to an Exhibit to this Agreement unless otherwise indicated. The words
"INCLUDE," "INCLUDES" and "INCLUDING" when used herein shall be deemed in each
case to be followed by the words "without limitation." The table of contents
and headings contained in this Agreement are for reference purposes only and
shall not affect in any way the meaning or interpretation of this Agreement.
When reference is made herein to "THE BUSINESS OF" an entity, such reference
shall be deemed to include the business of all direct and indirect
subsidiaries of such entity. Reference to the subsidiaries of an entity shall
be deemed to include all direct and indirect subsidiaries of such entity.
(b) For purposes of this Agreement, the term "KNOWLEDGE" means, with respect
to any matter in question, that any of the Chief Executive Officer, Chief
Operating Officer, Chief Financial Officer or Controller of Fractal or
MetaTools, as the case may be, have actual knowledge of such matter.
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8.4 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other party, it being understood that all
parties need not sign the same counterpart.
8.5 Entire Agreement; Third Party Beneficiaries. This Agreement and the
documents and instruments and other agreements among the parties hereto as
contemplated by or referred to herein, including Fractal Schedules and the
MetaTools Schedules (a) constitute the entire agreement among the parties with
respect to the subject matter hereof and supersede all prior agreements and
understandings, both written and oral, among the parties with respect to the
subject matter hereof, it being understood that the Confidentiality Agreement
shall continue in full force and effect until the Closing and shall survive
any termination of this Agreement; and (b) are not intended to confer upon any
other person any rights or remedies hereunder, except with respect to the
matters set forth in Section 5.12.
8.6 Severability. In the event that any provision of this Agreement or the
application thereof, becomes or is declared by a court of competent
jurisdiction to be illegal, void or unenforceable, the remainder of this
Agreement will continue in full force and effect and the application of such
provision to other persons or circumstances will be interpreted so as
reasonably to effect the intent of the parties hereto. The parties further
agree to replace such void or unenforceable provision of this Agreement with a
valid and enforceable provision that will achieve, to the extent possible, the
economic, business and other purposes of such void or unenforceable provision.
8.7 Other Remedies; Specific Performance. Except as otherwise provided
herein, any and all remedies herein expressly conferred upon a party will be
deemed cumulative with and not exclusive of any other remedy conferred hereby,
or by law or equity upon such party, and the exercise by a party of any one
remedy will not preclude the exercise of any other remedy. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any court of the United States or any state having jurisdiction, this being
in addition to any other remedy to which they are entitled at law or in
equity.
8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof; provided that issues involving the corporate governance of any of the
parties hereto shall be governed by their respective jurisdictions of
incorporation. Each of the parties hereto irrevocably consents to the
exclusive jurisdiction of any state or federal court within the Northern
District of California, in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, other than issues
involving the corporate governance of any of the parties hereto, agrees that
process may be served upon them in any manner authorized by the laws of the
State of California for such persons and waives and covenants not to assert or
plead any objection which they might otherwise have to such jurisdiction and
such process.
8.9 Rules of Construction. The parties hereto agree that they have been
represented by counsel during the negotiation and execution of this Agreement
and, therefore, waive the application of any law, regulation, holding or rule
of construction providing that ambiguities in an agreement or other document
will be construed against the party drafting such agreement or document.
8.10 Assignment. No party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the of the parties. 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.
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8.11 WAIVER OF JURY TRIAL. EACH OF METATOOLS, FRACTAL AND MERGER SUB HEREBY
IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE ACTIONS OF METATOOLS, FRACTAL OR MERGER SUB
IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT HEREOF.
* * * * *
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized respective officers as of the date first
written above.
Metatools, Inc.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
Rook Acquisition Corp.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President and Chairman of
the Board of Directors
Fractal Design Corporation
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
* * * * REORGANIZATION AGREEMENT * * * *
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<PAGE>
EXHIBIT 2.2
[OPTION FROM METATOOLS TO FRACTAL]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of February 11, 1997 (the "AGREEMENT")
is entered into by and between MetaTools, Inc., a Delaware corporation
("METATOOLS"), and Fractal Design Corporation, a California corporation
("FRACTAL").
RECITALS
WHEREAS, concurrently with the execution and delivery of this Agreement,
MetaTools, Fractal and Rook Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of MetaTools ("SUB"), are entering into an Agreement
and Plan of Reorganization (the "MERGER AGREEMENT"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
MetaTools and Fractal will enter into a business combination transaction to
pursue their long-term business strategies (the "MERGER"); and
WHEREAS, as a condition to Fractal's willingness to enter into the Merger
Agreement, Fractal has requested that MetaTools agree, and MetaTools has so
agreed, to grant to Fractal an option to acquire shares of MetaTools' Common
Stock, $0.001 par value, upon the terms and subject to the conditions set
forth herein;
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
MetaTools hereby grants to Fractal an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.001 par value, of
MetaTools ("METATOOLS SHARES") equal to 19.9% of the issued and outstanding
shares as of the first date, if any, upon which an Exercise Event (as defined
in Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set
forth below (i) by paying cash at a price of $15.00 per share (the "EXERCISE
PRICE") and/or, at Fractal's election, (ii) by exchanging therefor shares of
the Common Stock, par value $0.001 per share, of Fractal ("FRACTAL SHARES") at
a rate (the "EXERCISE RATIO"), for each Option Share, of a number of Fractal
Shares equal to the Exercise Price divided by the closing sale price of
Fractal Shares on the Nasdaq National Market for the trading day immediately
preceding the date of the Closing (as defined below) of the particular Option
exercise. Capitalized terms used in this Agreement but not defined herein
shall have the meanings ascribed thereto in the Merger Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of MetaTools' stockholders with
regard to, an Acquisition Proposal with respect to MetaTools with any party
other than Fractal (or an affiliate of Fractal) if the Board of Directors of
MetaTools shall have withheld, withdrawn or modified in a manner adverse to
Fractal its recommendation in favor of approving the issuance of the MetaTools
Shares by virtue of the Merger (and at that time there shall not have occurred
a Material Adverse Effect on Fractal) after receipt of and in connection with
an Acquisition Proposal with respect to MetaTools, (ii) immediately prior to
the consummation of a tender or exchange offer for 25% or more of any class of
MetaTools' capital stock, or (iii) immediately prior to the time at which all
of the events specified in clauses (x), (y) and either (z)(i) or (z)(ii) of
Section 7.3(c)(ii) of the Merger Agreement shall have occurred.
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(b) Fractal may deliver to MetaTools a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of MetaTools
shall have withheld, withdrawn or modified in a manner adverse to Fractal its
recommendation in favor of approving the issuance of the MetaTools Shares by
virtue of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on Fractal) after receipt of and in connection with an
Acquisition Proposal with respect to MetaTools, (ii) upon the commencement of
a tender or exchange offer for 25% or more of any class of MetaTools' capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(c)(ii)(x) and 7.3(c)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by Fractal, the closing of a purchase of Option Shares (a "CLOSING")
specified in such Exercise Notice shall take place at the principal offices of
MetaTools upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Fractal in writing.
In the event that no Exercise Event shall occur prior to termination of the
Option, such Exercise Notice shall be void and of no further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) Fractal shall have breached in any material respect any of its covenants
or agreements contained in the Merger Agreement or (ii) the representations
and warranties of Fractal contained in the Merger Agreement shall not have
been true and correct in all material respects on and as of the date when
made.
(d) If Fractal receives in the aggregate pursuant to Section 7.3(c) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by Fractal declared
on Option Shares, more than the sum of (x) $4,000,000 plus (y) the Exercise
Price multiplied by the number of MetaTools Shares purchased by Fractal
pursuant to the Option, then all proceeds to Fractal in excess of such sum
shall be remitted by Fractal to MetaTools.
3. CONDITIONS TO CLOSING
The obligation of MetaTools to issue Option Shares to Fractal hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which Fractal shall be entitled to deliver
to MetaTools an Exercise Notice, the parties will use their respective best
efforts to satisfy all conditions to Closing, so that a Closing may take place
as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event; provided that neither MetaTools nor Fractal nor any subsidiary
or affiliate thereof will be required to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
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<PAGE>
4. CLOSING
At any Closing, (a) MetaTools shall deliver to Fractal a single certificate
in definitive form representing the number of MetaTools Shares designated by
Fractal in its Exercise Notice, such certificate to be registered in the name
of Fractal and to bear the legend set forth in Section 10 hereof, against
delivery of (b) payment by Fractal to MetaTools of the aggregate purchase
price for the MetaTools Shares so designated and being purchased by delivery
of (i) a certified check or bank check and/or, at Fractal's election, (ii) a
single certificate in definitive form representing the number of Fractal
Shares being issued by Fractal in consideration therefor (based on the
Exercise Ratio), such certificate to be registered in the name of MetaTools
and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF METATOOLS
MetaTools represents and warrants to Fractal that (a) MetaTools is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by MetaTools and consummation by
MetaTools of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of MetaTools and no other corporate
proceedings on the part of MetaTools are necessary to authorize this Agreement
or any of the transactions contemplated hereby; (c) this Agreement has been
duly executed and delivered by MetaTools and constitutes a legal, valid and
binding obligation of MetaTools and, assuming this Agreement constitutes a
legal, valid and binding obligation of Fractal, is enforceable against
MetaTools in accordance with its terms, except as enforceability may be
limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any
filings required under the HSR Act, MetaTools has taken all necessary
corporate and other action to authorize and reserve for issuance and to permit
it to issue upon exercise of the Option, and at all times from the date hereof
until the termination of the Option will have reserved for issuance, a
sufficient number of unissued MetaTools Shares for Fractal to exercise the
Option in full and will take all necessary corporate or other action to
authorize and reserve for issuance all additional MetaTools Shares or other
securities which may be issuable pursuant to Section 9(a) upon exercise of the
Option, all of which, upon their issuance and delivery in accordance with the
terms of this Agreement, will be validly issued, fully paid and nonassessable;
(e) upon delivery of the MetaTools Shares and any other securities to Fractal
upon exercise of the Option, Fractal will acquire such MetaTools Shares or
other securities free and clear of all material claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever,
excluding those imposed by Fractal; (f) the execution and delivery of this
Agreement by MetaTools do not, and the performance of this Agreement by
MetaTools will not, (i) violate the Articles of Incorporation or By-Laws of
MetaTools, (ii) conflict with or violate any order applicable to MetaTools or
any of its subsidiaries or by which they or any of their property is bound or
affected or (iii) result in any breach of or constitute a default (or an event
which with notice or lapse of time or both would become a default) under, or
give rise to any right of termination, amendment, acceleration or cancellation
of, or result in the creation of a lien or encumbrance on any of the property
or assets of MetaTools or any of its subsidiaries pursuant to, any contract or
agreement to which MetaTools or any of its subsidiaries is a party or by which
MetaTools or any of its subsidiaries or any of their property is bound or
affected, except, in the case of clauses (ii) and (iii) above, for violations,
conflicts, breaches, defaults, rights of termination, amendment, acceleration
or cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on MetaTools; (g) the execution and
delivery of this Agreement by MetaTools does not, and the performance of this
Agreement by MetaTools will not, require any consent, approval, authorization
or permit of, or filing with, or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Fractal Shares acquired pursuant
to this Agreement will not be acquired by MetaTools with a view to the public
distribution thereof and MetaTools will not sell or otherwise dispose of such
shares in violation of applicable law or this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF FRACTAL
Fractal represents and warrants to MetaTools that (a) Fractal is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of California and has the corporate power and authority
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<PAGE>
to enter into this Agreement and to carry out its obligations hereunder; (b)
the execution and delivery of this Agreement by Fractal and the consummation
by Fractal of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of Fractal and no other
corporate proceedings on the part of Fractal are necessary to authorize this
Agreement or any of the transactions contemplated hereby; (c) this Agreement
has been duly executed and delivered by Fractal and constitutes a legal, valid
and binding obligation of Fractal and, assuming this Agreement constitutes a
legal, valid and binding obligation of MetaTools, is enforceable against
Fractal in accordance with its terms, except as enforceability may be limited
by bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings
required under the HSR Act, Fractal has taken (or will in a timely manner
take) all necessary corporate and other action to authorize and reserve for
issuance and to permit it to issue upon exercise of the Option and will take
all necessary corporate or other action to authorize and reserve for issuance
all additional Fractal Shares or other securities which may be issuable
pursuant to Section 9(b) upon exercise of the Option, all of which, upon their
issuance and delivery in accordance with the terms of this Agreement, will be
validly issued, fully paid and nonassessable; (e) upon delivery of Fractal
Shares to MetaTools in consideration of any acquisition of MetaTools Shares
pursuant hereto, MetaTools will acquire such Fractal Shares free and clear of
all material claims, liens, charges, encumbrances and security interests of
any kind or nature whatsoever, excluding those imposed by MetaTools; (f) the
execution and delivery of this Agreement by Fractal do not, and the
performance of this Agreement by Fractal will not, (i) violate the Certificate
of Incorporation or By-Laws of Fractal, (ii) conflict with or violate any
order applicable to Fractal or any of its subsidiaries or by which they or any
of their property is bound or affected or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give rise to any right of termination,
amendment, acceleration or cancellation of, or result in the creation of a
lien or encumbrance on any of the property or assets of Fractal or any of its
subsidiaries pursuant to, any contract or agreement to which Fractal or any of
its subsidiaries is a party or by which Fractal or any of its subsidiaries or
any of their property is bound or affected, except, in the case of clauses
(ii) and (iii) above, for violations, conflicts, breaches, defaults, rights of
termination, amendment, acceleration or cancellation, liens or encumbrances
which would not, individually or in the aggregate, have a Material Adverse
Effect on Fractal; (g) the execution and delivery of this Agreement by Fractal
does not, and the performance of this Agreement by Fractal will not, require
any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental Entity except pursuant to the HSR Act; and
(h) any MetaTools Shares acquired upon exercise of the Option will not be
acquired by Fractal with a view to the public distribution thereof and Fractal
will not sell or otherwise dispose of such shares in violation of applicable
law or this Agreement.
7. CERTAIN RIGHTS
(a) FRACTAL PUT. Fractal may deliver to MetaTools a written notice (a "PUT
NOTICE") at any time during which Fractal may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by Fractal
pursuant thereto, at the price set forth in subparagraph (ii) below (as
limited by subparagraph (iii) below) (the "PUT"). At any time after delivery
of a Put Notice, unless such Put Notice is withdrawn by Fractal, the closing
of the Put (the "PUT CLOSING") shall take place at the principal offices of
MetaTools upon the occurrence of an Exercise Event or at such later date prior
to the termination of the Option as may be designated by Fractal in writing.
In the event that no Exercise Event shall occur prior to termination of the
Option, such Put Notice shall be void and of no further force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for MetaTools
Shares as of the date Fractal gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and not terminated or withdrawn
as of such date and (B) the highest closing sale price of MetaTools Shares
on the Nasdaq National Market during the twenty (20) trading days ending on
the trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of MetaTools Shares purchasable pursuant to the
Option, but only if the Market/Tender Offer Price is greater than the
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<PAGE>
Exercise Price. For purposes of determining the highest price offered
pursuant to any Acquisition Proposal which involves consideration other
than cash, the value of such consideration shall be equal to the higher of
(x) if securities of the same class of the proponent as such consideration
are traded on any national securities exchange or by any registered
securities association, a value based on the closing sale price or asked
price for such securities on their principal trading market on such date
and (y) the value ascribed to such consideration by the proponent of such
Acquisition Proposal, or if no such value is ascribed, a value determined
in good faith by the Board of Directors of MetaTools.
(ii) The Exercise Price paid by Fractal for MetaTools Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of MetaTools
Shares so purchased. If Fractal issued Fractal Shares in connection with
any exercise of the Option, the Exercise Price in connection with such
exercise shall be calculated as set forth in the last sentence of Section 4
as if Fractal had exercised its right to pay cash instead of issuing
Fractal Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 MetaTools shall not be required to pay Fractal in excess of an
aggregate of (x) $4,000,000 plus (y) the Exercise Price paid by Fractal for
MetaTools Shares acquired pursuant to the Option minus (z) any amounts paid
to Fractal by MetaTools pursuant to Section 7.3(c) of the Merger Agreement.
(b) REDELIVERY OF FRACTAL SHARES. If Fractal has acquired MetaTools Shares
pursuant to exercise of the Option by the issuance and delivery of Fractal
Shares, then MetaTools shall, if so requested by Fractal, in fulfillment of
its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of Fractal Shares only, redeliver the
certificate(s) for such Fractal Shares to Fractal, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by Fractal.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing,
MetaTools shall pay the required amount to Fractal in immediately available
funds (and Fractal Shares, if applicable) and Fractal shall surrender to
MetaTools the Option and the certificates evidencing the MetaTools Shares
purchased by Fractal pursuant thereto, and Fractal shall represent and warrant
that such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other
than those imposed by MetaTools.
(d) METATOOLS CALL. If Fractal has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to MetaTools has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
MetaTools entered into a definitive agreement or letter of intent with respect
to such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, MetaTools may require Fractal, upon delivery to Fractal of
written notice, to sell to MetaTools any MetaTools Shares held by Fractal as
of the day that is ten business days after the date of such notice, up to a
number of shares equal to the number of Option Shares acquired by Fractal
pursuant to exercise of the Option in connection with such Exercise Date. The
per share purchase price for such sale (the "METATOOLS CALL PRICE") shall be
equal to the Exercise Price, plus an amount equal to six percent (6.0%) of the
Exercise Price per annum, compounded annually, since the applicable Exercise
Date, less any dividends paid on the MetaTools Shares to be purchased by
MetaTools pursuant to this Section 7(d). The closing of any sale of MetaTools
Shares pursuant to this Section 7(d) shall take place at the principal offices
of MetaTools at a time and on a date designated by MetaTools in the
aforementioned notice to Fractal, which date shall be no more than 20 and no
less than 12 business days from the date of such notice. The MetaTools Call
Price shall be paid in immediately available funds, provided that, in the
event Fractal has acquired Option Shares pursuant to exercise of the Option by
issuance and delivery of
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Fractal Shares, at the option of MetaTools, the MetaTools Call Price for part
or all of any purchase of MetaTools Shares pursuant to this Section 7(d), up
to a number of such shares equal to the number of Option Shares acquired by
Fractal by issuance and delivery of Fractal Shares, shall be paid by delivery
of a number of Fractal Shares equal to the MetaTools Call Price divided by the
closing sale price of Fractal Shares on the Nasdaq National Market for the
trading day immediately preceding the date of the Exercise Date on which the
Option Shares to be purchased by MetaTools pursuant to this Section 7(d) were
originally issued to Fractal.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, MetaTools
shall not sell, transfer or otherwise dispose of any Fractal Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principle executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such
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financial statements are not yet available for inclusion in such registration
statement; or (C) such Registrant determines, in its reasonable judgment, that
such registration would interfere with any financing, acquisition or other
material transaction involving the Registrant. If consummation of the sale of
any Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Holder may reasonably request and shall continue such registration or
qualification in effect in such jurisdictions; provided, however, that the
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or
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threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such
directors, officers or control persons or underwriters for any legal or any
other expenses reasonably incurred in connection with investigating, preparing
or defending any such claim, loss, damage, liability or action, in each case
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Registrant by the Holder for use therein, provided that in no event shall any
indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the MetaTools Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that Fractal shall receive, upon exercise of the Option, the number and class
of shares or other securities or property that Fractal would have received in
respect of the MetaTools Shares if the Option had been exercised immediately
prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither
MetaTools nor Fractal shall adopt a stockholders rights plan (a so-called
"poison pill") that contains provisions for the distribution of rights
thereunder as a result of the other party being the beneficial owner of shares
of the first party by virtue of the Option being exercisable or having been
exercised (or as a result of such other party beneficially owning shares
issuable in respect of any Option Shares). It is understood, however, that
following termination (if any) of the Merger Agreement, a party may adopt a
stockholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned
by virtue of the Option being exercisable or having been exercised (or as a
result of such other party beneficially owning shares issuable in respect of
any Option Shares).
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10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to Fractal hereunder, and
each certificate representing Fractal Shares delivered to MetaTools at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER AS SET
FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY 11, 1997, A COPY OF
WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
MetaTools, upon the request of Fractal, shall promptly file an application
to list the MetaTools Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. Fractal, upon the
request of MetaTools, shall promptly file an application to list the Fractal
Shares issued and delivered to MetaTools pursuant to Section 4 for quotation
on the Nasdaq National Market and shall use its best efforts to obtain
approval of such listing as soon as practicable. Promptly after the date
hereof, each of the parties hereto shall promptly file with the Federal Trade
Commission and the Antitrust Division of the United States Department of
Justice all required premerger notification and report forms and other
documents and exhibits required to be filed under the HSR Act to permit the
acquisition of the MetaTools Shares subject to the Option at the earliest
possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
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16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to MetaTools, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
(b) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
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20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
MetaTools, Inc..
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
FRACTAL DESIGN CORPORATION
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
***STOCK OPTION AGREEMENT***
(MetaTools option to Fractal)
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EXHIBIT 2.3
[OPTION FROM FRACTAL TO METATOOLS]
STOCK OPTION AGREEMENT
THIS STOCK OPTION AGREEMENT dated as of February 11, 1997 (the "AGREEMENT")
is entered into by and between Fractal Design Corporation, a California
corporation ("FRACTAL"), and MetaTools, Inc., a Delaware corporation
("METATOOLS").
Recitals
WHEREAS, concurrently with the execution and delivery of this Agreement,
Fractal, MetaTools and Rook Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of MetaTools ("SUB"), are entering into an Agreement
and Plan of Reorganization (the "MERGER AGREEMENT"), which provides that,
among other things, upon the terms and subject to the conditions thereof,
Fractal and MetaTools will enter into a business combination transaction to
pursue their long-term business strategies (the "MERGER"); and
WHEREAS, as a condition to MetaTools' willingness to enter into the Merger
Agreement, MetaTools has requested that Fractal agree, and Fractal has so
agreed, to grant to MetaTools an option to acquire shares of Fractal's Common
Stock, $0.001 par value, upon the terms and subject to the conditions set
forth herein;
Agreement
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements set forth herein and in the Merger Agreement and for
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties hereto agree as follows:
1. GRANT OF OPTION
Fractal hereby grants to MetaTools an irrevocable option (the "OPTION") to
acquire up to a number of shares of the Common Stock, $0.001 par value, of
Fractal ("FRACTAL SHARES") equal to 19.9% of the issued and outstanding shares
as of the first date, if any, upon which an Exercise Event (as defined in
Section 2(a) below) shall occur (the "OPTION SHARES"), in the manner set forth
below (i) by paying cash at a price of $11.235 per share (the "EXERCISE
PRICE") and/or, at MetaTools' election, (ii) by exchanging therefor shares of
the Common Stock, par value $0.001 per share, of MetaTools ("METATOOLS
SHARES") at a rate (the "EXERCISE RATIO"), for each Option Share, of a number
of MetaTools Shares equal to the Exercise Price divided by the closing sale
price of MetaTools Shares on the Nasdaq National Market for the trading day
immediately preceding the date of the Closing (as defined below) of the
particular Option exercise. Capitalized terms used in this Agreement but not
defined herein shall have the meanings ascribed thereto in the Merger
Agreement.
2. EXERCISE OF OPTION; MAXIMUM PROCEEDS
(a) For all purposes of this Agreement, an "EXERCISE EVENT" shall have
occurred (i) immediately prior to the earlier of (x) the consummation of, or
(y) the record date, if any, for a meeting of Fractal's shareholders with
regard to, an Acquisition Proposal with respect to Fractal with any party
other than MetaTools (or an affiliate of MetaTools) if the Board of Directors
of Fractal shall have withheld, withdrawn or modified in a manner adverse to
MetaTools its recommendation in favor of adoption and approval of the Merger
Agreement and approval of the Merger (and at that time there shall not have
occurred a Material Adverse Effect on MetaTools) after receipt of and in
connection with an Acquisition Proposal with respect to Fractal,
(ii) immediately prior to the consummation of a tender or exchange offer for
25% or more of any class of Fractal's capital stock, or (iii) immediately
prior to the time at which all of the events specified in clauses (x), (y) and
either (z)(i) or (z)(ii) of Section 7.3(b)(ii) of the Merger Agreement shall
have occurred.
<PAGE>
(b) MetaTools may deliver to Fractal a written notice (an "EXERCISE NOTICE")
specifying that it wishes to exercise and close a purchase of Option Shares
upon the occurrence of an Exercise Event and specifying the total number of
Option Shares it wishes to acquire and the form of consideration to be paid
(i) at any time following such time as the Board of Directors of Fractal shall
have withheld, withdrawn or modified in a manner adverse to MetaTools its
recommendation in favor of adoption and approval of the Merger Agreement and
approval of the Merger (and at that time there shall not have occurred a
Material Adverse Effect on MetaTools) after receipt of and in connection with
an Acquisition Proposal with respect to Fractal, (ii) upon the commencement of
a tender or exchange offer for 25% or more of any class of Fractal's capital
stock (and/or during any time which such a tender or exchange offer remains
open or has been consummated) or (iii) at any time following the occurrence of
each of the events specified in Section 7.3(b)(ii)(x) and 7.3(b)(ii)(y) of the
Merger Agreement (the events specified in clauses (i), (ii) or (iii) of this
sentence being referred to herein as a "CONDITIONAL EXERCISE EVENTS"). At any
time after delivery of an Exercise Notice, unless such Exercise Notice is
withdrawn by MetaTools, the closing of a purchase of Option Shares (a
"CLOSING") specified in such Exercise Notice shall take place at the principal
offices of Fractal upon the occurrence of an Exercise Event or at such later
date prior to the termination of the Option as may be designated by MetaTools
in writing. In the event that no Exercise Event shall occur prior to
termination of the Option, such Exercise Notice shall be void and of no
further force and effect.
(c) The Option shall terminate upon the earliest of (i) the Effective Time,
(ii) 12 months following the termination of the Merger Agreement pursuant to
Article VII thereof if a Conditional Exercise Event shall have occurred on or
prior to the date of such termination, and (iii) the date on which the Merger
Agreement is terminated if no Conditional Exercise Event shall have occurred
on or prior to such date of termination; provided, however, that if the Option
is exercisable but cannot be exercised by reason of any applicable government
order or because the waiting period related to the issuance of the Option
Shares under the HSR Act shall not have expired or been terminated, then the
Option shall not terminate until the tenth business day after such impediment
to exercise shall have been removed or shall have become final and not subject
to appeal. Notwithstanding the foregoing, the Option may not be exercised if
(i) MetaTools shall have breached in any material respect any of its covenants
or agreements contained in the Merger Agreement or (ii) the representations
and warranties of MetaTools contained in the Merger Agreement shall not have
been true and correct in all material respects on and as of the date when
made.
(d) If MetaTools receives in the aggregate pursuant to Section 7.3(b) of the
Merger Agreement together with proceeds in connection with any sales or other
dispositions of Option Shares and any dividends received by MetaTools declared
on Option Shares, more than the sum of (x) $4,000,000 plus (y) the Exercise
Price multiplied by the number of Fractal Shares purchased by MetaTools
pursuant to the Option, then all proceeds to MetaTools in excess of such sum
shall be remitted by MetaTools to Fractal.
3. CONDITIONS TO CLOSING
The obligation of Fractal to issue Option Shares to MetaTools hereunder is
subject to the conditions that (a) any waiting period under the HSR Act
applicable to the issuance of the Option Shares hereunder shall have expired
or been terminated; (b) all material consents, approvals, orders or
authorizations of, or registrations, declarations or filings with, any
Federal, state or local administrative agency or commission or other Federal
state or local governmental authority or instrumentality, if any, required in
connection with the issuance of the Option Shares hereunder shall have been
obtained or made, as the case may be; and (c) no preliminary or permanent
injunction or other order by any court of competent jurisdiction prohibiting
or otherwise restraining such issuance shall be in effect. It is understood
and agreed that at any time during which MetaTools shall be entitled to
deliver to Fractal an Exercise Notice, the parties will use their respective
best efforts to satisfy all conditions to Closing, so that a Closing may take
place as promptly as practicable, and in any event, upon the occurrence of an
Exercise Event; provided that neither Fractal nor MetaTools nor any subsidiary
or affiliate thereof will be required to agree to any divestiture by itself or
any of its affiliates of shares of capital stock or of any business, assets or
property, or the imposition of any material limitation on the ability of any
of them to conduct their businesses or to own or exercise control of such
assets, properties and stock.
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4. CLOSING
At any Closing, (a) Fractal shall deliver to MetaTools a single certificate
in definitive form representing the number of Fractal Shares designated by
MetaTools in its Exercise Notice, such certificate to be registered in the
name of MetaTools and to bear the legend set forth in Section 10 hereof,
against delivery of (b) payment by MetaTools to Fractal of the aggregate
purchase price for the Fractal Shares so designated and being purchased by
delivery of (i) a certified check or bank check and/or, at MetaTools'
election, (ii) a single certificate in definitive form representing the number
of MetaTools Shares being issued by MetaTools in consideration therefor (based
on the Exercise Ratio), such certificate to be registered in the name of
Fractal and to bear the legend set forth in Section 10 hereof.
5. REPRESENTATIONS AND WARRANTIES OF FRACTAL
Fractal represents and warrants to MetaTools that (a) Fractal is a
corporation duly organized, validly existing and in good standing under the
laws of the State of California and has the corporate power and authority to
enter into this Agreement and to carry out its obligations hereunder; (b) the
execution and delivery of this Agreement by Fractal and consummation by
Fractal of the transactions contemplated hereby have been duly authorized by
all necessary corporate action on the part of Fractal and no other corporate
proceedings on the part of Fractal are necessary to authorize this Agreement
or any of the transactions contemplated hereby; (c) this Agreement has been
duly executed and delivered by Fractal and constitutes a legal, valid and
binding obligation of Fractal and, assuming this Agreement constitutes a
legal, valid and binding obligation of MetaTools, is enforceable against
Fractal in accordance with its terms, except as enforceability may be limited
by bankruptcy and other laws affecting the rights and remedies of creditors
generally and general principles of equity; (d) except for any filings
required under the HSR Act, Fractal has taken all necessary corporate and
other action to authorize and reserve for issuance and to permit it to issue
upon exercise of the Option, and at all times from the date hereof until the
termination of the Option will have reserved for issuance, a sufficient number
of unissued Fractal Shares for MetaTools to exercise the Option in full and
will take all necessary corporate or other action to authorize and reserve for
issuance all additional Fractal Shares or other securities which may be
issuable pursuant to Section 9(a) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of the Fractal Shares and any other securities to MetaTools upon
exercise of the Option, MetaTools will acquire such Fractal Shares or other
securities free and clear of all material claims, liens, charges, encumbrances
and security interests of any kind or nature whatsoever, excluding those
imposed by MetaTools; (f) the execution and delivery of this Agreement by
Fractal do not, and the performance of this Agreement by Fractal will not, (i)
violate the Articles of Incorporation or By-Laws of Fractal, (ii) conflict
with or violate any order applicable to Fractal or any of its subsidiaries or
by which they or any of their property is bound or affected or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of Fractal
or any of its subsidiaries pursuant to, any contract or agreement to which
Fractal or any of its subsidiaries is a party or by which Fractal or any of
its subsidiaries or any of their property is bound or affected, except, in the
case of clauses (ii) and (iii) above, for violations, conflicts, breaches,
defaults, rights of termination, amendment, acceleration or cancellation,
liens or encumbrances which would not, individually or in the aggregate, have
a Material Adverse Effect on Fractal; (g) the execution and delivery of this
Agreement by Fractal does not, and the performance of this Agreement by
Fractal will not, require any consent, approval, authorization or permit of,
or filing with, or notification to, any Governmental Entity except pursuant to
the HSR Act; and (h) any MetaTools Shares acquired pursuant to this Agreement
will not be acquired by Fractal with a view to the public distribution thereof
and Fractal will not sell or otherwise dispose of such shares in violation of
applicable law or this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF METATOOLS
MetaTools represents and warrants to Fractal that (a) MetaTools is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has the corporate power and authority
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to enter into this Agreement and to carry out its obligations hereunder; (b)
the execution and delivery of this Agreement by MetaTools and the consummation
by MetaTools of the transactions contemplated hereby have been duly authorized
by all necessary corporate action on the part of MetaTools and no other
corporate proceedings on the part of MetaTools are necessary to authorize this
Agreement or any of the transactions contemplated hereby; (c) this Agreement
has been duly executed and delivered by MetaTools and constitutes a legal,
valid and binding obligation of MetaTools and, assuming this Agreement
constitutes a legal, valid and binding obligation of Fractal, is enforceable
against MetaTools in accordance with its terms, except as enforceability may
be limited by bankruptcy and other laws affecting the rights and remedies of
creditors generally and general principles of equity; (d) except for any
filings required under the HSR Act, MetaTools has taken (or will in a timely
manner take) all necessary corporate and other action to authorize and reserve
for issuance and to permit it to issue upon exercise of the Option and will
take all necessary corporate or other action to authorize and reserve for
issuance all additional MetaTools Shares or other securities which may be
issuable pursuant to Section 9(b) upon exercise of the Option, all of which,
upon their issuance and delivery in accordance with the terms of this
Agreement, will be validly issued, fully paid and nonassessable; (e) upon
delivery of MetaTools Shares to Fractal in consideration of any acquisition of
Fractal Shares pursuant hereto, Fractal will acquire such MetaTools Shares
free and clear of all material claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever, excluding those imposed
by Fractal; (f) the execution and delivery of this Agreement by MetaTools do
not, and the performance of this Agreement by MetaTools will not, (i) violate
the Certificate of Incorporation or By-Laws of MetaTools, (ii) conflict with
or violate any order applicable to MetaTools or any of its subsidiaries or by
which they or any of their property is bound or affected or (iii) result in
any breach of or constitute a default (or an event which with notice or lapse
of time or both would become a default) under, or give rise to any right of
termination, amendment, acceleration or cancellation of, or result in the
creation of a lien or encumbrance on any of the property or assets of
MetaTools or any of its subsidiaries pursuant to, any contract or agreement to
which MetaTools or any of its subsidiaries is a party or by which MetaTools or
any of its subsidiaries or any of their property is bound or affected, except,
in the case of clauses (ii) and (iii) above, for violations, conflicts,
breaches, defaults, rights of termination, amendment, acceleration or
cancellation, liens or encumbrances which would not, individually or in the
aggregate, have a Material Adverse Effect on MetaTools; (g) the execution and
delivery of this Agreement by MetaTools does not, and the performance of this
Agreement by MetaTools will not, require any consent, approval, authorization
or permit of, or filing with or notification to, any Governmental Entity
except pursuant to the HSR Act; and (h) any Fractal Shares acquired upon
exercise of the Option will not be acquired by MetaTools with a view to the
public distribution thereof and MetaTools will not sell or otherwise dispose
of such shares in violation of applicable law or this Agreement.
7. CERTAIN RIGHTS
(a) METATOOLS PUT. MetaTools may deliver to Fractal a written notice (a "PUT
NOTICE") at any time during which MetaTools may deliver an Exercise Notice
specifying that it wishes to sell the Option, to the extent not previously
exercised, at the price set forth in subparagraph (i) below (as limited by
subparagraph (iii) below), and the Option Shares, if any, acquired by
MetaTools pursuant thereto, at the price set forth in subparagraph (ii) below
(as limited by subparagraph (iii) below) (the "PUT"). At any time after
delivery of a Put Notice, unless such Put Notice is withdrawn by MetaTools,
the closing of the Put (the "PUT CLOSING") shall take place at the principal
offices of Fractal upon the occurrence of an Exercise Event or at such later
date prior to the termination of the Option as may be designated by MetaTools
in writing. In the event that no Exercise Event shall occur prior to
termination of the Option, such Put Notice shall be void and of no further
force and effect.:
(i) The difference between the "MARKET/TENDER OFFER PRICE" for Fractal
Shares as of the date MetaTools gives notice of its intent to exercise its
rights under this Section 7(a) (defined as the higher of (A) the highest
price per share offered as of such date pursuant to any Acquisition
Proposal which was made prior to such date and not terminated or withdrawn
as of such date and (B) the highest closing sale price of Fractal Shares on
the Nasdaq National Market during the twenty (20) trading days ending on
the trading day immediately preceding such date) and the Exercise Price,
multiplied by the number of Fractal
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Shares purchasable pursuant to the Option, but only if the Market/Tender
Offer Price is greater than the Exercise Price. For purposes of determining
the highest price offered pursuant to any Acquisition Proposal which
involves consideration other than cash, the value of such consideration
shall be equal to the higher of (x) if securities of the same class of the
proponent as such consideration are traded on any national securities
exchange or by any registered securities association, a value based on the
closing sale price or asked price for such securities on their principal
trading market on such date and (y) the value ascribed to such
consideration by the proponent of such Acquisition Proposal, or if no such
value is ascribed, a value determined in good faith by the Board of
Directors of Fractal.
(ii) The Exercise Price paid by MetaTools for Fractal Shares acquired
pursuant to the Option plus the difference between the Market/Tender Offer
Price and such Exercise Price (but only if the Market/Tender Offer Price is
greater than the Exercise Price) multiplied by the number of Fractal Shares
so purchased. If MetaTools issued MetaTools Shares in connection with any
exercise of the Option, the Exercise Price in connection with such exercise
shall be calculated as set forth in the last sentence of Section 4 as if
MetaTools had exercised its right to pay cash instead of issuing MetaTools
Shares.
(iii) Notwithstanding subparagraphs (i) and (ii) above, pursuant to this
Section 7 Fractal shall not be required to pay MetaTools in excess of an
aggregate of (x) $4,000,000 plus (y) the Exercise Price paid by MetaTools
for Fractal Shares acquired pursuant to the Option minus (z) any amounts
paid to MetaTools by Fractal pursuant to Section 7.3(b) of the Merger
Agreement.
(b) REDELIVERY OF METATOOLS SHARES. If MetaTools has acquired Fractal Shares
pursuant to exercise of the Option by the issuance and delivery of MetaTools
Shares, then Fractal shall, if so requested by MetaTools, in fulfillment of
its obligation pursuant to the first clause of Section 7(a)(ii) with respect
to the Exercise Price paid in the form of MetaTools Shares only, redeliver the
certificate(s) for such MetaTools Shares to MetaTools, free and clear of all
claims, liens, charges, encumbrances and security interests of any kind or
nature whatsoever, other than those imposed by MetaTools.
(c) PAYMENT AND REDELIVERY OF OPTION OR SHARES. At the Put Closing, Fractal
shall pay the required amount to MetaTools in immediately available funds (and
MetaTools Shares, if applicable) and MetaTools shall surrender to Fractal the
Option and the certificates evidencing the Fractal Shares purchased by
MetaTools pursuant thereto, and MetaTools shall represent and warrant that
such shares are then free and clear of all claims, liens, charges,
encumbrances and security interests of any kind or nature whatsoever, other
than those imposed by Fractal.
(d) FRACTAL CALL. If MetaTools has acquired Option Shares pursuant to
exercise of the Option (the date of any Closing relating to any such exercise
herein referred to as an "EXERCISE DATE") and no Acquisition Proposal with
respect to Fractal has been consummated at any time after the date of this
Agreement and prior to the date one year following such Exercise Date (nor has
Fractal entered into a definitive agreement or letter of intent with respect
to such an Acquisition Proposal which agreement or letter of intent remains in
effect at the end of such year), then, at any time after the date one year
following such Exercise Date and prior to the date eighteen months following
such Exercise Date, Fractal may require MetaTools, upon delivery to MetaTools
of written notice, to sell to Fractal any Fractal Shares held by MetaTools as
of the day that is ten business days after the date of such notice, up to a
number of shares equal to the number of Option Shares acquired by MetaTools
pursuant to exercise of the Option in connection with such Exercise Date. The
per share purchase price for such sale (the "FRACTAL CALL PRICE") shall be
equal to the Exercise Price, plus an amount equal to six percent (6.0%) of the
Exercise Price per annum, compounded annually, since the applicable Exercise
Date, less any dividends paid on the Fractal Shares to be purchased by Fractal
pursuant to this Section 7(d). The closing of any sale of Fractal Shares
pursuant to this Section 7(d) shall take place at the principal offices of
Fractal at a time and on a date designated by Fractal in the aforementioned
notice to MetaTools, which date shall be no more than 20 and no less than 12
business days from the date of such notice. The Fractal Call Price shall be
paid in immediately available funds, provided that, in the event MetaTools has
acquired Option Shares pursuant to exercise of the Option by issuance and
delivery of MetaTools Shares, at the option of Fractal,
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the Fractal Call Price for part or all of any purchase of Fractal Shares
pursuant to this Section 7(d), up to a number of such shares equal to the
number of Option Shares acquired by MetaTools by issuance and delivery of
MetaTools Shares, shall be paid by delivery of a number of MetaTools Shares
equal to the Fractal Call Price divided by the closing sale price of MetaTools
Shares on the Nasdaq National Market for the trading day immediately preceding
the date of the Exercise Date on which the Option Shares to be purchased by
Fractal pursuant to this Section 7(d) were originally issued to MetaTools.
(e) RESTRICTIONS ON TRANSFER. Until the termination of the Option, Fractal
shall not sell, transfer or otherwise dispose of any MetaTools Shares acquired
by it pursuant to this Agreement.
8. REGISTRATION RIGHTS
(a) Following the termination of the Merger Agreement, each party hereto (a
"HOLDER") may by written notice (a "REGISTRATION NOTICE") to the other party
(the "REGISTRANT") request the Registrant to register under the Securities Act
all or any part of the shares acquired by such Holder pursuant to this
Agreement (the "REGISTRABLE SECURITIES") in order to permit the sale or other
disposition of such shares pursuant to a bona fide firm commitment
underwritten public offering in which the Holder and the underwriters shall
effect as wide a distribution of such Registrable Securities as is reasonably
practicable and shall use reasonable efforts to prevent any person or group
from purchasing through such offering shares representing more than 1% of the
outstanding shares of Common Stock of the Registrant on a fully diluted basis
(a "PERMITTED OFFERING"); provided, however, that any such Registration Notice
must relate to a number of shares equal to at least 2% of the outstanding
shares of Common Stock of the Registrant on a fully diluted basis and that any
rights to require registration hereunder shall terminate with respect to any
shares that may be sold pursuant to Rule 144(k) under the Securities Act. The
Registration Notice shall include a certificate executed by the Holder and its
proposed managing underwriter, which underwriter shall be an investment
banking firm of nationally recognized standing (the "MANAGER"), stating that
(i) the Holder and the Manager have a good faith intention to commence a
Permitted Offering and (ii) the Manager in good faith believes that, based on
the then prevailing market conditions, it will be able to sell the Registrable
Securities at a per share price equal to at least 80% of the per share average
of the closing sale prices of the Registrant's Common Stock on the Nasdaq
National Market for the twenty trading days immediately preceding the date of
the Registration Notice. The Registrant shall thereupon have the option
exercisable by written notice delivered to the Holder within ten business days
after the receipt of the Registration Notice, irrevocably to agree to purchase
all or any part of the Registrable Securities for cash at a price (the "OPTION
PRICE" equal to the product of (i) the number of Registrable Securities so
purchased and (ii) the per share average of the closing sale prices of the
Registrant's Common Stock on the Nasdaq National Market for the twenty trading
days immediately preceding the date of the Registration Notice. Any such
purchase of Registrable Securities by the Registrant hereunder shall take
place at a closing to be held at the principle executive offices of the
Registrant or its counsel at any reasonable date and time designated by the
Registrant in such notice within 10 business days after delivery of such
notice. The payment for the shares to be purchased shall be made by delivery
at the time of such closing of the Option Price in immediately available
funds.
(b) If the Registrant does not elect to exercise its option to purchase
pursuant to Section 8(a) with respect to all Registrable Securities, the
Registrant shall use all reasonable efforts to effect, as promptly as
practicable, the registration under the Securities Act of the unpurchased
Registrable Securities requested to be registered in the Registration Notice;
provided, however, that (i) neither party shall be entitled to more than an
aggregate of two effective registration statements hereunder and (ii) the
Registrant will not be required to file any such registration statement during
any period of time (not to exceed 40 days after a Registration Notice in the
case of clause (A) below or 90 days after a Registration Notice in the case of
clauses (B) and (C) below) when (A) the Registrant is in possession of
material non-public information which it reasonably believes would be
detrimental to be disclosed at such time and, in the written opinion of
counsel to such Registrant, such information would have to be disclosed if a
registration statement were filed at that time; (B) such Registrant is
required under the Securities Act to include audited financial statements for
any period in such registration statement and such
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financial statements are not yet available for inclusion in such registration
statement; or (C) such Registrant determines, in its reasonable judgment, that
such registration would interfere with any financing, acquisition or other
material transaction involving the Registrant. If consummation of the sale of
any Registrable Securities pursuant to a registration hereunder does not occur
within 180 days after the filing with the SEC of the initial registration
statement therefor, the provisions of this Section 8 shall again be applicable
to any proposed registration, it being understood that neither party shall be
entitled to more than an aggregate of two effective registration statements
hereunder. The Registrant shall use all reasonable efforts to cause any
Registrable Securities registered pursuant to this Section 8 to be qualified
for sale under the securities or blue sky laws of such jurisdictions as the
Holder may reasonably request and shall continue such registration or
qualification in effect in such jurisdictions; provided, however, that the
Registrant shall not be required to qualify to do business in, or consent to
general service of process in, any jurisdiction by reason of this provision.
(c) The registration rights set forth in this Section 8 are subject to the
condition that the Holder shall provide the Registrant with such information
with respect to such Holder's Registrable Securities, the plan for
distribution thereof, and such other information with respect to such Holder
as, in the reasonable judgment of counsel for the Registrant, is necessary to
enable the Registrant to include in a registration statement all material
facts required to be disclosed with respect to a registration thereunder.
(d) A registration effected under this Section 8 shall be effected at the
Registrant's expense, except for underwriting discounts and commissions and
the fees and expenses of counsel to the Holder, and the Registrant shall
provide to the underwriters such documentation (including certificates,
opinions of counsel and "comfort" letters from auditors) as are customary in
connection with underwritten public offerings and as such underwriters may
reasonably require. In connection with any registration, the Holder and the
Registrant agree to enter into an underwriting agreement reasonably acceptable
to each such party, in form and substance customary for transactions of this
type with the underwriters participating in such offering.
(e) Indemnification
(i) The Registrant will indemnify the Holder, each of its directors and
officers and each person who controls the Holder within the meaning of Section
15 of the Securities Act, and each underwriter of the Registrant's securities,
with respect to any registration, qualification or compliance which has been
effected pursuant to this Agreement, against all expenses, claims, losses,
damages or liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any registration statement, prospectus,
offering circular or other document, or any amendment or supplement thereto,
incident to any such registration, qualification or compliance, or based on
any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which they were made, not misleading, or any violation by
the Registrant of any rule or regulation promulgated under the Securities Act
applicable to the Registrant in connection with any such registration,
qualification or compliance, and the Registrant will reimburse the Holder and,
each of its directors and officers and each person who controls the Holder
within the meaning of Section 15 of the Securities Act, and each underwriter
for any legal and any other expenses reasonably incurred in connection with
investigating, preparing or defending any such claim, loss, damage, liability
or action, provided that the Registrant will not be liable in any such case to
the extent that any such claim, loss, damage, liability or expense arises out
of or is based on any untrue statement or omission or alleged untrue statement
or omission, made in reliance upon and in conformity with written information
furnished to the Registrant by such Holder or director or officer or
controlling person or underwriter seeking indemnification.
(ii) The Holder will indemnify the Registrant, each of its directors and
officers and each underwriter of the Registrant's securities covered by such
registration statement and each person who controls the Registrant within the
meaning of Section 15 of the Securities Act, against all claims, losses,
damages and liabilities (or actions in respect thereof), including any of the
foregoing incurred in settlement of any litigation, commenced or
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threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by
the Holder of any rule or regulation promulgated under the Securities Act
applicable to the Holder in connection with any such registration,
qualification or compliance, and will reimburse the Registrant, such
directors, officers or control persons or underwriters for any legal or any
other expenses reasonably incurred in connection with investigating, preparing
or defending any such claim, loss, damage, liability or action, in each case
to the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Registrant by the Holder for use therein, provided that in no event shall any
indemnity under this Section 8(e) exceed the gross proceeds of the offering
received by the Holder.
(iii) Each party entitled to indemnification under this Section 8(e) (the
"INDEMNIFIED PARTY") shall give notice to the party required to provide
indemnification (the "INDEMNIFYING PARTY") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of any such
claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense; provided, however, that the Indemnifying
Party shall pay such expense if representation of the Indemnified Party by
counsel retained by the Indemnifying Party would be inappropriate due to
actual or potential differing interests between the Indemnified Party and any
other party represented by such counsel in such proceeding, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 8(e) unless the failure to give such notice is materially prejudicial
to an Indemnifying Party's ability to defend such action. No Indemnifying
Party, in the defense of any such claim or litigation shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a release
from all liability in respect to such claim or litigation. No Indemnifying
Party shall be required to indemnify any Indemnified Party with respect to any
settlement entered into without such Indemnifying Party's prior consent (which
shall not be unreasonably withheld).
9. ADJUSTMENT UPON CHANGES IN CAPITALIZATION; RIGHTS PLANS
(a) In the event of any change in the Fractal Shares by reason of stock
dividends, stock splits, reverse stock splits, mergers (other than the
Merger), recapitalizations, combinations, exchanges of shares and the like,
the type and number of shares or securities subject to the Option, the
Exercise Ratio and the Exercise Price shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction so
that MetaTools shall receive, upon exercise of the Option, the number and
class of shares or other securities or property that MetaTools would have
received in respect of the Fractal Shares if the Option had been exercised
immediately prior to such event or the record date therefor, as applicable.
(b) At any time during which the Option is exercisable, and at any time
after the Option is exercised (in whole or in part, if at all), neither
Fractal nor MetaTools shall adopt a shareholders rights plan (a so-called
"poison pill") that contains provisions for the distribution of rights
thereunder as a result of the other party being the beneficial owner of shares
of the first party by virtue of the Option being exercisable or having been
exercised (or as a result of such other party beneficially owning shares
issuable in respect of any Option Shares). It is understood, however, that
following termination (if any) of the Merger Agreement, a party may adopt a
shareholders rights plan, that contains provisions for the distribution of
rights thereunder as a result of the other party being the beneficial owner of
shares of the first party in addition to those that may be beneficially owned
by virtue of the Option being exercisable or having been exercised (or as a
result of such other party beneficially owning shares issuable in respect of
any Option Shares).
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10. RESTRICTIVE LEGENDS
Each certificate representing Option Shares issued to MetaTools hereunder,
and each certificate representing MetaTools Shares delivered to Fractal at a
Closing, shall include a legend in substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT DATED AS OF FEBRUARY
11, 1997, A COPY OF WHICH MAY BE OBTAINED FROM THE ISSUER.
11. LISTING AND HSR FILING
Fractal, upon the request of MetaTools, shall promptly file an application
to list the Fractal Shares to be acquired upon exercise of the Option for
quotation on the Nasdaq National Market and shall use its best efforts to
obtain approval of such listing as soon as practicable. MetaTools, upon the
request of Fractal, shall promptly file an application to list the MetaTools
Shares issued and delivered to Fractal pursuant to Section 4 for quotation on
the Nasdaq National Market and shall use its best efforts to obtain approval
of such listing as soon as practicable. Promptly after the date hereof, each
of the parties hereto shall promptly file with the Federal Trade Commission
and the Antitrust Division of the United States Department of Justice all
required premerger notification and report forms and other documents and
exhibits required to be filed under the HSR Act to permit the acquisition of
the Fractal Shares subject to the Option at the earliest possible date.
12. BINDING EFFECT
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns. Nothing
contained in this Agreement, express or implied, is intended to confer upon
any person other than the parties hereto and their respective successors and
permitted assigns any rights or remedies of any nature whatsoever by reason of
this Agreement. Any shares sold by a party in compliance with the provisions
of Section 8 shall, upon consummation of such sale, be free of the
restrictions imposed with respect to such shares by this Agreement and any
transferee of such shares shall not be entitled to the rights of such party.
Certificates representing shares sold in a registered public offering pursuant
to Section 8 shall not be required to bear the legend set forth in Section 10.
13. SPECIFIC PERFORMANCE
The parties recognize and agree that if for any reason any of the provisions
of this Agreement are not performed in accordance with their specific terms or
are otherwise breached, immediate and irreparable harm or injury would be
caused for which money damages would not be an adequate remedy. Accordingly,
each party agrees that in addition to other remedies the other party shall be
entitled to an injunction restraining any violation or threatened violation of
the provisions of this Agreement. In the event that any action shall be
brought in equity to enforce the provisions of the Agreement, neither party
will allege, and each party hereby waives the defense, that there is an
adequate remedy at law.
14. ENTIRE AGREEMENT
This Agreement and the Merger Agreement (including the appendices thereto)
constitute the entire agreement between the parties with respect to the
subject matter hereof and supersede all other prior agreements and
understandings, both written and oral, between the parties with respect to the
subject matter hereof.
15. FURTHER ASSURANCES
Each party will execute and deliver all such further documents and
instruments and take all such further action as may be necessary in order to
consummate the transactions contemplated hereby.
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16. VALIDITY
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of the other provisions of this
Agreement, which shall remain in full force and effect. In the event any
Governmental Entity of competent jurisdiction holds any provision of this
Agreement to be null, void or unenforceable, the parties hereto shall
negotiate in good faith and shall execute and deliver an amendment to this
Agreement in order, as nearly as possible, to effectuate, to the extent
permitted by law, the intent of the parties hereto with respect to such
provision.
17. NOTICES
All notices and other communications hereunder shall be in writing and shall
be deemed given if delivered personally or by commercial delivery service, or
sent via telecopy (receipt confirmed) to the parties at the following
addresses or telecopy numbers (or at such other address or telecopy numbers
for a party as shall be specified by like notice):
(a) if to Fractal, to:
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
(b) if to MetaTools, to:
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
18. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of California applicable to agreements made and to be
performed entirely within such State.
19. COUNTERPARTS
This Agreement may be executed in two counterparts, each of which shall be
deemed to be an original, but both of which, taken together, shall constitute
one and the same instrument.
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<PAGE>
20. EXPENSES
Except as otherwise expressly provided herein or in the Merger Agreement,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses.
21. AMENDMENTS; WAIVER
This Agreement may be amended by the parties hereto and the terms and
conditions hereof may be waived only by an instrument in writing signed on
behalf of each of the parties hereto, or, in the case of a waiver, by an
instrument signed on behalf of the party waiving compliance.
22. ASSIGNMENT
Neither of the parties hereto may sell, transfer, assign or otherwise
dispose of any of its rights or obligations under this Agreement or the Option
created hereunder to any other person, without the express written consent of
the other party, except that the rights and obligations hereunder shall inure
to the benefit of and be binding upon any successor of a party hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers as of the date first
above written.
Fractal Design Corporation
/s/ Mark Zimmer
By: _________________________________
Name: Mark Zimmer
Title: President and Chief
Executive Officer
MetaTools, Inc.
/s/ John J. Wilczak
By: _________________________________
Name: John J. Wilczak
Title: President, Chief Executive
Officer and Chairman of the
Board of Directors
***STOCK OPTION AGREEMENT***
(Fractal option to MetaTools)
11
<PAGE>
EXHIBIT 2.4
[FORM OF AGREEMENT]
METATOOLS, INC.
AFFILIATE AGREEMENT
This METATOOLS, INC. AFFILIATE AGREEMENT ("AGREEMENT") is dated as of
February 11, 1997, between MetaTools, Inc., a Delaware corporation
("METATOOLS"), Fractal Design Corporation, a California corporation
("FRACTAL"), and the undersigned affiliate ("AFFILIATE") of MetaTools.
WHEREAS, MetaTools and Fractal have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Fractal and MetaTools
intend to enter into a business combination transaction to pursue their long
term business strategies (the "MERGER") (capitalized terms used and not
otherwise defined herein shall have the respective meanings ascribed to them
in the Merger Agreement);
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of MetaTools, as the term "affiliate" is used in Accounting Series
Releases 130 and 135, as amended, although nothing contained herein shall be
construed as an admission by Affiliate that Affiliate is in fact an affiliate
of MetaTools;
WHEREAS, it will be a condition to effectiveness of the Merger pursuant to
the Merger Agreement that the independent accounting firms that audit the
annual financial statements of Fractal and MetaTools will have delivered their
written concurrences with the conclusions of management of Fractal and
MetaTools to the effect that the Merger will be accounted for as a pooling of
interests under Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to MetaTools to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that
the representations, warranties and covenants by Affiliate set forth herein
will be relied upon by MetaTools, Fractal, and their respective affiliates,
counsel and accounting firms, and that substantial losses and damages may be
incurred by these persons if Affiliate's representations, warranties or
covenants are breached. Affiliate has carefully read this Agreement and the
Merger Agreement and has discussed the requirements of this Agreement with
Affiliate's professional advisors, who are qualified to advise him with regard
to such matters.
2. Covenants Related to Pooling of Interests. In accordance with SAB 65,
until the second day after the day that MetaTools publicly announces financial
results covering at least 30 days of combined operations of MetaTools and
Fractal, Affiliate will not sell, exchange, transfer, pledge, distribute, make
any gift or otherwise dispose of or grant any option, establish any "short" or
put-equivalent position with respect to or enter into any similar transaction
(through derivatives or otherwise) intended or having the effect, directly or
indirectly, to reduce Affiliate's risk relative to any shares of MetaTools
Common Stock. MetaTools may, at its discretion, place a stock transfer notice
consistent with the foregoing with its transfer agent with respect to
Affiliate's shares. Notwithstanding the foregoing, Affiliate will not be
prohibited by the foregoing from selling or disposing of shares so long as
such sale or disposition is in accordance with the "de minimis" test set forth
in SEC Staff Accounting Bulletin No. 76.
3. Beneficial Ownership of Stock. Except for the MetaTools Common Stock and
options to purchase MetaTools Common Stock set forth on the last page of this
Agreement, Affiliate does not beneficially own any shares of MetaTools Common
Stock or any other equity securities of MetaTools or any options, warrants or
other rights to acquire any equity securities of MetaTools.
<PAGE>
4. Miscellaneous.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where
the context so permits, heirs, executors, administrators, trustees and
successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall be
entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
Executed as of the date shown on the first page of this Agreement.
METATOOLS, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
FRACTAL DESIGN CORPORATION
By:__________________________________
Name:________________________________
Title:_______________________________
AFFILIATE
By:__________________________________
Name of Affiliate:___________________
Name of Signatory (if different from
name of
Affiliate):__________________________
Title of Signatory
(if applicable):_____________________
Number of shares of MetaTools Common Stock beneficially owned by Affiliate:
__________________________________________
Number of shares MetaTools Common Stock subject to options beneficially owned
by Affiliate:
__________________________________________
***METATOOLS, INC. AFFILIATE AGREEMENT***
2
<PAGE>
EXHIBIT 2.5
[FORM OF AGREEMENT]
FRACTAL DESIGN CORPORATION
AFFILIATE AGREEMENT
This FRACTAL DESIGN CORPORATION AFFILIATE AGREEMENT ("AGREEMENT") is dated
as of February 11, 1997, between MetaTools, Inc., a Delaware corporation
("METATOOLS"), Fractal Design Corporation, a California corporation
("FRACTAL") and the undersigned affiliate ("AFFILIATE") of Fractal.
WHEREAS, Fractal and MetaTools have entered into an Agreement and Plan of
Reorganization ("MERGER AGREEMENT") pursuant to which Fractal and MetaTools
intend to enter into a business combination transaction to pursue their long
term business strategies (the "MERGER") (capitalized terms used and not
otherwise defined herein shall have the respective meanings ascribed to them
in the Merger Agreement);
WHEREAS, pursuant to the Merger, at the Effective Time outstanding shares of
Fractal Capital Stock, including any shares owned by Affiliate, will be
converted into the right to receive shares of MetaTools Common Stock as set
forth in the Merger Agreement;
WHEREAS, Affiliate has been advised that Affiliate may be deemed to be an
"affiliate" of Fractal, as the term "affiliate" is used (i) for purposes of
paragraphs (c) and (d) of Rule 145 of the Rules and Regulations of the
Securities and Exchange Commission (the "SEC") and (ii) in the SEC's
Accounting Series Releases 130 and 135, as amended, although nothing contained
herein shall be construed as an admission by Affiliate that Affiliate is in
fact an affiliate of Fractal;
WHEREAS, it will be a condition to consummation of the Merger pursuant to
the Merger Agreement that (i) the attorneys for each of MetaTools and Fractal
will have delivered written opinions that the Merger will constitute a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "CODE"), and (ii) the independent accounting
firms that audit the annual financial statements of Fractal and MetaTools will
have delivered their written concurrences with the conclusions of management
of Fractal and MetaTools to the effect that the Merger will be accounted for
as a pooling of interests under Accounting Principles Board Opinion No. 16;
WHEREAS, the execution and delivery of this Agreement by Affiliate is a
material inducement to MetaTools to enter into the Merger Agreement.
NOW, THEREFORE, intending to be legally bound, the parties hereby agree as
follows:
1. Acknowledgments by Affiliate. Affiliate acknowledges and understands that
the representations, warranties and covenants by Affiliate set forth herein
will be relied upon by MetaTools, Fractal, and their respective affiliates,
counsel and accounting firms, and that substantial losses and damages may be
incurred by these persons if Affiliate's representations, warranties or
covenants are breached. Affiliate has carefully read this Agreement and the
Merger Agreement and has discussed the requirements of this Agreement with
Affiliate's professional advisors, who are qualified to advise Affiliate with
regard to such matters.
2. Compliance with Rule 145 and the Act.
(a) Affiliate has been advised that (i) the issuance of shares of MetaTools
Common Stock in connection with the Merger is expected to be effected pursuant
to a Registration Statement on Form S-4 under the Securities Act of 1933, as
amended (the "ACT"), and as such will not be deemed "restricted securities"
within the meaning of Rule 144 promulgated thereunder and resale of such
shares will not be subject to any restrictions other than as set forth in Rule
145 of the Act unless otherwise transferred pursuant to an effective
registration statement under the Act or an appropriate exemption from
registration, (ii) Affiliate may be deemed to be an
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<PAGE>
affiliate of Fractal, and (iii) no sale, transfer or other disposition by
Affiliate of any MetaTools Common Stock received by Affiliate will be
registered under the Act. Affiliate accordingly agrees not to sell, transfer
or otherwise dispose of any MetaTools Common Stock issued to Affiliate in the
Merger unless (x) such sale, transfer or other disposition is made in
conformity with the requirements of Rule 145(d) promulgated under the Act, or
(y) Affiliate delivers to MetaTools a written opinion of counsel, reasonably
acceptable to MetaTools in form and substance, that such sale, transfer or
other disposition is otherwise exempt from registration under the Act.
(b) MetaTools will give stop transfer instructions to its transfer agent
with respect to any MetaTools Common Stock received by Affiliate pursuant to
the Merger and there will be placed on the certificates representing such
MetaTools Common Stock, or any substitutions therefor, a legend stating in
substance:
"THE SHARES REPRESENTED BY THIS CERTIFICATE WERE ISSUED IN A TRANSACTION TO
WHICH RULE 145 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
APPLIES AND MAY ONLY BE TRANSFERRED IN CONFORMITY WITH RULE 145(d) UNDER
SUCH ACT OR IN ACCORDANCE WITH A WRITTEN OPINION OF COUNSEL, REASONABLY
ACCEPTABLE TO THE ISSUER IN THE FORM AND SUBSTANCE THAT SUCH TRANSFER IS
EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED."
The legend set forth above shall be removed (by delivery of a substitute
certificate without such legend) and MetaTools shall so instruct its transfer
agent, if Affiliate delivers to MetaTools (i) satisfactory written evidence
that the shares have been sold in compliance with Rule 145 (in which case, the
substitute certificate will be issued in the name of the transferee), or (ii)
an opinion of counsel, in form and substance reasonably satisfactory to the
effect that public sale of the shares by the holder thereof is no longer
subject to Rule 145.
(c) To the extent required by applicable securities laws, MetaTools agrees,
for a period of two years from the date of this Agreement, to file with the
SEC in a timely manner all reports and other documents required of MetaTools
under the Act and the Securities Exchange Act of 1934, as amended.
3. Covenants Related to Pooling of Interests. In accordance with SAB 65,
until the second day after the day that MetaTools publicly announces financial
results covering at least 30 days of combined operations of MetaTools and
Fractal, Affiliate will not sell, exchange, transfer, pledge, distribute, or
otherwise dispose of or grant any option, establish any "short" or put-
equivalent position with respect to or enter into any similar transaction
(through derivatives or otherwise) intended or having the effect, directly or
indirectly, to reduce its risk relative to any securities, or shares of
MetaTools Common Stock received by Affiliate in connection with the Merger.
MetaTools may, at its discretion, cause a restrictive legend to the foregoing
effect to be placed on MetaTools Common Stock certificates issued to Affiliate
in the Merger and place a stock transfer notice consistent with the foregoing
with its transfer agent with respect to the certificates, provided that such
restrictive legend shall be removed and/or such notice shall be countermanded
promptly upon expiration of the necessity therefor at the request of
Affiliate. Notwithstanding the foregoing, Affiliate will not be prohibited by
the foregoing from selling or disposing of shares, so long as such sale or
disposition is in accordance with the "de minimis" test set forth in SEC Staff
Accounting Bulletin No. 76 and so long as Affiliate has obtained MetaTools's
prior written approval of such sale or disposition.
4. Representations, Warranties and Covenants Related to Tax Effects of the
Merger.
(a) Affiliate is the beneficial owner of the number of shares of Fractal
Common Stock (including shares issuable upon exercise of stock options) set
forth on the last page of this Agreement and did not acquire any of the
Fractal Common Stock in contemplation of the Merger;
(b) Affiliate has not engaged in a Sale (as defined below) of any shares of
Fractal Common Stock in contemplation of the Merger;
2
<PAGE>
(c) Affiliate has no plan or intention (a "PLAN") to engage in a sale,
exchange, transfer, redemption or reduction in any way of Affiliate's risk of
ownership by short sale or otherwise, or other disposition, directly or
indirectly (such actions being collectively referred to herein as a "SALE") of
more than 50% of the shares of MetaTools Common Stock to be received by
Affiliate in the Merger;
(d) If Affiliate is a partnership, then the term "sale" as used in paragraph
(c) above shall be deemed to include any distribution to the partners of the
undersigned unless no recipient of any such distribution will receive shares
of Fractal Common Stock representing 1% or more of the shares of Fractal
Common Stock presently outstanding;
(e) Affiliate is not aware of, or participating in, any Plan on the part of
the Affiliates of Fractal to engage in a Sale or Sales of the MetaTools Common
Stock to be received in the Merger such that the aggregate fair market value,
as of the Effective Date of the Merger, of the shares subject to such Sales
would exceed 50% of the aggregate fair market value of all shares of
outstanding Fractal Common Stock immediately prior to the Merger; and
(f) Affiliate understands that Fractal, MetaTools and their respective
affiliates, as well as legal counsel to Fractal and MetaTools (in connection
with rendering their opinions that the Merger will be a "reorganization"
within the meaning of Section 368(a) of the Code) will be relying on (a) the
truth and accuracy of the representations contained herein and (b) Affiliate's
performance of the obligations set forth herein.
5. Miscellaneous.
(a) For the convenience of the parties hereto, this Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document.
(b) This Agreement shall be enforceable by, and shall inure to the benefit
of and be binding upon, the parties hereto and their respective successors and
assigns. As used herein, the term "successors and assigns" shall mean, where
the context so permits, heirs, executors, administrators, trustees and
successor trustees, and personal and other representatives.
(c) This Agreement shall be governed by and construed, interpreted and
enforced in accordance with the internal laws of the State of California
(without regard to the principles of conflict of laws thereof.
(d) If a court of competent jurisdiction determines that any provision of
this Agreement is not enforceable or enforceable only if limited in time
and/or scope, this Agreement shall continue in full force and effect with such
provision stricken or so limited.
(e) Counsel to and accountants for the parties to the Agreement shall be
entitled to rely upon this Agreement as needed.
(f) This Agreement shall not be modified or amended, or any right hereunder
waived or any obligation excused, except by a written agreement signed by both
parties.
3
<PAGE>
Executed as of the date shown on the first page of this Agreement.
Metatools, Inc.
By:__________________________________
Name: _______________________________
Title: ______________________________
Fractal Design Corporation
By:__________________________________
Name: _______________________________
Title: ______________________________
Affiliate
By:__________________________________
Name of Affiliate: __________________
Name of Signatory (if different from
name of Affiliate): _________________
Title of Signatory (if applicable): _
Number of shares of Fractal Common Stock beneficially owned by Affiliate:
_______________________________________________________________
Number of shares of Fractal Common Stock subject to options beneficially owned
by Affiliate:
_______________________________________________________________
***FRACTAL DESIGN CORPORATION AFFILIATE AGREEMENT***
4
<PAGE>
EXHIBIT 2.6
[FORM OF AGREEMENT]
METATOOLS, INC.
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of February
11, 1997, between Fractal Design Corporation, a California corporation (the
"COMPANY"), and the undersigned stockholder ("STOCKHOLDER") of MetaTools,
Inc., a Delaware corporation ("PARENT").
Recitals
A. Concurrently with the execution of this Agreement, the Company, Parent
and Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan
of Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Stockholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
Parent as is indicated on the final page of this Agreement (the "SHARES").
C. As a material inducement to enter into the Merger Agreement, the Company
desires the Stockholder to agree, and the Stockholder is willing to agree to
vote the Shares and any other such shares of capital stock of Parent so as to
facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Agreement to Vote Shares: Additional Purchases.
1.1 Agreement to Vote Shares. At every meeting of the stockholders of
Parent called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of
the stockholders of Parent with respect to any of the following Stockholder
shall vote the Shares and any New Shares in favor of approval of (x) the
amendment of Parent's Certificate of Incorporation to increase its
authorized share capital to allow for the issuance of shares of its Common
Stock by virtue of the Merger, (y) the issuance of shares of such Common
Stock by virtue of the Merger and (z) any matter that could reasonably be
expected to facilitate the Merger.
1.2 Additional Purchases. Stockholder agrees that any shares of capital
stock of Parent that Stockholder purchases or with respect to which
Stockholder otherwise acquires beneficial ownership after the execution of
this Agreement and prior to the Expiration Date ("NEW SHARES") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Stockholder agrees to deliver to Parent a proxy in the form attached hereto as
Exhibit A (the "PROXY"), which shall be irrevocable, with the total number of
shares of capital stock of Parent beneficially owned (as such term is defined
in Rule 13d-3 under the Exchange Act) by Stockholder set forth therein.
3. Representations and Warranties of the Stockholder. Stockholder (i) is the
beneficial owner of the Shares, which at the date hereof are free and clear of
any liens, claims, options, charges or other encumbrances; (ii) does not
beneficially own any shares of capital stock of Parent other than the Shares
(excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law); and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement.
<PAGE>
4. Additional Documents. Stockholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of the Company or Stockholder, as the case may be, to carry out the
intent of this Agreement.
5. Consent and Waiver. Stockholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Merger under the terms of
any agreements to which Stockholder is a party or pursuant to any rights
Stockholder may have.
6. Termination. This Agreement shall terminate and shall have no further
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of
the Merger Agreement or (ii) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof.
7. Miscellaneous.
7.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants
and restrictions of this Agreement shall remain in full force and effect
and shall in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement
nor any of the rights, interests or obligations of the parties hereto may
be assigned by either of the parties without prior written consent of the
other.
7.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of
a written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto
acknowledge that the Company will be irreparably harmed and that there will
be no adequate remedy at law for a violation of any of the covenants or
agreements of Stockholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to the Company upon
any such violation, the Company shall have the right to enforce such
covenants and agreements by specific performance, injunctive relief or by
any other means available to the Company at law or in equity.
7.5 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and sufficient if delivered in
person, by cable, telegram or telex, or sent by mail (registered or
certified mail, postage prepaid, return receipt requested) or overnight
courier (prepaid) to the respective parties as follows:
If to the Company:Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Attn: President and Chief Executive Officer
With a copy to:Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
If to the Stockholder:To the address for notice set forth on the last
page hereof.
With a copy to:Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq. Marty Korman, Esq.
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<PAGE>
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
7.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
7.9 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly
executed on the date and year first above written.
Fractal Design Corporation
By: _________________________________
Title: ______________________________
Stockholder:
By: _________________________________
Stockholder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
Shares of Common Stock
Beneficially Owned:
***METATOOLS VOTING AGREEMENT***
3
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned stockholder of MetaTools, Inc., a Delaware corporation
("PARENT"), hereby irrevocably appoints the directors on the Board of
Directors of Fractal Design Corporation, a California corporation (the
"COMPANY"), and each of them, as the sole and exclusive attorneys and proxies
of the undersigned, with full power of substitution and resubstitution, to the
full extent of the undersigned's rights with respect to the shares of capital
stock of Parent beneficially owned by the undersigned, which shares are listed
on the final page of this Proxy (the "SHARES"), and any and all other shares
or securities issued or issuable in respect thereof on or after the date
hereof, until such time as that certain Agreement of Merger and Plan of
Reorganization dated as of February 11, 1997 (the "MERGER AGREEMENT"), among
Parent, Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company, shall be terminated in
accordance with its terms or the Merger (as defined in the Merger Agreement)
is effective. Upon the execution hereof, all prior proxies given by the
undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement dated
as of February 11, 1997 between the Company and the undersigned stockholder
(the "VOTING AGREEMENT"), and is granted in consideration of the Company
entering into the Merger Agreement. The attorneys and proxies named above will
be empowered at any time prior to termination of the Merger Agreement to
exercise all voting and other rights (including, without limitation, the power
to execute and deliver written consents with respect to the Shares) of the
undersigned at every annual, special or adjourned meeting of Parent
stockholders, and in every written consent in lieu of such a meeting, or
otherwise, in favor of approval of (x) the amendment of Parent's Certificate
of Incorporation to increase its authorized share capital to allow for the
issuance of shares of its Common Stock by virtue of the Merger, (y) the
issuance of shares of such Common Stock by virtue of the Merger and (z) any
matter that could reasonably be expected to facilitate the Merger.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the stockholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of (x) the amendment of Parent's Certificate of Incorporation to
increase its authorized share capital to allow for the issuance of shares of
its Common Stock by virtue of the Merger, (y) the issuance of shares of such
Common Stock by virtue of the Merger and (z) any matter that could reasonably
be expected to facilitate the Merger. The undersigned stockholder may vote the
Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated: February 11, 1997
Signature of Stockholder: ___________________________________
Print Name of Stockholder: ____________________________________
_____________Shares of Common Stock Beneficially Owned
***METATOOLS PROXY***
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EXHIBIT 2.7
[FORM OF AGREEMENT]
FRACTAL DESIGN CORPORATION
VOTING AGREEMENT
This Voting Agreement ("AGREEMENT") is made and entered into as of February
11, 1997, between MetaTools, Inc., a Delaware corporation ("PARENT"), and the
undersigned shareholder ("SHAREHOLDER") of Fractal Design Corporation, a
California corporation (the "COMPANY").
Recitals
A. Concurrently with the execution of this Agreement, Parent, the Company
and Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), are entering into an Agreement and Plan
of Reorganization (the "MERGER AGREEMENT") which provides for the merger (the
"MERGER") of Merger Sub with and into the Company. Pursuant to the Merger,
shares of capital stock of the Company will be converted into Common Stock of
Parent on the basis described in the Merger Agreement.
B. The Shareholder is the record holder and beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT")), of such number of shares of the outstanding Common Stock of
the Company as is indicated on the final page of this Agreement (the
"SHARES").
C. As a material inducement to enter into the Merger Agreement, Parent
desires the Shareholder to agree, and the Shareholder is willing to agree to
vote the Shares and any other such shares of capital stock of the Company so
as to facilitate consummation of the Merger.
NOW, THEREFORE, intending to be legally bound, the parties agree as follows:
1. Agreement to Vote Shares; Additional Purchases.
1.1 Agreement to Vote Shares. At every meeting of the shareholders of the
Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of
the shareholders of the Company with respect to any of the following,
Shareholder shall vote the Shares and any New Shares in favor of (x)
approval of the Merger Agreement and the Merger and (y) any matter that
could reasonably be expected to facilitate the Merger.
1.2 Additional Purchases. Shareholder agrees that any shares of capital
stock of the Company that Shareholder purchases or with respect to which
Shareholder otherwise acquires beneficial ownership after the execution of
this Agreement and prior to the Expiration Date ("NEW SHARES") shall be
subject to the terms and conditions of this Agreement to the same extent as
if they constituted Shares.
2. Irrevocable Proxy. Concurrently with the execution of this Agreement,
Shareholder agrees to deliver to Parent a proxy in the form attached hereto
as Exhibit A (the "PROXY"), which shall be irrevocable, with the total
number of shares of capital stock of the Company beneficially owned (as
such term is defined in Rule 13d-3 under the Exchange Act) by Shareholder
set forth therein.
3. Representations and Warranties of the Shareholder. Shareholder (i) is
the beneficial owner of the Shares, which at the date hereof are free and
clear of any liens, claims, options, charges or other encumbrances; (ii)
does not beneficially own any shares of capital stock of the Company other
than the Shares (excluding shares s to which Shareholder currently
disclaims beneficial ownership in accordance with applicable law); and
(iii) has full power and authority to make, enter into and carry out the
terms of this Agreement.
<PAGE>
4. Additional Documents. Shareholder hereby covenants and agrees to execute
and deliver any additional documents necessary or desirable, in the reasonable
opinion of Parent or Shareholder, as the case may be, to carry out the intent
of this Agreement.
5. Consent and Waiver. Shareholder hereby gives any consents or waivers that
are reasonably required for the consummation of the Merger under the terms of
any agreements to which Shareholder is a party or pursuant to any rights
Shareholder may have.
6. Termination. This Agreement shall terminate and shall have no further
force or effect as of the earlier to occur of (i) such date and time as the
Merger shall become effective in accordance with the terms and provisions of
the Merger Agreement or (ii) such date and time as the Merger Agreement shall
have been terminated pursuant to Article VII thereof.
7. Miscellaneous.
7.1 Severability. If any term, provision, covenant or restriction of this
Agreement is held by a court of competent jurisdiction to be invalid, void or
unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
7.2 Binding Effect and Assignment. This Agreement and all of the provisions
hereof shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by
either of the parties without prior written consent of the other.
7.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except upon the execution and delivery of a
written agreement executed by the parties hereto.
7.4 Specific Performance; Injunctive Relief. The parties hereto acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Shareholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation, Parent
shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to Parent at
law or in equity.
7.5 Notices. All notices, requests, claims, demands and other communications
hereunder shall be in writing and sufficient if delivered in person, by cable,
telegram or telex, or sent by mail (registered or certified mail, postage
prepaid, return receipt requested) or overnight courier (prepaid) to the
respective parties as follows:
If to Parent: MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
Attn: President and Chief Executive Officer
With a copy to: Wilson Sonsini Goodrich & Rosati, P.C.
650 Page Mill Road
Palo Alto, California 94304-1050
Attn: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
If to the Shareholder: To the address for notice set forth on the
last page hereof.
With a copy to: Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attn: James Brock, Esq.
2
<PAGE>
or to such other address as any party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
only be effective upon receipt.
7.6 Governing Law. This Agreement shall be governed by, and construed and
enforced in accordance with, the internal laws of the State of California
(without regard to the principles of conflict of laws thereof).
7.7 Entire Agreement. This Agreement contains the entire understanding of
the parties in respect of the subject matter hereof, and supersedes all prior
negotiations and understandings between the parties with respect to such
subject matter.
7.8 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be an original, but all of which together shall constitute
one and the same agreement.
7.9 Effect of Headings. The section headings herein are for convenience only
and shall not affect the construction or interpretation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Voting Agreement to be duly
executed on the date and year first above written.
PARENT
By:__________________________________
Title: President and Chief Executive
Officer
________________________________
SHAREHOLDER:
By:__________________________________
Shareholder's Address for Notice:
_____________________________________
_____________________________________
_____________________________________
_Shares of Common Stock Beneficially
Owned:
***FRACTAL VOTING AGREEMENT***
3
<PAGE>
EXHIBIT A
IRREVOCABLE PROXY
The undersigned shareholder of Fractal Design Corporation, a California
corporation (the "COMPANY"), hereby irrevocably appoints the directors on the
Board of Directors of MetaTools, Inc., a Delaware corporation ("PARENT"), and
each of them, as the sole and exclusive attorneys and proxies of the
undersigned, with full power of substitution and resubstitution, to the full
extent of the undersigned's rights with respect to the shares of capital stock
of the Company beneficially owned by the undersigned, which shares are listed
on the final page of this Proxy (the "SHARES"), and any and all other shares
or securities issued or issuable in respect thereof on or after the date
hereof, until such time as that certain Agreement of Merger and Plan of
Reorganization dated as of February 11, 1997 (the "MERGER AGREEMENT"), among
Parent, Rook Acquisition Corp., a Delaware corporation and a wholly-owned
subsidiary of Parent ("MERGER SUB"), and the Company, shall be terminated in
accordance with its terms or the Merger (as defined in the Merger Agreement)
is effective. Upon the execution hereof, all prior proxies given by the
undersigned with respect to the Shares and any and all other shares or
securities issued or issuable in respect thereof on or after the date hereof
are hereby revoked and no subsequent proxies will be given.
This proxy is irrevocable, is granted pursuant to the Voting Agreement dated
as of February 11, 1997 between Parent and the undersigned shareholder (the
"VOTING AGREEMENT"), and is granted in consideration of Parent entering into
the Merger Agreement. The attorneys and proxies named above will be empowered
at any time prior to termination of the Merger Agreement to exercise all
voting and other rights (including, without limitation, the power to execute
and deliver written consents with respect to the Shares) of the undersigned at
every annual, special or adjourned meeting of the Company shareholders, and in
every written consent in lieu of such a meeting, or otherwise, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger.
The attorneys and proxies named above may only exercise this proxy to vote
the Shares subject hereto at any time prior to termination of the Merger
Agreement at every annual, special or adjourned meeting of the shareholders of
the Company and in every written consent in lieu of such meeting, in favor of
approval of the Merger and the Merger Agreement and any matter that could
reasonably be expected to facilitate the Merger. The undersigned shareholder
may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This proxy is irrevocable.
Dated:February 11, 1997
Signature of Shareholder: ________________________________
Print Name of Shareholder: _______________________________
______ Shares of Common Stock Beneficially
Owned
***FRACTAL PROXY***
1
<PAGE>
Exhibit 2.8
-----------
[Form of Agreement]
NONCOMPETITION AGREEMENT
This NONCOMPETITION AGREEMENT, is entered into this 11th day of February,
1997 (the "AGREEMENT") by and between MetaTools, Inc., a Delaware corporation
("METATOOLS"), and ___________________ (the "EMPLOYEE").
BACKGROUND
----------
This Agreement is entered into in connection with and is ancillary to an
Agreement and Plan of Reorganization dated as of the date hereof (the "MERGER
AGREEMENT") among MetaTools, Fractal Design Corporation, a California
corporation ("FRACTAL") and Rook Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of MetaTools ("SUB"), pursuant to which MetaTools and
Fractal intend to enter into a business combination transaction to pursue their
long-term business strategies.
Employee is an executive employee and stockholder of Fractal and has been
actively involved in Fractal's business. MetaTools intends to continue the
business of Fractal after the Effective Time (as such term is defined in the
Merger Agreement) and to integrate such business into MetaTools's ongoing
business. To preserve and protect the assets of Fractal, including Fractal's
goodwill, customers and trade secrets of which Employee has knowledge, and to
preserve and protect MetaTools's goodwill and business interests going forward,
and as a material inducement for MetaTools to enter into the Merger Agreement,
Employee has agreed to enter into this Agreement.
Employee and MetaTools believe the limitations as to time, geographical
area and scope of activity contained in this Agreement are reasonably necessary
to, and no greater than that required to, protect the goodwill and business
interests purchased by MetaTools.
1. Noncompete. Beginning at the date hereof and until the date being
----------
thirty (30) months from the Effective Time (the "NONCOMPETITION PERIOD"),
Employee will not individually or as an employee, consultant, advisor,
independent contractor, partner, officer, director, stockholder or investor or
in any other capacity whatsoever of or for any person, firm, partnership,
company or corporation other than MetaTools or its subsidiaries:
(a) Own, manage, operate, sell, control or participate in the
ownership, management, operation, sales or control of or permit Employee's name
to be used in connection with any business engaged in the design, development,
manufacturing, licensing, sale, marketing or distribution of any computer
software products for any of the following markets in any of the geographical
areas referred to in Section 2 below: 3 dimensional paint, 2 dimensional paint
and composition, collaborative web paint, 2 dimensional illustration, 3
dimensional illustration, 3 dimensional modeling, human figure modeling, 2
dimensional image processing, 2 dimensional metaball and 3 dimensional metaball;
provided, however, that notwithstanding the foregoing, Employee may own,
- -------- -------
directly or indirectly, solely as a passive investment, up to one percent (1%)
of any class of securities of any such business which are traded on a
<PAGE>
national securities exchange or listed on the National Association of Securities
Dealers Automated Quotation System;
(b) Recruit, attempt to hire, solicit, assist others in recruiting or
hiring, or refer to others concerning employment, in or with respect to any of
the geographical areas referred to in Section 3 below, any person who is an
employee of MetaTools, Fractal or any of their respective subsidiaries, or
induce or attempt to induce any such employee to terminate his or her employment
with MetaTools, Fractal or any of their respective subsidiaries.
2. Geographic Area. The geographical areas in which the restrictions
---------------
provided for in this Agreement apply include all cities, counties and states of
the United States, and all other countries, in which Fractal or any of its
subsidiaries has engaged in licensing or sales or otherwise conducted business
or selling or licensing efforts at any time during the two years prior to the
date hereof. The agreement not to compete in each such geographic subdivision
is a separate and severable agreement from all such other agreements. Employee
acknowledges that the scope and period of restrictions and the geographical area
to which the restrictions imposed in this Section 2 applies are fair and
reasonable and are reasonably required for the protection of MetaTools.
3. Injunctions. Employee acknowledges that any breach of the covenants
-----------
of this Agreement will result in immediate and irreparable injury to MetaTools
and, accordingly, consents to the application of injunctive relief and such
other equitable remedies for the benefit of MetaTools as may be appropriate in
the event such a breach occurs or is threatened. The foregoing remedies will be
in addition to all other legal remedies to which MetaTools may be entitled
hereunder, including, without limitation, monetary damages.
4. Confidential Information and Invention Assignment Agreement. Employee
-----------------------------------------------------------
covenants that Employee shall sign a Company Confidential Information and
Assignment Agreement in substantially similar form to the agreements routinely
signed by other employees of the Company.
5. Miscellaneous.
-------------
(a) Effective Time; Termination. This Agreement shall be effective
---------------------------
as of the date hereof and shall terminate and be of no further effect when and
if the Merger Agreement is terminated pursuant to Article VII of the Merger
Agreement.
(b) Notices. Any and all notices permitted or required to be given
-------
under this Agreement must be in writing. Notices will be deemed given (i) when
personally received or when sent by facsimile transmission (to the receiving
party's facsimile number), (ii) on the first business day after having been sent
by commercial overnight courier with written verification of receipt, or (iii)
on the third business day after having been sent by registered or certified mail
from a location on the United States mainland, return receipt requested, postage
prepaid, whichever occurs first, at the address set forth below or at any new
address, notice of which will have been given in accordance with this Section
5(b):
-2-
<PAGE>
If to MetaTools: MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, CA 93013
Attn: Chief Executive Officer
With a copy to: Wilson Sonsini Goodrich & Rosati
650 Page Mill Road
Palo Alto California 94304-1050
Attn: Jeffrey D. Saper, Esq.
Marty Korman, Esq.
If to Employee, at Employee's address in the personnel records of MetaTools.
(c) Entire Agreement; Amendments. This Agreement contains the entire
----------------------------
agreement of all of the parties hereto and supersedes and replaces all prior
agreements between the parties concerning the subject matter hereof. This
Agreement may not be changed or modified in whole or in part except by a writing
signed by the party against whom enforcement of the change or modification is
sought.
(d) Successors and Assigns. This Agreement shall inure to the benefit of
----------------------
MetaTools and MetaTools's successors and assigns.
(e) Governing Law. This Agreement will be governed by and interpreted
-------------
according to the substantive laws of the State of California, without regard to
such State's conflicts law principles. The parties expressly stipulate that any
litigation under this Agreement shall be brought in the state courts of the
County of Santa Clara, California or in the United States District for the
Northern District of California. The parties agree to submit to the
jurisdiction and venue of those courts.
(f) No Waiver. The failure of either party to insist on strict compliance
---------
with any of the terms of this Agreement in any instance or instances will not be
deemed to be a waiver of any term of this Agreement or of that party's right to
require strict compliance with the terms of this Agreement in any other
instance.
(g) Severability. Employee and MetaTools recognize that the limitations
------------
contained herein are reasonably and properly required for the adequate
protection of the interests of MetaTools and therefore it is the intent of the
parties that the provisions of this Agreement be enforced to the fullest extent
permissible, under applicable law. If for any reason a court of competent
jurisdiction finds any provision of this Agreement, or the application thereof,
to be unenforceable, the remaining provisions of this Agreement will be
interpreted so as best to reasonably effect the intent of the parties as
articulated herein. The parties further agree that the court shall replace any
such invalid or unenforceable provisions with valid and enforceable provisions
designed to achieve, to the extent possible, the business purposes and intent of
such unenforceable provisions.
(h) Counterparts. This Agreement may be executed in counterparts which
------------
when taken together will constitute one instrument. Any copy of this Agreement
with the original signatures of all parties appended will constitute an
original.
-3-
<PAGE>
(i) Attorney's Fees. The prevailing party in any action to interpret
---------------
or enforce this Agreement shall be entitled to receive its reasonable attorney's
fees and expenses incurred in connection with such action.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
METATOOLS, INC. EMPLOYEE
______________________________ _______________________________
By Signature
______________________________ _______________________________
Title Print Name
-5-
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
April 28, 1997
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93013
RE: Registration Statement on Form S-4
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-4 filed by you with
the Securities and Exchange Commission (the "Commission") on or about this date
(the "Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of shares of your Common Stock, par value
$0.001 per share (the "Shares"). As your counsel in connection with this
transaction, we have examined the proceedings proposed to be taken by you in
connection with the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken or
contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon completion of the proceedings being taken in order to permit
such transactions to be carried out in accordance with the securities laws of
the various states where required, the Shares, when issued and sold in the
manner described in the Registration Statement, will be legally and validly
issued, fully paid and non-assessable.
We consent to the use of this Opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Joint Proxy Statement/Prospectus
constituting a part thereof, and any amendment thereto.
Very truly yours,
/s/ Wilson Sonsini Goodrich & Rosati
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI]
EXHIBIT 8.1
April 28, 1997
MetaTools, Inc.
6303 Carpinteria Avenue
Carpinteria, California 93031
Ladies and Gentlemen:
We have acted as counsel for MetaTools, Inc., a Delaware corporation
("MetaTools") in connection with the preparation and execution of the Agreement
and Plan of Reorganization dated as of February 11, 1997 (the "Reorganization
Agreement") by and among MetaTools, Rook Acquisition Corp., a wholly-owned
subsidiary of MetaTools incorporated in Delaware ("Merger Sub"), and Fractal
Design Corporation, a California corporation ("Fractal"). Pursuant to the
Reorganization Agreement, Merger Sub will merge with and into Fractal (the
"Merger"), and Fractal will become a wholly-owned subsidiary of MetaTools.
Unless otherwise defined, capitalized terms referred to herein have the meanings
set forth in the Reorganization Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon (without any independent investigation) the facts,
statements, descriptions and representations set forth in the Reorganization
Agreement (including Exhibits), the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (which contains a prospectus and
joint proxy statement of MetaTools and Fractal) (the "Registration Statement")
and such other documents pertaining to the Merger as we have deemed necessary or
appropriate. We have also relied upon (without any independent investigation)
certificates of officers of MetaTools and Fractal, respectively (the "Officers'
Certificates") and representations made by certain shareholders of Fractal in
"Affiliate Agreements".
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time)
<PAGE>
MetaTools, Inc.
April 28, 1997
Page 2
due execution and delivery of all documents where due execution and delivery are
prerequisites to effectiveness thereof;
2. Any representation or statement referred to above made "to the knowledge
of," "to the best of the knowledge" or otherwise similarly qualified is correct
without such qualification. As to all matters in which a person or entity making
a representation referred to above has represented that such person or entity
either is not a party to, does not have, or is not aware of, any plan,
intention, understanding or agreement, there is in fact no such plan, intention,
understanding or agreement.
3. All statements, descriptions and representations contained in any of the
documents referred to herein or otherwise made to us are true and correct in all
material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by MetaTools and Fractal on their respective
federal income tax returns in a manner consistent with the opinion set forth
below; and
5. The Merger will be consummated in accordance with the Reorganization
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and will be effective under the applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any of
the provisions thereof) and the statements set forth in the Officers'
Certificates and Affiliate Agreements are true and correct as of the Effective
Time, then for federal income tax purposes the Merger will constitute as a
"reorganization" as defined in Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the application or interpretation of the federal income
tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax
<PAGE>
MetaTools, Inc.
April 28, 1997
Page 3
consequences that may result from the Merger or any other transaction (including
any transaction undertaken in connection with the Merger).
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and assumptions
upon which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion has been delivered to you for the purpose of satisfying the
requirements of Section 6.1(d) of the Reorganization Agreement. It may not be
relied upon for any other purpose or by any other person or entity, and may not
be made available to any other person or entity without our prior written
consent. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Certain
Federal Income Tax Considerations." In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE>
EXHIBIT 8.2
[LETTERHEAD OF VENTURE LAW GROUP]
April 24, 1997
Fractal Design Corporation
5550 Scotts Valley Drive
Scotts Valley, California 95066
Ladies and Gentlemen:
We have acted as counsel for Fractal Design Corporation, a California
corporation ("Fractal"), in connection with the preparation and execution of the
Agreement and Plan of Reorganization dated as of February 11, 1997 (the
"Reorganization Agreement") by and among Fractal, MetaTools, Inc., a Delaware
corporation ("MetaTools"), and Rook Acquisition Corp., a wholly-owned subsidiary
of MetaTools incorporated in Delaware ("Merger Sub"). Pursuant to the
Reorganization Agreement, Merger Sub will merge with and into Fractal (the
"Merger"), and Fractal will become a wholly-owned subsidiary of MetaTools.
Unless otherwise defined, capitalized terms referred to herein have the meanings
set forth in the Reorganization Agreement. All section references, unless
otherwise indicated, are to the Internal Revenue Code of 1986, as amended (the
"Code").
You have requested our opinion regarding certain United States federal
income tax consequences of the Merger. In delivering this opinion, we have
reviewed and relied upon (without any independent investigation) the facts,
statements, descriptions and representations set forth in the Reorganization
Agreement (including Exhibits), the Registration Statement on Form S-4 filed
with the Securities and Exchange Commission (which contains a prospectus and
joint proxy statement of MetaTools and Fractal) (the "Registration Statement")
and such other documents pertaining to the Merger as we have deemed necessary or
appropriate. We have also relied upon (without any independent investigation)
certificates of officers of MetaTools and Fractal, respectively (the "Officers'
Certificates") and representations made by certain shareholders of Fractal in
"Affiliate Agreements".
In connection with rendering this opinion, we have also assumed (without
any independent investigation) that:
1. Original documents (including signatures) are authentic, documents
submitted to us as copies conform to the original documents, and there has been
(or will be by the Effective Time) due execution and delivery of all documents
where due execution and delivery are prerequisites to effectiveness thereof;
<PAGE>
Fractal Design Corporation
April 24, 1997
Page 2
2. Any representation or statement referred to above made "to the knowledge
of," "to the best of the knowledge" or otherwise similarly qualified is correct
without such qualification. As to all matters in which a person or entity making
a representation referred to above has represented that such person or entity
either is not a party to, does not have, or is not aware of, any plan,
intention, understanding or agreement, there is in fact no such plan, intention,
understanding or agreement.
3. All statements, descriptions and representations contained in any of the
documents referred to herein or otherwise made to us are true and correct in all
material respects and no actions have been (or will be) taken which are
inconsistent with such representations;
4. The Merger will be reported by MetaTools and Fractal on their respective
federal income tax returns in a manner consistent with the opinion set forth
below; and
5. The Merger will be consummated in accordance with the Reorganization
Agreement (and without any waiver, breach or amendment of any of the provisions
thereof) and will be effective under the applicable state law.
Based on our examination of the foregoing items and subject to the
assumptions, exceptions, limitations and qualifications set forth herein, we are
of the opinion that, if the Merger is consummated in accordance with the
Reorganization Agreement (and without any waiver, breach or amendment of any of
the provisions thereof) and the statements set forth in the Officers'
Certificates and Affiliate Agreements are true and correct as of the Effective
Time, then for federal income tax purposes the Merger will constitute as a
"reorganization" as defined in Section 368(a) of the Code.
This opinion represents and is based upon our best judgment regarding the
application of federal income tax laws arising under the Code, existing judicial
decisions, administrative regulations and published rulings and procedures. Our
opinion is not binding upon the Internal Revenue Service or the courts, and
there is no assurance that the Internal Revenue Service will not successfully
assert a contrary position. Furthermore, no assurance can be given that future
legislative, judicial or administrative changes, on either a prospective or
retroactive basis, would not adversely affect the accuracy of the conclusions
stated herein. Nevertheless, we undertake no responsibility to advise you of
any new developments in the application or interpretation of the federal income
tax laws.
This opinion addresses only the classification of the Merger as a
reorganization under Section 368(a) of the Code, and does not address any other
federal, state, local or foreign tax consequences that may result from the
Merger or any other transaction (including any transaction undertaken in
connection with the Merger).
<PAGE>
Fractal Design Corporation
April 24, 1997
Page 3
No opinion is expressed as to any transaction other than the Merger as
described in the Reorganization Agreement or to any transaction whatsoever,
including the Merger, if all the transactions described in the Reorganization
Agreement are not consummated in accordance with the terms of such
Reorganization Agreement and without waiver or breach of any material provision
thereof or if all of the representations, warranties, statements and assumptions
upon which we relied are not true and accurate at all relevant times. In the
event any one of the statements, representations, warranties or assumptions upon
which we have relied to issue this opinion is incorrect, our opinion might be
adversely affected and may not be relied upon.
This opinion has been delivered to you for the purpose of satisfying the
requirements of Section 6.1(d) of the Reorganization Agreement. It may not be
relied upon for any other purpose or by any other person or entity, and may not
be made available to any other person or entity without our prior written
consent. We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the heading "Certain
Federal Income Tax Considerations." In giving such consent, we do not thereby
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ VENTURE LAW GROUP
VENTURE LAW GROUP
A Professional Corporation
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
MetaTools, Inc. on Form S-4 (to be filed on or about April 28) of our report
dated February 3, 1997, except for Note 16 as to which the date is February 11,
1997, on our audits of the consolidated financial statements and financial
statement schedule of MetaTools, Inc. as of December 31, 1996 and 1995 and for
each of the three years in the period ended December 31, 1996. We also consent
to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Sherman Oaks, California
April 22, 1997
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of MetaTools, Inc.
of our report dated April 22, 1996, except as to the pooling of interests with
Ray Dream, Inc. which is as of May 24, 1996 and Note 11, which is as of February
11, 1997, which appears in Fractal Design Corporation's Form 8-K dated March
18, 1997. We also consent to the references to us under the headings "Experts"
in such Prospectus.
/s/ Price Waterhouse LLP
San Jose, California
April 22, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF MARK ZIMMER
In accordance with Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to the reference in the Registration
Statement on Form S-4 filed by MetaTools, Inc., a Delaware corporation
("MetaTools"), to the undersigned being named as a director of MetaTools upon
the consummation of the Merger described in such Registration Statement.
/s/ Mark Zimmer
-------------------------
MARK ZIMMER
<PAGE>
EXHIBIT 23.6
CONSENT OF THOMAS HEDGES
In accordance with Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to the reference in the Registration
Statement on Form S-4 filed by MetaTools, Inc., a Delaware corporation
("MetaTools"), to the undersigned being named as a director of MetaTools upon
the consummation of the Merger described in such Registration Statement.
/s/ Thomas Hedges
-------------------------
THOMAS HEDGES
<PAGE>
EXHIBIT 23.7
CONSENT OF ARTHUR COLLMEYER
In accordance with Rule 438 promulgated under the Securities Act of 1933, as
amended, the undersigned hereby consents to the reference in the Registration
Statement on Form S-4 filed by MetaTools, Inc., a Delaware corporation
("MetaTools"), to the undersigned being named as a director of MetaTools upon
the consummation of the Merger described in such Registration Statement.
/s/ Arthur Collmeyer
-------------------------
ARTHUR COLLMEYER
<PAGE>
[LETTERHEAD OF ALEX. BROWN]
EXHIBIT 23.8
April 22, 1997
CONSENT OF ALEX. BROWN
Alex. Brown and Sons Incorporated hereby consents to the filing of the
opinion letter dated February 11, 1997 as an exhibit to the Registration
Statement on Form S-4 of MetaTools, Inc. and the use of our name and the
reference therein to such opinion letter. In giving our consent, we do not
admit that we are of the category of persons from whom such a consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder nor do we
admit that we are experts with respect to any part of such Registration
Statement within the meaning of the term "experts" as used in the Securities Act
of 1933, as amended, or the rules and regulations of the Securities and Exchange
Commission thereunder.
Very truly yours,
Alex. Brown & Sons Incorporated
By: /s/ KARL WILL
-----------------------------
Name: Karl Will
Title: Principal
<PAGE>
EXHIBIT 23.9
April 22, 1997
CONSENT OF UNTERBERG HARRIS
Unterberg Harris hereby consents to the filing of the opinion letter dated
February 11, 1997 as an exhibit to the Registration Statement on Form S-4 of
MetaTools, Inc. and to the use of our name and the reference therein to such
opinion letter. In giving our consent, we do not admit that we are of the
category of persons from whom such a consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
UNTERBERG HARRIS
<PAGE>
EXHIBIT 99.1
[LOGO OF METATOOLS]
April 28, 1997
Dear Stockholder:
As many of you are aware, MetaTools, Inc., a Delaware corporation,
("MetaTools"), has entered into an agreement to combine with Fractal Design
Corporation, a California corporation ("Fractal"), in a strategic business
combination (the "Merger"). At our Annual Meeting on May 29, 1997, you will be
asked to consider and vote upon (1) the issuance of shares of the Common
Stock, par value $0.001 per share, of MetaTools (the "MetaTools Common Stock"
and, following the Merger, the "Combined Company Common Stock") to the
shareholders of Fractal pursuant to an Agreement and Plan of Reorganization,
dated as of February 11, 1997 (the "Reorganization Agreement"), among
MetaTools, Fractal and Rook Acquisition Corp., a wholly-owned subsidiary of
MetaTools ("Merger Sub"), (2) an amendment to the Amended and Restated
Certificate of Incorporation of MetaTools (the "Certificate") to change the
corporate name of MetaTools to "MetaCreations Corporation" (the "Combined
Company"), subject to and upon consummation of the Merger, (3) an amendment to
the Certificate to increase the number of authorized shares of MetaTools
Common Stock by 45 million shares to 75 million shares, subject to and upon
consummation of the Merger, (4) the election of six (6) directors to serve as
the directors of MetaTools until their successors are duly elected and
qualified, (5) an amendment to the MetaTools 1995 Stock Option Plan to add an
additional 1,500,000 shares of MetaTools Common Stock thereto and (6) the
ratification of the appointment of Coopers & Lybrand L.L.P. as independent
accountants for MetaTools for the 1997 fiscal year. Each of the foregoing
proposals is described more fully in the accompanying Joint Proxy
Statement/Prospectus.
Upon consummation of the Merger, the Board of Directors of the Combined
Company will be expanded to nine (9) members, and three (3) directors of
Fractal, Mark Zimmer, Thomas Hedges and Arthur Collmeyer, will be appointed to
the Board of Directors of the Combined Company.
Alex. Brown & Sons Incorporated ("Alex Brown"), MetaTools' exclusive
financial advisor in connection with the Merger, rendered its opinion on
February 11, 1997 that the Exchange Ratio was fair, from a financial point of
view, to MetaTools and its stockholders.
The Board of Directors of MetaTools has unanimously approved the Merger
and believes that the terms of the Merger are fair to, and in the best
interests of, MetaTools and its stockholders. The Board of Directors
unanimously recommends that the MetaTools stockholders vote FOR each of the
proposals to be presented at the MetaTools Annual Meeting.
Following the Merger, based on the shares of Fractal Common Stock and
MetaTools Common Stock outstanding as of April 21, 1997, the former holders of
Fractal Common Stock will hold approximately 39.5% of the Combined Company
Common Stock, and the holders of MetaTools Common Stock prior to the Merger
will hold approximately 60.5% of the Combined Company Common Stock.
Stockholders are urged to review carefully the information contained in the
accompanying Joint Proxy Statement/Prospectus, including in particular the
information under the captions "Risk Factors," "The Merger and Related
Transactions--Joint Reasons for the Merger," "--MetaTools' Reasons for the
Merger" and "--Material Contacts and Board Deliberations" prior to making any
voting decision in connection with their MetaTools Common Stock.
<PAGE>
Whether or not you expect to attend the Annual Meeting in person, please
complete, sign and promptly return the enclosed proxy card in the enclosed
postage-prepaid envelope to ensure representation of your shares. You may
revoke your proxy at any time before it has been voted, and if you attend the
Annual Meeting you may vote in person even if you have previously returned
your proxy card. Your prompt cooperation is greatly appreciated.
Sincerely,
/s/ John J. Wilczak
John J. Wilczak
Chairman of the Board of Directors,
President and Chief Executive
Officer
YOUR PROXY IS IMPORTANT--PLEASE VOTE PROMPTLY
2
<PAGE>
EXHIBIT 99.2
[LOGO OF METATOOLS]
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 29, 1997
TO THE STOCKHOLDERS OF METATOOLS, INC.:
NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders (the
"MetaTools Annual Meeting") of MetaTools, Inc., a Delaware corporation
("MetaTools"), will be held on May 29, 1997 at 8:00 a.m., local time, at Fess
Parker's Red Lion Resort at 633 E. Cabrillo Boulevard, Santa Barbara,
California, for the following purposes:
1. To approve the issuance of shares of the Common Stock, par value
$0.001 per share, of MetaTools (the "MetaTools Common Stock" and, following
the Merger (as defined below), the "Combined Company Common Stock") to the
shareholders of Fractal Design Corporation ("Fractal") pursuant to an
Agreement and Plan of Reorganization, dated as of February 11, 1997 (the
"Reorganization Agreement"), among MetaTools, Fractal and Rook Acquisition
Corp., a wholly-owned subsidiary of MetaTools ("Merger Sub"), providing for
the merger of Merger Sub with and into Fractal (the "Merger");
2. To approve an amendment to the Restated Certificate of Incorporation
of MetaTools (the "Certificate") to change the corporate name of MetaTools
to "MetaCreations Corporation", subject to and upon consummation of the
Merger;
3. To approve an amendment to the Certificate to increase the number of
authorized shares of MetaTools Common Stock by 45 million shares to 75
million shares, subject to and upon consummation of the Merger;
4. To elect six (6) directors to serve for the ensuing year until their
successors are duly elected and qualified;
5. To amend the 1995 Stock Option Plan to add an additional 1,500,000
shares of MetaTools Common Stock thereto;
6. To ratify the appointment of Coopers & Lybrand L.L.P. as independent
accountants for the Company for the 1997 fiscal year; and
7. To transact such other business as may properly come before the
meeting or any postponements or adjournments thereof. MetaTools does not
intend to bring any business other than the business described above before
the MetaTools Annual Meeting or any postponements or adjournments thereof.
Proposals 2 and 3 will not be implemented if Proposal 1 is not approved by
the stockholders.
The foregoing items of business are more fully described in the Joint Proxy
Statement/Prospectus.
As a result of the Merger, each outstanding share of Common Stock, $0.001
par value per share, of Fractal ("Fractal Common Stock") (other than shares as
to which dissenters' rights pursuant to the California Corporations Code have
been exercised and shares owned by Merger Sub, MetaTools or any wholly-owned
subsidiary of MetaTools or Fractal) will be converted into the right to
receive 0.749 shares of Combined Company Common Stock (the "Exchange Ratio"),
and each outstanding option or right to purchase Fractal Common Stock under
Fractal's stock option plans will be assumed by MetaTools and will become an
option or right to purchase Combined Company Common Stock, with appropriate
adjustments to be made to the number of shares issuable thereunder and the
exercise price thereof based on the Exchange Ratio. Following the Merger,
<PAGE>
based on the shares of Fractal Common Stock and MetaTools Common Stock
outstanding as of April 21, 1997, the former holders of Fractal Common Stock
will hold approximately 39.5% of the Combined Company Common Stock and the
holders of MetaTools Common Stock prior to the Merger will hold approximately
60.5% of the Combined Company Common Stock.
Only stockholders of record at the close of business on April 11, 1997 are
entitled to notice of and to vote at the meeting.
All stockholders are cordially invited to attend the meeting in person.
However, to ensure your representation at the meeting, please sign and return
the enclosed proxy as promptly as possible in the postage-prepaid envelope
enclosed for that purpose. Any stockholder may revoke his or her proxy at any
time before it has been voted, and any stockholder attending the meeting may
vote in person even if he or she has returned a proxy.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ John J. Wilczak
John J. Wilczak
Chairman of the Board of Directors,
President and Chief Executive
Officer
Carpinteria, California
April 28, 1997
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED
TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
2
<PAGE>
Exhibit 99.3
------------
[FORM OF PROXY]
METATOOLS, INC.
PROXY for Annual Meeting of Stockholders
To be Held May 29, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of METATOOLS, INC., a Delaware corporation,
hereby acknowledges receipt of the Notice of Annual Meeting of Stockholders
and Joint Proxy Statement/Prospectus, each dated April 28, 1997, and
hereby appoints John J. Wilczak and Terance A. Kinninger, and each of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf of the undersigned, to represent the undersigned at the Annual Meeting of
Stockholders of METATOOLS, INC. to be held at Fess Parker's Red Lion Resort, 633
E. Cabrillo Boulevard, Santa Barbara, California on May 29, 1997 at 8:00 a.m.,
local time, and at any adjournment or adjournments thereof, and to vote all
shares of Common Stock that the undersigned would be entitled to vote if then
and there personally present, on all matters set forth on the reverse side
hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR EACH OF THE PERSONS AND THE
PROPOSALS ON THE REVERSE SIDE HEREOF AND FOR SUCH OTHER MATTERS AS MAY PROPERLY
COME BEFORE THE MEETING AS THE PROXYHOLDERS DEEM ADVISABLE.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
------------
See Reverse
Side
------------
<PAGE>
[X] Please mark
votes as in
this example
FOR AGAINST ABSTAIN
1. To approve the issuance of shares of the Common [_] [_] [_]
Stock, par value $0.001 per share, of MetaTools,
Inc., a Delaware corporation ("MetaTools"), to
the shareholders of Fractal Design Corporation,
a California corporation ("Fractal"), pursuant
to an Agreement and Plan of Reorganization,
dated as of February 11, 1997, among MetaTools,
Fractal and Rook Acquisition Corp., a wholly-
owned subsidiary of MetaTools ("Merger Sub"),
providing for the merger of Merger Sub with
and into Fractal (the "Merger").
FOR AGAINST ABSTAIN
2. To approve an amendment to the Restated [_] [_] [_]
Certificate of Incorporation of MetaTools (the
"Certificate") to change the corporate name of
MetaTools to "MetaCreations Corporation,"
subject to and upon consummation of the Merger.
MARK HERE [_]
FOR ADDRESS
CHANGE AND
NOTE BELOW
FOR AGAINST ABSTAIN
3. To approve an amendment to the Certificate to [_] [_] [_]
increase the number of authorized shares of
MetaTools Common Stock by 45 million shares to
75 million shares, subject to and upon
consummation of the Merger.
FOR WITHHELD
4. ELECTION OF DIRECTORS [_] [_]
Nominees: John J. Wilczak, Kai Krause,
-------- Samuel H. Jones, Jr., Bert Kolde,
William H. Lane, III, Howard L.
Morgan
___________________________________________________________________________
For all nominees except as noted above.
FOR AGAINST ABSTAIN
5. To amend the 1995 Stock Option Plan to add an [_] [_] [_]
additional 1,500,000 shares of Common Stock
thereto.
FOR AGAINST ABSTAIN
6. To ratify the appointment of Coopers & Lybrand [_] [_] [_]
L.L.P., as independent accountants for MetaTools
for the 1997 fiscal year.
FOR AGAINST ABSTAIN
7. To vote or otherwise represent the shares on any [_] [_] [_]
and all other business which may properly come
before the meeting or any adjournment or
adjournments thereof, according to their
discretion and in their discretion.
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE NOTICE OF ANNUAL MEETING AND
JOINT PROXY STATEMENT/PROSPECTUS DATED APRIL 28, 1997.
PLEASE MARK, SIGN, AND DATE AND RETURN THE PROXY CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
Note: Please sign exactly as name appears on your stock certificate. If the
stock is registered in the names of two or more persons, each should sign.
Executors, administrators, trustees, guardians, attorneys and corporate officers
should insert their titles.
Signature: _________________ Date:_____ Signature: _________________ Date:_____
<PAGE>
EXHIBIT 99.4
[LOGO OF FRACTAL DESIGN CORPORATION]
April 28, 1997
Dear Shareholder:
Fractal Design Corporation, a California corporation ("Fractal"), has
entered into an Agreement and Plan of Reorganization (the "Reorganization
Agreement") with MetaTools, Inc., a Delaware corporation ("MetaTools"), and
Rook Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary
of MetaTools ("Merger Sub"), providing for a combination of Fractal and
MetaTools. Pursuant to the Reorganization Agreement, a special meeting of
shareholders (the "Meeting") of Fractal will be held at 5550 Scotts Valley
Drive, Scotts Valley, California on May 29, 1997 at 8:00 a.m. local time.
At the Meeting you will be asked to consider and vote upon the approval of
the Reorganization Agreement, which provides for the merger of Merger Sub with
and into Fractal (the "Merger"). Upon consummation of the Merger, Fractal will
become a wholly-owned subsidiary of MetaTools and, subject to approval of
MetaTools' stockholders, MetaTools will change its corporate name to
"MetaCreations Corporation" (the "Combined Company"). As a result of the Merger,
(i) each outstanding share of Fractal Common Stock will be converted into and be
exchangeable for 0.749 shares of Common Stock (the "Exchange Ratio") of the
Combined Company, par value $0.001 per share (the "Combined Company Common
Stock") and (ii) each outstanding option to purchase Fractal Common Stock under
Fractal's Option Plans will be assumed by MetaTools and will become an option or
right to purchase Combined Company Common Stock, with appropriate adjustments to
be made to the number of shares issuable thereunder and the exercise price
thereof based on the Exchange Ratio. The foregoing proposal is described more
fully in the accompanying Joint Proxy Statement/Prospectus.
Following the Merger, based on the shares of Fractal Common Stock and the
Common Stock of MetaTools (the "MetaTools Common Stock") outstanding as of
April 21, 1997, the former holders of Fractal Common Stock will own
approximately 39.5 percent of the Combined Company Common Stock and the
holders of MetaTools Common Stock will own approximately 60.5% of the Combined
Company Common Stock. In addition, following the Merger, three directors of
Fractal, Mark Zimmer, Thomas Hedges and Arthur Collmeyer, will be appointed to
the Board of Directors of the Combined Company. Furthermore, Mark Zimmer,
President and CEO of Fractal, and Thomas Hedges, Chairman and Vice President,
Research and Development of Fractal, will assume senior management positions
in the Combined Company.
Unterberg Harris, the financial advisor retained by the Board of Directors
of Fractal in connection with the Merger, rendered its opinion on February 11,
1997 that, as of such date, the consideration to be received pursuant to the
Reorganization Agreement was fair to Fractal shareholders from a financial
point of view.
After careful consideration, Fractal's Board of Directors has unanimously
approved the Reorganization Agreement and the transactions contemplated
thereby and has unanimously concluded that they are fair, and in the best
interests of, Fractal and its shareholders. Your Board of Directors
unanimously recommends a vote in favor of the Merger.
In the materials accompanying this letter you will find a Notice of Special
Meeting of Shareholders, a Joint Proxy Statement/Prospectus relating to the
actions to be taken by the Fractal shareholders at the Meeting and a Proxy
Card. The Joint Proxy Statement/Prospectus more fully describes the proposed
transactions. Shareholders are urged to review carefully the information
contained in the accompanying Joint Proxy Statement/Prospectus, in particular
the information under the captions "Risk Factors," "The Merger and Related
Transactions--Joint Reasons for the Merger" and "--Fractal's Reasons for the
Merger" and "--Material Contacts and Board Deliberations" prior to voting on
the proposal.
<PAGE>
All shareholders are cordially invited to attend the Meeting in person. You
may revoke your proxy at any time before it has been voted, and if you attend
the Meeting, you may vote in person if you wish even though you have
previously returned your proxy. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING,
IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AND VOTED AT THE MEETING,
REGARDLESS OF THE NUMBER YOU HOLD. Approval of the Merger requires the
affirmative vote of the holders of a majority of the outstanding shares of
Fractal Common Stock. Therefore, please complete, sign and date, and return
your proxy in the enclosed envelope.
Sincerely,
/s/ Mark Zimmer
Mark Zimmer
President and Chief Executive
Officer
2
<PAGE>
EXHIBIT 99.5
[LOGO OF FRACTAL DESIGN CORPORATION]
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 29, 1997
TO THE SHAREHOLDERS OF FRACTAL DESIGN CORPORATION:
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Fractal
Special Meeting") of Fractal Design Corporation, a California corporation
("Fractal"), will be held on May 29, 1997 at 8:00 a.m., local time, at 5550
Scotts Valley Drive, Scotts Valley, California, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Reorganization (the "Reorganization Agreement") dated
as of February 11, 1997, among Fractal, MetaTools, Inc., a Delaware
corporation ("MetaTools") and Rook Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of MetaTools ("Merger Sub"),
pursuant to which, among other matters (1) Merger Sub will be merged with
and into Fractal (the "Merger"), (2) Fractal will become a wholly-owned
subsidiary of MetaTools, (3) MetaTools will be renamed "MetaCreations
Corporation" (the "Combined Company"), subject to approval of MetaTools'
stockholders, and (4) each share of Common Stock, $0.001 par value per
share of Fractal ("Fractal Common Stock") will be converted into the right
to receive, and become exchangeable for, 0.749 shares of Common Stock (the
"Exchange Ratio"), par value $0.001 per share of the Combined Company
("Combined Company Common Stock"). In addition, each outstanding option to
purchase Fractal Common Stock under Fractal's Option Plans will be assumed
by MetaTools and will become an option or right to purchase Combined
Company Common Stock, with appropriate adjustments to be made to the number
of shares issuable thereunder and the exercise price thereof, based on the
Exchange Ratio.
2. To transact such other matters as may properly come before the meeting
or any postponements or adjournments thereof. Fractal does not intend to
bring any business other than the approval and adoption of the
Reorganization Agreement before the Fractal Special Meeting or any
postponements or adjournments thereof.
Following the Merger, based on the shares of Fractal Common Stock and
MetaTools Common Stock outstanding as of April 21, 1997, the former holders of
Fractal Common Stock will hold approximately 39.5% of the Combined Company
Common Stock and the holders of the Common Stock of MetaTools prior to the
Merger will hold approximately 60.5% of the Combined Company Common Stock. The
Board of Directors of Fractal has unanimously approved the Merger and believes
that the terms of the Merger are fair to, and in the best interests of,
Fractal and its shareholders. The Board of Directors of Fractal unanimously
recommends that Fractal shareholders vote FOR approval and adoption of the
Reorganization Agreement.
Information relating to the above matters is set forth in the attached Joint
Proxy Statement/Prospectus. Shareholders of record at the close of business on
April 11, 1997 are entitled to notice of, and to vote at, the Fractal Special
Meeting and any postponements or adjournments thereof. Approval and adoption
of the Reorganization Agreement will require the affirmative vote of the
holders of a majority of the shares of Fractal Common Stock outstanding on the
record date. All shareholders are cordially invited to attend the Fractal
Special Meeting in person.
BY ORDER OF THE BOARD OF DIRECTORS
/s/ Mark Zimmer
Mark Zimmer
President and Chief Executive
Officer
Scotts Valley, California
April 28, 1997
IMPORTANT: WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE REQUESTED
TO COMPLETE AND PROMPTLY RETURN THE ENCLOSED PROXY IN THE ENVELOPE PROVIDED.
DO NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARD
<PAGE>
Exhibit 99.6
P R O X Y
- ---------
[FORM OF PROXY]
FRACTAL DESIGN CORPORATION
PROXY FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 29, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned shareholder of FRACTAL DESIGN CORPORATION, a California
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Shareholders and Joint Proxy Statement/Prospectus, each dated April 28, 1997,
and hereby appoints Mark Zimmer and Leslie Wright, and each of them, proxies and
attorneys-in-fact, with full power to each of substitution, on behalf of the
undersigned, to represent the undersigned at the Special Meeting of Shareholders
of FRACTAL DESIGN CORPORATION to be held at 5550 Scotts Valley Drive, Scotts
Valley, California, on May 29, 1997 at 8:00 a.m., local time, and at any
adjournment or adjournments thereof, and to vote all shares of Common Stock that
the undersigned would be entitled to vote if then and there personally present,
on all matters set forth on the reverse side hereof.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR THE PROPOSAL ON THE REVERSE SIDE
HEREOF.
CONTINUED AND TO BE SIGNED ON REVERSE SIDE
-----------
SEE REVERSE
SIDE
-----------
<PAGE>
[X] Please mark
votes as in
this example
FOR AGAINST ABSTAIN
(1) To approve and adopt the Agreement and Plan of [_] [_] [_]
Reorganization dated February 11, 1997, among
Fractal Design Corporation ("Fractal"),
MetaTools, Inc. ("MetaTools") and Rook
Acquisition Corp., and the transactions
contemplated thereby, pursuant to which
Fractal will become a wholly-owned
subsidiary of MetaTools and each share of
Common Stock of Fractal will be converted
into and be exchangeable for 0.749 shares
of Common Stock of MetaTools, par value
$0.001 per share.
MARK HERE FOR [_]
ADDRESS CHANGE
AND NOTE AT LEFT
Note: Please sign exactly as your
name appears on your stock
certificate. If the stock is
registered in the names of two
or more persons, each should
sign. Executors, administrators,
trustees, guardians, attorneys
and corporate officers
should insert their titles.
THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF THE NOTICE OF SPECIAL MEETING
AND JOINT PROXY STATEMENT/PROSPECTUS DATED APRIL 28, 1997.
Signature(s) ___________________________ Date ______________________________
NOTE: Please mark, sign, date and return the proxy card promptly using the
enclosed envelope.
